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 Post subject: Roots of Poverty
 Post Posted: Sat Nov 05, 2005 3:30 pm 
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Roots of Poverty

By Fuss-Budget
@ LBO / 4 November 2005


Post independent Sri Lanka's budgets have always been instruments to buy votes and make the population collectively poorer from the results, and the upcoming one (if something unforeseen does not happen) would be no different.

In the words of once sentence, the 2006 budget would have revenue targets that would fail, and deficit targets that would overshoot, though the expected 8.2 percent GDP deficit is already too high.
If that is the case, why do we need a budget at all?

We need a budget so that the Finance Minister can stand up in parliament and (probably against his own conscience):

a) make a political circus of the unsustainable policy matrix within the budget,
b) sing the virtues of the public service and how it can be made more efficient, by hiring more people,
c) take pot shots at big business,
d) sing the virtues of agricultural development,
e) rail at the unfairness of western province oriented development, and,
f) promise instant relief for all economic ills, aches and pains.

If, after the elections, Victor Hettigoda of Siddhalepa fame, promises a cure-all, people can be excused for believing the promises. After all, he has a track record of soothing our ills for some years, even if the price of Siddhalepa is also subjected to the inflationary pressure from previous budgets.

As usual soon after the budget the business community would praise the budget for the tax breaks and various incentives offered. The man on the street would praise it for the ‘sahana’ and other goodies promised.

The opposition would criticize the only responsible provisions in it. A few months later rampant inflation would reduce everything to square one or worse.

Credibility

It is sad that a mere (cynical) columnist can sit on the side lines and predict the outcome of a budget even before it is presented.

Fuss-budget would have been best pleased if the dire predictions made in this column had not come true last year.

That, 2004/2005 was a record year for economic mismanagement is now quite well accepted among the economically educated sections of the population.

No policy matrix has failed so spectacularly as Rata Perata, as economic growth plunged, inflation skyrocketed and the country was driven towards a balance of payments crisis within the space of just a few months (Thrift Column – Print Job).

But how the Rata Perata policy framework made all this happen is not so universally known. (Thrift Column-Friends and Enemies).

For this the blame must squarely lie with the UNP. If the UNP had properly educated the public, such policies would have been banished from the country forever.

But that it did not, points to the success of the JVP in propagating their policies. They were so successful, that elements of their failed, poverty creating policies also found their way into the latest UNP manifesto, the Niyaya Patraya.

Anti-inflation

Having said that, Fuss-budget can hardly fail to applaud the parts of the UNP manifesto which promises to contain inflation and stop printing money.

But some of the rest is surely economic nonsense. Subsidising milk food and parippu (dhal) is stupid and unsustainable. (Shudder! Shudder!). And 10 percent economic growth?

The only consolation is that the Niyaya Patra types are saying the subsidies will only last a year or so.

The Mahinda Chinthana of course is even worse (Shudder! Shudder! Shudder!) Chinthana types say subsidies are an investment. Do we need say anything more?

The balanced economy is nonsense too. Where did that come from? Must be a New Chinthanaya. It is a nice Chinthanaya. It certainly cannot push growth to 8.0 percent.

Legacy of 57 years

But one should not be really surprised that the Rata Perata type poverty creating policies survive and thrive in Sri Lanka. In order to remain poor, we must be doing something right to preserve poverty!

As Presidential candidate Hettigoda says, we have mismanaged the country for 57 long years. Subsidies are not a leftist instrument by any means.

The UNP Niyaya Patraya is a partial throwback to the Dudley Senanayake type policies, which are at the root of most of the economic problems we see today.

Misuse of public funds in a grand scale, to give food subsidies (usually imported) at the expense of capital expenditure that give lasting long-term returns, is a post independence stupidity that has been diligently followed by most of our leaders.

But the resultant fiscal profligacy and inflation that comes soon in its wake, increases poverty.

Beginning of the end

Dudley Senanayake had a 'hartal' when he tried to cut subsidies raise the price of rice to 75 cents.

This was the decisive battle for subsidies, which the 'left' won, and the poor lost. From then on debt has been piling up, inflation rising, and no money was left for sustained investment in capital projects and people got poorer as a result.

Dudley of course came back with more subsidies later, and left the country more indebted when he left. People still love him for his rice rations, though he also grew the economy.

In 1951, his father, D S Senananayake achieved 6.2 percent economic growth and even brought national debt down to 16.3 percent from the 18.0 percent level it was Sri Lanka became independent.

But in his first term Dudley managed to push the national debt up to 27.0 percent and growth down to 1.9 percent, but under Sir John Kotelawala (after Dudley resigned) the economy turned around, recording the only two budget surpluses in the last 57 years.

Growth picked up and the national debt fell. With fixed exchange rates, inflation was yet to hit the country in a big way then.

Image

After Mr and Mrs. Bandaranaike came and went, (with Dudley having a brief sojourn) National debt was already topping 50 percent.

