ECONOMYNEXT – Many countries have tried to pick-winners decided by a self-style omniscient politico-bureaucratic elite with fiscal policies to support them but Sri Lanka is taking interventionism to new levels to week out ‘undesirables’ with penal taxes.

Sri Lanka’s fascination with the instruments of compulsion and coercion seems to have no end.

To what extent the rote-learning education system, a centralized syllabus which brainwashes young children with vicious nationalism and discourage critical thinking, make the population susceptible to interventionism and violence is not known.

Picking Winners

Sri Lanka’s central bank in its 2021 report advocated the standard ‘picking winners’ ideology, promoted by all-knowing interventionists who think they know better than businessmen who risk their own money in a venture.

“..[I]n the short term, prioritising export promotion in selected sectors, i.e., potential winning industries of the country, will drive the overall export performance, while enhancing domestic production,” the central bank said in its annual advice on policies.

“Concentrating on earmarked subsectors rather than the whole export sector could yield speedy results.

“Such results are imperative, given the pressing and urgent requirement of improving export earnings
to support the external sector.

“In this regard, the focused sectors identified in the National Export Strategy and by the Presidential Task Force of Economic Revival and Poverty Alleviation could be a starting point.”

According to the bureaucratic elite “winning industries include pharmaceuticals, rubber products, coconut related products, spices, electronics and electrical components, ship and boat building, food and beverages, cosmetics, toys, machinery and mechanical appliances and ceramic products, among others.”

The claim is made despite several of the ‘winning products’ including ceramics, cosmetics and boat-building having already been turned into geriatric non-competive import substitution crony businesses which are exploiting the poor ranging from apparel factory girls, fishermen and homeless through import duties.

Geriatric Cronyism

Import substitution cronyism is an extreme and ‘permanent’ form infant industry protectionism (forgive the oxymoron) found in Sri Lanka based on an ideology promoted by Argentina central bank creator Raul Prebisch.

Many countries that set up Argentina style central banks ended up with import substitution as money printing de-stabilized the external sector.

Interestingly the Argentina central bank itself did not create external imbalances until after Prebisch was sacked, though it operating rules involving active two-way sterilization currency collapses were inevitable.

Picking winners (or bringing industrial innovations that had taken place in free market nations in the West) is a supposed strategy used by Japan and its former colony Korea (and Taiwan) in industrial development.

Japan itself became an industrial power after Meijii restoration by transplanting Western technology, business as well as military knowledge, sometime denigrated as ‘aping the West’.

Picking Losers

Sri Lanka is now advocating taking interventionism beyond ‘picking winners’ to picking losers though fiscal policies and killing off ‘undesirables’ as determined by the omniscient elite.

“Additionally, appropriate revisions to the import tariff regime and other taxes, such as corporate tax, could be used to boost selected economic sectors and also to discourage undesirable sectors with marginal domestic value addition,” the central bank said.

Unlike the ‘winners’ such as coconut products and spices, no examples were given for losers.

It is not clear who will determine the losers, whether the politico-bureaucratic elite in the Treasury, central bank or economic task forces.

The picking losers strategy is coming as Sri Lanka is mired deep in import-substitution cronyism, with a few businessmen making billions at the expense of the rest of society.

Sri Lanka’s Latin America-style central bank – built by American on a model inspired by Argentina at a time when New Dealer/Keynesians were running riot in the US – has legitimized import substitution for decades on the basis of ‘saving foreign exchange’ or the other favourite Mercantilist holy grail ‘reducing the trade deficit’.

Fiscal Policy Fails in Primary Aim

Sri Lanka is using taxes to achieve various secondary objectives while it has failed in its primary objective of financing government spending.

The current administration slashed valued added tax as well as income tax for ‘stimulus’ another Keynesian hang up and the budget is now in disarray, the national debt is rising over 100 percent, with deficits rising 10 percent a year.

The last ‘Yahapalana’ administration also misused fiscal policy from 2015 onwards to achieve secondary objectives.

