Should an Econ student take Harshanomics 201?

Wednesday, 10 July 2024 00:30 -     - {{hitsCtrl.values.hits}}

If anybody is capable of successfully balancing a massive human development program through a vibrant economy, that would be Harsha


This is not a political article. I am not a political writer. Were politics your sole interest, you may choose to not to read further. Rather, this article caters to individuals with a deep interest in economics, just like myself. By the end, you will have a well-informed understanding of whether or not to pursue the subject of Harshanomics 201, which is offered by the esteemed Economics Department at the University of Lifelong Studies. 

Why call it Harshanomics? While the subject under discussion has been known to us as ‘Social Market Economy’ and many other different names, as you will find, it was Dr. Harsha de Silva, who referred to it most recently. While I may not completely align with Harsha’s perspective, it would be imprudent for me to disregard his thinking for one reason: The ideas he presents today have the potential to shape our collective future tomorrow.

Dr. Harsha de Silva, my friend and former colleague, is better known as a National level politician. He hardly gets credits for his exceptional expertise in economics. His academic achievements are noteworthy. In 1988, he obtained his BS in Business Management from Truman State University (formerly Northeast Missouri State University). Subsequently, he pursued his MA and PhD in Economics at the University of Missouri, successfully completing his studies in 1993. In 2006, Harsha further enhanced his experience by participating in an executive program on evaluating social programs at the prestigious Massachusetts Institute of Technology, where he was an Eisenhower Fellow. Undoubtedly, when it comes to economics, Harsha stands out among his peers in any political party. Nobody shows that kind of intellectual power in current politics. As a rational human being, I do not rule out the possibility of him one day becoming the Minister of Finance of Sri Lanka. So when Harsha speaks we must listen.

From neoliberalism to ordoliberalism

The main reason for this piece is a recent statement made by Harsha. In a media interview, Harsha expressed his belief in a ‘Social Market Economy’ rather than adopting ‘extreme positions’ of communism or neoliberalism (his words, emphasis mine). This is a departure from what I have known of Harsha’s ideas, as he has been associated with neoliberalism for many years. Numerous video clips of his previous statements on YouTube confirm this. Given that Harsha represents a powerful political party, it is reasonable to consider ‘Social Market Economy’ (aka ‘ordoliberalism’ and many other terms) as the collective ideology of that group.

The Sri Lankan neoliberal school of thought is highly influential within the field of economics, often considered as the mainstream economists. Notable scholars, including Dr. W.A. Wijewardena, Dr. Indrajit Coomaraswamy, Prof. Shanta Devarajan, Prof. Prema-Chandra Athukorala, Dr. Sarath Rajapathirana, and Dr. Nandalal Weerasinghe, represent this group. Sorry, if I might have missed any names. 

The ideas of the said scholars are not entirely homogeneous. However, as a general principle, this group believes in the importance of a robust private sector and a limited role for government intervention. They are opposed to price controls and stringent government regulations. Taking inspiration from the teachings of Milton Friedman, they also prioritise economic growth as a crucial indicator of development, while viewing inflation as a significant threat. In the aftermath of the economic crisis in 2022, the majority of these scholars strongly advocated for IMF assistance as the sole means to overcome the crisis. They hold the belief that strict adherence to IMF conditions, as exemplified by Ecuador’s success, will lead the country out of its difficulties (Ecuador example is theirs, not mine). 

Advocata, a think tank led by my friend Dananath Fernando as its CEO, aligns with this ideology and actively promotes it. In Pathfinder events too one frequently hears neoliberal ideas. This is certainly the school that is most intellectually powerful, when it comes to matters those are economic. 

Given this backdrop, Harsha’s decision not to be identified with neoliberalism is a bit puzzling. He can only justify that stance if he plans to offer a better alternative.

Harshanomics: Was that what saved Germany?

