Why we can’t afford another lockdown?

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

With the sudden spike in Covid-19 infections over the last few days, we have seen a re-emergence of discussion on a possible second wave. Globally, the Covid-19 numbers are increasing on the one hand, while countries have decided to resume activities on the other. However, when there is movement and interaction of people, there is a higher probability of the virus spreading.

Sri Lanka’s economy is at a stage where we can’t afford to face any economic shocks, given the bad economic fundamentals we have been practising over the years. The pandemic has re-exposed these weaknesses and for this, we might have to pay a considerable price as compensation for our past sins of economic mismanagement.

A second wave of the pandemic would bring in a significant array of economic challenges for both the developed and the developing worlds. However, Sri Lanka’s challenges are structurally unique as our economic problems have reached a boiling point.

Our economic problems at a boiling point

Relief schemes provided by the Government during the first lockdown and the economic revival measures scraped the bottom of our barrel, and the ability to absorb a second lockdown is a serious question.

We require foreign currency to pay our external debt at an average of $ 4 billion for the coming three years. Our exports have been declining over the years and Covid-19 has impacted the remaining markets; with a second wave, it will continue to bring new challenges. Our tax revenue is declining and rating agencies have downgraded our credit rating. As a result, investor confidence is low, making it difficult to raise money from markets even to roll over our debt and interest repayments.

Most of our workforce is in the Government and our government expenditure is burdened by salaries, pensions, and welfare structures. These welfare structures (Samurdhi relief, support for low-income differently-abled persons, financial support for the elderly, financial support for kidney patients, flood and drought relief, allowance for preschool teachers, etc.) are inefficient and ineffective. Our remittances, which is one of the main sources of foreign currency, are expected to decline further with Covid-19.

To manage the existing limited foreign revenue and foreign reserves, the Government has imposed import controls. The need to manage our foreign currency income is understandable. However, we cannot rule out the consequences of a further decline in government revenue and the impact this will have on our export industries. Furthermore, prices of consumable goods in the mid and long run are very likely to go up, making things further difficult.

How import controls hit govt. revenue and exports

According to 2018 statistics by the Ministry of Finance, 49% of government revenue was generated from import-based taxes. As per the Mid-Year Fiscal Position Report 2020, from January to April, over 55% of government revenue had been from import-based tax (savings from the lower fuel prices in the world market are one reason for higher import revenue). The Government extending import controls will result in a further decline in government revenue in the next quarter. While income is declining, our main expenditure items such as salaries and pensions are on the rise. Our recurrent expenditure – salaries (Rs. 253.8 billion), pensions (Rs. 79.8 billion), interest payments (Rs. 336 billion), and other payments (Rs. 150.7 billion) – are at Rs. 820 billion from January to April 2020, but our total revenue including a profit transfer from the Central Bank is at Rs. 476 billion. Calculations illustrate that after paying interest payments, we are running short of revenue to pay even our salaries and pensions, let alone other payments.

While import controls impact our national revenue significantly, it will have a higher impact on local businesses – just take computers, for example. If there is a restriction on computer imports and spare parts over time, we will face a challenge in replacing and upgrading the computers we use at present. Needless to say, this would affect the work of government offices and decrease our work efficiency as a significant proportion of the work is done through computers. This is just one example. We haven’t really felt the impact of import controls as we are still using existing stocks. Most imports we use for the moment are, to an extent, durable product categories, but in the mid and long term, people would feel the drop in efficiency and witness price increases.

The very same import controls impact our export businesses as most of the imports are used by local businesses to produce consumable goods and exports. (Think on the same lines of restrictions on importing computers.) The efficiency drop will impact the prices of exports to increase, making it difficult to compete in global markets. Industries like plantations will have further pressure to increase salaries with the high cost of living. Already many industries have indicated the difficulty to sustain their operations due to import controls. From the Government’s point of view, the need to manage the availability of foreign reserves is justifiable, but there will be significantly bigger costs and consequences to the local economy and the consumer.

Can we afford another lockdown?

Looking at the problems at hand and as all problems are reaching a boiling point, it is difficult to have another standstill in our economy. The only possible solution is to keep the movement of people between selected borders between districts or divisional secretariats while adhering to health guidelines, thus keeping the economy afloat running. Of course, the commute of the workforce between borders will have complications, but since most of us have hit rock bottom in our economic conditions, we are left with a very few alternatives.

The ideal solution for the foreign currency shortage is to secure a programme with the International Monetary Fund (IMF), as recommended by us. Such an IMF programme will require significant structural reforms. Another significant determinant by the IMF would be the need for a democratically elected government, meaning that a possible postponement of the election would be detrimental to seek such financial injections.

Probable solutions

The problems at hand have no quick fixes, and quick fixes will only worsen the current situation. First of all, we as a community should take precautions, adhere to all health and safety guidelines, and thereby stop contributing to the spread of Covid-19; we really can’t afford a second lockdown. Secondly, the problem with our economy is neither the high imports nor the consumption of imported goods – our problem is that our economy is not competitive or efficient. Our problem is poverty and the poor man or woman’s only tradable good is labour. There are limited or no opportunities to trade this tradable good called labour to earn a decent living as our economy is not competitive enough. Until we resolve this issue by setting our economic fundamentals right, our current crisis will exacerbate, also meaning that we cannot afford a second lockdown.

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.

Sri Lankans’ common enemy is poverty, not each other

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

We may worship different gods but as Sri Lankans, we all have one enemy – poverty. According to data on Sri Lanka’s poverty line, 4.1% of our population is “poor”, but nearly 50% of our population is eligible for the Samurdhi Programme. Another 1.4 million is employed in the government sector. Therefore, the majority of Sri Lankans are just above the poverty line.

This was confirmed recently by the World Bank (WB), when it downgraded us to a lower middle-income country from an upper-middle-income country, as our Gross National Income dropped in USD (dollar) terms. In other words, we have become poorer.

Our economy has grown by 2.3% in LKR (Sri Lankan rupee) terms but in reality, we have become poorer as our GDP growth in USD terms has dropped to the standard of living that existed in Sri Lanka in 2005. Even though we were an upper-middle-income country for a short period, Sri Lanka’s province-wise income told a different story. Apart from the Western Province, the other provinces were way below the upper-middle-income range. It is clear that our average income was skewed by Western Province data.

At a time when we have all become poorer, the last thing we need is to fight amongst ourselves based on cast, creed, religion, or ethnicity.

If you look at Sri Lanka’s history, our highest growth rates and higher levels of production were achieved when the country was in peace. Although there were many interpretations of it, after 2009, which saw the end of the civil war, the country experienced tremendous growth rates above 7% with the Northern and Eastern Provinces joining the national economy. 

However, unfortunately, we failed to establish the fundamentals of our economy post-war, and we have been paying constantly for our early mistakes. We only reaped the advantage of ending the war but we failed to utilise the opportunity to put in place basic fundamentals such as incentive structures, competitiveness, and price-based mechanisms in our economy. Till we establish that basic building block, we will have to go back and forth, and will not be able to experience sustainable growth to defeat our common enemy – poverty – and reach high-income status. 

An encouraging work environment as a country 

A country with a motivated workforce is one determinant the next Government needs to establish if we are serious about a prosperous Sri Lanka. Political parties may be victorious after the election but making Sri Lanka a victorious nation goes far beyond just securing a winning majority at an election. Winning elections is the same as an opportunity to play a cricket match representing the national team. In order to make Sri Lanka prosperous, it needs to put in a game-changing performance that ends in victory. A motivated workforce can only be built on unity between all Sri Lankans so that we can all work as one team, resulting in increased productivity. According to Frederick Herzberg’s Two Factor Theory (of Motivation), there is a hygiene factor instead of a motivator and in the absence of hygiene factors, people get demotivated easily. The biggest loser from tensions between the people and racial disharmony will be our economy, a fact that has been proven throughout history.

Most aspirational Sri Lankans are now tired of experiencing lost economic opportunities and revisiting these never-changing issues. Aspirational Sri Lankans expect to work harder, have better living standards, and to not be entangled in micro issues.  

The recent downgrade to lower-middle-income status has a greater impact, after the Easter Sunday attacks and tensions we witnessed thereafter. Even before the Easter attacks, the riots in Digana and internet blockages were indicators that alerted us about tension between ethnicities – a move in the wrong direction. International investors need stable and peaceful destinations to invest their money. Internal ethnic tensions and communal disharmony tend to scare away potential investments that could drive domestic economic growth.  

This phenomenon is key, among many other reasons, for our lethargic performance on the economic front over the last few years. Recent incidents connected to licensed banking institutes, which were shared widely over social media, highlight that tensions still prevail. If allowed to grow and fester, the price we all have to pay for these untreated wounds will be enormous. All Sri Lankans as well as the Government should understand that a peaceful, secure environment with a motivated and skilled workforce is a basic requirement for a small island nation of the calibre of Sri Lanka.

What should be our strategy and solution?

As outlined in this column, and as many other intellectuals have highlighted repeatedly, Sri Lanka’s strength is in its location and connectivity. Our weakness is that we are a small market and our resources are limited, while the available resources are not optimised. So we are left with no other strategy but to produce for a bigger market than our 22 million people and be competitive on all we produce by global standards. However, we cannot be competitive without having our house in order. 

Our success as a country depends on our ability to understand other people’s needs and the ability to provide goods and services for their needs and address gaps in the market. If we produce only for ourselves and for our own consumption, isn’t it a very short-sighted and selfish approach, which will limit us from reaching our full potential? 

If we blindly follow some trends in the US and other parts of the world which have far bigger domestic markets and very different economic indicators, we will be wasting our advantage of connectivity and location while also expanding our weakness as an isolated and divided society. 

As Frédéric Bastiat said, “when goods and services don’t cross borders, soldiers will”. We should ensure all Sri Lankans engage and trade with all Sri Lankans, beyond manmade intangible borders such as caste, creed, ethnicity, and religion. At the same time, we should trade beyond our shores and country borders if we are serious about making Mother Lanka prosperous again and defeating our common enemy – poverty. 

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.

Our public universities need more scrutiny, not blind endorsements

Originally appeared on The Daily FT

By Dr. Sujata Gamage

Dr. W. A. Wijewardena recently published an article on the technology campus of the Sri Jayewardenepura University. I looked forward to new information on the State technology education, but I was sorely disappointed. His column was essentially a pitch for the Acting Vice-Chancellor of Sri Jayewardenepura. Interestingly, there have been several such pitches recently for the university itself. On a positive note, it is good that a university tries to justify the public expenditure incurred on it, but in the absence of a counter assessment, these advertorials could be window dressing for a rotten system. 

There are serious issues in education confronting the country today. Our priority from a development perspective should be the preparedness of 360,000 or so youth who turn 18 every year. They should be prepared for living and working in the 21st century. The rest is details, I would say, because it is well established that the economic or social impact of education almost exclusively rests on school education, according to an extensive review of the literature by Alison Wolf in her 2003 book ‘Does Education Matter?: Myths About Education and Economic Growth’. While a highly educated few may contribute to innovation in the economy or society, mass higher education has no impact. A World Bank (WB) study of the same subject has shown that private benefits to higher education are many times greater than public benefits (WB, 2015). 

Yet, our education system is designed to define education as success at receiving three passes for a paper and pen test at the end of 13 years of education. Then we select 10% or less of a cohort of such students for a free-of-charge education at public universities, leaving other 90% off the radar of policymakers or the public. The Tertiary and Vocational Education and Training (TVET) sector admitted 35,599 students (CBSL, 2018). Yet, I would include those attending the TVET institutions within 90% who are ‘off the radar’ because the TVET sector which is a distant poor cousin to the university sector is barely visible. 

University education captures a lion’s share of education funding and media attention. Apparently, a discussion on amending universities have resurfaced as it does periodically. Such a discussion is like trying to change the deck chairs while the tertiary education ship is sinking. 

The University Grants Commission regulates 15 public universities and associated institutes. The Technical and Vocation Education oversees 500+ state institutes (not counting 700+ private institutes) enrolling 35,000+ students for short or long courses, graduated about 26,024 National vocational Qualification (NVQ) certificate holders. These institutions receive Government funding no matter their performance. 

What we need is a new commission which is a caretaker for all school leavers seeking a tertiary education and or training, not gatekeepers or apologists for underperforming institutions. These reforms will not happen unless the government overrides the interests of the higher education lobby. 

Overly influential higher education lobby

Education funding in this country is driven by three powerful lobbies, The GMOA, the University Community, and Inter-University Federation of University Students, a political arm of the JVP and/or the Peratugami Party. They serve to keep spreading the myth that free-of-charge education to a select few youth is free education, and policymakers and the media swallow the myth wholesale.

Their solution for the other 90% of youth is more and more public spending for education. Yes, it’s true that our education funding is way below international standards. As UNESCO noted: The Education 2030 Framework for Action proposed two benchmarks as ‘crucial reference points’: allocate at least 4% to 6% of GDP to education, and/or allocate at least 15% to 20% of public expenditure to education. Globally, countries spend 4.7% of GDP on education and allocate 14.2% of public expenditure to education; 35 countries spend less than 4% of GDP and allocate less than 15% of public expenditure to education (GEM Report, UNESCO)

Higher education interest groups lobbied for increased in education funding. However, the benefits did not go school education or the TVET sector because education funding formula is unduly tilted towards higher education at the expense of school education or TVET. The result is that university teachers are well remunerated now, and schoolteachers remain some of the poorest paid public servants.

Over-funding of universities

Our universities indeed receive a lion’s share of education funding in relation to international practices in education funding. As far back as 2002, the World Bank (WB) noted that our funding is unduly tilted toward universities. 

By international standards, average recurrent education expenditures per student in Sri Lanka are modest at primary and secondary education levels, but high at the tertiary education level. Average recurrent education expenditure per student as a share of national income per capita on primary and secondary education, at about 9% and 11% respectively, are among the lowest in South Asia and East Asia. In contrast, average tertiary education expenditure per student as a share of national income per capita, [set] at 100%, is slightly higher than India, and substantially above the level in East Asian countries such as South Korea, Singapore, Malaysia, Thailand, Indonesia and the Philippines. The main reason for the high share of public recurrent spending on tertiary education is the large unit cost of government universities. Overall, the pattern of average recurrent expenditure across education levels suggests that, in contrast to high performing East Asian countries, the balance of public resources in Sri Lanka may be tilted unduly in favour of tertiary education, at the expense of primary and secondary schooling (WB, 2005, Sec 16).

The internal efficiency of primary schooling (grades 1-5) and junior secondary schooling (grades 6-9), measured in terms of flow rates, are high (WB, 2005, Section 18). 

Public university education in Sri Lanka is expensive, with high unit operating costs in comparison to other developing countries. In addition, there are wide differences in unit costs among public universities, ranging from about 40,000-120,000 rupees per student per year (WB, 2005, Section 20). 

If education funding was titled in favour of university education in 2002, it is no better in 2019, according to our estimates.

The distribution of gross funding for education across the three sectors has widened since 2002. In 2002 Higher education received 14% of education funding. In 2019, this share increased to 38%. Funding for TVET sector too increased while the share for school education reduced to 50%.

It is true that new admissions to higher education have increased from 12,144 in 2002 to 31,451 in 2018, and new admissions to school education have slightly decreased from 328,632 in 2002 to 325,667 in 2018. We are still in the process of calculating the recurrent education expenditure per student as a share of national income per capita for 2018, in order to reassess funding situation vis-à-vis WB assessment published in 2005. However, a quick calculation of per-student funding for universities v. schooling shows that per capita spending remains as tilted as reported by WB in 2005. 

The problem lies in misplaced priorities. First, education achievement after 13 years of schooling is defined by the ability of a student to obtain passes for any three subjects in a national examination. As tuition teachers have revealed, a student can study for six months to obtain the necessary passes. Further, the government indirectly admitted that education is driven by private tuition by bending over backwards to change health regulation to suit private tuition needs. 

Next, we increase funding for higher education to accommodate these students deemed suitable for higher education by a faulty indicator. In fact, we are trying to find solutions to a poor output at the end of the pipeline without investing adequately in the pipeline.

The evidence is strong that mass higher education does NOT contribute to development. Only research-driven higher universities have an impact. Hence, the priorities for government spending is clear. Quality school education, some further education or training for all youth, and research-based or inquiry-based higher education for a select few. 

Unaccountable

University teachers who justify the expansion of public higher education point out that all higher education in developed countries are provided by the state. This is true indeed. In Canada or the UK, almost all universities are publicly owned. In the US, private institutions co-exist but the federal government supports the education of all students, though loan schemes. 

The comparison ends there because in Sri Lanka students are brought to the doorsteps of the universities. They come with public funds assured for their education, but there are no performance requirements for universities. Universities decide what courses to offer, how they teach, and they refuse to be held accountable for unemployability of graduates or the attitudes of these graduates. In US, USA, or Canada, public institutions receive funding based on enrolment and additional performance criteria. Retention and graduation rates of students are some such criteria. In Sri Lanka, a shockingly high percent of students dropout and the government does not to track that. 

