A few thoughts for the Opposition

Why the UNP needs to do better in its analysis of what’s wrong with the economy

This is hardly news, but the Opposition continued to be uninspiring last week. If a country is going to change its constitution, it really ought to be worth the bother. But the most encouraging thing about the draft published by the UNP on Wednesday is its support for provincial level devolution within a unitary state, which is exactly what is already in place thanks to the 13th Amendment to the existing constitution.

It is also one of the few commitments to which voters would trust it to stick in the unlikely event of Ranil Wickremasinghe being elected.

The Government should grasp this opportunity to confirm its own position and forge a consensus of what should be the vast majority of the country, rather than using it as an excuse to change direction and side with a few extremists in the form of the JHU and the NFF. There is a lot of space in the centre of the political spectrum in Sri Lanka, and Mahinda Rajapaksa should see the importance for the long term future of the SLFP of occupying it.

Sadly, by comparison with its attempts to challenge the Government on the economy, this rather underwhelming move by the UNP is absolutely brilliant.

The strike against the electricity tariff hike was pathetic. It was either too little too late or too much too soon. Even though this was an issue that had caused a major stir in the country, particularly with the urban middle class who should be the least attached to the Government, participation was extremely limited. And of course this is not so surprising since the action was really very badly timed, coming well after the President had stepped in to give the impression that he was rolling back some of the increase. It made the Opposition look ineffective – or I guess I should say even more ineffective – when it should have been gaining strength from its successful protest the previous week.

Having made a mess of that, it is now back to the business of trying to make less important problems look both vital and urgent. Thus Harsha de Silva has been deployed to ‘expose’ the possibility of an impending debt crisis.

To do this, he has been employing the recently published report of the IMF on its annual consultations with the Government. He says that the IMF has ‘revealed’ figures that the Government wanted to hide, in the form of the consolidated budget deficit. This stands at 8.6% of GDP, compared to a budget deficit of 6.4%. The claim is that the Government is trying to hoodwink the public into believing that the economy is in better shape than is the reality.

This being something people tend to be quite willing to accept, no doubt he thinks that he’s onto a winner.

The trouble is that the more often you predict disaster and it doesn’t happen, the less you look as though you know what you’re talking about.

The fact is that there are several different versions of the budget deficit, and they are used for different purposes. Harsha de Silva would know this, being an economist. And Ranil Wickremasinghe would know it, because the UNP too talked of the budget deficit and not the consolidated budget deficit in the brief period when he was Prime Minister. In any case, even if we all agreed that the consolidated budget deficit is ‘best’, the data to calculate it from the budget deficit is in the public domain.

This doesn’t mean that the Government isn’t trying to deceive people. It means that the Opposition has no idea whether the Government is trying to deceive people.

It means that the Opposition has no idea whether the country is overburdened by debt.

And that’s a pity, since a debt crisis wouldn’t be much fun.

Interestingly, the IMF seems to think that the Government is moving in the right direction, and that the prospect of such an unfortunate eventuality is diminishing. The major problem, according to the IMF, and as I have said on numerous occasions, is the very low level of tax revenue in Sri Lanka. The Government having decided that the IMF is correct to insist on cuts in the budget deficit, shortfalls in tax revenue mean that expenditure has to be curtailed, which even the IMF now accepts is detrimental to economic growth.

The UNP has been making some noise about taxation in recent weeks, which is long overdue. But if it is to make a serious contribution, it must say how it would raise more tax.

Who should pay?

Taxation obviously isn’t the only issue, since a significant amount of the debt that administrations in Sri Lanka have incurred over the years is due in foreign currency, which means that even more foreign currency has to be earned by the country to make the repayments of the capital plus interest. As demonstrated as recently as the beginning of last year, when reserves of foreign currency fell to the equivalent of 3.2 months of imports – three months being the usual point at which panic sets in – this is not so easy. Towards the end of the war, they reached 1.2 months of imports and the Government had to agree to an emergency loan from the IMF, with all its associated conditions.

The IMF being particularly obsessed with the ‘losses’ of the CEB and the CPC, this is clearly a situation that the Government would like to avoid if at all possible.

I wrote a few weeks ago about Sri Lanka’s increasing dependence on workers’ remittances, which now bring in $6.0 billion, compared to $4.0 billion from exports of textiles and garments, $1.4 billion from exports of tea and $1.0 billion in tourism receipts. In the context of a downturn in the country’s key export markets in the US and EU, it is easy to understand why the Government is happy to see remittances take on such an important role in the economy. Not only do they flow primarily from other parts of the globe, but so long as those countries remain willing to accept migrants, they also tend to be more stable than export earnings, since they are generally sent by individuals to their families.

However, as I said, this is clearly not a happy situation, since most people don’t want to have to travel thousands of miles to earn a decent living. I asked what the Government’s plan was for generating proper jobs at home.

Connected to that should be the question of what it is doing to boost exports.

Both the share of exports in GDP and Sri Lanka’s share of world exports are falling. If that were only the result of lower demand in the US and EU, it would be reasonable to do what the Government appears to be doing and borrow abroad to cover the shortfall. The debt could be repaid when exports recovered.

However, one of the infinitely more important facts highlighted by the IMF report is that these figures have been falling since 2000. In other words, it is not a temporary glitch.

A very useful recent article by Verite Research on the electricity tariff issue has shown exactly what can happen when the Government acts on what it hopes the future will bring and it is wrong. They say that the extraordinary ‘losses’ of the CEB in 2012, which surely contributed to the recent hike, were to a large extent the result of a gamble. They show how over the last decade the CEB has been relying much more heavily on hydro power, which is cheapest, assuming that low rainfall in one year will be compensated in the next, and how this strategy was employed to an even greater – by implication reckless – extent in 2010 and 2011, because the authorities thought that they had the Norochcholai coal power station as a back-up. What actually happened was that Norochcholai broke down, as it does regularly, and because reservoirs were already so close to empty, the CEB had to resort to expensive oil generation by the private sector.

This is also why the country was subject to major blackouts, which would have cost the economy a lot more than the CEB had to spend.

In a sense, this is not much different to the oil hedging fiasco that got the CPC into trouble in 2008. The Government thought that it would be a good idea to enter into contracts that would save it money if oil prices continued to go up, but failed to consider the impact of a collapse in the market.

As these examples demonstrate, the Government isn’t very good at managing risk.

In fact, as various commentators said after oil prices plummeted from nearly $150 per barrel to well under $50, that doesn’t seem to be its objective. Rather, it would appear to be speculating, which is all very well when it is right, but otherwise potentially disastrous.

No wonder people worry about a debt crisis.

The Opposition plays on their fears in the hope of generating a reaction. With every new loan the Government takes, it gives the impression that the world is about to end. No doubt that is simpler than trying to understand whether that particular deal makes sense, working out what it would do instead and explaining the whole thing to the electorate. But that is what the UNP would have to do if it were running the country.

It’s about time it started to look like it could.

This article was published in The Island on 5th June 2013. The internet version may be accessed here.

Getting Sri Lanka to work

Why the Government must find a better solution to the country’s unemployment and foreign exchange problems than sending hundreds of thousands of its people overseas 

Just when sanity seemed to be prevailing over the Bodu Bala Sena, following the various vigils, rallies and protests that have been organised in the last month, the Government found yet another imaginative way to agitate people – it had Azath Salley arrested. Apparently, the Police are so busy scouring the pages of limited circulation magazines in other countries for potentially disturbing statements by Sri Lankan Muslim politicians that they don’t have time to listen to the bilge that some Buddhist monks are repeating at full volume on a daily basis on the streets of Colombo.

Fortunately, Mahinda Rajapaksa was in a good mood on Friday and Salley was released.

Salley says that he was misquoted. He asserts that he would never advocate or support the taking up of arms against the State since he is all too aware of the consequences, Sri Lanka having only just come out of its three decade long war. Very wise.

Meanwhile, Gotabhaya Rajapaksa has proclaimed that there was more to it than an interview – we await his efforts to prove as much beyond our absolutely reasonable doubts.

When people are not so agitated, they focus on their immediate problems.

The electricity tariff hike was enough of a shock to generate a reaction, and the strike planned for next week should give us an indication of how much trouble the cost of living is going to be for the Government.

But what of other issues?

I was bemused the other day to read an article by a prominent economist suggesting that there was no shortage of jobs in the country. He was arguing that the Government might soon have to ban migration, on the basis that the Sri Lankan economy is near full employment. He was concerned about the implications of such a decision on the Balance of Payments, since remittances from workers overseas are the most important source of foreign exchange for the country.

Of course the Government couldn’t ban migration even if it tried. People would continue to leave the country with or without its blessing.

Why? Because they aren’t satisfied with the employment opportunities at home.

