|
||||
|
Gulf war and cowboy capitalism The achievements
of corporate America are usually admired in many parts of the world
that have similar economic systems, and American brands recognised
in even the most remote and impoverished of countries. But the crude
and arrogant manner in which the US administration is ignoring all
norms of decency and established procedures in giving contracts
to American companies in parts of Iraq it has invaded in the humanitarian
aid and reconstruction effort is hardly the kind of behaviour that
the rest of the world would like to emulate as a shining example
of American capitalism. Here in Sri
Lanka there was much talk about, and calls to adopt measures similar
to, the actions taken by the US to prevent the abuse of public trust
that followed the spate of corporate scandals in America. This came
after our own scandals such as the insider dealing fiasco at the
Securities and Exchange Commission. The business community and the
investing public looked to the US for guidance and inspiration and
were much impressed by measures to improve governance and transparency
in America's corporate society. But now it
looks as if the US is a country that does not care two hoots about
breaking the rules or ignoring them when it suits their interests.
Take the case of the contract to run the Iraqi port of Umm Qasr
given to the US stevedoring firm SSA. The USAID, which awarded the
contract, did not call for tenders ostensibly on the grounds of
security and the need to fast track the work to repair and modernise
the port. Does this mean that it is alright for the troops of America's
allies such as Britain and Australia to fight alongside US forces
but that British and Australian companies cannot be trusted? Or
is it that the US is driven by sheer greed and a desire to keep
the lion's share of the spoils to itself? Another example
of American double standards is the decision by the New York Stock
Exchange to withdraw access to correspondents of Al Jazeera - the
Arab satellite television station whose reports of the war have
angered the Bush administration. According to
commodity experts the US is in dire need of crude oil with its oil
production expected to fall by 12 percent in the next 20 years,
while consumption is seen rising by about one third. Iraq has the
world's second largest proven oil reserves, next to Saudi Arabia,
although Central Asia and the Caspian Sea basin with vast unproven
reserves is considered to be the Arabian Gulf of the 21st century. However, corporate America might eventually have to pay for its arrogance since there are signs of a backlash against US products in key markets. German children, considered the most enthusiastic consumers of American products, are said to be boycotting US brands such as McDonald's. In Berlin, restaurants have been taking American items off their menus and bars refusing to serve bourbon. Bicycle maker Riese und Mueller has cancelled orders with US suppliers. Meanwhile, the French are thinking of setting up their own CNN-type TV broadcasting station to give the rest of the world a less America-centric perspective on the news. Reviewing Sri Lanka's economy last year By S.S.
Colombage, Professor of Social Studies, Open University of Sri Lanka Modest recovery Secondly, more
than three-fourths of the GDP growth in 2002 came from service activities.
In other words, agriculture and industry contributed less than one-fourth
of the GDP growth. As an economy grows, the services sector tends
to expand. But the growth is not sustainable without an accompanying
real output growth in agriculture and industry. In the context
of political and economic uncertainties faced by the economy in
recent times, entrepreneurs seem to have moved their investment
from long-term production ventures to short-term, highly profitable
activities such as the import trade, property sales, etc. As a result,
trading activities have grown rapidly. Even the foreign direct investment
(FDI) inflows, sponsored by the Board of Investment (BOI) with so
many incentives, now seem to have been diverted to service activities
like establishing recreation centres, entertainment complexes, etc.