The Social Market Economy is a socioeconomic model that combines elements of a free-market capitalist system with social policies to ensure fair competition and the establishment of a welfare state. This approach is also known as Rhine capitalism or social capitalism. It has a rich history that dates back to the inter-war years and was developed, in mid last century, by German economists and legal scholars from the Freiburg School, such as Walter Eucken, Franz Böhm, Hans Grossmann-Doerth, and Leonhard Miksch, who rejected neoliberalism. 

This new approach aimed to strike a balance between free initiative and social welfare within a competitive economy. It stood in opposition to laissez-faire policies and socialist economic systems. Instead, it combined private enterprise with regulation and state intervention to establish fair competition and maintain a balance between economic growth, low inflation, low unemployment, good working conditions, social welfare, and public services.

This new model, for the first time, was implemented in West Germany by the Christian Democratic Union under Chancellor Konrad Adenauer in 1949, four years after the end of WWII. The Minister of Economics, Ludwig Erhard, played a crucial role by promoting the social market economy and implementing policies that led to rapid industrial growth and stability. It sought to combine the benefits of private enterprise with regulation and state intervention to ensure fair competition and social welfare. So in a way, one can interpret it as getting the best of both worlds. 

All would have lived happily ever after had this been the entire story. The reality was more complicated. There were multiple contributors to Germany’s recovery after World War II, often referred to as the “German Economic Miracle” or Wirtschaftswunder, other than the Social Market Economy. The US-financed Marshall Plan (1948–52) provided vital aid for rebuilding war-torn Germany. West Germany, specifically, was provided with $ 1.4 billion (equivalent to about $ 18 billion in 2024). The Marshall Plan, undoubtedly, was a significant factor in the economic resurgence of Germany and other European nations post-war.

Japan’s experiments with Harshanomics

I consulted Copilot to provide a list of countries that follow the Social Market Economy model. Sans Germany, it gave me this list: Austria, Czech Republic, Poland, and Japan. It may be worthwhile for Harsha and his team to thoroughly study the Japanese model, as it is the only Asian example. While Japan’s approach has unique characteristics that distinguish it from the traditional European social market economies, it shares a focus on social welfare and a mixed economy.

Japan was the first country in Asia to achieve a developed country status. Even with recent setbacks, it is the fourth-largest economy in the world by nominal GDP behind the United States, China, and Germany. Japan has a highly service-dominated economy, which contributes approximately 70% of GDP, with most of the remainder coming from the industrial sector. The automobile manufacturing industry, which is the second largest in the world, dominates the industrial sector, with Toyota being the world’s largest manufacturer of cars. It manufactured 11.2 million units in 2023. Japan is often ranked among the world’s most innovative countries, leading several measures of global patent filings. (However, its manufacturing industry has lost its world dominance since the 1990s)

The Japanese model included elements such as lifetime employment, a strong cooperative relationship between manufacturers, suppliers, and banks, and a significant role of government guidance in the economy, which are aligned with some principles of the social market economy. 

Sri Lanka’s human development achievements for 76 years

The Social Market Economy is characterised by a dual approach: principles of a free market economy and human development. The latter has been an integral component of the nation’s economic framework since before its independence. The strides made in this domain over the past seven to eight decades are commendable.

In the 1940s, a significant segment of the population hovered at the brink of subsistence, with malnutrition being rampant due to meagre incomes, suboptimal dietary practices, and the scarcity of foodstuffs. At the dawn of independence in 1948, malnutrition-related diseases and metabolic disorders were among the leading causes of mortality. Healthcare services were sparse and predominantly urban-centric. The infant mortality rate stood at a staggering 9%, and average life expectancy was merely 40 years. Although education was nominally free, socioeconomic barriers impeded access for children from rural and impoverished backgrounds. The literacy rate was 65%, and 25% of school-aged children were deprived of educational opportunities. Higher education was limited to two universities, with only 0.6% of individuals aged 15-20 gaining access to tertiary education. Housing conditions were also dire, with approximately half of all dwellings in 1948 being rudimentary mud structures with impermanent roofing. Biomass and petroleum products constituted the primary energy sources, and a mere 1% of households had electricity. Over the last 76 years, there has been a visible transformative shift in these conditions. While successive governments have had their shortcomings, each has endeavoured to diligently advance human development indicators.

