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Thursday, 4 September 2014 00:00 - - {{hitsCtrl.values.hits}}
Economic history narrates numerous stories of how a sudden accumulation of wealth has led to bursts of economic growth. When a few other important pieces are put in place, this new money can turbo-charge a sustained phase of growth in Sri Lanka. In the 19th century, the flow of wealth (from trading and plunder) from the colonies to the UK started the great momentum of growth that made ‘Great Britain’. It was a similar story with a number of European countries.
In more recent times, large sums of money ended up with the military in Indonesia. Their investments started the industrial manufacturing revolution in Indonesia. As we all know, finding oil, which again created a sudden accumulation of wealth, transformed the desert in the Middle East.
Source of new money
The new money has come from two sources: The Government’s massive spend on infrastructure and the huge increase in private sector investment.
The infrastructure projects are put out to tender. Every principal tendering has an agent to facilitate their bid. The successful bidder will pay his agent a 5% commission. There is nothing unusual or illegal about this. It is a universal practice.
Eyebrows are raised and heads are shaken to suggest that something is wrong about this because the agents are often people close to the powers in the land. But that is how it has always been, here and elsewhere, as contractors select agents who know the ropes.
The huge spend on infra structure 
The income generated from Government routine capital and private sector investment can be put into the new money pot, because over the last five years there has been a huge increase in the quantum. Both the Government capital expenditure and private sector investment result in goods and services being procured. If these suppliers made a margin of 15% on the spend of Rs. 1,975 billion, the new money is Rs. 384 billion.
This is a snapshot of 2013.This phenomena has been going on for at least the last five years. Then of course previously there were the commissions from supplies of arms. New money has always been there, but in the past quite small. What is different is that it is now huge.
New money transforms nobodies into somebodies
That is the magic about new money. It can transform someone who was clearly a nobody into an important somebody. World-over rapid growth creates new somebodies. Take China; 40 years ago everybody was in Mao suits and rode bicycles and they were all nobodies. Now it has over a million very rich somebodies. If you don’t create a lot of new somebodies, the country is not doing well.
The new money is really good news. If you get a few pieces in place, this money can give a good boost to sustained economic growth.
The new somebodies must be persuaded
The new somebodies must be persuaded to keep it in Sri Lanka and not to salt it away in Switzerland or other safe homes for parking wealth. Splash it around. Buy super duper cars and whiz round the country in them. Build palatial mansions, have fabulous country estates and helicopters to get to them.
The new owners of the new money and their families should dominate society magazines. They must, in other words, create a real feel good buzz in society. Create the feeling that good old Sri Lanka is now really motoring. Declare their wealth and pay their taxes (this will put a smile on the face of my old friend Dr. P.B.J.). It also makes it pure white money and can be freely invested.
Invest their money. Buy up companies struggling for a lack of funds. Start up PE companies, create new ventures. Become great catalysts for bringing in foreign investments. It is always more successful if you can tell the foreign investor that you will match his investment and thereby create a shared risk. Those who have a lot of money can pursue an enterprising entrepreneurial approach with a bolder bit of risk taking. All of this will boost economic growth.
The fuel to boost the growth rocket
We learn from economic history that a good shock to the system also boosts growth. The impact of the end of the war was something similar. The classic case history often quoted is Japan. In the 19th century Japan was a very feudal society. Nothing was allowed to change and so Japan was feudal and poor.
When the Totugawa regime ended in 1868 the new emperor Meji removed all the shackles of the feudal society. Everything that was viewed as permanent suddenly disappeared. All this was a major shock to the system, but a good shock as the bad was removed and replaced with good. This resulted in Japan starting a phase of rapid growth that went on forever.
Who will create the good shock and remove our shackles?
Our society is very unfriendly to investment. We are riddled with Acts, Gazette notices, administrative rules, political interference and bribery. Any investor in a major project will encounter all of this. But it’s worse than that as even a minor project hits some of these obstacles. I know of a Pradeshiya Sabha area where you are required to make an application with structural drawings to build a boundary wall.
We need an Emperor Meji who will remove the shackles and create an investment-friendly society and thereby help the new money to give a real boost to economic growth.
[Lalith de Mel, M.A (Cambridge University) AMP (Harvard), is a former Main Board Director of Reckitt Benckiser Plc UK and CDC Plc UK, former Chairman of Sri Lanka Telecom Plc and Board of Investment, Senior Advisor to the Ministry of Finance and Chairman and Director of many companies both in Sri Lanka and abroad.]
