Margaret Thatcher and JR: More contrasts than parallels

Tuesday, 16 April 2013 00:00 -     - {{hitsCtrl.values.hits}}

Many have sought to draw parallels between Margaret Thatcher, one-time British Prime Minister who passed away last week, with her contemporary in politics, Sri Lanka’s first Executive President J.R. Jayewardene, better known as JR. While there are a few parallels, there are stark contrasts between the two.

Parallels between Thatcher and JR

First, let’s turn to the parallels. Both are said to have left a legacy in their respective countries by changing the course of their future destiny. That change though necessary at the time they introduced it, has not been appreciated by many even when they were in power. Both of them became heads of state after being in politics for many decades. Both headed two rightist parties that had faith in the private sector.

At the time they became heads of state, their respective countries had undergone a disappointing experiment of socialism with an expanded public sector, untenable government budgets, slow economic growth, high unemployment and high inflation. In the UK, inflation had been at around 20% per annum, while in Sri Lanka, though the price index did not show it because of controlled prices, it would have been around that level or even higher when one adds the costs of the black markets, queues and rationing systems to the prevailing controlled prices. Thus, they were compelled by the circumstances of the day to introduce the changes which they did.

Both tamed the trade union militancy which had become a nuisance. They both faced the worst episode of terrorism in the history of their respective countries obstructing the growth oriented strategies they had put into practice.

But the contrasts between the two leaders have been many.

The first contrast relates to the economic ideology they had believed.


JR: The State is the best to run an economy

Though JR did his politics in a party that had trust in capitalism, he was a different type of a capitalist. According to the biographers of JR, K M De Silva and Howard Wriggins, JR led a policy committee of the Ceylon National Congress, the predecessor to the current United National Party, in 1939. De Silva and Wriggins say that the report of the policy committee was pretty much JR’s making. If it is true, JR in his 30s would have been a pro-socialist, outperforming even Joseph Stalin of the Soviet Union in that respect.

The committee had recommended in its report that except in the case of small holding paddy farmers, all other economic and business activities should be undertaken by the state. While farmers were to be supported by subsidies and technical know-how on scientific farming, they should also be protected from the inflow of imports through high tariffs and in some cases, the prohibition of the import of certain food items completely, a measure suggestive of his faith in a closed economy. He had gone to the extent of recommending that the state should take over the control of agricultural production and distribution, a system of planning that existed in the Soviet Union where resources are allocated by the state and not by the market system.


JR: Excess land should be acquired by the State

JR’s land policy had been much more socialistic in the sense that it aimed at restricting the extent of private land ownership which was implemented many decades later by the Government of Sirimavo Bandaranaike in 1970s. He had recommended that the State should compulsorily acquire private land after paying compensations for development purposes, lands below a certain extent should not be permitted to be blocked out and lands above a certain extent should be purchased by the State.

The recommendation on the payment of compensation for the land compulsorily acquired would not have done justice to the land owners since it involved a cumbersome procedure taking time and eventually paying compensations not according to the market values but as assessed by state bureaucrats. The outcome of JR’s land policy is clear: To reduce the land holdings of the private proprietors on the one hand and make the State a huge land owner on the other. Unless he had believed that the State was a better land manager, he would not have made this recommendation.


JR: The State should be the key player

He had also recommended the State ownership in key industries, importation of essential items, public transport and elementary, adult, industrial and vocational education. Thus, the State had been elevated to a superior position in the economy in terms of JR’s policy recommendations.

This is in accord with the famous statement made by V.I. Lenin in 1922 to the critics of his New Economic Policy that his comrades need not worry “because the commanding heights of the economy had been vested with the State” though the private sector had been used by the fledgling socialist State to push up production. With these policy recommendations, JR also had demonstrated that he had wanted the state to hold commanding heights.


Finding an ally in Keynes

Thus, JR’s ideology had been not for a mixed economy as inferred by his biographers but for a pro-state economy where the state would run the show. His biographers confirm that in order to become an effective Minister of Finance, JR had read a large number of books of which the most important one had been the classic ‘General Theory of Employment, Interest and Money’ published by the reputed British economist John Maynard Keynes in 1936.