In the 1970s and 1980s, the unemployment rate in Sri Lanka was over 15%. In the 1990s, it was over 10%. Now it is under 5%. However, the most important reason for this ‘improvement’ is the departure of hundreds of thousands of people. In 1990, only 50,000 people left the country for work. Now the figure is 280,000.

The 1.8 million workers currently overseas correspond to 22% of people employed in Sri Lanka. Every year, more people migrate for work than enter the labour market.

If this were to stop, the country would be firmly in the grip of unemployment again.

The Government no doubt understands this very well indeed, and I am quite sure that it has no intention of banning migration. That would lead to a serious increase in dissatisfaction, especially among young people, which the Government knows is dangerous.

But not doing something unhelpful is not the same as doing something helpful. Where are its plans to generate decent jobs at home?

At the moment, the Government’s idea of job creation is maintaining an unnecessarily large military and periodically recruiting unemployed graduates to do anything and everything – or most likely nothing at all – in the public service. Keeping people in non-jobs may be good for them and good for the country in some ways, in the sense that they are less likely to get involved in any more uprisings if they are employed by the State, and they will probably spend their salaries on goods and services produced at least in part in Sri Lanka, but this is not good for the country in other ways. While non-jobs occupy so many people, the economy simply cannot reach full employment.

And the country’s development suffers.

While the reconstruction of the conflict areas has generated a certain amount of employment, this won’t last. And it is clear that the Government’s plans don’t go beyond the building of infrastructure to considering how people in the North and East will actually use it to make a living.

What happens if Sri Lankan refugees come home? That’s another hundred thousand people in Tamil Nadu alone.

The Government doesn’t need to recruit them, but it should ensure that they will be able to work.

In the Vanni, the only businesses that seem to be growing at anything like the required rate are banks, which primarily exist to channel remittances from migrants.

Very few people would go overseas to work if there were satisfactory alternatives. The difficulties that migrants face are well known. Even more importantly, everybody understands that families do better when they are together. Tragedies like the execution of Rizana Nafeek have pushed the Government to introduce more checks and balances in the recruitment process, raising the minimum age for migration – especially for women – and to negotiate agreements with receiving countries that try to guarantee better working conditions. However, while these steps are clearly necessary, they are nowhere near sufficient. Most people would rather the Government made it possible for them to live at home.

Although the Government may think that it can safely ignore this issue, since Sri Lankans are now used to the idea of travelling thousands of miles if they want to earn a reasonable income, doing so is putting the country in a vulnerable position.

In 2009, remittances became the single most important source of foreign exchange for Sri Lanka, overtaking exports of textiles and garments. Now textiles and garments exports earn only $4.0 billion compared to $6.0 billion in remittances, with exports of tea accounting for a mere $ 1.4 billion and tourism receipts amounting to just $ 1.0 billion.

Banning migration is not on the Government’s agenda. But what if it were adopted as an objective by receiving countries?

The Indian press has been full of such concerns in the last month, following the implementation by Saudi Arabia of stricter laws on what it calls ‘Saudisation’. Passed in response to the Arab Spring, which made the authorities in Middle Eastern countries think a bit harder about the well-being of their people, they require all companies to employ a minimum percentage of their citizens, as well as to pay them a fairly substantial minimum wage – exemptions for companies with under ten employees have been removed. Also, a new system that may do better at ensuring compliance has been established.

Kerala expects to be badly hit, with an unusually large share of its population working abroad, and its Chief Minister is already talking about establishing a rehabilitation package.

This is probably an overreaction, but at least they are aware that they are exposed.

With 2.3 million workers abroad out of a population of just 33.4 million, Kerala’s numbers are similar to Sri Lanka, except that it has the rest of India to back it up if required.

Although keeping people’s minds off such problems is no doubt awfully time consuming, it would be nice if Mahinda Rajapaksa could spare one or two members of his administration to come up with a few solutions.

However, the rest of his followers will have to intensify their search for the next Azath Salley. The way things are going in Sri Lanka, the Government is going to need to create a lot more demons if it is to continue distracting people, since every distraction is a reminder of just how far off the right track it has swerved. And each demon has to be more extraordinary than the last. Only a few months ago, people were thinking that it couldn’t get much worse than the absolutely reckless impeachment of the Chief Justice, and then along came the Bodu Bala Sena.

This article was published in The Island on 15th May 2013. The internet version may be accessed here.

On the not so natural rise in electricity prices

How the Government is making the masses pay

One of the many conspiracy theories that has emerged with regard to the anti-Muslim campaign of the Bodu Bala Sena and others is that it is an attempt by the Government to distract people from other concerns, primarily the state of the economy.

If so, it isn’t working. Last week’s increase in electricity tariffs hasn’t been overlooked by anybody in Sri Lanka.

However, the Government has succeeded in convincing a fair share of the electorate that it isn’t really its fault. Keheliya Rambukwella summed up its argument at the regular media briefing on Thursday. He explained that the tariff increase was unfortunate but unavoidable, since ‘no administration can subsidise utilities forever’.

This sounds reasonable, but it isn’t actually true.

The concept of ‘breaking even’ doesn’t make sense when discussing a public enterprise. The CEB is not a company. We have come to talk of its ‘losses’, but this is to accept the neo-liberal logic that the Government claims to reject. The Ministries of Health and Education also spend more than they earn, but we don’t consider them to be ‘indebted’.

In that sense, the Opposition is right in pointing out that the Government is neo-liberal, as its economic affairs spokesman Harsha de Silva did in response to the hike. Of course he should have said ‘also neo-liberal’, since the credentials of the UNP as the vanguard of neo-liberalism in Sri Lanka are unquestionable, thanks to Ranil Wickremasinghe. Unfortunately, he combined that accurate observation with a totally misguided suggestion as to what to do about it, saying that if the economy is in so much trouble, what is needed is austerity.

Even the IMF is having second thoughts about ‘cuts’ as a response to a downturn, as its advice to the UK just days ago shows, with that country on the verge of an unprecedented ‘triple dip recession’.

Austerity isn’t the same as tackling waste and corruption. There is a difference between ensuring that expenditure is productive and targeting an overall reduction in expenditure.

In the same way, there is a difference between targeting subsidies so that the right people benefit and reducing the level of subsidies.

This is not to suggest that there is no problem with the amount that the Government spends on the CEB. It comes to 0.8% of GDP, which is an awful lot in comparison with the 1.9% that it allocates for education and the 1.3% that it gives to health.

Efforts should certainly be made to reduce this amount.

In terms of costs, Tilak Siyambalapitiya has produced a very succinct analysis (‘Talk sense about electricity costs and prices’, The Island, March 6th). He says that the approved cost of Rs. 2.56 for distributing a unit of electricity, which includes the cost of investment and maintenance of the distribution network and the supply of electricity, including metering and billing, is comparable with international norms, but could be brought down by 1% per year in real terms. A similar conclusion is reached for the transmission of a unit of electricity, with an approved cost of Rs. 0.73. He makes the same assumption as Keheliya Rambukwella that expenditure should be met by income to conclude that a unit of electricity has to be generated for Rs. 10.74, taking into account 12% losses and a total income of Rs. 15.50 per unit (10.74 = 0.88 x [15.50 – 2.56 – 0.73]), which is the case only for the CEB owned hydro and coal power stations.

An equally helpful discussion of prices is needed. The Rs. 15.50 per unit charged by the CEB is an average, and the way in which the burden should be shared is not obvious.

In response to the hike, everybody from bakers to the manufacturers of bathroom tiles have said that they will have to increase the prices of their products to compensate. This has to be taken into account in deciding who should pay how much.

Unfortunately, this is not going to happen by itself.

The Government carefully avoids debate of ‘zero-sum games’. It doesn’t want to admit that it makes choices between different groups in society, since that would mean alienating somebody. It prefers us to believe that all situations are ‘win-win’ or at least ‘lose-lose’.

This is equally true of taxation, and we should remember that the 0.8% of GDP that the Government spends on the CEB is only a problem because the share of taxation is so low and falling.

We may assume that the reason the Government has still not published the report of its Presidential Commission on Taxation, submitted to Mahinda Rajapaksa way back in 2010, is that it doesn’t want to upset people who really ought to be paying more. It thinks that it can get away with collecting almost everything from taxes on goods and services, rather than taxes on incomes, which is very bad news for people with low or no incomes.

High income earners not only pay relatively little in taxes on goods and services, they also pay relatively little for electricity.

The JVP raised another important point with regard to the electricity tariff hike. Its spokesman asked why the Public Utilities Commission bothered to hold a ‘consultation’ when it paid absolutely no attention to the opinions of anybody who participated.

