Dhananath Fernando 00:20 Hello, hello everyone! Welcome back to our conversation. As you know, we are having a conversation with Dr. Sarath Rajapatiranar about the book that he authored about Sri Lanka and globalisation. Very importantly, and we have discussed about seven chapters so far. And today we are going to discuss one of the most important chapters, chapter number eight, and that is avoiding inflation in Sri Lanka in order to benefit from globalisation. As the title says, there are multiple sides to it, because I think it's very clear that Dr. R's book, Dr. Rajabati's book, is more written with facts and narrative and figures that it's globalisation friendly story, but in this chapter he brings out the story why avoiding inflation is important if we want to benefit from globalisation. Dr. Rajapatiranath, welcome back. Dr. Sarath Rajapatirana 01:14 Thank you very much. Yeah, inviting me again. Yeah, Dhananath Fernando 01:18 Dr. Rajapatira, in this chapter basically you first at the first part you speaks about inflation episodes, and in fact, you say we have experienced over four episodes during the last 35 years. Could you kindly elaborate on this to start our conversation? Dr. Sarath Rajapatirana 01:39 Yeah, very good. Thank you. I I will give you some example, real life example. Right. So the the why are we so worried about inflation in relation to what the country is going to achieve? Inflation is just increase in the consist continuous increase in the rate of price increases. That is what inflation is. So that's very clear. The trouble is that if when that happens and the inflation rises up, it distorts markets. Right. Now people who don't talk about that very much, but very much so, because if you have prices, prices are rise by, say, 10% in one place, 15% in another, etc. The ratios of these increases are not consistent; they are the same ratio. So, in in other words, it sort of interferes with the allocation of resources. So, if you have, if you say first example, it's we had a couple of episodes, actually four main four main episodes we are Dhananath Fernando 02:57 speaking about in this section. Dr. Sarath Rajapatirana 02:59 Each episode is challenge the authorities, monetary policy authorities, to keep it under control and only let it go and fly away and create more distortions. More distortions have directly reaction relationship to how resources are allocated, since prices don't rise all at the same rate. When when 111 group of prices rise by one one pay 1% 1% pay, other than by 3% the the ratio between three and one tells you that there are consequences to it. So Dhananath Fernando 03:40 go ahead, Doctor. Dr. Sarath Rajapatirana 03:41 So that's why we worry about inflation. Dhananath Fernando 03:44 Dr. Ajbadan, a quick follow-up question. Now, now inflation is the rising of. You basically gave the definition. Yeah. The price levels across the board. Dr. Sarath Rajapatirana 03:56 Yeah. Dhananath Fernando 03:57 Do you mean to say when at like when at the rates of higher inflation, it is some. I mean, prices of certain goods and services will go. I mean, at a different rate to another one. Can it happen? Like, if you could explain how it can happen at the same time. I mean, with an example, if it's that the case. Dr. Sarath Rajapatirana 04:20 Yeah. So, shall we say? I take a real, real life example. Is oil prices Dhananath Fernando 04:26 right? Dr. Sarath Rajapatirana 04:27 Oil prices in 19, when I was working on that part of the world, oil prices suddenly shot up. So, the allocation of resources following from oil prices is not trivial. Dhananath Fernando 04:43 Right, it Dr. Sarath Rajapatirana 04:44 completely affected the whole East, South, South Asia. Dhananath Fernando 04:49 Right, Dr. Sarath Rajapatirana 04:50 and we also got a got got a shock in that sense that we had to pay more to. Get things done to buy things from others, so rather it has not only effect on the rates of change, but to the country facing, for example, where prices have suddenly gone up in oil. I think if I remember the numbers, it went from 12% to 34, 35% in the in the world. So it was a real shock that way because people are not ready for it. Entrepreneurs are not ready for it. They are not forecast properly what is going to happen, so we we had that is that's our first episode out of the four, the oil shock arising from actually East Asia. Dhananath Fernando 05:52 Excellent, thank you, Doctor. Thank you very much. I think it's very important what you explained because when the for an example when oil prices rise, actually the effect of that oil price rise will have, I mean, an impact disproportionately on different segments, and that will completely have an impact on inflation, and then it will have an impact impact on allocation of resources. Because if you are following our storyline, what Dr. what Dr. Rajbhatan has always been saying is prices is basically an indication for allocation of scarce resources, and when you intervene with the pricing