27 October 2014 03:43 am Views - 4059
“We are all Keynesians now,” Richard Nixon, then US President said, but the original phrase was from Milton Friedman. It expressed the reluctant embrace of Keynesian economics, in a time of financial crisis, by leaders such as Nixon, who had formerly favoured less interventionist policies. Friedman later clarified. According to him, the original statement has been “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” Interestingly, most remember the first version, not the corrected one. They also quote it frequently, as if that explains everything.What John Maynard Keynes to post-depression Britain is exactly what P.B. Jayasundara (PBJ) now to a former tiny colony of them. In a land sans a separate finance minister, PBJ’s influence and responsibilities are equivalent to those of the Chancellor of the Exchequer in the UK. If Sri Lanka were an institution, as the only professionally trained economist in upper echelons of power, PBJ would have been its Chief Economist. (Ajith Nivard Cabraal, the Governor of the Central Bank, is a professionally a Chartered Accountant)What makes PBJ unique is not just his position.
For the last few years, he has been presenting us a set of economic policies we now, as a nation, find the best we can expect. We are so used to these policies now, it appears even an alternative government will not be able to divert. The approach is somewhat novel. No other country follows this strange combination of opposing neo-liberal and populist economic policies. It looks like a salad made of different fruits. Each has a unique taste. Each is intended for a distinct group. Critics question individual items. They don’t offer their own salad.
The objective of this piece is twofold. Firstly, it briefly analyses the distinctive features of these policies, particularly in light of the 2015 budget proposals that have recently been presented. Secondly, it raises the question: can one seriously divert from these?
NEO-LIBERAL ASPECTS
While the government purposely avoids the term, more for political reasons, no doubt that we stand far above our South Asian neighbours in pushing neoliberalism in the region. As a result, we have been able to show an impressive growth.An interesting comparison would be with Gujarat, an Indian state formerly led by its present Prime Minister Narendra Modi, an icon of neo-liberalism in South Asia. Gujarat, aptly called ‘India’s Guangdong’ is three times bigger than Sri Lanka, both in population and size. Still it is only a US $ 125 billion economy, while much smaller Sri Lanka hit US $ 67 billion last year.
Only seven Indian states surpass Sri Lanka in terms of gross domestic product (GDP). (Maharashtra, Uttar Pradesh, Andhra Pradesh, Gujarat, Tamil Nadu, West Bengal and Karnataka) They all are far more populous and bigger in size. Only one, the most industrialised Maharashtra, with India’s commercial capital Mumbai, stands close in terms of GDP per capita. The rest, if they were independent countries, are more like subSaharan African and some developing Central Asian nations.
Neo-liberalism has been evident in Sri Lanka’s trade policies since late 1970s. Our free market policies commenced in 1978, after the fall of an unpopular protectionist regime in 1970-77. Afterwards, every successive government followed the laissez-faire trade policies with increasing openness. While high tariffs still exist for certain commodities such as automobiles, in general, the restrictions are low. A fine reflection of our free market policy was Nita Ambani’s purchase of 25,000 pieces of chinaware for her high-rise home from Sri Lanka. The wife of India’s richest individual didn’t see the taxinflated prices at the exclusive Noritake showroom in Mumbai’s Kemps Corner, attractive enough.
Fiscal deficits, a nightmare of neo-liberals, are on the decline here over the last few years. The government’s high debt payments and expanded administrative service have once contributed to historically high budget deficits. Fiscal consolidation efforts and strong GDP growth in recent years have helped bringing it down.
Sri Lanka has also maintained its currency at a competitive rate. The sharp depreciation in early 2012 had some negative impact but also has prevented the country moving into an abyss. A large trade deficit still remains a concern but strong remittances from Sri Lankan workers abroad have somewhat helped offsetting that.Sri Lanka also invests heavily on building infrastructure. This can be identified as another key neo-liberal initiative. The years 2013 and 2014 saw many key mega infrastructure projects including Mattala Rajapaksa International Airport, Colombo-Jaffna railway line, Norochcholai power plant phase II, South Container Terminal of the Colombo Harbor Development Project and Colombo – Katunayake Expressway commencing ‘commercial operations’, though not in a big way, even by the government standards.