Its report makes amusing reading. An unfortunate employee clearly wasted a very long time summarising the suggestions of the 275 people who either sent a written submission or made a presentation at the public hearing. Every single one of them is marked ‘no’ or ‘no comment’. Even proposals to ‘reduce corruption in the CEB’ are ruled out.

Given that the public has to pay for the opportunity to express their ideas, this is more than a little disappointing.

However, it is hardly surprising.

The Public Utilities Commission was established by the administration of Ranil Wickremasinghe, as part of its effort to privatise the CEB.

By now, everybody knows that this is a policy that has failed in many countries.

Even the Government has accepted that the private sector cannot help with electricity. At the media briefing, Keheliya Rambukwella also confirmed that it would be progressively reducing its purchases from the private sector, in favour of CEB owned power stations. If only it had worked this out earlier!

Also, it doesn’t seem to have understood why, since it is cheerfully pursuing exactly the same policy of privatisation in even less appropriate sectors of the economy.

Most extraordinarily, last week it was reported that the Government is to sign agreements with companies interested in investing in medical equipment such as MRI and CT scanners to be installed in public hospitals. The Secretary to the Ministry of Health was careful to explain that these services would continue to be free at the point of use – the Government will pay the owners of the machines according to the number of patients treated. How on earth they can’t see that this will end up in the Government spending more than if it had bought the machines itself is a mystery.

It may not be long before the Government thinks that the country’s health needs can just as well be met in private hospitals, in much the same way as it is so eager to have private universities cater to its education needs.

A little more attention to the state of the economy is therefore most certainly needed.

That doesn’t mean that the Bodu Bala Sena and others can be neglected, since they present a very serious immediate danger to society. However, what could very easily be ignored are the rest of the conspiracy theories that surround the anti-Muslim campaign. Far more likely than it being the work of Norway or Israel or India or the United States or any other country is that Sri Lankans have created this problem all by themselves. In any case, nobody else is going to solve it.

This article was published in The Island on 24th April 2013. The internet version may be accessed here.

Slaves to slogans

A few thoughts on the UNP’s criticism of flood relief efforts

As I concluded last week, it is the failure of the Opposition that has put Sri Lanka into its current mess. This political system requires competition between the two main parties, since it is only fear of being thrown out of office that limits the behaviour of the Government. When the Opposition is weak, the Government doesn’t take it as an opportunity to solve the long-term problems of the nation, free from the compulsions of electoral politics – it focuses on its own future and how it can further strengthen its grip on power. It becomes dictatorial.

Ranil Wickremasinghe has been defeated so many times that his name must surely be entered in the Guinness Book of Records. People don’t like his policies, and he refuses to change them.

His economic agenda is no more popular than his conflict resolution strategy. Indeed, they are very similar. He wants to hand over responsibility for the well-being of the Sri Lankan people and the resources that belong to them to unelected individuals with a record of exploitation.

My point was that the country seems to be doomed to undergo more spectacles like the impeachment of the Chief Justice, since the Opposition is apparently determined to remain ineffective. Eighteen years in any position should be enough. But the UNP has agreed to give Ranil another six as its leader, guaranteeing his grip on the party until well after the next presidential and parliamentary elections. (Anybody who thinks that Ranil would run the country more democratically than Mahinda Rajapaksa is an idiot – wearing a suit and tie doesn’t make him a ‘gentleman politician’!)

One really begins to wonder whether there is anybody in the UNP who is up to the job. Several of its politicians have been agitating for reforms in the party, but their campaign has now been going on for more than half a decade without any results.

And this week offered a look into the thinking of Sajith Premadasa.

Addressing the media on the floods that have afflicted Sri Lanka in recent days, he attacked the Government for its response. The Security Forces had done a good job of rescuing people, he said, but the relief being provided was condemnable. In particular, he questioned the offer of Rs. 5,000 in exchange for ten days of work, which he said amounted to ‘enslaving’ the victims.

Now, I am sure that the affected people could do with rather more than Rs. 5,000. According to the Disaster Management Centre, by Sunday, 35 people had been killed and 22 injured. A total of 44,901 people had been displaced, while 3,136 houses had been destroyed and 7,693 partially damaged. These problems obviously cannot be solved with such a small sum of money, and they are only part of the burden the victims will have to bear – the Disaster Management Centre has not collected data on the impact of the floods on livelihoods. Since the Government regularly wastes a lot more than Rs. 5,000 on totally useless activities, Sajith was right to be critical.

The people of his own district would surely prefer a bit more assistance to a Rs. 4 billion cricket stadium, for instance!

If that amount had been divided among the 66,299 families reported to have been affected by the floods, they would have each received a little over Rs. 60,000.

This is an important argument, but it is not the point that Sajith was making. He was concerned not so much with the amount as with the way in which it is to be provided – in exchange for labour. Apparently, even if the Government gives Rs. 60,000, it must be a gift.

Of course gifts are very nice. But they limit the amount that people can be given.

If the victims each need Rs. 1 million, it would require a genuinely impossible allocation, taking up the budgets of several ministries.

The idea of offering employment in exchange for assistance has already been used to good effect in this year’s drought, with farmers who couldn’t cultivate their fields due to lack of water being paid to rehabilitate local tanks instead.

The Government claims to have spent almost Rs. 5 billion for this purpose. The advantage is that instead of being cast as victims, unable to do anything to help themselves, the affected people were involved in productive work that should contribute to avoiding a repetition of the drought, or at least to reducing its severity.

Farmers will benefit from their own work, and so will the country.

We should remember that natural disasters are becoming ever more frequent. Climate change is a reality, and Sri Lanka is now facing drought and floods on a regular basis.

It is important to be prepared, and I believe that the Disaster Management Centre has done some work in that direction. But the Government should also have a clear and consistent policy on the assistance that it is going to offer to people affected by natural disasters – their fate shouldn’t be decided according to the whims of politicians.

Of course the Government doesn’t like to guarantee anything.

In lieu of such a promise, it has started to push insurance schemes.

Mahinda Rajapaksa announced in the budget speech that farmers who receive chemical fertiliser from the Government at a subsidised rate will now have to pay Rs. 150 per 50 kilo bag towards crop insurance. No doubt the motivation behind this move is not what is best for farmers but how to reduce the cost of the fertiliser subsidy, on which the Government spends more than Rs. 30 billion. Instead of providing bags at Rs. 350, they will be given for Rs. 500. This is not very honest, but perhaps one should not complain too much since the fertiliser subsidy is clearly not the best way to support farmers. (In addition to the now widely accepted impact on the environment, and hence on our health and the economy as a whole, the fertiliser subsidy is totally inefficient. To cultivate one acre, farmers use three bags of chemical fertiliser. These are sold to them for Rs. 350, when the market rate is Rs. 6,500. For the amount that the Government thus has to hand over to the manufacturers to support a single individual – nearly Rs. 20,000 – it could have bought them an indigenous cow! And such an animal would have fertilised as many as 30 acres for several years, without any of the disadvantages of chemical fertiliser. Why is it not done? Because the fertiliser companies are enthusiastic sponsors of a whole range of activities of both officials and academics.)

The problem with ulterior motives is that things don’t generally work out as we expect. One would have to see how easy it is to make a claim, since it is well known that the other major intervention in agricultural markets – purchasing at a minimum price – is largely ineffective, with the Government purposely making it difficult for farmers to take advantage.

Better than insurance schemes, or at least as well as them, would be a guarantee of work in exchange for a minimum income.

My advocacy of this idea is inspired by the experience of India’s National Rural Employment Guarantee Act, passed in 2005, which guarantees 15 days of employment at the minimum wage to Indians living in rural areas willing to do manual labour. Despite being plagued by corruption, as most things are in India, it has made a vital contribution to the development of the country.

The situation in rural areas in Sri Lanka is nowhere near as difficult as in India, except perhaps in the former conflict areas, but the country could still think of such a scheme islandwide.

Alternatively, this could also work as a Disaster Recovery Scheme.

It would be the opposite of enslavement, since it would confer on the Sri Lankan people a new right that they do not as yet enjoy, without imposing on them any new duties.

And that is bound to be popular.

Sajith Premadasa had better give it some more thought.

Of course Ranil Wickremasinghe cannot be expected to approve. His neoliberal handbook says that it is only a matter of time before we are all as rich as him, so long as the Government doesn’t try to help the process along.

He must love being in the Opposition!

This article was published in The Island on 28th December 2012. The internet version may be accessed here.

The limits of the budget debate

What sloganeering misses about the budget and what the budget tells us about Mahinda Rajapaksa’s popularity

Parliament has become a place where its members go for a free lunch when they have no better offer. And it would seem that MPs receive plenty of attractive invitations, since most of them are rarely to be seen in the chamber, even for a nap on the comfy recliners the Sri Lankan people have so thoughtfully funded, assuming that their representatives would be spending long hours debating the future of the nation.