In that book, Keynes had recommended the increase in government expenditure through deficit budgets often funded by printed money to push an economy toward the full employment level. After reading General Theory, it appears that JR had become an instant convert to Keynesianism. Since he had been holding similar views in 1930s, long before he read General Theory, it is likely that he found an intellectual and theoretical ally in Keynes to validate his state-centred economic ideology.




Going for full employment budgets with State expansion

JR’s leaning toward Keynes and a State-centred economy could be observed in the four budgets he presented after independence. He had been critical of the colonial era budgeting where budgets were balanced by curtailing expenditure. To JR, this was like cutting the coat not according to the size of the body but according the size of the clothes. Hence, calling his budgets full employment budgets, he had expanded the government sector and government expenditure to promote economic growth.

In the budget 1949, he went one step further arguing for the control of both prices and interest rates, his way of countering rising inflation in the absence of a central bank to conduct monetary policy. To expand the budget, he needed a mechanism to print money and the prevailing currency board system was an obstacle to do so. This was because issuing currency under that system had been linked to the acquisition of foreign assets by the country and thus, printing money could not be done at will as in the case of a central bank.

The establishment of the Central Bank of Ceylon in 1950 with powers to lend to the government enabled JR and subsequent politicians to practice Keynesian policies by getting the Central Bank to print money and finance the budget deficits, though that was not what the architect of the Central Bank, John Exter, expected.


Exter warning goes unheeded

In the report he submitted to JR, known as the Exter Report, Exter warned those who advocated Keynesian policies to Sri Lanka which was an open economy. He had said that if government expenditure is increased by printing money, it would lead to inflation on the one hand and increase imports on the other. Both will worsen the balance of payments forcing the country to devalue the rupee in the long run. Though this was exactly what happened in Sri Lanka since the establishment of the Central Bank in 1950 and what is happening even today, JR or any other Finance Minister was not in a mood to listen to this sound advice.


JR to Central Bank: Give priority to prosperity

At the opening ceremony of the Central Bank on 28 August 1950, as reported by Ceylon Daily News, Prime Minister D.S. Senanayake, assuming the role of a monetarist long before monetarism came to the forefront, had warned the new Central Bank against printing excessive money and getting into trouble like Greece at that time. But, JR who had graced the event as the Chief Guest, without hiding his Keynesian leaning, had reminded the Central Bank that ‘money exists for man and not man for money’. What he meant was that if there was necessity to print money to create prosperity for people, the new Central Bank should not hesitate to do so.

Thus, JR started his political career as a Keynesian believing that the state should be expanded in order to bring prosperity to people. But what about Margaret Thatcher? She started her career completely from the opposite camp.


Thatcher: Suspecting Keynesian validity

Thatcher, though a graduate in chemistry from the University of Oxford, was pretty much interested in learning of socio-political economic issues of the day. She too read Keynes’ General Theory but was sceptical of Keynes’ proposition that printed money can create prosperity on a permanent basis. What she had learned from her grocery-store owner father was that it was hard work that created prosperity.

Similar doubts had been entertained by the Singaporean leaders too after they read Keynes’ General Theory, as revealed by its first Finance Minister, Goh Keng Swee in an article he wrote to the Silver Jubilee Commemoration Volume of the Singaporean Currency Board in 1989. It appears that other leaders in both developed and developing countries, including Sri Lanka, had failed to read General Theory from this critical point.


Hayek: Government expansion is Road to Serfdom

Then, in 1949, Thatcher had read another book, this time a critical answer to the final outcome of Keynes’ General Theory, namely, the onset of socialism, by another leading economist of the day, the Austrian Economist Friedrich August Von Hayek, who had been attached to the prestigious London School of Economics at that time.

This book, which Hayek published in 1944 under the title ‘The Road to Serfdom,’ had argued that if a State intervenes in economic activities as prescribed by Keynes, people lose economic freedom to the state and with that loss, they would lose all other freedoms as well. Hence, the Keynesian prescription was nothing but cutting a path for people to walk to slavery – a kind of serfdom that prevailed in feudal societies.

