Sri Lanka’s Auditor General and Steve Jobs’ Garden Fence

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

A few days ago, I read up on an interesting anecdote from the life of Steve Jobs. When Steve was a child, his father had asked him to paint the fence around his house. Steve took the task up and painted the outside of the fence. When he proudly presented his hard work to his father, the father questioned why only the outside of the fence was painted. Steve replied: “Dad, no one sees the other side of the fence!”

To that, his dad responded: “Steve, but we will see it.” Many years later, when Steve briefed his engineering team on the deliverables of the Macintosh computer, he said to them: “I want the outside of the computer’s aesthetics and design to be outstanding. But I also want the inside of the computer to be more outstanding than the outside.” To that, his team responded: “Why do we need to spend so much time, effort, and money on the inside of the computer? No one really sees the inside!”

Steve replied: “But we will see it.”

The ongoing debate on the dilution of the Auditor General’s powers has reminded us of the need to paint both sides of our fence if we want to see a developed and prosperous Sri Lanka.

The development, prosperity, and progress we see in any society or institution are a result of structural changes, self-discipline, and systematic advances of working on an in-depth value system. That is why self-control is always better than state control.

Audits and checks and balances are unseen on the inside. What we see on the outside is a reflection of our society on the inside. Therefore, Sri Lankans not reaching our full potential is interconnected to the absence of many systems of accountability and transparency. Audits and checks and balances should come from within. What we see outside is merely a reflection of who we truly are on the inside. Sri Lankan society lags behind for this very reason, as we lack the many systems of accountability and transparency necessary for growth.

Systematic misgovernance

If you ask any Sri Lankan why their country is still developing, they will give you three reasons: corruption, waste, and misgovernance. What we see on the outside as low productivity, inefficiency, and delays are a result of a lack of accountability, transparency, audits, and checks and balances. This is not only valid for our public sector but also for our private sector.

In the context of the 20th Amendment, the proposed Clause 31 repeals article 153 (1) of the Constitution which mandated that the Auditor General be a qualified auditor subject to the approval of the Constitutional Council (CC), following which, s/he would be appointed by the President. The removal of this by the 20th Amendment opens the risk of appointing an Auditor General who wouldn’t possess the qualifications required for the position.

The risk of providing constitutional leeway in appointing an unqualified Auditor General is multidimensional. A greater degree of Sri Lanka’s corruption and crime is white-collar crime, and given the legal structure of Sri Lanka, even qualified auditors are finding it difficult to audit.

The VAT (value-added tax) scandal reported many years ago and the more recent Central Bank bond fiasco all indicate the enormous cost of ignoring simple processes, which when multiplied can cripple our entire economy. Unfortunately, the need for such processes only come into the limelight when things go wrong, while the positive results of having due process usually don’t make it to newspaper headlines.

Accountability is key

Even under the 19th Amendment, the Auditor General’s powers did not include the ability to audit state-owned enterprises (SOEs) incorporated through the Companies Act in which the government has a stake of less than 50%. Maintaining accountability in most of our gigantic SOEs that the Treasury has supported with taxpayer money has failed! Most SOEs have failed to produce even a basic annual report over the years for the benefit of the public, even though the revenue of some public enterprises is nearly half a trillion.

There are more than 500 SOEs of different scales which waste a colossal amount of taxpayer money, and there is no excuse that can be provided for not producing annual accounts when earning half a trillion rupees in revenue.

The space created by the 20th Amendment for SOEs to not get audited by the Auditor General will set a bad example for all businesses. The collective losses of only 16 strategic SOEs in 2018 amounted to Rs. 156.73 billion, which is equivalent to more than thrice (Rs. 47 billion in 2017) the expenditure of the Samurdhi Programme.

One may ask why corruption levels were still high with the Auditor General having the power to audit under the 19th Amendment, and when there were additional checks such as having an Opposition member heading the Committee on Public Enterprises (COPE) and opening COPE meetings to the media; it is true that neither the Auditor General nor opening COPE meetings to the media will solve all corruption problems within SOEs.

