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Sri Lanka: A Rationale for Five Year

Economic Planning

In the absence of proper targets, estimates and


strategies, the economic policies in Sri Lanka appear to be
haphazard and even ideological. Instead, we should be
more pragmatic.

by Laksiri Fernando-Apr 5, 2017

Democratic planning requires full consumers sovereignty, as


distinguished from the narrower concept of consumers free
choice. Carl Landauer
(April 5, 2017m, Sydney, Sri Lanka Guardian) Despite Indias
replacement of the National Planning Commission with more ad
hoc NITI Aayog (National Institute for Transforming India), India
along with China will stand as good examples for the benefits of
economic planning in a developing country. India was supposed to
complete its 12th Five Year Plan this year, and China initiated its
13th Five Year Plan last year. Indias recent decision under
neoliberalism might go in history as a mistake.
It is true that economic plans themselves would not reap results,
however superb they would be on paper. Action is needed with
leadership at various levels and not only at the centre. In the case
of Sri Lanka, the provincial councils and local government
institutions should be closely involved. In this sense, an economic
plan is a road map for where to go, possibly with outlining
alternative routes and scenarios.
Apart from correct action, there are so many other variables,
national and international, that would affect development,
stagnation or crisis in an economy. One of the major weaknesses
of the 1972-1977 Five Year Plan of the United Front (UF)
government then was its failure to take into account these
external factors. It is also true that international free trade
managed properly for their own benefit has benefitted China and
India immensely in their recent growth and development. Thus,
state/public sector planning alone should not be considered a
panacea. What might be required, therefore, is overall planning
with a whole area left for the market. China has even preferred
the term guideline, instead of plan in recent times.

Further Reasons for Economic Planning

It is generally assumed that arguments for economic planning


come from socialist type of thinking, while the retention or
reinstatement of unplanned or free market economies are
inherent in capitalist thinking. This may or may not be the case,
but Sri Lanka could adopt a more pragmatic approach in
combining the two at least at the present juncture. After all Sri
Lanka is a Democratic Socialist Republic!

When the Western economists (other than the socialists) were


advocating planned economies or several aspects of them in
1930s, their immediate objective was to avoid the recession or to
come out of it. This is also the case today. After the ruptures in
the European Union (i.e. Brexit) and apparent protectionism in the
USA, the world might experience tough times, if not a full blown
economic recession.

However, in the case of Sri Lanka or in any other developing


country, apart from the above international trends, the rationale
for economic planning should be to achieve and sustain economic
development, growth and prosperity. The development also
should be people centred (consumers sovereignty), enhancing
their living conditions and bridging the gaps between income
distribution. Therefore, economic planning has a more
fundamental imperative than conjunctural reasons. It is
unfortunate in this context that Sri Lanka never ventured into
consistent economic planning after independence, and few ad hoc
attempts even became abandoned after 1977 altogether.

There are of course other reasons as well. These are mostly


located in the economic and social rights of the people. Take the
example of education. Unless governments allocate sufficient
funding for education, covering the primary to university
education, the right to education could not be achieved. Then
there are issues of what kind of education that could also be
resolved through a better planned economy, including teacher
education and training. Educational planning does not limit to the
targets. The nature of the education and contents should be
determined through evidenced based planning and advanced
pedagogy. Education is not only a right, but a long-term
investment to generate growth and development.
We are living in a period where there is much talk about human
rights. But often, economic, social and cultural rights are
neglected even in the UNHRC sessions in Geneva, giving priority
only to civil and political rights. If a country is supposed to
implement, for example, the International Covenant on Economic,
Social and Cultural Rights (ICESCR), that cannot be done without
a planned economy. Such an implementation undoubtedly would
contradict the Washington Consensus on neo-liberalism. This is
something even the present drafters of the new constitution have
not taken into consideration so far under the chapter on
fundamental rights. At least the imperative of economic planning
should be highlighted under the chapter on the Directive
Principles of State Policy.

Some Economic Fundamentals

Sri Lanka has gone through several upheavals of nationalizations


and privatizations without proper direction for the economy
through a system of five year plans. If there is a system of
planning, through experience and evaluation of the past, any
imbalance or defect could be rectified in the future. There should
be a clear idea about what should be handled by the public sector
and what ought to be left for the private sector.