system, basically you are misallocating the resources which are scarce, and that's where the problem starts. Dr. Sarath Rajapatirana 06:36 Yeah, yeah, very good. Yeah, excellent. All Dhananath Fernando 06:38 right, Dr. Ajay, Padilla. In this book, also you in this chapter in particular use also speaks about inflation and like related concepts. Dr. Sarath Rajapatirana 06:46 Yeah, Dhananath Fernando 06:47 could you elaborate a little bit more on those concepts before we go a little in detail about Sri Lanka's cases in in in this Dr. Sarath Rajapatirana 06:56 one? For for episode we talk about whole 35 year period. These are related to economic events that come out not through the finance, not through finance system, but for example, oil price going up. Dhananath Fernando 07:15 Right. Dr. Sarath Rajapatirana 07:16 Yeah. Consequences for us. It works through the price relation between oil and other things changes radically, right? So that is very one one clear example. The first oil shock. Then thing is that remember that there are two groups involved. First is the people who run the general economy. Shall you say, Ministry of Planning or whatever. Although that is not being used these days, and the central bank. The central bank is ultimately responsible for what happened to prices. It's in the it's in the famous thing written up by visiting famous economist who was working with the Federal Reserve was came as and helped us write the constitution of the John Exter. John Exter, yeah, very good person Before my time, Dhananath Fernando 08:23 before your time. So yeah, I think the the point that you try to drive is that inflation is the main responsibility, or like controlling the the main responsibility of the central bank is to keep the inflation under control. Dr. Sarath Rajapatirana 08:39 Yeah, Yeah. So, if these two actors work together well, then then the shock will not be operated through the financial system. So, so it's a very important aspect of it that people have not, but they have not particularly dealt with what I said about changing relative prices. That's the heart of the problem allocation, as you say. If you don't mind that, then you are going to have real problems. I was working on Indonesia. Right. Indonesia, they are they are oil exporter, right? Dhananath Fernando 09:17 Right. Dr. Sarath Rajapatirana 09:18 Oil producer and exporter. And their prices went from very small to sudden jump. So now it is very distorting for the economy to have such a jump. Although it is good that they got the money, they had couldn't handle it properly. Yeah. So at the right, I led the mission. They let out a report about what is going to happen, and lot of people waiting to see that we we never included about the price ratios. I am sorry that we have missed maybe missed that then, but when we talk now, we. That into the into the four Dhananath Fernando 10:03 right excellent. So Dr. Then we speak about the inflation and the macroeconomic imbalance in Sri Lanka. Dr. Sarath Rajapatirana 10:10 Yeah, Dhananath Fernando 10:11 and like Sri Lanka had the highest inflation in South Asia, for an example. Did I? Dr. Sarath Rajapatirana 10:17 Yeah, that's correct. But the point is that not so high, anything. Not so high. Yeah, it's high, but it's highest. But South Asians were very careful with inflation. Dhananath Fernando 10:31 But you, in in your chapter, you say India had more Dr. Sarath Rajapatirana 10:35 better, Dhananath Fernando 10:35 better, Dr. Sarath Rajapatirana 10:36 yeah, Dhananath Fernando 10:36 more stable and low inflation. Yeah. Dhananath Fernando 10:39 So how do you basically keep inflation under check, Dr. Ajay? Is it the central bank? Dr. Sarath Rajapatirana 10:46 Central bank and the Ministry of Dhananath Fernando 10:49 Finance. Dr. Sarath Rajapatirana 10:49 Finance, yeah. Dhananath Fernando 10:50 Now, from the school of thought that you are coming from, Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon. Now, where do you stand on this? Because I am Dr. Sarath Rajapatirana 11:03 completely sitting on top of it. Which is true, actually true. Dhananath Fernando 11:09 So the also people speak about this supply side inflation. So how do you explain the supply side inflation on Milton Friedman's statement, if it's a yeah, Dr. Sarath Rajapatirana 11:24 it's a very interesting point that you raise because Friedman never referred to supply side Dhananath Fernando 11:29 inflation. Dr. Sarath Rajapatirana 11:30 Yeah, he never referred to it. I think that's a good reason. If he didn't choose it, that's a very good reason why he didn't. Dhananath Fernando 11:37 Right. Dr. Sarath Rajapatirana 11:38 Yeah. Dhananath Fernando 11:39 Interesting. And then, Dr. Ajay, Patrina, you in the in the Sri Lankan context, you speak about also the Sri Lankans, like basically how we invested quite a lot on the infrastructure projects, especially what we did with Mahavali and all that, and then the impact of that. At the same time, you speak about the macroeconomic