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by R.M.B Senanayake
Last week Mrs. Lakshmi Dias Bandaranaike, widow of the late Felix Dias Bandaranaike, the dynamic and well known political leader, mentioned to me that their former constituents in Dompe were much better off today and that they proffered one thousand rupee notes when making purchases. Yes, people are better off during the last five years as economic growth was good except in 2009. But this prosperity included many subsidies. People have free education, free health care, the fertilizer subsidy, subsidies for petroleum products, for electricity, water and other hidden subsidies when government institutions which provide a service like the postal department do not recover the costs.
Some economists might say that we ran a false economy where prices did not reflect costs, distorting the allocation of resources in favor of consumption rather than investment, in favor of imports rather than domestic production. It is not that we argue for protectionist tariffs for local goods but that the exchange rate should not be over-valued and place them at a disadvantage in competition with imported goods. The highly over-valued exchange rate enabled the pubic to buy imported goods cheap by almost 15% judging by the level that the rupee has found after it was floated in February 2012. The question is whether this prosperity is sustainable.
Wrong economic ideas
Herbert Frankel of Oxford University once said that there is a tendency in underdeveloped countries to think that their problems will be solved if they grow physically, i.e., if they just build enough new factories or engage in new activities, regardless of whether they will be profitable or not, protecting them artificially through protective duties or subsidies, and thereby in reality decreasing instead of increasing the income and well-being of the people. We still follow outmoded economic doctrines like Socialism despite the rest of the world giving it up. We are still suspicious of the free market price system and prefer to have administered prices on the ground that market prices are unfair to the poor. The private sector has no confidence in administered prices knowing that they can be changed without notice. So they will not invest in developing plant and machinery to cope with higher supply. The Milco Chairman has said that his plant and machinery was outmoded and lacks the capacity to cope with more supplies. But why didn’t he re-invest or invest to expand? Dairy farmers angrily threw their milk down the drain. Earlier paddy farmers who could not sell their produce set their grain ablaze. Let the free market price system determine prices if there is to be private sector investment and development.
Perhaps because of our incapacity to develop original thinkers, we imitate the more prosperous nations in many matters - not only in their many good features but also in their dubious and even frankly bad ones. Outmoded ideas are what guide the policies of our leaders. Our political leaders copied the Welfare State because it was then fashionable in Britain after the war with the Beveridge Plan touted by the Labor Party. So we introduced free education for all ignoring the unaffordable escalation of costs that would arise with the increase in population. We still pretend that it is providing equality of opportunity for all when admission to the really good schools is limited to those with money and social and political connections. We propagate this myth in the media so that the people will raise a hue and cry if the free education is tampered with.
This system of free State schools has bred a huge tuition industry where school teachers reap money to teach their wards after school hours instead of during their school hours. Our trade unionists and labor leaders still mouth the Marxist slogans of exploitation of workers by capitalists and instead of promoting co-operation between employees and management create strife and discord. We still continue to have many strikes particularly among public sector workers. We have participation of unions in politics who are often accused of staging strikes to embarrass any government they dislike. We have a highly overprotective Labor Law which discourages foreign investment in the country but since the political leaders believe in their own Socialist lies, do nothing to change it. So the country pays a heavy price for strikes and labor disputes and cannot attract adequate foreign investment.
We have come to accept wages as determined by the cost of living rather than being linked to productivity which alone make it possible for private sector companies to remain competitive in a global environment. We have minimum wages, and continuous pressure by unions to raise nominal wage rates, supposedly "to improve workers’ living conditions" and make "a more just" distribution of national income. Our political leaders believe in price control and administered prices supposedly to protect the poor. But price control does not resolve the problem whereas free market prices will do so after a time, even when there is a temporary imbalance between supply and demand which caused the price to rise.
Despite our prosperity thousands of our work force, men and women are migrating abroad to look for better paying jobs. Are our wages too low? Is our wage level inconsistent with the status of a lower middle income country? It would seem so and the lack of a free labor market which protects excessively those in employment at the expense of the unemployed is the cause of a totally distorted wage structure.
Consider the Agricultural sector. We are a country where crops grow easily. Traditionally we are an agricultural country. But over the years the agricultural plots have become smaller and smaller through subdivision. Hence the land is not able to support higher living standards for the farmers and many have given up farming and migrated to urban areas to do government jobs or be self employed in the informal sector creating huge social problems. Our post Independence political leaders opened up the Dry Zone which had gone to jungle after the Sinhalese kingdoms had collapsed. But they insisted on restricting the rights to dispose of the land and prevented the emergence of a free land market.
