Returning to a “Licence Raj”
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Workers at a fuel station playing cricket while waiting for supplies. (File picture)
If you had to marry in the 1970s, I am sure it would have been a “whole new experience” to you – I mean, a whole new “old experience” to you. If you are planning a wedding ceremony, you have regulatory procedures to follow. First and foremost, you need to prepare a set of documents for approvals and signatures in order to prove to the authorities that you are “truly” getting married – the truth, the whole truth, and nothing but the truth! Let me explain.
If any couple is planning a wedding, we know that both the bride and groom should wear beautiful and smart “wedding dress” made of high-standard clothing; at that time, such high-quality fabric was not produced by any of the domestic industries, whether they were state-owned or private-owned.
You need to buy the “imported” fabric from a specific dealer who held the “licence” to import that fabric. But the problem is that you have no right to buy them, unless you have the government permission.
The couple engaged in getting married or rather their parents should meet the Grama Niladhari, show the relevant certificates and, get a letter addressed to the Government Agent (GA), which is the Divisional Secretary in today’s term. Once the letter is submitted to the relevant GA’s Office, the GA would endorse it, of course, after completing the inspection and verifying the authenticity of the documents. Then the “permit” to purchase the required length of the fabrics for the wedding dresses will be issued by the “authorised dealer” who is holding the import licence.
Be “somebody”
Not everybody or anybody can be an authorised dealer to import fabric or anything else, because “who should be a businessman” is decided by the government – either politician or bureaucrat. Import business is permitted only under the government’s licence system, which is not open to everybody. Of course, not everybody can have the import licence, because you must be a “somebody” connected to the politicians or the bureaucrats to get that licence.
As a result, only a handful of dealers emerged as businessmen to hold import licences and made their fortune. This means that, these few licence holders enjoy the monopoly powers in the local market. The market competition had been effectively curtailed by import restrictions as well as the licence procedures.
The wedding matters controlled by the government regulations are not yet over even after purchasing the fabric for the wedding dresses. Given the food shortage at the time, the invitees should be limited to 100 guests. Wedding decorations cannot be made from fresh or tender coconut branches as well as coconut or arecanut flowers, as such activities can reduce the production or productivity.
I hope there were no food restrictions for the wedding, because anyway the severe food shortage was part of the day-to-day life of average people. In fact, serving rice at the restaurants and selling rice packets were also banned for two days of the week in response to the food shortage.
Two classes
In a regulatory system as such, there were often two classes of citizens: One is the “average citizen” whose life is subject to the regulations governing their daily affairs and future, including what they should eat, what they should wear, what they should buy and many other. The other class is the “privileged citizen” whose life is not subject to the regulations and who has the ability to benefit from the regulations and make their fortune out of the regulatory system.
I remember one of the stories shared with me by one of the professors who taught me during my undergraduate years: During the time he was a young Assistant Lecturer, by accident he got a rare opportunity to attend a dinner party at the Oberoi Hotel, which is present day, the Cinnamon Grand hotel.
He told me: “My professor was sick on this particular day and, he was unable to go to the dinner; so, he gave me his invitation card, and told me to go there in his place, if I wish. Of course, I wished, and I was very excited; I got dressed properly and went there.”
He continued: “Oh… my gosh…! You don’t understand it today! But for the first time in my life, I saw Western drinks, snacks and fruit served there; I had never seen red wine, cheese, ham, bacon, corn beef, grapes, apples and, many others, which were there! None of the import controls, foreign exchange restrictions and food shortages out there affected that dinner party.”
He added his concluding remarks: “You must understand that everywhere in the world, that’s how regulated economies with import controls work. Apparently, they create two classes; they ruin the lives of the public but raise up another class creating opportunities to make a fortune from that regulatory system.”
Unholy alliance
A system as such can be defended nicely, as it is being done today, convincing the public that it helps to save scarce foreign exchange on the one hand and, to promote and prosper domestic industries on the other hand. But it is the worldwide experience that regulatory systems as such have always created space for an “unholy alliance” between businessmen and politicians.
If businessmen want to succeed in their business, they must be the companions of the politicians and bureaucrats. In fact, even the politicians or the bureaucrats themselves can become businessmen, by regulating the economic activities in favour of their own businesses.
As per research evidence in many countries around the world, regulatory systems as such open the doors for corruption and bribery as well. Overnight changes in import taxes or import controls or foreign exchange controls can push the established industries out of business, while allowing new businesses which were nowhere in the business world to mushroom next day.
After all, the other side of the coin is that if you are not connected to the “unholy alliance” you have a risk and uncertainty about the future of your business which, otherwise, had a bright future in a competitive policy environment.
“Licence raj”
The term “Licence Raj” or “Permit Raj” were the names used for the Indian economic system that existed from 1947 – 1990; it describes the system of licences, regulations, and accompanying red tape, that hindered the set-up and running of businesses in India during this period of time. While India moved away from the import licence system after 1990, Sri Lanka did it long before that in 1977. However, for whichever the reason, Sri Lanka is now in a situation where we are back to the same import licence system.
From an economic point of view, import licences are worse than even high tariffs. Tariffs don’t create monopolies although they raise the price charged in the domestic market. Unlike that, the import licence system can create monopolies in the domestic market, favouring selected businesses.
Import controls try to make a distinction between essential and luxury items and, between consumption goods and producer goods (inputs to businesses). Conceptually, it seems that there is nothing wrong with such a decision taken by politicians or bureaucrats. But practically, it is difficult to judge whether it is “essential or luxury” or whether it is “consumption purpose or business purpose” to import “French mineral water, Norwegian salmon fish or Australian beef” to serve high-income tourists lodging in a five-star hotel.
Even an imported shampoo bottle or any other cosmetic product may be a luxury item to a household, but it could be an essential input to run a beauty parlour business by a professional. Even from a different angle, it remains to be seen as to how ethical it is for somebody else to decide which businessmen should be promoted or which consumers should be favoured; finally, it is a question about much valued economic freedom of individuals.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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