Further, in public higher education in other countries, the students pay a share of the cost of education. For example, at Ohio State University where I worked as a strategic planning specialist, the budget consists of roughly about one-third of cost recovered through student tuition fees, another one third though state subsidy, and the other one third through income generated through research funding, alumni giving etc. In the UK and Canada too, students pay a share of the cost of higher education, giving universities another good reason to be accountable. 

UGC – a commission past its time? 

The University Grants Commission was established in 1978 in the tradition of granting agencies in UK and India. The University Grants Commission of India continues to function but similar commissions in UK and eve USA have changed their roles.

In the nineties, the role of the Ohio Board of regent (OBR) was essentially the same as the UGC. Later, the OBR increasingly took on more responsibility for colleges and community colleges in the state, and today it is reborn as The Ohio Department of Higher Education with the mandate to “make college more affordable for Ohioans and drive the state’s economic advancement through the public universities and colleges of Ohio, the state’s network of public universities, regional campuses, community colleges, and adult workforce and adult education centres”. 

The UK has gone a step further:

The Higher Education Funding Council for England (HEFCE) distributed public money for teaching and research to universities and colleges. It closed on 1 April 2018. [It was] replaced by UK Research and Innovation [Agency] and the Office for Students.

This move in the UK is very significant. It is an acknowledgement that research and innovation and mass higher education do not belong together and that higher education agencies should serve the potential and current students, not the provider institutions. 

Need a commission for students, not gatekeepers for institutions

The UGC of has 15 institutions and 19 other associated institutes. These institutions awarded 26,024 basic degrees in 2018. The Tertiary and Vocational Education Commission (TVEC) is responsible for the registration and accreditation of TVET institutions. TVEC reported 582 public institutions and 50,215 National Vocational Certificate awardees for 2019 from public institutions. We have 350,000 +school lavers who have left school at various points. Taken together these institutions cater to needs of about 20% of a youth cohort. What about education and training for others? The government may offer merit-based opportunities for some, but there should some accountability for others. What we have is a government that allows the higher education lobby to disrupt the education for the other 80%. 

The present government is on the right track, more or less

As I pointed out, our universities receive an undue share of public funding thanks to a powerful higher education lobby. This situation must be corrected. Any additional funding for education should be directed to school education and 1-2-year colleges offering diplomas or advanced diplomas while holding funding for universities at present levels. On the other hand, funding for research and innovation should be increased with centres of excellence within or outside of universities getting additional funding from the research and innovation budget. 

In the present government, the higher education, technology and innovation portfolios are brought together. Bundling technology and innovation with higher education is unwise because higher education priorities are driven by a self-inflicted responsibility to find slots for students obtaining three passes from an outdated assessment system. New programs like the technology campus at Sri Jayewardenepura will not be able to perform miracles to produce innovators. They will more likely than not produce more job seekers. 

However, it is encouraging that the President has inquired about the feasibility of bringing all education functions under one ministry. This is good news. What we need is a ministry of education that oversees the education for all from early childhood to tertiary education, and a separate ministry of science, technology and innovation that funds centres of excellence in universities and elsewhere and nurture and award scholarships to select set of promising youth for a research-based or inquiry-based university education.

Dr Sujata Gamage is a Senior Research Fellow at LIRNEasia, a regional think tank based in Colombo, Sri Lanka. She specializes in planning, evaluation and capacity building in education, ICT in education, research and research networks, and public sector performance using data analytics, institutional research, scoping studies, systematic reviews, statistical methods and simulations. She is also an advisor to the Advocata Institute.

The myth: Self-sufficiency guarantees food security

Covered in the Daily Mirror, Ada derana and Colombo Telegraph

By Sathya Karunarathne

The novel coronavirus which drove cities and countries into lockdown has now sparked anxiety over a possible food crisis given the increase in export and import bans and disruption of global food supply chains. 

This uncertainty has left the Sri Lankan government to question whether these disruptions would affect food security in the near future and if ensuring self-sufficiency is the absolute and undisputed solution to this conundrum. In this attempt to achieve self-sufficiency in food the government has resorted to import substitution to strengthen domestic production.

Keeping in line with these protectionist policies the government has indefinitely extended import controls that were initially introduced on the 22nd of May for three months “to be in effect till further notice”. Import controls in this degree and nature have not been seen since the 1970s and this has led policymakers and public debate to be heavily inclined towards the possibility of revisiting and reconsidering the socialist policies adopted by the Bandaranaike government.

How credible is the popular narrative?

The renewed vigor attached to closed economic policies and food protectionism through public discourse is perhaps understandable. Amidst a foreign exchange crisis in April, the government imposed import restrictions on 156 categories of products including essential food items such as rice, flour, and sugar. 

Although import restrictions on most of the essential food items have been removed, temporary restrictions have been extended indefinitely on grains, stainless steel tankers and bowsers needed for the distribution of milk and blast freezers needed for preserving poultry meat. While these restrictions have been put in place with the motive of protecting the depreciating rupee it carries a massive potential to further harm the domestic distribution and storage of food which is already in a fragile state.  

Moreover, the latest Climate and Food Security Monitoring bulletin of WFP (United Nations World Food Programme) raises concerns of food security among vulnerable parts in Sri Lanka as a result of the impact and control response of the COVID-19 outbreak. The report further elaborated that weather-related shocks combined with poor hygienic and sanitation conditions could result in an increase of acute malnutrition in the island.  

In response to these growing anxieties in the wake of the COVID 19 pandemic, the government put in place programs and policies to ensure self-sufficiency in food within the island. On the 28th of May, the government approved the importation of 2,500 dairy cows from Australia. The motive behind this decision as stated by the cabinet spokesman is to ensure Sri Lanka’s self-sufficiency in milk by 2025, even though this measure failed just over a year ago with the death of 500 imported heifers that were ill-suited to Sri Lanka’s climate.

Furthermore, restrictions on maize imports that were imposed with the intention of strengthening domestic production has resulted in a lack of maize as feed for chicken. Available alternative feed is not as nutritious for poultry and has affected the quality and production of eggs. Egg production has fallen from 200-300 eggs per year from chicken to 200-240 eggs per year.  With the fall of production, prices have picked up.

On the 3rd of July, Senaka Samarasinghe, Managing Director of Harischandra Mills PLC stated to Ada Derana that import restrictions imposed on agricultural products such as ulundu, black-eyed pea, big onion, red onion, green gram, peanut, corn, and dried chili have affected manufacturers adversely resulting in a massive drop of production. 

These import restrictions have severely affected manufacturers who rely on ulundu as a raw material to produce products such as papadam, flour, thosai, wadai and dhal. Given the lack of raw materials, Harischandra Mills PLC has had to reduce their production by a staggering 90 per cent. Sri Lanka’s domestic ulundu requirement per year is about 12,000 metric tonnes (mt). The production of ulundu domestically has reduced to 5000 mt due to the drought. External factors that affect the domestic supply of food such as these calls for imports to fill the output gap. 

These import restrictions have adversely affected Sri Lanka’s already fragile export sector as well, as manufacturers have failed to meet the demand of international markets for products such as thosai mix. Harischandra PLC exports 15 per cent of its thosai mix to markets in Europe, North America, Asia, and Australia. These protectionist policies that aim to protect the domestic producer and to strengthen their production, have resulted in achieving the very opposite of its intentions as small scale producers of ulundu have opted to close down resulting in reduced shop sales. Moreover, the ban has affected the production of kurakkan flour with producers resorting to completely stopping or reducing production. This fibre-rich alternative to wheat flour is widely consumed by diabetic patients and is an important part of their medically recommended diet. 

It is no doubt that the pandemic has brought to light the extreme vulnerability of Sri Lanka’s domestic food supply to external shocks. These policies have a demonstrated history of achieving quite the opposite of their intentions. The ’70s “produce or perish” economy is an excruciating reminder of this fact as bug-infested flour, hardly edible bread, and stone infiltrated rice was every Sri Lankan’s staple. Therefore the popular narrative that promotes restrictive policies has zero credibility as it will only tighten the already constrained food supply by repeating the mistakes of the past. Long term policy solutions to the crisis, therefore,  should focus on the sustainability and practicality of isolating the island from global trade and food supply chains and producing the bulk of our dietary needs domestically.

Sustainable approach to attaining food security: Lessons from Singapore

The Global Food Security Index (GFSI)  ranks countries’ food security based on food affordability, availability,  quality as well as an adjustment for natural resources and resilience.  Singapore was able to secure the title as the most food-secure nation for two consecutive years, with a high rank in all three core pillars. 

Singapore’s success is attributed to the government’s continued commitment to stay connected to global food supply chains and to strengthen local production. Singapore diversified its food import sources from 140 countries in 2004 to more than 170 countries and regions in 2019  making the country’s food supply chain more resilient and has set a “30 by 30” goal to produce 30 per cent of the country’s nutritional needs by 2030. Diversifying food imports and making the country’s food supply chain more resilient are two sustainable policy solutions through which Sri Lanka can ensure long term food security. 

The Food and Agriculture Association of the United Nations (FAO) states that the crisis we are facing is a global problem that requires a global response.  This calls for governments to collaborate to avoid further disruptions to food supply chains. Import diversification in the context of food security refers to increasing the number of countries from which we import food. 
This ensures an undisrupted inflow of food supply into the country ensuring both physical availability and choice of food in crisis situations. Import diversification is effective even in ordinary situations as loss in the harvest of one exporting country will not threaten the availability or supply of that particular product/produce for the importing country. Singapore imports over 90 per cent of their consumption needs with only 13 per cent of vegetables and 9 per cent of fish being produced locally.  

Moreover, in order to avoid disruptions to the supply chain that may occur by depending on a single major import supplier Singapore has resorted to promoting frozen and powdered product alternatives. Sri Lanka cannot resort to these options by restricting the importation of freezers, tankers, and bowsers that are necessary for such alternatives.

The world is highly globalized and so are food supply chains. Isolating from this interconnected food supply chain will only exacerbate Sri Lanka’s food insecurity. This was evident in the 2007-2008 global food price crisis when export restrictions put in place by exporting countries to increase food security domestically led to serious disturbance in the world food market resulting in price spikes and increased price volatility. In a more local context, this was evident when the government banned the importation of turmeric along with other non-essential goods which led to a scarcity and the available being sold for an exorbitant price ranging from Rs 300-350/- per 100 g despite a maximum retail price of Rs.75 per 100 g. 

Eradicating weaknesses and inefficiencies in the domestic food supply chain is essential to ensuring food security within a country. This is referred to as building a resilient food system domestically. The Food and Agriculture Organisation of the United Nations (FAO) defines food security as follows: “Food security exists when all people, at all times, have physical and economic access to sufficient, safe, and nutritious food that meets their dietary needs and food preferences ”.  The abrupt lockdown and curfew COVID-19 brought revealed that our domestic food supply chain does not offer economic or physical access to nutritious food. This was painfully apparent when people desperate to eat set off a stampede during a cash handout held in celebration of Eid, leaving eight injured and three killed. 

This is an obvious cautionary alarm to the government to fix the inefficiencies of the domestic food system and to enhance emergency food assistance to the vulnerable communities, who most often end up bearing the brunt of such inefficiencies. Every crisis presents an opportunity to focus on rebuilding through a novel lens. This presents an opportunity for Sri Lanka to rethink its approach to food security and to branch out our policy solutions to more sustainable and timely options.

Solution 

This crisis has proved that import restrictions and heavy gravitation towards self-sufficiency cannot solve the myriad of issues plaguing the country’s food supply system. Closed economic policies to achieve self-sufficiency, do not guarantee all citizen’s economic and physical access to nutritious food nor do they guarantee a resilient domestic food supply chain. 

Investing in cold storages and strengthened logistics networks, shifting towards climate-smart agriculture, ensuring the supply of raw materials and agricultural equipment by making the eligibility verification process for tax exemptions less complicated and improving ease of doing business, removing import restrictions on veterinary medicine, chemical fertilizer, and other inputs,  relaxing restrictions on the cultivation of crops, strengthening emergency food assistance to vulnerable communities with linkages to local and provincial governments can be stated as policy priorities that can address the inefficiencies of the domestic food supply chain.

The way forward to ensuring the island’s food security is in improving internal inefficiencies while recognizing the extreme and timely importance of staying connected to global food supply chains through relaxing import restrictions and multiplying our food and raw material import sources. 

Sathya Karunarathne is a Research Executive at the Advocata Institute and can be contacted at sathya@advocata.org or @SathyaKarunara1 on twitter. Learn more about Advocata’s work at www.advocata.org. 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

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.

The pre-election opportunity ECT presents the President

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 and Shanaka Paththinigama

The East Container Terminal (ECT) has come into the limelight again.

Last week, a strike was ongoing by trade unions demanding to install gantry cranes, which were ordered a few years ago and which are now in the Colombo Port, at the ECT.

This was followed up with the Cabinet Spokesperson stating that it was “allowing the respective line Minister to conduct discussions at a diplomatic level on changing (the) Colombo Port Terminal deal with India and Japan”, according to Hellenic Shipping News Worldwide.

Subsequently, the Gantry Cranes were permitted to be unloaded and installed on the instructions of Prime Minister Mahinda Rajapaksa and the port workers decided to call off their strike on Thursday (2).

The fact of the matter is that the ECT is one absolute failure in terms of “getting things done”. Sri Lanka has been running it continuously and like many other economic issues, we have failed at getting our act together. This is despite being located at the heart of a strategic maritime route. Rather than taking advantage and converting the ECT to an operational level, we have lost a reasonable amount of credibility in the business world by opening the ECT for bidding and cancelling the bidding process on multiple occasions, thereby creating years of operational delays based on political favours. We hope, at least this time, Sri Lanka will be able to convert shop talk into actionable outcomes.

Understanding the shipping business

The shipping business is a technical subject and is very complicated. Ports are strategic geographical locations which are situated at the edge of oceans, seas, rivers, or lakes. These locations are then developed to provide facilities for the loading and unloading of cargo ships. The facilities provided for a port depends on the purpose for which the port is being used. A terminal refers to the set of facilities at a port where the loading and unloading of the cargo/container takes place. Terminals are named on the basis of the type of cargo that can be handled by it. Some of the most common types of terminals are container terminals, bulk cargo terminals, and LNG (liquefied natural gas) terminals.

Simply put, in one port, there are multiple terminals and the Port of Colombo has a few container terminals (CICT – Colombo International Container Terminal, JCT – Jaya Container Terminal, SAGT – South Asia Gateway Terminal, and UCT – Unity Container Terminal).

Global trade and most merchandise exports and imports account for a greater share of container terminals. The main factor that drives this business is efficiency and the networking ability to bring as many vessels as possible to the respective terminal. Simply put, when a ship enters the port/terminal how fast we can handle the containers and cargo (efficiency) and how networked we are to bring more vessels into the terminal are the two main determinants of making the business profitable.

Like most businesses, the price or the cost is a key determinant. To be profitable and bring the price down, over the years, shipping vessels have advanced to a point where there is capacity of more than 10,000 TEUs (20-foot equivalent units) in one vessel and those models (New Panamax – 12,500 TEUs | Triple E – 18,000 TEUs) have become popular with the development of global trade. These gigantic vessels can only be managed by deepwater ports which have a depth of more than 18 metres.

What’s all the fuss about the ECT?

There are two deepwater ports in the Colombo Port. One is CICT (85% owned by the China Merchant Port Holdings [for a period of 35 years, starting in 2013] and 15% by the Sri Lanka Ports Authority [SLPA] [owned by the Government]), which contributes to a higher share of the capacity and efficiency of the Colombo Port. The other deepwater terminal is the ECT. This is why the level of interest in this port is very high.

Geopolitical rivalries China, Japan, and India continue to seek operational ownership of the ECT through companies of their respective countries. The JCT (owned by the SLPA), SAGT (owned by John Keells Holdings – 42% , Mearsk – 26%, SLPA – 15%, A.P. Moller – 7%, Evergreen – 5%, and other investors – 5%), and UCT (owned by SLPA) are all shallow-water port terminals which can only handle smaller vessels (not economical compared to larger vessels) with about 10,000 TEUs capacity.

The ECT’s value is very high as it’s the only other deepwater terminal in the Port of Colombo except for CICT. As an additional benefit, it is located in the middle of the old port and the modern port, providing an added advantage for the movement of inter-terminal cargo, given its proximity to other terminals.

Despite the ECT having significant strategic value, consecutive governments have been just sitting on this, calling for bids and cancelling them, while competition is increasing every day – notably, the new Sagarala port development initiative by India, the construction of the Enayam Port in nearby Tamil Nadu, and also the Kerala Port, which is soon to be the world’s deepest multipurpose port.

