Finding the middle ground

Friday, 2 November 2018 00:00 -     - {{hitsCtrl.values.hits}}

Sri Lanka’s economic policies have always swung between open market and closed market systems. Historically, Sri Lanka has been a trading nation, but later decades saw socialist economic policies move to the forefront and these tendrils are still deeply etched in local social and economic ideologies. These leanings have also shaped the policies and political fortunes of Sri Lanka’s two main parties. 

The United National Party (UNP) has traditionally leaned towards open market policies but its main rival, the Sri Lanka Freedom Party (SLFP), has preferred economic policies that veer towards protectionism and import substitution. This was most marked during the leadership of former President Mahinda Rajapaksa, where focus was on populist policies, including para tariffs, fertiliser subsidies, arbitrary price controls and promoting local manufacture. With his appointment as Finance Minister by President Maithripala Sirisena, former President Mahinda Rajapaksa seems intent on returning to these policies.  

Rajapaksa also spearheaded efforts to increase the public service, aggressively expanding recruitments to areas that were not necessarily the most productive with development officers being a good example. 

The Government service has traditionally been a captive vote base that political parties aggressively woo, particularly ahead of closely run elections. There is also great demand for Government jobs in rural areas because of the scarcity of white collar jobs, as Sri Lanka’s economy remains largely limited to the Western Province and other key urban centres.

Therefore it is understandable that with elections looming, populist policies are the easiest measures to roll out. They are also faster to implement than attempting to restructure the economy, which is a slow and cumbersome process, usually requiring many years of consistent policies and political will. So, when governments offer subsidies to farmers and impose taxes on imports, most people are tempted to cheer. But, the results are more complex than what would appear at first glance. 

While local production, particularly of food, may bring down prices through competition in the short-term, there are negative impacts – the most problematic being productivity. Sri Lanka has given billions worth of subsidies over many decades, but has done little to introduce technology or scientific methods to agriculture. These measures have also kept more people trapped in agriculture, which only makes up about 7% of Sri Lanka’s GDP but encompasses about 27% of the labour force. This has prevented labour from moving up the value chain to more lucrative and productive jobs. Even though food security is important, it can be achieved through a balance of local production and imports. Actively discouraging imports also means that consumers cannot get access to goods and services at competitive prices, which hurts the poor the most.  

Protectionism has spilled over from agriculture to industries as well. A study done by the International Monetary Fund (IMF) earlier this year showed that the industries which have the highest level of protection contribute the least to exports. Ceramics, dairy, food processing, bakery products, alcohol and even noodles are protected, but none of these are key exports.   

Apparel, tourism, retail and IT sectors have led the way in earning precious foreign exchange and meet aspirations by creating well-paying jobs. This is the transition Sri Lanka’s economy needs to make to be truly prosperous. Populist policies are good for winning elections, but they have not provided much else to the people of Sri Lanka.