If the level of corruption and misgovernance was high even with the Auditor General’s powers under the 19th Amendment, imagine how the situation would be without such supervision. We sincerely hope that at the committee stage, matters pertaining to the transparency and accountability of SOEs will be taken seriously.

Improving systems and doing things better than we did in the past must be the way forward if we are serious about a “system change”. In order to strengthen governance, we should at least list strategic SOEs at the Colombo Stock Exchange (CSE) so that these institutions will have no choice but to adhere to the governance structure of the CSE. One other measure is to provide the Auditor General with more power to investigate SOEs incorporated through the Companies Act in which the government has less than 50% stake, as most SOEs have the practice of incorporating subsidiaries and sub-subsidiaries under the main SOE with different stakeholder arrangements.

In public policy, dismantling an existing accountability measure without an alternative could be highly problematic, given the level of corruption rooted in Sri Lankan society. Sri Lanka has dropped from 89th to 93rd in the Corruption Perception Index for 2019 by Transparency International.

If you observe any successful private company or society, there are systems and procedures that have been refined over the years with the advancement of technology to reach where they are today. Our attitude towards accountability measures has to change as a way of painting the fence on the inside even though no one sees it. Ultimately, what we see on the outside is what we build inside.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Trade, deglobalization and the new mercantilism

Originally appeared on the Hinrich Foundation

By Prof. Razeen Sally

The COVID-19 pandemic is accelerating shifts underway since the last global financial crisis (GFC). It ushers in a new era of deglobalisation and protectionism, indeed a new mercantilist world order.

Three global shifts will shape international trade. They will probably last beyond the immediate crisis to the “post-vaccine” future. The first is an accelerated shift from Market to State: more government interventions will further restrict markets. The second is to national unilateralism – governments acting on their own, often against each other – at the expense of global cooperation. The third is to more contested and unstable geopolitics, centred on US-China rivalry. Taken together, they herald a new mercantilism, whose main precedents are Europe and its colonial expansion in the seventeenth and eighteenth centuries, and the period between the two world wars in the first half of the twentieth century.

Mercantilism – the exercise of state power to control markets domestically and internationally – existed after 1945, but was constrained by the expansion of markets: it was relatively benign. But malign mercantilism governed the preceding decades, shattering domestic economies, shrinking individual freedom, destroying the world economy, and so poisoning international politics as to culminate in global war. Today’s emerging mercantilism is still far from that reality, but it risks heading in that direction.

Another set of historical precedents is also relevant. Increasingly, the US-China conflict today echoes that of the US and the Soviet Union in the “old” cold war. But China today, unlike the former Soviet Union, is an authoritarian (not totalitarian) power with a state-directed and partly globalised market economy (not a sealed-off command economy). China better resembles Germany and Japan as rising powers in the late nineteenth and early twentieth centuries. And US-China rivalry today better resembles that of the UK and Germany before the first world war: a contest between the established power, with a liberal-democratic political system and a free-market economy, and a rising power, with an authoritarian political system and a state-guided market economy.

Three eras of international trade preceded the present pandemic. The first – the quarter-century until the GFC – was an era of unprecedented liberalisation and globalisation. The second – the near-decade after the GFC – saw globalisation stall, though not reverse, and trade growth stagnate alongside “creeping” protectionism. The third, starting in early 2017, was triggered by President Trump, partly to retaliate against increasing Chinese protectionism. It centred on a US-China trade war but rippled out into copycatting protectionism by other countries. Protectionism went from creeping to galloping.

This pandemic has triggered the worst deglobalisation since 1945. International trade may shrink by up to a third, foreign direct investment by up to 40 per cent, and international remittances by 20 per cent, this year. The trade outlook is worse than it was during the GFC in two ways. Now economic contraction is synchronised around the world; during and after the GFC, fast growth in emerging markets, led by China, cushioned the fall in trade and enabled a recovery. Now services trade is suffering even more than goods trade; travel and tourism have collapsed. The GFC, in contrast, hit goods trade hard but services trade was more resilient, especially fast-growing travel and tourism. Now there are signs of a protectionist upsurge, starting with export bans on medical equipment, with new restrictions on foreign ownership in the pipeline.

