Sri Lanka desperately needs a new global economic strategy, and that
is what the government has promised. But this is not just about dry
economics: it must be part of a broader strategy for national renewal.
Sri Lanka needs a decisive shift to markets and globalization. That
requires the Prime Minister and his core economic team to have a clear
vision with a good sense of direction, an iron determination to succeed,
and a strong dose of practical implementation skills.
This is going
to be a gargantuan challenge. The good news is that Sri Lanka has its
most golden opportunity to achieve its long-advertised potential since
the victory of the UNP in June 1977. The bad news is that Sri Lankans
squandered that opportunity, as they have squandered opportunities
before and after since independence. How can this time be different?
What has gone wrong?
I will start with diagnosis before moving to prescription. What I
have to say is hardly original. Other Sri Lankans, with far better
local knowledge and expertise, have said it better. What has gone wrong
with Sri Lanka in the global economy? Why is its trade and investment
performance so under par? The answer is part of a wider national
malaise.
From 1956 – that fateful, calamitous year – Sri Lanka went down
the Indian, not East Asian, path of heavy-handed government intervention
in the economy, including import-substituting protectionism. This got
much worse in the 1970s. The opening of the economy after the '77
Election ushered in substantial gains, including the emergence of a
garments industry. That is why ordinary Sri Lankans are much better
clothed, housed and fed than they were in my childhood, despite a
quarter-century of civil war. But ethnic conflict prevented these gains
from being much larger. So did perennial macroeconomic instability. The
latter has a simple cause: Sri Lankan governments' chronic inability to
live within their means – their never-ending "auction of non-existent
resources ", as Singapore's Lee Kuan Yew put it. There were attempts to
reboot liberalization, especially under Chandrika Kumaratunga in the
'90s and Ranil Wickremesinghe when he was PM last time around. Sadly,
his Regaining Sri Lanka package failed due to the unravelling of the
ceasefire and a public backlash that Mahinda Rajapaksa exploited so
deftly.
The next decade of Rajapaksa rule is a study in
retrogression, despite the end of the war and newfound peace. First, Sri
Lanka swung to authoritarian politics; it became an "illiberal
democracy". Second, Sinhala-Buddhist chauvinism got worse, increasing
ethnic tensions. Third, foreign policy became unbalanced, with China as
"first friend" and deteriorating relations with the West and India. And
fourth, the economy was deliberalized in the nationalist spirit of
Mahinda Chintanaya.
The government intervened much more in the economy, with a
predictable rise in cronyism and corruption. Trade protection increased.
The tariff structure became more complicated, especially with cesses
(additional duties) on imports and exports. Non-tariff barriers
proliferated. Agricultural protectionism soared. One estimate is that
import protection effectively doubled during the Rajapaksa years.
Regulation of foreign direct investment (FDI) also became more
interventionist and opaque, with greater ministerial discretion to grant
tax incentives. The Board of Investment was marginalized.
More widely, a worsening domestic business climate – the result
of bewildering ad hoc government interventions on taxes, permits and
sundry regulation – deterred foreign investors and traders. Last,
post-war growth has been debt-fuelled and led by the low-productivity
public sector, while crowding out private investment from local and
foreign sources. It has wreaked havoc with public finances, and left Sri
Lanka dangerously exposed to foreign commercial borrowings at a time of
volatile capital flows to emerging markets. This type of growth has
boosted non-tradable sectors at the expense of higher-productivity
tradable sectors.
So Sri Lanka has deliberalized and deglobalised at
the same time. The big numbers tell the story. Sri Lanka is in 99th
place in the World Bank's Doing Business Index – OK by South Asian
standards, but terrible by the standards of all but low-income countries
in East Asia. Trade (imports and exports) has shrunk to little over 50
per cent of GDP – extraordinarily low for an island of 20 million
people. Sri Lanka's export share in global markets has shrunk to 0.05
per cent. East Asian countries with much larger populations, such as
Vietnam, Thailand and South Korea, have trade-to-GDP ratios of more than
100 per cent. Taiwan and Malaysia, with comparably small populations to
Sri Lanka, have trade-to-GDP ratios of 140 per cent and 160 per cent
respectively. Correspondingly, Sri Lanka receives about USD 1.5 billion
annually in FDI – less than 2 per cent of GDP. Again, this is not bad by
South Asian standards but pathetic by East Asian standards. Apart from
hotel and real-estate projects, FDI has practically dried up.
