Leadership for economic growth

Leadership is vital for a country’s economic development. This is particularly so in the context of external economic shocks and internal war and insecurity. Does Sri Lanka have the kind of leadership that can face up to the multiplicity of her economic problems and get it out of the economic crisis that we are heading to?

The contrasting leadership of India and Sri Lanka comes to mind after the towering presence of the Indian Prime Minister in the country recently. The overpowering personality of Manmohan Singh that dominated the SAARC summit was not merely because of his being a leader of the largest country in the region by any standards, but also the person he is. India has had the fortune over the years of great leaders. It is perhaps fortuitous that at a time when the country was submerged in moribund economic paradigms that a leader of Manmohan’s vision, capabilities and academic achievements emerged.

Manmohan Singh was one of the brilliant economists trained in Oxford and Cambridge, when these were the world’s leading universities for economics. It was also the good fortune of India that Manmohan Singh opted to join the Indian Civil Service rather than academia. Academia’s loss was India’s gain. In contrast his colleague Amartaya Sen his Cambridge colleague opted to remain in academic research that won him the Nobel Prize in Economics.

There is a contrasting approach between the leaders of India and Sri Lanka with respect to economic performance and policy perspectives. Both politicians and economists in high office in Sri Lanka are saying how wonderful the country’s economic performance has been. The rate of economic growth is what is often taken as evidence of this despite the weakness of the statistic and its suspect calculation that has been demonstrated and exposed. In Sri Lanka a “good statistic” is taken and beaten to death.

Unfavourable statistics are hidden away. It appears that the Sri Lankan economy is always faring well. The high rate of inflation, the unacceptable fiscal deficit, massive trade deficit, slowing down of industrial exports and many other unfavourable economic indicators are ignored. Sometimes the interpretation of some economists is stunning as when they say that inflation is a good thing as it denotes development. In contrast is the leader of India who pinpoints the deficiencies in their economic performance even though the world at large is all praise for their economic performance.

In his last Independence Day speech on August 15 2007, India’s Prime Minister Manmohan Singh cautioned Indians against hubris, instead of boasting about the rapid growth the economy has in fact attained. He cautioned people about the poverty in India and the need to industrialize and take people out of poverty stricken rural areas to more productive activities. He said “India cannot become a nation with islands of high growth and vast areas untouched by development, where the benefits of growth accrue only to a few.” This is in an economic context where his government has presided over sustained economic growth, strengthened her foreign exchange reserves, increased per capita incomes and undertaken vast development projects and provided the environment for rapid industrialization and development of services. It is not to these development strides that he focused the minds of the Indian people, but the problems and challenges the country faced. India which has a rate of inflation that is about a third of ours is trying to keep down its inflation to below 5 which it considers the tolerable levels.

In contrast, we are justifying our rate of inflation at about 30 percent. India knows the disadvantages of inflation for its sustained economic growth and international competitiveness; we are finding excuses and not taking corrective actions. This is particularly so as we are also keeping the exchange rate more or less stable with a high rate of inflation and thereby eroding our competitiveness.

As we pointed out last week, despite India’s recent impressive economic performance nearly 30 percent of Indians still live below the official poverty line and close to half of all Indian children under the age of 3 are malnourished. A recent government study found that the majority of Indians live on half a dollar a day. Our situation with respect to poverty is only slightly better. While India’s growth offers the prospect of reducing poverty, the economic recession and inflation is likely to drag us down to greater poverty and malnutrition.

A realistic assessment of the current economic situation would be the starting point for adopting the remedial actions that are so essential for preventing a slide in the economy. Both the political leadership and the country’s economic advisers must be bold enough to face up to the problems. The high rate of inflation is a serious danger to an economy that is so trade dependent as ours. This is especially so with respect to the industrial exports currently facing increasing production costs. Increasing oil prices and electricity charges, higher costs of chemicals, demands for higher wages are all squeezing profits to a level that they may find themselves at a point when they would need to close their enterprises. This is why corrective action in both the fiscal and monetary areas is vital. Without an appreciation of this remedial action would be quite difficult. There is a divergence in economic opinion whether in this context monetary policy could be tightened further without adverse effects on production. There is however no disagreement that fiscal prudence is essential and that the soaring fiscal deficit must be reined in. However neither action would be possible without the recognition that strong remedial policies are needed.

History provides ample evidence that the turning point in a country’s economic development has been owing to the leadership and foresight of its rulers. Whether we go back to pages of Western European history or post Second World War emergence of nations this is evident. The rapid strides of South East Asian countries too were due to the leadership provided to them to ensure political stability and correct decision making to adopt good economic policies and economic discipline.

Good economic leadership is vital to ensure the economy does not get into a worse crisis that would require drastic solutions. Comparisons between Zimbabwe and Sri Lanka are emerging. We are certainly a far cry from such a parlous state in the economy, yet there are danger signs that indicate we could drift into such a situation if remedial measures are not taken. Being aware and sensitive to the problems is the first step towards corrective action. Are we sensitive to the critical problems facing the country and do we have the leadership that could take the unpleasant corrective actions?