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Analysing Sri Lanka’s market economy 

31 Oct 2021

BY Imesh Ranasinghe  When you travel towards Fort starting from Wellawatte along the Galle Road, you will notice places such as the Marino Mall, One Galle Face, new sky-high buildings under construction, new apartments, star hotels, and office spaces with names you have never heard of and sometimes you will never know what these offices with new names are doing.  But if you go back about a couple of decades down memory lane, you will probably say things such as, “This is new” or “This used to be a good eating place” and even “Ah finally, that old house is taken care of”.  These new places and new buildings could be shown as examples of investments and development under a market economy.  What is a market economy? The great Austrian economist Ludwig von Mises once said, “The market is not a place, a thing, or a collective entity. It is a process.”  Although, the market economy came out in Sri Lanka as early as the 1970s it did not reap the benefits from it due to various reasons. While other countries such as China who adopted it in the same decade are an economic superpower today with state capitalism involved.  Market economy, the only way forward  Many Sri Lankan economists note that going for a proper market economy model is the only solution the country has right now, in order to come out of its crisis.  Speaking to The Sunday Morning Business, Prof. Sirimal Abeyratne, Professor of Economics at the University of Colombo said that there are no other ways other than going for a market economy to come out of the current economic crisis in the country.  Prof. Abeyratne who was the former Chairman of the Monetary Policy Consultative Committee at the Central Bank of Sri Lanka said that being poor in an economic system is a choice, “either you choose to be poor or rich, it is same for a person and even for a country”.  “To become rich as a country I don’t know any other way other than giving prominence to the market economy,” he added.  Speaking on the fears that going for a market economy at the moment would put further stress on the foreign exchange, Prof. Abeyratne said that policy-makers and the country should stop statically looking at things and start looking at them in a dynamic sense.  He noted that so far even with mixed policies the country has not managed to secure its foreign exchange, but said that if foreign and local investors are shown a proper direction the country is heading, the investments for the country would rise within the next couple of years.  “Instead of borrowing, I think we should depend on investments and that will gradually relieve our foreign exchange problem,” he added.  Moreover, he said Sri Lanka will not be able to put up if policies such as import limitations which are against the market economy continue while providing a hard time to its citizens. “Because the politicians and the upper class can always find ways to satisfy their consumer requirements,” he stated.  Additionally, Prof. Prasanna Perera, Professor of Economics at the University of Peradeniya, said there is no other option left for Sri Lanka rather than going for a market economy. “If you are in a well, you have to come out from the well itself.”  Prof. Perera who had worked in many Government agencies such as the Civil Aviation Authority, Sri Lanka Ports Authority, and Ceylon Petroleum Corporation said that Sri Lanka’s Board of Investment (BOI) has not been able to get any reasonable investment for the country in the last few years, and while there is a huge expenditure on the BOI, they have failed to serve the country well.  “We have to rely on FDIs in this scenario so, therefore those people should be given targets,” he added.  Prof. Perera noted that Sri Lanka is not investor-friendly at all with bribes and corruption involved; he added that Singapore, which has a highly developed market economy, completely stopped bribery and corruption.  Sri Lanka was ranked 99 out of the 190 economies in the Ease of Doing Business Index 2020.  In 2018, the former government introduced a roadmap to up Sri Lanka’s position by 40 positions in the Doing Business Index by 2020, but the country managed to gain only 12 positions between the two years.  Although there are geopolitical issues, Prof. Perera stated that the country should optimise its welcome investments from the US, China, and India which will cause no harm concerning dollars or rupees invested, but added that with the recent downgrading of credit ratings the country has become a risk country to invest.  The open economy in 1977  In 1977, the open economy brought in by the J.R. Jayewardene government was a shock to the system, as the government enforced it without proper planning. The government did not map out an alternative to the possible winners and losers that would come out of liberalisation. They should have safety-netted other mechanisms to assist people who would lose jobs because certain sectors had to close down and assist them to secure employment and look after them until they found employment.  Since such mechanisms were not in place, Sri Lankan people could never fully see the benefits of the open economy, and hence today majority of the people believe that opening the economy was the worst thing that happened to the country.  Moreover, Prof. Abeyratne said that when in the late 70’s, the market economy was introduced to Sri Lanka it did not succeed although policy reforms were initiated by policy-makers then. He said that Sri Lanka did not succeed due to three simple reasons; first, the then policy-makers ignored the fundamentals of market economy, rule of law, and finally public sector reforms. He added that while ignoring the importance of the rule of law and public sector reforms the country had made those areas work against the market economy.  “The current market economy in Sri Lanka is like a house built without a foundation,” he said.  With bribes and corruption deeply rooted in the public sector and the rule of law not properly implemented, it will not be an easy task for the country to establish a proper market economy.  While Prof. Perera noted that the economic policy that was implemented in 1977 was not an open economy as the policies were not implemented properly.  Reminding of the famous statement by the late British economist Joan Robinson who visited Sri Lanka in the 1950s: “Ceylon ate the fruit before growing the tree”. Perera added that people are blaming the open economy but the mistake leaders made back then was not opening up the sectors carefully.  “The open economy should not be blamed but the people who introduced it should be blamed. You cannot blame the open economic policies as we did not carefully adopt those policies, certain policies you have to introduce gradually but we didn't, and we cannot think about any other model under this global scenario,” he said.  “We have completed a cycle from being a closed economy to another close economy,” Prof. Perera added.  Changes for a market economy model  But for the market economy to work, he said fundamental requirements should be in place, and this is what has happened to Sri Lanka.  According to him, this is where the Government has to play a role and where the market does not function, the Government can do two things, which is the Government can remove documents that hinder economic progress through the market process, and interfere on equity grounds.  Further, he said to reap the benefits of liberal economic policies the country needs to have a liberal society, which Sri Lanka does not have.  Sri Lanka should strengthen public administration, reform the SOEs, labour market, implement the rule of law, promote export, attract FDIs, reduce the budget deficit and public debt level for the much-needed growth-enhancing reforms under the existing free-market policy.  Also, it is important to address the high transaction cost involved with regulatory compliance and lack of confidence in regulatory agencies, costly and limited access to finances and unstable macroeconomic conditions.  Moreover, Prof. Perera added that the Government should stick to policies rather than reverting them to make the investors confident about the country.  No total free-market economy in the world  “There are no total free-market economies in the world, not even in the US or in Europe,” noted an economist who wished to remain.  A real free-market economy will allow the movement of goods, services, and people without any restriction. When considering Singapore, it is a free market economy in terms of goods as it allows other countries to export duty-free. Only within the European Union (EU), there is some freedom for the movement of goods, services, and people among the countries in the EU. Almost all economies are restricted in a way. The economist pointed out that rather than having a free economy, policy inconsistency has become a major problem in Sri Lanka’s economy.  In Sri Lanka, the economic policies change with the party in power; earlier the United National Party (UNP) which is centre-right is more market-oriented while the centre-left Sri Lanka Freedom Party (SLFP) is more domestic economy-oriented. From 1970-1977, Sri Lanka followed a close economic policy under Prime Minister Sirimavo Bandaranaike.  When there is a UNP government there will be a lot of liberalisation, with SLFP doing the complete opposite, but when Chandrika Bandaranaike Kumaratunga was the President between 1994-2005, she was more committed to an open market-oriented economy. However, the economic ideologies of the Sri Lanka Podujana Peramuna (SLPP) and Samagi Jana Balawegaya (SJB) are not clear.  Further, the economist noted that when looking at leading market economies in East Asia such as Japan and South Korea, they went against the free market and the government was heavily involved in their domestic industries by providing subsidies and assistance.  Even in the US, a lot of technological innovations came out after the government put money into research, and the Lee Kuan Yew government did a lot of intervention with the economy in Singapore.  “There is no single path to development, but the importance is that the policies must be sensible and made based on data analysis which is not the way it is done in Sri Lanka,” noted the economist.  The economist pointed out that the world as a whole is becoming more protectionist than ever, and before following Trump’s protectionism and Brexit, a sense of nationalism is rising again among many countries.  According to a survey done by the World Economic Forum on 25 leading economies in the world in 2021, the majority thinks that expanding trade is a good thing, but also agreed that more trade barriers were needed. Additionally, it highlighted that the support for globalisation has declined, with half of the people unsure of its benefits and a third advocating for trade barriers.  Image: World Economic Forum-Ipsos  Despite this widespread support for increased trade, more people agreed there should be more trade barriers to limit the import of foreign goods and services into their country. Some 37% agreed there should be more barriers compared to 27% who disagreed. Around a third were neutral or didn’t have an opinion. Image: World Economic Forum-Ipsos “This means that Sri Lanka is not alone, but everyone agrees that protectionism is going to be a challenge and something that has dampened the economic recovery as well,” the economist concluded.


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