Understanding economics, understanding life

Originally appeared on The Morning

By Dhananath Fernando

Why Sri Lanka needs to comprehend economics to tackle its other problems

It is said that when John Lennon (the singer/songwriter) was five years old, his mother used to say that happiness was the key to life. When he went to school, the teacher asked him:  “What do you want to be when you grow up?” John replied: “To be happy.” The teacher told him: “You didn’t understand the question,” to which John responded: “You haven’t understood life.” 

John Lennon’s thinking is valid in economics as well. When we fail to understand economics, most of the time we just don’t understand life. 

It is a more serious problem for the common man’s life when our policymakers don’t understand economics. Asking the common man to pay for someone else’s decisions and choices is not the right way to think about economics. 

Sri Lanka’s continuous battle with Covid-19 is a good case study, not only in economics, but also in understanding what is happening to our quality of life. Especially with the risk of a Covid-19 third wave at hand. 

Public Health Inspectors (PHIs) have recommended another lockdown. A record number of patients have been reported per day, far exceeding our testing capacity. Newspapers have reported about a UK variant and asked the public to keep a two-metre physical distance, instead of one metre, to combat the new variant. 

As the nation went through a second lockdown, this column highlighted why Sri Lanka cannot afford another lockdown. 

Simply put, our government revenue is declining, our foreign currency debt repayments are mounting, our channels of foreign currency earnings have been interrupted negatively, and most of our economic challenges have reached a boiling point. 

None of these problems have quick fixes. The only quick fix we can apply is to buy more time. All the above are symptoms of wrong economic thinking rather than problems that cannot be solved. The right economic thinking is more important than ever before, as we slowly drift towards the brink of a third Covid-19 wave.

Economics is the study of maximum utilisation of scarce resources that have alternative uses. On the health care front, our hospital beds, PCR testing capacity, ventilators, vaccines, and oxygen supplies have now become crucial, scarce resources. 

If we fail to utilise these scarce resources to their  maximum, as a country we will face a health care crisis. This is taking place in the backdrop of a grave economic crisis that has been multiplying over the years. Globally, vaccination is in high demand, and even the slightest delay to place an order could cost human lives. To get vaccines faster, we need foreign currency and a good working relationship with other countries to get the vaccines down. Unfortunately, things are a bit difficult at the moment.

When resources are scarce, the only way to maximise that resource is to prioritise them – this means removing barriers for more players to enter the market and allow market forces to work, thereby allowing new channels of supply to be established. 

On the demand side, we have to constantly build public awareness on action on better sanitisation and minimise the spread of the virus.

During the first lockdown, this column recommended a strategy of testing based on symptomatic cases and asymptomatic cases, with the ability to do contact tracing and random testing. Basically, to highly prioritise the symptomatic contact traces, and assign low priority to the asymptomatic cases that are difficult to contact trace. 

The column also recommended conducting regular testing for frequent commuters and touch points such as taxi drivers, bus conductors, and others who interact with many people. During the initial wave, the testing was only allowed to be conducted through government hospitals, while the private sector was not allowed to conduct PCR testing. That decision was later relaxed.

Similar restrictions and guidelines were available for health care and treatment by private hospitals. What economics teaches us is that when resources are scarce, the actual cost of utilising that particular resource is the cost that we have to forego for the usage of the same resource. 

When it comes to PCR testing, when everyone is attempting to get the test from the government system, we have to forego the opportunity cost of someone with the disease getting tested, and someone who could afford to get the test done with a payment. 

The more we overstretch the government system, it is the more affluent and politically connected who get the opportunity of obstructing the poor man’s opportunity. 

Now the context has changed. Our existing problems remain as they are, a similar situation has occurred on our hospital beds, oxygen, and vaccines. The solutions to these problems have to be evaluated in multiple facets, as there are many dimensions. What often takes place in Sri Lanka is considering all aspects except economics. 

Given the scarcity of hospital beds, we now have to consider all methods of increasing the number of beds, PCR testing, and getting vaccines on the supply side.

At the same time, we must restrict the spread by continuous public education to manage the demand side. After seeing news stories from India, we may have to look at opening our health system for more private sector involvement. This can be through requesting hotels and unoccupied tourism properties to convert to hospital wards based on their consent as a backup plan, and allowing regulatory relaxation to bring down life saving medication. 

That is just healthcare economics. Vaccines and all medical equipment require money to purchase and upscale. We need both local currency and foreign currency. We have to think about financial resources on the other hand. To save foreign currency, policymakers are running a marathon of banning some import product categories every week, without understanding the overall impact the public has to face. 

Last week, it was fertiliser, and the week before it was palm oil. There have been many on the list. All these controls have a ripple effect, and impact the economy and public life. 

The ban on tyre imports has created a new market for secondhand tyres, which is a serious road safety concern. The ban on palm oil adds additional risk of multiple usage of coconut oil, which also adds to health risks and increasing the smuggling of coconut oil. As a result, the little quality of life we have is diminishing everyday. 

According to John Lenon’s understanding of life, we should not misperceive economics only in monetary terms. Economics is the science of maximising scarce resources with alternative usage. It is everywhere in life. 

We see the importance in healthcare economics better now than ever before due to the pandemic. The objective of economics is to take more people out of poverty by utilising our resources. Controlling imports or defending our current account is not a form of economic governance. It is important to understand the problems and the symptoms of the problem. But we need to comprehend economics to understand the problems first. 

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.