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Tuesday, May 21, 2024

RW’s inaccurate statements, inconsistencies, contradictions and an alternate way out of the crisis

A few weeks ago I was surprised to read a comment by the President with regard to SOEs and questioning why the Government should be in business and capping it off by saying that it did not happen in the time of D.S. Senanayake, the first Prime Minister of independent Ceylon.

Misquoting DS

I knew for quite some time that Ranil Wickremesinghe’s political and economic thinking was way off, but expected him to get the historical aspects correct, which he seems to have missed. To quote J.R. Jayewardene, Minister of Finance in the D.S. Senanayake Government, from the 1948/49 Budget speech, “In an undeveloped country like Ceylon, the State must play an important, in fact, the most important part, in industrial development. Government has decided that certain basic industries, such as power and heavy industries, e.g., steel and cement and industries which provide the necessities of life, should be State-owned.”

This is right from the heart of the D.S. Senanayake Government. Therefore, one wonders how the President could have missed it.

In the above-mentioned speech, what the then Minister of Finance refers to as ‘industries that provide the necessities of life’ are the public services required and expected from the Government.

In fact, it was the defenders and promoters of capitalism, such as Bismarck in Germany, who realised the need for welfare and public services to be a buffer against the harsh realities the people faced and to prevent a radical socialist takeover. Therefore, some public services were never designed to make a profit but to be a service with social contribution.

There is another aspect that the President needs to be reminded of and recorded, from the D.S. Senanayake era, before it is eliminated from the historical record. The call for Monetary Financing for development that the late Prime Minister called for at the opening of the Central Bank in 1950, is worth mentioning. He mentions that the Central Banks of Canada, Australia and New Zealand assist those countries’ development efforts. This was within the Anglo-Saxon model we were following.

Money Printing 

This monetary financing is what politicians and central bankers call ‘money printing’ recently to build up a fear psychosis amongst the people, but used wisely could bring great results. The Canadians established the Industrial Development Bank, as a subsidiary of the Central Bank and funded by the CB, which was able to develop Canadian industry within a ten-year period, without any inflation.

This is what D.S. Senanayake wanted, but the Central Bank stuck to its orthodoxy and disregarded the request. It is only a matter of time, before RW distorts this fact too, in his dash to impose upon this country the failed neo-liberalism, where the people would be at the mercy of the profit-seeking monopolies and oligarchs, abrogating the state’s fundamental obligation to its people.

John Kenneth Galbraith, the renowned American economist of the ‘new economics’ era points out “Left to themselves, economic forces do not work out for the best except perhaps for the powerful”. This should be understood by all who have some concern for the poor, vulnerable and downtrodden.

 Mixed economy

The mixed economy grew with the need for public services as an accepted format for economic development and the well-being of people. In the period after WW2, this could be seen in most of Europe and the UK. Many describe this period as ‘the golden era of Capitalism’ where economies grew and inequality reduced in the post-war period.

This was accepted practice, though management of these organizations could have been done better. I remember in 1972, the late Dudley Senanayake explaining to me (still a schoolboy) why he was supportive of a mixed economy, at a time when the United Front Government was emphasising that the commanding heights of the economy should be in State hands. He spent about an hour painstakingly explaining why in a poor country it was essential for the state to safeguard the people from the harsh conditions that could arise in a Capitalist economy, his explanation was very much on the lines pointed out by Dayan Jayatilleka in his article on Ranil Wickremesinghe’s response to the crisis.

Though it was known that the Capitalist system was flawed in many ways, the orthodox Capitalist system had a major flaw in that it could not adjust to major shocks. This was seen during the great depression from the late 1920s to the early 1930s until Keynes came along and showed a way out. By the mid-1970s once again the system could not adjust to the oil shock and went into what was called ‘stagflation’ the thinking at the time decided to throw away the baby with the bathwater, thus losing whatever gains that had been made and going back to the old liberalism, discarding collectivism.

The poor financial performance of the SOEs could hardly be blamed on them when it was the politicians who stuffed the organisations with their supporters and engaged in corrupt practices for their own gain. SOEs function well in most countries, Singapore is a classic example. Therefore, the problem is not the SOEs, but how the Government does not allow them to function properly.

