Targets and objectives are important. This is so in all human endeavours and especially so in economic planning and policy. However mistaking targets for achievements have been a regular feature of the country’s economic experience. Targets could be taken seriously only when strategies to achieve them are designed and consistent policies adopted to ensure their achievements. In as far as the record goes the country has experienced a series of economic targets that have not been realized. The targets of high and rapid economic growth that have been regularly stated have been transformed into mirages as the resolve to achieve the economic objectives were weak.
This national weakness was aptly described by the renowned Cambridge economist Joan Robinson over 50 fifty years ago when she said “You are a people who want to taste the fruit without planting the tree and nurturing it.” Once again the rhetoric for high rates of economic growth is aplenty. For instance the last budget speech said “Our government’s vision for future development envisages accelerating the growth rate to around 8 per cent in the medium term and placing the country’s growth path around a double digit level thereafter.” In fairness it must be said that the budget speech also enumerated some of the vital prerequisites to achieve such a goal. It said “This means our country needs to raise total investments to around 40 per cent over the next ten years.” It also said that as public investment will concentrate more on the long term infrastructure, private sector investments need to be increased from the current level and that this increase cannot be mobilized from our domestic private sector alone as the country does not have domestic savings to meet such a large resource requirement.”
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In this plethora of non achievement of targets one example of remarkable attainment stands out. This is the feat of completion of the Accelerated Mahaweli Development programme in less than the targeted period. The targeted period itself was seen as over ambitious. The World Bank made it clear that it could not be accomplished in the stipulated period of seven years. In the end it was completed in a much shorter time. It was the dedication, focus and the administrative efficiency and engineering capacity that enabled it. It is this kind of focused attention that is needed to transform the economic objectives into an institutional reality.
In the next six years the government expects to achieve a sustained 8 per cent growth and double per capita incomes. In fact an eight per cent growth cannot achieve a doubling of incomes in the space of six years. It is necessary to achieve a 10 per cent growth to double per capita incomes as allowance must be made for the annual increases in population of about 1 per cent. (In 2009 population grew by 1.1 per cent).At a GDP growth rate of 8 per cent and a population growth of 1 per cent it would take ten years.
Let us not quibble about this mathematical inexactitude and focus on the 8 per cent growth that is indeed a very desirable objective and a needed growth rate to meet the aspirations of our people. Such a high rate of economic growth cannot be achieved by merely wishing it. There are preconditions that must be established to achieve this. There are the non economic factors such as a durable peace by a reasonable settlement to the ethnic issue, law and order, a better work ethic, improvements in the government’s administrative machinery and industrial peace among other factors that must be established.
Then there are the important economic policies to achieve an economic growth of 8 per cent. Investment requires to be increased to 40 per cent of GDP, as recognized in the budget speech, from the low 24.8 per cent in 2009. This is on the basis of an incremental capital: output ratio (ICOR) of 5: 1 that has been the historical figure. Even if we are able to bring down the ICOR to 4, an unlikely proposition in the immediate years, it would require an investment of around 32 per cent of GDP. However this is not an impossible task but requires serious efforts.
It can be achieved by reducing the dissavings (negative savings) of the government from its current fiscal deficit of 10 per cent to the government targets of 7 to 5 per cent of GDP in the next few years. This requires defence expenditure to be cut, losses in government enterprise to be drastically reduced and non-productive expenditure to be curtailed. There has been no will or resolve to do these in the past. Will it be done now? There have been no signs of this yet. Household savings are very low at present at around 18 per cent of GDP. The encouraging factor has been the savings of Sri Lankans abroad that come in as remittances and are growing at 14 per cent currently. These contributed as much as 5.8 per cent of GDP last year to national savings.
A decrease in the rate of inflation as at present could induce more savings. Corporate savings are likely with the better environment for expanding production and enhancing profits. The expected tax reforms are also likely to help corporate profits and consequently increase corporate savings and investment. The other lever at hand is the increasing of foreign investment. Of the several forms of foreign investments, foreign direct investment is the most beneficial and least costly to the country. It is also a means of technology transfer over time. However, have we provided the incentives for attracting substantial foreign investment?
Loss of GSP plus status in Europe, conflicts with western countries, corruption and poor economic fundamentals such as high public debt, large fiscal deficits, unsettled ethnic issues, lack of law and order and the rule of law affect the attractiveness of the country in comparison with more stable countries in the region. There is no doubt that peaceful conditions would attract some foreign investment but will they be of the type and magnitude we need?
The objectives as well as much of the road map to achieve higher growth are commendable. What is required is a resolve to take firm actions to develop a hospitable climate for economic growth. This remains the challenge to achieve sustainable high rates of economic growth. Hard decisions to reduce the deficit and prioritise government expenditure are essential. The containment of the budget deficit as stipulated in the Fiscal Responsibility Management Act of 2002 and the targets of fiscal deficits established by the IMF as conditions for the standby facility are essential. In fact the inability to achieve these fiscal consolidation targets has been a serious impediment to economic growth. The last budget was no exception in stipulating desired economic objectives but too little in the methods of achieving these. It has been a tale of high objectives followed by excuses as to why they could not be achieved. Targets must be backed up with effective implementation of appropriate policies to achieve them. |
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