The
upshot is that, except for garments, Sri Lanka is absent from the global
value chains (GVCs) that are key drivers of productivity, employment
and growth. East Asian success owes much to insertion in these value
chains in goods and services. ICT is the core of GVCs in East Asia, but
ICT accounts for barely 5 per cent of Sri Lankan exports.
Sri Lanka's poor globalization performance is one of the main
reasons why it has fallen so far behind the East Asian Miracle economies
since the 1960s. Back in 1960, Sri Lankan living standards were higher
than in South Korea and Taiwan; they were on a par with Malaysian living
standards well into the '60s. But now they are 4-5 times lower than
they are in Malaysia, and much further behind South Korea. That condemns
Sri Lankans – not the rich, but the rest – to life-choices and
life-chances – employment, housing, health care, education, spending
power – those are a fraction of those in most of East Asia.
What has
changed since the January presidential election that toppled the
Rajapaksas? The authoritarian slide has been arrested, and the country
is moving towards political liberalism. Sinhala-Buddhist chauvinism has
been tempered, and early moves made to redress the grievances of the
minorities, particularly Tamils in the north and east. And foreign
policy has been rebalanced, repairing relations with the West and India
while attempting not to alienate China.
But the economy remains a
black spot. The Rajapaksas' illiberal economic policies have not been
reversed. On the contrary, the UNP-led government's first budget
contained spending giveaways, price controls and other gimmicky
interventions. The central bank has printed money freely.Opposition
forces united to defeat Mr Rajapaksa, but they had no consensus on
market reforms, and lacked a majority in Parliament. Ahead of the
parliamentary election, Wickremesinghe campaigned for big market reforms
under the label of a "social market economy". Now he has a mandate for
economic reform – not a decisive one, but a mandate nonetheless.
Pro-market
reforms are imperative for sustained growth and prosperity – and to
attain key non-economic objectives. Previous bouts of economic
collectivism, going back to the 1950s, ruined the economy, destabilized
politics,damaged relations with the West, and stoked ethnic conflict.
Lack of economic opportunity drove unemployed Sinhalese and Tamil youth
into the arms of violent militant groups. By the 1970s, Sri Lanka's
first friends abroad were Mrs Gandhi, Marshal Tito, Colonel Gaddafi,
Brezhnev and Chairman Mao.
A prospering, globalized market economy is
the sturdiest foundation for a genuinely open society – for
constitutional liberalism, the rule of law, ethnic peace and balanced
international relations. Without it, all else fails. It has to be the
government's top priority. And Wickremesinghe needs to proceed fast
before his window of opportunity closes. To mention the title of one of
Lenin's famous pamphlets – What is to be done?
What needs to be done?
A new global economic strategy has to be
part of a bigger market reform package. The Pathfinder Foundation
provides a sensible checklist.
Most urgent is macroeconomic
stability. Continuing macroeconomic volatility erodes export
competitiveness (through inflation and an appreciating real exchange
rate) and leads to import restrictions to protect the balance of
payments. It will derail liberalization attempts, as it has done before.
Now, fiscal and current-account deficits are widening, the rupee is
under pressure, and the debt pile-up is unsustainable. Sri Lanka looks
like it is heading for another balance-of-payments crisis. This could
require another IMF bailout. With or without a bailout, taxation and
expenditure need radical surgery to prevent further public-debt
accumulation and make debt financing more sustainable. The printing
press must be stopped rather than continuing to fund government
profligacy. The good thing about a looming crisis is that it can focus
attention and force corrective action. As Dr. Johnson quipped, "When a
man knows he is going to be hanged in a fortnight, it concentrates the
mind wonderfully."
Second, there should be an overhaul of domestic business
regulation -- a bonfire of red tape to liberate the private sector. This
should focus on product and factor (land, labour and capital) markets.
