Aprominent economist in his recent weekly column in the Sunday Times newspaper, has observed the following. There has been an economic resurgence since the end of the war in 2009 (7.3 percent growth i n GDP this year). However the following critical issues surface to block development. Foreign indebtedness (see Table 3 below) which had increased substantially. Large public debt component Increased debt servicing costs Large trade deficits Inadequate spend on social infrastructure and education (technical education in particular) Care of the elderly in the face of a widening aging population. The mystery deepens when one questions (as Verite Research did in June last year in the Mirror Business) about the jobs offered.
In fact there was a job loss of over 68,000 in 2012 compared to the previous year. Many other measures throw a somewhat sombre light on what the policy pundits of the government have achieved in the post war years. Some of them are analysed in this article in the backdrop of the five (5) strategic questions raised by a strategy consultancy (MTI) recently in the media:
1.What is the country’s competitiveness? (or more clearly what is our competitiveness inter alia competitiveness of the firm?)
Simply we have slid from the 65th to t he 73rd position t his year i n t he Global Competitiveness Index (among 144 countries). What is causing this is a couple of top line “Items” in the reform agenda .Firm Competitiveness (both in the formal and informal sectors) is in disarray, exacerbated by l ow productivity and factor misallocation (Read Michael Porter on Firm Competitiveness for a deeper understanding). The second item which is causing the internal bleeding is the colossal loss (Rs. 250 billion in 2012) of the State Owned Enterprises. Significantly the top three in 2011 1) CEB Rs.19.2 billion 2) CPC Rs.94.5 billion and 3) Mihin Lanka (Rs.1.9 billion)
The scale and speed of deterioration of the CEB is unbelievable (Rs.70 billion within 2010 and 2011 alone) why? One has only to look at the recent history of the enterprise (Sunday Leader May 5, 2013 Gross Mismanagement at CEB where Lanka Transformers Limited a viable venture had sunk to a loss making one) and wilful mis-timing of decisions to shut down plants for routine maintenance of hydro turbines (Victoria/Luxapana and Kukuleganga) accelerating losses to the tune of Rs.10.0 billion for the ten day period of the maintenance (Sunday Leader June 30, 2013).
Any attempt at Public Enterprise Reforms had ended up in failure too. The Ministry of Public Management Reforms initiated a reform agenda and spent time and money mobilising Consultants to pilot and drive a programmes aimed to 1)Enhance policy responsiveness 2) enhance efficiency and effectiveness and 3) enhance accountability of PEs from around mid 2011. However , what the Additional Secretary had to say after more than a year in piloting this programme, in January 2013 surprised many “The reform initiatives are not attractive and might not be digestible and marketable (to the SOEs) despite the developing of a Public Management Reform Road map; Crafting of the first integrated Nuwara Eliya district development plan; Reducing the rank of doing business index and similar (see the authors article on the last theme on 20 November of this year in the Daily Mirror ,for interesting observations/ recommendations ).
This was not surprising as the UNF government in 2001 had identified the root cause as the Lack of: 1) National policy on PEs 2) Accountability 3)Transparency 4) implementation delays and 5) competency shortfalls as impediments to an efficient public service and efficient management of PEs. An attempt to re invent the wheel had to meet with failure. Was it that Ranil Wickramasinghe was a better leader? Or the administration commanded the talent to lead such a change successfully.
2. Can national productivity be improved?
Adam Sack , country manager ,IFC (World Bank) no less, observed (quoted by the author in detail in the 20 November 2014 article in DM titled ‘ Response to verite research : Improving the business environment ‘ ) that improving productivity ,particularly labour productivity would increase FDI by a corresponding percentage .
While it may be true that land fragmentation is a major factor in low productivity i n agriculture and crop sector, it is lack of people “engagement. That is dragging the competitiveness at the firm level , down. In comparison, Sri Lanka’s productivity is half that of Thailand, and this is compounded by a subsidy dependency , maintaining highly inefficient, wasteful and now add to it corrupt structures.