With the agreement with SAGT due to expire in 2030 and with India developing their ports, the ECT has become a vital business asset as never before. Another deepwater port terminal operator adjacent to CICT will create more competition. However, the networking and other variables will matter to whoever gets the bid for the ECT.

At the same time, with the growth of global trade (not considering the effects of Covid-19), the Colombo Port is nearing full capacity of handling containers. The Port of Colombo moved to the top position of the Fastest Growing Port Index in the first half of 2018 by industry analyst Alphaliner and is one of the most connected ports in the entire world, handling about seven million TEUs in total. It is vital that the ECT is developed to maintain this growth.

Despite being situated in the centre of the Indian Ocean, and even though we are one of the most connected ports in the world, we are far from becoming a maritime hub. The root cause lies in our inability to be competitive and inadequacy to provide ancillary services such as logistics, bunkering, marine lubricants, fresh water supply, offshore supplies and ship chandelling, warehousing, and many more.

Our rules, regulations, and legal structures on the ownership of some shipping-related services and excessive government intervention, with the government acting as a player in the market and a regulator at the same time, has closed the space for private investment which could propel the Colombo Port to becoming a key global player.

Most experts have become weary of speaking about the same issues, while the opportunity of becoming a maritime hub in the Indian Ocean is slipping out of our hands.

Since the shipping business is based on efficiency and networking, the ECT has to be operated by a private operator and the Government should play a regulatory role and facilitate businesses by being the landlord of the port. This must be done while keeping the ownership of the port rather than trying to engage in the business and be a container terminal operator. Container terminal operation requires sizable capital investments. Private investments, which take the risk for the capital they invest, is the only possible way to create the right incentive structure and create the drive for efficiency and a very competitive business model.

Selecting a good terminal operator

After going back and forth, the previous Government signed a Memorandum of Co-operation (MoC) between Sri Lanka, India, and Japan. According to media reports, the current Government expects to discuss changes to the initial agreement, claiming that the previous deal was unfavourable for the country, and move to a new agreement.

At the same time, the SLPA unions claim that gantry cranes worth $ 25.7 million have been purchased for the development of the ECT, but concerns have been raised over the specifications of the cranes.

We really don’t know the truth

However, His Excellency the President, who received 6.9 million votes for a system change, should explore a method to select a proper operator. Undoubtedly, rather than handpicking operators based on introductions given by individuals, it has to be on a competitive bidding process, based on cost and pricing to ensure the competitiveness of the port with proper specifications. That’s the best system we can employ to find the most suited operator in a price-competitive industry.

Generally, Build-Operate-Transfer (BOT) agreements are provided with long tax holidays and the taxpayer has to be protected and prioritised as it is the people who gave the mandate for a system change.

At the same time, when the existing terminal operators bid for the project, their existing capacities and advantages need to be reflected in their pricing, investment, and proposal structure. The system change expected by the taxpayer, in this case, is to set up a system to ensure accountability and that things get done while getting the maximum benefit to the port and by establishing a level playing field for businesses and investors.

In countries like Sri Lanka where discussions revolve around high-value government transactions, there is a higher risk of such projects being influenced by many powerful businessmen and bureaucrats, leading to irregularities and corruption.

The President and the Government now have an opportunity to prove such assumptions wrong and set a prime example of how such a high-level transaction can be transparently managed. A single transaction with a conflict of interest can make a regime unpopular faster than anyone can expect. The Central Bank Bond irregularity is the most recent example.

On the verge of a crucial election and with the prospect of forming a fresh government, we hope Sri Lanka would move forward instead of dragging its feet on the ECT by ensuring and implementing a competitive bidding process (which will help avoid most of the geopolitical pressures) without getting sandwiched in between two global economic powers vying for regional dominance.

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.

Import controls - out of control?

Covered in the Colombo Telegraph

By Erandi de Silva

As the COVID-19 virus forced much of the world into lockdown, the scale of interdependence and reliance on trade across nations was apparent by the global urgency to re-open economies as soon as possible. The shortage of goods and loss of income experienced due to the disruption of supply chains helped some nations realize that a country typically stands to lose more than it may gain by being shut out from the global market. Sri Lanka continually increasing import controls and locking itself out of trading networks then begs the question, why are we punishing ourselves? 

A common justification in people’s minds may be that difficult times call for difficult measures; curbing imports may seem inevitable amidst the current health crisis caused by a contagious virus and the financial threat of a depreciating currency. However, as elections are approaching, it appears these decisions are primarily driven by political and not economic motives. Given that Sri Lanka’s exchange rate became a key campaign topic in the last election, the current rise in import controls seems to be an attempt at artificially maintaining a “strong” currency prior to elections after the excessive money-printing in March this year. 

Furthermore, such decisions should also be recognised as far more than precautionary policies due to the pandemic, and rather, a projection of the national tendency to revert to protectionism. The ban placed on maize imports in mid-January (prior to when the first case of coronavirus was reported in Sri Lanka) indicates this predisposition. Sri Lanka exhibits a recurrent desire - often fueled by nationalistic rhetoric - to boost domestic production or even become self-sufficient across various sectors and industries, sometimes in complete ignorance of comparative advantage and practicalities. This is evidenced in the aftermath of importing 5,000 milk cows in order to boost local dairy production in 2017 which led to many farmers accruing debt whilst over 400 cows died due to poor living conditions. Not only did it result in Sri Lanka still importing; this method was more expensive because now money had to be spent to feed and care for the cows in the absence of their natural habitat. Despite this result, the new Government again approved a proposal to import 2,500 cattle from Australia on the 1st of June this year in the hope of curbing milk product imports to Sri Lanka.

In the case of import controls and such protectionist actions, problems tend to manifest regardless of the intentions behind the implementation of such policies. For example, the maize embargo which was imposed with the intent of accelerating domestic production and protecting local farmers has led to several adversities - now including a shortage of supply. It is important to note that the brunt of the outcome was faced by a vulnerable stakeholder that the Government aims to protect: small-scale poultry farmers. As the main consumers of maize (because it is needed for chicken feed), poultry farmers were initially forced to pay higher prices to obtain maize and were at the mercy of Sri Lanka’s oligopoly of grain collectors. The problem was exacerbated as domestic stocks of maize withered away and suppliers could not import to fill the deficit. According to the Export Development Board, Sri Lanka imported 102,461.175 metric tonnes of maize in 2019 despite domestic production for the year being at 245,647 metric tonnes. This clearly reflects that the local demand for maize is far greater than the domestic capacity for maize production. Another example of unintended consequences can be extracted from the confectionery industry which recently expressed concern regarding the inability to access imported raw materials that are necessary for cost-effective local production. The 340% special commodity levy on block fat and margarine imports which was introduced this month has led to significant strain and job-insecurity within the industry. 

The new administration recently reiterated their pledge made under the ‘Saubhagya Dekma’ policy statement of turning Sri Lanka into a “people-centric production economy”. Despite his claim that limiting imports has “paved the way” for a production economy, it is necessary to understand that even most local businesses require imported materials in order to produce. The latest statistics from the World Bank indicate that 38.19% of our total merchandise imports are intermediate goods that are used locally as inputs for production. Regardless of our ambitions, Sri Lanka’s economy requires imports for growth. Many of our consumables are imported and local businesses, including key exporters such as the textile industry, use imported raw materials. Curbing imports will impede the ability of local businesses to cost-effectively grow.

If the Government fails to readjust its policy on import controls and continues down the path of increasing protectionism post-COVID-19, Sri Lanka may continue to face economic instability and revenue loss within the sectors that are affected by these constraints. Ultimately, despite the rhetoric and propaganda of “saving local businesses” and creating a brand of “made in Sri Lanka” that enamours the public during political campaigns, it is often the most vulnerable within local businesses that stand to lose the most from the enactment of protectionist policies. As poultry farmers struggle to maintain their income and employees within the confectionery industry remain anxious about the status of their jobs, the question remains: why are we punishing ourselves?

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.

Reform for our micro and small businesses

Covered in the Daily FT and Daily Mirror

By Aneetha Warusavitarana

Last Saturday was the UN World Micro, Small, and Medium Enterprises Day, and in light of that, focus should be given to Sri Lanka’s small businesses and the challenges they face. 

Sri Lankan micro and small enterprises form a substantial part of our economy. Sole proprietorships account for 63.1% of all businesses in the country, and account for 27.1% of national employment (Department of Census and Statistics). However, they face a myriad of challenges and this focus on improving their business environment is welcome. As highlighted in a study conducted by the Advocata Institute on the regulatory barriers faced by micro and small enterprises, the three main challenges faced are access to finance, labour, and rent.

In addition, 45% of micro-enterprises and 10% of small enterprises remain unregistered, exacerbating these problems. Unregistered businesses are excluded from formal sources of finance, business networks, and do not qualify for Government assistance. 

In early March this year, the Cabinet approved the establishment of ‘one-stop shops’ for micro and small businesses in Sri Lanka. This project is now moving forward, with the Government working with the EU to set up these ‘one-stop shops’ in each district; with the aim of streamlining the registration process and providing assistance on issues of access to technology, quality control and access to markets. However, what else is there to be done? 

The problem of registration

Registering a business in Sri Lanka has always been a long, tedious process; one that discouraged businesses and negatively impacted our ease of doing business ranking. However, in 2018, Sri Lanka was witness to some welcome reform with the launch of ‘E-RoC portal’, which streamlined registration, and brought the process completely online. This success in reform was reflected in the country’s ranking on the ease of doing business ranking and was hailed as a reform success. 

However, the E-RoC portal is only applicable to the registration of private companies. 

In Sri Lanka, the registration of private companies is governed by the Companies Act No 07 of 2007, while the registration of sole proprietorships and partnerships are governed by Business Names Ordinance No 06 of 1918. As a result, the E-RoC could not be broadened to include the sole proprietors and partnerships. 

97% of micro-businesses in Sri Lanka and 85% of small businesses have registered their business as sole proprietorships, with only 3% of the businesses surveyed having registered themselves as a partnership, and 2% registering themselves as a Private Limited Company.4 In other words, for the vast majority of micro and small businesses in Sri Lanka, their registration process is long, tedious and unnecessarily convoluted.

How does business registration work for sole proprietors and partnerships?

The process of registration is implemented by the Divisional Secretariats. At best, the country currently has nine different regulatory processes for the registration of sole proprietors and partnerships. The process of registering a sole proprietorship or a partnership in Sri Lanka is a time consuming, complicated task, with the main steps detailed below: 

1. Visit the Divisional Secretariat and collect form and instructions

2. Fill out the application

3. Provide documentation

   • Proof of ownership of business premises

   • Original Deed and notarised copy or

   • Original Rent agreement and notarised copy, or

   • No Objection letter from the owner of the premises

   • NIC copy

   • Tax assessment notification for the premises

   • Copy of the partnership business agreement

   4. Visit the Grama Niladhari and get the application and attached documents approved

   5. Receive additional approvals depending on the business type e.g.: PHI approval

   6. Hand over completed application to the Divisional Secretariat.

A majority of provinces do not have the application for business registration or the instructions sheet available for download from the Divisional Secretariat or Provincial Council website, and the instruction form is not always available in all three languages. 

This is in comparison to much simpler processes that have become standard internationally, and have also been replicated in Sri Lanka, as was seen with the E-RoC reform for private companies. 

Address the problem at hand

According to the island-wide survey conducted by the Advocata Institute, over 80% of respondents found the Grama Niladhari and the Divisional Secretariat to be an effective touch point. This would indicate that improving service at this point may not be an immediate requirement. Instead, focus should be placed on reforming the registration process for micro and small enterprises. 

Sri Lanka’s micro and small enterprises will have faced significant economic fallout during the curfew period. The Government has recognised this and responded with policy action like the debt moratorium to help ease some financial pressure. However, this is unlikely to be sufficient. These policies would only apply to entities that have registered their business and would leave the segment of unregistered businesses without support. It is vital that the registration process is streamlined, making it easier for these businesses to enter the formal sector and reap the benefits for formal sources of finance, and better access to markets that come with formalisation. There is a window for reform that exists, and we hope that the Government takes advantage of this to bring about some much-needed change. 

Treasury and Central Bank should consider credit guarantees for COVID-19 distressed bank loans

Covered in the Daily Mirror, Daily FT

By Fellows of the Advocata Institute

Even though Sri Lanka’s economy has opened up, businesses are still recovering from the dual shock of the locally imposed curfew as well as the global fallback from the coronavirus. A vast majority of Sri Lankan businesses are in need of support if they are to survive the next few months. 

The need of the hour is for liquidity support and enhanced access to credit. However, banks find this situation to be challenging. They need to be able to finance the loans that are being demanded but they also need to have some guarantee that their loans will not go bad. 

Will Central Bank’s solution work?

In response to this problem, the Central Bank has announced a subsidised credit scheme for businesses. Through this, the Central Bank will be offering a facility of Rs.150 billion to licensed commercial banks (LCBs), at a concessionary rate of one per cent. LCBs, in turn, will be required to lend to businesses at a rate of 4 per cent. 

Put simply, the Central Bank is essentially offering commercial banks a credit line to solve their issue of a source of financing this new demand for loans.  

Assuming that the bank’s marginal cost would be around one per cent, it is left with a contribution of 2 per cent before provisioning. Lending to this segment of businesses will be risky as many of these borrowers are already leveraged and do not have spare collateral to pledge. 

Under distressed economic conditions, non-performing loans could increase significantly. While part of the non-performing loans could be partially recovered, the impairment cost or credit cost could be as high as 6 per cent.  

If the net contribution to the banks is 2 per cent after their direct cost, a potential 6 per cent credit cost per year would mean a pre-tax loss of 4 per cent per year, creating the need for a credit enhancement or guarantee. 

This credit line means that the Central Bank is printing money to meet this requirement, leading to a monetary expansion. The risk of increasing money supply in the current economic context is that the subsequent pressure on the exchange rate will result in a depreciation of the currency. 

Looking at Sri Lanka’s import bill, 19.8 per cent of our imports are consumption goods and 57 per cent of imports are intermediate goods for production. The share of investment imports is also higher than consumption goods at 23.1 per cent. The impact of a depreciating currency will be significant on the economy’s ability to recover and grow. 

There are additional risks associated with this solution. A key problem is that while banks are receiving newly minted money from the Central Bank to finance the loans, the bank and the depositors have to take the credit risk on the lending. The collapse of finance companies in recent years shows what happens when deposit taking institutions take on risks that they cannot bear. 

Bad loans of Sri Lanka’s banks have been rising since the currency crisis in 2018 and the Easter Sunday bombings. The banks are already burdened with the credit moratorium that was also given in early 2020. In the first quarter of 2020, bad loans had risen to 5.1 per cent, which is the highest since the third quarter of 2014.

If banks collapse, the government may end up having to bail them out with capital injections. At the moment, Sri Lanka’s banking system is fairly sound and given the indications that bad loans will rise, all efforts must be made to keep banks stable.

Further complications

As highlighted by former Central Bank Deputy Governor and senior economist W.A. Wijewardene, the issue with excess liquidity already in the system, the problem is not about liquidity but the fear of default. According to Wijewardene, this fear of default could be tackled by a comprehensive credit guarantee scheme and smoothing out banks’ internal credit approval systems. 

Instead of using the CRIB reports for rejecting loans, a rating system could be used to eliminate the worst ones. If treasury guarantees are available, it may not be necessary to create new money and endanger the balance payments. Banks may be willing to make loans from their own deposits if there is a guarantee. 

There is also a moral hazard associated with this decision. This crisis hit at a time where there was significant pre-existing distress in the economy, there is the possibility that this financing will be utilised to keep ‘zombie entries’ alive. Additionally, this would prevent resources from being allocated to productive and efficient firms. What is needed is quick support for viable companies to get their business going. Steeply subsidised credit may induce businesses to go after loans that are not needed and refinance other loans, which are at higher rates. Or whenever they have the cash, the incentive will be to settle the higher cost loan than the low-cost one, inviting default or delays. The artificially low rate of interest of 4 per cent for working capital also may create other distortions. 

A working solution 

Given a challenging environment, if the authorities want to direct banks to give loans, the government will have to share the risk. Ideally, the credit risk should be split three ways between the government, multi-laterals and banks, to ensure that they have skin in the game. The worst-case scenario would see the banks with a potential zero profit from this scheme and not the alternative of sustaining heavy losses, incentivising the banks to lend.

Guarantees could also be structured to give high credit cover to smaller firms and lower amounts to large firms, as it may not be necessary to give all borrowers the same amount of credit cover. 

For instance, loans up to a million rupees for very small firms could be covered by a 100 per cent guarantee, loans from 1 to 10 million by a 90 per cent guarantee, from 10 to 20 million, 75 per cent and loans above 20 million to 50 per cent or a similar suitable share of risk. Of course, this solution is not devoid of risk. This would allow the LCBs to meet the demand for the loans, with the guarantee offered by the government.  

