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Review

by S.S. Jayawickrama,
BA (Cantab), former Secretary General, Ceylon Chamber of Commerce

The latest Institute of Policy Studies (IPS) annual review of the economy enhances its reputation for quality economic analysis. The economy, and topical issues, are covered under five broad headings - Policy Perspectives and Performance, the Garment Industry, Leading Issues in the Development Process, Policy Briefs, and final section on Prospects.

For policy-makers, analysts, and general readers, one of the most useful features of the report is its insight into the realities that lie behind apparently impressive figures. In the opening section on policy perspectives, while the creditable estimated GDP growth of 5.5 % in 2003 and the improved growth momentum are recognised, they are placed in the context of high public debt, widespread poverty, infrastructure bottlenecks, and deterioration in revenue collection. The success in pruning the budget deficit is qualified by the observation that the reduction has been partly achieved by cuts in capital spending, which are not conducive to attaining sustainable growth.

Again, the reporting of the substantial foreign aid marshalled by the government is followed by the caveat “Foreign aid is not a panacea for the ills of economic underdevelopment”, and the observation that foreign funds have a cost, and prudent utilisation is essential if it is not to become a burden on the economy. The report urges that increased domestic savings and private capital flows should replace aid as the main source of funding over the medium-to-long-term.

The increase in foreign exchange reserves is reported with the comment that it can mask fundamental weaknesses in the economy. The apparently healthy external resources position at July 2003, for instance, was due to aid inflows and short-term investments, but the balance of trade remained in persistent deficit, which, in the view of the IPS, indicates fundamental weaknesses in production capacities and export competitiveness.

At a time when bilateral trade agreements are being concluded with more fanfare than analysis, the IPS offers sage advice. While it recognises the benefits of FTAs, the report observes that the evidence on their economic and welfare benefits is inconclusive, and cautions that bilateral free trade agreements should be entered into with a select number of countries where distinct opportunities for trade and economic gains are evident. The report adds perceptively that “as technical expertise is stretched in the engagement of multiple negotiations, the broader trade policy reform agenda may be relegated to the back burner, where bilateral tariff adjustments are worked out in isolation from the wider context of a medium-term tariff policy and industrial development strategy.”

Another timely comment, when the country faces power and water cuts, while simultaneously promoting Sri Lanka as the coming development centre, is that “existing infrastructure facilities …are simply inadequate to meet the demands of a fast moving economy.” The IPS has warned from its inception about the adverse long-term effects of cuts in capital spending. The report identified inadequate infrastructure as a significant constraint to larger FDI flows, and for the concentration of industrial facilities in the Western Province.

The section on macroeconomic performance covers the period to mid-2003, with the latest statistics being estimates for the year 2003 or figures up to mid-2003. This means that comparisons of performance sometimes go back to 2001, and the latest complete year statistics available are those for 2002. . Given the reporting period of the publication this may be unavoidable, but the timeliness factor merits some consideration by the IPS.

The section on the international background includes an admirably balanced, comprehensive account of developments in the World Trade Organisation (WTO), from the Doha agreement in November 2001 to the failed meeting in Cancun in September 2003. The key issues arising from the WTO programme, developing countries’ efforts to alleviate the bias against them, advanced countries’ efforts to bring more activities within the purview of the WTO and to bulldoze the “Singapore issues” on to the Cancun agenda, and the shift in the power balance with the formation of the G22 group of developing countries in Cancun, are outlined with great clarity.

Along with the overall survey, the section goes into some detail on the technicalities of the TRIPS agreement, and the refusal of one country to agree to a text which would provide developing countries with the flexibility to cope with public health emergencies. The complicated negotiations on the agricultural and textiles agreements are also analysed. We are reminded that the rich countries grant over US $ 300 billion in subsidies to their agricultural sectors. (These are the countries which preach to us on the evils of subsidies!). A welcome feature is that in addition to the analysis of the issues, the reader gets an insight into the wheeler-dealer nature of international trade negotiations.

The rationale for Sri Lanka’s controversial stand at Cancun, which was perceived to be out of line with that of G22, is presented very fairly. The report concludes that in the long run, it is advisable to have a more developing country-orientated but flexible position on WTO issues.

Sri Lanka’s regional trade negotiations, in SAPTA, SAFTA and BIMSTEC, and its evolving bilateral trade agreements are concisely covered, with special attention given to the progress of the FTA with India.

