Financial Times

Parate powers for all?
“Parate powers of debt recovery (allowing foreclosure on collateral without court intervention) should be granted to all licensed institutions – banks as well as finance, leasing, and factoring companies”, reads a recommendation by the World Bank in a recent report on “Improving the Rural and Urban Investment Climate” in this country.

Could this recommendation be entirely serious? Perhaps its inclusion in the report was at least partly a concession to the powerful financial sector lobby.
The World Bank speaks of an investment climate “that supports (or fails to support) entrepreneurship and efficient markets”. “Few now accept the simplistic view that greater investment alone will lead to higher growth. Instead, the prevailing view emphasizes building a productive environment in which private businesses can flourish,” the report points out.

There is no doubt that parate powers would make financial markets more efficient. However, what effect would they have on entrepreneurial initiative in a society in which such initiative is already highly constrained by a deep-seated aversion to risks and a debilitating fear of failure, in addition to the constraining effect of “policy uncertainty [and] macroeconomic instability”?
“Today Sri Lanka ranks among the most open economies in South Asia”, the report points out adding that the focus on literacy, universal health, and gender equality has produced remarkable outcomes with indicators showing levels “close to those of industrial countries”.

“[Yet, by] contrast with its impressive human development record, Sri Lanka’s economic growth and poverty reduction have been less noteworthy, especially when compared with achievements in East Asia”. This the report attributes in part to the civil conflict. However, a “host of other factors have also held Sri Lanka back”.

But any assessment of our investment climate that has seriously failed to support entrepreneurship and efficient markets perhaps should include some consideration of the cultural atmospherics that might either hinder or encourage entrepreneurship. Had there been some such consideration, the World Bank would have acknowledged the need to combine parate powers with a mechanism to cushion business failure.

We must not forget that our atmosphere is not exactly fizzing with energy of life. And the joy of life is not something that is written upon our traditional lore. The courage to risk failure and the disposition to keep trying until effort is crowned with success are human excellences to which we are not habituated.
Yet even societies with a disposition sprung from tradition to think like the Greeks, plunder like the Romans, and pray like the Christians acknowledge the tension between the unleashing of entrepreneurial spirit and the perfecting of market efficiencies.

Our bankers who have had the privilege of using parate powers for sometime now, would be quick to say that rarely are businesses destroyed by the use of such powers - that only ownership and management changes are intended. To say this, however, is to show scant regard for the role of the individual and the importance of personality in a property-owning enterprise society. The saying of it is also shows no appreciation of the effect of fear psychosis on potential entrepreneurs.

On a very basic level, parate powers could be viewed as a mechanism to resolve the tension between freedom and order. Freedom without order is anarchy; but order without freedom is tyranny. Surly, the World Bank is not suggesting that prosperity could be more efficiently achieved in a climate of enlightened financial sector despotism.

Despotism might come naturally to many of us. But the financial sector enlightenment? On this, let us be informed by the World Bank: “Sri Lanka's financial sector has developed and expanded over the past two decades, but its financial system remains shallow by international standards. Despite having a higher per capita GDP, Sri Lanka also continues to trail India in financial market depth. [And the World Bank laments that our banks] appear to be unable to discriminate between loan applicants on the basis of performance. Instead, they rely more on the value of collateral when considering a loan application”.

The advice of the World Bank is, look to the better-informed elsewhere: “Financial institutions could use international assistance to develop new financial products better tailored to small and medium-size enterprises”.
In an investment climate in which the atmosphere is hardly brimming with entrepreneurial vision, vigour, and courage, there is a need to show greater willingness to err on the side entrepreneurship than on the side of efficiency. Then there would indeed be climate change. The writer could be reached through
(The writer could be reached on ft@sundaytimes.wnl.lk)

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