Economy without Tiger agenda
By Susantha Goonatilake
The new government has raised hopes regarding the
twin problems — the economy and the ethnic issue. These two do not necessarily
depend on each other, although pro-Tiger and foreign-funded lobbies and
their business agents claim the contrary. A decent economic programme can
be implemented without the involvement of Tiger agenda.
I believe that any person with some modicum of intelligence could coordinate
and manage the economy better than President Kumaratunga's government.
The new government was greeted by a rise in the stock market, which is
a barometer of expectations rather than performance. But our stock market
does not reflect the economy although it could be seen as an indicator.
Only a small part of our economy is traded in the stock market.
Contrary to simplistic labelling, we were never a completely closed
economy. Nor are we today completely open. Our import substitution phase,
(closed economy) followed by a more open export-oriented phase, (open economy)
has its parallels in countries such as Korea, India and China. In fact
these countries opened up during the same time that Sri Lanka did-in 1977.
The stock market's daily turnover these days is around Rs. 100 million
or in the one million dollar range. Internationally speaking, this is peanuts.
There was a period during which the stock market boomed in 1993 and
1994 and was featured once in the New York Times as an "emerging, market".
This was partly because of the spillover effect of the massive Western
investment splurge in Asia. Although a large part of this investment went
to East and South East Asia, some of it spilled over to us. What we got
for a short time was in the region of millions of dollars, small change
compared to the tens of billions of dollars being annually invested in
China. But this had a great effect on our tiny stock market. Sri Lanka
is not the only country going into negative growth this year, the first
time since Independence. Singapore — the economic role model for many in
the UNP — too is going through a similar crisis.
And of course, several Western economies are suffering economic problems
due to the combined effects of a global downturn and the September 11 attacks.
Here the downturn has been due to these twin factors together with the
devastating LTTE attack on the BIA in July last year.
The government is just a month old but there are indicators to judge
the direction of the economy.
J.R. Jayewardene opened up with the memorable phrase, "let the robber
barons come". He also introduced a harsh labour culture sacking tens of
thousands of workers during a general strike spearheaded by the NSSP. He
dismantled state protection in key industries like handlooms. This was
just the opposite of what was happening then in India — "Be Indian, buy
Indian." But still investment, both through aid and private sources, came
and the economy did grow.
A first indicator of Prime Minister Ranil Wickremesinghe's external
economic orientation was his commitment in Delhi that India and Sri Lanka
would stand together regarding the WTO. India has been in the forefront
in the campaign against the WTO which is by and large a Western prescription
for the developing world. The WTO in effect also eliminated the role of
pro-Third World institutions like UNCTAD. Mr. Wickremesinghe's Delhi stand
could be a reversal of JR's robber baron philosophy, a sign of a changed
UNP (or of a UNP agreeing to matters that they do not understand).
Ravi Karunanayake appears honest and dynamic, pushing actively for keeping
the CWE opened for 24 hours.
A key to investor promotion is having a steady power supply. Power and
Energy Minister Karu Jayasuriya and his team comprising the Ministry Secretary,
the CEB Chairman and national energy advisors appear to be honest and hard
working. The 180-day target could be kept not because of new plants but
largely because existing plants, including recently commissioned and non-operative
ones, being brought to full steam. Yet questions remain.
One simple rule, the quicker you want new power sources, the more expensive
it is. So quick energy fixes invariably drive up prices. That is, if instead
of coal you want the quicker diesel or gas turbines, the cost to the consumer
would be higher. Due to high costs, the ability of the CEB to invest in
the expansion of the system and give reliable supplies at an affordable
cost will be curtailed.
A principal reason for future high costs and delayed electricity is
the Church's role in preventing the construction of the coal power plant,
a necessity for any power strategy. The Church seems to be driving us to
a new dark ages.
One of the arguments being made by the anti-Norochcholai lobby is that
the nearby cement plant spews dust and that the coal plant would be worse.
But this is disingenuous. Dust extraction is a well-known and widely practised
technology and there are coal power plants in the environs of the Vatican.
The cement plant spews dust because of breakdown of maintenance; the result
of policies that rid the then Cement Corporation of carefully trained personnel.
A key to economic growth is also the efficient functioning of financial
institutions, especially the dominant state institutions. The chasing away
of the new People's Bank restructuring staff by the JSS has aroused a debate.
The JSS insists that these new recruits are redundant; an analysis endorsed
by the two non-political unions — the CBEU and the Executives' Officers
Association. The JSS has had an unsavoury past in the country generally.
But its moves are significant as it comes from a UNP wedded to the private
sector and allegedly to meritocracy. The situation seems more complex.