The Garment Industry, the theme of this latest report, receives comprehensive coverage. The industry will face the full brunt of international competition when quotas are removed from 2005. The high cost of production inputs and utilities (electricity, telecommunications, freight, insurance, internal transport); and low productivity, long lead-times, and insufficient use of modern technology have been identified as factors reducing competitiveness. However, the report rates most of the efficient large factories as very competitive, and concludes that the industry continues to have a future with restructuring, cost-cutting and more aggressive marketing.

Turning to issues, the section on the peace dividend is, perhaps unavoidably, rather nebulous by nature of the subject, with many possible sets of outcomes. The report rightly comments that the peace process is still (apparently in mid-2003) in its early stages, and that several incidents have raised concerns about its long-term sustainability. Another problem in quantifying the peace dividend is the uncertain correlation between economic development and the state of peace negotiations and the ceasefire..

The second issue is Employment and Labour. Basic statistics of labour force, employment and unemployment are supplemented by discussions of theories of the country’s unemployment problem, concepts of labour productivity, trends in labour demand, and labour legislation. The report observes that labour market reforms and educational reforms did not take place in tandem with trade reform, which partly accounts for the unemployment and productivity patterns, and the skills mismatch.

On the third issue, general education, the report deals with the needs to align curricula to the needs of a modernising economy, devise a new approach to the provision of teachers, set up a management structure which would encourage accountability, and develop a financing system to encourage school managements to optimise the use of funds.

The concluding issue is the employment effects of privatisation. In the absence of reliable data, the IPS has collated data from selected entities, and analysed the pros and cons of different kinds of safety nets and retrenchment schemes. The report’s conclusion is that the welfare impacts of privatisation deserve more attention than they have received so far, and that if the divestiture process continues in the same vein as at present, privatisation would be blamed for some socio-economic problems.

The section on Policy Briefs examines the strategy of boosting regional development through the demarcation of Five Economic Zones, under the purview of Regional Economic Development Commissions. Advantages seen are the clear demarcation of responsibilities to REDC, their skilled personnel, and the convenience of a one-stop shop; disadvantages foreseen are the inadequate infrastructure, how sustainable incentives would be, funding constraints, and regional politics.

An interesting innovation is a discussion on zero-based budgeting (ZBB) in the context of our institutional setting. The report concludes that this technique, which is an attractive option to achieve administrative reforms, to optimise use of funds, and to improve budget preparation, has not been entirely successful in the past, but that the new commitment to ZBB may provide a fresh impetus.

The rationale and scope of the massive e-Sri Lanka project, which aims at improving the delivery of public services, are described. The report considers that progress has been rather slow, with a shortage of skilled ICT human resources being a constraint. The report stresses the importance of the right mix of sectoral participation, and considers the potential of e-Sri Lanka to be high.

The last brief, on Labour Reform, highlights provisions of the Termination of Employment of Workmen Act and the Industrial Disputes Act, and recent labour legislation. The former in particular protects those already employed at the expense of those seeking employment, reduces the demand for labour, and constrains restructuring. The report stresses that labour market reform, with a proper balance between the interests of employees and employers, is a priority to ensure a more competitive economy.

In its concluding section titled “Prospects” the report discusses various scenarios of growth. It picks a durable settlement to the ethnic problem as the main determinant of faster economic growth, followed by political stability and continuity of economic policies. The report does not foresee a permanent settlement to the ethnic problem in the near future, but envisages a continuation of the peace dialogue. It cautions that the impressive growth rate achieved in 2002 and the half year 2003 were mainly driven by service sector activities, which are liable to short-term fluctuations, and may therefore not signal any fundamental improvement in economic growth. The report considers that the 1998-2002 five-year average investment/GDP ratio of 24.7%, given optimum conditions of high productivity, may suffice for a growth rate of up to 6.5%, but that the investment/GDP ratio would have to increase to around 30% to achieve medium term growth targets. On poverty alleviation, the report comments that direct support measures and economic reforms to improve the capacity of the poor to access economic opportunities are needed, and that reliance on overall economic growth and its trickle-down effect will not suffice.

The IPS has produced a high quality report in its “State of the Economy 2003.” It contains an impressive blend of perceptive analysis, constructive comment, and the highlighting of specific issues, all set out in readable language. The IPS has set a high standard since its inception, and the tradition has been not only maintained but improved upon. The balance and fairness with which important matters are treated, and the ability to point out implications behind figures, are particularly noteworthy. IPS Executive Director, Dr. Saman Kelegama and his research team can be justifiably proud of their report.

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