Blaming the banks: Why a credit guarantee is better

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 Central Bank of Sri Lanka (CBSL) is in the spotlight yet again. Questions have been raised as to whether the CBSL and the banking system have been provided sufficient facilitation to contain the health crisis (that has been contained successfully at the moment) which led to an economic crisis.

The Government announced a series of economic relief packages since the beginning of the Covid-19 pandemic, including a Rs. 5,000 allowance for the most vulnerable sections of society and for the rescheduling of leases and loan facilities. Currently, the discussion is not on what the relief measures are, but rather on how we can execute them in the right way or whether we have better alternatives.

First, let’s understand the context. The CBSL offered a Rs. 50 billion refinancing facility in March, which was then increased to Rs. 150 billion in June. By the time the second scheme was announced, Rs. 27.5 billion of the original Rs. 50 billion had been given out. The CBSL offered the Rs. 150 billion credit facility to licensed commercial banks (LCBs) at 1% interest where the banks have to provide 4% interest to their customers affected by Covid-19.

Additionally, the CBSL brought the Statutory Reserve Ratio (SRR) to 2% from 4%, increasing liquidity (availability of money) in the market. The deposit that needs to be kept at the CBSL by banks as a percentage of total deposits is called the SRR. This means that when a customer deposits Rs. 100 in any LCB, the respective LCB has to deposit Rs. 2 to the CBSL which will not be paid any interest. Earlier, the banks had to deposit Rs. 4 and now it has been brought down to Rs. 2. As a result of this decision, out of the total deposits of all LCBs in Sri Lanka, 2% has been released to the market. That is depositors’ money.

The process of getting a working capital loan for a business is as follows: The businesses can apply for working capital loans from their respective LCBs and upon their approval, they send the application to the CBSL and the CBSL provides the money from the credit line they established, which is Rs. 150 billion. The CBSL provides money to LCBs at 1% and they give the loan to customers at 4%. The main question is how the CBSL got Rs. 150 billion in the first place. That was through money printing or money creation.

Additionally, banks now have more money from the reduction of the SRR, which can be used for other investments, to provide credit facilities, or as a deposit at the CBSL to earn an interest. The CBSL offers a 5.5% interest to LCBs parking excess money at the CBSL, which is called the Standing Deposit Facility Rate (SDFR). The CBSL has a similar facility where LCBs can borrow money if they run short of money, which is called the Standing Lending Facility Rate (SLFR) which is at 6.5%. A few challenges we may face in the future in this context are outlined below.

Challenge 1 – refinancing previous loans

When a loan scheme is available at a 4% concessionary rate, there can be instances when unnecessary loans will be applied for, to settle previous loans which have been taken at a higher interest rate. In the overall system, it may indicate that the CBSL and other banks have provided adequate loans under the newly established credit facility for Covid-19, but the ground reality may be that many businesses who have a solid working relationship with banks and bank managers will refinance their previous facilities.

The same has been experienced in large-scale loans under the previous Government’s Enterprise Sri Lanka loan scheme. It was reported that some established companies incorporated new companies just on paper to get the concessionary loan to refinance previous facilities. It was alleged that the majority of politically connected individuals received the loans and in most cases, the loans were canvassed to known businesses by bank managers themselves, avoiding customers who truly had financial needs. For bank managers, it is safer to provide a loan to a known business entity with a track record and good relationship, rather than taking a risk in a challenging business environment and risking underperformance in bank manager/branch key performance indicators (KPIs).

Challenge 2 – risk of market distortions and increasing expenses in CBSL

Since the CBSL pays 5.5% on deposits by the LCBs, banks have a higher incentive to simply earn a 5.5% interest with minimal administration cost, rather than providing a loan facility at 4% for the customers with a 3% interest margin, which also requires a significant amount of administration work. The banks will most likely park the excess money they received from the SRR cut and deposit it at the CBSL. This would increase the interest expenses for the CBSL. LCBs may also consider investing the excess money in bonds and other investment instruments which may distort those markets as well.

The positive side to this is that since banks park their liquidity back in the CBSL, the risk of inflation due to excess liquidity is somewhat minimised, but it will not bring the expected economic revival post-COVID-19. The non-performing loan (NPL) percentage has already increased to 5.1% as business recovery was very slow even before the Covid-19 pandemic, due to the Easter Sunday attacks. Similar concessionary loan facilities were provided to businesses impacted by the Easter attacks and it is highly likely that NPLs will increase.

As a result, banks may have a natural reluctance to provide facilities as they have a lucrative and stable option available without risking depositors’ money. The CBSL may push banks to provide loans as much as possible due to the lack of a correct incentive structure, which will lead to an impact on the stability of the banking sector and result in loans not reaching the right target audience.

Challenge 3 – pressure on LKR compared to USD and foreign currencies

By the time the CBSL announced the SRR cut and the Rs. 150 billion credit line, there was about Rs. 223 billion excess money in the financial system. The problem was not a lack of money (liquidity) in the financial system but the reluctance of banks to absorb risk to provide the facility to the impacted customers. At the same time, the mechanism of dispatching loans was not efficient and all banks were just depending on the Credit Information Bureau of Sri Lanka (CRIB) without having a risk-based credit assessment system to determine the borrowers’ ability to settle the loans and offering different interest rates based on the risk assessment. Additionally, the delays in banks’ internal approvals may not be supportive, given the urgent need of facilities and higher demand.

Now, as a result of excess liquidity, inflation may increase and the Sri Lankan rupee (LKR) will face further pressure to depreciate, leading us towards a Balance of Payments (BOP) crisis. Bringing the SDFR and SLFR down will bring down all interest rates in the market which will result in more money (liquidity) in the market, adding further pressure on the LKR.

In summary, the reluctance of banks to take the risk to provide loans in a challenging environment by risking depositors’ money is the problem, not the lack of liquidity in the market.

A workable solution

It is challenging to find an ideal solution for very complicated problems as our economic fundamentals have not been good for decades. Most variables are interconnected so we have to make a compromise in one of the areas. As the problem is not the lack of money supply, but rather the banks’ reluctance to take risks with regard to loan recovery, a credit guarantee by the Government could have been the first line of solution. That would minimise the risk taken by the banks without adding excess liquidity to the market and distorting other market sentiments.

Ideally, the Government credit guarantee has to be backed by a foreign funding line (USD funds) and this column has been promoting the idea of a bilateral loan with a neighbouring country or active engagement with the International Monetary Funday (IMF) for a fund facility, given the international sovereign bond settlements starting from October. The government guarantee can be provided on an agreed ratio where small loans are fully guaranteed by the Government and for bigger loans, the bank and the Government share the risk, where early instalments first cover the risk of the bank and their depositors.

One bottleneck for the Government in providing a credit guarantees scheme is the past mistakes made with our state-owned enterprises (SOEs). Multiple back-to-back credit guarantees have been provided to colossal loss-making SOEs like SriLankan Airlines, Ceylon Petroleum Corporation (CPC), and the Ceylon Electricity Board (CEB). Successive governments turned to these last resorts very early to fund completely unnecessary operations and now, faced with a real crisis, we have run out of solutions.

However, in a recent interview, Dr. Nandalal Weerasinghe mentioned that the Treasury wanted to create money and support businesses instead of providing a government credit guarantee. The reasons for these instructions are yet to be clarified by the Treasury. However, Dr. Weerasinghe has alerted the potential risk of excessive money printing on banking sector stability.

When the Easter Sunday attacks impacted the economy, we never expected a global-level pandemic of this scale. The lesson is that we should not underestimate the possibility of similar pandemics and market disruptions with climate change and a dynamic global environment in the future. I sincerely hope that there will be no calamities for the next few years as there is a lot we all have been hoping to achieve for decades.

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.

SOE sector: Promises of change on the horizon?

Originally appeared on Daily FT

By Maleeka Hassan

With the harsh reality of a global recession slowly descending on Sri Lanka, questions about Government expenditure and its allocation of resources have begun to dominate dinner table discussions. Fears of higher taxation to cover the losses earned and to sustain the blows from the impending recession have started to emerge.

There is a simple solution: introduce reforms to prevent areas for corruption and inefficiency within SOEs – thus preventing the State from bearing tremendous losses. However, there is hesitation and discomfort amongst the general public, when consolidation or privatisation of SOEs are discussed. This begs the question: why?  

Why are SOEs so popular amongst the public?

One of the reasons could be due to the portrayal and framing of the SOE sector, over the years. SOEs are perceived by the public as a source of stable employment as well as a source of goods and services at affordable prices. This perception is backed up by the fact that the SOEs hire over 200,000 people; framing the sector as ‘people-oriented’ over ‘profit-oriented’, with no consideration given to the losses sustained by these entities. Moreover, privatisation is often viewed in the same light as capitalism: cold, hard and unforgiving.

This perspective could be propelled by our history with the SOE sector. In the 1980s, the incumbent Government was pushed to reform the SOE sector. This was due to SOE products struggling to remain competitive amongst imported substitutes and therefore turning to the State to fund and sustain most of them. In addition, foreign aid agencies lobbied the Government to adopt a privatisation programme in order to secure external aid. However to avoid backlash from labour unions and state employees, the media and other campaigns around the policy were careful to avoid associating the policy with employee redundancy. Privatisation was concealed by the word ‘peoplisation’, and involved providing 10% of the shares to employees from former public enterprises.

Another reason behind the immense support for SOEs could be due to their heavily subsidised products. However, when products are sold below cost, the cost is still indirectly borne by taxpayers in the form of higher taxes, to recover the loss. The belief that privatisation will result in the prices of goods rising is contingent upon the creation of a monopoly. However, with the reduction of red tape and appropriate measures taken to prevent anti-competitive practices, prices may reduce or remain the same in a competitive market. An example of this was the conversion of Sri Lanka Telecom to a public company. This resulted in an improvement of internal operational efficiency and the number of new connections provided increased from 72,457 in 1997 to 143,075 in 1998.2

A similar reason that may have contributed to shaping current public opinion that SOEs are most effective at serving the people when they remain public, was the introduction of ‘The Revival of Underperforming Enterprises or Underutilised Assets Act’ of 2011 (also known as the Expropriation Act). This is where 37 businesses that were classified as ‘underperforming and ineffective’, were nationalised – suggesting to the public that privatisation wasn't always effective and ideal. However, these attitudes may be fuelling the problem.

Why are these perceptions wrong?

By utilising the narratives above, certain SOEs and officials attached are able to conceal corruption and nepotism behind the idea of employment, and ‘helping the people’. An example of this is the Sathosa scandal that emerged earlier this year, relating to 67 files that tied Sathosa to controversial transactions, such as land deeds that were purchased under various names and involved hundreds of acres, that cost the State billions of rupees.

Similar instances of bribery are easily carried out, and go unrealised, due to the absence of monitoring and oversight of the rest of the 524 SOEs that are ‘not essential’. The lack of transparency with regards to the financial reports of the SOEs makes it easier for these companies to commit such acts. In the Annual Report for 2019, published by the Ministry of Finance (MOF), only 14 SOEs had submitted their Annual Reports for 2018 out of the 52 that are monitored by the MOF and Public Enterprise Department (PED). Even more worrying is the fact that 21 out of the 52 companies hadn't submitted their 2017 Annual Reports either. 

Despite the introduction of the COPE reports and the appointment of the Department of Public Enterprises (PED) to monitor the operations and efficiency of SOEs, the SOE sector continues to amass tremendous losses. The recently published Annual Report by the Ministry of Finance estimates a total loss of Rs. 151,439 million from the 52 essential SOEs for 2019 based on provisional data.

These numbers would change drastically if they included data for the rest of the 524 SOEs (which include subsidiaries and sub-subsidiaries that have been gazetted but are not monitored by the Ministry of Finance, due to them not being ‘essential). The opacity of this sector would usually raise alarm bells amongst the Sri Lankan public if it was occurring anywhere else – and yet it doesn’t with SOEs. change drastically if they included data for the rest of the 524 SOEs (which include subsidiaries and sub-subsidiaries that have been gazetted but are not monitored by the Ministry of Finance, due to them not being ‘essential). The opacity of this sector would usually raise alarm bells amongst the Sri Lankan public if it was occurring anywhere else – and yet it doesn’t with SOEs.

Evolving circumstances propelling change

Despite these concerning particulars, there may still be hope on the horizon. The manifesto of President Gotabaya Rajapaksa indicated that whilst privatisation was not up for consideration, consolidation was still an option. Additionally, a board was appointed to select the heads for loss-making, inefficient SOEs, in order to reform and improve such entities.

More importantly, however, is the question of SOEs in a COVID-19 economy. 

With predictions for Sri Lanka’s estimated real GDP (percentage change) for 2020 amounting to -0.5 due to COVID-19, some economists predict that large scale reforms may be introduced in order to improve efficiency and increase its global competitiveness when seeking foreign direct investment and increased capital inflows. These reforms may extend to the SOE sector – in order to improve the financial accounts of the country and to reduce room for corruption and bribery.

What reforms can the Government adopt?

Reform of SOEs, focusing on underperforming entities, in particular, could create some much needed fiscal space for the treasury. The first phase of reform would be improving governance and accountability in SOEs. The Government should compile a comprehensive list of all SOEs; at present, the Government only tracks the financial of the key 52 entities. This should be expanded to include all entities. Clear reporting guidelines for SOEs should be introduced and enforced, with COPE and COPA strengthened to improve accountability. If these reforms are adopted, the SOE sector will increase productivity and efficiency immensely, saving the Government and the average taxpayer – millions of rupees.

The second phase of reform would be on the consolidation of SOEs. Of Sri Lanka’s 524 SOEs, the Government recognises only 52 of these as strategic or key entities. In line with Government policy, underperforming, non-strategic SOEs should be identified for a consolidation plan. 

This may be the golden window of opportunity to reform and improve the transparency of the sector, but if missed – may not come again for a long time. 

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.

The ingredients of a ‘system change’

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 mandate given by the people of Sri Lanka to His Excellency Gotabaya Rajapaksa can be interpreted in multiple ways. All interpretations funnel down to a single insight: Change the system. The word “change” is powerful. However, “change” is difficult to execute. In contrast to setting up things from scratch, altering an existing system is not an easy task under any circumstance. 

The President’s desperation is clear. He has been given a mandate to “change the system” in five years; of which, seven months have passed. With elections coming up, it seems that it will take almost 10 months to really get to the starting line. In other words, the existing “system” itself has pushed the man in charge of “system change” to the wall and the clock is ticking.

Last week’s column discussed the systems that need change and how the President could start. We highlighted that state-owned enterprises (SOEs), public transport, land reforms, and e-courts would be the four big aspects that can be implemented with minimal capital investment. If the President succeeds, the people of Sri Lanka will be able to witness a considerable change in their standard of living, and it is important that the opinion leaders support this system change in a democratic framework, and leaders at the frontline make sure the changes take place within the same framework.

Today, let’s explore a few insights on how to execute a system change. 

Understanding the system

If you ask the common man: “How can we change the system?”, a popular answer is that we can do it by imposing strict laws and regulations. Some believe the leader has to be firm and critical and supervise their team closely.

While the aforementioned is true, a sustainable system change requires the establishment of three main components: (1) ownership of the system, (2) incentives and rewards, and (3) accountability and capable people who drive the system.   

If you look at the current inefficient system, it is completely faulty due to many factors. The incentives in most government institutions and systems promote inefficiency; a system where work is delayed, and individuals are paid overtime to reward that. 

Take our judiciary system for example. In most instances, lawyers charge their clients based on the number of appearances, so the incentive is to have more appearances. Therefore, postponing cases is common and as a result, the average time taken for contract enforcement is 1,318 days with 22% of claim value. There is no pressure to finish a case within a stipulated time frame, so there’s no accountability and monitoring. 

At the same time, there is no ownership for the system as individual performance is not measured and no one will be questioned on the delays in procedure. Imagine a scenario where you hire a mason bass for a small-scale construction project at a daily rate, but you fail to monitor his work. The obvious result would be that the work will go for months, making the system completely inefficient. 

Ownership of the system

Any successful system runs on the ownership of risk. A main reason investors want to engage in businesses is because they have invested risk in the form of money, reputation, time, etc. This means they have an ownership stake and an interest to recover what they invested. For a system change, the upcoming government and President are required to consider engaging people who invest risk in the form of money, reputation, time, etc. and provide them with the opportunity to own the system as well as the results of their action.

Public-private partnership (PPP) is a great model to consider and many forms of PPPs are available and it just requires detailed attention. This would be a fundamental factor in changing any system. 

On that basis, the appointment of the ministerial portfolios’ board for SOEs cannot be just a blanket appointment – an ownership of risk has to be associated with it. In implementing large-scale projects, the President advised a few months ago, to explore acquiring investment from the private sector instead of taking loans and expanding debt stock. That means getting private investors to invest their money (risk) in projects which they can recover through profits. 