Licensing needs to be simplified radically. Wickremesinghe's idea to
have just two or three agencies responsible for issuing permits, with a
40-day deadline for approvals, would be a good start. More complex,
politically sensitive reforms – to buy and sell land, hire and fire
labour, and deepen the capital market – need to follow.
Third,
education reform is needed to upgrade knowledge and skills, given that
Sri Lanka is now a lower middle-income country that cannot compete with
cheap labour. Fourth, bloated, loss-making public-sector enterprises
should be restructured and downsized. That should include partial or
full privatisations, and more reliance on public-private partnerships.
And there are other important reforms besides.
Now turn to a new global economic strategy. The overall objective
should be to make Sri Lanka the most open, globalized and competitive
economy in South Asia by 2020-2025. By then it should be integrated into
GVCs, and be an Indian Ocean hub for trade, investment and foreign
talent. This would be a reconnection with Sri Lanka's ancient history,
when its ports – Manthai, Gokanna, and later Colombo and Galle – were
magnets for seagoing trade, halfway between the Arabian Gulf and
Southeast Asia and on India's doorstep.
Such a vision is no use
without making a powerful case for free trade. This has never really
been done in Sri Lanka, leaving the field free for protectionist
nostrums. Openness – to imports, exports, foreign investment and foreign
talent – allocates resources more efficiently, exposes the economy to
best international practice, speeds up technology transfer, drives
productivity growth, creates better companies, jobs and skills, and is a
boon to consumers. This is not just theory: it is, overwhelmingly, the
track record around the world. No country has prospered without being
open to commerce with the rest of the world; and the more open the
country, the more it has prospered. This is especially important for
small countries that do not have large internal markets for growth.
Age-old mercantilist myths must also be demolished. One is that
"exports are good but imports are bad". How often one hears the
refrain:"the government must promote exports, but it must also restrict
imports to nurture infant industries and protect the balance of
payments". This is nonsense. A tax on imports is a tax on exports: an
import tax boosts non-tradable goods and services at the expense of
tradables, including exports. That might sound abstract, but the world
of GVCs, the driving force of early 21st-century international trade,
makes it concrete. In GVCs, exports rely on imports of parts and
components, and of assorted services: without an open border to imports,
there is no export competitiveness, and no insertion into GVCs. Apple's
products – iPods, iPhones, iPads and Macs – make that crystal-clear.
A
second myth is that export restrictions are needed to encourage
processing activity at home, which promotes value-added exports. This
has failed wherever it has been tried. It limits export potential,
cossets inefficient domestic firms, breeds corruption and raises prices.
One of Sri Lanka's most idiotic trade regulations is the export tax on
tea and rubber. In the case of tea, revenues from the cess are used to
promote exports. In other words, exports are first restricted, then, via
a cumbersome bureaucracy, revenue is used to market Ceylon Tea abroad.
Protectionism,
almost always, is mind-bogglingly stupid. It also favours a small knot
of politically well-connected producers at the rest of society's
expense. As John Stuart Mill said, protectionism is an "organized system
of pillage of the many by the few". And beware when patriotism is
invoked and protectionism wrapped up in the national flag. That, said
Mill, "is the last resort of the scoundrel".
Next, the government must set key targets to achieve its global
economic objectives. These should be ambitious but realistic, with a
five-to-ten year timeframe. I suggest five.
n Trade: The trade-to-GDP
ratio should at least double to over 100 per cent by 2020-2025. This
would take Sri Lanka out of the South Asian second division and into the
East Asian first division. It would mean at least a tripling of export
volumes. Given the connection between exports and imports, especially in
GVCs, imports would rise correspondingly. That should be welcomed, not
disparaged.
n Export markets: The USA and EU will remain the two key
export markets, though with a diversified export basket – not only
garments and plantation crops. India should be a much bigger export
market, especially the four states of South India with a population of
300 million. Southeast Asia and the Far East, including China, should
also be bigger export markets. But the Big Three will remain the EU, USA
and India.
