ECONOMYNEXT – Sri Lanka is in a period of dangerous policy drift with mediocre governance which is inherently unstable with the danger of falling back to a ‘big man illiberal’ politics is getting nearer, a top economist and policy analyst has said.

It is two years since the Rajapaksa regime was ousted but an expected economic take-off has not happened, with no serious reforms to unleash competition and boost productivity, Razeen Sally, Associate Professor of Lee Kwan Yew University said.

"The good news is that we have a little bit more liberalism and democracy than we had under the Rajapaksa’s. We seem to have lost the fear," Sally told a forum organized by Advocata Institute, a free market think tank in association with Echelon Business Magazine.

"People seem to have to have lost their fear for the moment. The media is freer. There is a 19th amendment to the constitution. There are restored independent commissions.

"The ethnic temperature was lower than it was a couple of years ago and yes, the right symbolic overtures have been made to the minorities."

Foreign relations have been re-balanced from a ‘China weighted’ to one that has restored relations with India and the West. Initial frost between China and Sri Lanka has also been mended.

Bad News

"The bad news to begin with is that there is no Yahapalanaya (good governance)," he said. "Governance is back to where it was under the Rajapaksa’s, in other words bad to mediocre governance, rife with corruption and nepotism.

"And that is what I suppose disappoints people most of all."

The government was facing tough challenge with, redressing human rights abuses, devolution of power, de-militarizing and mending ethnic relations, with having to ‘look behind its shoulder’ at Sinhala-Buddhist hardliners, he said.

"What I think has really has gone wrong is with the economy," Sally said. "And that is crucial. Without it right or better, everything does fall apart."

Sri Lanka has a chronic problem, with macroeconomic policy involving fiscal policy (budgets) and monetary policy (money printing), ever since independence, though there was some recent improvements under a deal with the International Monetary Fund and a new central bank governor.

Under Prime Minister Ranil Wickremesinghe, the problems in the economy has been better diagnosed, Sally said.

There were two policy statement by the Prime Minister. But so far not much of it had been implemented especially in doing business reforms and trade.

Sri Lanka trade to gross domestic product ratio was about 50 percent, compared to over 100 percent in fast growing Asian economies. There was a trickle of foreign investment.

Though reforms had been promised nothing much had happened so far in trade and investment liberalization, which was key to drawing productivity boosting foreign investment.

Reforming state enterprises, land, and education also remained, but which could be politically more difficult.

Missing Opportunities

Sri Lanka had windows of opportunity to change direction in the past, but had ‘missed the bus’ several times in its post-independence history according to many commentators.

Sally recalled something that is said often about Brazil: "Brazil is the country of the future, it always was and it always will be.

"There is that golden potential out there, but it is never achieved," Sally said.

"Of course Sri Lanka never misses an opportunity to miss an opportunity. I hope that opportunity has not been squandered. It is late in the day, but it is still there."

Sri Lanka’s economy did not have enough competition with ‘commanding heights’ of the economy controlled by oligarchs.

The country was in the grip entrenched political and economic interests without any new blood to bring change and competition.

"Sri Lankan economy has a competitiveness problem," Sally said. "It has a productivity problem," The way to raise productivity and to raise competitiveness is to have a stronger private sector.

"And also to have much more globalization of the Sri Lankan economy. More trade, more exports import as well as more foreign investments.

Doing business policies had to change. A combination of domestic and private sector investment was needed to transform the economy to have 6-8 percent growth.

Reforms were needed to bring 3 to 5 billion US dollars of foreign investment.

Sri Lanka needed simple and predictable tax policies.

"No more price controls, no more announcements of exchange controls."

A stable macro-economic policy that went beyond the IMF program, including tax reforms that were genuinely simpler and relatively low without sudden changes was

Institutional checks were needed including a genuinely independent central bank with better policies.

Indrajit Coomaraswamay who was appointed the Central Bank Governor has started fixing the institution, which became far too politicized over a decade and was printing too much money to support budgets.

Drift

Unless trade and investment liberalization was done to draw investments into services and industry, including shipping, Sri Lanka could become over-dependent on Chinese investments by state firms without productive private sector investments from the West or India.

Chinese state investments have to be balanced by investments from competitive private firms to have a take-off,  that will give productivity boosting growth that will bring broad benefits.

Though private Chinese firms were ‘incredibly entrepreneurial’ state firms operated in a different way.

At the moment Sri Lanka was drifting with an ‘ossified political and business elite."

Monopolies remained in many areas, exploiting consumers.

There was mal-governance and economic drift with ethnic tensions on the boil but not quite boiling over and a creeping drift towards overweening Chinese influence and economic stagnation.

"What economic drift, not achieving that potential means is that outside a narrow elite ordinary Sri Lankans will be deprived of opportunities that they deserves.

There will be much bigger class of Sri Lankans who are undereducated and under-employed who went to the Middle East or perhaps depended on three wheelers.

A situation of drift was inherently unstable, Sally said.

Relapse
 
Beyond economics, conflicts can re-emerge.

"When the economic pie is static or shrinking it means more political conflict. That is the lesson of history. People will fight more for a share of the pie.

"In Sri Lanka it translates into racial, ethnic and religious fights. Ethnic relations are much more complicated than this."

Economic drift will give an opportunity for a strongman to re-emerge, lie the last regime.

"It will be a relapse into big man authoritarian politics," he said. "So a charismatic big man comes along taking advantage of social discontent, win the presidential election, and comes into clean house.

"It means a relapse into illiberal democracy. It means secondly a statist economy, where the state has a much more direct role, and a much bigger indirect role in shaping the private sector."

Allowing the foreigners to come selectively. That will be a recipe for stagnation. It will be dressed up in visionary socialist language of the past."

(Colombo/Dec21/2016)