Facts, figures and misconceptions on the economy

By the Economist

Anyone can say anything on the economy and get away. This applies to important persons in high places and even institutions charged with the responsibility of giving correct information and giving advice to the government. In the latter case it is not ignorance of the facts but their interpretation. The politicization of public institutions is at the centre of this problem. Consequently, discussions on the economy are hardly enlightening at best and misleading at worst. Highly placed officials often make statements that display their ignorance of economic facts and the changes that have occurred in the economy in the past three decades. Regrettably even university students in economics have wrong ideas about the factual situation of the economy and their ideas on economic development are moribund and outdated. In this context it will be useful to point out some of these factual errors and misinterpretations.

A few days back, in our sister paper the Daily Mirror an important member of the government made a blatantly wrong statement about economic growth and the state of the economy. When asked whether the economy was in crisis, he responded that it was thriving. As a member of the ruling government such an idea of the economy may be expected whatever the actual state of the economy. However, he backed it with a figure that showed his ignorance. According to him the economy reached the highest level of economic growth ever achieved last year, of 7 percent. There are many issues that this statement raises.

First, the rate of economic growth for last year is not yet estimated, but one could expect the Department of Census and Statistics and the Central Bank to come up with a figure around that though it is very clear that it would be lower than the growth of 2006 of 7.4 percent. That is not the issue. He went on to say it was the highest ever rate of economic growth. If the growth rate is to be even 7 percent let us remind him and the public in general, who may have been misled by this statement, that this is not the highest level of economic growth achieved by the country. In fact even in recent times and during the time of this government a higher growth of 7.4 percent was attained in 2006. This growth in 2006 is often flaunted as the highest rate of growth ever achieved in the country. This too is wrong. Surprisingly, the Central Bank itself has made this statement every now and then. The factual situation based on Central Bank figures is that the economy reached the highest rate of economic growth in 1978, when it achieved an 8.2 percent growth according to the Central Bank Annual Reports. So, there are two factual corrections that have to be made. The expected growth of last year is not the highest rate of growth. The highest rate of growth was attained in 1978 after the liberalization of the economy and the massive development trust of that year. The period 1978-82 was the one with the highest sustained growth.

In fact this discussion of the growth rate per se can be deceptive as the sources and quality of economic growth is ignored. In actual fact the economic growth of 1980 and of recent years is very different. The economic growth of 1980 was the result of massive investments in development activities like the Accelerated Mahaveli Development Schemes and the large investments that flowed into the country after the liberalization of the economy. In recent years there has been a bloating of the economy with increases in expenditure on defence, public service recruitment and salary increases and the huge expenditure on political staff and activities, among other unproductive expenditures. This aspect of growth that is most important is hardly commented on.

There is another issue that we wish to point out. Much of the discussions on economic issues in the media are by persons who have only a nodding acquaintance with economics and a large dose of political prejudice. It is distressing to find television discussions on the economy that are based on factual inaccuracies and political biases. At least one would expect that when discussions on economic issues are taken up that there would be an economist on the panel to correct any mistakes of facts and misconceptions on the economy. Instead, each politician makes a prejudiced statement of the economy, much heat is generated and little enlightenment of the economy is achieved. This is particularly so in the Sinhala media that matters. There are no doubt valuable discussions and divergent views based on facts and figures in several English programmes devoted to business matters. It must also be admitted that during the time of the last Budget the Sinhala media too had valuable discussions on it with the participation of economists from the academic and business sections.

Politicization of public institutions has had their toll on economic discussions to a good extent. The current discussions on economic growth and of inflation are replete with such instances. In fact the credibility of these institutions is at their lowest level with the general public sceptical of even data and statements that are quite correct. The expectation of inflation in recent months is a glaring instance. We have had a series of statements that inflation would abate when at the same time there are price increases that erode the credibility of these statements. Each time we are told that price inflation would decline there have been a wave of price increases.

Fortunately, most recently the Central bank made a U turn from its previous prediction of a decline in the rate of inflation to a projection of an increase in the rate of inflation.

It is correct to say that when such optimistic projections are made there are qualifications in fine print that these projections would be correct only if certain conditions in the international economy would prevail. Surely, realistic perceptions of the expected global changes that are well known should be taken into account in such projections without assuming the often used dictum of economists, ceteris paribus, that other things remain the same.

A correct knowledge of the facts, an understanding of economic processes and realistic expectations are vital for economic perspectives that will have an input into appropriate economic decision making. When will we develop these?