System change and economic stabilization

By Ameer Ali –

Dr. Ameer Ali

Fear has been deliberately sown among the voters by the champions of the old order that Nuclear power plantChanging the system of government through a social revolution would, apart from other harms that critics claim, primarily destabilize the economy and endanger even what little stability there is. Ranil Wickremesinghe had managed to get under IMF direction. RW, for its part, also warns listeners attending its campaign rallies about the return of long queues and the disappearance of gas bottles. Anura Kumara-Dissanayake be elected as president and the NPP is allowed to form a government. Even Sajith Premadasa and his lieutenants compare AKD’s emphasis on revitalizing the domestic real sector to the disastrous, inward-looking economic policies and import substitution strategy of the Sirimavo government of 1970. It is time to cut through these distortions and scaremongering and explain to voters the real nature of the NPP’s economic strategy.

To begin with, we must remember that NPP is the child of aragalaja, and the generation that led that uprising with the demand for system change, unlike its predecessors in the last century, is part of a global family of network societies with direct connection to people and events and is not prepared to live in isolation in a closed society with a closed economy. This generation aspires to see Sri Lanka remain an open society with an open economy but develop competitively and progressively to gain a respectable place in the world arena while protecting itself from unwanted pressures and interference from outside. The economic strategies of NPP must and therefore reflect this overall objective and its policies must be viewed and assessed accordingly.

There are three areas or issues where critics have raised concerns about the economic course of the NPP: the policy towards the IMF-supported economic revival agenda, the future of the market economy and the role of foreign investment. AKD has stated in no uncertain terms that his regime would follow the IMF programme but that it would renegotiate with its author certain adjustments to the agenda, particularly with a view to strengthening the domestic real sector and reducing the burden on the working poor. This should have been done from the outset when RW asked the IMF for help. But he and his deputies did not do so. As a result, it is the lower income groups that bear a larger share of the costs of stabilisation and recovery. The IMF’s recommended disbursement through RW’s aswesuma is no answer to this injustice. Given Sri Lanka’s dire financial situation, the IMF was right to insist on fiscal consolidation to reduce the rising budget deficits. This should be achieved by increasing government revenues while reducing expenditures. Increasing tax rates and profits from state-owned enterprises are the safest way to generate revenues. When SOEs are in losses, the responsibility for generating revenues falls on taxes. But the question is who should pay the taxes and at what rate? No one pays taxes voluntarily. But the IMF prefers to broaden the tax base to spare the rich and wealthy. The VAT of RW was the result that hit the low income groups harder than the wealthy class. However, those familiar with the Laffer curve know that lower taxes generate more revenue than higher taxes, an idea that comes from the 14^and century sociologist Ibn Khaldun. But that is only valid if tax collectors are honest, efficient and above corruption. Sri Lanka’s tax authorities have a lot to answer for when it comes to low tax revenues. Ultimately, the problem lies with governance. That is why even the IMF has been pushing for governance reforms. In this regard, the NPP’s determination to change the political culture and governance of the country is highly commendable. With a fairer tax structure, the NPP could generate more revenue than RW’s VAT and other taxes. Therefore, AKD’s proposal to renegotiate with the IMF should be heard sympathetically. The IMF will not suspend its programme if AKD is elected. There are also geopolitical factors that would prevent the IMF from continuing its mission, regardless of who is elected president.

Likewise, AKD has assured that NPP will not kill free market economy and free enterprise and replace it with old-fashioned state capitalism. But free market economy should be made completely free without artificial rigidities and mafia operations as they exist now. For example, is the local rice market free from collusion? Are the rice millers not acting like a mafia and exploiting both the rice growers and the rice consumers? The tragedy is that this mafia has connections within the government circle and RW has done nothing to cut them in the past two years. Again, it is a matter of bad governance.

Finally, NPP’s position on foreign investment. AKD had reiterated that they would welcome foreign investors, but again the question is why they are reluctant to invest in Sri Lanka. Consider how Gota handled the Colombo Harbour West Terminal issue. He unilaterally broke the original agreement with India and Japan by giving in to pressure from nationalist unions and Buddhist priests. Similarly, he stopped the Japanese railway project after Japan had started it. After that failure, Mitsubishi Corporation decided to close down its operations in Sri Lanka. What message do these incidents send to foreign investors? Do they trust Sri Lankan governments? There was no transparency in many of the deals that governments made with foreign investors. Therefore, AKD’s quest for FDI should start with rebuilding this lost trust by reforming governance. Even then, Sri Lanka needs to be selective in choosing the right type of FDI so that the projects initiated by foreign investors have strong ties to the local economy. The revitalization of the domestic real sector through NPP must benefit from FDI. Otherwise, FDI companies would simply remain export enclaves with little connection to the local economy, like the British plantations in the 19^and century. Currently, the Port City Project resembles such an enclave. So, while NPP welcomes FDI, it should be selective and channel those investments to fill the gaps left by domestic investors due to lack of funds. Doesn’t this policy make economic sense?

The success of the entire economic trajectory of NPP depends on governance reform. This is the pillar on which the new system would be built and that was the message of the aragalaja generation. AKD’s determination to change the rotten political culture and the dying system of governance should therefore stabilize the economy faster with IMF aid and lay the foundation for sustainable economic growth with equality. Voters seem to have understood this message for the first time. System change warrants a new constitution and AKD has promised to implement one. In contrast, none of the other candidates have anything better to offer than the same smorgasbord of promises within the existing political culture and governance. Either the country is entering a new era on 21^st with AKD at the helm or will it continue to struggle with one crisis after another under the current system.

*Dr. Ameer Ali, Business School, Murdoch University, Western Australia