Putting the economy on a war footing

By the Economist

President Rajapaksa was dead right when he said, “The management of the economy is also a sort of war. Economic strategies are also as important as war strategies.” He was equally correct in saying that the economy should be put on a war footing. These statements taken together have significant implications for economic policy. They imply that there is a need to have a strategy for the economy in the same way as there has to be a strategy for the war, and that the war imposes special reasons for adopting a new strategy owing to the economic strains that it has brought about. It also reflects concerns about the emerging economic crisis and the need to take bold and corrective decisions to avert a long-term economic decline.

Large cabinet with large expenditure

The severe economic impacts of the war are at last dawning on the powers that be. International agencies, the Central Bank and the Institute of Policy studies, among others, have been pointing this out for some time, though the Central Bank’s preoccupation with a high growth attainment, irrespective of its quality, has masked the developing problems. The President has opted for the “classic” solution of appointing another think tank. This looks like a strategy for postponement of action as in the case of so many national problems. The solutions to the emerging problems are well known and there is no need for the same people grouped under another banner to tell the same things. The policy imperatives are clear; the will to act is missing.

The need for an economic strategy for the war effort arises mainly due to the vast expenditure incurred by the war. There is the additional fact that the huge military expenditure also results in a large increase in imports in the form of military hardware. Therefore the massive war expenditure is a strain on the public finances and on the balance of payments – two of the key areas of the economy. It must also be stressed that deterioration in these has long-term adverse effects as well. The public debt increases and the debt servicing costs rise and in turn these have detrimental effects on future budgets and on future balance of payments.

There are serious implications of the war for the economy. First, since war expenditure is high, these must be undertaken with carefully and monitoring of such expenditure is essential. There is always the danger of viewing war expenditure as essential and therefore that the government must spend “whatever is needed” and that it need not be accountable owing to security reasons. There could be considerable wasteful expenditure and corruption as defence expenditures are high, they are in dollars and often from indirect sources. It is well known that corruption grows when the sums involved are large. There are already accusations that this is happening. It is therefore imperative that parliament devices methods to minimise large scale corruption and wasteful expenditure and make defence expenditure accountable to it. Since war expenditure is high it must be spent in a cost-effective way. The need to spend money effectively and preventing unnecessary and wasteful expenditure is vital when pursuing the war.
The curtailment of other non-essential and wasteful expenditure is an essential strategy at a time of large war expenditure. Placing the economy on a war footing necessarily means the curtailment of expenditure that has no urgency. It means the reduction of expenditure on extravaganzas and tamashas and unnecessary foreign trips by ministers.

There should be political courage to reduce expenditure that is not immediately productive. Government and the people must make sacrifices. The government must first take steps to reduce unnecessary expenditure and then appeal to people to make sacrifices. It would be difficult to get people at large to accept difficulties without clear signals of the government taking steps to curtail expenditure. People are already enduring hardships owing to the spiralling high costs of living, and any further burdens would have serious political implications.In the current economic context in the country, it is vital that public expenditure is curtailed in a number of areas. Although infrastructure development is essential, in the context of the war, less important expenditure should be curtailed. An example would be to halt the Weerawila airport project and other similar projects that would not qualify as a priority. Such pruning of capital expenditure would be needed to cope with the serious financial position of the country as it wages a war entailing large scale expenditure.

It is however current expenditure, rather than capital expenditure, that must be curtailed. There are many components of current expenditure that cannot be reduced as they are committed expenditure. The debt servicing costs and salaries and pensions of public services are good examples of such rigidity. Unfortunately the government has increased rather than decreased expenditure on this account. There are many other examples as well. On the other hand, there are other expenditures that can and should be curtailed in the current situation of fiscal stringency. The government must take serious measures to curtail these.

A good example of wasteful expenditure is the large Cabinet that entails considerable additional expenditure on office space, vehicles and security, while at the same time reducing implementation of policies. It is a well-known war strategy to have a smaller cabinet than at ordinary times. If the President is serious about putting the economy on a war footing a “war Cabinet” of about 20 members should be established straight away. This would give the correct signals and unpopular fiscal measures to raise revenue would be more acceptable to the people.

One of the mistakes that the government must not make is to pursue bad economic policies in the name of the war. In fact it may seem trite to say that there are no special policies that have to be adopted at a time of war, except for some special measures of stringency in government expenditure. What is needed is a return to good economic management principles. Fiscal consolidation at a time of war is a difficult and challenging policy. The iron laws of economics make it imperative to follow stringent fiscal measures. Failure to adopt these because of political considerations would lead the country into further economic difficulties in the future.

The economic policies that should be pursued in the context of the war are well known. The new think tank will not come up with any magic formulae. They have already said what they think should be done in various places and documents. What is needed is a political will to implement these. Will the government adopt these as economic strategies at a time of war?