The Speaker admitted as much last week. There is no point in holding the budget debate, he said, when the responsible ministers are not present.

In principle, he was quite right. Why bother to ask questions about the allocation for higher education when SB Dissanayake is not there to answer or at least to hear what is being said? Suggestions cannot be taken into account in formulating policy if the person taking the decisions is ignorant that they have even been made. And on the day Chamal Rajapaksa made his statement, only four out of the scheduled twenty-two ministries were represented!

However, practically speaking, we should probably breathe a sigh of relief when ministers stay away.

Consider the Parliamentary Select Committee that has been impeaching the Chief Justice. Ministers enthusiastically attended every one of its sittings. But what did they contribute? When they were not calling Shirani Bandaranayake names, they were justifying a very obviously unjustifiable process on the pathetically simplistic grounds that what Parliament says goes. There was no debate about the decision to require the Chief Justice to reply to more than 1,000 pages of ‘evidence’ literally overnight. It was simply declared by the ministers present. Likewise, once she had walked out of the proceedings in protest at her treatment, there was no debate about calling the ‘witnesses’ they had previously said would not be available for cross-examination. They arrived within minutes, once the coast was clear. And by the following day, the Parliamentary Select Committee had managed to finish its ‘deliberations’ and prepare a lengthy report (including references to cases from as long ago as 1852!) – more work than any of the ministers had done in the previous year.

But what Parliament says goes. And in this case it said that it didn’t care to give the Chief Justice a fair trial according to the principles that Sri Lanka applies to everybody else (including ministers!).

In any case, the budget debate is generally used by MPs not so much for commenting on the Government’s plan for the following year as for presenting what they hope will be a headline-catching soundbite, on whatever subject happens to take their fancy.

And this time was little different.

The Opposition quickly latched onto a catchy slogan. The budget was summed up with the phrase ‘lamborghinis for politicians, badagini for the people’, which no doubt resonates with the middle class in Colombo. However, it is not really accurate. If things were that simple, Mahinda Rajapaksa would be a lot less popular than he is with the masses.

Of course the war victory is important in explaining the support he enjoys among the majority Sinhalese, but it can no longer be the only factor.

We need to understand the secret of his success. For if the President were even somewhat more unpopular, his capacity to use the powers that he has won would be considerably restricted. He would not be able to control Parliament to the extent that he does today.

And then the Chief Justice might just stand a chance.

As the Government’s plan for the following year, no matter how many changes are bound to be made later, when nobody is paying attention, the budget gives us an idea of Mahinda Rajapaksa’s appeal.

The lamborghini-badagini slogan is not really accurate, but it is not completely inaccurate either. As the UNP’s chief economist MP Harsha de Silva pointed out, the budget maintains taxes on food such as milk powder and tins of salmon while exempting racing cars. He called it a budget for the 0.1%, no doubt consciously evoking parallels with the popular campaign of the Occupy Movement in the United States and elsewhere that talks about 1% of the population controlling an ever greater share of the country’s wealth. His point was that only the richest of the rich can afford racing cars, which are now going to be cheaper thanks to the Government’s proposals, while the price of basic food items is of most concern to the poor.

The Treasury issued a totally ridiculous statement in response to this criticism. It seems that it is not lamborghinis but go-karts that are being exempted from tax. Well, that’s a relief, isn’t it? People are constantly complaining about the cost of go-karts!

Of course tax exemptions for racing cars of whatever kind are completely misguided.

The proliferation of such random concessions is one of the many things that are wrong with the Government’s tax policy. The more complicated the system, the easier it is to avoid paying one’s dues. At the same time, exemptions mean less revenue for the Government.

Far too little attention is paid to the appallingly low level of tax revenue being collected in Sri Lanka. Taxes amounted to only 12% of GDP in 2011, far below the international benchmarks of 25% for a Middle Income Country and 18% for a Low Income Country, as noted by Anushka Wijesinha in a recent article on the Institute for Policy Studies ‘Talking Economics’ blog. And rather than improving with average incomes, the ratio is getting worse. This is a massive anomaly.

In the absence of sufficient tax revenue, the Government resorts to borrowing, which tends to push the country ever further into debt.

Another huge problem is the extraordinary dependence on indirect taxes, meaning taxes that fall not directly on incomes but indirectly through consumption.

There are two issues here. First, the two forms of taxation are not substitutes. Indirect taxes create inflation, since they add to costs – if a company has to pay taxes on its inputs, it will simply increase the price of its output to compensate. By contrast, direct taxes have no inflationary effect. And so long as the Government spends the money it collects, taxing corporate profits actually increases the level of profits in the economy and thus also the national income. This is counterintuitive, but non-economists should try to understand that this is often the case in economics. Something that is true at the level of an individual is often not true at the level of the economy as a whole. A company might believe that taxes reduce its profits, but it does not exist in a vacuum – the effect of spending by the Government increases economic activity and generates increased profits, albeit not necessarily for that particular company. (This idea should be more easily accepted now, since it was such a fallacy of composition that Keynes pointed out at the time of the Great Depression, saying that if individuals all saved more then aggregate demand would fall, which would mean a lower national income and thus less savings in the aggregate – the ‘paradox of thrift’. The Global Financial Crisis and its aftermath have repopularised his ideas regarding the need for what is now called a ‘fiscal stimulus’ to get out of an economic downturn.)

Secondly, the poor bear more of a burden than the rich when taxes are collected indirectly rather than directly, since consumption forms a larger share of their income. They may spend half of what they earn on food, but it would be physically impossible for Bill Gates to do likewise – even throwing so much food away would be a challenge!

In Sri Lanka, direct taxes constitute only 20% of the total, with the remaining 80% being indirect taxes. This compares extremely badly with other countries.

Totally ignored by just about everybody, the Government is busy making things worse. Last year, when it finally restored income tax liability to public servants, it managed to ensure that this resulted in no overall increase in tax collection by significantly reducing tax rates and doubling the tax-free allowance. And this year it has introduced a whole range of additional concessions, such as reducing the income tax rate for IT professionals to 16%, organic tea exporters to 12% and large scale poultry farmers to 10%. Meanwhile, companies that list on the stock exchange are to be given a three year half tax holiday. And these are just the new measures. Some time ago, the Institute of Policy Studies estimated that concessions offered by the Board of Investment to foreign companies cost Sri Lanka 1% of GDP, in the process of attracting investment that amounts to no more than 1.5% of GDP – and this money would likely have come anyway, since foreign companies openly state that they are not primarily interested in the level of taxation. Soon it will cost the Government more to administer the tax system than it actually collects!

Many of these issues were undoubtedly highlighted by the Presidential Commission on Taxation, which spent about a year working solidly on the issue, submitting its report in October 2010. But Mahinda Rajapaksa has declined to publish it.

When presenting the budget, he highlighted the fact that the Government has not resorted to privatisation, a recruitment freeze in the public sector, cuts in subsidies or neglect of infrastructure development, even though it is short of revenue. But what the President was hiding is that he has nevertheless cut expenditure. Or rather he has prevented expenditure on certain items – education and health in particular – from going up in line with the national income.

Why? Because he wants to meet the fiscal deficit target set by the IMF.

I would argue that there is absolutely no need to follow the advice of the IMF, but even doing so would not have been a problem if Mahinda Rajapaksa had got a grip of tax policy.

All that said, even if we limit ourselves to discussing tax policy, Harsha de Silva’s analysis of the budget is tellingly off the mark.

He wants to abolish taxes on milk powder and tins of salmon, but these are not just a matter of revenue. They are an integral part of Mahinda Rajapaksa’s programme for the development of agriculture in Sri Lanka. Backed up by a whole range of other interventions, including through the much criticised (including by me) Divi Neguma, they provide incentives to farmers and fishers to boost production, since they increase the price of imported goods. And they are working.

Sri Lanka has become self-sufficient in rice, maize and black gram, and will soon be in green gram, onion, sugar and milk.

This is a good thing, since the prices of food on the international market are now subject to speculation by financiers, who regard it as just another commodity. They are volatile and increasing at a faster rate than ever before.

It is also one of the reasons why Mahinda Rajapaksa is popular with the Sinhala masses. For he has put a lot of money into rural areas.

Rural areas have also benefited from what I would describe as his other major economic policy – maintaining a large army and putting them to work in all manner of ways. I have written at length against this on political grounds, but economically speaking it has been a key source of growth. And the budget shows that there will be no change in approach. It justifies a significant increase in spending on the police on the basis that they will take on some of the responsibilities that the army handled during the war, while making no proposal to reduce spending on the army.

An addition this year is the plan to establish twenty technical colleges catering to the requirements of jobs in other countries.

