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Sri Lanka presents budget with sweeping reforms to unlock growth

Nov 10, 2017 08:08 AM GMT+0530 | 0 Comment(s)

  

ECONOMYNEXT - Sri Lanka has presented a budget with sweeping proposals to liberalize trade, shipping, labour, land and unlock the island's locational advantages and growth potential which has been held back by controls and vested interests, in one of the most progressive reform drives seen in decades.

Sri Lanka has removed para tariffs mainly in the form of a port and airport levy on 1,200 items which can bring down prices domestically and boost exports.

Economic Hub

"Sri Lanka needs an unrestricted economic growth to achieve the upper-middle income level by 2025," Minister Mangala Samaraweera said presenting a budget for 2018.

"Sri Lanka needs to liberalize and globalize. The dormant spirit of competitiveness must be reawakened to make Sri Lanka the trading and the commercial hub it deserves to be.

"The country needs to shift away from being more protectionist and inward-oriented.

"Sri Lanka’s border measures need to see a complete revamp through well-targeted and time-bound trade reforms promoting growth. Our over dependence on non-tradable drivers challenges growth in the coming decade."

Though Sri Lanka started liberalizing in 1978, around the same time as China, but ahead of Vietnam and India, it failed to keep up the momentum.

Some of the trade freedoms were rolled back especially in the last decade, making the country a more closed economy, though Chinese loans kept the economy ticking, despite lack of private investment.

Bad Money

The Achilles heel of Sri Lanka's 1978 liberalization was the central bank which continued to print money and depreciate the currency, creating foreign exchange shortages and inflation while helping deficit spending.

Except for Philippines and Indonesia, which exports labour to the Middle East, East Asia went on the opposite direction with sounder money and outright currency boards in the case of Singapore, Hong Kong, Macau and Brunei.

Even now the central bank is targeting a real effective exchange rate index, instead of inflation and is depreciating the currency, which analysts have warned will create a 1980s style inflation-depreciation feedback cycle.

Inflation and never ending currency depreciation generate victims in the workforce, create political instability, as benefits of an open economy is denied to them, and also give fodder for protectionists to call for import substitution to 'save foreign exchange ' or narrow a trade deficit.

Opening Up

The budget has proposed ending of para-tariffs such as a port and airport levy which has constrained trade. High import duties in general promotes corruption and undervaluation.

Samaraweera said an anti-dumping law and a trade adjustment package will be given to domestic industry.

Samaraweera also proposed liberalization of shipping and logistics allowing foreign companies buy into the sector, which can create a Singapore-style shipping hub.

"Restrictions on the foreign ownership on the shipping and the freight forwarding agencies will be lifted," Finance Minister Mangala Samaraweera said.

"This will enable major international shipping lines and logistics operators to base their operations in Sri Lanka."

But no mention of warehousing, which is also a closed and keeping costs high has been made.

The budget also planned to liberalize a labour law which had prevented women in particular from working in emerging service sectors involving different time-zones, which provide high paying jobs.

Laws preventing farmers from moving to different crops from paddy will also be removed.

Second to Japan

Samaraweera said at the time of independence in 1948, Sri Lanka was only the second to Japan in Asia in term of per capita income but the country then lagged behind.

"The English newspapers at the time of independence projected the then Ceylon to be the "Switzerland of the East" due to its strength in human capital and natural resources," Samaraweera said.

"In 1948, the per capita GDP of the country was second only to Japan in Asia, whereas the others lagged behind."

Japan which was also a closed economy started liberalization in 1868 carbon copying freedoms that have emerged in the West, overhauling a serfdom-based political system in the form of the Tokugawa Shogunate in its Meiji Restoration reform drive.

Japanese gave land ownership to farmers, providing Western style property rights, ending the feudal-serfdom involving service tenure and in-kind payment to cash tax, and creating an explosion in agricultural output, boosting tax revenues and providing labour for industry in cities.

Technology and thousands of engineers and technical people were imported from the West and an industrialization drive was started with the increased tax revenues.

Japan also engaged in the perhaps one of the first known privatization drives before the term was made popular by US economist Steve Hanke, selling off the newly-started firms, artificially creating Western style industrial houses.

Nationalism

However a section of the polity was also influenced by Bismark's Germany, who later gained leverage eventually leading to the militarization of society, nationalism, assassination of liberal leaders, and mistreatment and enslavement of non-Japanese people in the Japanese Empire, especially in Korea and China.

In the First World War Japan was aligned with Western powers, but by the Second World War it was with Nazi Germany.

Liberals regained power after Japan was defeated in World War II and took the country back to being an economic power with no militarization. Similar changes took place in Germany.

Hit by hyperinflation, both countries fixed central bank to create some of the strongest currencies, with low inflation which ended labour unrest, particularly in the 1970s when Western nations were in turmoil with the Bretton Woods soft peg system collapsing.

Sri Lanka however has enacted laws such as the paddy land act which prevented farmers from using their land for the best crop available at the time,

Many of the reforms in Meiji Japan were made in Sri Lanka by Colebrooke-Cameron Commission of 1833 including the ending of serfdom (service tenure or Wadawasam), involving judicial and civil service reforms, helping Sri Lanka become only second to Japan. Slavery was also abolished.

Like Korea, Malaysia and Japan today, Sri Lanka was a net importer of labour at the time of independence. A currency board was set up in 1885 giving a fixed exchange and free capital mobility, allowing foreign companies in East Asia to raise capital in Colombo.

Regressed

But Sri Lanka regressed after independence, recreating controls and serfdom style controls on the use of land ownership and use through the Paddy Land Act and other measures.

Nationalism also took off, creating conditions for unrest.

Meanwhile Samaraweera said Sri Lankan also started to fight among themselves.

"However, since the day of independence, instead of collectively working towards building the nation, we were fighting with each other on the basis of political ideologies, ethnicity, religion, and even on the basis of cast," he said.

"Hence, during the last 70 years, we encountered two violent insurgencies fueled by youth unrest and a three-decade long ruthless war."

Economic philosophers say there is a narrow line between economic interventionism and full blown nationalism and social engineering as was shown in both Japan and Germany.

The current budget also contains interventions, including interventions such as a carbon tax, popular among Western interventionists, which even targets petrol vehicle owners who currently pay a high tax on every mile travelled.

Injustice tends to foment discontent.

A controversial tax on cash transactions on banks could also take the country back, depending on how it is implemented. Meddling with the banking system can bring disastrous results.

America's Obama administration, which leans to the left engaged in un-necessary interventions when economic conditions were bad, including through banking restrictions critics say. The interventions which creatd so-called 'regime uncertainty' needlessly delayed investment recovery, paving the way for nationalist Trumpism to emerge.

Trump fortunately has not been able to do much of what he promised including ramping up import duties, helping continue a recovery.

Sri Lanka also plans to eliminate fossil-fuel driven cars and move to electricity, which can make the country hostage to unions in the state-run power utility by eliminating competition from alternative energy sources.

Sri Lanka has already seen the benefits of having Lanka IOC, which is able to keep the country supplied from its Trincomallee tanks even when the state-run CPC unions and a common user facility in the capital go on strike. (Colombo/Nov10/2017 - Update II)


 

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