Economic Policies Of ‘Maithri Palanaya’: Hopes And Doubts (Part Ii)

This part takes the economy related proposals in two other sections. It will be ideal if I can discuss each policy proposal in detail. However, due to time and space constraints, I selected the most important ones, in my opinion.Also I take the liberty of combining and summarizing the policy statements for the sake of the space. I tried my best to offer a fair presentation of the policies. Any inadvertent mistakes are regretted.

SECTION 4 - FOOD SECURITY AND SUSTAINABLE DEVELOPMENT
01.“A special subsidy (similar to present fertiliser subsidy) will be made for organic farming. State patronage is provided for indigenous pest control methods. Inorganic fertilisers and agro chemicals will be gradually eliminated.”Organic farming, prima facie, appears great. It excludes the use of synthetic petrochemical fertilizers and pesticides, plant growth regulators like hormones, antibiotic use in livestock and genetically modified organisms for reasons including sustainability, openness, independence, health, and safety. Since 1990, the market for organic food has grown rapidly, reaching USD 63 billion worldwide in 2012.

One may suggest it is high time Sri Lanka adopts organic farming. Increased use of pesticides and inorganic fertilisers has raised serious health concerns. Though not fully confirmed, the heavy use of fertiliser/pesticides could be the key reason for CKDu, Chronic Kidney Disease widespread mainly in North Central Province. Physical disability prevalent in estate communities are often attributed to the fertiliser use for tea. Organic farming appears a magic bullet solution to these problems.

Still worldwide organic farming represents only about 1 percent of the total farmland. No country has fully eliminated the use of synthetic fertiliser and pesticides. It is not practically possible. Organic products have always been for a tiny niche market; not for the mainstream. Even with full state backing, serious constraints exist for organic market promotion. The best is to leave the decision for farmers. Encouragement is good. Perhaps the government can also ban the use of chemicals identified that cause serious health issues. Beyond that, little is practically viable. 02.“I will take measures to repair clogged irrigation systems and remove silt from tank beds to preserve abundant rain water and address climate change issues.”

This proposal too, like the one above, appears to be based on a popular myth. JVP, a partner in the 2004 government, launched a program to remove the slit from 1,000 tank beds. By the time they left the coalition, disappointed by its performance, they could complete only 3 tank beds. That too with great difficulty.
Finding manpower wasn’t easy. JVP had to finally use its own cadre as volunteers. That shows t he level of resources necessary for t he task. An irrigation engineer, writing to Sri Lanka Engineering News, the monthly publication of Institute of Engineers of Sri Lanka (IESL) demonstrated it takes minimum 25-30 years to cover the cost of removing silt from tank beds. By that time there will be more slit. It is a futile effort. Repairing the irrigation systems is good and the responsibility of the Irrigation Department. 03.“50 percent of all farmer’s’ loans will be written off and a grace period will be given to freshly reassess and pay the balance money. Farmers’ pension will be increased. A pension scheme will be provided for fishermen.”

Writing off any loan, be it a farmer’s or not, is a wrong precedence. In addition to placing a burden on the banking system, it passes a wrong message to masses. Sadly, that has been done in the past and will be done in the future. As long as the treasury can support that, it will work. Ditto for farmers’ and fishermen’s’ pensions. Easy to redistribute. Difficult to earn. 04.“A Crop damage insurance will be provided with a contribution by the government. An insurance cover of Rs. 1 million will be offered to the fishermen who lose their lives at sea.”

This is perhaps the most useful and viable proposal in this section. Natural disasters are becoming increasingly common.As a Sarvodaya volunteer, I had firsthand interactions with the victims of 2010 floods in Batticaloa. Ninety percent of the district was under water. Over 300,000 were displaced. More than one million acres of crops were damaged. As it happened just two weeks prior to harvesting, the impact was substantial. The biggest worry of the victims was not the property damaged, but the harvest lost.

The government had to spend Rs. 33 billion in recovery. Perhaps since then the government compensates the damage of the victims of every natural disaster. A farmer insurance scheme would have taken at least part of this burden. Such a scheme also encourages farmers not to cultivate on risky lands. The insurance scheme for fishermen too isn’t a bad idea. It brings relief to families without unnecessarily burdening the treasury. 05.“Purchase price of milk, paddy and potatoes will be guaranteed at respectively Rs. 70 per liter (Rs. 10 more than the current price) Rs. 50 per kg and Rs. 80 per kg. A fixed purchase price between Rs. 80-90 for a kg of green leaf tea and Rs. 350 for a kg of rubber will be established.”

We entertained fixed prices for some of the essential commodities in the pre-1978 era. This practice was abandoned by President Jayawardene when he introduced the market economy. Ironical is that his own party, typically the ‘pro-market’ UNP now supports diametrically opposite economic policies.
Economics undergraduates in their first year learn it is demand and supply, not the state, that decides the price of a commodity. They also learn the possible consequences if the state attempts to dictate artificially fixed prices. Firstly, the state has to bear the difference in prices. Secondly, as there is little control over overproduction there should be adequate storage facilities. If not, it leads to massive wastage.

Thirdly, if consumers resist higher prices the selling costs should be lowered further burdening the treasury. Fourthly, as we have seen during the 1970-77 era, black markets emerge. It is so fundamental. You just cannot oppose market forces. I am also at a loss as to how government decides the purchase price of tea and rubber, as they depend on the international market conditions. Since when the vendor countries unilaterally decide prices? 06.“New methods will be introduced to strengthen the market mechanism since the removal of anomalies in the transport of the harvest from the farmer to the consumer is an essential factor in preserving farming.”

