The debate: Practical Economist’s views on Wijewardena’s article of 31 March
Friday, 4 April 2014 00:00
In his customary Monday article on 31 March, W.A. Wijewardena has gone to great lengths to argue that even single digit inflation means that price levels are rising. No student of Economics would contest such fundamental reality, and hence that argument is superfluous.
However, the point made in the Practical Economist’s response was that inflation remained at single digits for the longest continuous period in post-liberalisation history of Sri Lanka, only after Wijewardena ceased to be in charge of monetary policy at the Central Bank. In reply, Wijewardena has mentioned that there were times when single digit inflation was recorded during his period as Deputy Governor, as well. That is true, but what he forgot to mention was that the average inflation during his period in high office was about 12% on a year-on-year basis, compared to the inflation of about 6% after his retirement. Perhaps, at least at this late stage, he could gain some credibility as an apolitical writer if he admits to such reality.
"The debate thus farn17 March – ‘Potential Output in Sri Lanka: It is dangerous to speed the car beyond the installed engine capacity’ by W.A. Wijewardena: http://www.ft.lk/2014/03/17/potential-output-of-sri-lanka-it-is-dangerous-to-speed-the-car-beyond-installed-engine-capacity/n20 March – ‘Potential output: The reality behind the fiction’ by at Practical Economist: http://www.ft.lk/2014/03/20/potential-output-the-reality-behind-the-fiction/.n24 March – Reality behind potential output: Critical reading by Practical Economist is commendable by W.A. Wijewardena: http://www.ft.lk/2014/03/24/reality-behind-potential-output-critical-reading-by-practical-economist-is-commendable/n27 March – Reality behind potential output: A response by Practical Economist: http://www.ft.lk/2014/03/27/reality-behind-potential-output-a-response/n31 March – Practical Economist responds, but resorts to tactic of making personal remarks to win the debate: http://www.ft.lk/2014/03/31/practical-economist-responds-but-resorts-to-tactic-of-making-personal-remarks-to-win-the-debate/
Wijewardena presents another argument to downplay the present day single digit inflation levels achieved by the Central Bank, by claiming that the Central Bank objective is to realise both economic and price stability. His suggestion that economic stability has not yet been achieved seems to be based on the existence of several other economic imbalances that he has pointed out, such as trade and current account deficits, fiscal imbalances and high short-term debt.
His argument unfortunately indicates either a misunderstanding of the underlying monetary policy objective of a central bank, or a political bias which is manifested in his desire to highlight imbalances only in the current economic and political context.
As any student of Monetary Economics would know, economic and price stability means short-term stabilisation of the output gap and inflation. All students of Monetary Economics also know that in the medium to long term, monetary policy alone cannot address many structural imbalances which need to be addressed by other policy measures.
As the main economic adviser to the Government, Sri Lanka’s Central Bank has the responsibility of providing economic advice to the Government. Hence, from Wijewardena’s comments, what is implied is that the Monetary Board (MB) and Wijewardena’s colleagues at the Monetary Policy Committee (MPC), have ignored his advice on Monetary Policy, or he has been unable to convince other policy makers and stakeholders of his views on how to address other structural imbalances of the economy, although it was an important part of his (and the Central Bank’s) responsibility.
Wijewardena admits that recommendations on monetary policy decisions were made by the MPC which was chaired by him for a considerable period from as far back as early 2000. At the same time, Wijewardena also states that the success or failure of monetary policy implementation lies with the MB, which he states takes the final decision on monetary policy.
In this background, two possible scenarios could arise. First, Wijewardena, as the Chairman of MPC may have submitted inappropriate recommendations to the MB and the MB may have approved such policies which failed to achieve price stability during the period under reference; or second, Wijewardena’s MPC may have offered the appropriate technical advice, but the MB did not accept the MPC’s recommendations, which of course suggests that Wijewardena as Deputy Governor failed to convince the eminent members of the MB of the MPC’s view.
Wijewardena’s comments also give the impression that he is attempting to shift the blame to the other members of the MPC for Sri Lanka not being able to achieve price stability during his time. He explains that the MPC recommendations are the result of team work, by which he seems to be confirming the famous saying: “victory has many fathers, but failure is an orphan,” while also making the tacit admission that he has either failed to convince the other members of MPC of his own enlightened stance, or that he had merely acted as a mailbox by submitting recommendations of the MPC to the MB. In that context, Wijewardena can certainly enrich this debate by sharing further insights on this subject with the eager-to-learn public.
Strangely, Wijewardena continues to argue that the investment in Mahaweli was a failure, by highlighting some selective data points to buttress his stance. He also suggests that the current infrastructure drive is unproductive on the same token. Suffice to state, followers of this debate could make their own judgments on this issue, since sufficient data and information is publicly available on this subject, and therefore further debate is unnecessary.
Wijewardena also goes on to make some interesting comments on education reforms which deserve a more comprehensive debate. For the time being however, it must be stated that successive governments have made useful progress in reforming education and providing more opportunities for education. However, it has to be appreciated that education reforms have often been politically controversial in Sri Lanka, and hence such reforms agendas need to be implemented wisely and in a measured manner to suit the emerging needs of the economy.
Finally, Wijewardena has raised the question as to the identity of the Practical Economist, possibly in order that he could make an assessment as to whether the ‘Practical Economist’ has the stature and learning to question and test Wijewardena’s own eminent track record and words of wisdom. By raising such issue, he seems to be cleverly trying to suggest that the view of an ordinary Practical Economist cannot be matched against that of a high-ranked former Deputy Governor of the Central Bank, who possesses vastly superior knowledge and extensive experience.
Therefore, this Practical Economist humbly acknowledges that he does not claim to be as knowledgeable or experienced as Wijewardena, but only that he wishes to hold out as a practical professional with a sound Economics learning and background. Hence, the Practical Economist’s identity will not add any new value to this debate, since this effort is purely to apprise the general public of another dimension to Wijewardena’s regular and eminent contributions to the Daily FT, in an impartial and professional manner.