Why economic reality matters more than honesty

By Dhananath Fernando

Originally appeared on the Morning

At least once a week, we find ourselves blaming corruption and criticising how corrupt our current and former leaders are.

Blaming dishonesty and corruption often suggests that honesty alone could solve all our problems. Honesty, integrity, and transparency are universal values that we must all uphold. However, these values alone cannot guarantee success, especially if we lack an understanding of economics and how the world truly works.

The world operates on incentives. People naturally prioritise their self-interest, even when their actions seem altruistic. A common mistake is believing that policies based on good intentions will always lead to good outcomes.

However, in economics and public policy, success is measured by consequences, not intentions. A well-meaning policy, even when created by an honest person, can have disastrous outcomes. Good intentions alone are not an excuse for poor results in economics.

Take the example of the rice, coconut, and egg markets in Sri Lanka. In the case of rice, many believe that a mafia of rice millers hoarding stocks is the root cause of the problem. To address this, price controls were imposed with the honest intention of lowering prices. Instead, this led to shortages in the rice market and the creation of a black market.

When rice imports were allowed, the landing cost was around Rs. 130 per kilo. It was assumed that traders would add a profit margin if the imports were sold without price controls, so a tariff of Rs. 65 was imposed to limit their earnings.

This, however, resulted in consumers paying an additional Rs. 65 per kilo at a time when approximately 25% of the population lives below the poverty line. This demonstrates how well-intentioned policies can backfire when basic economic principles, like how price controls create shortages and tariffs burden the poor, are ignored.

A classic example of unintended consequences is the subsidy for kerosene. The subsidy was introduced to provide an affordable fuel source for poor households. At the refinery level, kerosene is a byproduct closely related to jet fuel.

The subsidy made kerosene so cheap that it created excessive demand, prompting industries to convert boilers and heat-generating systems to run on kerosene. Even tuk-tuks and long-distance buses began mixing kerosene with fuel to cut costs and boost performance. Once again, good intentions resulted in undesirable consequences.

The maize market provides a similar example. To encourage local maize farmers, a licensing system and high tariffs were introduced. This policy led to inflated maize prices, which significantly impacted the poultry industry since maize is a primary ingredient in animal feed.

As feed costs soared, chicken and egg prices increased, driving up the cost of bakery items. At a time when 25% of the population lives in poverty, the policy intended to protect maize farmers ended up raising food prices for everyone, disproportionately affecting the poor.

Even in the coconut market, the story is no different. Coconut imports are prohibited, forcing domestic production to meet all demands, including those for coconut oil and other byproducts. If imports of specific varieties were allowed, the prime coconuts could be reserved for export, potentially increasing export revenue.

While transparency, honesty, and integrity are essential values, they are not substitutes for sound economic principles. Economics operates on incentives and consequences. In public policy, we must focus on outcomes rather than intentions. That’s why, in economics, honesty alone is not enough – it must be accompanied by an understanding of how systems work.