Target 2048 – Social Market Economy Ideology Need Be Clarified & Signed Off

By W.A. Wijewardena –

Reiteration of social market economy ideology as policy guide

President Ranil Wickremesinghe has reiterated that, in the march toward richness by 2048, his Government will follow the economic ideology known as the Social Market Economy. As I have mentioned in the previous article in this series, this is not new for him. Even in 2015, when he formed the Government, the declared policy ideology of his Government was the same. This ideology, borrowed from post-war Germany, emphasises the need for following the middle path avoiding both the extreme capitalism and the extreme socialism.

In extreme capitalism, every economic activity is left to the private sector, known as laissez-faire economic policies. The role of the government is confined to national defence, maintenance of law and order, protection of property rights, and enforcement of contractual obligations. In the extreme socialism, there is no private sector and every economic activity from running sideway shoe polishing units to manufacture of rockets is done by the state. This is called statism.

Post-war Germany adopting social market economy policy

Post-war Germany thought that neither extreme capitalism nor extreme socialism will deliver prosperity to Germans who had already been beaten by two world wars. Hence, while recognising the role of the private sector as the engine of growth, the state chose to function as the engine driver. The Ranil Wickremesinghe Government, as announced, will follow this policy to deliver prosperity to Sri Lankans by 2048. Since it is a long time spanning over one or two generations and there will be many administrations in the interim, it is necessary to clarify what is meant by social market economy policy and get the opposing political forces to sign off the policy ideology as the foundation of reaching the state of richness.

Social market economy policy need be clarified to avoid ambiguity

Wickremesinghe has just made a passing reference to social market economy ideology and has not given any details. It is presumed that he had expected all others – those who support him and those who oppose him – to understand what it is. But it will lead to ambiguity since each party will interpret it in its own way. To avoid this, it is necessary to translate it into a detailed policy document explaining everything that it contains. It would avoid ambiguity on the part of those who are to implement it and disabuse the minds of people who are to benefit from it. It also generates a free public discussion of the policy thereby helping the policy implementers to redesign the policy on the basis of the criticisms they have received.

Importance of democratic economic policy

Presenting a policy for public discussion before it is implemented is an essential requirement under good economic policy governance to which the present Government claims itself to be committed and ‘economic democracy’ which the policy has promised to deliver to people. About the system in Germany, an OECD report has emphasised the following which will be useful for Sri Lanka to follow as guidance: “Transparency is one of the central pillars of effective regulation, supporting accountability, sustaining confidence in the legal environment, making regulations more secure and accessible, less influenced by special interests, and therefore more open to competition, trade, and investment.

It involves a range of actions including standardised procedures for making and changing regulations, consultation with stakeholders, effective communication and publication of regulations and plain language drafting, codification, controls on administrative discretion, and effective appeals processes. It can involve a mix of formal and informal processes. Techniques such as common commencement dates can make it easier for business to digest regulatory requirement”.

Winners and losers of free market economy system

Free market economy has been hailed as the best allocator of resources in an economy to maintain its efficiency on a sustained basis. But the punishment and reward code of the free market economy system has been very harsh. If someone does well in a free market economy system, he is rewarded with profits, success and prosperity. By the same token, those in the opposite camp are punished with losses, bankruptcies and adversities. The delivery of such rewards or punishments is objectively determined by the market with no role for personal likes or dislikes to play in the passing of the judgments. Accordingly, those who can run faster can reach the goal post easily.

The others who cannot do so would lag behind and are bound to perish. Then, it makes the economic prosperity exclusive, meaning that only a select crowd would enjoy the fruits of development. This development is in accordance with Nature’s dictum aptly coined by the 19th century British philosopher Herbert Spencer as ‘Survival of the Fittest’ in his 1864 book ‘Principles of Biology’. But, can it be allowed to happen? Societies throughout history have fought against this natural development by introducing measures to save those unfit brethrens from the destined perish. A social market economy should ensure this important requirement.

Exclusive economic prosperity allowing a select group to enjoy the fruits of prosperity to be avoided

Kautilya, the 4th century BCE Indian Guru and Statesman laid down in his treatise on economics, The Arthashastra, that one of the duties of the king is to safeguard the welfare of the people since king’s happiness lies in the happiness of his subjects. Accordingly, the king has to look after both the fit and the unfit equally. All major religions have a commandment for their followers to help the unprivileged. In today’s context, there is a valid economic reason to avoid ‘exclusive economic prosperity’ in society. That is, such exclusiveness in prosperity leads to social, political and economic chaos threatening a society’s capacity to sustain its prosperity. Hence, inclusive economic prosperity has been upheld by modern societies as a goal. In this context, social market economy policy combining both the free market economy system with social safety nets is in line with both the historical trends and modern economic goals.

Germany has ownership for social market economy policy

As mentioned earlier, social market economy policy is not new and has existed for more than six and a half decades as the main economic policy ideal of Germany. After that country was fully devastated by the World War II, the Christian Democratic Union government led by Chancellor Konrad Adenauer adopted a social market economy as the key driver of government policy. At that time, Germany was frustrated with the Laissez Faire Economic Policy promulgated by pure capitalism and the extreme state management of the economy enshrined in the Communist economic policy system. Hence, a midway, coined as the ‘Third Way’ was searched for and the result was the introduction of the Social Market Economy Policy that combined the virtues of capitalist system with the need for ensuring the welfare of the people.