situation managed by the Reserve Bank of India in the Indian case. Could you elaborate on those two points, like how India did it and how the Mahavali project, so on and so forth, had the impact on Sri Lanka? Yeah, Dr. Sarath Rajapatirana 12:19 I don't want to get this wrong idea. I am not against Mahavali project. The trouble is that Mahavali then the housing that President Prabhudasa did you know all happened together. Right. So the economy could not cope up with this. First, you have the oil shock, right? Then, then you have this huge expenditure created by the government. Okay, so for Dhananath Fernando 12:51 these large-scale infrastructure projects, people want Dr. Sarath Rajapatirana 12:54 to call supply-side. I won't take it seriously, right? Yeah, because in the in that statement, fantastic statement, there are no reference supply and demand. System takes care of it in his world. In in the world of Milton Friedman, government doesn't have to go and hang around. People allowed the freedom to invest somewhere. They will do it. There is no need to talk about supply side, demand side. I mean, that's a very good part of the economics, but that has little to do with what we are talking about. Yeah, Dhananath Fernando 13:32 interesting, Dr. Vadhira. And now let's come to the theme of your, like the chapter eight, like why low inflation is important for become globalisation friendly or get more benefits? I understand the point that you drove on; it misallocates resources and prices will go up. But in a in a connected world, how if you have low and stable inflation, how it can be more globalisation friendly in the context of Sri Lanka. Dr. Sarath Rajapatirana 14:03 Yeah, because I think the easiest way to think about is that globalisation is unfriendly when you are changing when you are trying to allocate arbitrary allocate things, not not allowing the market to do it has certain consequences. You know, so the Mahavali case, I am not against Mahavali. Actually, it was a good thing we done it. But all were done at the same time. The economy could not deal with that type of pressure coming from the huge project that we undertook. But Mahavili in my book has a different one because actually a friend of mine who recently in Sri Lanka also pointed out that the rice that I produced in that time in. In the East Eastern area, Dhananath Fernando 15:04 right, Dr. Sarath Rajapatirana 15:05 were once only once sixth of the price of rice in Sri Lanka. Dhananath Fernando 15:14 Right. Dr. Sarath Rajapatirana 15:15 So price of rice in Sri Lanka was not too high. On the other hand, Because of Mahavali and other things, prices get changed because of Mahavali. People don't talk about, but it leads to tremendous misallocation. Dhananath Fernando 15:35 Right. Dr. Sarath Rajapatirana 15:36 Yeah. Dhananath Fernando 15:36 Excellent. Thank you. Thank you, Dr. Raymond, for that clarification. And now let's come to the inflation and the labour market. Dr. Sarath Rajapatirana 15:42 Yeah, Dhananath Fernando 15:43 can you shed some light on this and the impact on globalisation and what happens to the labour market at a high inflation? Our Dr. Sarath Rajapatirana 15:52 labour market has a unique feature. Dhananath Fernando 15:54 Right, Dr. Sarath Rajapatirana 15:54 it's completely politicised. So completely volatiles is no exercise. It is not the case in other parts of these Asian countries, and so their labour market has been distorted by this group of people who wanted high wages. Who blames you know they want high wages? Yes, but they won't be able to pay. For example, the wages are distorted. Then the whole system also get distorted allocation. So, what I would say is that it challenges the country to be more careful about the misallocation that is taking place. So, so dealing with the Ministry of dealing with the central bank alone won't do it. Central bank and nothing do with inflow of the the price of petrol going up. Central bank is innocent by you know hold holder of that responsibility, Dhananath Fernando 17:09 right? Dr. Sarath Rajapatirana 17:09 So so that inflation into Sri Lanka was imported in a way when the oil price went up. Went up, yeah. Dhananath Fernando 17:17 Got it, Doctor Ajay. That's that's that's interesting, and also, could you again take us through when it comes to inflation, like how the other South Asian, Southeast Asian countries, where you have worked for many years, can you bring some success stories? How they kept the? Dr. Sarath Rajapatirana 17:42 I can give you a very nice structure story. Dhananath Fernando 17:45 Okay, Dr. Sarath Rajapatirana 17:47 that is that they they got people oil producer got this huge bonus, prices going up for what if they were selling Oil, and they hid it in the accounting system. Dhananath Fernando 18:06 Right. Dr. Sarath Rajapatirana 18:06 So at that at that time, I was living in the mission. Right. Lead in the mission, and I immediately saw that there was some funny stuff taking place. And then, and I talked