In my opinion, after safeguarding primary interests of people in


the public sector, all others could be left for the private sector,
while promoting a competitive cooperative sector. In addition,
there is an increasing understanding that there are spheres where
public private partnership (PPP) is most appropriate. Without clear
guidelines and documentation, even when budgets are presented,
there is fundamental lack of reliable data and analysis to gauge
the future directions of the economy.
Take the example of the last budget for 2017. On the most
important subject of Investment for growth and development
this is what it says.

In the last decade, investments were maintained at 30.1 percent


of GDP, but the bulk of it came from the Public Sector. This
resulted in the country carrying a debt burden of almost 76
percent of the GDP, which is higher than that of our peers. At the
same time, private sector investments have been stagnant.

When it says, in the last decade, investments were maintained at


30.1 percent of GDP it is not only vague, but also unreliable. In
my opinion, the figure cannot be true, unless the government/s
and the businesses might be doing something else in the name of
investments. On the other hand, the government does not have
a clue about the breakdown of investments between the public
sector and the private sector when it says, the bulk of it came
from the Public Sector. What do we mean by the bulk? No one
perhaps knows?

Let me just ignore the reference to the debt burden for a


moment which is ideological or political in the statement. But
the budget speech of the Minister of Finance does not explain why
the private sector investments have been stagnant. Is it
because of the lack of ease of doing business as the World Bank
prescribes or something else? No answers are given because
perhaps no one knows for sure.

The above is one reason why proper research and compilation of


data are necessary from a planning perspective. If there is a
National Planning Commission and a Planning Secretariat, these
matters could be properly handled and necessary data and
information could be compiled and available even for the public.
In the case of India, the rate of investment was 24 percent out of
the GDP and the contributions of the public sector and the private
sector were respectively 6 percent and 18 percent as the 12 th Five
Year Plan (2012-2017) announced. There was a target to increase
the investment rate to 35 percent with contingencies for higher
economic growth. No such targets are available in Sri Lanka. A
budget, obviously is not an economic plan.

Investments to Take-Off

In the absence of proper targets, estimates and strategies, the


economic policies in Sri Lanka appear to be haphazard and even
ideological. Instead, we should be more pragmatic. In a developed
country like in Australia, for example, economic planning is not a
major issue because the economy is developed. What might be
necessary is fiscal management and incremental growth in
sustaining the economy and delivering fairer income re-
distribution. Policy and political debates are generally on those
lines.

But in a developing country like in Sri Lanka, we need to build up


from a lower to medium base and the economy still needs to take-
off. Sri Lankas economy is around US $ 80 billion. Per capita
income is still less than US $ 4,000, with considerable regional
and social disparities, which is around 30 percent of the worlds
average. The level of per capita income has an impact on
labour/output ratio, among other consequences. Simply said, you
cannot expect a high labour productivity from those who are on
the edge of subsistence level. This is one reason why the state
sponsored welfare and subsidies are important, other than for
their own social merit.
If I may venture on some theoretical points, for the economy to
really take-off under such circumstances, Rostows prescribed 10
percent of investment rate would not be sufficient. This is already
proven in Sri Lanka and elsewhere. As he later clarified, this rate
is applicable in a strategic sector also depending on other
factors, among which most important might be the capital/output
ratio (The Stages of Economic Growth: A Non-Communist
Manifesto, p. 192). This is what we normally talk as technology.
Lower the technology, the capital/output ratio would be lower and
even with a 30 percent of investment rate (although I dispute the
figure), we cannot even achieve more than 6 percent of growth.
That is not at all a take-off, however much we manipulate the
overall figures.

There is some attempt in the last budget to address this issue


however distortedly. I am referring again to the most important
section under Investments. It says,

The alternative is to facilitate more private sector investments


and partnerships between the private and the public sector. We
must promote investments in areas where the impact to the
economy is high, due to value addition and employment creation.
We will support domestic entrepreneurs especially in sectors such
as Agriculture, Manufacturing, Fisheries, Ornamental Fisheries,
Solar Panel Manufacturing, Rolling Stocks, Livestock, Poultry and
Tourism.