What is the medium-term – post-vaccine – trade outlook?

First, protectionism is likely to increase as a spillover of domestic state – particularly industrial-policy – interventions that last beyond the present crisis. Crisis-induced subsidies will be difficult to reverse wholesale and will have trade-discriminating effects. New screening requirements might have a chilling effect on foreign investment. These and other interventions to protect domestic sectors and national champions have a home-production bias. The list of “strategic” sectors to protect on “national security” grounds against foreign competition will likely expand. There will probably be more restrictions on migration and the cross-border movement of workers.

Two precedents are relevant: the “new protectionism” of the 1970s and ‘80s, which partly resulted from bigger, more interventionist government in domestic markets; and, more perniciously, the expansion of government after the first world war, which empowered interest groups to lobby effectively for restricted imports, foreign investment and immigration.

Second, national unilateralism – this time “illiberal unilateralism” – will likely expand and make effective regional and global policy cooperation more difficult. It bodes ill for the WTO, APEC and the G20, also for regional organisations such as ASEAN, and will cramp the liberalising effects of stronger preferential trade agreements. This only increases the prospect of tit-for-tat retaliation, starting with the Big Three (the US, EU and China), and copycatting protectionism that will spread around the world.

Third, the reorientation of global value chains will accelerate. Western multinationals will relocate parts of their production from China to other countries on cost grounds, as they have been doing, but increasingly on political-risk and security grounds as well. There will be a combination of onshoring, near-shoring and regionalisation of value chains, which will vary widely by sector. But the overall effect will be to raise costs for producers and consumers.

Fourth, international trade will be hit harder by a more fractured and conflictual geopolitical environment, especially US-China rivalry, but not helped either by an inward-looking and divided EU. It will be squeezed between more unstable geopolitics and the recalibration of states and markets – more “state” and less “market” – domestically.

All the above points to a new mercantilist trade order that might be more malign than benign, echoing the “new protectionism” of the 1970s and early ‘80s, or, even more worryingly, the 1920s and ‘30s.

My ideal world is a classical-liberal one: limited government, free markets and free trade, underpinned by appropriate domestic and international rules. I would add political liberalism and legally protected individual freedoms. The post-1945 global order was some distance from this classical-liberal ideal, but it was liberal enough to deliver unprecedented freedom and prosperity. From this vantage point, the new mercantilist order, with emerging malign characteristics, is alarming – bad economics, politics and international relations; bad for individual freedoms and global prosperity. As a realist, however, I must take the world “as it is” rather than indulge in wishful thinking. To improve the world, principled liberalism must be combined with practical realism.

I believe the two biggest threats to global order are rising illiberal populism in the West, endangering the West’s adherence to its own liberal values, and the increasingly aggressive illiberalism of the Chinese party-state. Both have mercantilist features that spill over the border into protectionism and restricted globalisation. Both feed off each other in a global negative-sum game. Hence both must be resisted: naivety and complacency should apply to neither.

China under Xi Jinping, with its mix of authoritarianism, a state-directed market economy and external assertiveness, is becoming a classic mercantilist power, like Germany and Japan in the late nineteenth century and early twentieth century. Its external power projection, especially in the last decade, looks quite different to that of the US in the Pax Americana. Of course, at times, here and there, the US threw its weight about unilaterally and arbitrarily. But the essence of US leadership was to provide public goods for a stable, open and prosperous world order. It did so by organising concerts of international and regional cooperation. In international trade, that took the form of the GATT, later the WTO, and the multilateral rules it administers.

China, in contrast, prioritises a combination of unilateral and bilateral action to expand and entrench its power. That subsumes the expansion of the PLA Navy in the East China Sea, South China Sea and Indian Ocean; and tight, asymmetric bilateral relations with smaller, weaker states in a twenty-first-century recreation of the ancient tributary system. The Belt and Road Initiative should be seen in this frame: a network of hub-and-spoke bilateral relationships in which China wields power over-dependent states. This is classic mercantilism. It privileges discretionary power, exercised unilaterally and bilaterally, over plurilateral and multilateral rules that constrain such power.

