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Response to Pathfinder Foundation’s rejoinder

By Collective for Economic Democratisation
We welcome the response by the Pathfinder Foundation on June 30, 2015 to our critique of its economic blueprint on June 24, 2015, both published in Daily Mirror, as a vigorous and informed debate on economic reforms is important, especially with the upcoming parliamentary elections.

In recent times, there has been little critical discourse on the neoliberal direction of our country and one of the reasons for the formation of our voluntary non-funded collective of researchers and activists formed two years ago, is to further conversations on political economy, to democratise economic decision-making and to support people’s struggles for social justice.  

Our response to the Pathfinder Foundation focuses on three themes. The first pertains to the question of inequality and the need to ensure redistribution of revenues and productivity gains for the benefit of all. Our second theme will be to critique the proposed labour reforms advocated by the Pathfinder Foundation and the pro-business economic establishment in this country, which amounts to an attack on labour. Finally, our third theme will focus on going beyond the Pathfinder Foundation’s continued emphasis on “fiscal consolidation” and “financial market development”, which overlook global challenges to financialisation.


Economic priorities and redistribution

The Pathfinder Foundation questions our interpretation of the United Nations Development Programme’s (UNDP) ‘Human Development Report 2014, Sustaining Progress: Reducing Vulnerabilities and Building Resilience’, particularly its critique of targeted measures. We wish to clarify this point, in order to challenge the Pathfinder Foundation’s “common sense” approach to creating better targets as opposed to advancing universal welfare. 

The UNDP Report claims: “Recent decades have seen a global shift in the politics of social spending, changing the emphasis from development to poverty alleviation. As a result, there has been greater stress on targeting social spending for the poor rather than for all. Targeted services were considered more efficient, less costly and more effective in ensuring redistribution. But historical evidence presents a more nuanced picture. 

Universal provision has in many instances been associated with greater poverty reduction, greater redistribution and lower inequality, something of a paradox since targeted benefits are theoretically more redistributive. A key factor is that when benefits are narrowly targeted, the middle class and elites are less willing to fund them through taxes. … [Targeting can give] rise to two-track systems: under-funded low-quality services for the poor and better quality commercial services for the middle classes and the rich.”

At the centre of such questions about social welfare are questions about class inequality. The Pathfinder Foundation questions as to where the money would come from to pay for such social welfare policies, given also the “loss of access to concessional financing”. Our view is that our government should not seek to fund such basic needs of the people, including their right to food, through international financing. 

Rather, it should come through increased taxation of the rich in our country, which will also serve to reduce the mounting inequalities in our country. While the Pathfinder Foundation correctly acknowledges the regressive character of taxation and the inequalities in our economy, it evades the logical rationale for redistribution.

According to the data compiled by the conservative Heritage Foundation based in Washington DC, out of 183 countries in 2014, Sri Lanka has the 167th lowest government expenditure as a percentage of gross domestic product (GDP), amounting to 19.7 percent. Furthermore, Sri Lanka is 152nd in terms of the lowest tax burden as a percentage of GDP amounting to 12 percent. (Data can be accessed at: www.heritage.org/index/explore?view=by-variables). Therefore, the bogey of extreme spending by the government by way of international comparison is false. In fact, one crucial way to address the problem of government revenue is through fairer taxation, shifting the tax burden from the poor to the corporations and the rich.

In addition to progressive direct taxes and reconsidering tax holidays to investors and exporters, the economic priorities in government budgets should also be reconsidered. Should Sri Lanka be spending exorbitant amounts on defence and infrastructure such as airports where aircraft don’t land, ports where ships have to be forced to dock and highways for SUVs instead of rural access roads when people cannot afford basic necessities? When one begins to analyse the data based on the economic priorities, it becomes clear that the economic establishment is concealing the real causes of Sri Lanka’s mounting debt.


Class inequality and labour regime

Let us now look at what has happened to inequality in Sri Lanka in recent decades. According to the International Labour Organisation’s (ILO) Asia-Pacific Labour Market Update February 2015, not only has the Gini Coefficient, which measures inequality increased in Sri Lanka in recent decades, it is the highest in South Asia. 

Furthermore, Sri Lanka also has the highest ratio of income share, where the highest 10 percent have nine times the income of the lowest 10 percent of the population. The figures for inequality in Sri Lanka and their comparison with other South Asian countries reflect an extremely unequal country. 

Furthermore, the ILO states: “Labour market and social policies are crucial for the achievement of these inclusive growth goals. Countries have acknowledged the importance of sound wage-setting institutions in creating shared prosperity. Wage increases in line with productivity gains could boost household consumption and domestic demand which in turn would help to re-balance the drivers of growth. 

For instance, in 2013, Malaysia introduced a new national minimum wage in an effort to more closely align wages and productivity. … Productivity gains in Asia and the Pacific have often outstripped wage increases and this has contributed to rising inequality in the functional distribution of income in many countries.”

While the Pathfinder Foundation and the pro-business economic establishments emphasise the need to accelerate improvements in productivity, the sad reality is that the continuing gains from productivity are not redistributed in the form of real wages. Sri Lanka does not even have a national minimum wage, as companies continue to race to the bottom for lower wages.

