Economic Policies Of ‘Maithri Palanaya’: Hopes And Doubts

It is a comprehensive document; in fact, the most extensive opposition elections manifesto for some time. Ranil Wickramasinghe’s 2005 manifesto was not more than 20 pages. Sarath Fonseka’s two-page 2010 manifesto was worse. It hardly had anything on economy. Compared to those, this is far detailed and longer (11 sections and 64 pages). It covers all important areas.

For example, the economic policy spreads over at least three sections, namely, 2. A Developed Economy, 4. Food Security and Sustainable Agriculture and 8. Industry and Services to Eradicate Unemployment. Economic issues are discussed under other sections as well. At each section a brief narrative of the present situation is followed by recommendations. It provides a good reading for any student in economics.

This article is the first part of a quick attempt to analyse the economic policy that appears in ‘Maithri Palanaya’ manifesto. Quick, because the time runs out - we are just two weeks ahead of presidential polls. It would have been ideal if each policy is discussed in detail but the time and space constraints are grave.
I take only the policies under Section 2, ‘A Developed Economy’ in this. Also I take the liberty of summarizing the policy statements for the sake of the space. I tried my best to offer a fair summarization. Any inadvertent mistakes are regretted.

1. “By eliminating mega corruption and wastage, I (Maithripala Sirisena as the President) will develop the country 10 times faster and provide relief to the people”:

Eliminating corruption is an omnipresent and ever-popular election promise. Some of us naively believe it will really happen and then everyone will live happily ever after. Successive governments have promised elimination of corruption and establishment of good governance. They all have invariably failed.
In that backdrop, how serious we should believe in this objective? Should we believe a new set of politicians, the majority of whom were part of old regimes which they themselves call corrupt will deliver a better administration?

2.“I will rearrange development priorities. I will establish a National Economic Planning Council (of intellectuals). On their recommendations, I will improve the living conditions of the poor”:
Central planning (against market mechanism) has been used for economic coordination in many communist and third world countries, the most popular example being GOSPLAN under Stalin administration. India is the most prominent South Asian example.The first Five-year Plan in India was launched in 1951, which mainly focused in development of agricultural sector. The 12th plan was underway when Narendra Modi, the new Prime Minister, in his 2014 Independence Day speech announced the scrapping of Planning Commission.

The efficacy of Central Planning is a matter of controversy. One school argues if not for GOSPLAN the Russians would have lost the World War II to Germany - Russia would never have produced the necessary war equipment. Korea too is another country that famously benefited from central planning in its early stages of development.

Still the days of planning are gone. We have found a far better solution in market mechanisms. Why revert to ageold traditions? Have not the free market delivered enough? (Another interesting question is who would be the ‘wise old men’ who know the market better than itself, but I avoid raising it.)

3. “I will fix the irregularities of loans. Steps will be taken to reduce the burden of debt”:
Yes, as a country we are badly burdened by the debt. The latest confirmation comes from the Forbes magazine that ranks Sri Lanka 89th (out of 146 countries) for conducive investment environment. We are being continuously told the debt to gross domestic product (GDP) ratio is on the slide.
Even if we agree, it does not reveal an important fact: The debt as an amount and the debt service cost (which the Central Bank of Sri Lanka prefers to call ‘debt service payment’) are on the rise.

It was Rs.1,163 billion or 13.4 percent of the GDP in 2013. This is nearly four times what the state spends for health and education combined. Great if we can bring down this burden. But how? The loan terms, I guess, have already been discussed and agreed. Can a new government unilaterally change all that? I seriously doubt.

4. “I will not sell state property. I will stop the dominance by selected foreign states or companies in investments”:
It is certainly better if we can have more countries and companies investing. That spreads the risks and balances the portfolio. The question is whether we have a choice. We like to believe investors are queuing to invest in Sri Lanka. The reality is the opposite.For any serious investor, Sri Lanka is one out of many choices, probably not even the second or third best. Can we afford rejecting some offers because we think they would give dominance to a certain state or a company? Again I doubt.

5. “All recent mega projects will be reassessed. All project activities will be monitored”:
This is again good, provided it makes a difference. Still what has already been done is a ‘sunk cost’. Whether efficiently or not, or overestimated or not the money has been spent. Reassessing will not make any difference.This will certainly be a good policy for any future projects. We have almost no serious financial and technical monitoring and evaluation processes, particularly on mega-scale projects. However, its impact on what has been over is a question mark.

6. “Custom duties will be relaxed on 10 essential food items to give relief to the people burdened with high cost of living. The prices of essential food items will come down instantly as a result”:
Why do we impose a custom duty on import items? For two main reasons. Firstly, it benefits local producers. Secondly, it contributes to state revenue substantially. Import duties earned Rs.83 billion in 2013. This was 7 percent of the total state revenue.Now what happens when we relax import tax? Yes, the commodity prices may slightly drop. So does the state revenue, increasing the budget deficit. That will also make the local producers unhappy. This is interesting as this policy contradicts the protectionist policies the manifesto declares elsewhere.

Is there a serious need to import these 10 ‘essential food items’? Will it not be possible to produce them locally instead? Will that not be a better choice given the serious protectionist flavour apparent in the manifesto?