to the governor, very nice man. What has happened? He said, "You don't ask me. I know you know what it is. They had to hide it because the politicians will come and say, "We have got this money. Let's do this, that, and others. So they didn't allow it to happen. Dhananath Fernando 18:34 Right. All the first Dr. Sarath Rajapatirana 18:35 countries hid their accounts. Right. Yeah. So when the World Bank people go, they know that there's what we call jokingly something generated that we didn't intend, they didn't intend. Dhananath Fernando 18:49 Right, Dr. Sarath Rajapatirana 18:49 but actually serve the purpose. Dhananath Fernando 18:51 Purpose. Dr. Sarath Rajapatirana 18:52 So inflation didn't go up in because although prices have gone up. Dhananath Fernando 18:57 So they had the foresight that if the if the government gets to know about this saving or like the massive profits that has been made. Yeah, then the impact that yeah they would have come and Dr. Sarath Rajapatirana 19:08 said we can buy grass, we can get big machinery and all that. So that was avoided actually, and there was a central World Bank guy who had worked there earlier, a very good person. He had been the advisor to them, Dhananath Fernando 19:24 right? Dr. Sarath Rajapatirana 19:25 So, so they avoided having even further inflation, right? Right, right. Dhananath Fernando 19:31 So, Dr. Rajapati, you have in your book and in multiple chapters, you have segregated like globalisation friendly eras, globalisation unfriendly eras, and the I think probably in our history, the the highest inflation that we saw was after the economic crisis 2022. So, do you? I know you haven't really categorised that crisis period and what happened after. Words on whether globalisation friendly or unfriendly. Dr. Sarath Rajapatirana 20:02 Yeah. Dhananath Fernando 20:03 But could you could you share your thoughts? How does it? How can it be unfold in the next coming years after that massive inflation rush and also the interest rate jump to control that inflation? Because one factor that most people don't speak about is also the role of the interest rates. Dr. Sarath Rajapatirana 20:24 Yeah, Dhananath Fernando 20:24 can you share your thoughts on on these two issues? Dr. Sarath Rajapatirana 20:30 It's a part of the responsibility of the central bank and the miniature finance working together to make sure that the path of the prices are, you know, kept under control; that they don't allow it to jump up and create distortions to the whole system. So both the central bank and municipal finance, and then other agencies that deal with oil and them, we have to work together to get to that place, and we have not done too badly in that thing. Although we are supposed to have the highest inflation rate, it's not relative to other countries. It's not too high actually. So we did some good things in that. We didn't allow it to go out of control. Yeah, Dhananath Fernando 21:19 we did not. We we we contained the problem without moving into the hyperinflation sort of a cycle. Dr. Sarath Rajapatirana 21:26 Yeah, yeah, we avoided that. Yeah, Dhananath Fernando 21:28 excellent. So thank you, Dr. Rajapatiruna, for sharing your thoughts on Chapter Eight. Did I miss anything? Are there any final thoughts that we have to discuss on the under the book of policy challenges in a globalisation world, in and in Sri Lanka, and in particular about the chapter that we have been discussing, that is on the avoiding inflation in Sri Lanka to get in order to benefit from globalisation. Anything that Dr. Sarath Rajapatirana 21:59 did we Dhananath Fernando 22:00 miss? Dr. Sarath Rajapatirana 22:00 Yeah, because if, for example, if we allowed inflation to rise up, you know, it would distort the whole price as we just talked. So while, so it requires a good management skills on the part of the central bank and the Ministry of Finance to keep it in some control to the how it will not come and interfere, and also I also say somewhere there that these other goods being at the same time, meaning the increase wages that the people have used in order to get their also contribute to inflation, but in a way it's unavoidable. We are a democracy. People in working in different parts of that democracy have the right to, you know, ask why we are getting only so much where where some other country or neighbouring country or some other episode had a better time than that we people that we had at that particular period that we are talking about, at the at the end of the day, it was not a bad way how we handle it. But it the central bank and the finance worked together well, and so so we didn't have very high inflation. I mean, there are countries, Latin America that I worked, 75% inflation for you know long period. The whole economy is being destroyed in the sense that it's highly challenging to control it after it goes up to that range. But people get used to this also. They they they get used to the idea that inflation will rise, and they take various