Free lunch syndrome
There is the implicit belief in a free lunch and that the government has no lack of money. This mentality of having a free lunch is growing daily and creating all sorts of difficulties for governance. The people have become accustomed to not paying for economic goods and services or to paying less than their cost, so that the inevitable rise in prices or fares becomes a political instead of an economic question. So there is resistance to any increase in prices. This leads to a very serious political situation because the government, victim of the same mentality, neither speaks out clearly nor acts forcibly while the Opposition continues to pin point the price increases as the work of a heartless government. This makes it difficult for any government to deal with economic problems that arise in a changing global economic environment.
Middle-of-the-road
inflation
In the problem of inflation, we occupy a middle position; we are not among the worst offenders. But we do not belong within the better group of nations with low inflation- low being defined as 2-3%. We have had continuous inflation since the 1960s when the then Minister of Finance T.B Ilangaratne introduced deficit finance for the first time. Since then prices have been steadily going up although lagging behind the increase in the supply of money according to the official price indices.
Our inflation has sometimes proceeded at a more rapid pace, as it did in the early 1980s and sometimes more slowly during periods of UNP rule when orthodox economic management prevailed. Nevertheless, the fact is that we have been unable to either stop inflation or even to approach a rate of "3 per cent a year" which is looked on by some economists as not too harmful.
Underlying Causes of inflation:
1. The Welfare State
2. The power of trade unions
3. The desire for rapid economic
development by political lead ers.
Our budget has been unbalanced over the last 50 years. We also have dozens of State Corporations and public sector agencies providing economic goods or services free or at below costs, costs that are often high because of waste and extravagance. Some like Sri Lankan Airlines or Mihin Air must be permanently subsidized to continue; some of these agencies go in for extensive development and investment plans with public money. In many cases, the Bank of Ceylon has had to grant loans and absorb their losses. Naturally, it also helps to sustain them by pegging their prices.
The labor unions exert constant pressure. Collective labor agreements have to be revised every two years. In general, unions succeed in securing approximately a 15 per cent rise every time. Of course, this is not a direct cause of inflation. It is still necessary for the monetary authorities to add to the money supply for it to be inflationary.
We go for mega projects rather than the small projects where economic benefits are faster and more likely to benefit the small man. A large infrastructure investment program can be carried out without inflation only if the private savings increase to offset the government dis-saving due to investment.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=51745
Last week Mrs. Lakshmi Dias Bandaranaike, widow of the late Felix Dias Bandaranaike, the dynamic and well known political leader, mentioned to me that their former constituents in Dompe were much better off today and that they proffered one thousand rupee notes when making purchases. Yes, people are better off during the last five years as economic growth was good except in 2009. But this prosperity included many subsidies. People have free education, free health care, the fertilizer subsidy, subsidies for petroleum products, for electricity, water and other hidden subsidies when government institutions which provide a service like the postal department do not recover the costs.
Some economists might say that we ran a false economy where prices did not reflect costs, distorting the allocation of resources in favor of consumption rather than investment, in favor of imports rather than domestic production. It is not that we argue for protectionist tariffs for local goods but that the exchange rate should not be over-valued and place them at a disadvantage in competition with imported goods. The highly over-valued exchange rate enabled the pubic to buy imported goods cheap by almost 15% judging by the level that the rupee has found after it was floated in February 2012. The question is whether this prosperity is sustainable.
Wrong economic ideas
Herbert Frankel of Oxford University once said that there is a tendency in underdeveloped countries to think that their problems will be solved if they grow physically, i.e., if they just build enough new factories or engage in new activities, regardless of whether they will be profitable or not, protecting them artificially through protective duties or subsidies, and thereby in reality decreasing instead of increasing the income and well-being of the people. We still follow outmoded economic doctrines like Socialism despite the rest of the world giving it up. We are still suspicious of the free market price system and prefer to have administered prices on the ground that market prices are unfair to the poor. The private sector has no confidence in administered prices knowing that they can be changed without notice. So they will not invest in developing plant and machinery to cope with higher supply. The Milco Chairman has said that his plant and machinery was outmoded and lacks the capacity to cope with more supplies. But why didn’t he re-invest or invest to expand? Dairy farmers angrily threw their milk down the drain. Earlier paddy farmers who could not sell their produce set their grain ablaze. Let the free market price system determine prices if there is to be private sector investment and development.
