By Sunil Abhayawardhane
While delivering his budget speech in parliament, President Ranil Wickremesinghe asked perhaps the most important question he could have: “Where did we go wrong?”
President Wickremesinghe asked the same question in 1989, when he was the Minister of Industries. Though the answer to it is as self-evident as it was back then, however, not much has been done to rectify the situation. No lessons have been learnt and the same mistakes are being repeated over and over. The simple truth seems to be that while President Wickremesinghe has had over 30 years to study the issue, he has not properly identified the causes. To this end, my essay examines four process which have been neglected by successive government to such an extent that it has contributed to the mess we are in: state intervention, industrialization, development banking, and national planning.
If the country’s main problem is a negative balance of payments, the budget needs to formulate a feasible solution. Yet though the focus of the budget is on “export oriented competitive economy”, there is no further mention of how this is to be achieved.
There is a catch to the term, moreover: “competitive” is used here in the context of eliminating state intervention in industry. This is where the ideological bias of the past shows its face, even as the President calls for a new thinking. Neoliberal thinkers are opposed to state intervention. They believe in the magic of the market, though it has been proved again and again that markets do fail.
It would be interesting to highlight our own experience with regard to state intervention. The only successful example of a local industry from the past four decades has to be the garments sector, whose development came about through intervention on two fronts: on the international front, the Multi Fiber Agreement, and on the local front, the 200 Garment Factory Program.
A key mistake made back then was to liberalize without assisting local import substitution industries to become competitive. Industries which, as the President observed, had been starved of capital for seven years (1970-1977) were asked overnight to compete with foreign imports.
Indeed, one should be aware that intervention, used where it should be, turns out to be beneficial for the economy. Many examples could be drawn from the High Performing Asian Economies (HPAEs), if one wishes to. Most misunderstand intervention as establishing State Owned Enterprises. But this is not the rationale for intervention. Intervention involves creating the necessary atmosphere to encourage entrepreneurs to take to enterprise whenever market forces do not. It is only if the private sector does not take up the role, or if they are of strategic importance, that SOEs should be set up.
More worryingly, the allocation of funds in the present budget does not indicate a focus on industrial development. Education has faced cuts while defense expenditure has been raised. New Industrial Zones are proposed, while some already set up have been closed. This dovetails with another issue. Interest payments on local borrowings are almost double those of public investments. Yet the budget leaves much to be desired in its approach to public finance.
In that respect, another key shortfall of the budget is that it leaves the funding of development to market forces. Not surprisingly, the relevance of development banking for the development process has been sidelined and neglected, despite countries like Canada using such strategies.
The problem advocates of free markets have with development banking is the concessional interest rates, which is considered intervention and directly contradicts the “Washington Consensus.” However, it is imperative that one leaves ideology behind and follow simple common sense.
Another gaping hole, perhaps the most worrying yet, is the lack of a development plan. We know that planning was and is anathema for neoliberals, who felt that everything should be left to the market. We have witnessed first-hand the effects of market failure. When there is a development plan, it is possible to note where economic targets are being met and where it does not, making it possible to implement corrective measures where needed. All the High Performing Asian Economies (HPAEs) developed on the basis of a plan. Even Singapore, in its early stages of development.
A development plan can form the basis of a National Plan. It can be formulated in such a way that whoever comes to power would have to follow the policies proposed and recommended in it. Such a plan should be known to all, so that it can involve not just local industrialists and entrepreneurs, but also foreign investors. It can provide a holistic view of where the country is heading and make matters easier for all, as opposed to the culture of ad-hoc changes we see at present.
In any case, one thing is clear: if there is no satisfactory method to fund development, there would be no new industry on the scale required, and there would hence arise a possibility of existing industries not expanding beyond or even falling below present levels.
Having said that, it must be admitted that budgets are built on assumptions and that this budget is no different. However, due to the situation the country is now in, those assumptions should be closer to the truth. The possibility of the IMF disbursing funds over the next four years and of additional bilateral funds flowing in after the IMF deal are assumptions which would hopefully transpire as expressed in the budget figures. The sale of assets like Sri Lanka Telecom are predicted to improve the foreign reserves: this may happen or may not. If it does not, there will be shortfalls in expected revenue.
The biggest factor we should account for right now is one that will jolt us all: what happens once the debt repayments commence? Though debt could be deferred for about two years, that would be the grace period in which we should get ready to meet these obligations. Are we making the correct effort to face the situation we will confront in the not-so-distant future?
It is sad that the Central Bank of Sri Lanka has not played its part well over the years and has contented itself in being a bystander, while successive regimes have engaged in disastrous policies and practices. Indeed, at times the Central Bank has encouraged the pursuit of such policies.
The stark reality we have to come to terms with vis-à-vis the budget is that no country in the world has developed through free markets alone. Even the developed economies of today had heavy intervention in the early stages of their development. As Professor Ha-Joon Chang argues in his book “Kicking Away the Ladder”, it may be that these countries do not want others to emulate them.
The philosophy that guided the HPAEs in their development was nothing but common sense and not any specific ideology. Sri Lanka would do well if it has more of that common sense, and if it uses what little common sense it possesses. To this end, President Ranil Wickremesinghe should ideally revisit what Sri Lanka’s first Prime Minister D. S. Senanayake observed in his speech at the opening of the Central Bank in 1950: that if the country is to progress, it must look at “other possibilities” for development.
Sunil Abhayawardhane was the CEO of Sri Lanka’s largest heavy construction company, CDE, which completed several major projects in the country. Today, he is a social activist and student of macroeconomics. A graduate of the University of Wales, he is now working on his Ph.D. He can be reached at sunil.ab@hotmail.com
Factum is an Asia Pacific-focused think tank on International Relations, Tech Cooperation and Strategic Communications accessible via www.factum.lk.
The views expressed here are the author’s own and do not necessarily reflect the organization’s.