The Government can incorporate similar practices to a range of sectors. The government sector is too large, from managing airlines to managing cashew production. It will be difficult to bring private risk ownership across the board, but we can roll it out on a priority basis. Until we get the election results, time can be spent on setting up ownership structures for key institutions and a mechanism on how they can invest risk into the system. The structures have to differ based on the sector and on the type of the business and service model. Take our President for example, who has an ownership of the trust of 6.9 million people where he has invested risk. Hence, he is under pressure to deliver results. Shouldn’t the same be applicable for the rest of his supporting divisions?

Incentives and rewards

Setting up the correct incentive structures and rewards is the second important factor in a fluid system change. The current incentive structure is driven by inefficiency and corruption. Regardless of whether you perform well or underperform, you get the same benefits. So no one has an incentive to take things into their hands and do it differently. The recent discussion on the Central Bank is a good example. Whether the Central Bank maintains monetary stability, regulates license banks and non-banking financial institutions (NBFI) in the right manner or not, their destination won’t change. 

Incentives can be negative and it should not need to be positive always. If there had been a positive or negative incentive structure bearing on salaries of bureaucrats on maintaining the stability of NBFIs, I am certain they would have taken matters more seriously instead of waiting for some financial institutions to collapse completely (institutions need to provide the necessary legal authority to regulate effectively). Having regulations without incentives is a sure way of not fixing the system. 

If you are surprised by the friendliness and politeness of hotel staff, it is not just because they were asked to do it or not because the management installed CCTV cameras, but it is because they receive a financial incentive for being friendly. At the same time, we should not misinterpret that the hotel staff is kind and pleasant just because of the financial incentive. The fact that their genuineness is incentivised, which in turn makes system efficiency sustainable, is the bottom line.

Accountability and people 

Checks and balances have to be maintained if we are to monitor and evaluate the incentives and ownership of risks. That is where “accountability” and the people who drive “accountability” matter. If we have the accountability structures, we can make decisions based on meritocracy.

For example, most of the SOEs haven’t produced their annual accounts or annual reports. Most of these institutions do not even have a website. Most of the institutions that have a website have only updated the welcome message by the newly appointed minister. 

The people who drive reforms have to make a significant contribution. However, we have to keep in mind that the people-driven regulatory model where a system change is driven by personality and personal charisma has a shorter life span. But without the right people, it would be difficult to drive a system change.

We need people who can drive the system to overpass their personal charisma, so even without their presence, the system starts to function. The next government will have the challenge of identifying the right people who can fix a system rather than just pushing on getting daily operations done.

For the right people who have been identified to change the system, the broader mandate is straightforward; identify ownership structures, identify incentive systems, and set up accountability procedures are the main mandate. We should not confuse the skill of “changing the system” with project management skills. “Changing the system” is a unique visionary sport. There could be good project managers, but transforming to a system change goes far beyond project management, although it has some components of project management. 

System changes are not popular

We need to remember that system changes are not popular. Most of the people who demand a system change are usually beneficiaries of the inefficient system. Changing the system will have a direct impact on them and resistance may come with it. That is why the transferring of ownership of risk comes to the forefront when looking to change the system. 

It is important that we learn from past mistakes. The previous government too received a mandate for a system change to establish rule of law, but the same people who gave them the mandate decided to pick a different regime, again, pretty much on the same promise, that is to “change the system”.

Ownership, accountability, and the right people who could drive system changes were not in charge of policy implementation during the last Government; all were preoccupied with micromanagement without looking at the bigger picture or considering rapid implementation.

Policy statements of the main leaders of the Government went in two different directions, as did the heads of ministries and their officials.

The Vision 2025 policy plan was introduced a considerable time after taking office. The policy statements on institutions were contradictory and as per media reports, and the basic composition of the security council was questionable. 

System changes are visible, and people will experience tangible differences, such as in the government balance sheet. There will not be a better time than one of crisis to engineer a system change – we should not waste this opportunity.

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.

Professor Deepak Lal: Departure of a Free Market Champion

Originally appeared on Economy Next

By Sarath Rajapathirana

On the night of Thursday the 30th of April 2020, Professor Deepak Kumar Lal passed away in London after a brief illness. Thus ended a remarkable life journey as a celebrated intellectual and thought leader.

An author of highly acclaimed papers and books, a professor with a stellar academic career in two continents. Economic adviser to Governments for over 55 years. His observations went beyond book learning to be actually engaged with policymakers from many countries including the United Kingdom, India, Sub-Saharan Africa, Japan, Sri Lanka, Philippines, Brazil and Russia. While there have been many been appreciations and remembrances of Deepak in India, UK and the United States, one missing aspect of his life was his scintillating conversations with his friends and associates in three continents who will miss him sorely.

Deepak the Person

Those who associated with him closely would bear witness to his contributions as a great conversationalist. His vast knowledge of economics, history, and political science, sociological explorations in his quest to understand how economies and societies worked in the broadest possible ways made him great company. He was not inhibited by researching ancient history or in praising empires.

His astonishing knowledge, gentle ways and ability to analyse and advance economic issues set him apart from many academics. He was one of the more well-read individuals. He was always up to date on world politics, newest contributions to economics. He was a voracious reader, reading into the early hours of the morning, even when he had returned home past midnight. He read everything from learned research papers, novels to articles in leading newspapers of the world. His monthly column in the Indian Business Standard was read internationally.

In this essay which is short compared to his vast presence in the economics literature, we capture the most important and salient aspects that have helped many economists including us, to refine and change our world view on economics and economic policymaking.  The best description of Deepak is that he is a classical liberal. And, one who had made formidable contributions to free-market economics and its importance to specially help developing countries to grow faster, reduce poverty and improve income distribution.

Status Quo in Economic Thinking for Developing Economies

In the 1950s, thinking on economic development was influenced by the two main sources. These were the Soviet model and the other the ideas of Latin American structuralists. (Excluding China which claims to practice socialism with Chinese characteristics). The Soviet model was adopted by India for two important reasons, free-market economics was associated with British imperialism and the ideological position of the Indian leadership led by Pundit Nehru.

The Soviet Union was seen as “India’s ally and implicit role model” “(Srinivasan and Tendulkar 2003). In the case of Latin America, its colonial past was a century ago. Its leadership followed the Soviet model too,  implicitly with the special characteristic of being “ structuralists” implying a rejection of the price mechanism under the influence of a few British economists, especially from the University of Sussex, such as  Dudley Seers, Hans Singer and Latin American economists such as Celso Furtado and Raul Prebisch of Brazil and Argentina respectively.

A common issue with the followers of the Soviet model and structuralists was their failure to grow (referred to as the “Hindu rate of growth” of India, partly pejorative characterization by RajKrishna (1978). Mainstream Indian economists in the 1950s were planners, deeply suspicious of the free market. They were influenced by Mahalonabis a leading Indian scientist and statistician who postulated that in order to raise domestic consumption in India, it needed to invest in capital goods based on what was called the Feldman-Mahalonabis model. Moreover, the approach was to use a closed economy model with high import barriers to promote industrialization.

Deepak Lal’s Contributions

Deepak’s contributions which took on the above sources of dissent against free-market economics were more credible following the collapse of the Soviet economy in 1989, the poor growth rate of India the largest economy following the Soviet model and the sheer failure of economic policies of the Latin American structuralist school that led to high inflation and low output growth.

Deepak was in a group of world-class economics Professors such as I.M.D little, Maurice Scott, and Max Corden at Nuffield College, Oxford University.

They were critical of the planning approach to economic development and for the exclusion of the price mechanism to allocate resources. Interventions were justified in the presence of externalities in which case free markets could under-produce goods and services.

But even here there were better ways of intervening on externalities and infant industry grounds.
This particular group was well versed in economic theory, its application in developing countries and had practical experience in working on developing countries.

There are four books among the 40 books and pamphlets he had written that putDeepakat the top tier of economists who have advanced the case for free markets in developing countries.

They are ‘The Poverty of Development Economics’ (1983), ‘The Hindu Equilibrium’ (1989). ‘Poverty, Equity and Growth: A Comparative Study’ (with Hla Myint) 1999 and ‘Against Dirigisme’ (1994).

It would be important to provide a context in which Deepak advanced his ideas on free-market solutions for developing countries’ economic challenges.

The majority of mainstream economists in the 1950s to 1970s argued for planned economic development.

India was the leading light for most economists in the developing world. And, to buttress this position India’s leading scientist turned statistician and member of the Planning Commission, Mahalonabis had shown that in order to raise levels of consumption in India, it had to make investments in the capital goods sector based on the Feldman-Mahalonabis model.

And, the Planning Commission espoused this position in Indian plans, particularly in the second five-year plan, creating heavy industries, with little regard to rates of return or the possibility of producing iron and steel products that could compete in the world market.

Most Indian economists at the time believed that India’s large size (both in geography and population) justified producing for the domestic market.

Taking the view of a closed economy was consistent with the Socialist model espoused by leading politicians such as Pandit Nehru a Fabian socialist who favoured Soviet-style planned development.

On the other hand, Gandhi’s ideas were to support self-sufficient village-based economies where 83 per cent of the Indian population lived in 1950. In effect, both models were closed economy models protected from foreign competition.

Deepak wrote powerful critiques of the status quo thinking on economic development prevailing at the time beginning with ‘The Poverty of Development Economics’ first published in 1983 but revised and expanded in 1997.

It provided a robust critique of the statist model of development which denigrated both trade and free markets. He argued that the death of this dogma would be beneficial to the economic health of developing countries.

The history of the last thirty years has vindicated the veracity of Deepak’s critique. The dogma in its old form has gone.

However, he showed it in a postscript that brings the original text up to date, both in terms of statistics and in terms of the history of ideas.

Nevertheless, as he warns, dirigiste tendencies have not disappeared totally, but are emerging in new guises in the wake of the CORVID 19 epidemic.

Early calls for protection have arisen in countries like Sri Lanka. Ominous signs appear with the Central Bank of Sri Lanka banning many imports on the claim that it was necessary to address the balance of payments problems, ignoring the distortions in resource allocation that it would create. And the economy becoming non-competitive as a result.

Some policymakers casually suggest that Sri Lanka should adopt such a policy. This would cause a bias against export production since resource allocation is influenced by relative strengths of incentives. Besides, limiting imports would raise domestic prices of these goods and lead to inefficient import substitution not being subject to foreign competition.

In Deepak’s multi-country study with Hla Myint on ‘The Political Economy of Poverty equity and Growth: A Comparative Study’, they used a counterfactual approach of “twining” countries with similar resource endowments.

Sri Lanka and Malaysia both of which were British colonies and both had large plantations, one of the seven paired country studies. In the case of Malaysia, a mining export sector coexisted with a peasant rice economy.

The expansion of the plantation and mining sectors in past centuries attracted large numbers of immigrant Indian and Chinese workers and created plural societies composed of different ethnic groups with different cultures and traditions.

Native Malays were designated as “bumiputras” and have preferential treatment in securing public sector jobs and access to credit. However, despite this common background, (except for ethnic preferences) these two countries have had very different experiences in economic development since their independence.

Malaysia achieved unusually high growth rates but had trouble with equity and employment creation being relatively more market-friendly policies than Sri Lanka. However, Sri Lanka did well on equity by maintaining its culture and heritage, but its market unfriendly economic policies before the1977 liberalization created problems with productivity growth and balance of payments difficulties. Consequently, there was virtual economic stagnation by early 1970.

Deepak and Hla Myint and their associates point to the constraints within which governments made policies and they sought to evaluate the origins and validity of these constraints.

In the case of Sri Lanka, the departure from free-market policies through high import controls led to low GDP growth. Without the high growth, the Government of Sri Lanka (GOSL) could ill afford to subsidise its large social expenditures without straining the Government budget.

Important reasons why Sri Lanka could not achieve high growth was its high protection, large inefficiency and losses of state-owned enterprises that stood in the way of raising productivity growth. However, the analysis of both these countries underscores the importance of free-market policies as a solution to raising productivity growth which generally accounts for more than 50 per cent of the overall growth rate in worldwide studies.

Deepak’s masterly two-volume ‘Hindu Equilibrium’ deals with cultural stability and economic Stagnation in India over millennia in volume I and aspects of Indian Labour in volume II. They lead him to trace the origins of present India’s present status as a predatory and dirigiste state.

Bringing culture and standard economic analysis, he comes to these conclusions. It is the neo-classical framework that allows him to examine phenomena over three millennia. And, then come to the conclusion that India has to change its course by adopting a free-market approach to reach and sustain high rates of economic growth.

The very high growth rates achieved following the 1991 reforms in India vindicates the position taken by Deepak in this work.

‘The Repressed Economy: In this outstanding collection of essays on economic liberalization, Deepak lays the claim to be one of the world’s leading development economist. He questions why many developing countries have followed policies which have retarded both growth and achieving equity, before discussing why and how these policies need to be reversed.

‘The Repressed Economy’ brings together Deepak’s most important work on economies that function unsatisfactorily because of government policies that distort the working of the free market. He explains both why governments create these distortions and when, if at all, they are likely to heed the technocratic advice of the economists to eliminate or reduce them.

The theme of the repressed economy is explored throughout these essays, include applied studies of developing economies in Asia (China, India and the Philippines), Africa (Kenya), and Latin America (Brazil).

The role of ideas, interests and ideology are explored, as is the importance of differences in initial resources are discussed in this book of essays. Simple political economy models are developed to explain the actions of the governments concerned.

An intellectual biography is included which outlines how Deepak’s practical experience in the Third World led him to become a free-market-oriented development economist.

Conclusions

First, even a limited survey of Deepak’s contribution as above shows the wide breadth and depth of his work on development. No matter whether countries are large or small, with different factor endowments and locations, the successes and failure of their efforts depend on the type of development strategies adopted, whether they are market-friendly or not.

Second, the wide scope of the studies using simple analytical tools show that free market-based approaches to economic management can bring greater success than the alternative of heavy economic interventions. The opportunity costs of failure are high in terms of low growth rates, limited equity and skewed income distribution outcomes.

Third, Deepak notes that dirigisme has not been totally eliminated and that it can raise its ugly head again with the anti-openness attitudes engendered by the likes of CORVID-19.

Finally, noting his total contributions to economic development, Deepak has made honest and brave contributions to our understanding of economic development.

Witness his delving into economies that go back to 3.5 millennia and his praise for some empires that led to better institutional arrangements as found in the former British colonies that left behind sound legal frameworks regulatory institutions and even partial democracies.

Bibliography

T.N.Srinivasan and Suresh D. Tendulkar ‘Reintegrating India with the World Economy’ Institute for International Economics, Washington D.C 2003.

Deepak Lal,’The Poverty of Development Economics’, Hobart Papers 16, Institute of Economic Affairs, London 1983.

‘The Hindu Equilibrium Volume’. 1 and Volume 2, Clarendon Press, Oxford 1989.

‘Against Dirigisme’, The Case for Unshackling Economic Markets, International Centre for Economic Growth, San Francisco CA: ICS Press, 1994.

Hla Myint, ‘Political Economy of Poverty, Equity and Growth – A Comparative Study’, Clarendon Press, Oxford 1996.

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.

"Changing the system": How the President could start

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 day has 24 hours but the clock ticks faster in some countries, and Sri Lanka is certainly one of them. We have many things to get done, but time is running out and the conditions are right to brew the perfect storm. Our economy’s fundamentals have been in poor shape for a few decades. The country’s economic growth was 2.3% in 2019, a budget deficit of 8.5% in comparison to the GDP of  2020 is expected this year, and we are already on an IMF (International Monetary Fund) bailout programme. There is nearly $ 7.2 billion as reserves in Treasury coffers, but debt servicing payments account for nearly $ 6 billion up to December 2021.

Amidst these conditions, a pandemic was the last thing we needed and its abrupt arrival damaged the main economic engines of Sri Lanka on a larger scale than ever before. Tourism, which brought in $ 4 billion revenue in 2018, and the export industry were severely impacted, and the unfolding events in the US, which is the market for 37% of our apparel exports, are not in our favour. The impact on the Middle East will not only bring down nearly $ 7 billion worth of remittances but will also result in job losses and the repatriation of Sri Lankans due to the global economic contraction.

In that context, it seems President Gotabaya Rajapaksa will have to sacrifice nearly nine to 10 months of his five-year tenure to address unexpected challenges. He has been pushed to a difficult corner with many restrictions from the system itself (postponement of elections, etc.) to convert decisions into actions. Leaving this gloomy story aside, let’s unpack a few opportunities hanging around to get things done along with priority actions to be taken during this difficult time up until the general election in early August.