Of course there are many other things to be said about the budget, but they will have to be left for another opportunity. For the moment, let us simply realise that things are not as clear cut as Harsha de Silva made out.

The UNP’s problem is that it has no coherent alternative to present to the people. Its policies under Ranil Wickremasinghe were tremendously unpopular, and he does not appear to have changed his mind about them. What is worse, the UNP does not appear to have changed its mind about him. He has been given another six years to accomplish what he could not do in the last eighteen. And the country’s problem is how to keep Mahinda Rajapaksa in check when the Opposition seems so determined to remain ineffective.

Until that question is answered, any debate in Parliament is bound to be a waste of time.

This article was published in The Island on 17th December 2012. The internet version may be accessed here.

Drunk and disorderly

What the university teachers’ strike tells us about Mahinda Rajapaksa’s thinking

Something has gone to Mahinda Rajapaksa’s head, and I’m guessing it’s power. Because that seems to be the only thing that interests him these days – how to bolster his own position and how to undermine everybody else’s.

Hence his first priority after the end of the war was to get himself another term as president. The presidential election was called early, and it was followed within a couple of months by a parliamentary election, enabling him to strengthen his grip on the legislature too. The Opposition was in disarray. But that wasn’t enough. He wanted a two thirds majority, so a few more crossovers had to be engineered. Neatly bringing us to priority number two – legislation to reduce checks and balances on the executive, and to enable him to run again, as many times as he finds convenient, by abolishing term limits. The Constitution was changed. And it was ‘urgent’. Naturally, for what could be more important than Mahinda Rajapaksa’s future? Not peace-building, certainly. That’s for wimps. The third and final priority was to keep the Opposition cowed. Which is why he has called one election after another, to keep them in campaign mode so that they never get around to replacing their has-been leader.

The actual running of the country has suffered. But that needn’t matter if people learn to be satisfied with the mere appearance of achievement rather than the real thing. What matters is announcing that resettlement is complete and Manik Farm closed down, right? Not whether the IDPs are actually back home with roofs over their heads. Get with the programme, folks.

The Government isn’t bothered about ‘details’ like that. After all, it won the war – nothing else matters.

It certainly doesn’t matter that university teachers have been on strike for three months. Never mind that such a massive and sustained trade union action by a normally rather conservative group of people is unprecedented in Sri Lanka.

What matters is not giving in to terrorism.

Sorry, did I say terrorism? I must be getting confused – the modern world is so difficult for those of us with only limited intelligence. It’s academics Mahinda Rajapaksa shouldn’t negotiate with, right?

The FUTA struggle presents us with a crystal clear picture of the Government’s post-war failings.

The debate has exposed just how little substance there is to the grandiose vision that was set out in Mahinda Rajapaksa’s much-hyped Chintana. He wanted Sri Lanka to become a knowledge hub, for people to flock to its universities from around the world and for them to turn out graduates prepared to transform the country into the ‘Miracle of Asia’.

So far, so inspiring.

But Mahinda Rajapaksa appointed a man with half a brain to make it happen.

SB Dissanayake had only one idea for the development of universities – put a stop to ragging. Because this is how he managed to spend four years at the University of Sri Jayawardenapura following a degree in ‘public administration’ without learning even the basics of how to minister to a government department? I guess not. It was training in how to be a politician he was after those days, for which purpose I imagine ragging was very helpful. Who knows. Wiping out ragging is a pretty simple task. And as a ‘bonus’, it can be linked up with the further militarisation of society by making young people eager to discover the origins and meaning of life in the universe march around in circles and learn how to salute. A no-brainer, in other words. Anything else would no doubt turn out to be a bit tricky, the Minister may have thought, so it had better be left to the private sector. At least that would bring in some money.

I have already discussed the follies of the Private Universities Bill in these columns, so I will not bore readers by repeating myself, except to say the following – companies may provide the kind of education that students think will get them jobs, but they have absolutely no incentive to do anything more.

That leaves stopping ragging.

Now, ragging is a waste of time (and worse) that certainly ought to be stopped. But stopping it falls rather short of being a comprehensive plan for the creation of a knowledge-based society in Sri Lanka!

When confronted with other people’s ideas, the Minister hasn’t demonstrated a lot of patience. Indeed, his response to the FUTA struggle has mirrored the Government’s reaction to any and all criticism, displaying a totally absurd war mentality.

SB Dissanayake alternates between claiming that the demands of the university teachers are unreasonable, if not downright sinister, and saying that they have already been met.

Take the call for the Government to spend 6% of GDP on education. According to SB Dissanayake, this is a random figure dreamt up by Nirmal Ranjith Devasiri over his morning tea, with short eats provided by the Opposition, NGOs or most imaginatively Prabhakaran’s ghost, all to make trouble for Mahinda Rajapaksa. However, it is actually a globally accepted norm. What’s more, it is a target that the Government along with its counterparts in many other countries, including the whole of South Asia, has committed to reaching. The only person who thinks it is not important is the responsible minister in Sri Lanka.

Adding insult to injury, he then manages to claim both that public expenditure on education is already nearly at 6% and, in his very next utterance, that it need never be anywhere near 6% since Sri Lankans are already very well-educated. What a propaganda machine! The figure of 1.9% was calculated by the Government. The last time the UK allocated such a tiny proportion of GDP for education was during the First World War – it currently spends 6.1%. Think of all the extra ministers we could have if only we realised that 1.9% was enough for countries with near universal literacy! Maybe SB Dissanayake would agree to look after our universities once he has finished ‘revitalising’ the ones in Sri Lanka. We could do with some help with our trade union movement. But coming back to the point, it is official statistics that UNESCO includes in its global database (www.uis.unesco.org). FUTA has nothing to do with it. Rummaging around in the national income accounts to find some other vaguely associated spending to add to the 1.9%, as SB Dissanayake sometimes advocates, is simply not credible.

When the Minister is in a mood to accept that Sri Lanka does indeed spend only 1.9% of GDP on education, he is keen to point out that increasing the allocation would take up an impractically large share of government revenue. How thoughtful! Like any good housewife, he is keen to keep expenditure within income. Will he also offer to give up his perks in the national interest? Don’t hold your breath. But of course the economy doesn’t function like a household – increasing government expenditure can generate more income. The share of government expenditure, which is the only relevant figure, wouldn’t have to be unduly large either, since government expenditure could be increased to meet the 6% target.

But enough with the ‘details’, right?

SB Dissanayake would rather waste our time (or worse) calling the leaders of the FUTA struggle names, trying to make us suspect their motives.

Smear tactics are the bread and butter of the Government.

Its objective is not to find a solution to the problems in universities, but to hang on until academics have to give up their strike – three months is a long time to go without salaries.

It simply hates to lose. And winning has come to mean sticking to a position, whatever happens.

Mahinda Rajapaksa should be ashamed of himself for losing track of what is truly important. He did Sri Lanka a tremendous service by putting an end to the generation long war, for which the vast majority of people are extremely grateful, even if they do not approve of each and every action taken in the process. He amassed massive political capital. And he was, and indeed still is, in a position to do even more good for the country. Sri Lankans waited a long time for peace, not only to escape the relentless death and destruction but also because so many things were excused or put on hold because of the war. They have a long list of priorities, none of which it seems Mahinda Rajapaksa can be bothered to tackle now that he has ensured his own place in the history books.

A change of attitude at the top is required.

This article was published in the Midweek Review on 10th October 2012. The internet version can be accessed here.

In solidarity with the Kudankulam villagers

Why people are protesting on both sides of the Palk Strait

As university teachers were marching from Galle to Colombo to press their now well known case for the education sector, an equally impressive mobilisation was taking place just a few hundred miles away in Tamil Nadu. The villagers of Kudankulam were burying themselves up to their necks in sand in a last ditch attempt to prevent a nuclear reactor from being commissioned, having spent a couple of days standing in the ocean and several weeks picketing on the beaches.

The sheer numbers involved brought the protests a lot of publicity, including in Sri Lanka, to the extent that the Indian High Commission felt obliged to issue a ‘reassuring’ statement.

Fishermen opposing nuclear power have a tough job. They are automatically dismissed as backward and determined to remain that way.

But ‘progress’ sometimes takes us into blind alleys.

A simple calculation by an Indian researcher demonstrates that nuclear power is not unavoidable for Tamil Nadu (‘No more empty promises’ by Nityanand Jayaraman in Tehelka, September 22nd). The argument goes as follows.

