Currently, little attention is drawn to economic realities in the midst of consecutive elections and political turmoil.
Sri Lanka has failed to reap the benefits of economic liberalization over the last three decades, owing to, among other factors, the prolonged war and various types of political volatilities, while some of our neighbouring countries which adopted economic liberalization policies much later are forging ahead with faster economic growth rates.
Having experienced dismal economic performance for so long, at least in the present post-war period we should make a humble attempt to understand and address our economic problems and constraints, rather than propagating further conflicts in the society.
The bitter truth is that there are no short cuts to economic growth or development. It is only through the hard way that we can achieve it. The longer we postpone taking the corrective steps the longer we have to wait for economic progress.
According to official figures, around 15 % of the population lives below the poverty line. However, this ratio could be high as much as 30 % according to authentic independent household surveys.
This implies that every third person of the country is poor. The living conditions of the poor are further exacerbated by rising consumer prices. Undisputedly, high economic growth is imperative to overcome poverty and to uplift the living conditions of the people.
In comparison with the South Asian countries (except Maldives), we are enjoying the highest level of per capita income in the region, which is around US $ 2,000. But the picture is not that rosy if we make a comparison with most of the East Asian countries.
Their per capita income levels range from $4,200 in Thailand to $ 8,000 in Malaysia and to $ 38,000 in Singapore. About five decades ago, per capita income levels of some of these countries were more or less close to that of our country. What went wrong? And, when can we raise our per capita income to reach the levels of East Asia? Those are the pertinent questions that we should address at the moment.
There is a simple arithmetic rule that can be used to compute the time that a country takes to double her income, which is known as the “rule of 70”.
Simply divide 70 by the anticipated GDP growth rate to work out the doubling period. A country that grows at 2 %, for instance, will double its income in about 35 years (=70/2). If the growth rate is high say, 7 %, the doubling period would come down drastically to around 10 years. Thus, a small change in the growth rate can make a big difference to a country’s income level. Unfortunately, making such a tiny change in the growth rate in the real world is not so simple.
In principle, a country’s economic growth heavily depends on her investments, among other factors. Sri Lanka’s present investment/GDP ratio, which remains stagnant around 25 %, is sufficient to achieve an annual growth rate of about 5 %, assuming that the current productivity levels remain unchanged. Given the low technological diffusion and weak research and development efforts in the country, productivity stagnation is a reasonable assumption.
East Asian countries were able to achieve high growth paths through their productivity improvements on top of the massive increases in factor inputs. Based on the recent experience, Sri Lanka’s GDP is likely to grow at around 5-7 % in the next couple of years. If we use the optimistic GDP forecast of 7 %, it would take at least 10 years to double our per capita income to about $ 4,000. That would be still lower than the present per capita income levels of some East Asian countries at the low end, say Thailand which enjoys a per capita income of over $ 4,000 right now. This means that we will be lagging behind such countries even after 10 years when they reach a much higher income plateau by that time! This is the bitter reality.
Taking into account these considerations, authorities and policy makers ought to give highest priority in their policy agendas to foster a conducive political and economic environment to attract domestic and foreign investment, and thereby to achieve faster economic growth. Such an effort seems to be lacking so far. Essentially, macroeconomic stability and correct economic fundamentals are pre-requisites to economic growth.
However, the term conducive environment is not confined to right economic fundamentals. It also involves other factors including political stability, good governance, anti-corruption and social discipline, without which it would be difficult or impossible to attract foreign or local capital. Eminent scholars like Prof. Joseph Stiglitz and Prof. Douglas North have given so much attention in their writings to institutional and market factors in the growth process. North argues that economic institutions are derived from political institutions. Thus, we have political structures that in turn put in place economic structures.
Empirical evidence shows that institutional and market imperfections propelled by political structures have retarded economic growth in many countries. Celebrated academic, Prof. Amartya Sen in his writings stresses the need to broaden the definition of development to take into account real human freedoms including political freedom, economic and social opportunities and transparency. He also highlights the critical importance of democratic form of governments in the development process. Autocratic governments usually end up with social evils such as corruption, less transparency, favouritism, economic stagnation and acute poverty, according to Sen.
Sri Lanka’s foreign trade does not seem to be much promising in the recent past, despite the dramatic improvement in the trade balance which fell to $ – 2.5 billion in the first eleven months in 2009 from $ -5.5 billion in the corresponding period of the previous year. This happened in spite of a 15 % decline in export earnings in 2009. Export earnings declined in all categories – industrial, agricultural and mineral. In spite of this downfall, the trade deficit improved because imports were down by a much faster rate of 32 % last year. As in the case of exports, the import shortfall was felt in all categories – consumer goods, intermediate goods and investment goods. The declining imports of the last two categories, of course, are a reflection of the economic and business setback.
A large amount of worker remittances amounting to over $ 3 billion in 2009 has helped the country to boost her foreign reserves to $6.9 billion by November 2009 from $ 3 billion in the previous year. This is a welcome development, but we should note that it is solely an external outcome rather than an upshot of domestic economic performance. It is needed to siphon-off the after effects of such external booms to attain economic stability. Particularly, a possible exchange rate appreciation arising from such foreign exchange inflows, which is commonly known as “Dutch disease”, should be avoided so as to maintain the country’s export competitiveness.
That does not seem to be happening in view of the rigid exchange rate regime that we are experiencing for quite some time. Besides, the expansionary effects of foreign exchange inflows on the money supply also need to be arrested by way of sterilization – that is by absorbing excess liquidity in the market through sales of government securities by the Central Bank. The present annual money supply growth rate of 19 % seems to be too high considering the relatively low GDP growth and inflation rates. Over a twofold increase in the net foreign assets of the monetary authority emanating from high foreign exchange inflows resulted in a faster growth in the reserve money stock (or high-powered money) and money supply.
Unless corrective measures are taken to rectify these disarrays in macroeconomic fundamentals, in addition to addressing the political, social, institutional and market imperfections, attainment of high economic growth and better living standards would be a distant reality.
More importantly, the Central Bank should have adequate autonomy and competence to implement prudent monetary policies so as to navigate the economy in a sustainable high growth path keeping macroeconomic stability objective in the forefront.
(Any comments/clarifications on the article can be sent to the writer at sscol@ou.ac.lk) |
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