Reforms through structural changes 

Considering our public finances are weak and the spending capacity is limited, we have a grand opportunity to make structural changes to the system rather than investing our time on micromanagement. The President’s mandate was to “change the system” within a democratic framework and set up a new, functional system. Since the clock is ticking at a faster pace, we need to identify a few major reforms that could generate faster results and meaningfully benefit the people of Sri Lanka.

Below are a few areas the President could focus on in carrying out major reforms through which an impact would be visible within his five-year tenure.

Governance structure and KPIs for State-Owned Enterprises (SOE’s)

The big gaping hole in our national account is the losses of state-owned enterprises (SOEs). In 2018 itself, 54 strategic SOEs out of 527 SOEs made a Rs. 28 billion loss and received government budgetary support of Rs. 58 billion. The total of these two figures is almost two times the entire allocation of the Samurdhi fund. The initial attempt to appoint a separate panel to appoint qualified members for state institutions was commendable, but it had its own challenges.

Since a new Cabinet and new ministers are to be appointed post general election, if we are able to set key performance indicators (KPIs) for SOEs at the soonest time as the first step at the year end, then the President can evaluate the performance of SOE boards and make them accountable accordingly. When every minister is given their appointment letters when the new Parliament is appointed in a grand red carpet ceremony at the Presidential Secretariat, every minister receives an additional file listing the institutions under their purview and indicators under which the minister will be monitored along with their respective institutes’ boards.

In the list of deliverables, we can start with including basic requirements such as presenting an annual report with profits, losses, and employment for each institute so as to ensure the newly appointed boards are accountable. Ideally, the KPIs can be published before the election in selected SOEs as there would be less reluctance from the newly appointed ministers when they take over the job. In terms of management, it would be easier to get the consent for already established guidelines rather than imposing guidelines after they take up the job.

If we have the political capital, we can consolidate a few institutes early on and publish the plan to facilitate the appointment of members for all 527 SOEs, of which the total number of people in the boards alone would be a factory of senior people. When the governance structures are in place, performance will improve and losses, in turn, will decrease. Therefore, the changes will be visible to showcase to the people, and it will bring significant relief to the Treasury. At the same time, it is easier to identify the poor-performing institutes and so the boards of those can be shuffled based on meritocracy.

Public transportation

As highlighted in “The coordination problem” column earlier, public transportation bottlenecks are mainly caused by structural issues rather than investment issues. One main issue every individual goes through every morning and evening is public transportation. Regardless of whether they travel in their own car or via bus/train services, the experience is essentially the same.

In this regard, re-implementing the bus lane structure is a positive move. Removing the route permit structure and having a more open and competitive system is an easy and quick way of improving the public transport system before moving on to large-scale infrastructuring projects, given the tight public finance situation. A period of four years is a good time frame to showcase improvements on public transportation, and these reforms are fairly easier to implement especially as Covid-19 has given the perfect opportunity.

Buses are already operating only under the capacity of the number of seats and we expect that the University of Moratuwa would release official data on the improvement in average speed with the new bus lane system. This is a golden opportunity to implement the long-awaited plans of reformation with the blessings of the people and the industry. 

Establishing E-courts 

Another hassle for a majority of Sri Lankans is the delay in court cases. The outside of every court is fully crowded on weekdays with disappointing faces seen in every direction due to a completely inefficient system. Mostly, the poorest in society have fallen prey to this problem and the problem extends to prison and every sector of the economy. In Sri Lanka, the time for contract enforcement is 1,318 days and it’s just 22.8% of the claim value.

An e-court is a system of services that ensures minimum use of paper during the course of a court proceeding with digitally captured information, an unbroken chain of data exchange, readily available case histories, electronic fee payments, and an overall streamlining of court proceedings. Since a plan already is in place to digitise Sri Lanka, a two-year time frame is more than enough to establish a functioning e-court with necessary legal reforms, given the Covid-19 social distancing guidelines. If less complicated cases are moved to e-courts, there will be space for more complicated cases to proceed with the physical presence. Isn’t this the main mandate of the Minister of Justice and Legal Reforms after the election?

Land reforms

Land is the most precious resource in Sri Lanka and it’s very limited given the size of our country. Most of our economic bottlenecks have a greater bearing on land titling. We should not forget that land is a stable capital asset and only 18% of it is owned by our people whereas the rest (82%) is owned by the government. It is well documented how badly we have managed even our forest cover and sanctuaries which account for 30% of our land. Most of the bottlenecks in agriculture and investments are due to our land concerns. Investment is slow (investments from Sri Lankans) and technology is not entering our shores.

In an age where Google provides live updates of real-time traffic movement at our fingertips, we Sri Lankans cannot spend anymore time without a digital land registry, with the decades-old land registry at government offices wasting our precious time. As long as we continue with the unresolved land issues, which are to an extent connected to our judiciary system, Sri Lanka will not see a connection to the Fourth Industrial Revolution.

Above are the big four insights the present Government should focus on. In my humble opinion, a four-year time frame (calculating for many unexpected events in the global context) is a reasonable period to achieve reasonable progress. Even more importantly, people across Sri Lanka will experience a tangible difference if the above reforms take place. Furthermore, except for e-courts and land reforms, the other two big reforms are comparatively less investment-driven.

Execution over politics

Most of the leaders who take up the challenge to lead the country find themselves preoccupied with micromanagement, appearing in one meeting after another or one ceremony after another. In building the needed political capital, we should not misread the President’s mandate to “change the system” and his voter base appears to be measuring him based on the execution of his big ideas rather than the traditional political micromanagement.

I hope the current Government is reading the peoples’ mandate correctly and would not drift away and lose sight of it after the general election on 5 August. I hope…

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.

Ragging is responsible for the misogynistic and anti-intellectual culture in our universities

Originally appeared on The Daily FT

By Dr. Sujata Gamage

When universities closed on 15 March, Pasindu Hirushan, a fresher at the Faculty of Management in the University of Sri Jayewardenepura, was in intensive care. He was hit by a heavy tyre rolled down the stairs during an event organised by the student union. This was allowed to happen despite the recent memory of Samantha Withanage, a student opposed to ragging in the same university who was murdered by raggers.

Our indignation over these crimes may rise with each incident, but a greater crime is taking place every day for every penny we spend on these universities. It is the perpetuation of a political ideology which is anti-intellectual, coercive, and misogynistic. Administrators and university teachers are responsible, some directly and others by their silence.

In this column I draw from reports, research papers, and first-hand accounts from credible individuals, to bring to the attention of the public, the damage done to our higher education institutions by ragging and the associated political agenda.

Universities receive 75% of post-secondary funding, to serve 7% of youth

According to the 2019 Budget estimates, the total allocation tertiary education including higher education, technical and vocational education and youth services was Rs. 110 billion. Of this allocation, 75% goes to universities which serve only 7% of a given youth cohort. 

To put this percentages into perspective, Government budgets 40 times more for a student attending university than for a youth in the neglected 93%.

The responsibility of universities is that much bigger

The taxpaying public do not oppose this anomaly of a small fraction of a youth cohort receiving a lion’s share of scarce public resources. They believe that our system gives opportunities to all youth to attend school but sends the cream of the cream to the universities where they would make a great contribution to national development. Both assumptions must be questioned, but my focus is on the latter. 

Our public universities are a national asset. The contribution of a university to society is through teaching, research, and service. Our universities, which are essentially undergraduate colleges, may not produce cutting-edge research, but they have a responsibility to synthesise existing knowledge and guide students to be informed and inquiring consumers of knowledge. 

Being anti-intellectual is the anti-thesis of a university. But that is exactly what is happening in our universities because they have been captured by ‘a political ideology’ with the complicity of academics, intentional or otherwise. 

Ragging as an instrument of political indoctrination

As we try to make our campuses safe for students, we must understand the forces behind the ragging. A study commissioned by the National Education Commission (NEC) in 2014 stated:

“The lacunae in university administration and teaching have given occasion for entry of national-level political parties and organisations outside the university to encroach on and usurp duties that should properly fall within the purview of university administrations. These lacunae also serve as opportunities for political parties to recruit new members, mobilise students for protests and demonstrations, and use them as instruments for enlarging the party revenues and activities. One party in particular, namely, the JVP, has followed a systematic method to recruit and indoctrinate new batches of enthusiastic supporters and a hard core of activists every year, the party is also assured of a continuous supply of new entrants with the commencement of the academic year at all three universities [included in the study]. The most vulnerable students are, therefore, those who are in their first year at the university.”

Unfortunately, these observations have not been published, let alone acted upon. The Vice Chancellor of the University of Ruhuna was the first academic leader to appear on popular media to put ragging in the context of its political reality. To quote from the interview:

“Annually, university freshers are subjected to extremely inhumane harassments. These rituals are called by different names in different universities, but they involve violence and even sexual harassment. These acts are carried out by the senior students who are led by the student unions, who in turn are led by the Inter University Federation of Students (IUFS). The objective is to make these new entrants to think the way the IUFS want, behave the way they want and even to eat, dress and walk the way they want. This IUFS is led by political parties – in fact, it is one political party. …Ragging is a political enterprise. It is just not a one-or-two-week event. Ragging is used by a certain political Party to gain recruits for demonstrations, picketing, etc. This political party also uses university students to raise funds for their politics. At least once a month these students are sent out across to all corners of the island to ‘shake the till’ and collect money.”

What political party is this? The 2014 NEC report names the Janatha Vimukthi Peramuna (JVP) as the party responsible. Since then, the Peratugami Party, a breakaway of the JVP, is thought to be a force, but overall it seems to be a complex interplay of the two.

Indoctrination leads to anti-intellectualism – the antithesis of a university 

A few faculty members have spoken at length about the impact of ragging on our universities. There are some research reports as well. For example, a survey on ragging in universities was commissioned by the University Grants Commission (UGC) chaired by Prof. Mohan de Silva with funding from the UNICEF. Though the results are yet to be released, I quote from an unofficial copy of a presentation in the public interest.

The survey used the UGC Complaints Database, university records and responses from a representative sample of 1,986 students and 1,551 staff. The results lead to the conclusion that “Ragging is pervasive, multifaceted, debilitating, and disrupts learning and critical engagement and it normalises violence even in non-ragging interactions”. The survey also reveals that one of the consequences of the ragging is the “promotion of an unhealthy campus environment, by way of discouraging individual initiative, idealising mediocrity and gender stereotypes and distancing staff from students, and silencing some students”.

Some recent undergraduate dissertations provide an intimate look at the day-to-day life of an undergraduate in the University of Peradeniya. One study reveals that freshers are forced to memorise the names and deeds of student “heroes” and sing the student hero song at events. Many of these heroes died in the 1988-89 uprising after they had left the university. Those like Samantha Withanage who resisted ragging and were brutally murdered on campus are not mentioned. 

The outputs of the majority of students in the Faculties of Arts do not display much scholarship. When anybody applies for a research position it is customary to ask for a sample of writing. During the last twenty years I have requested for and received samples of writing form university graduates. A typical arts faculty dissertation is written by hand and cites only material written in Sinhala. The purpose of the university is to open the minds of students, no matter their origin, to a larger world in order to re-examine accepted notions. How can our students do that if they cannot consult the global literature on any topic

Raggers actively prevent freshers from learning English according to studies from the Universities of Ruhuna and Sabaragamuwa. Student leaders not only stop freshers from attending English classes, but ‘not using English’ is proudly claimed to be a part of the so-called sub-culture. An undergraduate thesis on student factions notes the same. Professor Sunethra Weerakoon too notes the “politicised suppression of English language in the Faculty of Applied Sciences of the University of Sri Jayewardenepura” in her memoir.

English is not just another foreign language in Sri Lanka. In fact, in a column published in 2015, I argued that the English-Speaking Elite (ESE) in Sri Lanka, intentionally or not, have created a cultural divide which also serves as an economic divide. There has to be a healthy debate about the place of English in our society, but you cannot begin a dialogue on English related issues or any issue by allowing a student faction to tie the hands of our future intellectuals. This anti-English stance of the student unions is a stark manifestation of anti-intellectualism in our universities.

Misogyny and marginalisation of women

According to the 2018 University Statistics report from the UGC, women comprise 64% of the total enrolment in our universities. In the Faculties of Arts, the percent of women can be as high as 80-90%.

What is experienced by these undergraduates?

A 2011 study by Ruwanpura based on fieldwork at the University of Kelaniya finds that sexuality of female students continues to be constrained by a reiteration of social and cultural expectations which are contrary to the setting which is ostensibly liberating and progressive). In a 2011 study of relationships in campuses, Gunawardene, et al. note that “male dominance within relationships resulting in coercion seems to be common in undergraduate relationships though such behaviour was unacceptable to females”. 

The subjugation and denigration of women by men who are in the minority is shocking, as revealed in an undergraduate thesis on student life at the University of Peradeniya. The researcher, having interviewed men and women from both ‘rag’ and ‘anti-rag’ factions notes: 

“Exclusion of women students from leadership positions is a characteristic feature of student politics. Women students experience an inferior position vis-à-vis male students and have to perform such tasks as taking down notes on behalf of male student activists who keep away from lectures, wash and iron the latter’s clothes including underwear, and, once they have found a partner, satisfy the male partner’s sexual needs. This pattern runs similar to that found in the hierarchical relationships between males and females in the rural social context and therefore appears to be replicated on such patterns in the so-called liberal context of university life.

“The subculture slang identifies every male student as a (pora) which suggests machismo and female students by the terms, hitch eka, baduwa, kokka, toiya, which are derogatory and objectifies female students by either relating them to males who befriend them in a potential sexual relationship or to their appearance. The boys’ residential hostels are called “palaces” while girls’ hostels are called “female genital stores” which translates to an expletive in Sinhala, and these terms are handed down to every new batch as part of the subculture credo. The girls are not allowed to do posters or set foot in the wala or the open-air theatre in fear that they would “desecrate” the “sacred” performance space. During the literary festival preparations, the girls are “kept in their place” and are assigned the duty of serving tea when their male counterparts get on scaffolds and engage in “manly” tasks.”

A machismo culture existed in the University of Peradeniya when I was student there in the seventies. One would have expected some progression by now. What is actually happening now is imposition of a regressive culture by coercion.

If universities perpetuate such a culture, what hope is there for curtailing harassment of women in public transport and in other public and private spaces? 

Leadership of the Vice-Chancellors

The Vice Chancellor is the chief executive officer of the university. The prime responsibility of a VC is not only that of providing a safe environment for the students, but to maintain an intellectual environment conducive to education. So far, we have heard from Prof. Sujeewa Amarasena, the VC at Ruhuna, speaking up on the dire situation in our universities and what he is doing to correct it. Though some may view his comments as hurting the image of the university, his interview conveyed the positive message that the faculty and students in our institutions are ready to cooperate with leaders who are genuine and committed.

Unfortunately, the complicity of some of the leaders is evident in the following summary of student views gathered by the UGC survey: (a) Students view staff and administration as disinterested and complicit to ragging (b) [Weak] reactions to ragging hinder the enforcement of a zero-tolerance policy (c) Culture of fear, silence and acceptance prevails surrounding ragging, and (d) The [University] Councils are disengaged from the process of addressing the issue of ragging.

Professor Weerakoon, an eminent mathematician, describes “institutional and cultural corruption within public universities” in her memoir:

“[T]he single greatest issue confronting our public universities remains the high prevalence of ragging, which in many cases extends into intimidation, bullying, thuggery and assault. There is also a strong relationship between ragging and political extremism. At the University of Sri Jayewardenepura, sympathisers of extremist ideology on the academic staff – including at senior level - do not merely acquiesce to ragging but tacitly support it and use student thuggery as a means of consolidating their position and that of their extremist ideologies within university life.”

Professor Dangolla, a long-standing advocate for students’ right to a peaceful environment, summarises his frustrations as follows:

“I have served as the Proctor in the University of Peradeniya under four different Vice-Chancellors (VCs). On 08th December 2016, in the evening around 5 pm, I was called by a senior professor to settle a ragging related incident at the Faculty of Veterinary Sciences. This meeting between freshers and their immediate seniors had been coordinated by the senior professor without my knowledge. I was called in when it had turned into a brawl. I managed to settle the situation and send the freshers back to the hostel. Thereafter, I took down the curtains to the students’ common room to curtail future such incidents since as many academics know that is where the student union does organised ragging. The student union had complained to the VC about my intervention. A JVP parliamentarian had also inquired about this incident from the VC. Without consulting me, the VC went on media to announce that my services would be terminated and had told the same to the students. A preliminary inquiry barred me for four years from any administrative posts and examination work. In 2020, a formal inquiry exonerated me from all charges but the previous punishment (based on a preliminary inquiry) is still in effect. In my view, our administrators do not stand firm with miscreant students and they yield to politicians unnecessarily. If proper discipline is to be adopted within the University, the VC and the Proctor must work together. They should listen to students’ and even politicians’ concerns, but they need to have the integrity and the courage to do what is in the best interest of higher education.”

