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Who will own the world in 2050?

04 Jun 2014 - {{hitsCtrl.values.hits}}

“Will the world in 2050 be owned by traders and the super-rich or will it belong to the oil and gas producing countries or Bank of China? questions Thomas Piketty, author of the famous book (2013) ‘Capital in the Twenty-First century’.

After Adams Smith’s ‘Wealth of Nations’, David Ricardo’s ‘Principles of Political Economy’ and Karl Marx’s ‘Das Capital’ French economist Piketty’s book has been acclaimed as the foremost analysis on industrial capitalism and wealth distribution, based on scientific data.

Having analyzed WTID (World top income database), Piketty shows that the wealth gap in Europe and North America since 1980 has been widening. As economist Kuznets suggests, inequality is not decreasing as Per Capita Income is increasing (Kuznets Curve). This is what is happening in ‘submerging Europe’ which Neo Nazis are slowly taking over, and struggling USA, whose economic progress has slowed, is losing its super power status. In this backdrop, what is happening in Sri Lanka?

Sri Lankan scenario

Recently published Central Bank report and the Finance Ministry annual report (2013) suggest that the prevailing economic condition in Sri Lanka is healthy and sound and forecast it to be so, in the coming years as well. They have projected over eight percent growth rate for coming years (2015-8.2 percent, 2016-8.3 percent, 2017-8.4 percent). The per capita income in 2013 has been recorded as US$ 3,280 and it is predicted that it may exceed the US$ 4,000 mark in 2015. They also have declared that inflation, unemployment, poverty and budget deficit have reduced to a single digit and would prevail in time to come.

Social indicators like electrification level, telephone facility penetration and road accessibility will be almost 100 percent and it is noted that at present the computer literacy is increasing at 30 percent and also internet penetration is at 30 percent. So, as far as all economic indicators are concerned, Sri Lanka will be an economic dynamo of South Asia.

Criticisms

However, the opposition parties always have been criticizing our economy. The JVP criticizes even the statistical data used to calculate the related figures. Both UNP and JVP emphatically air their views about high indebtedness (76 percent of GDP-public debt), high interest rates and the government debt service bill which exceed the government revenue. Therefore, according to them, the government is already bankrupt.

Although the JVP is good at criticizing, it falls short of practicing what it preaches, as was evident from its poor performance during the spell of 2004-2005 SLFP-JVP coalition government. It is a known fact that indebtedness, debt service ratios or any other economic indicator was not improved during that period (2004-2005).

It was true that the UNP, under J.R.Jayawardena, modernized the country’s economy. However, it was rather a makeup and not real or sustainable growth. During 1977-1993, JRJ-Premadasa era, the country experienced the highest public debt ratio (109 percent in GDP in 1989), highest inflation (29 percent-1982), highest unemployment (34 percent-1984) and the highest budget deficit (23 percent GDP-1980). On the other hand, JVP’s economic agenda-Bolshevik Socialism is not clear. Also, the old Soviet type economic model is obsolete and will not work. Denial Ortega’s new Nicaraguan model, Chavez’s Venezuelan model or Eva Morale’s Bolivian models are also not clear and still not have been studied properly, whether the JVP is going to adopt them or not.

Our growth figures are somewhat misleading if we are not considering the real growth with the current price growths

The UNP is still dreaming of JRJ’s model and apparently, it does not understand why it failed. Its neo liberal model, proposed by Ranil-Milinda duo in 2002-2004 was an utter failure. If we had adopted that policy, the country would have gone bankrupt during the global economic crisis (2008-2009), just as much as some countries, adopting the identical economy had to face.

However, although our growth figures are interesting, other indicators show a different picture of our economy.

Middle income trap

Firstly, Sri Lanka was declared as a middle income country by international monetary agencies in 1998. (Middle income means, band between US$ 1,035-12,616 per capita). Now, after a period of 15 years, ours is still a low level middle income country.