Another addition to proposals based on a popular myth. We like to believe the difference between the agri product prices are the result of profits of the middlemen and excessive transport costs. Certainly not.Current transport costs are reasonable. If they were not fixed already by the market itself. The so called ‘middleman’ in addition to the transport costs has to bear the cost of storage and possible wastage. (Wastage in agri products is as high as 30-40 percent) These costs cannot be fixed arbitrarily.

SECTION 8 - ERADICATING UNEMPLOYMENT
01.“Tax concessions will be offered to industries with substantial local investment in technology exchange, local value addition and local end-product manufacturing. Tax concessions and energy concessions will be provided to export manufacturers. A joint initiative of state and private banks will be launched to provide financial assistance to small and medium scale local industries. The country will be oriented toward a knowledge and innovation economy. High and green technology will be popularised.”

This reminds me some of the initiatives taken by President Park Chung-hee of Korea during its highest growth period. Sri Lanka now stands exactly where Korea was i n 1971. The latter has just entered the middle income category of countries but with little solid future prospects. Income from light industries (like apparel) and foreign remittances ( Korea then supplied nurses and technicians to Germany) have reached t heir limits. President Park, t hen Korea’s almost dictator ruler, against all advice, took a brave step t o launch a Heavy and Chemical Industry (HCI) drive. The donors were skeptical whether Korea could enter into new and difficult areas like ship building. They had no capital, no skilled work force and the risks of failure were high.Interestingly, President Park followed a set of policies similar to above. He encouraged industry oriented research and development. Korean engineers disassembled thousands of American and Japanese electronic products to learn and copy their operations.

Korean conglomerates (known as ‘chaebols’) like Samsung, LG (earlier Goldstar), Hyundai, SK and Daewoo were offered preferred status. All import oriented industries were offered loans at a specially lower rate, which sometimes was much lower than the rate of inflation. This was possible as all banks were owned by state. The outcome was the complete transformation of the Korean economy. Korea in 1970s recorded the highest growth rate in its recent history.

This policy is certainly meaningful if Sri Lanka too plans a similar initiative. Still the economic conditions have changed. The markets have transformed. Whether we can follow Korea’s footsteps is a matter of controversy. It would be a true challenge for Sri Lanka to follow similar policies under present conditions. 02.“I will financially support every village to develop industries at rural level.”This again reminds me Korea. President Park is also famous for launching one of the most successful rural development program called ‘Saemaeul Undong’ or the ‘New Community Movement’. This, against the famous panchayat movement in India attempted building infrastructure and improving living conditions at rural level. But even under Saemaeul movement, at the height of industrialization of Korea, little attempt was made to introduce industries at rural level. This perhaps explains the difficulty.

A certain school in Sri Lanka, perhaps after witnessing the success of the apparel industry during the times of President Premadasa, seems to believe we can and should set up factories at villages. I am not sure the viability of this idea. Firstly, there is an environment concern. Ratupaswala incident is too recent to be forgotten. Secondly, the infrastructure at rural level may not be adequate for most industries (eg. poor roads, frequent power breakdowns). Finally, unlike in case of apparel industry in 1980s, the community will not necessarily provide the cheap labour. It will be more expensive now. These challenges should be faced for this proposal to be a success. 03.“Sri Lanka’s export market focus will be shifted from Europe and North America to Asia, South America and Africa.”

Others, not us, decide what they would purchase from us. It depends on many factors like their requirements, costs of goods and services and ease of transportation. South American and African markets are anyway not as big as we like them to be. We have limited historical trade relationships with them. Asian market is relatively bigger but most Asian countries have no demand for Sri Lankan products. Xi Jinping, President of China, in his recent visit to Sri Lanka, observing the asymmetry in bilateral trade, has asked what more we could export to China. We could suggest almost nothing. All what we have, they produce more economically. So implementing this policy will be far easier said than done. And it will not make things any different. Seriously, what is wrong with Dollars and Euros? 04.“Imports other than essential items will be controlled. Import substitution manufacturing is encouraged. In order to do this a centralised marketing and technological plan will be launched for the state and private sector.”

This, arguably, is the weakest link. No country has ever developed itself by import substitution. All South East Asian and East Asian success stories were based on export promotion instead of import substitution. Korea in seventies for example, produced colour television sets for export market while all local channels were purposely maintained black and white. Transformation of local channels to color could have made masses happier in short term and opened a substantial domestic market for color TVs. It wasn’t done as it would have ruined the exports. Sorry, import substitution manufacturing is a bad idea. Making centralised, state controlled market plans for doing that is worse.

CONCLUSION
In the first part of this article I have raised one key concern about the ‘Maithri Palanaya’ economic policy set. It focuses heavily on redistribution but does not say from where the funds come. In this part I address another aspect: Mismatches between problems and solutions. Problems do exist. Kidney Disease is real.

Inorganic fertiliser and pesticide usage is high. Rural economic conditions are not satisfactory. Natural disasters offer a threat as never before. Still the ‘solutions’ offered do not necessarily address these issues. Some ‘solutions’ are based on popular myths. Some, while looking people friendly deliver the opposite. Only few of them make true economic sense.

I pen this two days before the release of ‘Thunkal Dekma’, election manifesto of President Rajapakse. Thus I have no way of comparing the two. I wouldn’t expect that to be too different. It too will propose curbing corruption, focus more on redistribution of wealth, rural development, pay hikes, special privileges for senior citizens and more opportunities for ‘indigenous’ producers. It too will criticise western influence in everything in our life. After all, both candidates address the same audience. Why should they be any different?