The Vice Chancellor of the University of Ruhuna has shown that with strong leadership ragging can be eliminated. I only hope that the recent counter-attack by the Acting Vice Chancellor of the University Sri Jayewardenepura, calling the VC of Ruhuna a crazy man, does not reflect the viewpoint of other VCs. 

The solution for ragging is in the hands of each Vice Chancellor. No doubt, they will benefit from a complete disengagement of the JVP and the Peratugami Party from the activities of the raggers, and the end of covert support from the authorities. As has been shown at the University of Ruhuna, with strong leadership, the university community is capable of eliminating the scourge of ragging on their own.

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.

Rice crisis: Just give our farmers their lands

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

Rice, the main source of carbohydrates for the majority of Sri Lankans, is a sensitive political topic. I am sure we have all been experiencing this in the recent past. Most often, it is a political football where everyone passes the blame to one another without unpacking the economics behind the rice problem.

Increasing the harvest

If you ask any Sri Lankan the question “what is the problem with the rice market?”, there will be a few common answers. “A rice mafia/monopoly or oligopoly by rice millers” is the most popular. The second most common answer is the fact that the intermediaries are earning more, resulting in farmers being at the losing end.

The third most frequent response is the lack of modern technology in paddy fields which decreases our yield. Many economists and politicians support this argument with a popular statistic which states that agriculture contributes only to 8% of our GDP in comparison to 25% of our labour force involved in farming. In my opinion, the aforementioned concerns are just the tip of the iceberg.

Sri Lankans consume approximately 108 kg of rice per annum per person while the global rice consumption average is 54 kg. The conundrum is that in a country where consumption is twice the global average, farmers continue to be relatively poor.

The main question with rice is: Should farmers increase the harvest or if the harvest drops due to external weather conditions, will they earn the same amount? At times when rice harvest is high, the prices plummet due to ample supply. During this period, we can frequently observe farmers protesting as they urge the government to purchase their seed rice for a guaranteed price or for the government to impose a minimum selling price for farmers as well as a minimum buying price for rice millers. Rice millers have two main solutions to this issue: Either they stop buying seed rice as they cannot sell it at a competitive price because their cost is higher, or they still buy it which results in rice prices in the market skyrocketing to Rs. 110-120.

The high price is not only difficult for consumers to afford but is also a price that political parties pay, which dilutes their political capital. As a result, the Government intervened in the market with limited and poor storage capacity and in some cases, rice was stored in airports. After a few weeks and months, the Government sold these rice seeds to large-scale millers for a lower rate than what they initially paid the farmers, incurring a massive loss of taxpayers’ money. Some of the harvest is wasted due to the lack of storage facilities and logistics failure. As a result, farmers lose out on their income and taxpayers’ money is lost.

The second scenario is the reduction in harvests due to harsh weather conditions which decrease supply and subsequently increase prices of seed rice. Since the total quantity of the harvest is low, the money earned by farmers too continues to be low. Regardless of whether there is a large or smaller harvest, the farmer’s earnings remain consistently low. Hence, farmers are not given an incentive to increase their harvest and overall yield. Playing to their advantage, rice millers have created an oligopoly and so decide on prices in line with their modern and expensive storage capacity.

Land issues

Then comes the question of why technology is out of reach for most farms. The preliminary reason is that most paddy lands are fragmented for small lands, so it is not possible to run a commercial-level operation with superior technology. The more significant reason is that 82% of Sri Lankan land is owned by the government (out of which approximately 30% is covered by forests) and the remaining 18% is available for people’s private usage.

A small proportion of government-owned land has been given to people for cultivation, but their ability to take loans from banks to invest in technologies such as greenhouses is far beyond their reach. Construction on paddy land is illegal, which means there is a lack of space for any transaction or technological investments.

Land issues are a sensitive political issue, but many believe that if farmers are given full ownership of the land, they will sell it to foreigners, which in turn challenges our sovereignty. However, the government ownership of farmlands for nearly a century does not change the destination or quality of life of our farmers. Making things worse, the regulation is such that the paddy lands cannot cultivate anything other than paddy and even if the farmer wants to move for a better high-yield crop, a license needs to be obtained via a cumbersome procedure at government offices.

Given these challenges, how likely is it that anyone would enter paddy farming even if they have a disruptive agricultural idea?

Loopholes in costing structure

Many Sri Lankans believe that we can easily upscale our farming for rice exports. I sincerely wish we could do that too, but unfortunately, this is far from the reality. Sri Lanka cultivates mainly short grain rice in comparison to long grain rice where the world’s demand mainly lies. Even following a good season and excess rice production after domestic consumption, it is not exportable and will further drive the prices down due to excess supply. Furthermore, water is becoming a scarcity due to environmental challenges and currently, we do not calculate costs for water consumed in farming.

Recent research has found that 1 kg of rice requires 2,500 (1) litres of water and more than half of that is consumed by the plant itself. If we consider the cost of water to be Rs. 0.20 per litre, the water consumed by the paddy plant itself adds up to about Rs. 280 which is almost three times the current-controlled price of 1 kg of rice. The cost of utilising land hasn’t been factored. Fertilisers have been provided with a subsidy and that cost needs to be added to our final cost if we are to create a comparable and competitive costing structure.

Solutions

The decade-long series of solutions are well known by most of us. For example, rice millers impose price controls on the selling price following raids by the Consumer Affairs Authority (CAA) at the retail level, and the list goes on. That has been the same response by most governments and it is pointless to further elaborate on what has happened. As a solution, we need to have an easier regulatory system and allow the farmers to own their land. The draconian regulations have trapped farmers in a never-ending cycle of poverty for decades.

From the supply and demand end, the only buyers are rice millers. When there is a single buyer in the industry, they inevitably get higher bargaining power. It is important to diversify our buyer category and the only way to do it is to make rice an industrial product. Today, rice is not only used as a source of carbohydrates; alcohol products, rice bran, rice perfumes, rice-based milk, and rice antioxidants are produced at a commercial level, which offer far higher prices to farmers at the buying stage. This is the solution to increase revenue for farmers and help them escape the vicious cycle of poverty.

The day our farmers have access to their own land will be the day the market is open for many categories of buyers, which will be revolutionary for farmers. Until then, we as the consumers need to patiently experience the price controls, higher prices for rice, and the political blame game.

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.

Production economy: Think small, Sri Lanka!

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

Why can’t we produce the goods we need? Why do we have to depend on all these other countries?  Why can’t we produce world-class brands? Over the years, these have been million-dollar, or to be politically correct, million-rupee questions. 

From agri-based economic planning to state-owned industries that left a stench not only on the economy but also on the shirts and the sarees of the public, policymakers have ignored or botched time and again economic reforms which could have made Sri Lanka a production-based economy.

Let’s get back to fundamentals – “producing an economic good” and “producing it competitively” are two completely different concepts. I can drive a car, but I’m no Ayrton Senna or Michael Schumacher. In cricket terms, many Sri Lankans can play cricket but only a handful can make it to the National XI. In today’s age, producing an economic good is like playing to win at a World Cup. Observe how the Australians go about their business at World Cups. They play to win. If we are not focused and fail to adapt, we will fail as a nation. As Charles Darwin said: “It’s not the strongest but the most adaptable that will survive.” 

Many centuries ago we produced goods and services for our consumption and all parts and components of that economic good or service had an ecosystem in the same country. With the invention of penicillin, arguably the most important life-saving drug ever discovered, by Scottish scientist Alexander Fleming, the world saw a burst in population and Sri Lanka was no exception. Keeping a growing population fed, housed, and employed paved the way for integrated supply chains to form the world over. 

This is because every country has a competitive edge in a particular good or service. For example, Germany and Japan have it in cars, Korea in electronics, New Zealand in dairy products, etc. Factors such as human capital, education, technical skills, natural resources, the climate, and trade agreements have a direct impact on what we produce. Since independence, Sri Lanka has relied heavily on the big three for foreign exchange, namely tea, coconut, and rubber, but failed to make it as an integrated member of the world supply chain mechanism due to poor branding and value addition. Other countries have successfully done it. There are French champagne, Swiss chocolates, California oranges, etc. 

However, the apparel sector which took off during the post-liberalisation period has eclipsed the rest as a major player in the world apparel sector and an integrated part of the world supply chain. The apparel sector competes on price, quality, service, and delivery with the rest of the world and has won due to specialising in high-value apparel such as lingerie and swimwear. With the exception of the aforesaid example, as a result of not understanding the need for producing goods competitively, we failed to catch up with the fast-growing East Asian tiger economies. 

Joining a global production network

Rather than producing all parts and components of a complicated final product, countries began producing a small component of a big product in a complex procedure. As an example, rather than producing a total computer, companies started producing microchips, transistors, and hundreds of other small components in large scale. Producing small components of large complex products in a gigantic scale brought the cost significantly down and as a result, the price of products became reasonable. This process became a common factor in the range of high-end expensive products like aeroplanes and even to lower-end products like sporting shoes. 

Source: Aeronews TV.com

Going back to my cricket example, winning a World Cup means not only having more talented players but a host of other elements and individuals which are already operating at a world-class level. This includes compatible cricket turfs, safety and cricketing gear (headgear, pads, gloves, cricket bats, boots, cricket bats), training techniques, professional administrators, supplements, and the list goes on. In simple words, now the production of even a simple component or a product is shared across the globe (which is called Global Production Sharing [GPS]). Everyone is contributing to a small component of a complex product and everyone is part of a big value chain (which is called a Global Production Network [GPN]). 

Sri Lanka’s strategy should be to join more and more GPNs if we are serious about converting our economy to a production-based economy. The good thing about joining GPN is that it only requires a basic-skilled workforce to join the network. This will lead to earning better income for unskilled and semi-skilled workers, so the poverty levels will be elevated, because for most vulnerable sections of the society the only tradable good they have is their “labour”, and by joining a GPN we provide the opportunity for them to sell their labour. Countries like China have the unique advantage of being able to produce parts and small components of a complex product as well as assemble it and make the final product due to their large population and availability of labour at all levels (starting from unskilled to supervisory and super skilled). 

How do we do it? 

Some Sri Lankans tend to believe that joining a part of a big production network is an underestimation of utilising full Sri Lankan potential of manufacturing all components under one roof.  Some believe it may hinder Sri Lanka’s ability to create world-class brands and labels. Certainly not; Sri Lanka can create a Sri Lankan label brand for a component rather than a final product. It is already done in Sri Lanka. Certain safety and rubber components that are vital for the automobile sector are manufactured in Sri Lanka. The entire world is aware that Apple computers are not made in the US and even the product itself mentions that it is made in China and designed in the US. The same is valid for Boeing aeroplanes. 

Sri Lanka makes high-end apparel. We manufacture for giant brands such as Victoria Secrets, Nike, and Adidas. But this doesn’t mean that if we launch it under a brand name of ours that there will be the same demand. An apparel manufacturer tried to launch its own brand in India but was not successful. Sri Lanka can move towards assembling and creating more Sri Lankan brands when we evolve from our basics, but as we would all agree, our basics are not right yet. This is where foreign direct investments (FDIs) become critically important. We need to attract one big company to set up here and Sri Lanka should actively capitalise on post-COVID-19 dynamics of companies that are forced to move out from China. If we attract one good investment for a GPN, the rest will follow. That is exactly what Vietnam did, attracting just one company as they knew then the tide would turn. 

Rethink import substitution

A popular strategy to convert Sri Lanka to a production-based economy is considering import substitution. As we have highlighted in this column previously, most of our imports are capital goods and intermediate goods used for many other products (57% of imports are intermediate goods and 23.1% of imports are capital goods). If we are to join GPNs, the inputs have to be competitive. Otherwise, the output will be expensive and uncompetitive.

If we are to carry out import substitution, then ideally it has to be based on the competitiveness of the local substitutes but not substitution through a complete ban or through exorbitant tariff rates for imports. If we are to substitute imports through bans and tariffs it would further impact other local industries due to higher costs and regulatory barriers creating difficulties in managing their input supply chains. That’s why the word “competition” has significant meaning in economic vocabulary. 

The best example for this is the construction industry. Importation of most of the construction raw materials are subjected to a 60%-plus tariff and as a result, our hotel room rates are higher compared to our competitive destinations such as Thailand, given the time taken to capital recover is high (there are more reasons contributing to high room rates but construction cost is one major determinant). So the tourism sector as a whole is impacted just because of one single attempt of import substitution in the construction industry. 

COVID-19 provides us the opportunity to convert Sri Lanka into a production-based economy again, but we need to take the correct path instead of being shortsighted as in the past. We should focus on making our inputs and outputs competitive and look at the broader picture rather than restricting ourselves to micromanagement.  

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.

Advocata Policy Brief: Sri Lanka should reduce taxes levied on menstrual hygiene essentials

52% of Sri Lanka’s population is female, with approximately 5.7 million menstruating women. However, for many Sri Lankan women, access to safe and affordable menstrual hygiene products has become a luxury. In light of the continued unaffordability of menstrual hygiene products for women in Sri Lanka, the Advocata Institute proposes a few policy recommendations.

READ COMPLETE POLICY BRIEF

Public transport reform: Covid is our vehicle

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

We’ve had enough discussions about how Covid-19 could bring about a new normal, and its negative impacts on the economy and our day-to-day lives. However, “crises” do not only bring threats but also open up ample opportunities. That’s probably why wartime UK Prime Minister Sir Winston Churchill said: “Never waste a good crisis.” Reforming our public transportation is one golden opportunity presented to us on a silver platter due to Covid-19. 

What’s wrong with our public transport?

When Sri Lanka progressed to a middle-income country to reach GDP per capita of $ 4,000, people could afford a personal vehicle even with the exorbitant import tariff imposed by the Government. As a result, about 48% of Sri Lankans started commuting to the city in their personal vehicles.

At the same time, our public transport, still lumbering along as it was in the mid-1980s, had not progressed to the aspirations and expectations of a fast-growing middle class. Adding to woes, the quality of public transport depleted at a rapid rate, increasing the number of people commuting in their personal vehicles and burning more fossil fuels, which account for 19% of our total imports. The environment paid the price as our air quality index plummeted. Simply, our problem was that we had been commuting vehicles instead of commuting people. 

Commuting amidst COVID

With Covid-19 hitting us hard, buses and trains cannot operate to their full capacity, according to the Government’s health guidelines. That brings two contradicting problems. People may not have adequate commuting options to adhere to health guidelines, so individuals commuting via crowded public transport pre-pandemic may consider travelling in their own vehicles for health reasons when the economy gradually opens up, spelling disaster and making our existing traffic jam worse.

At the same time, bus owners will be demotivated to field their buses as they cannot make a profit without operating at full capacity without a ticket price revision.

Meanwhile, some commuters may not need to travel at all while “working from home”.

Hidden problems and mediocre solutions

 Whenever the topic of public transportation enters the national discussion, our solutions have been very shallow and out of depth. We have taken a more regulatory and blanket tariff approach instead of understanding the real problems. The popular solutions were increasing tariffs on vehicle imports and discussing a ban on tuk tuks, claiming that they contribute to most of the congestion and accidents, even though hard facts paint a completely different picture.

Looking back 20 years, do you see a different brand or structure of buses running on our roads? It’s the same box-type Leyland or Tata, and the same air-conditioned (AC) Rosa buses. Why has the structure of the buses operating on our roads not changed over the last 20 years, when the world has moved to the extent of offering services of unparalleled comfort and safety?

With limited railway service, the 138 bus route (Maharagama/Homagama-Pettah) is considered the most congested bus route to the commercial capital of Colombo. Even at an electoral level, Maharagama/Homagama is considered one of the most densely populated suburbs where aspirational Sri Lankans live, or in other words, where the educated middle class reside.

Have you ever wondered why AC buses do not operate on this route? Most of the main routes (Galle Road, Kandy Road, Negombo Road, Battaramulla Road, Gampaha, etc.) on which most educated middle-class citizens commute to the city on a daily basis for employment, business, and education, use buses which are in the dilapidated state; the so-called luxury service (AC) is horrendous, despite passengers being charged double the usual price.

Have you ever thought about why, while there is a big demand for people to commute comfortably even at a higher price, no one ever thought to have more AC buses, at least as a surface-level solution? That is where a pragmatic approach to public policy, in this case, transport policy, comes into play.

Deadly combination

Ideology aside, the deadly combination for any market, which leads to its stagnation, is lack of competition, over-regulation, and price controls. Unfortunately, our public transport system has all three in just the right amounts to brew a recipe for disaster, costing the Sri Lankan economy a colossal amount of money and having a significant environmental impact.

The route permit for buses that commute between districts costs several times more than the bus itself. At the same time, the route permit is not competitively priced, creating entry barriers and restricting supply. Private bus owners request that even if new route permits are issued, the existing bus owners should be given priority. Simply put, the public bus owners run a cartel, creating meticulous entry barriers so they can continue to provide a ramshackle service to the public and get away with it. On the other hand, a maximum price ceiling on a ticket price is imposed by the Transport Authority. 