The Pathfinder Foundation, in a problematic apology for business, claims that it is “the current outdated and inflexible labour laws which are incentivising companies to resort to temporary and casual employment”. We would argue it is not the labour regime but the lack of implementation of labour laws reflecting the duplicity of the state in its collusion with capital that has led to this state of affairs.

Indeed, rather than a result of obstructive trade unions in our country, the failure to properly implement a strong legal regime is a reflection of the continuing weakness of labour since it was crushed by the Jayawardena regime in 1980, occurring soon after the introduction of the “open economy” liberalisation policies.

This weakness of organised labour and its inability to hold the state and employers even to existing tripartite agreements, including those agreed to in the National Labour Advisory Council, has led to paralysis in the labour regime. For example, the National Workers’ Charter has not been implemented for years, despite promises by successive governments. More recently, the promise of a Rs.2,500 pay increase for private sector workers was conveniently delayed and not legislated, now lapsing in the face of parliamentary elections. 

Contrary to what Pathfinder maintains, despite laws to the contrary a ‘defacto’ regime of flexibilisation—including use of contract workers, rapid rise of ‘manpower’ agencies and outsourcing—has increasingly come to be the norm in the private and public sectors in Sri Lanka. These changes reflect global capital’s shift to outsourcing, subcontracting and other forms of precarious employment that further undermine workers’ rights.

Therefore, the problem is not with the labour laws, though they certainly can be strengthened to address the loopholes benefiting errant employers but the lack of implementation of labour laws, the lack of political will of the state and the weakness of the labour movement to hold business and government accountable. In this context, the calls by the Pathfinder Foundation, the Employers’ Federation of Ceylon and other actors in the pro-business economic establishment towards changing labour laws to make them more flexible is nothing less than a frontal attack on already weakened labour. These moves, as with the initial attack on labour by the Jayawardena regime, will lead to increased job insecurity and exploitation of workers.


Financialisation and crises

The Pathfinder Foundation continues to emphasize the need to develop financial markets, downplaying the larger consequences of such processes. The one defining characteristic of neoliberal globalisation has been the increasing frequency and depth of financial crises, linked to the rapid flow of speculative finance capital and the related economic devastation; this is evident from the Latin American crisis of the 1980s and 1990s, the East Asian crisis of the late 1990s, the Western economic crisis of 2008 and the on-going economic turmoil in Southern Europe. 

These crises have also provided the opportunity for international institutions such as the International Monetary Fund (IMF) and global investors to further change the structure of economies to facilitate accumulation by global finance capital and local elites while increasing the social and economic burden on ordinary citizens. This process often involves imposing lean budgets on ordinary citizens, while banks are given a free run. Paradoxically, it is because Sri Lanka’s financial institutions are “underdeveloped” that it was spared the more devastating effects of these crises. 

The Pathfinder Foundation’s response claims that we have “conflated capital and financial market development with liberalisation of the capital account of the balance of payments” but we would argue there is an inextricable link between the two. The flow of global capital into local capital markets is promoted through the liberalisation of the capital account and the flight of global capital for example from the stock market will place considerable pressure on the capital account and the balance of payments. Thus, these processes would put Sri Lanka further at the mercy of international ratings agencies, global investors and the institutions such as the IMF. 

We argue that rather than adhere blindly to financial trends, the irrationality of markets must constantly be kept in check. The Pathfinder Foundation claims that banks are like roadways in that they entail risks when driving, our rhetorical response is the importance of regulations to ensure the safety of these same roads, rather than opening them to racing by the global and national financial elite. Global public opinion has also begun to shift in this direction, especially with rising popular anger at financial and banking scandals.


Need for new policies

In its rejoinder, the Pathfinder Foundation claims that we are “dogmatic”, harking back to failed “welfarist” policies from the 1970s in Sri Lanka. We argue instead that it is the neoliberal ideology of which Pathfinder Foundation dare not speak its name that is being discredited. This includes austerity policies that are being resoundingly rejected in Southern Europe. As a result, mainstream economists are starting to recognize that what made the period from the 1940s to the 1970s an era of prosperity for Western countries was precisely those policies that protected workers, prevented rampant financial speculation and ensured taxes on the rich. 

While Sri Lanka in the 21st century is obviously a different case, we should consider what this revision to economic orthodoxy means for our assumptions about how countries develop. It is clear that the failure of neoliberal policies has forced a debate among Western economists to reconsider basic dogmas about cutting public spending to promote growth. However, international financial institutions and global investors along with their local partners are continuing to pressure poor countries such as Sri Lanka, which are in a vulnerable international position. Those of us concerned about the economic future of our country—not just think tanks or politicians, but unions and ordinary working people—must continue to challenge attempts to implement failed policies from elsewhere.

(The Collective for Economic Democratisation in Sri Lanka strives for a historically grounded and socially relevant political economic analysis in solidarity with progressive struggles. Its articles and other resources can be found on 
www.economicdemocratisation.org)