Some economists identify this middle income as a trap. Malaysia, Thailand, Brazil and even China had been experiencing long stays in that trap. Singapore, Korea, Taiwan, Hong Kong and Malta, tunneled through this barrier and have become high income countries like Japan, Germany and the USA. Asian tigers do not have oil or other resources to sell and grow. All these countries went beyond the middle income trap by way of introducing high-end manufacturing and trading business with special investing in technology, innovation and management. Sri Lanka’s current strategy is to widen the service sector, specially the tourist sector for higher growth which may not succeed.

Secondly, our growth figures are somewhat misleading if we are not considering the real growth with the current price growths. For an example, in year 2006, the GDP was Rupees 2,936 billion. When compared with 2005, the current figure Rupees 2,452 billion, the growth rate (with inflation) was 19.8 %. However, the real growth rate (without inflation) was 7.5 percent. If we take the current prices from 2005 to 2010, the GDP had increased from Rupees 2,452 billion to Rupees 5,602 billion by 128 percent. However, if we take the real growth, with respect to 2005 (constant price), the growth was 36 percent. So, with the current prices, the per capita income in 2012 should have recorded as 2,923 US$. But in real terms with respect to 2005 was 1,462 US$ per person.

Public and social indebtedness should be measured against the assets of the government and the society

Thirdly, our debt service figure to public revenue ratio is alarming. In Sri Lanka, no one has ever valued the government asset base or public wealth in relation to national economy. Public and social indebtedness should be measured against the assets of the government and the society. The other important factor is our revenue. According to the government treasury’s own statistics, in 2012 the government revenue was estimated as Rs. 1,150 billion. It was also estimated the debt service component as Rs. 1,016 billion (or 94 percent of the government revenue leading towards 100 percent) In 2012, the total government expenditure was estimated as Rs. 2,190 billion and the government was forced to raise Rs. 1,139 billion as loans to bridge the gap. If our debt service to the government revenue ratio was at 80-100 percent level, we were definitely at the fiscal cliff and needed to be turned around.

Fourthly, the ever growing gap of export-import revenue and the expenditure- export revenue at US$ 10 billion and import figure at US$ 19 billion. Our export revenue with respect to GDP is falling and the export market is still depending on European and North American countries which are threatening to impose sanctions on us. Also, there is no government plan to produce import subsidies. (Rs 6 billion worth of fruits have been imported while 50 percent of fruits produced locally, had gone waste).

Skilled labour shortages

Fifthly, we are facing serious skilled labour shortages and economists have warned of diminishing demographic advantages that were experienced in 1980’s by foreign investors.

Sixthly, it is the deteriorating governance. It is a known fact that very often the law and order is lenient towards the superrich and politically powerful entities. However, with the advent of the present ICT era where Citizen Journalism is in every nook and corner of the smart phones, injustices and frustrations are wide spread. Corruption now pervading the entire society and as a result, our corruption conception index (CCI) is deteriorating. Although the foreign Capital (FDI) infusion actualization is 15 percent, (Actual projects versus projects signed) social capital is an essential prerequisite to harness foreign investments.

The seventh reason is the inequality of wealth distribution. Lowering of income tax concessions have forced to reduce the government revenue from 29 percent in 1978 to 12 percent in 2013, thereby forcing the government to reduce its social investments on mostly handicapped poor communities.

Other worries

There are many other negative indices worrying the Sri Lanka’s economy. On the other hand climate related crisis like water stress, food scarcity, energy insecurity, sea level rise and demographic changes are posing new threats to the economy and the society. Unfortunately, our economic planners are turning a blind eye to these demographic and environmental problems.

There is no government plan to produce import subsidies. (Rs 6 billion worth of fruits have been imported while 50 percent of fruits produced locally, had gone waste)

Sri Lanka should adopt a new economic vision and a strategy. It should not be confined to a debate on Builders and Balancers. It should be a broader debate, encompassing the efforts to discover how to tunnel through the middle income trap that interfere environment, good governance and social justice factors. Let us debate on these issues, keeping in mind our common future with the emerging Asia.

(The writer is Sri Lanka’s Minister of Technology and Research)

Features

Who will own the world in 2050?

Sri Lankan scenario

Criticisms

Middle income trap

Skilled labour shortages

Other worries

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