- A response to the budget by Eran Wickramaratne, MP
The Lee Doctrine
The Rajapaksa regime aspires to be the wonder of Asia. How will this be achieved and not be confined to mere rhetoric? The President stressed in his budget speech that economic policies that are being enunciated in his speech are not neo-liberal economic policies. These, we are told, are unique Sri Lankan policies. Despite the rhetoric, governments need to be aware that economic fundamentals are universally applicable – you cannot print money without putting upward pressure on prices, you can’t indefinitely consume more than you produce, you can’t grow per capita income without improving the productivity of capital and labour. Whatever economic model is followed, the basic economic fundamentals apply. Regimes ignore economic reality at their own peril.
The government appears to be content on labeling its economic policy rather than describing the substance behind it. But it is important for us to understand today the substance behind the economic model and analysis being used by the government, to project the success of its policies. A meaningful discussion on the budget must focus on the substance of the economic policies, not an argument about what name we give those policies. Many of the described policies of the government seem by and large to fit the well established modeling and analytical approaches of modern liberal economies – despite loudly claiming to the contrary. There are certainly advantages to adopting a liberal economic policy that is more market and investor friendly, as the government has done. The government need not be embarrassed by its new clothes.
At various points the government and its ministers have spoken about making Sri Lanka more like Singapore. The city state of Singapore made great economic strides in the past four decades. In some situations of development, economic progress came at some cost to social protection and political freedom. Singapore today has the largest income gap between the rich and poor of any country in the world. It has, effectively, a one party political system — just like communist China and Vietnam — despite the holding of regular elections. We certainly need to take the lessons not only from Singapore but from societies around the world, while evolving our unique mosaic.
Nobel laureate in Economics Amartya Sen has argued that economic development cannot be distinguished from the increasing of freedom. Increased income increases freedom but it is only one important goal of economic development, because freedom does not arise only from income. Therefore political liberties and civil rights are a necessary component of economic development. There is no historical statistical evidence to show a link between less freedom and more economic growth; in fact more freedom can often be an enabler of more economic growth – it is not for no reason that the United States has succeeded over centuries to attract migrants, from politically oppressive countries, that have made huge contributions to the economic success of that country.
Most developed countries have had a vibrant democracy as its socio-political foundation. Singapore is somewhat exceptional in this regard, but the problems are becoming more evident when we look closely at the distribution of wealth within Singapore. It’s usually in an environment of freedom that ideas, innovation and entrepreneurship thrive. Any restriction of freedom of the individual and the media will lead to a crony capitalist’s state. It can lead to GDP growth, but crumbs for the poor.
The role of elites
Singapore evolved a legislature which overwhelmingly included academics, professionals and business elites. The selection process for candidates ensured that the elected parliamentarians will have the necessary skills for legislating. It also invited professionals and others to take a seat in parliament for a term and give leadership to government ministries. Singapore encouraged professionals in politics not just professional politicians. Professionals who were invited often returned to their professional careers. Members of parliament were financially market compensated, while corruption was not tolerated.
The ethic that was promoted was that the most suitable person, whether in parliament or the bureaucracy, should be given the responsibility. Narrow nationalistic ideas were not entertained. For example, like in India, the head of the Monetary Authority was a competent economist. Singapore in its quest to give responsibility to the best person, once appointed an expatriate to head its Monetary Authority. Even the nationality of an individual, far less ethnicity, was not a hindrance in making suitable appointments to the civil service.
The bureaucracy was financially market compensated and rewarded on performance. As a result, the best educated had no hesitation in joining the civil service. Even if we aspire to be economically like Singapore, the political will to transform politics and government is lacking as evidenced by the appointment of a jumbo cabinet of ministers and deputy ministers. So we are back to our unique Sri Lankan model as proudly espoused by the government.
Sri Lanka has doubled its per capita income from US$ 1000 to US$ 2000 over the past five years. The government’s goal is to increase it to US$ 4000 by 2016. While the goal is commendable, it must not be confused as a doubling of living standards in any one of the periods. An economy which grows at six to seven per cent per annum over five years, does not double its living standards. A strong rupee maintained from 2005 – 2010 mathematically provides for a higher dollar value when calculating the per capita income.
The benefits to the poor of an increased per capita income are not obvious. The President when presenting the budget said, “I am also humbly proud as the Minister of Finance and Planning for being able to reduce poverty to 7.6% during the last five years, while taking our country forward as an emerging economy in Asia.” I am concerned that the idea that Sri Lanka has become a middle income country and poverty has reduced will lead to a cut in welfare of expenditures to the poor. According to the household survey conducted by the Department of Census and Statistics, in 2006 – 2007, 29.6% of families received Samurdhi and of those households only 7.3% were poor while 22.3% were not poor.
Even in 2006 – 2007, only half the poor were receiving Samurdhi. Why is the programme so badly targeted where the ratio of recipients are one poor person to three not poor persons? In 2010, the required expenditure that had to be incurred by a family of five to be beyond the poverty line was Rs. 15,555. While the government claims that poverty has fallen from 15% to 7.5%, it must be pointed out that any reduction in poverty can be misleading as the calculations are based on surveys of expenditure and not income generated by the family.
Poverty is assessed based on people’s expenditure, while Samurdhi is assessed based on income. As we all know, the transfer of money from overseas relatives to their families at home have grown rapidly during this period. There are hundreds of thousands of families who live by transfer of money from abroad even though they have no employment or income. Poverty reduction has not come by increasing the productive capacity of the economy or by increased incomes as much as from exporting manpower and children growing up without their mothers at home. People spend time and energy collecting a pittance of Rs. 500 or so each month because they are really poor. Poverty reduction is more a function of women working on our plantations — overworked and underpaid — women in the textile and garment industry by their productive and hard work making Sri Lanka globally competitive and women working overseas as domestic labour – usually suffering from being separated from their families and often working under harsh conditions in foreign lands.
The budget anticipates the economy to grow at 7.5 – 8% over the next year. Tax revenues are expected to grow at 19.75%. If tax revenues are to grow so rapidly, either the tax burden has to increase, or the tax base has to expand in a manner that more than compensates for any reduction in taxes, or there will have to be higher levels of inflation so that nominal numbers in tax revenues could be achieved. The budget proposals have reduced the tax burden particularly for employees and businesses. The attempt to increase the tax base is laudable, but is likely to be achieved in the medium term. So a fall in tax revenue is most likely to be compensated by a rise in inflation. The projected inflation in the budget is 6.3 per cent but is likely to be closer to ten per cent, while income increases by five per cent for most. Inflation will make people poorer. The poor will be disproportionately affected by a rise in inflation.
I urge the government to drop its medium term goal of cutting welfare expenditure to the poor based on a statistical fiction. A more targeted approach is required to ensure that the poorest will benefit from the welfare transfers.