Indraratna Chinthana on sustained development: Still valid and will be valid forever
Monday, 24 November 2014 00:00
The need for critically debating policy proposals
Colombo University’s Emeritus Professor and Sri Lanka Economic Association’s President A.D.V. de S .Indraratna has just released in book form an updated and revised version of the SLEA presidential addresses he has delivered over the last 10 years. Titled ‘Policy Issues for Sustained Development of Sri Lanka’, the book covers a wide range of issues which the country’s economic policy makers cannot ignore when carving out the path of its future development.
Prof. Indraratna presenting a copy of the book to the Chief Guest at the book launch, Minister Basil Rajapaksa
In any other country, the addresses delivered by the head of its economic profession’s main association at its annual sessions are taken very seriously. Once they are delivered, they are debated in public, analysed and assessed by university academics, reviewed in class assignments by students and used as the main seed ingredients for subsequent policy research.
For instance, when the American Economic Association or AER conducts its annual sessions, for months, universities in North America and the UK prepare their students for the oncoming event. Students are advised to be vigilant on the President’s address and other papers to be presented at the sessions.
The pet topic being discussed by university dons teaching economics in classes as well as in corridors of those universities invariably revolves around AER proceedings. Everyone tries to be ahead of the others with respect to his reading of the outcome of the proceedings.
Aloof attitude of Sri Lankan society to matters that are ‘economic’
But that is not the case with Sri Lanka. University academics teaching economics at universities pay scanty attention to SLEA proceedings. Media do not give sufficient coverage to what happens at those events. The public, as usual, show a strange aloofness to anything ‘economic’, though they are categorised as species known as ‘Homo economicus’ or ‘Economic Man’. Thus, economists as well as non-economists do not think that economic issues are important for them to be concerned with. This apathy on the part of the public is demonstrated by the poor response they have shown to articles analysing economic issues published in newspapers.
The internet editions of these newspapers have opened opportunities for public to get engaged in discussions and debates. Yet the comments section relating to these articles is usually left blank though the open invitation has been for readers ‘to leave a comment’. It appears that economic issues are mostly relegated to studying for examinations and after those examinations they are conveniently forgotten.
Public policy proposals for public policy makers
In this background, it is encouraging that Indraratna has chosen to bring out his presidential addresses in printed form. It will enable the interested readers and even those who are engaged in policy research to have access to his addresses as a ready reference.
This does not mean that readers should necessarily agree with Indraratna. They can bring his addresses to a free debate, agree or dissent with him or even refute him. For whatever the intellectual enterprise one may wish to have, all his addresses are now available in a single place in printed form.
According to the Preface, the book is addressed to the relevant authorities or policy makers and relevant public officials who are engaged in policy making. Thus, it is worthwhile reading for public officials whether to accept or refute Indraratna.
Structural changes in Sri Lanka’s economy
Indraratna has been the President of SLEA since 2004 and the book covers his addresses from 2004 to 2013. In this period, Sri Lanka has seen a major transformation in its economy. One may loosely categorise the economy of this period into two parts, pre-2009 and post-2009.
The pre-2009 period was marked by an escalation of the ethnic war to an unprecedented level needing the utilisation of the country’s scanty resources for war efforts. The period from 2007 to mid 2009 was especially critical with all signs of economic malaise hitting the country. There were high budget deficits, accelerated inflation, depletion of foreign reserves and pressure on the exchange rate to depreciate. Eventually, in early 2009, IMF had to rescue Sri Lanka with an unprecedented Stand-by-Arrangement which the Sri Lankan authorities had rejected in toto when such an offer was made on previous occasions.
With the end of war in mid-2009, the country got a breathing space to think of long term economic restructuring and planning. Here also the country’s scanty resources had to be spent on some other priority purpose: the reconstruction of the war-torn economy. Hence, one may wonder how far the Indraratna Chinthana which had been pronounced prior to 2009 would be applicable and valid for an economy which has now taken a different path after 2009. This article will probe into that aspect of Indraratna Chinthana.