Key element of social market economy is to accept both the market and the need for governmental intervention

Germany’s social market economy had the following key features. It recognised the validity of the free market economy system as an efficient allocator of resources with its free determination of prices in the market. Accordingly, it accepted the following key four features of the free market economy system: private property, free foreign trade, free exchange of goods and free determination of prices. While accepting that economic prosperity is being brought by the free market economy, Germany also accepted that the government also has an important role to play in facilitating the operations of the private sector and looking after the vulnerable groups in society.

An important role assigned to the government was to regulate the economy to create a level playing field for businesses, prevent the formation of monopolistic businesses, take care of the citizens in their old age through a sustainable social security system funded by the government, employers and workers jointly and introduce social policies covering education, healthcare, housing and employment for all.

Knowledge and competition are a must

These ideals were announced in an abridged manner by the Christian Democratic Union as follows: “Social Market Economy system is the socially anchored law for the industrial economy, according to which the achievements of free and able individuals are integrated into a system that produces the highest level of economic benefit and social justice for all. This system is created by freedom and responsibility, which find expression in the ‘social market economy’ through genuine performance-based competition and the independent control of monopolies. Genuine performance-based competition exists when the rules of competition ensure that, under conditions of fair competition and equal opportunity, the better performance is rewarded. Market-driven prices regulate the interaction between all market participants.”

Today’s dictum: Ignore knowledge and perish

Thus, Germany’s policy makers had accepted both knowledge and competition as key strategies to establish a social market economy in that country. Knowledge is important because the continuing prosperity of modern economies is based on their having relevant and appropriate knowledge and using such knowledge productively in producing goods and services for the market, both local and foreign. Sri Lanka’s customisation of the social market economy has highlighted this vital ingredient for attaining sustainable economic growth.

It requires the country to spend more resources for education, research and development and use of research outputs in producing goods and services for the market. Singapore did this since it attained its independence in 1965. It built world class universities by getting the local universities to team up with the best universities in USA. It allocated more resources for research and development year after year. When the new millennium broke in, it got its universities and higher learning institutions to concentrate on fields that would elevate Singapore to the status of a knowledge-based economy. Some such fields are genetic, biomedical and biotechnology research, nano technology, information and communication technology and entertainment. A country today cannot think of attaining sustainable economic prosperity by disregarding the value of knowledge.

Economic democracy means allowing people to choose for themselves

An important ingredient in the social market economy policy is the delivery of ‘economic democracy’ to people. This was specifically announced in the election manifesto presented by Wickremesinghe in 2015. Hence, it is relevant today in the march toward richness by 2048. Sri Lankans had been enjoying political democracy of electing or ousting their rulers for nearly seven decades. Economic democracy is different from political democracy in the sense that it is concerned with the choices of people relating to major economic problems: what to produce, how to produce and for whom to produce. In a free market economy, these decisions are made by the markets but markets have now been captured by corporate magnates and politicians.

Yet, people are the supreme choosers in an economic democracy. Hence decision making powers in an economic democracy are shifted from corporate magnates in the private sector and politicians and bureaucrats in the state sector to people.

It therefore requires a complete overhaul of the Government’s decision making machinery. In an economic democracy, instead of a few politicians or bureaucrats making choices for people, it will be the people themselves who will make choices for them. Hence, economic decision making at national, regional and local levels will have to be made after wide consultation with people. But people are diverse and dispersed and therefore cannot be consulted effectively and efficiently. To overcome this issue, two changes could be made to the prevailing system in Sri Lanka. One is the empowerment of the civil society institutions so that they could echo the sentiments of people on key economic policy decisions. The other is the use of the social media to learn of the views of people on such policies.

The executive and the bureaucracy should learn to heed to people’s choices

But the most important responsibility in creating and running an economic democracy rests with the President, Prime Minister, Cabinet Ministers, State Ministers and Deputy Ministers. They should have a system in place in evaluating the views of the people, assess their validity and relevance and make a public announcement whether those views are accepted without modification or adopt them with modification. It they reject those views in toto, that decision should also be made known to people through a public announcement assigning reasons for such rejection.

IMF bailout package not consistent with social market economy policy

The Wickremesinghe Government is presently following a bailout package agreed with IMF for receiving an extended fund facility, upheld by the political parties supporting him in Parliament. The detailed policy measures sanctioned in this package are more oriented to the policies being recommended by the three Washington based institutions, namely, IMF, World Bank, and the US Treasury, commonly knowns as the Washington Consensus, for global economic change. They are also known as neoliberal economic policies since they rely more on the private initiatives than on the state for driving an economy toward economic advancement. The political parties supporting him in Parliament which upheld the package are noted for their opposition to the neoliberal type of economic policies. Their acceptance of the policy package in Parliament has merely been driven by the necessity of the day rather than a change in the ideology. If they did not support it, their power base would have been broken. Hence, it is unlikely that this group will continue to support this policy package for long.

In these circumstances, it is necessary to make the clarification that what is being implemented at present is not social market economy ideology but a medium-term policy stance that will help Sri Lanka to get out of the present acute economic crisis. It is therefore, challenging for the Wickremesinghe administration to return to the social market economy policy as the guiding ideology for Sri Lanka to reach the avowed goal of making it a rich country by 2048. But it is a must if his administration is to rely on social market economy as the policy ideology during the next 25 years.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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