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Envisioning beyond economic growth and per capita income

24 Feb 2015 - {{hitsCtrl.values.hits}}

ri Lanka is, slowly but surely, emerging out of vicious civil war that has lasted over twenty-five years (July 1983 – May 2009); armed conflict since 1972; and the conflict per se ever since independence in 1948.

The amount of human, material, environmental and psychological destruction caused by this long drawn out civil war, especially in the conflict affected Eastern and Northern provinces, is immeasurable and would last for generations; though some quantitative and qualitative estimation do exist.

The end of the protracted civil war and a stable government with an invincible majority in parliament has removed two structural impediments (i.e. political and security) to economic take-off in Sri Lanka. However, what are lacking are robust economic growth strategy and an optimal policy framework to implement the envisioned growth strategy, and strategise beyond economic growth and per capita income.

The Gross Domestic Product (GDP) in constant prices (real terms) grew by 8 percent, 8.3 percent, and 6.4 percent in 2010, 2011 and 2012 respectively in the immediate aftermath of the civil war.

Though the economic growth rates in 2010 and 2011 were higher than during the time of the civil war (1983-2009), it is lower than most other post-civil war countries around the world, especially in Africa and Asia, that have recorded double-digit growth (10 percent or more) in the immediate aftermath of respective civil war.

Despite a high intensity civil war, Sri Lanka’s growth in quantitative terms during the time of civil war is remarkable in comparison to countries under similar circumstances. However, the quality (or the source) of such growth is the cause for concern. In 2009, Afghanistan’s economic growth rate of 15.1 percent was the highest in South Asia and one of the highest in the world (in fact, in the past several years Afghanistan has recorded double-digit growth rate annually).

However, foreign aid accounted for 40 percent and poppy plants and opium trade accounted for another 40 percent of the Afghan economy. Is this the kind of economy that would secure Afghanistan from war and poverty? Hence, it is imperative, especially in civil war-times and post-civil war times, to look beyond the numerical rate of economic growth and identify the source/s (or quality) of growth to determine the success or otherwise of the economic model/strategy pursued.

Sri Lanka’s growth during the last few years of civil war (2006-2009) has been largely fuelled by the growth of the public sector; both the civilian public administration and the security forces. That is, the increase in the number of personnel in public services and frequent pay rises to public sector employees were the main sources of economic growth during the period 2006-2009.

Productivity in the public sector is too low and the cost of the public sector is too expensive. Moreover, bulk of the rise in public expenditure was for public consumption rather than public investment. Public expenditure fuelled growth is wealth diversion rather than wealth creation. However, in the post-civil war period of 2010-2013 public investment led growth has taken precedent, which is relatively better than the previous public consumption led growth but not the best policy option of private investment led growth.

In the same way as the economic growth strategy at the national level, the government’s post-civil war economic revival strategy both in the Eastern and Northern Provinces has been overwhelmingly based on government-funded projects with majority financial contributions from the bilateral and multilateral donors. For the four-year period (2007-2010), the budget provision for the Eastern Reawakening Programme (Nagenahira Navodaya) was a total of Rs.197 billion (US$.1.75 billion); 52 percent of this amount was to be financed by foreign aid, nearly 30 percent by the GoSL, and the rest 18 percent by the private sector. Similarly, the development programme for the North (Uthuru Vasanthaya and other projects) has been earmarked a total sum of Rs.7 billion during 2009-2010 (foreign funding accounting for 40.5 percent and the rest by the GoSL).

Both at the national and regional levels there was heavy reliance on government-funded and government-driven development strategy, which is a cause for concern because of the limited fiscal space available to the government, low (or less than optimal) productivity of the public sector, and the perpetuation of dependency on foreign donors and the non-governmental sector for delivery of goods and services to the people. Thus, the sustainability of the post-civil war growth strategy is doubtful.

This paper briefly charts out the economic path that should be followed by the former conflict-affected provinces in particular and the nation in general, and an enabling environment that the national government should create and foster for speedy recovery from the ruins of civil war. Economic resurrection of the former conflict-affected provinces, undoubtedly, would have a spill-over effect on the national economy as well.

The objective of this paper is to set out the contours of broad policy framework for rebuilding the nation, particularly the former conflict-affected provinces, in the aftermath of the civil war but does not intend to get into specific sectoral or sub-sectoral strategies, policies, programmes, or projects. Moreover, this paper aspires to go beyond the avowed goals of economic growth (8 percent or over annually) and per capita income (achieving US$ 4,000 by 2016) of the present government in the aftermath of the civil war.

Lessons from international experiences
Germany and Japan are two prime examples of successful resurrection of battered minds and economies after ruinous adventure of war.

