A Layman’s long-view of the economy

by Kumar David

Experts rarely layout the longer view of Lanka’s impasse in simple words. Political manifestos are all boringly much the same except a difference in emphasis between the roles of state and market. I do not touch on a What Next Programme today; that will have to wait. I wish to take a step back and measure processes not persons. We need first to appreciate that both the consumer side and producer side have been transformed between Independence and now.

In previous times mass consumption needs were simpler; now even the less well-off classes and all but the lowest stratum in the village have more complex expectations; books and apparel for school kids, tuition-masters, consumer durables – fridge, microwave, gas-cooker, a motorbike or a scooter, and money to sometimes take a three-wheeler, better clothes, jeans, shoes, the list goes on. There is explosive growth not only in the amount but also range and variety of consumer demands across the social spectrum. And I must mention the quality of housing and furnishing. This is not the snotty elite; I refer to maybe 70 or 80 percent of people in towns and villages.

A simple agricultural economy as in colonial times cannot generate the surplus required to meet these expectations of a much-expanded population. In an agricultural economy the value of output minus costs of production (including farmers labour time) is too small to generate a net economic surplus to carry this burden. (The plantation sector of course produces a large surplus). This is transformation number one, the consumption side.

There have also been advances to a degree in the production side. Local industry in the broad sense that includes the capitalist sector, state enterprises after the mid-1950s and often forgotten but very important small and medium enterprises (SME) have expanded, somewhat. (The contribution of SMEs to the economy, in production, services – repair shops, computer services and trade – is significant). Still, the gross surplus generated in production is inadequate to (a) plough back for sector expansion and (b) satisfy growing consumer needs.

The extended nature of consumption and the somewhat muted progress in production together characterise Sri Lanka’s stifled transition to economic modernism. I speak here of the economic side, not of life-style, cultural, educational and political progress. Furthermore, alterations in the rural sector has created an excess labour pool that the agricultural economy cannot absorb. This together with population growth has led to a demand by the young for jobs in the modern sector which it cannot satisfy because this sector is struggling to expand.

Allow me to summarise what I have said. There has been a large if not explosive expansion in consumption but a by no means matching response in production. It is also vital to bear in mind that the surplus value (that is output-value net of all costs including labour) created in manufacturing, services, plantations and SMEs, must put aside a portion for expanded reproduction. In other words, a part of the profits in manufacturing must be ploughed back for expanded reproduction. But Sri Lanka is a democracy, every one of us jealously guards our democratic system. When you have growing mass consumption, inadequate surplus generated in production and also democracy, the outcome is inevitable; Political Populism!

Political parties, leaders and budgets have no option but to resort to theoretically off-radar methods not only to survive but also to maintain social stability. Otherwise you get strikes, unsustainable wage demands, hartal-1953, electoral avalanches (1956, 1970, 1977, 1994-Chandrika, 2019-20 Rajapaksa landslides) and now in 2022 an explosion on the streets. I do not gloss over corrupt leaders, rampant robbery by political classes and monumental policy blunders but these subjective elements have to be placed side by side with evolved economic imbalances. The failure of material conditions is more important than the robber barons, but let’s not pause here to argue about chickens and eggs.

You would have observed that I have so far assumed a closed or autarchic economy. That is, I have not said anything but cross-border influences – trade, export-import, foreign investment and indebtedness. In the case of a small dependent economy, in an age where globalisation is sweeping like wildfire across the world and bending even mighty China to its will, to ignore the ‘border’ is like talking about an unclothed emperor.

Take-off into modernism failed in Lanka because economic conditions for take-off did not come to fruition. And add another aspect, nationalism. Sinhala nationalist extremism and its child a Tamil nationalist civil-war undermined economic development. The counter example that is quoted frequently is Singapore. The thesis that basic material factors are interwoven with the independent actions of decision-making elites is not new, some people have a name for it, the dialectic, but never mind, no ideology today.

But there is no escaping that the political dimension influenced the consumption-production contradiction and had deep influence on how take-off into modernism took effect in countries whose economies modernised. The Singapore way curtailed racist-populism but satisfied consumption expectations (housing first), in South Korea the tool was harsh repression till the capitalist class expanded the economy, then the dictatorship was overthrown in the late 1980s releasing the nations democratic energies.