The first phase of the Kudankulam project will add just 1,000 MW to the grid, of which some 48% is due to Tamil Nadu. Since nuclear reactors in India generally operate with a plant load factor of 60%, the additional power generated works out at a measly 280 MW. Compare this to what is lost in transmission – 18% of Tamil Nadu’s total installed capacity of roughly 10,400 MW, or a massive 1,900 MW. Reducing losses by half, which can be done at a tiny fraction of the cost and which must be possible since the Chinese manage 7%, would supply 900 MW extra. Even including another 280 MW from the second phase at Kudankulam doesn’t come close to wiping out the deficit for nuclear power.

Meanwhile, people inclined to think that Tamil Nadu needs to do both to meet its demand for electricity should note that in the immediate vicinity of the Kudankulam project are windmills generating more than 3,000 MW. They do so at only INR 3.50 per unit, compared with a cost of INR 4.00 per unit for nuclear power.

There are plenty of alternatives. And they are cheaper.

It is indeed vaguely worrying to think that the wind might not blow enough to support all the gadgets in the shiny new air-conditioned buildings in Tamil Nadu’s ‘IT corridor’ for every minute of every day, but this would probably not be quite so much of a headache as a nuclear meltdown that released into the environment materials with the capacity to maim and kill for many thousands of years to come.

In any case, why should the Kudankulam villagers care about the ‘IT corridor’? Why should Sri Lanka?

Why should the Indian government, for that matter? The corporate sector in India sucks up all the country’s resources while providing almost no employment. It is the reason the vast majority of its people continue to live in poverty.

The golden rule of ‘development’ as it is commonly practised these days is that the poor masses have to sacrifice themselves for the sake of the stellar growth of the elite.

This must also be the answer to another rather perplexing question. Why on earth is India stepping up investment in reactors in the aftermath of the Fukushima disaster, while so many other countries are thinking again?

One of Union Home Minister Sushil Kumar Shinde’s vital contributions when he was in charge of the power sector, other than the biggest blackout in history, was to confirm plans to boost India’s nuclear installed capacity to 63,000 MW by 2030, from under 5,000 MW today. The French, Russians and Americans were delighted, since their companies are for some mysterious reason having considerable trouble flogging their reactors at home.

The Indian government claims that there is absolutely no chance of anything going wrong, but the Kudankulam villagers aren’t stupid. For a start, that’s exactly what the Japanese said even after they were hit by the tsunami!

Natural disasters cannot be ruled out, as we know from the bitter experience of 2004, and there are plenty of man-made disasters to worry about too. The Japanese are known for their technological sophistication and concern about standards. Yet their nuclear meltdown demonstrated that they are not immune to failure. Their investigators found that they had not done all they could to avoid it. The company in charge of Fukushima hadn’t paid enough attention to safety, even to specific warnings about the kind of catastrophic event that actually happened. India has the handicap of its Nuclear Liability Act. And its record is hardly reassuring. Its reactors have suffered hundreds of accidents over the years, of varying degrees of seriousness, as documented in some detail by Indian academics such as MV Ramana, despite the ‘radioactive curtain’ of secrecy that has shrouded its nuclear agencies for much of their lives.

After the Fukushima disaster, India’s nuclear regulator set up a committee to look into safety issues. It recommended 17 improvements to be made at Kudankulam before commissioning the reactor, but only six have been completed to date.

No wonder Sri Lanka needed ‘reassurance’.

But the information that a Sri Lankan delegation will be visiting India later in the year to talk about it doesn’t really qualify as such. These discussions should have been completed long ago.

Still, it could be worse. The villagers of Kudankulam have faced even less useful responses to their concerns.

Imagine this. A nuclear reactor is being constructed a couple of miles from your home, and researchers from the National Institute of Mental Health and Neuro-Sciences turn up on your doorstep offering ‘counselling’ to try to find out what you’re so upset about!

The Indian government has now dropped the idea of brainwashing its people and is focusing instead on harassment. The Prime Minister declared earlier in the year that opposition to the Kudankulam project was a foreign conspiracy (sound familiar?), and deported an unfortunate German backpacker who happened to be enjoying a spot of winter sun in Kanyakumari, on the pretext that he was the brains behind the campaign – officials later had to admit that there was absolutely no evidence to demonstrate that money from abroad had played any part whatsoever in the protests. Then having exhausted the NGO option, they moved onto treason (heard this one before too?). According to the convenor of the People’s Movement Against Nuclear Energy, SP Udayakumar, who is currently being sought by the Tamil Nadu Police, hundreds of cases have been filed against an extraordinary 200,000 people, either for sedition or for waging war against the State.

You’d have thought India had enough real wars not to want to start imagining them!

The scale of the crackdown in Kudankulam is almost as extraordinary as the scale of the protests.

This reminds me of the opening of a widely-circulated piece from the Indian media supporting Jayalalithaa’s decision to send home a visiting sports team (‘Boycott Sri Lanka until Tamils get justice’ by Meena Kandasamy in Tehelka, September 5th). The author argued that the sight of Sri Lankan schoolboys kicking a ball around might lead Indians to believe that all is well in Sri Lanka, which is certainly a possibility. However, she went on to illustrate just how bad the situation is with reference to the fact that 4,000 university teachers had been on strike for two months. This ‘evidence’ even took precedence over the usual claims of genocide. Well, if that’s how we’re going to decide on a boycott, even small babies are going to have to be repatriated to India, in ‘solidarity’ with the villagers of Kudankulam.

As we approach the Universal Periodic Review of Sri Lanka at the United Nations, at which the country’s performance in terms of human rights will be assessed by India as one of the three appointed rapporteurs, Indians must try to look at Sri Lanka’s problems against the background of their own.

As for FUTA, of course Mahinda Rajapaksa should have resolved the matter amicably long ago.

This article was published in the Midweek Review of 3rd October 2012. The internet version can be accessed here.

The one and only family

How Mahinda Rajapaksa is promoting his relatives to consolidate his power

The rise of Basil Rajapaksa has been rapid to say the least. Having spent years out of the country pursuing other interests, his return to support his brother’s presidential campaign was unexpected. Even more surprising was the popular backing he managed to acquire within a very short period in an unfamiliar district – he recorded the highest number of preferences in Gampaha in the 2010 parliamentary election, about as many as the next three candidates combined.

He is projected as a man who gets things done. The idea is that he will do for the economy what Gotabhaya did in terms of security, with Mahinda Rajapaksa being the figurehead who holds it all together.

The family brand is now so strong that people either love them or hate them.

It is perhaps understandable that Mahinda Rajapaksa is so obsessed with his family. Politicians adore power and want to hang onto it for as long as possible, and in this region in particular one means of extending their period of influence is to promote their relatives, lining them up for eventual succession.

Some months ago, Namal Rajapaksa gave a most amusing speech in Delhi at a forum on ‘political dynasties’ in which he claimed that the only real advantage of being the President’s son was that it had been slightly easier to get a nomination to contest elections. He argued that it was then up to the public to decide. This must be one of the most ridiculous statements of 2012. Yes, they have to collect votes, but even if they do so honestly on the basis of their image and not through the abuse of state resources that we all know is rampant in Sri Lanka, their image is only partly reflective of their capabilities. It is far more dependent on the opportunities they are given.

And both Namal and Basil have had a lot of help.

Why does Sri Lanka even have a Ministry of Economic Development? Because after the 2010 parliamentary election, Basil wanted a portfolio that would enable him to get involved in everything that might help to increase the family vote bank while making him responsible for nothing that could jeopardise it.

The Economic Development Ministry undertakes programmes that involve distributing freebies, money and jobs, especially focusing on young people in rural areas. Divi Neguma is an excellent example. Launched in 2011, its first phase involved the creation of one million home gardens. A lot of people were recruited to go around handing out seeds and equipment, or the money to buy them, and the whole exercise was given a lot of publicity. Never mind the impact of an increase in household production on farmers, since their marketing problems are the responsibility of the Minister of Agriculture.

Or is it the Minister of Agrarian Services and Wildlife? Livestock and Rural Community Development? Rural Affairs? Could Divi Neguma be run by the Minister of Food Security?

Does anybody actually remember who is responsible for these subjects?

Mahinda Rajapaksa believes in the centralisation of all useful power in the hands of his family, and the distribution of all useless responsibilities among as many other people as possible, so as to reduce the likelihood of any challenges to his authority from both inside and outside his governing coalition. He is constantly on the lookout for Parliamentarians he can induce to join the Government. Crossovers weaken the Opposition, but they also dilute the influence of each Cabinet Minister – instead of being one of about 20, they are now one of 60.

The resulting confusion obviously creates tremendous wastage and inefficiencies, which people ‘tut tut’ about from time to time.

But wastage and inefficiencies are only really actively opposed in Sri Lanka when they are sins committed by provincial councils. People are ever ready to find reasons to get rid of provincial councils, and their consumption of resources without producing much in the way of improvements to well-being is the issue cited most often as justification.

