Past errors that need corrections

These days we are enjoying the benefits of bilateral credit extended to us by our neighbouring countries such as Bangladesh, India and China. At the same time, we are preparing to consult and get whatever the assistance that can be given by the International Monetary Fund (IMF), a multilateral source. From all of these we can survive in the short run. 

In the past, we have depended on credits and grants extended to us by the so-called ‘Aid Consortium’, a forum of bilateral and multilateral donors gathered once a year in Paris to consider granting fund facilities to developing countries. Hence, borrowing is not new to us but a practice on which we have depended for the past 70 years. 

The country’s economic and social problems have not been resolved based on these arrangements but debt stock has gone up and up continuously and the poverty is remaining. Hence, the purpose of this article is to analyse in summary, what we in Sri Lanka need, what has gone wrong and what remedies we can implement to overcome bad results of past errors, thus promoting the living condition of the people. 

What do we need?
According to the World Bank’s classification, Sri Lanka is a low-income receiving country. Our per capita income in dollars is around 3,680. The world’s happiest 10 countries receive a per capita dollar income ranging from 20,000 to 60,000. Hence, in terms of income, we are a poor country. 

People living in the happiest countries can get satisfied their basic needs and many other needs required for a happy life comfortably from their income along with making substantial savings. But the low-income of poor countries prevents the people from getting happiness and they are struggling to come out of the poverty circle, which they are trapped in. 

Sri Lanka needs to reach a per capita income level of dollar 12,376 to become a high-income receiving country. The country needs 15 years with an annual economic growth of 8 percent to achieve this level of per capita income. In recent times, our economic growth has been around 2 to 4 percent. 

Hence, it seems that economic policies that we have persuaded so far have not been helped to grow economy sufficiently by resolving economic problems. Presently, the economic and social problems in the country have aggravated along with a scarcity of basic items that require for day-to-day life, along with stretching queues in front of shops. Hence, we see a failure of policies we have implemented so far but the country’s borrowings from domestic and international sources have increased.    Currently, the government is in a debt trap. 

The seeking of the IMF assistance is not a new thing for Sri Lanka since 16 times in the past we have sought assistance from the IMF. However, the country’s poverty is remaining as it is. Once the programmes and funds from donors are over, we have fallen to the same poverty circle with substantial economic and social hardships. Then we have to accept the fact that our past policies have been wrong and there is a need to persuade on a result-oriented new path to gain prosperity.  

What went wrong?
Presently, we have a series of advisory committees to take policy decisions. But we are still taking inappropriate decisions, which are harmful to the country and society. The best recent example to prove this was the failure of the steps taken to introduce organic fertiliser to agriculture. Although the intention was good, steps taken to introduce were impractical. 

Ultimately, the results of the failed policies ended up with seeking bilateral assistance for rice imports and it impacted adversely on sacrificing the much-needed external reserves, which we were struggling to collect.  This would have not happened, if we had a proper implementation plan for the project. This is only one example to show our failure of policies but there are so many similar processes, which have gone wrong and authorities have been freed from responsibilities. These have widely impacted badly on our economic and social conditions. 

We need to raise the income of the people in order to eradicate poverty. For this, it is required to raise the total income or the value of production we generate. Hence, it is clear that we need plans to improve value addition to production. Steps have to be taken and the government budgets have to be enriched with the fruitful procedures along with the follow-up plans to ensue true implementation of the plans.  

Borrowed funds have to be carefully directed to the projects that can add values to production without flowing to consumption. Present unserviceable debt stock has been created by us, due to lack of a proper procedures to improve value addition (lack of using debt into productive purposes). Hence, generation of funds to pay back the debt has been lacking. Then we are in trouble.     

We are presently experiencing a lack of internal and external funds to secure day-to-day requirements, including essentials. This is true for both individuals and the government. Financial institutions are struggling to manage their internal and external funds in this environment. The country’s external resources have deteriorated to the lowest level, which is not sufficient to fund even for essentials. This situation has been created as a result of errors in our past policies that aggravated by recent incidents such as deceases (corona) and wars in other countries.  

Historically, our own wrong or carelessly implemented economic policies have created present unpleasant economic and social conditions in the country. One example is the errors in the implementation of our past industrial policies along with much praised economic liberalisation or so-called outward looking economic policies. Until 1977, our country followed the so-called closed or inward-looking economic policies and due to the weaknesses in these policies, we went to implement a liberalised economic policy package, of course in line with international trends. 

We, by looking at ‘comparative advantages’, opened up our import market for any goods and services. Although some countries won in this procedure, our country has failed in the implementation of it as seen from the economic and social problems we are currently experiencing. In this procedure, price mechanism was allowed to be determined based on the demand and supply conditions and unrestricted flow of goods and services allowed. As we see now, this practice impacted adversely on our domestic production process, especially on our infant industrial products. 

For instance, prior to 1977, we had more than hundred semi-government institutions (corporations and boards), which engaged in producing goods and services for domestic needs. Some produced even to international market or some were about to produce to international market. 