China – meaning the Chinese Communist party-state – presents a pressing challenge to the liberal world order. Dealing with this challenge will require some trade, technological and investment restrictions, and limited supply-chain decoupling. But that could easily descend into an all-round mercantilist and deglobalisation spiral. Hence China must be engaged at the same time, not least to preserve existing links that are mutually beneficial. Engagement and strategic decoupling need not be mutually exclusive. Still, this will prove an incredibly difficult, perhaps elusive, balancing act.

Liberal or semi-liberal small states and middle powers in Asia, the West and elsewhere have a crucial role to combat malign mercantilism. In Asia, this group includes Japan, South Korea, Taiwan, Singapore, Australia and New Zealand. They need to keep their economies and societies open; demonstrate best policy and institutional practice (as they have done in this pandemic crisis); build coalitions of the willing on trade and other issues; strengthen alliances with the US and EU to nudge them to be more outward-looking and globally constructive, and finesse a mix of strategic decoupling and engagement on China. But doing all that in a global mercantilist environment will be an uphill struggle.

Prof. Razeen Sally is a visiting associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also the author of "Return to Sri Lanka: Travels in a Paradoxical Island."

Why Sri Lankans aim low

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

Over the years, a lot of weight has been put on building “aspirational Sri Lankans”. Different terminologies have been used to define them; however, the core group of the so-called aspirational Sri Lankans remains the same – “intellectuals”, “business professionals”, “young professionals”, and “members of professional movements”. The key question then is what makes aspirational Sri Lankans aspirational, and why have they been unsuccessful in placing Sri Lanka back on the map?

Where are our aspirations?

Many Sri Lankans aspire to build a house, buy a vehicle, and probably have a grand wedding and proceed on to provide a good education for their children. Achieving these aspirations continues throughout their lifecycle. Then, the next generation takes the baton and runs the same race. This is the constant marathon run by our “aspirational Sri Lankans” for decades.

The serious question we need to ask ourselves is why basic needs such as housing and transportation have become aspirations for the average Sri Lankan in the 21st Century. Moreover, attention should be given to the opportunity costs of obsessing over housing and transportation by these “aspirational Sri Lankans” – what could be achieved if this was not the case?

Why people consume capital by building a house

While it is true that the financial literacy of Sri Lankans is low and that we have failed at the formation of capital due to excessive consumption from our initial capital instead of investing, we also need to investigate the economic rationale behind such behaviour. The reason as to why basic needs such as housing have become a distant dream to the average Sri Lankan is deeply rooted in the distortion of prices in the housing market due to the implementation of misguided economic policies. Most of the construction material in Sri Lanka is far more expensive than the prices of the said material in the entire region. The total tax Sri Lankans pay for imported steel ranges between 19% and 64%.

The tax on imported tiles ranges between 19% and 93%, and at present, the Government has imposed a temporary import restriction on tiles and sanitaryware, driving the prices of local goods up. Anyone who has attempted to build a house would know how ridiculous the prices for light fittings, curtains, aluminium, and other material are. Sri Lanka also has a shortage of skilled labour, and finding a mason or a furniture craftsman is not only difficult but also expensive. They have become expensive on the basis of productivity. If you are wondering why Chinese labour has expanded beyond large-scale construction to small-scale residential construction, the answer is rooted in productivity. Chinese labourers are five times more productive (according to an in-depth interview conducted by the author with an apartment builder) than the Sri Lankan labourer.

High import tariffs and import bans have led to skyrocketing domestic prices, and now the simple transaction of buying or building a house has become a lifetime dream of the aspirational Sri Lankan. If you ask a banker for their reason for remaining in that job, they will tell you that it is the concessionary “housing loan’” and “vehicle loan” that attracted them. While a fortune will be spent on building a house, there will be limited funds to explore better education opportunities, hereby pushing the tertiary education of young professionals to the grave due to extra prices paid for inefficiencies in housing.