The new private sector recruits had helped run much smaller establishments
and were now being paid five to ten times the salaries of top People's
Bank officials. The payment of expatriate salaries to local staff raises
key questions in a country with one million persons working abroad and
getting foreign salaries. Will the one million expatriate be paid such
high salaries once they return?
The restructuring team was expected to change the fortunes of the bank
straddled by politically induced loans. Yet, their actual "decisions" were
largely the transmission of advice they had obtained from their much lower
paid parallels. And after one year of such activity (including it is said
abuse of privileges), the new bank experts had little to show.
There are inherent contradictions in this government as with the last.
A key example is its delivery machine, the cabinet. Its large size and
built-in areas of overlap seem to be a textbook example of how not to draw
an organization chart. That is how to clog up the delivery. One month on,
the government is feeling its way around the one area — the economy — where
it has a clear advantage over the last.
Peace and President: new Govt.'s tight-rope walk
By Victor Ivan
The Prime Minister with his retinue skilfully crossed
the river full of man-eating crocodiles. He has now reached the land. The
group led by Ranil Wickremesinghe must have thought that the journey from
there to the oasis would not be as difficult as crossing the river. Although
land might seem to be a terrain in which one might move without dangers,
it is in fact full of pitfalls and dangerous illusions. Sometimes crossing
the land might be more difficult than crossing the river. Although there
may be a timetable for the journey towards the target, if the group procedes
in the belief that the journey after crossing the river is free of danger,
then this group might get destroyed while crossing the land. Although some
time might have to be spent in studying the terrain properly and identifying
and removing the obstacles, the aim can be reached only if those conditions
The political picture of the country is extremely complex. Although
the UNP has been able to win the election and take over the internal administration
to a considerable extent, the executive power is still in the hands of
the PA. Although the President did not enter into a quarrel with the winning
party immediately and has taken action to hand over the Defence Ministry,
she has not transferred all the activities of internal administration and
become a nominal President. She has retained for herself the right to appoint
personel prominent positions. She is using her power to appoint the Inspector
General of Police, the Commanders of the armed forces, the governors and
the Ambassadors. She has not handed over all the institutions that come
under the ministries and seeks to keep and control selected institutions.
When the opposing party came to power, the presidential secretariat
should have contracted proportionately, but, on the contrary, there is
a speedy expansion. Some of those who lost their jobs with the triumph
of the UNF and who are among her trusted colleagues are being absorbed
into the presidential secretariat. The President has also started a massive
media unit of her own. A large number of the vehicles which had been held
by state institutions appear now to be attached to the presidential secretariat.
Although the President has surrendered a large extent of internal powers
of administration, she seems to have followed a policy of keeping for herself
the decisive elements of state power. When she had parliamentary power,
she took hold of positions like Chief Justice, IGP and Army Commander.
Although the present victorious ruling party would like to remove them
from those positions which have a symbolic significance, the new government
is facing the problem of how to remove them without the President's consent.
A factor that disheartens the people is that, although they had defeated
a government, persons in positions of symbolic importance, whom they resent,
have not changed. The President's strategy seems to be to keep them in
a position in which they cannot join the government and to use them at
a time of crisis for a programme of destabilising the government.
Although it is Parliament which has the power to control the treasury,
the President's Fund has enough funds to hold on until the coming of a
crisis. It is the largest fund existing in the country apart from the treasury,
and no one knows the exact balance. On the other hand the President has
a special security division armed with ultra modern weaponry and the number
of defence personnel in it, is not less than four thousand.
The Prime Minister thinks that in the search for a solution to the ethnic
problem, it is necessary to keep the main opposition in a position of non-obstruction,
and seems to think that he must be satisfied with what he has got and must
function in collaboration with the President. That is what the President
herself wants. She signals to the victorious party that, if it wants her
co-operation it must be satisfied with what it has got and must make no
attempt to curtail her powers. However, the Prime Minister has to do business
not with an opposition which has been ousted from governmental power but
with one which holds in its hands very vital elements of state power. The
UNP did not have such power while it was in the opposition. The President,
on the one hand while showing that she would not obstruct any move in search
of a solution to the ethnic crisis supports behind the scenes the JVP programme
against reaching a peaceful solution.
The President knows that the search for the ethnic crisis is not an
easy or simple one and that moments would inevitably occur which would
baffle the people. She would need just one incident which would cause deep
resentment in the minds of the armed forces.