n FDI: The FDI-to-GDP ratio should at least double to 4-5 per
cent by 2020. Sri Lanka should get about USD 5 billion in inward
investment annually. And it should be in manufacturing, assorted
services and agro-processing, in addition to hotels and real estate. Sri
Lanka should play host to a wide array of multinationals from the USA,
Europe, India, ASEAN and the Far East.
n GVCs: Sri Lanka should be
embedded in GVCs beyond garments. That will happen if the
afore-mentioned trade and FDI targets are achieved. Multinationals with
export operations will occupy manufacturing niches. But I do not expect a
manufacturing take-off, since Sri Lanka lacks a labour-cost advantage
(for labour-intensive production) and lags behind East Asian countries
in education, skills and connectivity (for mid-value production). Rather
the greater promise lies in services. ICT services should expand,
though its potential is limited by Sri Lanka's small skill pool. But the
biggest prize is for Sri Lanka – Colombo in particular – to become a
logistics hub. This would be centred on the port and perhaps the
airport, with feed-in from a cluster of transport, financial and
business services. These GVC niches depend critically on Sri Lanka
linking up with value chains in South India.
n Domestic
competitiveness: Attracting international trade and FDI depends as much
on improving the domestic business climate as it does on trade and
investment policies in the narrow sense. Sri Lanka should be in the top
50 of the World Bank's Doing Business Index by 2020. A domestic
deregulation agenda should be geared to that end. Corresponding targets
should be set for other global scorecards that foreign investors track
keenly, such as Trading Across Borders (a Doing Business sub-index), the
World Bank's Logistics Performance Index, the World Economic Forum's
Global Competitiveness Index and its Enabling Trade Index, and the Simon
Fraser Institute's Economic Freedom of the World Index.
Overall, these targets should be aimed at lifting Sri Lanka out
of a South Asian bracket and into an East Asian bracket of comparison,
especially with foreign traders and investors in mind. Hence Sri Lanka
should benchmark itself against middle and upper-income East Asian
countries. That is where most of the relevant best-practice examples
lie. I would add one other benchmark: the five best-performing states in
India, including Tamil Nadu and Gujarat. They are the locus of India's
economic reforms and its globalisation. Sri Lanka should track these
states carefully.
How to do it?
Let's move to concrete measures to
meet economic targets. The watchword should be: KEEP IT SIMPLE. The
measures needed are not rocket science; they should not be
overcomplicated. The mantra should be: Deregulate as much as possible to
expand individuals' economic freedom and unleash the animal spirits of
entrepreneurs. And simplify rules of the game for market actors.
"Getting the basics right" – prudent fiscal and monetary policies, a
stable exchange rate, domestic competition, openness to trade and
foreign investment, improving education, skills and infrastructure – is
the essence of the East Asian Miracle. That is what Sri Lanka should
emulate. And simplicity is as important as anything else.
n Trade: There should be a bonfire of cesses and non-tariff
barriers on imports and exports as soon as possible. Exports should face
no restrictions except on narrow national-security grounds. Import
protection should be confined to ad valorem tariffs. But the tariff
structure needs to be simplified radically, and average nominal tariff
protection more than halved. Sri Lanka should move to a uniform tariff
of 5 per cent on industrial goods by 2020. All other industrial goods
should enter duty-free. This is what Chile did, with spectacular
results. Why a modest uniform tariff? First, it is the best way of
removing distortions, including corruption, arising from different
tariffs on different products and at different stages of production. It
has the cardinal virtue of simplicity. And second, East Asian
trade-weighted import tariffs average 5 per cent or less – which is
where Sri Lanka should be.
The obvious objection to tariff-slashing
is that the government would lose much-needed revenue. That is why
tariff cuts should be accompanied by tax reform, so that more revenue is
raised from domestic taxes, preferably a simple consumption tax.
Furthermore, evidence from other countries shows that revenue loss is
minimized because simple, low tariffs increase trade volumes and provide
the incentive for previously illicit trade to become licit. In many
instances, the effect is to increase, not decrease, revenues.
Sadly, it is politically impossible to reduce agricultural
protectionism in the same way. But the government should move to reduce
it gradually. Import protection, price controls and subsidies to
agriculture condemn a large percentage of the population to living in a
low-productivity welfare trap, while forcing up taxes and consumer
prices.