The existing land issues, the inability to transfer properties, and lack of property rights have made the situation worse. So in real terms, the “aspirational Sri Lankan’s” capital that they couldn’t invest for returns was not invested in their house, but rather in the extra price they paid for construction. More importantly, potential aspirational Sri Lankans are expending valuable energy in trying to overcome the consequences of these misguided economic policies.

Where is the capital for the vehicle?

It is no secret that Sri Lanka’s vehicle market is one of the most distorted markets. Based on the usage of the vehicle, the value increases, and we pay exorbitant amounts of tax at the point of importing a vehicle. Making things worse is the vehicle permit system that is only available to VVIPS and few professions.

So what is the incentive to be an aspirational Sri Lankan? Is it to take the risk of investing the capital and trying to consume from the yield, allowing the capital to multiply, while lobby groups and politically connected pressure groups not only get a vehicle permit but also the legal blessing to sell despite tax losses to the government?

The permit culture is not only in buying vehicles, but it is also in the public transportation system where route permits for public transportation are more expensive than the bus itself, even though the cost of a bus is multiplied several times over when you factor in the tax.

Yet again in the real world, the aspirational hardworking Sri Lankan’s capital, which they never invested (which they did not have the knowledge to invest), gets gobbled down in distorted markets that are protected from competition. 

Even when looking at leisure and recreation, the cost of recovering capital invested in the construction of a hotel is passed on as room rates at prices that are higher than those of similar destinations in the region, because of our high cost of construction. At weddings, the costs of the food they serve, electrical appliances, storage, and prices of cutlery, liquor, etc. are added to the final cost of a plate at a wedding. Hence, there is no alternative but to eat away at the capital that belongs to the average aspirational Sri Lankan. 

It is true many Sri Lankans get into this trap by trying to live beyond their means, spending lavishly at weddings, building bigger houses than they require, and buying vehicles due to a lack of financial literacy. But the reasons why artificial value has been created for basics such as housing and commuting is misguided economic policies.

What young entrepreneurs chase as aspirations are not the real aspirations that could put Sri Lanka back on the map. The very reason for this is that our prices do not indicate the true value of the product or service and the real value it offers. The concept of “price” is of paramount importance. It is the single indicator of value, resource scarcity, productivity, supply, demand, and so many variables that are all encapsulated in that single number called “price”.

When governments and policies intervene in demarcating prices, the price set is a result of people chasing the wrong things and the entirety of society has to bear the cost and loss of it.

What we need is to set a culture of hard work and free exchange where young entrepreneurs are provided with a level playing field, right incentive structures, and motivation to be productive and innovative – that is the real expectation of the aspirational Sri Lankan which has now been shadowed by glittery basics such as housing and buying a vehicle. Until we work towards that, we will not be able to see a new Sri Lanka nor will aspirational Sri Lankans ever prosper.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why ‘banning culture’ is no solution

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

Last week, the Government proposed a ban on sachet packets as a measure to protect the environment. And now, another proposal has been tabled – banning the slaughter of cattle. This is not the first time such strict measures have been imposed by consecutive governments, but it is paramount that we understand the economics and unintended consequences behind “banning”.

Before we jump to any conclusions, let’s just take a look at the results of similar policies adopted in the past, to get a taste of this “banning strategy”.

Previously, we saw a proposal to ban polythene below 20 microns in thickness to protect the environment and it was not too long ago when the former President announced a ban on chainsaws and carpentry sheds. A simple visit to the market is sufficient to demonstrate the extent these banning mechanisms have been productive.

Earlier this year, the Government learned a bitter lesson on imposing “price controls” (which is sort of a ban on selling at high prices) on tin fish and dhal. The price controls had to be revoked due to obvious market disruptions. Prices shot up, and there were shortages in the market, which was the complete opposite of what the Government intended.

