2017: An economy on crutches
View(s):The residence of my one-time teacher, named as “wana leheba” (shrubbery) is located in a beautiful piece of forest-like garden, hidden within the Kurunegala city – a sanctuary with shades of big trees and beautiful natural landscaping for art-lovers as well as bird-lovers. It was after many years that I recently had an opportunity to visit my teacher whom I called “Munasinghe Ayya” – not a teacher of economics, but of arts and design. I happened to train my mind and hands in arts, graphics and designs under him before I became a university student.
File picture of Katunayake airport runway under reconstruction last year, one of the bright sparks in the economy. However the SriLankan Airlines plane was a negative with the Government struggling to find a foreign partner.
There were numerous creations of art work scattered throughout his shrubbery, and they were quite unusual to a normal eye; anything that you throw away had been the raw materials for my teacher’s art works. I realised that he had moved into a new direction of creativity from the previous form of arts and designs.
I walked through this new types of creative pieces, listening to his explanations and interpretations of each one. Among them I noticed something that looks like a “pair of crutches” hanging on a tree – another piece of art work. You really need his help to understand most of them; so that I asked him what it was. He replied, “It is the way I see our economy; you know it, don’t you?”
Economy on crutches
Last week the Department of Census and Statistics released provisional estimates of growth performance of the Sri Lankan economy in 2017. When I glanced at the indicators of the growth performance last year, I could picture the paralytic economy standing with the support of crutches!
The rate of real GDP growth has declined further to 3.1 per cent in 2017 for the third consecutive year. It was like a further deterioration of the condition of a paralytic! Real GDP growth rate was 4.5 per cent in 2016 and 5 per cent in 2015.
Per capita GDP in nominal terms has only slightly improved to US$4,065 from $3,857 in the previous year. Had the exchange rate depreciated little more (which was not at all an unlikely event), even that slight improvement would have been wiped away.
The nation’s hope of achieving and sustaining 8 – 10 per cent growth after the end of the war in 2009 and of becoming a rich nation is gradually fading away. Those who sense the paralytic nature of the economy have been staring sorrowfully and compassionately at the numbers of growth performance. They are like those numbers on a medical report that indicate the severity of the paralytic condition. Let us look at the issue of economic growth and, the implications of its slowing down.
Fundamental issues
The issue of economic growth looks alien to many, because they don’t feel its ups and downs with their five senses. What people feel in their day-to-day life is a different set of issues: Poor meals of the day, unbearable commodity prices, monthly utility bills, insufficient salaries and incomes, paucity of money in hand, dearth of suitable jobs, lack of basic needs, challenges of children’s education, health hazards, helplessness, insecurity and, so on.
Slower economic growth is the most fundamental factor underlying all these issues, because it is the rapid economic growth that would provide sustainable solutions to them. These issues are only symptoms of the problem or the manifestation modes of the problem – just like those symptoms of a paralytic patient.
We like to provide external support to a paralytic patient with crutches or other modes of support; but crutches do not present a sustainable solution to the sickness. Nevertheless, donating a pair of crutches to a paralytic patient is politically correct; it is more acceptable from a political point of view than treating the patient to get well from the sickness.
Without setting the parameters of rapid economic growth, a nation cannot increase people’s income or expand job opportunities or eliminate poverty.
Post-conflict economic recovery
Sri Lanka was an economy that had sustained on average 5 per cent rate of growth throughout its difficult times from 1983-2009. In fact, many have taken it with a surprise! Then, how much more we should be able to achieve after ending the war and restoring peace? Sri Lanka would have easily reached 8 per cent average annual rate of growth.
The economy, in fact, achieved higher growth rates during the period of consecutive three years from 2010-2012, but failed to sustain it. It was because that sudden growth spurt was based on: The improvement in capacity utilisation that was previously “under-utilised” and,the expansion of output in the area what economists call “non-tradable” sector.
In particular, the productive capacity of the Northern and Eastern regions had been under-utilised due to conflict. As a result of the end of the war, this regional capacity utilisation improved with people gradually returning to agriculture, fishing and other economic activities. Once the capacity utilisation comes to normalcy, there is no reason to accelerate growth unless there is capacity expansion.
Secondly, the post-conflict sudden growth spurt was driven by construction and reconstruction activities on the one hand, and public sector expansion on the other hand – both come under the category of “non-tradable” sector. Public sector expansion can be identified with an unusual increase in government expenditure, government activities, and government employment.
The growth momentum based on these factors naturally comes to their limits of expansion; hence, the growth starts to slow down, thereafter.
Sustainable growth momentum
Sustainable growth comes from expansion in private investment and productivity growth. Even if a nation does not have its own savings for investment, today there is no shortage of investment funds in the world. Didn’t we expect that once the war ended Sri Lanka would be flooded with foreign investment? But soon we realised that it was not so; they didn’t jump out so soon and, wanted more time to “wait and see”.
It is clear now; so far we have failed to win the investor confidence; how could we, without doing anything about that?
Growth momentum cannot be sustained, if its output cannot be sold in international markets through export expansion. That is why the sustainable growth needs to be based on the expansion of what economists called “tradable” production – products that can be exported globally. This is because the local market is too small to allow industry expansion and, hence to reap the benefits of improved cost advantage. Besides, industries have to be efficient and productive, because in the international market there is competition.
Sri Lanka’s persistent trade deficit widened in 2017 as well, reaching $10 billion, since total exports accounted for about $11 billion and imports $21 billion. Sri Lanka’s services exports which was about $7 billion, shows signs of slight improvements. This sector is currently dominated by tourism-related activities, but it has a long way to go to reach its potential growth.
Since the engine of growth has been slowing down for the past three consecutive years, someone might ask a sensible question: Didn’t our economy perform far better during conflict times than during peace times? The answer is yes, it did.
Rest of the matters
Expansion of wealth and opportunities of a nation is associated with economic growth. The faster the growth of the economy, the greater the expansion of wealth and opportunities for that nation. There is no country in the world that has eliminated poverty from its nation, without creating job opportunities and expanding incomes.
Growth will stabilise the exchange rate, since it is connected to export growth. It would stabilise the inflation since there would be supplies to meet rising demand. It would reduce the budget deficits, since the government’s tax revenue expands. It would reduce the nation’s debt burden, since the ability to repay the loans improves for the nation.
Because growth is fundamental to everything else, our priority number one needs to be the establishment of a policy and political atmosphere for accelerating growth; it should originate mainly from private investment and, it should be destined mainly to global markets. (The writer is Professor of Economics at the Colombo University)