The Godagama – Pinnaduwa section of the Southern Expressway and the Kottawa – Kaduwela section of the Outer Circular Highway (OCH) were opened for traffic in March 2014. The construction work relating to other mega infrastructure projects such as phase II of Magam Ruhunupura Mahinda Rajapaksa Port, the Northern Railway Project, phase II of the Colombo South Port Project, phase II of the OCH are being continued.
Several urban development initiatives were underway in key cities. Multiple small-scale infrastructure development projects such as the ‘Maga Neguma’ rural road development programme, rural electrification projects, irrigation projects and community-based water supply projects continued. The government investment on hard economic infrastructure development was US $ 3.4 billion or 5.2 percent of GDP in 2013.
Neo-liberals also wish non-preference status for sectors or industries. The service sector does well not because of the special favours but it makes the best match. Two sub sectors that have seen remarkable growth during postconflict times are tourism and IT-enabled services.The tourism target is to attract 1.5 million ‘guests’this year with the hope of increasing that to 2.5 million by 2016. In 2013, Sri Lanka earned US $ 1.7 billion from the hotels and restaurants sub sector. That made it the fifth largest foreign income earner.
Tourism is also responsible for about direct 70,000 jobs - about 50,000 in hotels and restaurants alone. The Sri Lanka government itself earns over US $ 40 million from taxes and entrance fees to parks, museums and ancient cities. Informal earnings can be equally impressive. A total of 50 four- and five-star hotels will commence operations in 2015 - making it one per week.IT-enabled services too are not doing bad. The US $ 100 million income in 2003 has reached US $ 800 million in 2013. The number of IT professionals has increased from 4,000 in mid-1990s to 75,000 in 2013. It will be 100,000 next year.
The neo-liberal mark is seen at multiple points of the 2015 budget. The government aims investing heavily in building the railway network with double tracks up to Vavuniya, Anuradhapura and Kandy. (How profitably it will be used is a different question)The higher education sector is another area under focus. The University of Sri Jayawardenapura will get an Engineering and Technology Faculty and the University of Moratuwa separate faculties for electronics, petroleum and aeronautical engineering. Tax holidays are offered to industries for importing machinery.
KEYNESIAN ASPECTS
We remember Keynes typically in mid-crisis. Keynesianism is the view that in the short run, especially during recessions, the economic output is strongly influenced by the aggregate demand (total spending in the economy). Keynesians argue that the private sector decisions sometimes lead to inefficient macroeconomic outcomes, which require active policy responses by the public sector, in particular, monetary and fiscal policy actions, in order to stabilize the output over the business cycle.
A serious economic crisis would have illustrated how far our policies were Keynesian. Interestingly, we have not faced any during recent times. Sri Lanka did feel the impact of the global financial crisis but still maintained a 4 percent growth even in 2009. The very next year, it jumped to 8 percent. The present regime could be blamed for many things but dragging the country into a recession is not one of those. Therefore, we can leave Keynes alone.
This certainly wasn’t the case everywhere in South Asia. Dr. Manmohan Singh’s Congress government has found growth dramatically dropping in its last few years. Inflation remained high. ‘Foodflations’ were common. The Indian rupee has depreciated sharply against the dollar, adding to turbulence. The Congress government acted Keynesianly.
It passed the National Rural Employment Guarantee Act. It assured livelihood security in rural areas by providing at least 100 days of guaranteed wage employment annually to every household whose adult members volunteer to do unskilled manual labor. The economy still did not catch up. The employment remained low. India finally saw no other option than replacing the rulers, with their own economic policies.
