Sri Lanka losing battle to increase productivity growth due to cronyism, lack of strong institutions
Prof. Razeen Sally does not hold his punches back. He charges the government with doing “bugger all” and says it has done hardly anything to uplift the economy since coming to power in 2015.
Prof. Razeen Sally
“Pardon my French, but they have done bugger all and it is a Right Royal ….” Prof. Sally points out. A titter sweeps across the packed auditorium at the Sri Lanka Foundation Institute. The innuendo isn’t lost among the audience. Hence the sniggers.
But it is no laughing matter if the Sri Lankan-born associate professor at the Lee Kwan Yew School of Public Policy at the National University of Singapore is right on the money. The economist was painting a grim picture at the public lecture, ‘Capitalism in Asia: What it means for Sri Lanka’, organised by Advocata this week in Colombo.
Prof. Sally, who is also chairman of the Institute of Policy Studies, one of the leading economic-policy think tanks in the country, believes Sri Lanka’s crony patronage system between politicians and businessmen and the lack of strong institutions (legal, banking, public administration, etc) were an impediment to productivity growth.
“There is a battle to fight on Sri Lanka soil – in economic policy, in building liberal-democratic political and economic institutions, in relations with foreign powers, and participation in international institutions,” Prof. Sally ticks off.
Sri Lanka is classified as part of ‘Poor Asia’ and in the lower middle-income group alongside others like India, Pakistan, Bangladesh, Indonesia, Vietnam, and the Philippines. According to Prof. Sally, “we” are still in catch-up growth phase – in perspiration mode where brawn not brain is more in use (the West and the US as well as rich Asian countries like Japan, Australia, New Zealand and the East Asian tiger economies are in inspiration mode where brain matters).
A big fan of Schumpeterian capitalism – Joseph Schumpeter was one of the most influential economists of the 20th century who advocated a dynamic, change-oriented and innovation-based economics – Prof. Sally says Sri Lanka had reached a stage where it had limited room for catch-up growth and as such should be looking at improving productivity through innovation as the Austrian economist championed.
“Sri Lanka is now close to middle-income and qualifying for Middle Asia but we need to shift gears to innovation-led growth. But to achieve this we need to improve the quality of our institutions, something which is proving to be difficult (due to political issues),” Prof Sally pointed out.
Vision of economics
Schumpeter’s vision of economics was based on entrepreneurship and constant change where economies were changing all the time and everything was disruptive. Prof. Sally’s admiration for Schumpeterian is due to more than just economic reasons.
“Most economists were boring people whereas Schumpeter was a colourful character. He once said he wanted to be the best lover in Europe, the best horseman in Vienna and the best economist in the world. He said he had failed in only one area – as there were too many fine horsemen in Austria,” Prof Sally narrated.
“The central agent of Schumpeter capitalism is the entrepreneur who begs, borrows or steals ideas and turns them into innovation. In the past, most of the really big ideas came from Asia mainly China and the Islamic West Asia. Things like the printing press, gunpowder, paper were invented in Asia but they were innovated in Europe.
“New entrepreneurs swarmed around new ideas and turned them into innovations in the process destroying old industry. We cannot have a prosperous capitalism without social disruption,” Prof. Sally pointed out.
He likened the three faces of Asian capitalism – economic, political and global – to the Hindu Trinity (Trimurti) with Brahma the creator, Vishnu the preserver and Shiva the destroyer.
“First, regarding the economic face, Asia has had successful catch-up growth based on mobilizing labour and capital and imitating what the West has already done.
Poor Asia still has much room for catch-up growth but Middle and Rich Asia have either exhausted or come close to exhausting it. Their challenge is to innovate, to move to more productivity-based growth. They need the ‘creative destruction’ of Schumpeterian capitalism,”Prof. Sally advocated.
“Second, Asian capitalism’s political face. What are the varieties of institutions that underpin Asian capitalism? Are they equipped to move to Schumpeterian capitalism? Is Schumpeterian capitalism possible in a Chinese-style autocracy or does it need Western-style liberal democracy and open societies,” he asked.
“And third, Asian capitalism’s global face which has been successful due to global and regional environment of stability thanks to post-1945 Pax Americana. US leadership has provided geopolitical security and the maintenance of a liberal world economy. But these conditions seem to be changing, and faster than expected, with the US in seeming decline and retreat, and China ascendant and more assertive.”
Less optimistic
As such, Prof. Sally was less than optimistic about the future.
“Asia will find it much more difficult to meet its innovation challenges than it did in meeting its catch-up challenges in past decades. I have strong doubts about the ability of Asia’s political and economic institutions to meet future innovation challenges. I doubt China’s ability to move to Schumpeterian capitalism and to provide strong leadership in Asia – a Pax Sinica to replace the Pax Americana.
“I believe Schumpeterian capitalism needs stronger liberal-democratic institutions and more open societies in Asia, and a global context of stability and openness that will require continued leadership by the US. There is a battle to fight,” he summed up.
And in Sri Lanka that battle is being lost, according to Prof. Sally.