However, this problem too is created by the Government. Provincial councils don’t get a lot done because the Government doesn’t want them to do a lot.

The Government implements whatever projects it likes, wherever it likes, never mind whether their subjects fall within its purview or within that of the provincial councils. Cabinet Ministers may be given a chance to get involved to stop them feeling too bad about their increasingly powerless situation, but the really important stuff is bound to be given to a member of the Rajapaksa family. Why else would Basil have been put in charge of reawakening the East and bringing spring to the North – as far away from his constituency as one can get while remaining within Sri Lanka’s borders?

It is obviously nonsense to suggest that there are no capable people in the Northern and Eastern Provinces, or that the Chief Ministers couldn’t have done the job with appropriate support from Parliamentarians representing those areas.

There is not even the explanation generally put forward as regards Gotabhaya, that Mahinda Rajapaksa really needed somebody he could trust due to the sensitivity and urgency of the situation during the war.

There was no justification for giving the responsibility to Basil.

I have made the same argument about the recent expansion of the Ministry of Defence to include street cleaning and landscape gardening as surely the world’s only Ministry of Defence and Urban Development (‘The Army’s No-War Games’, The Island, June 20th). Gotabhaya is apparently now spearheading the Rajapaksa family’s popularity drive among the middle class in Colombo.

Mahinda Rajapaksa doesn’t want devolution on anything other than a highly selective basis to people who won’t be in a position to use the power they are given meaningfully.

Divi Neguma is his ideal model. The key actors in the programme are community-based organisations, which operate in just one Grama Niladhari division or indeed in only part of one Grama Niladhari division. This is supposed to be empowering. Indeed it might be if there was a mechanism to enable these community-based organisations to have a say on policy – if the process were actually democratic, in other words. However, this is clearly not what is intended. They are given every opportunity to discuss amongst themselves, in a whole range of different forums at the local and even national level, no doubt involving plenty of wastage and inefficiencies that people won’t mind in the slightest, but all important decisions are taken by somebody else – Basil and officials under the control of Basil.

Provincial councils, which could reasonably expect to be in charge of work to promote home gardens, and more importantly to decide whether promoting home gardens is really the best option to make people in their areas better off, aren’t given the chance. They are not the ones with the money.

Why discuss this now? Because the Government is in the process of further extending and formalising this way of operating by means of a bill that transforms what was once merely a programme into a permanent structure of the Government – the Department of Divi Neguma Development, to be established within the Economic Development Ministry – which will also take over the work of regionally-focused development bodies such as the Udarata Development Authority and the Southern Development Authority, plus the work of the Samurdhi Authority.

The move is being challenged in the Supreme Court this week by a range of different groups, including the JVP.

A particular concern is that money deposited in Samurdhi Banks could be used by the Ministry of Economic Development without oversight, while the bill says that officials will be required to maintain absolute secrecy about their work, which is rather unusual.

However, it is the implications for the coordination of the development process that are most disturbing. Is Sri Lanka really best served by a system in which everything is decided by one, two or at best three people in Colombo?

Even if passage of the bill is blocked as a result of this legal action, it is clear that the real work will still remain to be done – the growth of Basil’s empire will be only slightly affected.

Mahinda Rajapaksa will pay no attention, certainly. He will continue to promote his relatives, in the expectation that being the President’s father will bring plenty of benefits in his dotage, and the space for others to contribute will continue to be closed down.

People may not feel very inclined to care about the fate of politicians, such is the frustration that has built up. The fact that internal democracy is as much of a problem in the SLFP as it is in the UNP doesn’t seem very important. However, it is through political parties that change has to come. The impact of their internal problems is being amply demonstrated by Ranil Wickremasinghe, who is preventing the Opposition from mounting a serious challenge to the Government by refusing to give up the UNP leadership. What Mahinda Rajapaksa is doing to the SLFP should be equally obvious.

Reforms are needed, and soon.

Basil Rajapaksa’s admirers shouldn’t get agitated by this suggestion – if he is as competent as they believe, he can manage without so much assistance from his brother.

This article was published in the Midweek Review on 29th August 2012. The internet version can be accessed here.

What India really wants

Assessing the resurrection of the Comprehensive Economic Partnership Agreement

While Tamil Nadu is fixated with the politics of India’s relationship with Sri Lanka, as was amply demonstrated by the hullabaloo over the conference of the Tamil Eelam Supporters’ Organisation in Chennai on August 12th, the rest of the country has been focusing on rather different issues.

The August 2nd to 5th visit to Colombo of Union Commerce Minister Anand Sharma brought with it announcements of several major developments on the economic front. He spoke of doubling bilateral trade to $10 billion per year by 2015, plus a considerable increase in investment and the resumption of negotiations on the much-postponed CEPA. Meanwhile, a 20-member delegation of India’s top business leaders were holding talks with their Sri Lankan counterparts, and more than 100 companies were showing off their wares at the India Show organised by the Confederation of Indian Industry at BMICH.

Of course, economics is not apolitical. Indeed, making the Sri Lankan economy more dependent on India has often been suggested by Indian analysts as a means by which New Delhi can acquire greater leverage over the Government.

However, Sri Lanka is already economically vulnerable, with around 60% of its exports going to the West. We have seen the follies of such dependence in the last few years as demand from Western countries has fallen with the Global Financial Crisis and subsequent recession. And during the war, we saw the potential political impact when trade preferences under their GSP schemes came up for renewal – both the European Union and the United States attempted to use the opportunity to push for their preferred policies, never mind what the Sri Lankan public wanted. A more balanced export profile would reduce these problems. Anyway, only 15% of Sri Lankan exports go to Asia, and with the region likely to continue growing faster than Western nations for decades to come, Sri Lanka really ought to be thinking about where it wants its markets to be.

India’s desire to increase Sri Lanka’s dependence on its economy may be motivated by other concerns, but that doesn’t mean increased Indian involvement is a bad thing. The Government just has to be careful.

To that end, let us look at a few concerns with the Indian proposals.

First and foremost, the CEPA is being sold to the Sri Lankan public using exactly the same rhetoric as was employed for the FTA. It is described as a wonderful opportunity for Sri Lanka to access the huge Indian market, with absolutely no danger of huge Indian companies swamping their Sri Lankan counterparts since India is not asking for reciprocity.

Who do they think they are kidding? The FTA was driven not by any desire on the part of India to help its neighbour but by the interests of the Indian business class, who had precisely two objectives – exporting more of their goods to Sri Lanka without paying tax and thus increasing their profits and increasing their profits by avoiding tax on their imports to India by diverting them through Sri Lanka.

Officials present the considerable increase in trade between the two countries since the entry into force of the FTA as undeniable proof of its success. However, this is far too simplistic. For a start, while Indian exports to Sri Lanka have been increasing steadily throughout, Sri Lankan exports have followed a rather different trajectory – going up rapidly at first, then from 2005/6 gradually falling back. More crucially, the increase in Sri Lankan exports was largely in goods in which Sri Lanka is not competitive globally, and the trade proved unsustainable.

In 2005/6, more than 50% of Sri Lankan exports to India were of just two items – copper products and animal and vegetable oils – which is rather surprising, given that Sri Lanka doesn’t produce the necessary raw materials.

In fact, the raw materials come from ASEAN, and they were heavily taxed by India at the time of the signing of the FTA. Sri Lanka, on the other hand, applied low tariffs, due to its earlier and deeper liberalisation – starting in 1977 rather than 1991 in India – and the fact that it offers incentives to foreign investors enabling them to import inputs for goods to be manufactured for export without paying tax at all, plus tax holidays for operations in Free Trade Zones. Indian businessmen promptly invested in a number of processing units in Sri Lanka. However, in the end this led to trade disputes, following which Sri Lanka had to introduce various limits on its exports to India, and finally in 2010 an FTA between India and ASEAN came into effect. The tariff difference disappeared, and Sri Lankan exports of copper products and animal and vegetable oils fell almost to zero.

We cannot say this trade was definitively a bad thing, since India’s exports to Sri Lanka would have grown even without the FTA – more than 50% are either petroleum products, vehicles or iron and steel, which are all excluded from the agreement. The trade reduced Sri Lanka’s problem with its balance of payments.

However, it is silly to suggest that it proves how good liberalisation was and will be for evermore, as officials do. After all, the trade didn’t go on for long – the few Sri Lankans who found jobs in Indian-owned factories lost them after a while, and the factories themselves are now unused and indeed useless.

The question for Sri Lanka is what to replace it with.

As usual, India seems to have the answer. This is the second major concern.

