Columns

Today’s May Day rallies are of political significance rather than a means of improving the conditions of workers. The rallies demonstrate the relative strengths of parties. Ideological slogans and political accusations will not improve the lot of workers. Rapid economic growth coupled with social legislation is what would improve the living standards of workers.

Slogans on the economy
The crowds at the opposition rallies would shout condemning the economic policies of the government and blame the government for the current economic crisis. Those at the UNP rally would shout vociferously condemning the previous government as strongly.

It is not difficult to envisage the slogans on economic issues at today’s May Day rallies. One of the dominant slogans at the opposition rallies would be resistance to the IMF loan and conditions attached to it. Opposition to the proposed Value Added Tax (VAT) would no doubt figure prominently. It is worth examining and discussing these slogans on economic issues.

IMF loan
The slogans opposing the IMF loan may not be clear as to whether they object to obtaining the IMF loan or whether they are only against the conditions attached to it. Opposition to the IMF loan is hypocritical as the Mahinda Rajapaksa government too was rescued in 2009 by an IMF Stand-By Arrangement of US$ 2.6 billion that was completed in July 2012.

It is difficult to imagine the plight of the economy and country had the IMF not provided this facility. Is the opposition short of memory and forgotten that it too borrowed from the IMF? Is it a case of “What is sauce for the goose is not sauce for the gander?”
If the opposition is for obtaining the IMF loan, then in effect they are advocating that loans should be obtained at higher interest cost from commercial lenders or having other cheaper sources in mind or not borrowing at all? Cheaper sources are not available though some temporary facilities and accommodation is possible. The government has obtained such arrangements, but these will not resolve the critical situation in the balance of payments and external reserves.

If the IMF loan facility is not obtained, then the current economic conditions would deteriorate and result in enormous burdens on the poor as happened in 1970-77, when essential commodities such as rice, wheat flour bread, sugar, milk powder, drugs and textiles, among other essentials were in short supply or not available. The stark truth is that since we import so many of our essentials, the foreign reserves have to be stronger to import these.

Conditions
May be the vociferous opposition is not for the IMF loan per se, but the conditions attached to it. This again is a gross misunderstanding of economics. Much of the current economic crisis was brought about by bad fiscal policies and inadequate fiscal and monetary measures to control the deteriorating external finances. Most conditions imposed are those of good financial and economic management. It was the lack of good fiscal management and monetary and exchange rate management by both the Rajapaksa government and the coalition government that brought about the crisis.

Revenue
Government revenue has to be increased much above the current inadequate 12 per cent of GDP. The IMF conditions are mainly focused on minimising tax exemptions, tax avoidance and tax evasion and making the tax collection system more efficient. These are essential requirements to achieve fiscal consolidation that is essential for economic stability.

VAT
A specific bone of contention is that these conditions would bring about a higher cost of living, especially by the imposition of VAT on basic items. There is no doubt that VAT would increase prices of several items so as to both reduce consumption and increase revenue. The President has assured that VAT will not be imposed on foods and medicines.

Progressive taxation
The government must impose tax increases on commodities that fall on the affluent. Ways and means must be found to collect higher taxes from the rich that have evaded and avoided taxes for a long time. A tax regime that does not leave loop holes and are easily and automatically collected from affluent consumption is much needed. The tax system is highly regressive and fall heavily on the poor and the lower income earners, while the rich evade taxes. This is a “tolerance of the intolerable’ in Amartya Sen’s words.

Higher growth
The joint Opposition rally would no doubt shout ad nauseam that the previous government achieved a higher rate of growth and did not have an economic crisis on their hands. This is superficially correct. The growth rate in 2010-2014 was an average 7 per cent, though it was tapering off in the latter years. This growth was however propelled by high cost foreign funded infrastructure projects that was a basic reason for the subsequent financial problems. Consequently the foreign debt increased nearly twofold from US$ 21 to US$ 43 billion during this period and debt servicing became a serious burden. This was a core reason for the balance of payments crisis in 2016.

Dire straits
The workers who march the streets today shouting slogans are perhaps unaware of the dire straits the economy is in. The government rallies would blame the previous government for bringing about the crisis. This is largely true as the successive large fiscal deficits raised the public debt to enormous propositions and the foreign funding for expensive infrastructure projects doubled the foreign debt.

The foreign debt servicing together with the large trade deficits brought about the crisis in the balance of payments. While the opposition charge that the “national” government caused the crisis is inaccurate, that it aggravated the situation is incontrovertible. Populist policies to gain votes by both governments were the reasons for this crisis, it is now imperative that the government follows sound fiscal and monetary policies to redeem the economy and achieve economic stability.

Bottom line
The interests of workers can only be achieved by policies that ensure economic stability and provide a climate for higher domestic and foreign investment. Higher investments that generate economic growth are what would ultimately improve the conditions of workers, reduce unemployment and reduce poverty. The experiences of East and South East Asia, China and India have demonstrated this convincingly.