Indraratna, the centre rightist
What is Indraratna’s economic philosophy? His presidential addresses reveal several facets of his economic thinking. He is a centre-rightist, believer in the private sector and free enterprise, advocate of free trade and integration to world economy, campaigner for inclusive growth and equity in sharing wealth and respecter of individual freedom, liberty and rule of law.
He is politically neutral, being able to serve governments of different complexions provided such governments subscribe to his economic values which have been tempered through decades of hard-thinking and conviction. He will thus find it difficult to amend his ways to suit the rhythms and pulse-beatings of people in power. Thus, given the current political and public policy culture in Sri Lanka which does not accommodate alternative views, it is hard for Indraratna to play any useful role in influencing the evolution of the country’s economic policy thinking.
Addressing burning economic issues
The 10 presidential addresses he has delivered in the last 10 years have in fact addressed 10 burning issues that had plagued the Sri Lankan economy at that particular point in time. They cover human, regulatory, macroeconomic, global and sustainability aspects of economic development of the country.
On the human side, he has addressed human development, poverty alleviation and equity issues relating to development. On the regulatory side, he has questioned the viability of the all-inclusive economic role that has been proposed by many for the government and instead proposed effective public – private partnership as the way forward. On the macroeconomic side, he has emphasised the need for taming inflation for maintaining the country’s competitiveness and growth.
On the global side, he has discussed how free trade will usher growth and how Sri Lanka should successfully face the challenge of unfavourable global and domestic developments to sustain its growth. On the sustainability side, he has proposed the way forward for the country emphasising on relying on savings – both at government and private levels – to finance investments rather than using borrowings that will drag the country to a potential foreign debt trap in the future.
Education should generate employability
Indraratna has covered human development in two presidential addresses. One is titled ‘human development and poverty alleviation’ and the other is titled ‘Inequity, poverty and development’. In both, the message he conveys is the same: that, human development should be the main goals of development efforts of societies. To help human development, two necessary ingredients are the elimination of poverty and the building of an equitable society.
Indraratna has defined human development very broadly: “any investment or expenditure which increases employability and productivity of a people and thereby contributes to growth should be considered human development. This should involve investment not only to provide quality and relevant education, and to ensure freedom from disease and hunger, but also to provide to all, security against crime, violence and terrorism, to ensure the prevalence of law and order and the practice of the rule of law and an unpolluted environment. Quality or relevant education, not mere rote learning, provides skills to, as well as instils discipline into, the youth. Both enhance productivity and employability. Freedom from disease and hunger improves a person’s physical capacity and mental health and thereby contributes to productivity. So would security and clean air (that is unpolluted environment) by enhancing quality of life as well as providing a better work environment” (p 2-3).
The need for increasing expenditure on education
Thus, human development is the final goal of economic development. The necessary ingredients for human development are the investment in human beings to improve their skills and productivity o one side and physical and mental capacity on the other. Nations which have become developed countries within a generation have heavily invested in education and health to prepare the ground conditions for sustained development.
Between 1970 and 1990, Singapore spent more than 3.5% of GDP on public education. South Korea spent more than 4% of GDP on public education during 1980-90. In comparison, Sri Lanka had spent on average 2.5% of GDP on public education during 1980-2000. But, Indraratna’s argument is that it is not the expenditure per se on education that will contribute to human development.
It is the quality and relevance of education plus expenditure on the employability of youth that will contribute to human development and through it, to improvement in productivity. Sri Lanka today lacks both. Its public expenditure on education has declined to a level below 1.7% in the recent past. To make the matters worse, it does not provide a quality and relevant education that increase the employability of the youth who get such education.
Since Sri Lanka is now planning to become a rich country by 2035, it is of paramount importance for Sri Lanka to allocate funds for human development. Thus, what Indraratna had suggested in 2004 is more relevant to Sri Lanka today. He has said that such a policy package should be “a major and essential part of a larger government package of socio-economic policies for sustained and accelerated economic growth” (p 17). This message is an eye-opener for Sri Lanka’s public policy makers today.