When such an occasion arises she will stand up as a heroine rising up
for the honour of the armed forces and the Sinhala people. Such a rise
up would push the government to a serious crisis and would weaken the government's
popular base and would frustrate the entire peace programme. If the Prime
Minister fails to see this serious challenge before him and thinks only
about the peaceful co-existence that should be maintained with the President,
the day when the new government would be pushed to a massive crisis cannot
be very far. It is essential to go on acting in co-operation with the PA
as the main opposition for the purpose of reaching a solution to the ethnic
At the same time the government must not forget that the PA is not an
opposition party entirely outside state power. The political conditions
in the country change in accordance with incidents that occur. A co-existence
with the President can be meaningful only if the government succeeds in
achieving a situation in which her ability to sabotage the government's
actions can be completely controlled. For that purpose she must be made
powerless, or her powers must be constitutionally controlled .
The writer is the Editor of Ravaya
The Sunday Times Economic Analysis
Politics and economics of prices
By the Economist
Prices and politics are inextricably interwoven in Sri Lanka. This is especially
so as wages and incomes are low on the one hand, and, on the other, prices
of basic consumer items, especially food, are relatively expensive compared
to those of other low-income countries like India, Pakistan or Bangladesh.
A repeated theme of Sri Lankan politics has been the inability of incumbent
governments to keep down prices and promises of the opposition to bring
prices down once in power. Often new governments bring down prices in the
first weeks and months in office only to find that they increase once again.
The reasons behind this phenomenon are many and complex. Let us discuss
some of these dispassionately. Take the case of food prices. First of all,
in the case of many food commodities, prices are high both due to the higher
costs of production in the country and high marketing margins. These in
turn have a number of causative factors. Rice is a good example. The cost
of production of rice in Sri Lanka is much higher than in most rice producing
countries. Consequently the price of imported rice is lower. If, as the
Minister of Agriculture has said, he would ban the import of rice, then
rice prices would rise further. The conflict between producer's interests
and those of the consumer is evident in this case as in many others. Protection
of most food prices would raise consumer prices.
Such protection could be a good incentive to increasing rice production
though it would increase consumer prices. In such a conflict of interest
between producers and consumers, the best option is to use such an incentive
for increasing domestic production of rice for a short period.
During this period the country must strengthen its support measures
for paddy cultivation, especially credit and extension services to increase
yields and thereby bring down the cost of production. The protection afforded
to paddy farmers should not be one that will encourage inefficient production
and maintain low yields.
Equally important would be the improvement of the marketing of paddy
so as to reduce the margin between the price that the paddy producer gets
and what the consumer pays. Again a host of factors, such as fuel prices,
road conditions, vehicle repair costs, wages and the costs of food prices
impact on these margins. Monopolistic control and lack of competition in
the purchase of paddy also have an influence in depressing farm gate prices
while increasing consumer prices. Many efforts in the past to improve paddy-marketing
services have not met with success. This indeed is a difficult problem
to solve, but one that must be seriously addressed. A more competitive
marketing system rather than efforts for the government to control and
administer marketing is the solution.
What we have said about paddy is equally true of several other food
crops, such as vegetables, potatoes and fruits. Potato prices are the best
illustration of this. Sri Lankan potatoes cost several times the import
cost. The government protection of potato imports will further raise the
price of potatoes and bring into cultivation marginal and low yielding
lands. This would also have the result of sustaining the high price of
local potatoes. The other dimension of the problem is in several basic
food commodities where local production is small and therefore they have
to be imported. Sugar, milk powder and wheat flour are the best examples.
The prices of these commodities are affected by the exchange rate. Even
though the international prices of these commodities have not increased,
the domestic prices rise owing to the depreciation of the currency. There
are also the increase in shipping costs and the various tariffs and other
charges that importers have to pay and these have often increased. This
illustrates the fact that overall economic conditions and the fiscal situation
have an important bearing on import prices.
A third category of problems arises with respect to utilities. Most
utilities are monopolies. They are therefore able to raise prices and pass
on their inefficiencies or increase their profits. Electricity and cooking
gas are the best examples of these. In the case of gas it appears that
the government did not take sufficient steps to protect the consumer. It
is a cardinal principle of privatization of utilities that the state prescribes
conditions to protect the consumer. Public utilities should also come within
the jurisdiction of a Utilities Pricing Commission. However there may be
good economic and financial reasons too for the increase in prices.
These are issues that the government must look into. Finally the overall
economic conditions and the state of the public finances have an important
bearing on the general level of prices. Sri Lanka's case is also one of
" too much money chasing too few goods". An improvement in the public finances
and increases in productivity, particularly of agriculture, would provide
the most lasting solution to the problem of persistent increases in prices.