Premadasism: The first version of Social Market Economy in Sri Lanka

The other facet of the Social Market Economy was introduced only after 1977. The transformation was better known as the “Open Economy”. While then President Junius Jayewardene focused more on the economic side, it was President Ranasinghe Premadasa who achieved, perhaps for the first time after independence, a balance between a free market economy and Human Development. 

President Premadasa was best known for his public sector housing programs, which first aimed at building 100,000 houses but later expanded the target to 1 million and then 1.5 million. While the state was directly involved in improving housing conditions of public since 1953, it was only after 1977 the initiative was recognised as a national priority. Under the visionary guidance of Premadasa, first as Prime Minister and then President, government supported housing for the underprivileged with activities facilitated with low interest loans, provision of grants, construction of low cost houses for sale and supply of building materials either free or at low cost. 

Accomplishments of these programs were legendary. In 1971, reveals Census of Population and Housing of the same year, there were only 2.2 million houses. This number has risen to 2.8 million by 1981. By 1994 there were 3.8 million houses. It was not just a quantitative increase. Average size of household (number of persons) has fallen from 5.1 in 1971 to 4.5 in 1994. Percentage of permanent houses to total has almost doubled from 35% to 67%. Percentage of mud houses and houses with temporary roofing materials (cadjan and palmyra) were brought down to less than half what it was in 1971. Number of houses with toilets for exclusive use has increased from 39% to 76%. Percentage of houses with water sealed and flush toilets has jumped three times from 21% to 63%. Availability of electricity to houses from a mere 9% in 1971 has enhanced to 44% by 1994. By the time of assassination of President Premadasa nearly 80% of the population was living in houses they own, not rented.

Gam-Udawa, Janasawiya and Garment Factory Program

President Premadasa went far beyond improving housing facilities. His ‘Gam Udawa’ was not merely a development exhibition. Parallel activities developed the entire infrastructure setup in selected rural areas – one location every year. Road networks in these areas were developed mostly for the first time after colonial times. A mobile secretariat brought the central government bureaucracy to villages. Buildings constructed for ‘Gam Udawa’ exhibition were later converted to form a government administrative framework at village level. Perhaps for the first time in history, a national level attempt to develop rural small and medium scale industries was in force. The foster parents’ program he introduced has helped thousands of kids, even decades after his demise. 

Then came Janasawiya. Born following an election promise, each disadvantageous family was offered the equivalent of a monthly stipend of Rs. 2,500 – then a considerable sum. Sadly, it ended a political apparatus using which (under different names) successive governments pumped colossal amounts of funds to their party supporters. This could be politically the most popular, but economically and socially the least effective of all Premadasa programs.

After successfully defeating rebels in the South, President Premadasa also launched ‘Two Hundred Garment Factory Program’. This was a part of a large scheme that introduced over 750 new commercially operated projects also in three Export Processing Zones in Katunayake, Biyagama and Koggala but the bulk outside them during the regimes of Jayawardene and Premadasa. 

These periods, especially the short tenure of President Premadasa has seen an unprecedented creation of employment opportunities. By mid 1990s nearly 250,000 were newly employed in the industry sector. Out of this about 60%, i.e. 150,000 were engaged in the apparel sector. Today apparels constitute a $ 5 billion industry and Sri Lanka’s primary foreign exchange earner accounting to 40% of the total exports and 52% of industrial products exports. The apparel industry provides direct employment opportunities to over 300,000 – largely rural women.

President Premadasa’s accomplishments were achieved amidst conflict in both North and South of the country. Had his tenure extended into a more peaceful environment, the tangible outcomes of his efforts would likely have been even more pronounced.

Is Sri Lanka now ready for Harshanomics?

