Financial Times

Economic policies of presidential manifestos
Who will deliver prosperity?
Dr. Sirimal Abeyratne, University of Colombo
The forthcoming poll seems to be a distinguishable one due to the resurgence of intense political competition to ‘give free’ to the people. In the election manifestos, the promises to ‘give free’ undermine everything else. Thus much needed long-term strategies to achieve peace and prosperity are not spelt out clearly.

Subsidy competition
The UNP, which was not in favour of a ‘giving free’ policy in the history, has also come up with such a programme this time learning lessons from the past – not only from the recent past, but also from the ‘old’ past in the early 1950s and the late 1960s. The then UNP leader, late Mr. Dudley Senanayake was defeated twice for tampering with the then rice subsidy. And we elected governments just because they even promised to bring ‘rice from the moon’. Despite the appeal of the UNP leadership that it needs few years to put the country on track, the UNP was defeated at the last parliamentary elections in 2003 due to the lack of populist-type policy measures in its election campaign. The UPFA, which released its manifesto later than the UNP, had a better chance to put forward even a more populist programme than the UNP manifesto.

It is a fact that subsidy programmes have never developed a country and never eliminated poverty, and will never do so in the future. They can be justified only as ‘temporary measures targeting the low-income groups’ because they address just the ‘symptoms of poverty’, but not the ‘cause of poverty’. If subsidies can solve development problems, Sri Lanka would have developed long ago and then, today we would have no poverty or unemployment and, would not have even faced with armed struggles of youth in the South as well as in the North.

However, given the political reality of the type of democracy that we enjoy since Independence from Britain, the promissory note on ‘giving free’ policy play a major role in elections.

Even if you have a long-term vision and mission, coming to power is necessary to implement it. Election manifestos outline a wide range of populist subsidy and policy measures such as consumer subsidies, increase in cash subsidies, minimum fixed prices for farmers and maximum fixed prices for consumers, agriculture subsidies, old-aged benefits, salary hikes and public sector employment.

How to pay for it?
A usual question that many would raise is that who is paying for the implementation of all these policy measures, if these are going to be actually implemented. Even if they are not, we should not be surprised given the economic reality of the country. We are faced with fundamental budgetary problems that have been aggravating in the past:

1.There is a growing current account deficit, implying that we need to borrow not only for public investment but also for our recurrent spending. This is no less than surviving on loans without worrying about how to pay it back.

2. Tax revenue, which stands at around Rs. 300 billion, is not enough to cover interest payments, salaries and wages and, transfers and subsidies. Interest payments on accumulated debt, which amounts to more than the annual GDP, is the largest single current expenditure item in our budget.

3. The budgetary problem got worst last year with an increase in our budget deficit to around 10% of GDP, resulting in money printing and foreign borrowing. During the past two years, the government resorted to both printing of new money and issuing dollar bonds to borrow from abroad. This happened even when government got tsunami-related foreign aid and, even debt relief cushioning the budgetary problem as well as the exchange rate problem.

The simple question is how we finance increased spending in the years to come. Whatever the form of financing, it is a fact that ultimately people have to pay for it through increased taxes or get stuck in the debt trap. Our weak tax system does not have a wide tax base, while ‘taxing according income’ does not seem to be an important part of taxation. About 85% of tax revenue comes from indirect taxes, paid by everybody.

Way out
With all the above problems, however, there could be a way out. Given the ground reality, it is difficult to ignore the importance of subsidies. However, it is necessary to manage the expansionary budget within minimums during the first 2-3 years with donor assistance, and at the same time put the economy on track. Higher growth can facilitate the maintenance of an extensive welfare state beyond the first 2-3 years, and it may be the price that we need to pay for getting the economy on track.

Sustainable higher growth is the answer to many other fundamental problems such as tax and debt burden as well as the development problems such poverty and unemployment. We should not forget that the unutilized foreign aid commitment already amounts to about $ 7-8 billion. This includes the $ 4.5 billion of the Tokyo donor conference (which had a budgetary relief component as well), about $ 2 billion as tsunami-related aid, and other multilateral aid components such as the World Bank commitment for poverty alleviation programmes. All these have got delayed considerably. The question is, then, will the new president be able to receive this massive aid commitment during his tenure and, to utilize it productively.

The economic vision of both UPFA and UNP is to raise the growth rate to above 8% - a rate that we experienced only twice (1968 and 1978) in the post-independence history. The economy has been growing only at about 5 % on average, with domestic savings at 16% and investment at about 25% of GDP. Fast growing economies in Asia are having about 25-30% savings rate and 35-40% investment rate, while foreign capital plays a major role in bridging the savings gaps.

Domestic agriculture has a very limited role to play in accelerating economic growth and, it will never be able to raise our income adequately and solve unemployment problem. Whatever assistance you give to domestic agriculture, under the present conditions of domestic agriculture, our farmers will never be able to raise their living standards significantly, unless some of their family members find non-agriculture jobs. In Sri Lanka, 35% of work force is in agriculture contributing only 18% of GDP.

In fact, more and more people in rural agriculture should have the opportunities to leave it (which actually happens with education), allowing a lower percentage of the workforce to produce more with increased productivity. This will make both – the one who decides to remain in agriculture and the one who decides to leave it – better off. Then farmers do not need either fertilizer subsidies or the fixed paddy price, which actually nail them to the less-rewarding rural agriculture. With all subsidies and government assistance, including the tank rehabilitation programmes, the agriculture production which may rise by a certain small percentage does not put the economy on a dynamic growth path.

It is clear that our domestic savings cannot be doubled in the medium term, so that Sri Lanka’s effort in achieving rapid growth foreign investment together with domestic private investment should play the major role. This requires an establishment of an investment-friendly policy and political climate, which has got deteriorated during past few years even without the war.

In fact, Sri Lanka seems to be losing the ground for achieving its potential economic growth and development. The World Bank’s ‘Doing Business’ Report 2005 highlighted that in terms of business-friendly environment, Sri Lanka’s rank is 75 out of 155 countries surveyed. Furthermore, New Zealand and Singapore are on the top, while most of our Asian neighbours such as Bangladesh, Nepal, Pakistan, Malaysia, Thailand, and Maldives all are much ahead of Sri Lanka. World Investment Report 2005 published by the UNCTAD stated Sri Lanka as one of the least attractive countries in Asia for foreign direct investment.

According to the Global Competitiveness Report 2005 of the World Economic Forum, Sri Lanka’s competitiveness has deteriorated in 2005 as compared with the previous year and, its rank is 98 out of 107 countries. Fast growth is the ultimate solution to most of our problems – low income, unemployment, poverty. No country has solved any of these problems with subsidies, but only with fast growth.

It is possible for Sri Lanka to accelerate its growth rate to 8% or even beyond, as some Asian countries have done it. It requires an investment-friendly economic policy and peaceful political climate. Therefore, the last question is that whether our new president will be able to establish the stable economic policy and political climate within the next 6 years and sustain it in the long run, to achieve higher growth.

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