A so-called ‘super gains’ tax was used to punish companies who had supposedly had ‘ill-gotten gains’ without benefit a court hearing.

Taxes were raised on imports after printing money to target an ‘output gap’ created currency trouble to control imports.

Taxes were slammed on sugar.

The current administration had take the sugar taxes and import taxes to an extreme level and started an outright ban-nomics using the instruments of compulsion and coercion inherited from British rulers.

Ban-nomics – Extreme Regime Uncertainty

This administration relaxed the sugar tax, but has learnt no lesson.

Under ban-nomics plastics been banned, in a country where plastic recycling has been innovated and is being taken to a level that the technology and knowledge by private enterprise that can be exported to the entire world.

Palm oil imports have been banned. Palm oil plants have been banned.

Turmeric and green gram have also been banned. The list is too long to keep track of.

Now fertilizer has been banned. Under the import controls various items have been banned to help cronies starting from salt.

Policies change from day to day.

The midnight gazette is the main tool through which regime uncertainty in implemented.

Gazette are issued and reversed. Of course it is better to reverse than to perpetuate ill-thought out interventions.

The central bank through its law is also issuing regulations, generating more regime uncertainty after printing money.

The central bank during the last administration controlled lending rates, deposit rates.

During the current administration, the central bank has also slammed on the economy, despite their clear failure under Soviet Gosplans and Nehru’s five year plans.

It was not so long ago, that this very same central bank bunched vehicle lending to agro-enterprises to protect the economy and the aspirations of the people from a Treasury directive on agricultural lending.

When the omniscient bureaucrats decide to prioritize credit to one sector, some other area, including an innovative or fast growing one may be denied credit.

The greatest evil of directed credit is not the opportunity cost, but the customers of the business that receives directed credit – the market so to say – will not agree with all knowing bureaucrats and the business will fail.

The more the policies fail the more extreme they seem to become in Sri Lanka’s case.

Compulsion, Coercion and Violence

Organized government has always taken people and countries forward, as opposed to anarchy. Organized governments have also done interventions with some success – when the policies have been carefully studied and discussed.

However imposing interventions through gazette rule is a recipe for disaster.

It is an extreme form of regime uncertainty.

Governments are good at destruction; they can coerce and kill better than anyone. However economics does not work that way.

It has been shown time and again that free exchange leads to economic prosperity and innovations in products, services and also processes that are un-imaginable to bureaucrats in state agencies.

Totalitarianism in general was possible due to the agencies created in the European nation-state, backed by police, which were used effectively in Eastern Europe, especially in nationalist Germany.

Under Sri Lanka’s traditional monarchical rule, totalitarianism of the type seen in post 19th century world, including using sugar taxes indiscriminately to change the behavior of a child of poor parents drinking ginger beer – as their grandfather and grandmother had done before them – would have been impossible.

The last regime imposed sugar tax on products while imposing massive import duty on brown sugar to give profits to expropriated sugar companies.

The correct strategy would have been to privatize the expropriated firms, and equalize the taxes between brown and white sugar.

The last regime also imposed an eco-tax which penalized old pensioners with cars that hardly went on the road while brand new cars.

This is the embodiment of the coercive state.

“Men now seem eager to vest all powers in governments, i.e., in the apparatus of social compulsion and coercion,” economist and philosopher Ludwig von Mises wrote decades ago as the Western interventionism grew in the 20th century with Marxist, nationalist and Keynesian interventionism.

“They aim at totalitarianism, that is, conditions in which all human affairs are managed by governments.

“They hail every step toward more government interference as progress toward a more perfect world; they are confident that the governments will transform the earth into a paradise.”

Many of the bureaucrats who implement these policies had studied at Western universities and convinced themselves of their omnipotence.

“A new type of superstition has got hold of people’s minds, the worship of the state,” von Mises said.

“People demand the exercise of the methods of coercion and compulsion, of violence and threat. Woe to anybody who does not bend his knee to the fashionable idols!