One economist had commented that something worse than a monopoly is a duopoly, where for example CPC and IOC are operating in the import and distribution of fuel. Pour into this unsavoury “mix” Tax concessions (visibly to bail the enterprise out on the short / medium run)SriLankan / Mihin air become eligible for ten year income tax exemptions while CEB and CPC also qualify for 5 year tax exemptions with effect from April 2011. This certainly takes the cake!
What does this tell us? Does it mean the government is covering up its inefficiencies and no effort is made to rectify long ailing state enterprises? This situation cannot prolong further. Its suicidal if we do not (1) Unbundle the CEB to farm out specific operations for productivity and efficiency improvement and (2) Broad base the power sector and petroleum distribution to new players to promote competitive pricing mechanisms. This is exactly what Ranil Wickramasinghe wished to implement in the first place. Now the realisation is dawning on us.
3.Ensure economic growth and development which reaches the ‘bottom of the pyramid’ (GDP growth in Tradeables than non tradeables
narrowing the income distribution between the top and bottom segments of the workforce, creating new employment)
What is now evident is that only 4 percent of the national income is shared by the bottom 20 percent of the population while the richest 20 percent of the population command 55 percent of the income/GDP.
The growing differential between t he t op end and bottom end of the income spectrum can only lead to one situation: Social unrest and even fracturing the peaceful co existence of the various segments of the population. The wisdom of the 17th amendment to the constitution to promote inclusive growth can now be understood. Ranil Wickramasinghe was spot on. The reform initiatives are not attractive and might not be digestible and marketable (to the SOEs) despite the developing of a Public Management Reform Road map
4. Improving export competitiveness
It is surprising for t he informed reader to realise how often the powers, keep harping on the role of the private sector without a semblance of awareness as to what is going wrong. I did touch on the mechanism adopted by the CBSL to control exchange rate of the country to the detriment of export- growth (in my last article in the DM 20 November 2014).
The real exchange rate directly influences the resource allocation between tradable and non tradable goods. The international reserves rise due to the increased foreign inward remittance and foreign borrowings ,thereby causing domestic currency to appreciate .Such real exchange rate appreciation caused by exogenous factors, lead to weakening of the export competitiveness of domestic industry, which is symptomatic of the ‘Dutch disease’erosion of export competitiveness in the Netherlands in the 1960s due to appreciation of domestic currency pushing the relative prices of non tradable goods (infrastructure, utilities and similar) against the tradable goods, causing the shift of resources to the non tradable segment drastically reducing the country’s export competitiveness . You will of course realise now that if we need to increase our export competitiveness the currency needs to be re valuated (or pegged to the actual trading position of the country).
*PPP adjusted as per World bank reports 2013.
We have to realise that if we are to simulate Malaysia in Export growth (82 percent of GDP) we need to have the right macro economic environment , including the exchange rate regime. Exporters will welcome the policy change , as essential ‘support’ to boost exports.(read the last paragraph of my 20November 2014 article in the DM for more detailed strategies).RW did understand this mechanism to such an extent that he was misunderstood to be supporting the ‘trickle’down classical model.
5. Creating a positive psychological climate among all constituents (i.e. promoting good governance )
The manifesto of the Common Candidate states: “I will create the necessary just political atmosphere for the establishment of a government based on free media” in its true sense. While media freedom is both the guardian of free opinion it is also the vehicle for promoting good governance by spotlighting responsibly the deviations (if any) of the policy makers and government leaders.
When the present Chairman of the Ceylon Chamber of Commerce said at a recent National Forum “Sri Lanka’s regulatory systems as it applies to the private sector is in need of overhaul. Most of the regulations are perceived as a deterrent to investment and doing business than as an enabler, a consultative process between the public and private sectors is essential before new regulations are implemented.
We need to move from this adversarial relationship (contrary to what ever is said in the open) to one of partnership and on going consultation, which may yield the remedy eluding the government.When the real outcome of a sound economy is felt by the people (at the bottom of the pyramid), then all segments of society will “engaged”. The drivers of this engagement are good leadership and sound policies.