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The market, popular pressure and public policy


19 August 2013 03:54 am - 0     - {{hitsCtrl.values.hits}}


Liberal economic reforms that swept across the world over the last several decades have had a significant transformational effect on many countries. Many state-led economies gave way to ones dominated by private capital, both local and foreign. The role of the state in turn became less significant in the management of the economy and the distribution of life chances among citizens. Privatisation of state enterprises reduced state sector employment and more and more people began to rely on the private sector and self-employment.

Incentives given to private investors by way of tax holidays, reduced taxes, low tariffs on exports and imports, etc. restricted government revenue. Household income, particularly among low income families, often did not keep up with the increasing cost of goods and services leading to widespread poverty. Liberalisation also had an adverse impact on some of the traditional economic activities such as small holder agriculture and handicrafts, making such activities unprofitable in the face of increasing cost of production and increasing competition from cheaper imports.

" Incentives given to private investors by way of tax holidays, reduced taxes, low tariffs on exports and imports, etc. restricted government revenue "
Sri Lanka’s experience following economic liberalisation in the late 1970s has been very much in line with the brief account given above. While the proponents of economic liberalisation have argued that the policy shift has brought about a positive transformation of the domestic economy leading to low unemployment, higher incomes and better standards of living, the opponents have highlighted the negative outcomes of economic liberalisation such as widespread poverty, unprecedented income inequality, dehumanisation of society and the decline of traditional sectors of the economy.

The contradictory nature of the above analysis is partly indicative of the ideological divide between political parties and partly reflective of the mixed outcomes of the policy shift. While the UNP continues to be committed to a market fundamentalist position, the SLFP-led coalitions have tended to advocate a greater role for the state. On the other hand the actual performance of the state over the last three decades has not been as clear cut, though the political rhetoric has influenced the thinking of many people across the ideological divide, with considerable negative consequences.

For instance, arbitrary curtailment of state sector employment in the 1980s and the failure to implement a realistic and rational agriculture policy, among others, made the situation worse for a large segment of the population under UNP regimes, leading to a massive rural backlash. On the other hand, populist measures taken by SLFP - led regimes such as unsustainable subsidies to farmers, rapid expansion of state sector employment and diversion of scarce public resources to maintain inefficient and loss making state enterprises have resulted in higher prices and wages across the economy leading to steadily increasing cost of intermediate and consumer goods. As a result, many people do no longer want to work in Sri Lanka. The other negative consequences of increasing inflationary pressure brought about by irrational allocation of public resources have become too obvious. These include widespread corruption, politicisation of public institutions and the deprivation of vital sectors of much needed resources.

The impact of neo-liberal reforms has not necessarily been uniform across countries. Many countries have adopted pragmatic policies in order to, on one hand, benefit from private investment and on the other, reduce the negative impact of market forces. In other words the role of the state has been critical, provided that the approach adopted is broadly technocratic rather than populist. In many cases, serious policy analysis has helped the state to respond to issues in a reasonable manner. For instance, when the wages go up, measures need to be taken to improve  productivity, through skills training etc. so that labour can be used to produce higher value products and services, both for export and domestic consumption. Moreover investments in R&D can result in innovations that can lead to new product development and improvement of production processes.

Being part of a globalised world economy, Sri Lanka’s economy today is constantly influenced by the dynamic balance between exports and imports. While the widening trade gap continues to be a major issue that affects the country’s domestic and international finances, the life chances of the country’s labour force are also shaped by the international standing of the economy. For instance,  increasing international and domestic debts reduce the state’s ability to invest in the social sectors that are critical for the present well being and the future prospects of the local population. Yet, the lack of investment capital prevents the government from allocating adequate resources for education, health, income support, social insurance public transport, etc. Increasing popular pressure compels governments to take short-term, populist measures that often make the situation worse in the long run. Resulting public resentment can lead to public protests that in turn can invite a harsh response from the powers that be. Persisting unrest can lead to social and political instability – a situation highly inimical to economic development and social peace.
 The past and recent public policy failures have contributed significantly to the present predicament of the country. Moreover, the protracted ethnic conflict absorbed considerable resources, both material and human, while the opportunity costs involved have been even greater. In order to face the persisting development and welfare challenges, the country has no choice but to adopt a rational approach to policy making. What is equally important is to promote social cohesion so that communities cannot only live in peace and harmony but also look forward to a common future. Yet, whether we could collectively rise up to these challenges remains as uncertain as ever.

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