There would be an expanded state beyond imagination encompassing all aspects of the life of people and they would continue to pay taxes to maintain that state out of their meagre earnings. The state would continue to use those tax incomes inefficiently and wastefully because its knowledge is faulty and inadequate thereby impeding the creation of prosperity. The result is that a super giant state sitting on the shoulders of people overburdening them with no chance to escape.


JR: Politicians can create ideal men

When Thatcher read this book, she became an instant fan of Hayek’s reading of Keynesian prescription. Hayek’s book was a best seller running into six impressions in the first 16 months despite the war-time shortage of printing paper. Then, The Readers’ Digest serialised a condensed version of ‘The Road to Serfdom,’ making it available to many more thousands of readers worldwide. It was translated into many languages and circulated clandestinely in the Soviet Union as well.

It was strange that a voracious reader like JR did not get a chance to read this counter view. Perhaps, his convictions would not have made it necessary for him to do so, since in Buddhist Essays he published in 1942, JR had argued that the ideal state should have ideal men without greed, hatred and delusion and it is the duty of politicians in power to make those men through legislations, policies and control and direction of education. So, JR had a firm conviction of the ability of the state to create ideal men and prosperity in society too.


The challenge of dismantling the expanded state

When both Thatcher and JR came to power in late 1970s, the two countries they took over were in a mess due to the overexpansion of the state. In both countries, practically everything was produced and supplied by the state. In the UK, as revealed by the British Prime Minister David Cameron in paying tribute to Thatcher in the House of Commons, the state had owned even a removal company.

In Sri Lanka, the State had been producing and supplying even biryani through a State-owned restaurant. So, their challenge was to dismantle the state and make the respective economies working again. The motto of Thatcher was that governments do not create wealth but the businesses do. So, she, having dismantled the huge state sector, went ahead with creating within a short space of time the environment conducive for businesses to thrive and create wealth.


Not much done to reduce the state size

JR too accepted as a matter of principle the role to be played by the private sector; but he failed to dismantle the state completely and allow the private sector to play that role effectively. Though he introduced the open economy, by the time he left office in 1989, about 60% of the imports of the country – rice, fuel, sugar, wheat flour – were in the State sector. There was a licensing requirement for almost all the exports and exporters had to flock to government bureaucracies to get the necessary permits.

It was left to his successors – President Ranasinghe Premadasa and President Chandrika Bandaranaike – to further open up the economy. Even as late as 2002, Prime Minister Ranil Wickremesinghe had to steer a special project to remove all the obstructive regulations to make the economy business-friendly. He could not complete this job because of the short lifespan of his Government and it is now up to the current leadership to take it forward and deregulate the economy.


Further expansion of the State during JR’s time

During JR’s time, the State sector further expanded though there were some marginal privatisations. It was the State sector investments and not private investments that brought a temporary economic upheaval in the country. For instance, in 1980, of the total investments, government investments amounted to nearly a half and investments by public corporations by another 35% making private investments only a paltry 15%. He was able to mobilise a large volume of concessionary bilateral and multilateral credit for investments but they were all implemented through the creation of public sector bureaus.

One stark example is the Mahaweli Authority and a dozen of subsidiary corporations and companies formed under it. All these authorities and subsidiaries have become white elephants draining taxpayers’ money today. When Thatcher was successful in taming the budget deficit and reducing the UK’s public debt, Sri Lanka’s budget went into eternal deficits raising its public debt phenomenally.

Since the government utilised all the available savings, the private sector was starved out. Since the Central Bank printed money was used to finance the budget – even as late as 1990, of the total Treasury bill issues, about 95% was held by the Central Bank – as predicted by John Exter, the country had to grapple with the problems of rising inflation, deteriorating balance of payments and depreciating exchange rate. It appears that the Keynesian living within JR did not permit him to go all the way for economic reforms reducing the size of the government.  This is the striking contrast between Thatcher and JR.


Who is Sri Lanka’s Thatcher?

Most of the economic reforms in line with free market economic policies were introduced by Chandrika Bandaranaike during her presidency. Hence, she is the only Sri Lankan leader who comes close to Margaret Thatcher as far as economic reforms are concerned. The current policies where the State sector has been reconstituted are similar to the Keynesian state expansion perpetrated by JR in his wisdom as a pro-state man.

(W.A Wijewardena can be reached at [email protected].)

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