The authorities have failed to attract FDI for high-tech high and
value added industrial ventures, which are very much needed to elevate
the economy. Although FDI inflows increased in 2002, such receipts
continue to remain as low as about one-fifth of the private remittances,
received mainly from the Middle East workers. Meanwhile,
the low interest rate policy of the Central Bank has enabled commercial
banks and other financial institutions to raise their profitability
by pushing down the deposit rates offered to their customers, while
keeping the lending rates more or less at the same level. As profits
are included in the value added in GDP computations, the higher
the profits the higher the value added of such sectors. These are
some of the major reasons for the increased contributions of service
activities to GDP growth. Declining
productivity Unemployment
up In the context
of the low economic activities, the unemployment rate rose to 10
percent of the labour force in 2002. This invariably leads to a
rise in the poverty level. Moreover, real wages, defined as money
wages adjusted for consumer price changes, declined in the sectors
of industry, commerce and service activities in 2002 due to high
consumer prices. In 2002, exports
fell and imports increased. This led to widen the trade deficit
to $ 1,400 million. Fortunately, we received private remittances,
mainly from the Sri Lankans working in Middle East countries, to
the tune of almost $ 1,000 million. This greatly helped to contain
the current account deficit of the balance of payments to $ 500
million. Otherwise, the foreign exchange crisis would have been
worse. If we exclude private remittance inflows, the current account
deficit is about 9 percent of GDP instead of the actual ratio of
3 percent. This clearly shows the contribution made by the workers
abroad. Inflation
impact Inflation declined from 14 percent in 2001 to 9.6 percent in 2002, and this was a favourable development. But this trend does not seem to last long, as inflation has already picked up this year. Also, we should be mindful of the fact that the official inflation rate is an underestimated one due to the outdated consumer basket used in the Colombo Consumer Price Index. Inflation has a multitude of adverse effects on living conditions, real incomes, export competitiveness, savings, investment, etc. In particular,
inflation creates uncertainty among investors. As I mentioned earlier,
investors attempt to make a fast buck by engaging in trading activities
rather than investing in long-term projects. This partly explains
the rapid growth of service activities relatively to agriculture
or industry. The vicious circle of rising prices, rising wages,
rising production costs, weak export competitiveness, and exchange
rate depreciation is haunting the economy. For instance, the Central
Bank allowed a free-float rupee system in January 2001 to restore
export competitiveness. But as I predicted then, that objective
was not realized due to the high inflation, and the beneficial effects
gained from the rupee depreciation is already eroded by now. This
is why the export sector is on a downward path at present. Spending
cuts The government's
fiscal operations showed an improvement in 2002 with a lower budget
deficit of 8 percent of GDP, compared with 11 percent in the previous
year. But this was achieved mainly by cutting down capital expenditure,
which is essential to boost economic development. With the continuous
budget deficits over the years, the government had to rely heavily
on borrowings from domestic and foreign sources. As a result, the
accumulated public debt stock now amounts to 105 percent of GDP. Savers hit Monetary policy
has focused on reducing inflation and ensuring financial stability.
For this purpose, the Central Bank has been increasingly relying
on open market operations. The Central Bank has reduced its two
policy rates, namely the Repurchase (Repo) rate and Reverse Repurchase
(Reverse Repo) rates on a number of occasions in recent times claiming
that the inflation rate is coming down. Also, it is envisaged that
this policy stance would help to reduce the lending rates of commercial
banks and other financial institutions, and thereby boost investment.
But the outcome is rather different. Commercial
banks have reduced the interest rates offered to their depositors
substantially, but not the interest rates charged from their borrowers.
According to the Central Bank figures, the weighted average deposit
rate declined from 10.5 percent in 2001 to 7.2 in 2002, while the
weighted average lending rate remained at 18.3 percent in 2002,
which is marginally lower than 19.8 percent in 2001. As a result,
the interest margin of commercial banks, which is the difference
between the interest income and interest expenses, rose from 9.3
in 2001 to 11.1 percent in 2002. Consequently, most commercial banks
recorded very high profits last year, despite the slow GDP growth.
As these profits are treated as value added in GDP computations,
the banking sector made a big contribution to GDP growth in 2002,
as I mentioned earlier. Meanwhile, savers have become losers, as
deposit rates offered by financial institutions are much lower than
the inflation rate. For instance, the annual yield rate of 12-month
Treasury Bills is around 9 percent as against the current inflation
rate of 11 percent, leaving a real interest rate of minus 3 percent.
In other words, savers receive a negative real interest of 3 percent.