If there is no equity, there is no development
Indraratna has come up with an important nexus between inequity and poverty. If there is inequity in income distribution, it necessarily leads to poverty too because a large segment of a people will not get sufficient income even for their daily maintenance. If there is poverty, there is no development because it impedes human development. Without human development, there is no way for any country to continue with an accelerated economic growth. Hence, to have sustained economic development, it is absolutely necessary for any country to ensure an equitable distribution in income.
Indraratna, having drawn data on income distribution since 1950, has pointed out that, except in 1973, Sri Lanka’s income distribution, as shown by the relatively higher values in Gini Coefficient, has remained iniquitous. For instance, in 1953, Gini Coefficient relating to income receivers amounted to 0.5 manifesting an iniquitous income distribution. This improved marginally to 0.41 in 1973 not because the income share of the lower segments of income receivers has increased but because the share of the middle income groups has increased at the expense of the high income receivers.
The situation in the last 10 years has been a reversion to the situation that prevailed in 1953. Accordingly, Gini Coefficient has deteriorated to 0.5 once again by 2003/4 and remained virtually at that high level since then. The stubbornly high inequity in income distribution in the country should necessarily be a concern of public policy makers since it sows the seeds of social, economic and political instability.
Inflation should be tackled through improvement in productivity
There is a section of economists who believe that inflation is inevitable with economic growth. According to them, when an economy accelerates its growth, the incomes of the people start rising faster than the growth in output leading to an imbalance between the total amount demanded and the total amount supplied. This imbalance leads to inflation and, according to these economists, such instance of having inflation in a fast growing economy is inevitable.
But Indraratna says that it is not the case. He asks the question whether inflation is inevitable with growth and answers in the negative. Says Indraratna: “The answer is a firm no, because inflation arises due to imbalance created between aggregate demand and aggregate supply” (p 73). Indraratna says that in such an event action should be taken to eliminate the imbalance by siphoning off the excess demand.
An important requirement in this connection, according to Indraratna, is the need for both monetary policy and fiscal policy to work in harmony. He says that “a tight monetary policy would not be effective if there were fiscal profligacy or fiscal indiscipline or fiscal imbalance” (p 73). Indraratna’s solution is to improve the long term productivity to counter the inflation by increasing the supply. But, productivity improvement requires, according to Indraratna, several enabling factors, namely, efficient institutions, good governance, law and order and industrial peace in addition to good infrastructure and high technology.
This is an unorthodox way of tackling the inflation issue which is now relegated wholly to the monetary policy conducted by central banks. Given the adverse consequences of inflation such as loss of competitiveness and pressure for exchange rate to depreciate, it is necessary to implement a long term productivity improvement plan by creating the above enabling factors in the economy.
Export growth is paramount for economic growth
Indraratna emphasises that Sri Lanka should necessarily improve its export capability if it wants to sustain a high economic growth. This is because Sri Lanka’s domestic market is limited and therefore its industries cannot have a sufficiently high demand for their products to sustain in the long run. However, its export growth in the past has been far from the desired.
The government that came to power in 1977 commenced an export-oriented development policy but that government failed to diversify the exports and make the export sector sustainable. In the recent past, though exports have increased in absolute terms, their share in GDP has been falling continuously. For instance, in 2000, exports amounted to 33% of GDP. By 2005, it fell to 26% and by 2010 to 17%. By 2013, the share further fell to 15%. Indraratna, therefore, makes a series of recommendations to increase the level as well as the share of exports.
The country should, among others, create an enabling environment for private businesses to promote exports by having a proper macroeconomic stability and proper ground conditions for businesses. These ground conditions, he says, should include efficient, honest, independent and impartial public service, prevalence of law and order, operation of the rule of law and good governance which should be free from corruption and waste. However, Indraratna concludes that “Much more was desired in these in the country” (p 118).
Indraratna Chinthana is still valid
The Indraratna Chinthana is based on hardcore economic principles rather than fancy economic policy wishes. Hence, it is valid forever even when an economy has undergone economic transformation, needing fresh thinking on economic policy.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)