A common belief is that the “banning strategy” often fails or is less effective due to poor implementation. This is far from the truth. There is very much a market and an economic dimension that show the concept in itself is flawed, which we often fail to understand.

Emotional policymakers often get the art of public policy drastically wrong. They view it through an accounting lens due to a lack of knowledge on human behavioural economics and the presence of the concept called “markets”. As a result, all good intentions result in far worse consequences.

Ban on sachets

The concept of sachets was introduced by FMCG (fast-moving consumer goods) market players on the basis of affordability and as a measure of resource allocation. Someone who cannot afford a full bottle of shampoo or any other equivalent product can use a sachet as a one-time useable product, based on the requirement. This is easy on customers’ wallets and provides value for money.

A good reason why sachets are predominantly available in general trade and mom-and-pop shops as opposed to modern trade is its easy access and affordability for the poor. On the other hand, from the manufacturer’s end, sachets help to allocate raw materials effectively and allow them to reach the market.

According to a recent article by Dr. Rohantha Athukorala, a Neilson Survey revealed that people have reduced the usage of baby soap by 18% and adult soap consumption by 17%. This indicates how people who find it difficult to manage their finances resort to eliminating basic hygiene products like adult and baby soap due to unaffordability. Cutting down on baby soap indicates a booming cost of living problem which goes beyond soap usage.

The ban on sachets will be a double whammy for most vulnerable people in society who are voiceless. All FMCG companies spend an enormous amount of money before they launch any SKU (stock-keeping unit), and we need to understand this was a market demand.

A sudden decision without prior engagement with the industry and relevant stakeholders will push manufactures to an extremely difficult situation, which will demand them to realign their manufacturing and marketing strategies in an already challenged Covid-19 economic environment. We have often forgotten that polythene is a wonderful innovation, and where its hydrocarbons are recycled to produce electronic chips and fabric.

MAS Holdings manufactured a special fabric for our cricket World Cup team with marine plastic waste which received global recognition. This can be utilised as an effective example to understand that the prime need is for setting up proper recycling methods coupled with incentives and disincentives.

Already, the discussion is heated on serious environmental concerns such as that of the Anawilundawa Wetland Sanctuary and many other places across the island, as highlighted through this column last week. The Government has to keep an eye on more macro issues pertaining to environmental protection rather than obsessively focusing on micro issues. These “banning strategies” will dilute the Government’s well-earned political capital, which will make hard reforms difficult in the coming years.

Import controls

Import controls are another form of ban on a temporary basis. The Government’s urgent need to manage its Balance of Payment (BoP) crisis is understandable. However, this requires a series of different actions coupled with temporary solutions such as bailout programmes from the IMF (International Monetary Fund) and clear policy decisions to help make our exports competitive.

Import controls hurt exports as the prices of import substitutes rise, especially where the goods are used as an input for the production of exports. In addition, import substitutes become more profitable to produce than exports.

The result of the current import ban is highly likely to affect our existing exports, as we have indicated in this column multiple times. Already, people are struggling to buy phone chargers, repair washing machines, and purchase goods which are required on a daily basis. We are running on existing stocks which will expire soon and prices have already started going up.

On the other hand, in our import bill, the big-ticket item is fuel and essentials such as pharmaceuticals, which are very difficult to control. The General Hospital has already announced a shortage of 70 essential drugs. These drugs are used to treat diseases such as Thalassemia and heart-related conditions.

However, trying to cut corners of other imports carry the potential to distort various other markets, businesses, and value chains horizontally, vertically, upstream, and downstream due to price hikes.

Prices of vehicle tyres and spare parts have shot up, which will have an impact on all goods and services with a transportation cost component. At one point, the collective effect of the rising cost of multiple consumable goods and intermediary goods may go beyond people’s affordability.

Releasing import controls at this point would be too late, given the situation of our currency. The higher cost of living will impact labour prices and most of our value addition in exports which are in the form of labour will be uncompetitive over a period, which will affect our main exports such as apparels, tea, and rubber products. In economics, the need is to take a look at the market from a holistic perspective. Otherwise, similar issues will arise over and over again.

