Perils to sustained growth

by Dr. G. Usvatte-aratchi
(Continued from 01 Jan. 2024)

Middle income trap

There is one other comment I wish to add about a seeming fascination with ‘middle income status’ and its implications for sustained growth. It is well to remember that ‘middle income economy’ is a statistical category without economic significance. It contrasts in that respect with concepts like labour surplus economy, export-led economy, import-substitution economy and others. These latter categories have implications of how the economy functions and therefore instructions for economic policy. I don’t see how growth processes in middle income categories vary significantly from those in others.

A ship sailing with ‘sloping masts and dipping prow’

With your permission I will now change key, but the tempo will remain. I have so far addressed mainly questions of stability in the economy. Important as they are and quite in flow with strong current currents, we mustn’t imagine that stability is more important than growth. First, we want a growing economy and then stability for sustained growth. We are not looking for a ‘painted ship on a painted ocean’ but one that will sail fast with ‘sloping masts and dipping prow’. We worry too much about someone who ‘with his cross bow will shoot the albatross’. It is important not to have an albatross hanging around our neck but growth must take place and questions of instability must be addressed at its roots. That is why government expenditure cannot contract and must indeed grow as I made clear earlier.

There are many severe problems which the economy has stored up because government expenditure has grown too slowly and because the economy has grown in particular directions. The most obvious and most severe is the problem of unemployment that government has covered up claiming that there is almost full employment of the labour force. That is apparently true because more than 20 percent of our labour has gone overseas seeking employment at wages acceptable to them and the balance 80 percent is more or less fully employed according to measurements designed by our statistics Department. Only apparently true, when in truth some 24 percent of the labour force cannot find gainful employment in this slowly growing economy. They have found employment overseas.

The large-scale emigration of labour has generated its own problems for the economy quite apart from the disruption to normal life in families and society. The exclusion of a fifth of the labour force from the market has helped wages in the economy to rise. Entrepreneurs are now presented with a new set of relative factor prices quite different from those that they faced for well over 60 years. Sri Lanka is no longer a cheap labour economy, especially when one takes account of low physical productivity in that economy. The pressure to augment human labour with other sources of energy to use capital equipment for that purpose is present here more than in most south Asian countries. Yet entrepreneurs face high energy prices which are disincentive to the use of capital. There is much rumour afloat that a good part of the high cost of energy is because of corruption and incompetence. These need to be examined to be denied and energy prices brought down. [You might meditate on the coal scam rollicking government in India.] According to some recent analysis, it was the search for combinations of expensive labour and cheap energy in Britain that brought about the avalanche of changes that amounted to the first Industrial Revolution. [See Allen, Robert C. (2009), The British Industrial Revolution in Global Perspective, Cambridge.] Expensive labour and even more expensive energy may provide the ecosystem to generate a new mutation of the Dutch Disease.

Growth and exports

There is one area which must move much faster than it has so far. That is exports. The proportion of exports in aggregate demand has fell from 25 percent of GDP in 2002 to 23 percent in 2012. That is contrary to experience in most countries during this period. The ratio of world exports to world GDP rose from about 24 percent in 2002 to about 32 percent in 2012, when the parallel ratio in respect of Sri Lanka dropped and moved in the opposite direction. Large economies like Brazil, China and India have grown, pulled heavily by the rising demand for exports during those years. So have small economies like Malaysia. Growth in much of Africa during the same years is also accounted for by fast rising export demand. In our economy, export markets are quintessentially for exploitation by private entrepreneurs. That they have not, is the tragic tale of the private sector here. Government is responsible for not providing the right incentives. Most lucrative tax holidays to casinos is not exactly providing incentives to export growth. That tale remains to be told and the tail turned on that trend.

Allocation of government expenditure

The allocation of government expenditure is not simply its total but also its composition. Between 2004 and 2012 there has been a marked shift from Social Services to Economic Services, the proportion of all government expenditure allocated to Transport and Communications rising from 6 percent in 2004 to 14 percent in 2012. The Social Services category includes education and health. I will not speak about health services now, but nobody should minimize the gravity of the problems that have arisen consequent upon new patterns of morbidity which is part of the process of aging in our society. Precisely three weeks ago I addressed the members of the Faculty of Arts in Colombo and had occasion to consider briefly government expenditure on education again. There is a woeful neglect of education at all levels, much of it reversible with far more money spent on them. One is not arguing naively that more government money on schools and universities will produce better students and teachers. Then Saudi Arabia should have the world’s best universities. There is much besides that that go to improve education. Teachers must commit themselves to their students, their discipline and their universities. They must stand up to ensure that organisations live by the statutes that govern them. The neglect of schools and universities by government is not the reason for private sector higher education institutions to come up. I welcome them all warmly but with competition. Government cannot abandon public schools and universities and ask private institutions to come to fill the void. I have not seen evidence in India [or elsewhere] that private sector education institutions will compete effectively with the IITs, IIMs, AIIMSs and the All India Science Institutes. Good teaching in private sector higher educational institutions cannot be assured by bureaucratic regulation. But good public sector universities must provide the bar which private sector institutions must at least try to reach to be acceptable to parents and students. To neglect public sector education at all levels is to throw open the market for the sale of mediocrity and worse. If we begin now, several years down the line we will have that set of educated people who will comprise the backbone of what has come to be called the ‘knowledge economy’. Without increased expenditure from government and the commitment of teachers to their students, their discipline and their institutions, all this talk about an education hub is a hollow hubbub. Ignore it.

Conclusion

Nobody underestimates the importance of short-term stability of the economy in policy formulation. However, we seek stability in a growing economy. For the last dozen or so years we have been obsessed with short-term stability neglecting those policies essential to promote long-term growth. Among these, policies relating to exports and education and health are predominant now that physical infra-structure has received fair attention. This change of directions will need government to collect and the public to pay more in taxes. This prescription will not be sweet either to the populist government we have or the public who for a variety of reasons is reluctant to pay taxes. But most medicines are bitter! On that sweet note, I end.