This kind of interest rate structure is detrimental to savings. Who's responsible? I would like
to conclude my lecture with a statement of the Central Bank, appearing
in one of its recent publications. It states, "(In 2002), It appears that economic growth, investment expansion and surplus in the Balance of Payments would be lower, while inflation, unemployment, budget deficit, public sector borrowing, public debt burden and monetary expansion would be higher in relation to expectations at the beginning of the year, as well as compared with the desired targets. These deviations are mainly due to factors, such as a continuing weak export demand, unfavourable terms of trade and the lagged effect of the severe drought and terrorist attacks experienced in 2001, all beyond the control of policy makers. ...". Source: (Recent Economic Developments, Nov. 2002) This simply
means that the policy makers are not responsible for any malfunction
of the economy, and the exogenous or external factors are to be
blamed. I am leaving it to you to make a judgement on this statement. (This article is an abridged version of a public lecture delivered by Prof. Colombage at a seminar of the Sri Lanka Economic Association held at the University of Colombo on March 20.) Chari de Silva hands over the baton By Thushara
Matthias March was a
particularly sad month for many employees at Lanka ORIX Leasing
Company Ltd, Sri Lanka's first leasing company, when he stepped
down as its chairman after a 23-year stint. It was in 1955, that de Silva, then 17 years, started his career as an accountant at Caltex Ceylon Ltd. Though he had a BSc (Hons) degree from the University of Colombo, he was also qualified in a totally different field - Chartered Accountancy. Asked why he
switched streams, he said: "C.P.L. de Silva, my eldest brother
who was a senior lecturer at the University of Colombo at that time
- persuaded me to take up accountancy. I think it was the financial
stability associated with it that would enable me to marry the girl
of my choice." When Caltex was taken over by the government,
he joined Aitken Spence and Co Ltd as Chief Accountant and climbed
the corporate ladder to become its chairman in 1972. When he recalls
the happiest times in his career, the diversification and expansion
of this old and established company under his guidance are among
the satisfying periods in his career. Asked about
his other happiest moments, de Silva smiles humbly, thinks for a
moment and says it is his marriage and when the Japanese government
bestowed on him the Order of the Rising Sun, Gold and Silver Star.
It was the highest ever honour that was given to a Sri Lankan or
for that matter any foreigner. De Silva considers
the role that he played in persuading the UNP government to abandon
its proposed legislation to introduce worker participation in ownership,
management and profit sharing, as an important milestone in his
life. That legislation
would have been disastrous for the private sector. In 1980, at a
time when small entrepreneurs had no choice but a bank loan or hire
purchase to acquire a productive asset, the IFC (the World Bank
private sector window) suggested the need for a leasing industry. "At that
time, the International Finance Corporation (IFC) wanted the Bank
of Ceylon (BOC) to initiate the industry and they needed a private
sector man to lead it. They chose me for the job as the Chairman
of the first ever-leasing company in Sri Lanka when I was serving
as the Director at BOC," he recalled. The Orient
Leasing Company (OLC) of Japan, the world's largest independent
leasing company had a 30 percent stake and IFC 15 percent in the
newly established Lanka Orient Leasing Company Ltd, now known as
Lanka ORIX Leasing Co Ltd or LOLC. De Silva calls the LOLC a "model company". From the inception he had the opportunity of moulding the institution in the exact way he desired resulting in LOLC being one of the market leaders in the leasing industry. De Silva says that he enjoyed creating LOLC as a model institution because at Aitken Spence he was only able to improve it, not change it altogether, as it was a very old institution. Speaking on
the importance of the leasing industry to the nation, he says, "The
back bone of any country is the small and medium businessmen. Leasing
is a means of enabling them to acquire productive valuable assets."
The leasing industry should grow with time. The ADB and the World
Bank too has recognized 'leasing' as a vital component of any economy. De Silva has
held many distinguished positions such as the Chairmen of the Securities
and Exchange Commission, Ceylon Chamber of Commerce, Employers'
Federation of Ceylon and president of the Asian Leasing Association,
Singapore, Sri Lanka-Japan Business Cooperation Committee, National
Council of the International Chamber of Commerce, Contract Bridge
Federation of Ceylon and the Director of Bank of Ceylon, State Rubber
Manufacturing Corporation, Bata Shoe Company of Ceylon, a member
of many commissions and committees. Internationally he was the third
President of the Asian Leasing Association, and a director of the
International Chamber of Commerce, Paris. Educated at
Royal College, de Silva says emotional intelligence (EI) is the
key to a successful career and attributes his own success to EI. Apart from
listening to classical music, the veteran businessman also loves
reading and playing bridge and chess which he hopes to pay more
attention during retirement. |
||||
Copyright © 2001 Wijeya Newspapers
Ltd. All rights reserved. |