measures to counter it. There's a very famous example. I think I told you one other thing, in the case of Germany, where people bought two two glasses of glass. What did I say? Glasses of beer. Two glasses of beer, because once you finish one, the price of the other would go up. Dhananath Fernando 24:32 That's a good one, Dr. Ajbaro. Okay, now now let me come to something a little beyond on on what you have described in the chapter, now our good friend Asantha generally argues on the role of central bank on keeping the inflationary. He doesn't like the central bank. He doesn't like the central bank. But just want to understand, like now, if you look at countries like Singapore, Dr. Sarath Rajapatirana 24:57 yeah, Dhananath Fernando 24:57 I mean they have done a fantastic job on. Containing the inflation and pretty much on also you know moving towards a globalisation. That, but we have to understand it's a small country and also the political system is quite different. Dr. Sarath Rajapatirana 25:10 Yeah, also they're very good people. Dhananath Fernando 25:12 They're very good people. Yeah. But now, how does this central bank conversation and this currency board and floating exchange rate. How could you give for our viewers? Dr. Sarath Rajapatirana 25:23 Yeah. Dhananath Fernando 25:24 Because you you bring the point, you drag the point on avoiding the inflation to, I mean, to become get the most benefits out of globalisation. Yeah. But the problem is, how are we going to contain the inflation? Is it through the central bank, or whether do we have to think of alternative ways of controlling the inflation? And why do you? I mean, what what would you recommend? And why not other alternatives? Dr. Sarath Rajapatirana 25:50 Yeah, well, I can give you an alternative because people here also I notice want to get very excited about currency boards. Okay, currency boards is not a bad idea, but the point we can today, when prices are determined by trade unions and others, you can do. You can't play that that card now. Dhananath Fernando 26:08 Right. Dr. Sarath Rajapatirana 26:09 That's so. Why Dhananath Fernando 26:10 is that? Like, what do you mean? Like, when the trade unions play with the prices? No. Could you explain? Like, why do you say prices Dr. Sarath Rajapatirana 26:16 automatically would have adjusted? If you have a currency board, it is determined by the system itself. You don't have to go and intervene. Intervene, yeah. So, which is a good system in a way, but the point is that it is restricted to countries that that have a currency board system and where prices are what called downward flexible, so so there is no central bank in currency board system. Central bank is there. There is no central bank. All the prices and what is allocated automatically through the system by by a currency word, and lot of people get very excited because it turns out we can't do it. Actually, I wrote a paper about some time ago why we can't use a currency word in these circumstances where prices are not downward flexible. Dhananath Fernando 27:18 Understand? Dr. Sarath Rajapatirana 27:19 Yeah, so you get clogged somewhere, so you you can't do Dhananath Fernando 27:23 it. Thank you very much, Dr. Rajabatirana. We are looking forward to seeing you under Chapter Nine, and thank you very much for our weavers. Yes, did did I miss anything? Dr. Sarath Rajapatirana 27:32 Actually, it's a difficult chapter to write. Dhananath Fernando 27:34 Yes, Dr. Sarath Rajapatirana 27:35 yeah, maybe I did say too little and not too much, but on the other hand, there are too much written words. That's the thing. I look at it carefully again and see how we can get it to go more smoothly. Yeah. So, and I was doing it at the height of the this thing last night. Dhananath Fernando 27:59 All right. So thank you very much, Dr. Ajay Patrina. Today we discussed about Chapter Eight: Avoiding Inflation in Sri Lanka in order to benefit from Sri Lanka. That's the Chapter Eight of Dr. Ajay Patrina's book, Policy Challenges of Globalisation in Sri Lanka. And as you know, it's a book about Sri Lanka, and it's a book about globalisation, and it's a book about how Sri Lanka could have taken a stance more globalisation friendly and uplift the living standards of our people, and we are looking forward to seeing you on discussing Chapter Nine. And so, stay tuned. At the same time, you can become an Advocata Insider. 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But more than that, more than you getting exclusive content, you join the policy community basically to get economic reforms done, and you are you are helping to improve the economic literacy of fellow Sri Lankans, and I would say that's the main investment that you are doing by joining the Advocata Insider programme. Once again, thank you very much, Dr. Rajapatiranath, and we are looking forward to seeing you in the next episode. Dr. Sarath Rajapatirana 29:56 Thank you. Dhananath Fernando 29:57 Thank you. Transcribed by https://otter.ai