World Bank rhetoric and Chintana-nomics

This refers to the recent news item titled “Need for Lanka’s rural economy to grow” in The Sunday FT of November 5 quoting the World Bank’s country Director.

The newly appointed Country Head of the World Bank (WB), Naoko Ishii apparently said that even though Sri Lanka enjoyed remarkable economic growth annually over the last few years, the pattern by region was alarming as growth was lopsided.

We all know that economic growth is concentrated in the Western Province with other regions lagging behind. As a country we need not be told by the WB country director what to do. However, shooting the messenger is not what we need to do. We must know what we are capable of and must have a game plan. To create our game plan however we must take advice from people who have experience in helping other countries in similar predicaments as ours.

So perhaps what we would like to know is what the World Bank has done to address this issue so far. In fact while the Western province has grown by over 40% over the last five years other regions have grown by only 20%. Perhaps Naako would become very popular with the government and the people if she actually addresses this issue during her tenure through action and results. The other issue the World Bank needs to be more assertive and responsive is on poverty reduction and that too in the regions.

In general poverty reduction in many regions has been much slower than in the Western province because successive governments have failed to integrate the rural economy with the Western province. To realize this goal the private sector and the public sector should work together to create a conducive regulatory framework by improving infrastructure and access to capital. An effective banking sector would contribute significantly to economic growth and poverty reduction. The other issue we need to address urgently to reduce poverty is to develop our rural Human capital. The more global information based and fast moving the economy becomes the more economically valuable the human elements in a country will become. Therefore more emphasis should be given to develop our human capital, both natural and trained.

Development Strategy
While the rupee continues to depreciate big time causing hardship to the general public who are now beginning to feel the full impact of the government’s economic policies. The government for some reason is holding interest rates down, hoping that post 2007, something could be done with the economy and also with the LTTE to get the peace process off the ground, thereby convincing our aid donors to give us the money they promised in Tokyo.

So far official flows have not come in the way we would have liked. However official aid will not solve the problems we have forever. Most aid has to be paid back. Therefore exports and FDI must fill the gaps. To deal with this problem, which is becoming a very serious problem, real investment and investor friendly policies are needed.

Foreigners should be encouraged to buy land and companies without heaping too many taxes on them, or for that matter telling the IMF to keep their money to simply get votes does not strengthen the rupee or help the poor.

On the other side printing money to give subsidies and to meet government expenditure only pushes inflation and does not help the poor. With the pressure building on the dollar, outdated economic measures won’t help. The government cannot attempt to fool the people by pronouncing that the main reason for galloping inflation was the increasing price of oil. Also keeping savings rates at 9% when inflation is around 17% does not help the poor saver. When lending rates are around 15% to 17%, the pensioners to some extent are subsidizing the borrowers. They are being paid to borrow. Today it makes no business sense to buy Treasury Bills when inflation is over 17 percent. The UNF was lambasted for lowering interest rates despite inflation being much lower and people getting positive returns for their deposits. All this is happening in a country where we have a strong opposition and many trade unions. The problem is most of our leaders in the opposition and trade unions are either sleeping or do not know what is going on. This is why people say they have an opposition they do not deserve. All governments in the past have artificially managed the interest rates and generally rates are not market based. But this government has shown that economic theory does not apply to them.

Coffers
We all know the state coffers are relatively empty and government revenue is not keeping up with the ever-increasing demands. As a result the government overdraft has increased.

Prospective donors would wait for the peace process to reconvene to release their funds. Lack of funds can surely endanger the very peace process that the international community and the people support. What this country needs is development and peace to journey together. The need of the hour is for the government and the LTTE to hammer out a compromise formula to restart the stalled peace process.