Pragmatic economic policies vital for economic development

Much of Sri Lanka’s economic revival and economic development from now onwards would depend on the willingness and capacity of the Government to adopt pragmatic economic policies. The need for pragmatic policies is especially important now when an economic recovery is needed in an inhospitable global economic environment.

Wrong policies

Regrettably, the current economic crisis has resulted in wrong prognoses and prescriptions that could aggravate the problems and result in continued underperformance of the economy. The dominant and influential thinking at the helm appears to be the adoption of impractical ideological policies that failed in the past.

Economic policies

In the past the country’s economic development has been hampered by successive governments being unable to adopt pragmatic economic policies. Political expediency, ideological biases, vested interests and corruption have been among the reasons why governments have failed to be pragmatic.

The pace of economic development of the country from now on will depend very much on pursuing pragmatic economic policies.

Pragmatism

Pragmatic economic policies are policies that are suitable to the particular economic situation and are effective in generating economic growth.

The best definition of pragmatic economic policies has been given by Deng Xiaoping, the successor to Mao, who was the architect of the opening of the Chinese economy. He was the Chinese leader behind the Chinese economic reforms. Deng Xiaoping was the ultimate pragmatist who said, "I don't care if the cat is black or white as long as it catches mice."

China

Much of China’s economic prosperity has been due to its pragmatism. Despite being a communist country and ideologically committed to the state playing the lead role in the economy and private enterprise relegated to a few less important activities, Chinese leaders realised that the country’s development depended on a revolutionary change in economic policies. Consequently China's leaders deviated from communist economic policies to liberal trade and investment policies that welcomed foreign investment.

Other Communist countries

The same could be told of Russia’s economic changes. Similarly, Vietnam encouraged private investment, liberalised its trade and attracted large amounts of foreign direct investment (FDI). This accounts for Vietnam’s robust and rapid economic growth.

East Asia

The rapid development of East Asian countries was undoubtedly due to their pragmatic economic policies. They figured out that rapid economic growth needed the adoption of liberal and open economic policies. They invited foreign capital and foreign industries to be established in their countries and adopted an export-led economic growth strategy.

NICs

These newly industrialised countries (NICs) developed owing to their adoption of policies that enabled them to export more and generate economic growth based on liberal economic and trade policies. They were not hampered by ideological policies that they had in the past.

Others

Other countries too have adopted pragmatic economic policies and benefited by them. Bangladesh, has become a fast growing economy owing to the adoption of liberal trading and economic policies. Last year Bangladesh was the fastest growing economy in South Asia, which in turn was the fastest growing region in the world.

Sri Lanka

Sri Lanka’s economic policies have often been determined not by their efficacy, but ideological considerations. A good example is the nationalisation or state takeover of the plantations. This resulted in the country “killing the goose that laid the golden eggs."

Losses

The plantations that were profitable ventures contributing to the state coffers became financial liabilities. Production on the state owned plantations decreased. They ran at a loss like other state enterprises and had to be financed by government revenue.

Political courage

Although later governments realised the need to privatise, they did not have the political courage to do so as it was politically unpopular. So the government continued to bear the losses that distorted public expenditure priorities and increased public debt.

State enterprises

That over 300 state owned enterprises are running at a loss is a clear example of ideological factors and vested interests not allowing some of these to be privatised. Instead year-inyear-out these enterprises are a huge drain on the economy.

For many years there has been talk of reforming state owned enterprises but little has been achieved. On the other hand, there is a prospect of more state enterprises being established or private enterprises being taken over by the state.

Reasons

The reason why governments are unable to privatise state owned enterprises are manifold. There is a popular notion that privatisation of state enterprises is a “selling of family silver." The masses have been indoctrinated to think that privatisation is a process of selling government wealth.

Former efforts

Former President Ranasinghe Premadasa realised the need for privatisation, but also recognised that it was an unpopular move. He even coined the word “peoplisation” to substitute for privatisation. His efforts to reform state enterprises was however limited.

President Chandrika Bandaranaike privatised a few enterprises and reduced the burden of the government. These included, telecommunications, Sri Lankan Airlines andthe gas company. The privatisation of telecommunications revolutionised telecommunications in the country. Sri Lankan Airlines was re-vested in the government and continues to incur huge losses.

Vested interests

One of the foremost reasons for the inability of governments to implement privatisation is the vested interest within the government. This is illustrated by a former finance minister telling me that all his cabinet colleagues were for privatisation, but that none of the enterprises within their ministries should be privatised. Why?

Why

State ownership of businesses provides politicians an opportunity for corruption, providing employment to gain popular support and various means of earning money.

Other policies

There are many areas of economic policies other than those cited above that are guided by ideology or vested interests, rather than pragmatism. These include trading policies. Although the country liberalised trade in 1977, over time some of the trade liberalisation has been blunted.

It is estimated that the country, which was a pioneer in trade linearisation in South Asia in 1977, is one of the most protected economies in Asia. This is owing to several charges on imports that have been placed from time to time. Paratariffs have made the country a protected one.

Import costs

It is not easily realised that when import costs are high, the cost of manufactured exports also rise and make the country’s exports less competitive as the import content of our exports is high. Although pragmatic trade policies are vital, obsolete ideas on trade policies are likely to hamper the further liberalisation of trade that is vitally important for the country’s economic development.

Summary

The unwillingness or inability to deviate from ideological policies have been a root cause for the country’s economic underperformance. In contrast, the success of other Asian countries rapid economic development was due to their adoption of pragmatic economic policies that enabled them to expand exports.

Sri Lanka has bee unable to adopt effective economic policies owing to ideological commitments and lack of pragmatism in economic policies. In contrast, former communist countries and those that were inward looking, liberalised their economic and trading policies.

Conclusion

Sri Lanka’s economic revival in 2020 and long term economic development would depend on the willingness and capacity to adopt pragmatic economic policies. Will we have the wisdom and political courage to be pragmatic?