De-regulation and RW’s philosophy

Liberalism was thus reinvented in its new avatar as neo-liberalism. Though many think that neo-liberalism came about with the full support of the Conservative Party, there was quite some opposition to it even within Mrs. Thatcher’s cabinet and it was really in her second term that she was able to unleash it in full. What it means is that even among right-wing thinkers there was much doubt as to the repercussions of such an exercise, which going back takes one to the Collective vs. Liberal debate.

One of the first sectors that were deregulated was the financial sector and the end result was the creation of a vast amount of money. It took 300 years to create the first trillion pounds and only eight years to create the second trillion. One could thus imagine the volume of money that was so created and its repercussions on the rest of the world.

This was one of the many de-regulations that were done without understanding the repercussions on the overall economy. In fact, the Thatcher Government had a constant battle in fighting inflation in the 1980s, as it was not the Government that was creating the ‘new money’ via the Bank of England but the private banking system, with the Bank of England having very little control. This phenomenon soon spread to the global economy and is a major issue as we go along. Also related to this was the fact that Monetary Policy was becoming ineffective, particularly with its centuries-old tools, which are double-edged, meaning that when one problem is to be solved, another is created.

The reason these are mentioned is to highlight that none of these are understood by politicians and when implemented it is the people that have to face the consequences.

If the financial sector is not controlled, nothing is controlled. The financial sector acts in its own interests. During this period much money was created to wipe out poverty in the world many times over but most of this money was not directed to GDP-related activity, but grew into a monster that cannot be controlled. Most of this new money went to the Finance, insurance, and real estate (FIRE) sector, which was overseen by the ‘market’, without any direction from the Government. This should be indicative of Ranil Wickremesinghe’s thinking, which does not seem to have understood the full repercussions of the financialisation of the economy.

According to the CBSL report of 2021, the volume of money created by the CB was around 13% while 87% was the Banking System created, in the UK the Bank of England created money is around 3% while 97% is created by the Banking System. Should it not alarm anyone? Some may ask how this happens, well that too needs to be discussed much more.

When the emphasis shifts from people and society to finance and corporates, the unexpected happens, which is a topic for a new dissertation.

Ranil Wickremesinghe’s connotation of politics, economics, development, society, neo-liberalism, or the social market economy is a bundle of contradictions, which hardly makes sense.

The ultimate result of it would be the Government abrogating its responsibility in the economy and expecting the market to do its magic, which has not worked in the developing world nor in the developed world with de-regulation. What is needed today is not the old capitalism in a savage form but a common sense approach that brings verifiable results that benefit the vast majority.

Ranil’s ‘pie in the sky’

The policy of the Thatcher period clearly indicates the situation the UK is in today, with hardly much growth in industry to speak of and the pathetic condition of some of its public services.

What Ranil Wickremesinghe should realise is the fact that his ‘pie in the sky’ stories have not got him or the country anywhere and that a Common Sense approach as used by the High Performing Asian Economies (HPAEs) is a more practical approach and once a certain stage of development is reached, hope that the market would perform its ‘magic’.

The market works on the basis of demand and supply. If the supply side does not match up and the private sector seeks to import to fill the gap, it is also ‘market economics’ that would create a Balance of Payments problem, when exports do not measure up to imports, as in Sri Lanka’s case.

In such situations, does one expect the state to be just an onlooker or set up industry via SOEs? Do we need to repeat and repent the mistakes of the past or change our thinking to meet the challenge?

No plan 

Another, not-so-surprising statement by the President was that he had no plan to get out of this mess. All countries that have developed have done so on the basis of a plan. No country has developed on the basis of free market economics.

A plan is a must, at least an indicative one so that all know where they could fit in. The only two plans that we have had, the 10-year plan was never implemented after the assassination of the Prime Minister, and the 5-year plan was derailed by the oil shock.

Ranil Wickremesinghe, while being Minister of Industries, speaking at the fourth annual sessions of the Sri Lanka Association of Economists in June 1989: “Where did we go wrong? One such mistake was to liberalise without providing a package of policies to assist the import substitution industries to become competitive. Industries which had been starved of capital for seven years were asked overnight to compete with imports. Therefore, we must help these industries to bridge the gap between their current performance and what is required to become internationally competitive.”