However, along with the liberalised economic policies implemented, these institutions received stepmother’s treatment and were encouraged to close down activities or closed down business, expecting benefits from comparative advantages. Some corporations were subjected to sell under the ‘privatisation programme’, which generated short-term funds to finance unsustainable government budgets. 

We are now experiencing a high level of imports and insufficient exports to finance them, resulting in a scarcity of foreign exchange (dollars). Insufficient forex and high import demand have led to depreciate the exchange rate, resulting in increasing domestic prices and thereby affecting adversely on people’s living conditions.       

This way I see the bad effects of the production process we have undergone in the past, when compared with the mechanisms implemented by other countries, which are more advanced and successful. Two countries, India and China, which have extended credit facilities to us to overcome the present difficult situation, have undergone successful reform processes in the past, leaving lessons to countries like us. These countries also implemented liberalisation processes while protecting their domestic industries.

In 1970s, these countries were at par with us as far as living conditions are concerned. During that time, they were also struggling to come out from poverty. Also, the product quality they had were improved gradually. Advanced mechanisms with technology improvements for products came later. In fact, our semi-government institutions, which were failed in competition due to liberalisation had been created by the aid of international community. If we had them engaged in the production process up to now, their products would have been quality products, which have been capable to compete with products in the international market. 

By this way, these institutions would have contributed favourably to foreign exchange problems we are currently experiencing. In contrast, we are now net importers of goods and services and net borrowers (beggars). Our current debt trap and forex problems are partly due to our errors in implementing the liberalisation policies in the past. 

A proper value-added production process will also contribute to generate employment to our educated youths. Presently, our skilled and unskilled workforce is leaving the country, seeking lucrative employment in other countries. This is due to lack of suitable employment in the country or receiving insufficient income from domestic employment.  If the country had a forward-looking institutional production process, our educated group would have been employed in them retaining a quality labour force for our own industries in the country. 

At present, our labour force is contributing to run processes in the other countries. The remittances they send back home are not sufficient to finance our own country’s needs.  The sacrifice that the country makes by way of educating and training this labour force may not be comparable with the limited amount of remittances we receive from employing them in other countries. Hence, strengthening the country’s production process may help retaining a trained labour force within the country.  

The ability of our workforce to produce to the world market has been proven by our traditional exports of tea, rubber and coconut and new products such as garments and shipbuilding, etc.  In history, our farmers produced rice to foreign countries. Further, our youths at present have proved their capabilities in handling mega projects successfully in the other countries. What is scarce to us is the funds for investments to a new product-oriented growth process. In this regard, our errors in fund management and debt management have to be corrected. 

The error is the excessive borrowings in a short run and utilising them for infrastructural projects that give benefits in the long run amidst excessive expenses for consumption and welfare purposes gaining short-term political benefits. What is needed in the country is attracting foreign investments for a product-oriented process by creating a conducive environment, assuring confidence about our policies among investors. Many corrections to our political and legal processes are required in this regard.       

Undue priority given to politics in this country compared to promoting product-based industries is also an error in our policies. A thinking has been created in society to believe entering politics is the only way of getting benefits. This has been so due to much more priority given to politics compared to formulating policies for a sustainable value-added production process. 

Budgetary expenses for administering a large crowed in politics has become a burden to the government budget too, when compared to the value addition made by politicians. We can compare our priority given to the political process with that of other developed countries and come to learn how differently they are giving priority to research and development of the production processes rather than to politics. 

Our treatments to investment policies change from government to government. The changes in political philosophy change industrial policies as well. But if we observe the countries like India or China, the situation is different. The business policies are kept unchanged for a long period without changing according to the governing philosophy of the politicians. China’s business policy has not changed even for a period like 30 years, compared to our country’s changing industrial policies in every five years, thus disturbing to maintain a stable investment process. 

The lesson we learn from China is the importance of political stability for investments. China’s stable political philosophy has been successful for attracting investments to their country in recent decades. We have to examine their way of business development as against our politics in the presence of pending our new investment projects such as Port City.  

Way forward   
Making corrections to our errors and going forward by learning lessons from successful countries are not a waste to resolve our own economic and social problems. Countries such as Switzerland, Singapore, Israel and Taiwan are small countries like Sri Lanka but are more advanced compared to us.  They are happier countries in the Happiest Country Index. India, China, Japan are some other countries in the Asian region that are happier than us. 

Following are a few requirements for consideration in creating a production-oriented development mechanism for our small country. This is an attempt to provide some solutions to our current economic problems. 

• Have a long-term plan for the people to engage in a value-added production process independent from changing political visions.
• Establish an institutional setup to support the production process.
• Have a suitable manpower training plan to provide expertise to production process and respective institutions.     
• Maintain a stable policy and environment to attract internal and external investments for production.
• Implement a suitable follow-up procedure in achieving production targets.
• Obtain foreign assistance to establish and promote production process.
• Give a genuine leadership to the process irrespective of political gains.
• Establish a proper legal framework to safeguard the interests of the stakeholders.     

This is a broader framework that I suggest to have a value-added production process in the country, leading to promote living conditions of the people. It is a task of the Planning and Economic Development Ministry to consider these suggestions and making arrangements for implementation.
(Dr. W.M. Hemachandra is a retired central banker)