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Prime Minister Ranil Wickremasinghe’s vision and economic strategy for development disclosed in parliament on November 5th is significant as it promises a new wave of reforms that are imperative at this critical juncture. To what extent the good intentions of these policies could be implemented is the decisive issue.

Statement opportune
The policy statement was opportune for many reasons. The various promises and different positions of the two main party manifestos, the statements at the elections and pronouncements of ministers from time to time rendered the economic policies of the combined parties of the government unclear. Furthermore, the two main parties have pursued different economic strategies in the past and therefore what policies would be pursued remained to be clarified. The Prime Minister’s statement of economic policies was therefore timely and pertinent and provided the backdrop for the first budget of the coalition government on November 20th.

Consensus
It is essential that this economic policy statement is fully endorsed by the two coalition parties and that the entire government would support the new thrust in policies. The tone of the policy statement however provokes scepticism of this being the case and that it is the policy position taken by the PM and UNP rather than with discussion, acquiescence and support of the SLFP. If this is so there can be serious difficulties in implementation. An optimistic expectation is that there has been a change in SLFP policies towards pragmatic and realistic policies.

Clear vision and policies
A policy statement of this character was needed due to the state of uncertainty in the policies to be pursued at this critical juncture of the country’s economic future. The economy was in crisis with its macroeconomic fundamentals weakening and bold measures needed to stabilise the economy. Furthermore, without a clear vision and policy framework, it would be quite impossible to pursue consistent economic policies and undertake essential reforms to achieve sustained economic growth.

Past policy pronouncements
Such definitive statements of policy were proclaimed at three other points in the past. The UNP government that came into power with a five-sixth’s majority in 1977 announced a break from past economic policies with the November 1977 budget. The pursuance of open market policies and an outward orientation of the economy with liberalisation of trade, exchange controls and import restrictions were announced together with the devaluation of the Rupee.

Continuity and change
When Chandrika Bandaranaike Kumaratunga assumed power in 1994 there was uncertainty about the continuation of open economic policies. Her policy statement was noteworthy for its assurance of a continuity of policies with some changes that was described as “Open Market Policies with a Human Face”.

Mahinda Chintanaya
President Mahinda Rajapaksa’s regime announced a reversal of policies with its Mahinda Chintanaya. Greater state control of the economy and some inward looking policies were pursued with an emphasis on foreign funded high cost uneconomic infrastructure projects. Statist economic policies, high foreign borrowing, extravagant public expenditure and arbitrary takeover of private properties were features of this regime.

Social Market Economy
It was precisely because of the financial crisis that a new vision and economic policy programme was needed. Ranil Wickremasinghe policy framework described the change as ushering a “Social Market Economy” This is largely a slogan for popular support. The specifics of the new policies are what matter.

Open market economy
There are clear signals that the government would restore open market and outward looking policies and encourage foreign investments and exports. It will stem the drift towards inward looking statist economic regime and reverse some of the measures taken by the previous government that deterred private investment.

Positive directions
The positive steps in the statement include the intent to bring down the fiscal deficit to 3.5 percent of GDP, the emphasis on export growth, the multifaceted approach to reform public enterprises, the expansion of technical education, the teaching of English and computer skills, the schemes for caring for the elderly and new strategies for agricultural development. These steps are in the right direction, but what matters is their effective implementation.

Fiscal deficit
For instance bringing down the fiscal deficit has been an objective of successive governments. In 2002 parliament passed legislation to progressively bring down the deficit and contain the public debt to 60 percent of GDP. However fiscal conditions deteriorated and resulted in a huge debt and debt servicing cost that is itself a cause for the continuing high fiscal deficits.
Similarly, there have been good intentions but poor performance. The proposal to correct the regressive taxation system where 80 percent of revenue is derived from indirect taxes that mostly fall on the poor to one where 60 percent of revenue is derived from direct taxes is good intent that is difficult to implement with an inefficient tax collection system. It would be more realistic to raise consumption taxes on items of consumption of the rich, such as road licences on luxury vehicles and import duties on extravagant imports, while retaining a low import tax regime.

Similarly other announced policies are in the right direction. Yet they are mere intentions and a part of a vision. The previous government too had visions of making the country an education hub, shipping hub and an aviation hub, but hardly achieved any of these. Clear specification of these policies and effective measures to implement them are needed.

Constraints
There are several constraints in achieving the economic order spelled out by the Prime Minister. First and foremost is the need for consensus in the government that would enhance the political will and resolve to implement the correct economic policies despite political unpopularity. A lack of financial resources, human skills and capacities and limited administrative capacity are serious constraints. Detailed strategies in each of these developmental areas must be followed up by speedy implementation.

Bitter pill
Will the Prime Minister’s strong resolve be implementable? As the PM said: “Taking all of this into consideration, it must be stated that for the sake of future generations and in pursuit of reality, we must have the strength to take the right decisions. Now these may not be popular and may offer a bitter pill to swallow. But we need to take bitter medicine to cure our sick systems and ourselves.”