The reason I thought of quoting Ranil Wickremesinghe while Minister of Industries is to highlight a point. He knew the problem, had the authority to correct the problem, and did not do it for whatever reason.

Can one expect him to do it now?

Think it is quite clear that we can’t depend on individuals to sort out the issues the country faces and the Reactivation of the National Planning Council (NPC) may be necessary to get a long-term development perspective going.

Social Market Economy

The President has now started to mention the Social Market Economy (SME). To do so he must accept that the neo-liberal policies he so often mentions have failed. This he does not say. One thing is certain, one cannot implement Social Market ideas while following neo-liberalism.

What it seems is that as neo-liberalism has lost its flavour, the slogan of SME is used as a veil, as it sounds good, without any commitment to the ideals. In a Social Market Economy, public services and SOEs play a big role and how is it that a person who rejects those ideas could establish something he does not believe in?

As we go along Ranil Wickremesinghe is becoming a bundle of contradictions.

IMF deal

Though the IMF deal as such has been inked, there are huge financial gaps to be filled and how that is to be achieved is of great concern. The President hopes to sell off State assets to meet part of the bill. Would it not be a better idea to come up with a development plan for industry and get an agreement for repayment on the basis of export income?

When the IMF itself expects the Government to come up with growth-enhancing methods, we do not see such an attempt by the Government. The sad part is that the so-called economists have got into the neo-liberal box and are unable to think anew, they are thinking like accountants within a given framework, when they should be thinking out of the box, to design the future. This new design would not come when the President insists on people to ‘shut up and sit down’ and do it his way.

Most of his periods in office have seen much talk of trade agreements, yes they are important, but should not manufacturing to be able to export also be part of the deal? Knowing the President’s attitude, his intention may be to show the trade agreements to seek FDI into the country. Hope he understands even now that it did not work.

When the ‘no plan’ of the President becomes obvious to the people and social unrest is seen on the streets, the Government is planning to meet the situation by force and no one could say how it would end. As the situation does not see a solution even on the horizon and the Government’s only hope is more debt to tide over the crisis, one has no option but to hope for the best fearing the worst.

If the President wants all to participate in the rebuilding, he is certainly not getting about it in the correct way.

Destroying the democratic traditions

One could notice a dangerous trend being formulated to destroy the democratic traditions of the country. Not holding the local Government elections, not permitting dissent, and enacting new legislation to suppress dissent, gives one the feeling that the President has shifted his focus from the economy to be in power beyond his entitlement. He does not care a hoot for the people

The alternative?

OK, what’s the alternative? Some possibilities

One of the main counter arguments would be: OK, what is the alternative to Ranil Wickremesinghe’s no plan?

1) The most logical would be to devise a plan (short/medium term) immediately.

2) Ask the exporters what they require to expand their exports and provide them, even tax concessions and other incentives.

3) Seek new growth areas, such as textile manufacturing and other inputs for the garment industry.

4) Expand the steel industry to manufacture for industrial requirements and expand the SMI sector to participate in the GMVCs.

5) Seek World Bank and ADB support to establish a new refinery in Trincomalee for export.

6) Keep an eye on the possibility of developing green hydrogen for export.

7) Make Colombo a Gem Centre and encourage gem exporters to trade through Colombo and reduce smuggling. (Thailand exports around $ 20 b and it is known that most of the gems are of Sri Lankan origin)

8)Explore the possibility of increasing manufactured toy exports and the rubber-based industry.

9) Develop the local heavy construction industry to what it was earlier, to prevent the huge drain of forex.

10) Set up development banks for each development sector.

11) Develop cooperatives so that farmers could sell rice instead of paddy.

12) Develop a rural industrial sector to use local raw materials such as straw. (China exports over a billion dollars of straw products).

13) Enhance research grants on a performance basis and create the framework to identify innovators and develop them.

If at least some of the above are done, it could generate around $ 20 b annually and change our course.

However, to get at least some of these sectors going, one needs a doer, who understands how an economy really works and does not believe in ‘pie in the sky’ stories.

(The writer was CEO of one of Sri Lanka’s largest heavy construction companies and holds a Master’s Degree from the University of Wales in Business Administration.)

Daily FT/11.04.23

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