There is no apparent intention of the government to enhance the


public-sector investments, unless it is a private-public
partnership. As the Minister has said given the fiscal constraints
that the large debt burden has imposed on us, I do not think that
it is prudent to continue in the same vain and pile up more debt.
Let us say, that is understandable. But has the budget identified a
strategic sector where private investments could be encouraged
and diverted? It doesnt appear to be the case. The sectors
identified are Agriculture, Manufacturing, Fisheries, Ornamental
Fisheries, Solar Panel Manufacturing, Rolling Stocks, Livestock,
Poultry and Tourism.

The identifications are quite vague (obviously without planning or


much thought), with agriculture, manufacturing and fisheries
mentioning as general areas. The specific areas mentioned are
ornamental fisheries, solar panel manufacturing, rolling stocks,
livestock, poultry and tourism. There cannot be any doubt that
all these areas have great potential for contributing to the
economy and while some are new (rolling stocks), other are not so
new (solar panel, ornamental fisheries). It is also not clear
whether in the case of rolling stocks, whether the government
really think that those locomotives could be manufactured in Sri
Lanka? It is good if it the case, but what we know from last year is
that the Minister of International Trade was approached by two
(SOE) Indian companies for the building of railway lines and
supplying of locomotives (EconomyNext, 6 July 2016).

Be as it may, the whole section on Investments is haphazard


without at least expected targets from the local private sector or
through FDI. What it offers instead are concessions of capital
allowances, tax concessions, visa for investors and expatriate
labour and liberalization of foreign exchange transactions. Some
concessions are undoubtedly necessary, but the purpose should
not be of creating a capitalist class at the expense of sovereign
consumers interests.

Conclusions

Finally, let me turn to some of the misconceptions about


economic planning in Sri Lanka and in general. First, the
recognition of the market economy is not a reason to give up
economic planning for a country. Economic planning can
encompass even the private sector without unnecessary
strictures or constraints for them. Their input in formulating
national plans is also important. This is further important where
the public-private partnerships are feasible and beneficial.

Second, as Montek Singh Ahluwalia, the Deputy Chairman of the


Indian National Planning Commission, explained in his Preface to
the 12th Five Year Plan in 2013, National planning is a process of
setting national targets, and preparing programmes and policies
that will help achieve those targets. These targets are not only
about growth and narrow development, they are about raising the
living standards of the population as a whole. As Ahluwalia further
said, Along with programmes, the policy content of the Plan
deserves much greater attention than it typically gets. In an
economy in which the private sector has grown in scale, decisions
taken by individuals and firms determine many critical economic
outcomes, and the policies which influence these decisions are
therefore important. The above is equally valid for Sri Lanka.

Third, if the private sector has demonstrated capability of


investing and stimulating growth in certain areas, the public-
sector initiatives and investments might not be necessary in
those areas. However, if the private investments are stagnant
(see the budget speech) whatever the reason, the government
should not unnecessarily try to stimulate profit making like in the
case of bond issues.

Fourth, in the last Budget, as well in other statements, there had


been much talk about a bloated public sector. As I have pointed
out in my last article (A Review of Razeen Sallys Sri Lanka: Three
Scenarios for the Future), 1.5 million employees are not excessive
for a country like Sri Lanka for around 21 million people. Australia
has 1.9 million in the public sector for a little over Sri Lankas
population. The issue is not the size, but its output and
orientation. That can be corrected through retraining,
restructuring and with specific performance targets. The private
sector has ample opportunities, if they have funds and initiative,
to expand into other areas. They dont need to encroach into the
public sector! While allowing 1.9 million in the public sector in
Australia, the private sector employees roughly about 10 million
people. In the case of Sri Lanka, this is only about 4 million and
that also includes a large number of self-employed people.

Fifth, if there is a planned economy, and research and surveys


towards that end, all these facts could be known more accurately
without much speculation. If the government is interested in
assisting the private sector, in promoting economic development,
that can be done through the banking sector without actually
channelling public funds to the private sector. Public funds are
peoples money and not of politicians. The banking sector is
thriving, including the public-sector banks, and they can lend
necessary funds to the private sector, if the latter wants. For all
these matters, what is important is to have a planned economy
for Sri Lanka, including a vibrant private sector. The economy
could have two engines of growth and not one: public engine and
the private one.

Posted by Thavam