7. “The monthly Samurdhi allowance will be increased. At best, it will be doubled. A programme similar to ‘Janasaviya’ will be reintroduced”:
When Ranasinghe Premadasa, as a presidential aspirant in 1988, announced his poverty alleviation programme (later named ‘Janasaviya’) his opponent Sirima Bandaranaike seriously questioned about the funds. From where does the money come from? Does he plan to run the money printing machines at Biyagama overtime?

Premadasa had a former Central Bank Deputy Governor to respond. Dr. H.N.S. Karunatilake (later to be appointed as the Governor of Central Bank) assured if the economy grows as planned, paying Rs.2,500, then a sizeable amount, to each poor family, will not be that difficult.He was correct only partially. Premadasa government or Wijetunga government that followed never paid the amount fully. Still the government made some investments to fight poverty. There were no substantial improvements.

Today, we have at least one active former Central Bank Governor and five former Deputy Governors. Some hold responsible positions in the private sector. Some are prominent contributors to the media.Will Maithripala Sirisena, to demonstrate the viability of this proposal, get at least one of them offering the same assurance Dr. Karunatilake gave in 1988? If so, that would certainly add to the credibility of this promise.

8. “Salary of public servants will be increased by Rs.10,000. The first instalment will be from February 2015”:
The government in its 2015 budget proposals increased the salaries of all public officers by Rs.3,000 on average. I assume this is the maximum the treasury will allow, that too with great difficulty. If not, the government itself, knowing the importance of the times, would have certainly offered more.As we all understand, to look better, the opposition has to offer more.

The problem: Is it practical? Where one finds the money? The state sector is now 1.3 million personnel large. One just needs only a calculator to work out how much more is necessary to pay Rs.10,000 each. It comes to a staggering Rs.156 billion.
The 2014 estimate for public sector salaries and wages was only Rs.411 billion. That was 33 percent of total government expenditure. This move will increase the spending by 38 percent. How long do we plan to work the money printing machines over time? Seriously.

9. “A monthly Rs.3,500 interim allowance will be paid to pensioners. The anomalies in pension payments will be settled. There will be a substantial pension for other senior citizens. Interest rate for the first one million in fixed deposits of senior citizens will be increased to 15 percent”:
Nearly 10 percent of the government spending goes for pension payments. Sri Lanka, in 2013, had 521,700 pensioners. They totally received a sum of Rs.136 billion. Add Rs.3,500 times 521,700. It makes Rs.2 billion. Not as critical as the earlier cases. Still it has to come from somewhere.
Raising senior citizen interest rate to 15 percent is another matter, for multiple reasons.

One - It does not come from the state coffers. Commercial banks can raise the interest to one customer by decreasing that to another. So there will be losers.

Two - 15 percent is too high given the present interest rates. This creates a serious anomaly. In fact, it is paying far higher than a depositor deserves. Thirdly and most importantly, it will create what we call ‘a moral hazard’.In economics, a moral hazard occurs when one person takes more risks because someone else has agreed to bear the burden. It can lead to a situation where the senior citizens opening fixed accounts on behalf of the rest. So, the whole purpose of the initiative is lost. The viability of this move is seriously questionable.

10. “There will be programmes to urgently provide houses for the needy. A special protection scheme will be introduced for war widows and their dependents”:
Prima facie, both attempts sound good. Providing shelter for the needy is worthwhile. Then, we didn’t initiate the war. So, it is fair that the victims (and their families) are properly compensated. The issue again is the money. Where does that come from?

CONCLUSION
Redistribution of wealth is perhaps the most popular government policy worldwide, under the one-man-one-vote systems. It guarantees the sustainability. Every government since independence has used this policy at different scales.D.S. Senanayake offered lands to farmers; Maithripala Sirisena’s father himself was a recipient. Later came Janasaviya and Samurdhi. Rajapaksa government, since 2005, has been the biggest redistributor ever. It increased the public sector by three fold; offered fertiliser subsidies and compensation for the victims of every natural disaster.

So, we cannot really blame Maithripala Sirisena for following the footsteps of others. He fights an election. He too, like any other, values sustainability. He likes to be seen people-friendly. Nothing wrong with that.The problem is redistribution comes with a price tag. A rough calculation shows the funds necessary just to fulfil the promises under this section itself are in the range of Rs.200 billion. (Redistribution is evident in many other sections. For example, the section on education ensures the state expenditure on education will be 6 percent of the GDP; health expenditure is to reach 3 percent). The total government expenditure in 2013 was Rs.1,670 billion.

Implementing the proposals in this section only calls for a 12 percent increase in state expenditure. The proposed increase in health and education calls for another 26 percent increase. The subtotal is 38 percent. So, we can fairly assume for all proposed changes need the state expenditure to be raised at least by 50 percent. In other words, we need half more of what we spend now.

From where does this money come from? A government can find money in three key ways. Firstly, it can increase the taxes. We understand this is not the intention of ‘Maithri Palanaya’. It wants less, certainly not more, burden on people. Then it can take foreign loans. This too is against its policies.

The third option is to print money at Biyagama factories or elsewhere. We can guess the consequences. It will lead to inflation. The rupee value will drop. Doubled Samurdhi payments will be the same or lower in real terms. Increased state sector salaries will not be of any help. Is this the end we are heading to? I wish the distinguished economists in the Maithri camp will clear my doubts.