On the flip side, bus owners have no incentive to field a higher quality bus and a higher quality service as the ticket price would be the same, whether a new or old bus. In a similar way, buses can’t charge a premium for providing a friendly and courteous service. Irrespective of whether they operate during off-peak hours or peak hours, the price of a ticket is the same. Due to this, there’s no incentive for buses to operate after dark and the few that do run are often seen racing each other to grab passengers at the next halt, in contrast to the crawl during rush hour.

Think of a situation where airline ticket prices are regulated – undoubtedly, it looks silly, given the dynamism of the industry. The same applies to public transport. As a result, there is no competition in the public transport space. Trains are a government monopoly and there is no competition and no pressure for them to increase their services as they have no incentive, even if they improve the quality and quantity of service. Their incentive is securing overtime via inefficiencies; they earn the same salary regardless of service levels.

The taxi service which has evolved without single government regulation, respecting market forces, is the only hope for the people. As we all know, the night rates are higher in taxis. The taximeter works in a system where when demand in a specific area is high, prices are higher. As a result, resources are better managed and utilised. People can plan their lives methodically and decisions can be made rationally, while convenience is delivered to your fingertips. Of course, there are areas for improvement, but undoubtedly, service levels, experience, and value for money are far superior. 

Central Bank Annual Report 2019 Table 81

Opportunity post Covid-19

Subject experts such as Prof. Amal Kumarage of the University of Moratuwa have done enough research and listed solutions to bring an end to this debacle in many forums.

What the Government could do is reconsider the route permit system and do away with entry barriers for businesses to enter the public transport market which would then end the present cartel.

The Government has to reconsider the pricing formula for bus fares and deploy a flexible pricing structure with the proposed pay card system where buses can charge a higher fare if they operate at night.

A test run has already been done with the participation of some cabinet ministers in this Government.

Given lower fuel prices in the world market, even a concessionary rate can be provided for public transportation to encourage them to operate at lower costs, considering the damage to the environment.

Simultaneously, the Railway Department requires more competition. The Government can consider keeping the ownership of the railway tracks with the Department and provide private investors with the space to join in a public-private partnership to run train compartments, operations, and cargo. If we can check the location of our tuk-tuk taxi, obviously it isn’t rocket science to develop an application to monitor the arrival and departure times and locations of trains. 

Most of these regulatory reforms won’t affect the Government’s fiscal position, and we should look at options to take maximum mileage of market-based pragmatic solutions rather than inefficient government interventions.

When public transportation sees significant improvement, the Government should consider imposing a congestion tax as done in London, where vehicle entry to the city is expensive, so more people are encouraged to use public transport and congestion is discouraged.

The current higher taxes on vehicle imports is a blanket tariff which has no impact on reducing congestion. When the public transportation is up to the mark, vehicle imports (mainly low efficiency-engine vehicles) will automatically drop, so the Government will not have to crush the dreams of aspirational Sri Lankans progressing to four wheels from two or three. Additionally, the Colombo Municipality will earn extra revenue via the congestion charge. 

Last but not least, the Government should abolish the vehicle permit system and treat all its hard-working residents equally. The vehicle permit system has indirectly allowed daylight robbery of taxpayer money, and of course, it has to be kept active for political reasons. This is the golden opportunity to move from the “do nothing” seat to the “do reform” seat, and we should not waste this crisis without making reforms in our public transport system.

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.

Resilient food supply: By command or through markets?

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

The COVID crisis

It is when something breaks that we notice. The curfews imposed at short notice to flatten the curve of COVID-19 infections damaged the food supply chains that Sri Lankan consumers had taken for granted since the demise of ration books that were central to our existence until the 1980s.

Since 2006, LIRNEasia has been studying fruit and vegetable supply chains in Sri Lanka centred on Sri Lanka’s largest wholesale market in Dambulla which was recently shut down by the Government along with several other wholesale markets. 

The closures were preceded by scenes of massive oversupply, frustrated farmers throwing away unsold produce in large quantities, claims that the traditional traders were exploitative “middlemen,” and counterclaims that politicians were seeking to replace them with their own middlemen, and so on. 

At the other end, consumers confined to their homes were complaining not only of difficulties in obtaining supplies but also in some cases of low quality and high prices. The Government’s response included short-term efforts to purchase unsaleable produce directly from farmers and to distribute through government channels. Understandably, it has been difficult to build supply chains from scratch in these strained circumstances. 

Reports of shortages and delivery delays emanating from the United States, home to some of the most complex and advanced food-supply chains, suggest it is unrealistic to expect food supply to be completely unaffected by shocks of this magnitude. Despite the stretching of food-supply chains over longer distances and across borders because of efficient logistics, the system did not collapse. It is reported that locked-down Indian coastal states found international supply chains for edible oils to be working better than domestic ones.

The COVID-19 shock may have impacted food-supply chains in various ways, including difficulties in delivering to homes due to lack of efficient warehouse facilities and logistics; lowered demand in specific segments (for example, the sudden elimination of demand for premium produce from tourist hotels and restaurants); general reduction of demand caused by frugality resulting from concerns about finances; failures in e-commerce, and especially in the form of difficulties in the discovery function wherein consumers locate retailers with desired price-quality bundles and in placing orders; and breakdowns in the producer-end of the supply chain, caused by staff shortages, transport problems and input shortages and delays.

Things were not that great before COVID-19. Growers were poor; supply fluctuated wildly as did prices; waste was pervasive across the supply chains; the jobs of those who work for the intermediaries were uncertain and poorly paid, and consumers were perennially unhappy. All political parties recognise the problem and have proposed solutions within various points in the planning-market spectrum. We should see a lot more promises on food security when the 2020 manifestoes come out.

Command solution

Around 10 years ago, the President’s Office was persuaded of a State-centric solution that rested on village-level officials collecting information on what crops were being grown and harvested for collation in a centrally administered database. When crops were being grown in excess of what the officials deemed adequate, they would command farmers to grow something else or deprive them of planting material, thereby balancing supply and demand. 

Despite many efforts including the development of IT systems, this approach appears to have failed to yield the expected results as evidenced by frequent reports of gluts and unhappy growers. Yet, the notion that the State can “discourage overproduction of certain vegetables” persists, as indicated by a joint letter to the President from the deans of eight agriculture faculties dated 14 April 2020.

The failure of the command model was preordained. It was tried for decades in the former Soviet Union and in China and failed miserably. It produced shortages and occasional gluts and left growers and consumers unhappy. Whenever the command model was relaxed, production went up. Nobel Laureate Friedrich von Hayek made the theoretical case against the command model as long ago as 1935.

For the command model to work, what crops farmers grow and harvest (and the losses they suffer in between) must be reported by officials or by the farmers. These activities are not supported by incentives for accuracy; indeed, the incentives are for the reporting of whatever causes the least trouble with the lowest transaction cost. There may even be incentives for under or over-reporting. 

Unlike in stock markets where all transactions occur on electronic platforms, price data from agricultural wholesale markets in Sri Lanka are manually collected and are open to error and manipulation. Even if the data is accurate, the processing is too complex, as shown by the debates between Hayek and Oskar Lange and colleagues in the 1930s. 

Market solution

Claims have been made at the highest levels that the current difficulties in food supplies indicate market failure. An information problem exists for sure, but not necessarily a market failure. 

The grower must decide what to grow in May based on the price the crop is likely to fetch in, say, August. That price will be determined by the law of supply and demand. How much of a particular crop is grown in May and how much demand there will be for that vegetable in August need to be known. How can a grower estimate demand in the future? She has to go by past patterns, such as prices fetched last August. This knowledge is not exclusive to one grower. If too many growers make planting decisions based on these kinds of common knowledge, a glut can be guaranteed in August. 

But if information on what others are planting is known, growers can make better decisions. Forward contracts is the best way of getting information. Here, a specialist with skin in the game collects and processes the information on supply and demand and offers forward contracts for August. If the data are incomplete or the processing is flawed, he will lose money, having to pay more than spot-market price. That is skin in the game. As more forward contracts are entered into, the buyer will see that supply is trending toward glut. The prices on forward contracts will decrease, prompting growers to consider other crops. 

Supply will be aligned with demand, with no coercion of the grower. Risk is managed by those best equipped to handle it. Additional elements such as insurance and futures exchanges will be needed for optimal results. Forward contracts have other benefits. They can be used as collateral for agricultural credit, allowing the phasing out of the present informal and dysfunctional credit mechanisms. 

Our efforts to interest private investors in establishing the necessary market solutions failed to take off several years ago due to concerns about contract enforceability in Sri Lanka, among other reasons. Government interference in the functioning of India’s incipient agricultural commodities futures exchange at that time may also have contributed. 

Information gaps

Another reason may have been the undeveloped nature of market information systems. Our research showed massive information gaps in the markets for agricultural produce. We found that sustainably filling these gaps with data on what was being cultivated when and on quality and market prices to be challenging in the absence of information-hungry futures and forward traders.

Crop (what is grown, when, how much), harvest and price data are needed for the market approach. Information on forward contracts being signed is also needed in real-time. Those selling such contracts need to know what farmers are planning to grow, while there is still a chance their behaviour can be nudged by incentives. 

One reason the existing data are of uneven quality is the absence of proper planning mechanisms or functioning forward contracts and futures exchanges. Because of the lack of consistent demand for data, sustainable data collection and analysis systems do not exist. Difficulties of capturing the returns of investment in data products caused piecemeal private efforts such as those that LIRNEasia was associated with being bundled into other products. 

Whichever path we take to build robust food supply chains, the data gaps and contract-enforcement problems need to be addressed. These are the productive interventions that will ensure food security; not the repetition of efforts to build a command model. 

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

The import ban will kill the aspirational Sri Lankan

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 friend of mine in his mid-40s had a heart attack. I mean a real one. He was a dynamic rugby player and a national-level athlete in school. Everyone was dumbfounded at how a person with such a high level of physical fitness could possibly have a heart attack. I asked him: “When did you last hit the gym or go for a walk to burn calories?” He replied: “After I left school, I did not do any exercises.” He has also been constantly eating greasy and unhealthy food. That being said, are we still surprised at why a dynamic school athlete, who probably was the envy of some of his classmates at that time, suffered from a heart attack?

Past glories

We always reminisce at what a blissful nation we were during King Parakramabahu’s reign and how our state coffers were full when our colonial masters – the British – left us. It’s a distant memory, even surreal now; how strong the exchange rate was and how we were only second to Japan, which is now the third-largest economy in the world, just a shade over seven decades ago in 1948.

While all that is undoubtedly true, the world has evolved. And alas, we have been under the shade of a coconut tree with a kurumba (local king coconut) in hand dreaming of our past glory, while Japan, despite getting nuked no less than two times, forged ahead as an economic superpower.

It all comes down to choice. Japan as a nation could have withered away dreaming about their past glory, being the first nation to launch a purpose-built aircraft carrier, the IJN (Imperial Japanese Navy) Hosho, and later, to rule the seas (at least for short while) with – to date – the largest battleship ever built, the IJN Yamato.

Japan lost the Pacific theatre and ultimately the war, comprehensively. They arrived at a crossroads and decided not to simply fade away. As I said earlier, it simply comes down to choice, the choice Japan made. We all know what that was and so can comprehend why the West calls Japan the Land of the Rising Sun.

Japan is just like us, in that it doesn’t have much in natural resources, despite churning out cars and electronics to be exported by the shipload.

Returning to the Pearl of the Indian Ocean, the quagmire we face raises the question: Have we been engaging in our daily 20-minute exercise to be in the game or at least in the park, to keep pace with the world?

Definitely not. And as a result, we have blocked our arteries and are staring down the barrel of an impending economic heart attack as a result.

No more new cars

At the time of writing, the Government announced a complete halt on the import of vehicles and luxury goods for the next five years.

I want to get this off my chest – the Government’s or Finance Minister Dr. Bandula Gunawardana’s definition of a luxury good differs from mine. Maybe even your – the reader’s – definition of a luxury good greatly differs from mine.

A pertinent question is: How can a luxury good be defined? And can imports be stopped in this day and age without actually doing the opposite of what was intended; hurting the economy? A high-end Mercedes, Lexus, Range Rover, or BMW, even with the present exorbitant taxes, might be needed for the tourism industry. Luxury goods send the right signals to investors and tourists, of a vibrant economy. The economy also becomes a lot less scary. No one wants to go for a holiday to Kim Jong-un’s land. It’s just too boring…and scary.

Similar to imposing price controls, the Government may have drifted towards this move with the good intention to manage our limited foreign currency reserves. Put simply, we have about Rs. 16 billion in debt payments that need to be fulfilled in the next two to four years. To put things in perspective, this is a colossal amount, equivalent to 16 times the debt-to-equity swap we transacted for the Hambantota Port. Regardless of good intentions, this will follow a deadly sequence of unintended consequences. Leaving aside the revenue losses to the Government and the impact on the retail sector and bank credit, the biggest impact would be for “Aspirational Sri Lankans”.

In any country, aspirations and aspirational people drive the economy. They need a dangling carrot to entice and motivate them to reach higher.

Let me give you a few examples. In the midst of the Covid-19 battle, the GMOA (Government Medical Officers’ Association) requested tax relief on duty-free vehicle permits from the Government; this received significant criticism online and offline.

Though I have my own opinion, keeping that aside, a question we should ask ourselves is: Why, in the heat of a pandemic, is a leading trade union requesting duty-free concessions on vehicles, out of all the consumable goods?

Although I see their request as unfair, the reality is doctors are aspirational Sri Lankans, and vehicles are an element of an aspirational Sri Lankan; I would even dare to stay, a status symbol. If you look at the life cycle of a doctor, you observe that they study very hard to get into medical college, study even harder for about five to six years at that medical college, and undergo training at an obscure hospital thereafter. After burning so much midnight oil, is it unfair for them to buy a vehicle from the market? (I refer to the general right for a doctor to buy a vehicle, not a duty-free vehicle; whether to utilise one’s aspirations at a cost of a pandemic, is a different discussion altogether).

This fate seems to be shared by not only doctors but by everyone who dreams big and is really committed to contributing back to the world. Young, middle-class professionals work very hard to accomplish the aspirations that drive them. While writing this article, I recalled a TV advert by a finance company or bank, of a young couple on a motorcycle stuck on the roadside, seeking shade during a thunderstorm. They want to move up in life to be able to afford a vehicle. It’s the same situation; everyone wants to live a good life because they have all made enough sacrifices. What is wrong with that and why should they have to pay for the cock-ups since 1948?

Money isn’t everything, but…

Aspirational people drive the entire economy. They are business people who take on the risk of starting a business, pay salaries to employees, and invest their money on research development and technology.

If you ask students at a university or any young graduate during their job interview, what they hope to achieve in five years, their most likely response would be: “Build a house, buy a vehicle, and travel the world.” These are the three things that top the list. Why are banking jobs and even jobs at the Central Bank very high in demand? Simply because of the so-called 4% interest rate for housing and vehicles extended to staff.

Many alternative arguments have come into the limelight; that we have to measure happiness instead of our living standards; some say the material world is not the entire world. That may be true, but for a country which has continuously missed opportunities over and over again, and which is at the edge of another brewing economic crisis, this is not a time to conduct any social experiments and kill the aspirations and hopes of young Sri Lankans.

Of course, I am a true believer that money’s not everything, but there is a cycle that you come to realise and your aspirational motives are what brings you there.

Most of our tariff lines on housing materials are above 60% and the fate is the same for many consumables for middle-class people. How can we justify asking the middle class to sacrifice their living standards by downgrading them at the cost of import controls for someone else’s sins? They have paid their taxes, they have worked hard, and they have done their job. The private sector hasn’t been given any vehicle permits nor have they used any government relief packages. Instead, every corporation has been taxed heavily, even on profits earned over the prior years when the previous Government was in power.

From a different perspective, Sri Lankans who work abroad and send foreign remittances from the Middle East, Europe, and Asia, do so to upgrade the living standards of their families, who consume goods like vehicles and electronics. You can observe how fellow Sri Lankans buy TVs and washing machines from duty-free shops at the airport. Do you think it is fair to ask them to cut their usage of electronics to cover up the failures of our incompetent politicians who ruled the country for the last seven decades?

Solution

We hope the import controls imposed are a temporary move and the Government will reconsider this decision. In this column, we have highlighted multiple times, backed by facts, that import control is not the way to defend our currency nor is it the path to economic prosperity.

In 1972, this experiment failed comprehensively. At the same time, too many controls mean too many regulations, and this may contradict His Excellency, the President’s inaugural Independence Day speech where he hit the nail on the head on why Sri Lanka failed to succeed, speaking of how badly its people were treated with over-regulation. In unprecedented times, it is understood that we need to take hard calls, but the cure cannot be worse than the disease.

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.