The best example is higher prices requested by the poultry industry and the bakery industry. Sri Lanka’s maize production is not at all sufficient for domestic consumption, which is the main source of food for poultry. As a result of higher prices of maize, the prices of poultry products have shot up, which will have an impact on the bakery industry. Now you have a happy maize farmer but an unhappy poultry farmer and a baker. Eventually, this will translate to an unhappy consumer and a very unhappy voter.

Ban on slaughtering cattle

Adding to the banning spree, the proposed ban on slaughtering cattle is the latest. This may cause more damage rather than being helpful for the protection of cattle in Sri Lanka. However, the Cabinet Spokesperson mentioned the proposal was postponed by one month so as to allow for discussions with the relevant stakeholders.

Though the proposal may have been put forward with good intentions in terms of animal cruelty, India is a good example of how such policies don’t work. Cattle owners in India are left with no option other than to resort to the creation of illegal and unsanitary slaughtering houses and illegal markets.

Keeping aside the logical fallacy of placing a ban only on the slaughter of cattle and not the entirety of the poultry and meat industry, and the justification of leaving domestic demand to only be met through the importation of beef, the matter goes far beyond that.

The beef industry does not exist in isolation; our leather industry, dairy industry, and leather exports are also dependent on it. According to the Export Development Board (EDB), in 2016, about 1% of total merchandise exports consisted of footwear and leather products, which has now dropped to 0.6% of our merchandise exports.

According to the EDB, there are about five large companies, 10 medium-scale companies, and more than 1,000 small enterprises and seven tanneries that produce 25 tonnes of leather every day.

If passed by Parliament, this proposed ban on cattle slaughter will prevail at the expense of 1,000 small enterprises and exports worth $ 550 million. While animal cruelty is of grave importance, sometimes in life we have to keep some markets for the greater good and to avoid much greater negative impacts.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Environment vs. development: It's all about land

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

The question of how to develop Sri Lanka without obstructing our valuable environmental ecosystems has come to the forefront yet again. The recent incidents surrounding the development of a road in the territory of the Sinharaja Rainforest, a World Heritage Site, is one prominent discussion.

The deforestation in Haputale for cardamom cultivation and the establishment of a prawn farm in Anawilundawa, a Ramsar wetland, also raised serious concerns among the general public and environmental activists, adding more fuel to the debate on development vs. environmental protection.

This debate has come to a point where questions are being asked on whether Sri Lanka can be developed without disrupting the environment, and whether environmental activism is hindering the development of the country.

This is not the first time this topic had taken centre stage. “Save Wilpattu”, the Mount Lavina beach expansion project and the development of the Port City have been popular thematic stories over the years; the human-elephant conflict (HEC) is a continuous battle that gets primetime news coverage too.

What’s the real problem?

On the surface, it seems that all the incidents are a result of efforts to strike a balance between development and environment – which is true to an extent. However, if we dig a little deeper, in economic terms, it is a clear case of an attempt to maximise the utility of a scarce resource – “land”; at the same time, it is an issue of property rights.

And all that we’re seeing is an outcome of our inability to maximise the utility of land by improving productivity, alongside the absence of “property rights”.

Let me explain why and how.

Forests are sacrificed due to the absence of property rights

One of Sri Lanka’s most limited and precious resources is “land”; being a tiny island which is just a dot on the world map, land is not in abundance for us. Our size as a country is quite smaller than average cities or states in the rest of the world. Unlike other resources, land is fixed in size, and increasing the extent of land (similar to what was done with the Colombo Port City) is an extremely expensive affair, both monetarily and environmentally.

Sri Lanka’s total land extent is about 6.6 million hectares. Can you take a guess on the amount of land owned by the Government and the amount of land owned privately by its own Sri Lankan citizens?

Only about 18% (1.2 million hectares) of the land is owned privately by its citizens while about 82% (5.4 million hectares) of the total land is owned by the Government.