Finally, customs administration needs to be simplified
radically to reduce paperwork, delays at the border and corruption.
Studies show these trade costs are higher than tariffs. 'Automation' and
'automaticity' should be the watchwords. Many customs procedures could
be put online, with more automatic approval procedures. Where checking
is required, there should be tight deadlines for inspection and
approval. There are several best-practice models that Sri Lanka could
follow, including APEC's Single Window procedure.
n FDI: Sri Lanka has a fairly liberal regime on inward investment
by developing-country standards. Full foreign ownership and
non-discriminatory treatment are allowed in many sectors. But the
government should go further. All sectors should be fully open except
for a short negative list.
That leaves the question of tax incentives
and the role of the Board of Investment. Tax holidays have dominated
investment policy since the economy was opened up in the late 1970s. The
results have disappointed. Indeed, tax incentives have probably done
more harm than good. They have been highly discretionary – a boon for
corrupt politicians, officials and shady businessmen. This reached its
nadir under the Rajapaksas. The BOI was sidelined. But it has long been
politicized, overstaffed and inefficient.
Investment policy needs a
thorough reorientation. There should be much less emphasis on tax
incentives. They should be simplified, with less room for the
bureaucratic and political discretion that invites delays and
corruption. Rather the emphasis should be on "getting the basics right" –
to attract investment with a welcoming domestic business climate with
the pro-market policies I described earlier. That is far more important
than selective incentives. Where investment policy can add value is by
providing the foreign investor with a genuine "one-stop-shop" – a
statutory agency that advertises Sri Lanka as an investment destination
abroad, and deals with paperwork and approvals so that the investor's
path to operating a local business is smooth and seamless. That should
be the BOI's central function, rather than dishing out incentives as a
'one-more-stop-shop' among the thicket of ministries and agencies the
investor has to deal with.
Singapore is often singled out as the gold standard in attracting
inward investment; its Economic Development Board (EDB) is considered
the paragon of investment agencies. That is merited. But it is important
to learn the right lessons from this Singapore experience. From the
1960s, Singapore has attracted multinationals chiefly by getting the
basics right; tax incentives have not been the main factor. The EDB does
grant incentives, but its success comes down to being an excellent
one-stop-shop.
n Industrial policy: In Sri Lanka, as elsewhere,
governments are obsessed with targeting particular sectors and firms.
Supposedly intelligent, disinterested politicians, officials and experts
promote this-or-that sector or firm to be a hub of productive activity
and for export success. This is the lesson they draw from
"industrial-policy success" in Japan, South Korea and other East Asian
economies. But this is wrong. Industrial policy has a decidedly mixed
record in East Asia, and been an abysmal failure in South Asia, Africa
and Latin America. To repeat, the East Asian Miracle was much more about
getting the basics right than anything else.
Sri Lankan governments
have wasted enormous amounts of taxpayers' money, stoked corruption and
exacerbated market distortions with industrial policy. To borrow F.A.
Hayek's term, it is a 'fatal conceit' to assume that politicians and
bureaucrats have better market sense than entrepreneurs and corporate
executives. The lesson, therefore, is to cut back on 'vertical'
industrial policy that targets selected sectors and firms with specific
measures – and focus instead on 'horizontal' (economy-wide) policies to
get the basics right. The government could help with 'soft' industrial
policy – marketing campaigns abroad, organising exhibitions and fairs,
one-stop-shops for investors, providing infrastructure through
industrial and science parks, and even creating special economic zones
(SEZs). But that should be the extent of it. And one should be cautious
with SEZs: numerous small SEZs end up as tax boondoggles rather than
hubs of enterprise, as the Indian experience shows.
n GVCs: Inserting Sri Lanka into GVCs can only be done by
attracting multinationals who bring in big-ticket investment. They
favour countries with open borders to imports, exports and investment.
But the right trade and FDI policies are only elements of a package
needed for GVCs. A welcoming domestic business climate is as important.