At this critical point, it is imperative to assess whether Sri Lanka is equipped to adopt a Social Market Economy. The precedents set by Germany and Japan post-WWII differ notably; despite their devastated economies, they received substantial financial injections. In stark contrast, Sri Lanka in 2024 does not have this advantage. The era of being referred to as “the donors’ darling” has passed. The assistance provided to Sri Lanka under the 48-month IMF Extended Fund Facility is insufficient to be deemed substantial support. The country struggles improving its foreign reserves. The life would not be this easy when we restart paying debts. In this environment, could one expect any human development initiatives funded by the Government?

The next issue would be how the IMF might look at it. Historically associated with austerity measures rather than welfare programs, the IMF evaluates Sri Lanka’s economic recovery based on key indicators such as increased Government revenue and reduced budget deficits. Given the current financial constraints, Sri Lanka lacks the resources to support an extensive human development initiative. The central challenge, according to the IMF, lies in securing funding for the Government from taxing the citizens, rather than the reverse. 

The most viable solution to address this situation would be to develop a comprehensive plan aimed at achieving rapid economic growth. This growth would then provide the necessary resources to support welfare programs. It was Dr. Neville Karunatilake who provided this very advice to President Premadasa when he was contemplating the implementation of the Janasawiya program, which was a significant undertaking for the economy at that time. However, it is important to acknowledge that implementing such a plan is much easier said than done. Sri Lanka has been diligently striving to overcome the challenges of the middle-income trap for the past 15 years. It is crucial to recognise that addressing this issue requires the expertise of a seasoned politician, as it is not a task suited for an amateur.

What Suwa-Seriya teaches in delivering human development solutions

If anybody is capable of successfully balancing a massive human development program through a vibrant economy, that would be Harsha. He has demonstrated exceptional capabilities in effectively launching the 1990 ‘Suwa-Seriya’ program in 2016. This commendable initiative offers comprehensive, island-wide pre-hospital emergency care to all Sri Lankans, ensuring a rapid average response time of 16 minutes. With a network of 300 strategically positioned ambulances and efficient 24/7 call centres, immediate attention is provided to individuals in medical emergencies. A dedicated team of 1,400 enthusiastic individuals, predominantly young, work tirelessly to save lives through their unwavering commitment and provision of proper care. A single call from any phone network will swiftly summon the necessary assistance. Alternatively, one can also use an emergency app (available on Android and iOS) to call an ambulance with just a press of a button during emergencies. All this, without a cent cost to the patients or families. 

How could this be achieved? The key lies in implementing effective and efficient management practices. Harsha, has made a deliberate effort to assemble a team of highly skilled professionals to lead the way. Dumindra Ratnayaka, a renowned business leader, has been appointed as the Chairman to spearhead this endeavour. Under Dumindra’s guidance, the initiative has embraced some of the best management practices available. This includes leveraging technology to optimise operations and enhance service delivery. In addition to providing basic emergency services, Suwa Seriya has integrated technology into its operations. One of the notable advancements is the implementation of a locally developed real-time vehicle tracking system. This system is closely monitored by a central command centre, enabling efficient monitoring and coordination of resources.

Conclusion: Do you still think you want to take Harshanomics 201? 

Selecting one subject, and not another, always has advantages and disadvantages. In this case, choosing the Social Market Economy presents its own challenges. Typically, a rational individual would opt for neoliberalism, which prioritises growth and then considers human development separately. This approach is also the one endorsed by the IMF. There would be serious repercussions on deviating that path. Thus anyone moving away from this path must proceed cautiously and accept significant risks. Once the decision is made, there is no turning back. If a social economy model fails, it could set the country back by 20 years.

I understand that those who still wish to pursue this option have likely weighed the risks carefully. I hope they proceed with confidence, believing they have control over the situation. Although I may not fully agree with their decision, I wish them luck in their endeavour.

(The writer, an independent policy researcher, can be reached at [email protected]. The opinions expressed are personal.)

Recent columns