Corrupted seeds of a vicious cycle
View(s):Many people admire the resource endowment of countries as the reason for their prosperity. According to this “misconception”, countries become rich if they have resources. Land, gold, oil, diamonds, and minerals are some of the most common resources that some countries have discovered within their territories.
After the first 1973 oil shock, Sri Lanka also became interested in possible oil deposits in the region of Mannar. During this time Sri Lanka was marching towards a “socialist economy”; as a result of the policies adopted then, there were domestic supply shortages of almost everything and everywhere. Due to this reason, the 1973 oil shock was a “knockout punch” to the economy! It was forceful enough to force the government to look for oil in Mannar but not forceful enough to abandon the socialist march.
As the first attempt for extracting oil in Mannar failed, the Sri Lankan enthusiasm for oil exploration withered away, but only temporarily. About 30 years later, it seemed we are revisiting and continuing to guide our oil and gas exploration to-date.
Blessing or a curse?
It is a big mistake if we think that potential oil or gas discovery in Sri Lanka will end our economic problems. One must remember that while resources have become a “blessing” to some nations, to others it’s a “curse”. If resources such as oil were the underlying factor of prosperity, Venezuela would not have collapsed to a level of humanitarian misery today, as I explained last week. In the same way Nigeria would not have fallen to an economic crisis as it experienced in the recent past.
If resources can make nations prosperous, the most prosperous people in the world should have been the nations in Africa. You name any type of mineral resource, they all have it in abundance in the African soil. But the world’s poorest nations belong to the African continent.
We can’t, however, argue that it was always the case. There are many countries which have made use of their resources to achieve prosperity and stability. The US and Australia have made use of their abundant land resources, became less and less dependent on land resources. Some of the West Asian countries such as the United Arab Emirates and Qatar also started off with oil, but became less-dependent on oil for the achievement of their prosperity and stability.
We may find ample evidence to suggest that for some nations their resource endowment was the driving force of their prosperity at their initial stages of development. For them it was a blessing, but the bottom line is that they did not remain dependent on resources.
The other side
The reverse side of the argument is also true. If resource endowment is the underlying reason for prosperity, we are in a serious difficulty in explaining the prosperity of some nations which did not have any resource of their own. Some of these countries are, in fact, the richest nations in Asia such as Japan or Singapore.
Even without any oil deposit, Singapore has become the leading oil trading hub in Asia, ranked as the third in the world after New York and London and, positioned amongst the world’s top five oil refining centres. But people around the world and their businesses have gathered in Singapore to engage in oil and gas refining, storing and trading. It shows that there is no need to have even the ownership of resources for a nation to claim over the business ownership of someone else’s resources.
Therefore, it is indeed a blessing for some nations not to have any resource of their own. If Sri Lanka does not have the capacity to handle any resource that it discovers, it is better for the nation not to discover them at all. Resource endowments have the ability to destroy people and nations who do not have the capacity to handle them.
File picture of queues at a fuel station. The writer argues that finding oil off Sri Lanka's coastline doesn't necessarily mean the country will become rich.
Policies and Politics
What makes a nation prosperous? A short answer to this question in two words is “policies and politics”. Because we have already talked much about policies, I thought of bringing politics also into our discussion. Practice of economics is not as simple as in textbooks, because of politics; after all, the application side of economics is all about the “political economy”.
I chose the word “politics” in its broader meaning to refer to the behavioural patterns of a nation. In addition to the policies that nations choose to follow, the behaviour of the people, their various lobbying groups and, their leaders will determine the nation’s road to prosperity.
Some nations are rich and some nations are poor, because of the policies they choose and politics they play. These two factors lead some countries to grow fast and some countries to grow slow. It is also the leaders ability and capacity to manage both and drive the nation to prosperity or to poverty or, if not keep the nation stationary.
Corrupted seeds
I was on alert keeping an eye on the “playing of politics” in our nation and making an assessment on how much it impacts up on Sri Lanka’s road to prosperity. I did that as I was convinced over the years by the poor investment track record that Sri Lanka has maintained.
Prosperity requires investment – basically private investment in all types of businesses, an area where Sri Lanka has been performing poorly.
Let me elaborate a few thoughts on my observations:
- I noticed an unprecedented increase in protests and strikes in the recent past by trade unions and various lobbying groups. These activities are impacting upon the economy through their interruptions and disruptions. Part of the negative impact is on the operation of the economic activities at present. But the major negative impact is on the future of economic progress, which discourage investment growth.
- Then I observed the response of the authorities; they compromised. On most of the occasions they compromised on their initial political mandate to lead the nation to prosperity. It has an even bigger negative impact over the future investment climate of the country. The uncertainty is an underlying factor of discouraging private investment decisions.
- Further I observed an important promise made by the future leaders – to reverse the policies and regulations, after the elections of the next regime. This claim adds up further to the uncertainty wiping out the possibilities for raising private investment during the next regime.
When elections are approaching, “handout programmes” dominate and oust economic programmes and once the elections are over, the government’s struggle to balance the budget undermining the investment climate through distorted economic fundamentals.
We have already planted the bad seeds which would produce dismal growth performance of the years or regimes to come; history repeats as a vicious cycle.
Democratic rights
After all, we say that all these are our democratic rights! Well, I haven’t seen any justification for the act of “sabotaging” present and future economic progress as a democratic right. I have never seen the “lack of responsibility and accountability” as a democratic right. Neither I have seen at least “paying salaries for the days of strike” as a democratic right.
It would be good for the nation, if we keep estimating at least the “direct cost” of economic damage that is caused by the “play of politics”. An estimate as such is important to improve the accountability of the nation. Although the potential damage that it carries by avoiding future investment is hard to measure, the slower progress of the economy is an indication of its contribution.
Democracy is not an instrument that various groups and individuals can use for their personal mileage. It is for the nations who have the capacity to manage it for their wellbeing. It requires a greater degree of discipline of the nation.
(The writer is a Professor of Economics at the Colombo University. He can be reached at sirimal@econ.cmb.ac.lk)