Image

Though we are just looking at the macro numbers, there were other measures that had progressively set the economy back and increased the role of an inefficient government in the overall economy during the intervening period.

Green revolution

During his third stint, in 1968, Dudley managed to push economic growth to 8.2 percent, but by this time, the vicious cycle of inflation and depreciation had already started.

Image

In any case in 1950 the Central Bank was set up, and the citizens of the newly independent country had the power to print money. It was the case of the proverbial monkey with the razor blade. (What would John Exter say about later Governors of the Central Bank who printed money to finance the Treasury?)


Stagflation

When Mrs. Bandaranaike returned in the 70's, she topped everyone else by strangling the economy with some of the worst controls imaginable.

Image

With the oil prices rising (sounds familiar doesn't it?) the country had high inflation while the economy stagnated. But high inflation also pushed the national debt down, just like it did in the late 80's and will now.

Overheating

While we are at it, we may also have a bash at JR. Though he unshackled the economy, he and Ronnie de Mel mismanaged the fiscal and monetary sector in grand style.

Talk about galloping inflation! In 1980 the budget deficit was 23.0 percent. Inflation was 26.0 percent. Can you beat it? Nobody has so far. Not even the Dr (Sarath Amunugama + P B Jayasundera) combination (The Thrift Column-Invitation to Disaster), has managed that.

Massive amounts of money were printed to provide counterparty funds for projects in the eighties.

Image


We had relatively high growth but high inflation as well in the 1980's. So people, government servants in particular, were reduced to paupers.

Then of course the war came.

Mixed results

It was President Chandrika Kumaratunga (with A S Jayewardene), who articulated an explicit anti-inflationary strategy for the first time since independence.

She had some success in cutting the deficit and reducing inflation, in the first few years of her rule.

Chandrika inherited the UNP's desperate election budget of 1994. By 1997 she had pushed growth up to 6.3 percent, but an escalating war soon destabilized the economy, leading to negative growth for the first time since independence, and a balance of payments crisis.

Image

It was Ranil Wickremesinghe in 2002/2003 that made a determined effort to boost growth and slow inflation. He succeeded on both counts, but he was a poor communicator, and nobody really knew what he was doing.

So he was kicked out for his pains in 2004. The Rata Perata framework had the distinction of creating another balance of payment crisis, sans a war, and the rest is history.

Brainwashing

So now we are back to the enduring populist policies, which fostered poverty in this country for nearly four decades.

That should not really surprise us.

For instance, the Bandaranaike nationalizations were clearly wrong. But anti-privatisation sentiment is still going strong. That is because leftist parties are better at promoting their policies than the right wing ones.

It is like religion. You do not have to prove anything. You have to just say this is the truth, so believe it. If you repeat it often enough you can make people believe anything.

For example:
a) How can the JVP claim to save state institutions when they were people who killed CTB bus drivers, burnt CTB buses and burnt CEB transformers?
b) Under Parivasa and Rata Perata, CEB and Petroleum Corporation made the biggest losses in the history of the country. Sathosa went bankrupt during the Parivasa period, with a crippling Rs. 9 billion loss, but who now are the saviors of Sathosa?
c) How can the JVP claim to safeguard Buddhism when they attacked the Dalada Maligawa and killed so many priests and more recently happily photographed a poor monk whose genitals were being mutilated inside parliament itself?

But they can and they do. The JVP can talk their way out of almost anything – mass murder included - and brainwash the people. But the UNP cannot talk their way out of Regain Sri Lanka.

This is also why the World Bank and IMF are constantly blasted by the poverty merchants of the left. The IMF wants inflation down more than even the left, but IMF tells practical ways of doing it, (The thrift column-Trickle Up) while the left wants it done by creating money out of nothing.

This is the basic reality of poor countries. The poverty merchants win, because they only have a strategy to brainwash the people. The doers have a strategy to do things, but they do not have an effective communications strategy to convince the people, or 'Economic Statesmanship' as a Singaporean leader once said.
But this matters only if you want to fix the country. If you just want power you do not have to fix the country.

A President can only serve two terms. So might as well become President, give some subsidies, enjoy the trappings of power and buzz off.

Of course the national debt would be ten percentage points higher and more people would be pushed below the poverty line. But who cares? That is the next man's problem.

You do not really have to fix the country or reduce poverty. That is a peculiar mania reserved for stupid politicians. Most of our politicians are far more practical. We can carry on as we have done for the past 57 years.

Postscript- Lots of readers have asked why fuss-budget had not written of late. Sorry fuss was very busy. If you have comments you would like to be featured in this column or bouquets and brickbats please e-mail fuss-budget@vanguardlk.com. Fuss-budget is also in the process of updating the Fuss-budget’s Glossary and would like your ideas. So send them in.

-Fuss Budget: fuss-budget@vanguardlk.com


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