That includes strong intellectual-property protection; transparent and
competitive public-procurement regulations; ready availability of land;
good infrastructure; a flexible labour market; and uncomplicated tax
regulations, licensing procedures and work permits for foreign
nationals. In other words, trade, investment and domestic
competitiveness policies must be joined up. That is a huge challenge –
even more so for a government splintered into scores of ministries and
regulatory agencies.
n Trade negotiations: All measures recommended above should be
implemented unilaterally, not, in the first instance, through trade
negotiations. They should proceed regardless of what other countries do.
I call this the Nike strategy: 'Just Do It!' This will benefit Sri
Lanka by signalling it is wide open for business. So why wait for
cumbersome, long-drawn-out international negotiations where bargaining
chips are exchanged? Sri Lanka will lose precious time and benefits if
it delays liberalization in order to extract concessions from
negotiating partners. That would be a classic case of shooting oneself
in the foot. East Asian countries did the bulk of their trade and FDI
liberalization unilaterally, not through the WTO and free trade
agreements (FTAs). That is how they inserted themselves into GVCs. Sri
Lanka should be no different.
International trade agreements, however, can be a helpful
auxiliary to unilateral liberalization. If done well, they lock in and
extend domestic reforms, as well as open export markets. But they should
never be seen as a substitute for unilateral reforms. So what should be
Sri Lanka's trade-negotiations strategy? It should be ambitious but
realistic. Let's look first at FTAs.
n India: The government should
aim to complete the Indo-Lanka CEPA as soon as possible, and be
ambitious about market-opening on both sides. But India is generally
protectionist, and the CEPA will inevitably be partial, with lots of
exemptions and loopholes. Like other Indian FTAs, it will be
'trade-light' by international standards.
Ideally, there would be
progress on a South Asian Free Trade Area (SAFTA). But it has long been
stalled; absent Indian leadership, nothing will change. So Sri Lanka
should not waste time on SAFTA, unless India becomes serious about
regional liberalization.
n USA and TPP: The government should aim for an FTA with the USA.
This should be its top priority for trade negotiations. Why? Because
the USA is Sri Lanka's second biggest export market;it is and will
remain the most innovative economy in the world; it is home to the
world's best multinationals who can integrate Sri Lanka into GVCs,
particularly in services; and, geopolitically, it would cement an
alliance with the world's only superpower and 'balancing power' in Asia,
which is also a civilized liberal democracy. Also, US FTAs, unlike
Asian FTAs, are serious: they are comprehensive and deep. They demand
substantial liberalization in goods, services, investment and public
procurement, underpinned by strong disciplines (also on product
standards, intellectual property and subsidies),and enforced by strong
dispute-settlement procedures. Unlike FTAs with China, India and other
Asian partners, an FTA with the USA would spur domestic market reforms
and expand competition in the economy, in addition to gaining extra
access to the US market. But negotiating an FTA with the USA is usually
excruciating and often induces a domestic political backlash. So it is
important to do a careful cost-benefit analysis before proceeding.
However, there may be no need to negotiate a bilateral FTA with
the USA. It and ten other Asia-Pacific countries are in the final stages
of negotiating the Trans-Pacific Partnership (TPP), intended to be an
ambitious FTA covering 40 per cent of the world economy. If and when the
TPP is concluded, Sri Lanka should consider lodging an application to
join it. That would obviate bilateral FTAs with other potentially
important trading partners such as Japan, Australia, Malaysia and
Singapore. And it would be a great signal to foreign investors: Sri
Lanka would be the first South Asian country in the TPP.
-EU: The
government should aim for an FTA with the EU as well. EU FTAs are
relatively strong, though not as strong as US FTAs. The EU has a
long-stalled FTA negotiation with India, so an EU-Lanka FTA could be the
EU's first in South Asia.
-China: The government should complete the China-Lanka FTA. But this will be trade-light, like China's other FTAs.
-Prioritization: It is imperative the government does not agree
to FTA negotiations with all and sundry. Rather its priorities should be
India, the USA (ideally via the TPP) and EU. For one thing, Sri Lanka
has hardly any trade-negotiating capacity. It will have to be built up
virtually from scratch; and it will have more than enough on its plate
with India, TPP, the EU and China.