Perhaps because of our incapacity to develop original thinkers, we imitate the more prosperous nations in many matters - not only in their many good features but also in their dubious and even frankly bad ones. Outmoded ideas are what guide the policies of our leaders. Our political leaders copied the Welfare State because it was then fashionable in Britain after the war with the Beveridge Plan touted by the Labor Party. So we introduced free education for all ignoring the unaffordable escalation of costs that would arise with the increase in population. We still pretend that it is providing equality of opportunity for all when admission to the really good schools is limited to those with money and social and political connections. We propagate this myth in the media so that the people will raise a hue and cry if the free education is tampered with.
This system of free State schools has bred a huge tuition industry where school teachers reap money to teach their wards after school hours instead of during their school hours. Our trade unionists and labor leaders still mouth the Marxist slogans of exploitation of workers by capitalists and instead of promoting co-operation between employees and management create strife and discord. We still continue to have many strikes particularly among public sector workers. We have participation of unions in politics who are often accused of staging strikes to embarrass any government they dislike. We have a highly overprotective Labor Law which discourages foreign investment in the country but since the political leaders believe in their own Socialist lies, do nothing to change it. So the country pays a heavy price for strikes and labor disputes and cannot attract adequate foreign investment.
We have come to accept wages as determined by the cost of living rather than being linked to productivity which alone make it possible for private sector companies to remain competitive in a global environment. We have minimum wages, and continuous pressure by unions to raise nominal wage rates, supposedly "to improve workers’ living conditions" and make "a more just" distribution of national income. Our political leaders believe in price control and administered prices supposedly to protect the poor. But price control does not resolve the problem whereas free market prices will do so after a time, even when there is a temporary imbalance between supply and demand which caused the price to rise.
Despite our prosperity thousands of our work force, men and women are migrating abroad to look for better paying jobs. Are our wages too low? Is our wage level inconsistent with the status of a lower middle income country? It would seem so and the lack of a free labor market which protects excessively those in employment at the expense of the unemployed is the cause of a totally distorted wage structure.
Consider the Agricultural sector. We are a country where crops grow easily. Traditionally we are an agricultural country. But over the years the agricultural plots have become smaller and smaller through subdivision. Hence the land is not able to support higher living standards for the farmers and many have given up farming and migrated to urban areas to do government jobs or be self employed in the informal sector creating huge social problems. Our post Independence political leaders opened up the Dry Zone which had gone to jungle after the Sinhalese kingdoms had collapsed. But they insisted on restricting the rights to dispose of the land and prevented the emergence of a free land market.
Free lunch syndrome
There is the implicit belief in a free lunch and that the government has no lack of money. This mentality of having a free lunch is growing daily and creating all sorts of difficulties for governance. The people have become accustomed to not paying for economic goods and services or to paying less than their cost, so that the inevitable rise in prices or fares becomes a political instead of an economic question. So there is resistance to any increase in prices. This leads to a very serious political situation because the government, victim of the same mentality, neither speaks out clearly nor acts forcibly while the Opposition continues to pin point the price increases as the work of a heartless government. This makes it difficult for any government to deal with economic problems that arise in a changing global economic environment.
Middle-of-the-road
inflation
In the problem of inflation, we occupy a middle position; we are not among the worst offenders. But we do not belong within the better group of nations with low inflation- low being defined as 2-3%. We have had continuous inflation since the 1960s when the then Minister of Finance T.B Ilangaratne introduced deficit finance for the first time. Since then prices have been steadily going up although lagging behind the increase in the supply of money according to the official price indices.
Our inflation has sometimes proceeded at a more rapid pace, as it did in the early 1980s and sometimes more slowly during periods of UNP rule when orthodox economic management prevailed. Nevertheless, the fact is that we have been unable to either stop inflation or even to approach a rate of "3 per cent a year" which is looked on by some economists as not too harmful.
Underlying Causes of inflation:
1. The Welfare State
2. The power of trade unions
3. The desire for rapid economic
development by political lead ers.
Our budget has been unbalanced over the last 50 years. We also have dozens of State Corporations and public sector agencies providing economic goods or services free or at below costs, costs that are often high because of waste and extravagance. Some like Sri Lankan Airlines or Mihin Air must be permanently subsidized to continue; some of these agencies go in for extensive development and investment plans with public money. In many cases, the Bank of Ceylon has had to grant loans and absorb their losses. Naturally, it also helps to sustain them by pegging their prices.
The labor unions exert constant pressure. Collective labor agreements have to be revised every two years. In general, unions succeed in securing approximately a 15 per cent rise every time. Of course, this is not a direct cause of inflation. It is still necessary for the monetary authorities to add to the money supply for it to be inflationary.
We go for mega projects rather than the small projects where economic benefits are faster and more likely to benefit the small man. A large infrastructure investment program can be carried out without inflation only if the private savings increase to offset the government dis-saving due to investment.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=51745