Taiwan’s is far too complicated a story of economic take-off and political democratisation to recount here. These are examples of take-off into economic modernity and democracy. Eastern Europe pulled off economic take-off under the Stalinist gun and democratisation after the Berlin Wall tumbled. Among smaller countries, Cuba, Nicaragua and Venezuela have failed the tests of both democratisation and economic take-off for reasons outside the scope of this essay.

The previous paragraph was something of a digression. I wish to return to the significance of turning away from the autarkic road (closed-economy) to economic modernisation and return to the theme of cross-border flows; that is globalisation, external economic relations and foreign investment. The chances of economic take-off in a closed economy (that is generating sufficient surplus in domestic industry and manufacturing alone to bridge the ever-widening consumption-production imbalance) is zero.

Sri Lanka is the classic example of that failure. We have fiscal deficit, money printing, balance of payment deficits and gigantic foreign debt. Even if Gautama Buddha, Jesus Christ and the Prophet were President, Prime Minister and Finance Minister (in any order) this outcome was inevitable in a country that has for 70 years been unable to raise production to match consumption. In truth Lanka is not a closed economy, but it has not been open enough to modernise production, trade, investment, technology and thinking.

Enter trade and investment

Investment from abroad whether the capitalist West or China is the lifeline if after these chaps take away their profits there is, first, expanding reproduction (growth in production), second a surplus injected in some form (goods, services or money) into local consumption and third employment creation. Employment is another way of saying injecting consumption into the domestic economy. Production has to expand and expand uninterruptedly to meet increasing and diversifying local consumption expectations.

This is where champions of shaving imports down to the bone, eliminating all “luxury” imports, introducing cooperative distribution of necessities and such like frugality, are careless. There is a large element of social justice motivating them; that’s ok but it’s not going to do much good for modernising and expanding production. It also calls for a licence regime; licence-raj as they call it in India.

Allow me to tell you a story about licence-raj. My late uncle Vernon Peries was Director of Family Planning in the 1970s. At one stage there was panic in all the clinics; the essential wherewithal had disappeared from pharmacy shelves. Vernon maama investigated, visited the Treasury and dug out files. Now this was the era when the import of sports goods was prohibited as a luxury. He found that an enterprising official had classified condoms as Sports Equipment and the Customs Department had withheld import licences. That’s a true story, and that’s licence-raj for you.

To get back; does encouragement of foreign investment spell the death of state engagement in the economy? No, in my scheme which envisages a different State from now, there will be directive principles about what investments are welcome bearing in mind the three criteria in the para before my sporting story. I envisage three categories; all-foreign, joint ventures where local and overseas capitalists participate, and in the case of the largest enterprises, joint ventures between the state and big investors.

Sure, investors have to take something away, but it has to be a win for the nation too; Deng Xiao Ping played it well. They left behind the capability of production facilities to survive on their own when it was time to say goodbye. This assumes a government with clear objectives and the ability to implement policy. Observe that I have not touched on technology and productivity enhancement – crucial, but too much for one essay.

What are the benefits? One is rent extraction. Taxes and duties will accrue to the state, that’s a sine qua non apart from the previously mentioned three points. This helps finance populist demands without recourse to deficit budgets. And export earnings will help buy motorbikes, cell-phones, refrigerators, books and blue jeans without falling off the debt cliff. It assumes intelligent political leadership and clear policy; well, if you don’t have that forget the whole discourse anyway.

My mind is on a future progressive regime, so in relation to state-foreign joint ventures what should the role of the state in enterprise management be? Managers of the best international companies are professionals whose loyalty is to the excellence of the company itself; they are rarely the big investor or representatives of share-holders. Similarly, our government and ministerial mutts should keep their grubby fingers out and let able managers get on with it. Younger readers will not know BD Rampala, Vere de Mel and ANS Kulasinghe. The role of the state is only laying out directive principles.

You might object that this is not socialism. Well which idiot said that socialism was possible in one country, and how bizarre to expect it in a tiny island or to expect it even in mighty China in this day and age? But I am not talking about bare-faced capitalism and extraction of surplus value by that class by simple exploitation either. What is the state form in Vietnam, or in China or such indeterminate cases? Not capitalism, but I don’t have a name for it either – a rose by any other name is good enough. As for party programmes everybody says the same thing; raising production and productivity, pruning handouts, cutting expenditure, export orientation and attracting foreign investment of the correct type. Aye there’s the rub; the dichotomy between inordinate market orientation and the directive function of the state. But that’s for another time.

END

(FDI Graphic below)