-WTO: The Doha Round has been
stalled for many years, and action on trade negotiations shifted to FTAs
over a decade ago. But a multilateral rules-based trading system is
still important, especially for small economies like Sri Lanka. So it
should not disengage from the WTO. On the contrary, it should re-engage,
only this time with a different strategy. It should break ranks with
India and other Third World foot draggers, and join forces with the OECD
and emerging-market countries (like Chile, Colombia, Costa Rica,
Singapore and Hong Kong) that favour liberalisation and pro-market
rules. In this spirit, Sri Lanka should join the Information Technology
Agreement, which has zero tariffs on IT goods, as well as the
plurilateral TISA negotiations to liberalize trade in services.
-Process issues: Having the right ideas and policies is one
thing. But, ultimately, success depends on effective implementation. The
national unity government's monstrously large Cabinet does not augur
well. On the other hand, it was the right decision to create a new
Ministry of International Trade and Investment, and to have a senior
figure enjoying the Prime Minister's full confidence at its helm. Trade
and FDI are joined at the hip in today's world of GVCs, so they should
be housed in a single ministry. All relevant statutory boards such as
the BOI and EDB should come under this Ministry.
The new minister
faces three challenges: 1) formulating the right policies; 2) building
up in-house capacity for policy implementation and trade negotiations;
and 3) sourcing good-quality policy research and analysis. The task is
daunting, for all this will have to be built up from scratch. Foreign
governments and donor agencies can assist with trade capacity-building
programmes. And I hope the Institute of Policy Studies will feed in
useful policy research and analysis.
-Reform politics: The politics of trade and other economic
reforms will be extremely difficult. Reforms will have to be sequenced
carefully, proceeding from "easy" to "hard". The next few months and
first couple of years should prioritise big reforms to cut red tape and
liberalise international trade and investment. Tax and expenditure
reforms should have short-term and medium-term components. Public-sector
and agricultural reforms will have to be last in the queue, given their
extreme political sensitivity.
Ultimately, reforms depend on
Wickremesinghe – Sri Lanka's only senior politician who gets the case
for markets and globalization – and a handful of clean, competent
professionals in his inner circle. It is vital they control the major
reform areas. The danger is that anational unity government, full of
old-style populist politicians, will dilute and slow down reforms,
thereby perpetuating Sri Lanka's pattern of squandering heaven-sent
opportunities.
Conclusion: a plea for economic liberalism
Economic
collectivism is the central source of Sri Lanka's post-independence
failure. It has bred too much politics at all levels of society. It has
metastasised a political class that has served the country so
disastrously since independence. Political connections are needed to get
even the most basic things done – fine for the rich and influential,
but terrible for everyone else, particularly the poor and excluded.
Very few Sri Lankan politicians, intellectuals and even
business people understand the damage done by collectivist policies and
the importance of economic freedom. There is a growing constituency for
liberalism in politics, but still a tiny one for economic liberalism.
But what Sri Lankans need most is economic freedom – the freedom to
produce and consume goods and services. This is the kind of freedom that
affects ordinary people's daily lives most. That demands better rules
of the game for markets and competition, and much less room for
politicians to control people's livelihoods.
This is what Adam Smith
had in mind when he called for "natural liberty, upon the liberal plan
of freedom, equality and justice" almost two-and-a-half centuries ago.
In his Wealth of Nations, he conceived of government as an effective
umpire, policing the rule-framework of a free market economy. He
assailed governments that were also players in the market, distorting
the game and compromising their umpiring role. As the German Sociologist
Alexander Rüstow put it, the state should be 'small but strong',
performing its legitimate limited functions well. But the modern state
has become 'big and weak', intervening badly left, right and centre
while neglecting its core functions.
A new global economic strategy
for Sri Lanka should be seen in this frame. It should be part of a
bigger agenda to limit the state and expand economic freedom. Without
greater economic freedom, Sri Lanka will never achieve its potential for
prosperity with political stability, the rule of law and ethnic
harmony. (
Razeen Sally)
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