Nazi Germany and Imperial Japan pursued militaristic paths for dominance of their respective geographical regions of the world. In the same way, the Liberation Tigers of Tamil Eelam (LTTE or the ‘Tamil Tigers’) waged a relentless and ruthless war for separation of the Eastern and Northern Provinces from Sri Lanka. The consequences have been disastrous for the Tamil minority community in particular, and for Sri Lanka as a whole.

Though the German and Japanese military pursuits of dominance were transnational wars, LTTE’s separatist war was national. The LTTE was an institution that resembled militaristic adventurism of the regimes of Nazi Germany and Imperial Japan in the run up to and during the Second World War. The modus operandi of the LTTE also has close resemblance to the Khmer Rouge (Pol Potist) regime of Kampuchea (now known as Cambodia) in the late-1970s.

It is time for introspection, self-criticism, and remorse by the Tamil community in particular and Sri Lankan nation as a whole as we chart a way out of the current morass. There are two potential pathways ahead for the Tamil community in particular and Sri Lanka as a whole; one is that pursued by Germany and Japan in the aftermath of the Second World War and the other followed by post-Khmer Rouge Cambodia.

Post-Second World War Germany and Japan rebounded from ashes following pacifism, resolute adherence to democracy cum rule of law, and industriousness; as a consequence became economic powerhouses in the world within a short span. On the other hand, Cambodia is dogged by democratic deficit, corruption, nepotism, and authoritarian regime even after the ouster of Khmer Rouge regime in 1979 and end of Vietnamese occupation in 1989; thereby continues to be one of the poorest countries in the world (per capita income US$800 in 2011 according to World Development Indicators 2013). Thus, whilst post-war Germany and Japan reflect prosperity, post-war Cambodia reflects pauperism.

It is imperative for the people of the Eastern and Northern Provinces in particular, and Sri Lanka as a whole, to draw lessons from historical experiences of these two sets of contrasting post-war developments. Naturally, we would argue in favour of the path pursued by both Germany and Japan in the aftermath of the Second World War for the Eastern and Northern Provinces in particular and Sri Lanka as a whole to pursue in this post-war (not yet post-conflict) era.

Economic freedom: Path to economic and political emancipation
A laypersons definition of Economic Freedom is freedom to do business locally, nationally and internationally with minimal cost and minimal interference of the local, national and international governments. Economic freedom is an essential ingredient of democracy like political freedom. Yet economic freedom is less understood, and even less underscored, compared to political freedom.

According to Gwartney, Lawson, and Hall “The cornerstones of economic freedom are (i) personal choice, (ii) voluntary exchange coordinated by markets, (iii) freedom to enter and compete in markets, and (iv) protection of persons and their property from aggression by others.” A country’s adherence to economic freedom is measured by the Economic Freedom of the World (EFW) index developed by the Fraser Institute based in Vancouver, Canada.

The EFW index is based on 42 variables (including 22 survey-based variables derived from the International Country Risk Guide, Global Competitiveness Report and Doing Business Report of the World Bank). The EFW index has a scale of 0 to 10: zero denoting no economic freedom at all and 10 denoting highest economic freedom.

The EFW index is subdivided into 5 major components: (i) Size of Government: public expenditures, taxes and public enterprises; (ii) Legal Structure and Security of Property Rights; (iii) Access to Sound Money; (iv) Freedom to Exchange with Foreigners; and (v) Regulation of Credit, Labour, and Business. Further, the ‘Size of Government’ is subdivided into 5 components; ‘Legal Structure and Security of Property Rights’ is subdivided into 9 components; ‘Access to Sound Money’ is subdivided into 4 components; ‘Freedom to Exchange with Foreigners’ is subdivided into 9 components; and ‘Regulation of Credit, Labour, and Business’ is subdivided into 15 components. Hence, altogether 42 variables compose the EFW index.

There is positive correlation between economic freedom and economic growth, per capita income, life expectancy, poverty, income inequality, literacy rate, access to safe sanitation facilities and safe water. Moreover, a cross-country study by Eriksen and De Soysa establishes that there is a positive relationship between economic freedom and human rights; i.e. higher the economic freedom index, better the condition of human rights. Another cross-country study by De Soysa and Fjelde disputes the argument that free-market economy is associated with political violence.

Based on the conceptual framework of economic freedom as noted above, we would argue that the guiding principle of economic renaissance in the conflict-affected regions of Sri Lanka should be economic freedom, whereby the national, provincial and local governments should create an enabling environment for private sector-led economic emancipation of the people, with private cum public partnerships where absolutely necessary.