POPULIST ASPECTS
Let us face it. The Rajapaksa regime is far more populist than any post-independent ones. The Premadasa regime came closer, but even it did not offer the benefits the masses enjoy now. Ten years ago the government was just 350,000 personnel large. The short-lived UNP government, as a fiscal management measure, officially avoided creating more government jobs. In a country where many exceptionally value a position in the government, this was nothing but political suicide. It was one of the two reasons that made the government fail.
Learning from others’ mistakes, the present regime took a hundred and eight degree turn in its employment policy. According to the Central Bank of Sri Lanka annual report, the government employed nearly 1.3 million individuals in 2013. The President recently claimed a figure of 1.7 million, which could be the most recent.
It makes one out of every 13 persons (or 8 percent of population) works for the government. As a percentage of total workforce that is 20 percent. It is high. Only a few European countries famous for their welfare systems maintain such high ratios. In America, many think even the current rate of 7 percent is too high. A big government is a burden on the economy as the workforce’s contribution not necessarily justify the cost.In 2013, the government spent 33 percent of its total expenditure on salaries and another 10 percent in pensions. The 2015 budget, with a promise of Rs.25,000 minimum salary and Rs.2,200 cost-of-living allowance pushes this still ahead. This will not stop further expansions of this sector. After all, which government likes to be unpopular?
There is more. The agriculture output constitutes only 11 percent of GDP and declining each year since 2008. (The share was over 20 percent in 1990s) This has not prevented the government from offering a fertiliser subsidy to the sector that is equal to 2 percent of aggregate government expenditure. In 2014, Rs. 38 billion was estimated to be spent on the fertiliser subsidy. That is roughly Rs.1,500 per individual and Rs.15,000 per farmer.
Add Rs.15 billion for Samurdhi payments and Rs.44 billion for other subsidies. These are certainly not free market policies. But ironically, they are very the pillars on which the free market rests in our country. Without them the government will not be able to continue pushing its free market agenda. Thus, it is the cost of sustaining capitalism.
CHALLENGE TO OPPOSITION
The opposition, with just two months to a critical election is now faced with a serious challenge. It fights a government that makes a fine balance between growth and populist policies. The economy grows and the government is still sufficiently popular even after nine years. What magic the opposition has to offer? Can it offer anything different to these? One hopes not.
This is clear from the first attempt of the oppositions’ election offerings. Rs.10,000 increase against the government’s Rs.2,200 one. (Interestingly, Rs.10,000 was the same pay rise Sarath Fonseka offered in 2010. The opposition needs to be a bit more creative!) Rs.2,000 for pensioners. Apart from these numbers, which means little, is there are different road?
There can be two approaches an alternative government can take - at least in theory. One is to stretch neo-liberalism, the other is to stretch populism. The first approach will make the government unpopular overnight. It means creating no job opportunities and diverting subsidies. Sri Lankans are used to more redistribution, not less. Such an attempt can be another unpleasant experience of a deja vu.Any government naive enough to take that approach will be out of power within two years.The second approach is great in terms of popularity but one has to find money. From where does that come from? The west will no more be interested in supporting a welfare state in a middle-income country. Approaching China is back to square one.
CONCLUSION
The present government follows perhaps the best policy mix practically possible in Sri Lanka in short term. There can be many theoretical alternatives. Practically there isn’t any. It is like biological evolution. We go back to day one and start with a clean slate. Still we end up with the same outcome; may be with minor variations - but not serious changes.The country must lead a neo-liberal economy, but to ensure political stability it should also offer enough free lunches. The socio-economic-cultural factors leave us with no alternatives. Nothing can be worse for the opposition. They now have absolutely nothing new to offer.
Perhaps that explains the silence of the opposition when the President asked at the end of his presentation what the former thinks of the “budget of the gode bayiya” (country bumpkin). May be that was why the opposition leader evaded the media, wasting a golden opportunity to make his debut. Admit it whether you like it or not. The opposition has no trumps. We are all Jayasundarians now.