About 28% of our total land is forest cover, according to the FAO (Food and Agriculture Organisation of the US). Out of this, about 573,400 hectares (2,214 sq. mi.) of land is categorised as “Protected Nature Reserves”.

So in reality, the Government owns about half of Sri Lanka’s land (more than 50%), and this can be used for economic activity and environmental purposes. We should not be misled into thinking that private land is owned by anyone else other than our fellow Sri Lankans. In other words, many Sri Lankans do not have the rights to their property; they do not have deed titles; many of our fellow Sri Lankans do not have access to land, and the limited access some Sri Lankans have to government land is on a license basis.

According to news reports, a Sri Lankan has to visit 20 institutions just to get clearance (not to obtain a deed title) on land for cultivation on a lease basis. They have to take a licence from the government office if they are to cultivate on land owned by the government; as they do not own it, they have no incentive to use it sustainably.

As a result of agriculture, illegal settlements, and economic activity, the borders of forest land have always been blurred. It has been reported that usually, surrounding villagers and elite businessmen who have political and influential power encroach forest land for commercial purposes. Information reported on deforestation and obstructions on environmental ecosystems make up just a fraction of the ground reality. This is because most illegal deforestation takes place in obscure locations close to forest cover, which is difficult to track.

Inability to maximise on lands and its utility

The inability to protect our land and forest cover is a completely internal issue and of course a political football pertaining to a very sensitive issue. Whether we like it or not, the “market” works in good-case scenarios and worst-case scenarios. When Sri Lanka has a rising population with more households, and when people do not have land and property rights for agriculture or many more economic activities including housing and investments, what do you think would be the outcome if we fail to improve productive usage of land? For example, if we fail to improve the productivity of land by constructing vertical buildings, what would the outcome be if all five million households expect to build houses on 10 to 20-perch plots of land? The same applies to agricultural land, and this is one of the main contributory factors to deforestation across the globe.

According to the Economic Census in 2013/2014, about 2.2 million hectares were used for agriculture, an increase of 18% from 2002. It is obvious that in order to feed our population and sustain economic activity, our land usage has increased. However, we need to focus on improving productivity and efficiency by utilising it effectively for agricultural purposes if we are serious about protecting our forest cover. We have to move to high-yield varieties and vertical farming, and again, it boils down to accessing property rights if we were to increase the utility of land through investment. No person would invest in land they would not want to own. Unfortunately, most of Sri Lanka’s land is dead capital. No one uses it and there is no economic activity. Now, Sri Lanka expects to be self-sufficient in paddy, milk, maize, and vegetables and is aiming to supply the entire demand for rubber within the country. Sri Lanka is also aiming to expand coconut product exports by fewfold; where do we have the land to do all this? We need to take our land policy seriously or else we will put our forest cover into further risk.

President received firsthand information

The President received firsthand information on the gravity of the land issue. One of the main requests by the people or fellow Sri Lankans is for the Government to provide them with land.

His Excellency the President, in his policy statement, stated that land issues are one of his priority areas. Moreover, there were recent news reports on his directives to the relevant institutions to issue title deeds within three months which pertained to unresolved land issues.

Land issues are very sensitive, and all conspiracy theorists have a collective voice; they all suspect that foreigners and other parties may take over our land. However, since 1948, it’s been purely Sri Lankans who’ve owned the land. The responsibility cannot be passed on as it is our own leaders who control 82% of our land. (According to Sri Lanka’s regulations, there is minimal room for anyone who is not a legal citizen of Sri Lanka to buy land. Even the apartments and condominiums can be bought only if it’s above the fourth floor).

According to data, Sri Lanka lost about 490,000 hectares, or 20.9% of its forest cover, in just 20 years, from 1990 to 2010. If the majority of the land is governed by the State and if there is no room for any outsider to exploit our land, doesn’t this mean that we have really failed in our public policy and in understanding the economics of land management?

However, instead of looking inward, we have become masters of pointing fingers at outsiders and fearmongering to cover up our failure, and sadly, our forest cover has become the victim.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.