Government wishes to stay in power forever?
Judging from reader responses to the previous article on the complete rejection of the ‘Yahapalana’ regime by capital markets, those who are politically aligned to this house of cards are bitter at the negativity of it all. What is a writer to do when the evidence provides nothing but negative news? Hide the truth or smother it along some vain lines about how bad the previous thugs were? On the 70th anniversary of the formation of the United National Party, it’s worthwhile to help understand the investment case on how they should remain in power forever - the humble wish of those critical of the previous column.
The sad reality for investors of Sri Lankan assets close to the end of the third quarter of 2016 is that political economics has become the largest contributor to prospective returns since 2009, during the final days of the war. This is an unacceptable outcome from a government promising a better deal than the previous lot. And in true time tested manner, they have spent their 18 months in office apportioning blame about everything on the previous regime. Before we give our lords and masters ‘power forever’, it may be prudent to take a good look at the facts and understand why they are getting big red ‘F’s on their report card – and that’s only from investors.
The single biggest myth taken at face value by Sri Lankans is that we are paying for the sins of the previous regime. That mob was awful, but the current economic mess is purely of the ‘Yahapalana’ crowds making. As the macro charts illustrate, the political decision by the government to increase public service salaries was the largest drag on government finances. The second chart (Figure 2) clearly illustrates that government expenses excluding interest payments have ballooned since January 2015.
Figure 3: Fiscal Balance - Undoing years of hard work with a worsening fiscal deficit. All figures as % of GDP.
That has led to the worst deterioration of the country’s fiscal balance. It’s against this backdrop that this columnist needs to answer fervent supporters of the green political persuasion.
How does the UNP remain in power forever? Never hold an election. Take a leaf out of the playbook of former President JRJ. When things got too hard in the early eighties he ran with a hideously designed referendum and magically extended the life of parliament by seven years. So blessed were we that the ensuing period gave us July 1983 and government sponsored mass murder in the South. The current lot can go on without ever going to the people by saying they are helping minorities such as say, stockbrokers without insider information.
If you have to go for an election, because those pesky ‘rights activists’ who you supported in opposition actually do act independently and demand one, make sure the main opposition is in tatters so you can basically win every electorate with a voter turnout as low as 30 per cent.
Negativity aside, the UNP does have the ability to be in power a very long time. First, their junior ministers offer better bench strength than the opposition. Second, to the Prime Minister’s credit, he has stuck to a broadly similar economic vision for the country for at least two decades. That he has used the wrong people to execute it has been the cause of most of the governments’ problems. Of course the PM suffers from the same problem many CEOs do – the lack of talent who want to do the job. The sad reality of the last two decades in politics and corporates has been that the most capable people want to work for themselves.
What are the bright spots to work on for a party that wants to remain in power forever? Drop the pipe dream of making manufacturing viable in Sri Lanka. The transpacific partnership now on the cards would decisively shift Asian manufacturing to Vietnam, Laos, Cambodia and Myanmar in that order. All countries have; superior demographic profiles, many are connected by land to China where most factories will be relocated from due to rising labour costs, and input costs are much cheaper thanks to cheaper generation of power. That leaves us with an ageing population and a natural advantage in services. Here then are two items the UNP should consider working on.
First, face up to the demographic time bomb of an ageing, poor society. In so doing, we may actually be able to find a winner that can add significantly to the bottom line of the nation. Make Sri Lanka a geriatric and aged care hub. By developing the skills to address the longevity challenge today, we may be in a position to dominate the sector for the region in decades to come.
Second, because management practices and wages are so poor in this country, many young enterprising individuals are trying their hand at various ventures - from old industries such as coir manufacturing to building new technology applications. The best policy decision to encourage this movement is change banking culture through regulations so funding is available for cheap and create physical hubs at cheap rents to foster collaborative discovery. This has worked well to contribute significantly to GDP in both Cambridge, Massachusetts (thanks to MIT) and Israel.
Finally, both these themes can be brought together by getting the infrastructure right. Sri Lanka needs to spend close to 10 per cent of GDP to close the countries physical infrastructure gap. A further 10 per cent is needed to sort out making energy cheaper to consumers and businesses. The country can sustain productivity growth over the next seven years if the right infrastructure projects are delivered.
Here is a positive agenda for the green party to work on. High time they stop palming blame on the previous regime as most of what they are saying can be refuted through facts. As Richard Nixon so famously said throughout his political career and made public during the Alger Hiss case, ‘it’s never the act that gets you in to trouble, it’s the lie, and it’s always the lie’. Words of wisdom the UNP can do with. (Kajanga is a behavioural economist based in Sydney, Australia. You can write to him on kajangak@
gmail.com)