Accountability, integrity, and transparency
Accountability, integrity, and transparency should be the cornerstone of provincial and local governments and provincial and local public administrations in the conflict-affected region, as well as rest of the country. A vibrant market economy could function effectively only when rule-of-law is supreme; merit and productivity are sine qua non; accountability, integrity and transparency are paramount.

In order to attain such an ethical system of governance, independent, efficient and credible Department of Auditor General, Bribery Commission, Public Services Commission, Police Commission, Human Rights Commission, and Media are indispensable.

The existing similar national level institutions are limited in scope and heavily politicised. The immediate past government has undermined the functions of the Bribery Commission, Human Rights Commission, Police Commission, and Public Services Commission set up under the Seventeenth Amendment to the Constitution by overriding it with the Eighteenth Amendment to the Constitution. While an independent and proactive media is sine qua non for a vibrant, modern market economy, the media in Sri Lanka is bruised and battered by extra judicial killings, public beatings, and self-censorship under the immediate past authoritarian regime.

The functioning of the Auditor General’s Department and the Human Rights Commission is undermined by apportioning inadequate financial and human resources. The latter is also politically interfered at times. Further, the Bribery Commission has severe limitation on three counts: firstly, the legislative act setting up the Bribery Commission is fundamentally flawed because it restricts its functions to bribery and corruption in the public sector only. Secondly, Bribery Commission has authority to make investigations only when complaints are made orally or in writing (reactive). It has no power to proactively investigate suspected bribery and corruption on its own initiative. Thirdly, there is blatant political interference and selectivity in its functioning as reflected so blatantly in the case against the Forty-Third Chief Justice.

The national integrity system encompassing the foregoing supposedly independent institutions should have been the watchdogs of democracy, justice, and rule-of-law. However, in reality they have become just lapdogs of the powers that be.

Due to the aforementioned shortcomings in the national institutions, each province should set up regional institutions to foster good governance within the province. The corresponding national institutions could undertake the oversight of the provincial institutions. When there are truly independent, impartial, and non-partisan governance institutions, external interference or interventions on governance in the country would become irrelevant.

Moreover, an equal opportunities law should be enacted in order to stamp out discrimination based on ethnicity, religion, gender, caste, regional origin, physical disability, political party affiliation, etc, and promote merit-based system of economic, social, and political governance. On this score the conflict-affected provinces should become exemplary to rest of the provinces and the national government by instituting meritocracy in regional governance structures.

* Education for knowledge economy
Historically, the bedrock of regional pre-eminence of the North, particularly the Jaffna peninsula, has been education and knowledge.

It is time to spread that to the East as well as the rest of the country. Relatively, the North is endowed with marginal natural resources in comparison to other provinces. Therefore, education was the pathway to prosperity by way of entering professions and public sector employment. Thus, the competitive advantage of the people of North has been education and knowledge (human capital).

Although the Eastern and Northern Provinces are touted as primarily agriculture cum fisheries economy, it is no more the case due to the protracted civil war resulting in mass displacement, mining of agricultural lands and coastal areas, and exodus of kith-and-kin overseas causing a ‘demonstration effect’ to migrate inland or overseas.

During the conflict time, services sector was the largest contributor to the provincial economies of the East and North (over 65 percent), which was larger than the services sector’s share in the national economy (just over 50 percent). Furthermore, the services sector in the two conflict-affected provinces has been dominated by defence and public administration sub-sectors those are sterile and have minimal productivity.

These minimal-productive services sub-sectors could and should be supplanted by dynamic and highly productive modern knowledge economy in order to compete in a globalised market place. The emerging economies in the conflict-affected provinces should seize this opportunity to foster and promote a knowledge-based economy. Information technology and English language are two indispensable ingredients of a knowledge economy.

Besides, totally independent private schools and tertiary educational institutions (such as universities and technical/vocational educational institutions) are also indispensable to build a knowledge economy. The state-owned and run schools, universities, and further educational institutions should be made to compete for students with corresponding private institutions. The state should provide financial resources directly to needy students so that they could buy the educational services from either the public or private institutions according to their own choice.

Sri Lanka is one of the very few countries in the world where Vice Chancellors of universities are appointed by political authority, viz. the President of the country, which is ridiculous to say the least. Appointments to the independent governance bodies such as the ones noted above, the judiciary, educational institutions, and the Central Bank should be made by groups of independent, non-partisan eminent persons in respective fields in order to inculcate merit cum competence, productivity, and performance based public administration and governance structures.

(Muttukrishna Sarvananthan (Ph.D. Wales, M.Sc. Bristol, M.Sc. Salford, B.A. Hons. Delhi) hails from Point Pedro and a Development Economist by profession and the Principal Researcher of the Point Pedro Institute of Development, Point Pedro, Northern Province, Sri Lanka.
http://pointpedro.org
He is contactable on
[email protected] )

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