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The Economy The Most Critical Factor

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e have spent the whole of this year talking about democracy and good governance. This is understandable. The semi-authoritarian rule that preceded was characterized by widespread corruption, nepotism and wastage of public funds etc. Many people lost any hope of a decent future. The growing nexus between business and politics frustrated decent entrepreneurs and discouraged many foreign investors. Investments in R&D remained incredibly low for a country with a lower middle income status. The continuing brain drain led to the depletion of highly skilled human resources, making it virtually impossible to promote technology intensive industrialization. Now that democracy and good governance have been restored to a considerable extent,  many people expected the new government to focus attention on economic development. In order to do so, it was necessary for the leaders to get a thorough economic analysis of the domestic economy done in order to identify the possibilities and challenges and formulate a rational plan of action. Yet, except some disjointed comments and pronouncements by several leaders, we have not seen anything like a well formulated action plan to get the economy out of the present mess.



An unambiguous policy framework indicating investment priorities and the kind of structural changes envisaged would have given local investors and potential foreign investors the signals that they want before making long term investment decisions. Given the fact that a high level of accumulated public debts precludes large public investments, productive private investment is critical for the development of various sectors of the economy. On the other hand, it is doubtful whether the so-called national government that comprises a highly diverse group of politicians could agree on a common policy framework that can provide the basis for consistent decision-making on development priorities including critical public investments.

 

"For people who are under economic and social pressure, good governance  might be of secondary importance in comparison to pressing economic and  social issues such as cost of living and poor public transport."




Though Sri Lanka is no longer a low-income country, economic and social conditions under which a large majority of people live are much to be desired. While their disposable incomes are low, making it difficult for them to satisfy the basic needs of their families, given the low productivity levels, it is virtually impossible to increase their incomes without creating considerable inflationary pressure on essential consumer goods. For instance, hundreds of thousands of employees added to the State sector over the last decade contributed little to labour productivity and production of goods and services but the wages paid to them have to be paid by the taxes levied on consumer goods and higher income. What is also significant is the large size of the informal sector, accounting for about 45 percent of the employed population. As is well known, work in the informal sector is generally precarious and does not provide any social protection during or after employment.

 

"The ongoing political controversies within the government, irrespective  of their merits or demerits, show that the leaders have so far failed to  iron out their differences and establish unity among constituent  sections of the government."



But, unless more lucrative and regular employment is generated in the productive sectors through new investments, the situation of employees or the self employed in the informal sector cannot be improved. In other words, a large part of the country’s population remains vulnerable and can be easily persuaded to vote against the incumbent government at a future election. For people who are under economic and social pressure, good governance might be of secondary importance in comparison to pressing economic and social issues such as the cost of living and poor public transport. But these issues cannot be resolved without creating productive employment. So, the soundness of the economy is the most critical factor in creating social and political stability which in turn is a prerequisite for economic development.  The ongoing political controversies within the government, irrespective of their merits or demerits, show that the leaders have so far failed to iron out their differences and establish unity among constituent sections of the government. Some Ministers have openly expressed their doubts about the stability of the present government. So, the prevailing situation is certainly not conducive for investment decisions, particularly by foreign investors. This is particularly so in the present global economic environment where export markets for manufactured goods are not rapidly expanding.

 

"But, unless more lucrative and regular employment is generated in the productive sectors through new investments, the situation of employees or the self employed in the informal sector cannot be improved. "



As is well known, decades of political instability in the country resulted in many lost opportunities leading  to the present state of the economy and society. Recent political changes created a sense of hope in the minds of many people. But these political gains cannot be sustained unless they are accompanied by tangible economic and social benefits to people. The only way to provide such benefits to people is to increase agricultural and industrial production for local and overseas markets leading to higher levels of stable and decent employment and incomes for low income groups. Against this background, present contentious political divisions within the government are more than likely to hinder not only  much needed economic development but also political stability itself. Though the divisions within the coalition government were not wholly unexpected, the political and economic fallout of greater instability can be far more damaging to the present and future prospects of a majority of people. Given the serious economic and social issues they face today, their tolerance level cannot be too high. In a country where people have been living with corruption and abuse of power for many years, continuing hair splitting on one case leading to  serious loss of confidence in the regime can have serious political repercussions. In any controversy, there are two sides but there can be only one truth.  Do we have a credible arbiter to uncover that truth and resolve the matter ? Why can’t we get that arbiter to resolve the issue once and for all and save the country from another disaster ? 
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