The CEPA is another of India’s babies. The expansion of the FTA to include not just trade in goods but also trade in services and investment is its much-cherished and long-awaited next step in its bilateral relationship with Sri Lanka. India is Sri Lanka’s number one investor. Also, services are its fastest growing export. The Indian business class wants more security for its investments in Sri Lanka and more opportunities to sell not just its goods but also its services – energy and education (hence the Government’s mysterious determination to push forward with the Private Universities Bill?) have been mentioned as priorities.

The major stumbling block has been Sri Lankan business, a section of which has been vigorously opposing the CEPA ever since it was first proposed, coincidentally or otherwise in 2005/6.

However, last week it was reported that the Chairman of Laugfs Holdings, who was one of the businessmen professing to be so worried about Sri Lanka being swamped by huge Indian companies if the CEPA were signed, is now quite keen on the idea. What changed? India has promised to bring Sri Lankan businessmen into joint ventures in services and also into the Indian manufacturing production chain. There are plans to set up Special Economic Zones, one in Trincomalee to make parts for vehicles and other engineering goods, and another somewhere yet to be decided to produce pharmaceuticals – a delegation to discuss the modalities was expected in Colombo on August 14th.

This could well be good for Sri Lanka. At least, it will add to capacity in both manufacturing and services and hopefully support exports, including to India, improving the ever-worrisome balance of payments. There will also be employment.

India has claimed that it is not seeking tax holidays in the Special Economic Zones (the Government may still give them, willing as it always seems to be to forego revenue!), arguing that the provision of land is incentive enough. They are quite right. The biggest problem the Indian business class faces at home is finding a place to set up their operations – there are regular and very serious agitations by farmers and tribal communities over land acquisition, with particularly intense conflict over Special Economic Zones.

Will the Sri Lankan public be overall winners or losers if this really is a quid pro quo for the CEPA? That is anybody’s guess.

Economics and politics are difficult to assess without information, and negotiations between the two countries are kept secret. Even documents that commit Sri Lanka to a particular course of action for generations to come are not shared before they are signed – sometimes they aren’t shared afterwards either. This means that vital details are often only discovered when it is too late. For example, while a phrase like investment protection seems quite harmless, in some cases protecting investments from expropriation has been interpreted by courts to mean that companies have to be compensated for any action that reduces their profits, even a general increase in the tax rate. A lot depends on the wording.

Indians have much more experience in this area, so it might be a good idea for Sri Lanka to spend a bit more time studying and a bit less time burning effigies of Karunanidhi.

This article was published in the Midweek Review on 15th August 2012. The internet version can be accessed here.

Another kind of elephant in the room

On the Government’s hit and miss plans for infrastructure development

It’s hard to know when to take official statements seriously. The Government isn’t known for taking the quiet, cautious approach. Indeed, its spokesmen very often make obviously false claims, such as that Mervyn Silva hasn’t done anything wrong or that no civilians were killed during the war. They seem to think the public are idiots.

When it comes to informing people about their plans, they are equally blasé about the difference between fact and fiction. We can never be sure what to believe. Take the proposed reclamation of land at Galle Face. This project sounded most unlikely when it was first announced back in 2010 – why spend so much money raising the seabed to build more luxury hotels and malls when supply already outstrips demand? Colombo has enough for the number of visitors it gets. But now this mildly ridiculous idea has somehow developed into total lunacy. According to the Chairman of the Ports Authority, speaking at a conference a few weeks ago, the Galle Face reclamation will now include a yachting marina, golf course, centre for water sports and most extraordinarily of all a Formula One racetrack!

There are undoubtedly a handful of people in Sri Lanka who would be delighted if this project were to materialise. The problem is that there are millions of others for whom it would be of absolutely no use.

Consider the Formula One racetrack. Never mind the capital cost of building the racetrack or even the recurrent costs of maintenance and the organisation and security of the three-day event. These are of course massive. But according to reports in the Indian media – Delhi was home to the inaugural Formula One event in India last year – the licence fee alone comes to $200 million. That’s more than the annual budget of the Ministry of Higher Education. Do Sri Lankans want to watch a few cars driving round in circles for an hour, or might they prefer to have twice the number of universities? It’s a tough one.

And in case anybody was wondering, the Delhi event made a loss. They could fill only two thirds of their seats, despite India’s fast growing engagement with motorsports. (India now has a Formula One team.)

If visitors didn’t flock to India for the inaugural Formula One event, it is hard to imagine them descending en masse on Colombo to play golf or go jet skiing. There are more attractive parts of Sri Lanka to stay in, to be honest, with less traffic and better weather. So the Galle Face reclamation probably isn’t going to boost the Sri Lankan economy or create jobs – it will simply consume funds that could have been used for something more productive.

The project is of course going to be carried out by a Chinese company. Who else?

China has been financing more and more infrastructure projects in Sri Lanka in recent years, most obviously in Hambantota, many of them implemented by the China Harbour Engineering Company.

On the plus side, the Chinese don’t try to tell Sri Lanka what to do. This makes a refreshing change from agencies like the World Bank, which refuses to lend unless the Government undertakes major reforms to key policies. Want to build a power plant? Tough luck, because they will only give money to the private sector, and then only if the Government promises to buy the electricity these companies generate at inflated prices for decades to come. Meanwhile, tariffs will have to be increased, particularly for home owners, and part of the Electricity Board must be sold off. Some deal! The entire sector has to be transformed for the sake of a few million dollars, which anyway have to be paid back with interest.

China only insists on using its own workforce and materials.

While this is not very good for Sri Lanka either, and the sight of thousands of Chinese labourers wandering around the otherwise pretty empty countryside of the Hambantota district with their shovels is quite peculiar, it is at least straightforward. The Chinese are looking for markets for their companies and employment for their people. Again unlike the World Bank, China doesn’t pretend that it is trying to do Sri Lankans a favour – it is here in its own interest.

It is up to the Government to decide what Sri Lanka needs. That it is now being suggested – after a series of breakdowns – that the Norochcholai coal power plant may be a Chinese cast-off, neither very good quality nor particularly suitable for Sri Lankan conditions, indicates that people are not at all sure that the Government is doing this job properly.

Infrastructure projects are essential for the development of the country, but they can also be a source of little other than debt.

The Greater Hambantota Scheme alone is going to cost Sri Lankans billions of dollars, including to date $360 million for the port and $550 million for its associated tax-free zone (because the Government is already overburdened with the taxes of profit-making companies?), $210 million for an international airport, $15 million for an international convention centre and $9 million for the sports stadium, according to official announcements.

Anybody who has visited the area since work started in 2008 cannot have failed to marvel at how out of place these huge structures appear, surrounded as they are by miles and miles of nothingness – no offence intended to the inhabitants of the Hambantota district. Will they be worth the investment?

In the case of the sports stadium and international convention centre, it is quite clear that the answer is almost certainly no. These are the equivalents of the proposed golf course and water sports centre at Galle Face – while they probably won’t generate much in the way of benefits for the economy, at least their cost is measurable in tens rather than hundreds or thousands of millions of dollars. What a sad measure of the ‘success’ of a project – how much of a failure it is! The number of conferences and cricket matches to which Sri Lanka plays host is not about to leap up exponentially. As we have seen, to make use of these facilities, events have to be diverted from other locations.

Sri Lankans must be hoping that the rather more pricey international airport and port will not turn out the same way.

That the first commercial operation at the Magampura Port took place more than 18 months after its ceremonial opening is hardly a great sign. Even less encouraging is that it involved the transshipment of cars manufactured just 500 nautical miles away in Chennai. One wonders how much if anything the Hyundai Group paid for the pleasure of briefly interrupting their 5,000 nautical mile journey to Africa and Europe – the vehicles were offloaded from one ship on June 6th and put on another on June 17th. It sounded very much like a publicity stunt to make the public believe that all is well. However, given Sri Lanka’s position on East-West shipping routes, there is still every reason to hope that Hambantota will attract a decent passing trade in time, at least once the current global downturn has passed.

The problem is that nobody is convinced that there is a coherent strategy behind the Government’s enthusiasm for infrastructure development – it all looks a bit hit and miss.

The Government seems to think that announcing grand plans is an easy way of boosting its popularity – the public are supposedly impressed by words rather than deeds, hence the surely crazy talk of a Formula One racetrack on the land to be reclaimed at Galle Face. A minister can then unveil a foundation stone that will immortalise his contribution to the nation for all to marvel at for decades to come, and perhaps also pocket a bribe from a Chinese company.

And by the time the public realise that it was all a ploy, or that it was madness that resulted in a loss to the country of billions of dollars, they will have forgotten who is responsible.

However, things are changing in Sri Lanka. In recent weeks, this newspaper has carried several letters from readers angry at proposals to construct domestic airports in Kandy and Nuwara Eliya. Is this country really big enough, they have asked. Who will fly from Colombo to Kandy, dragging themselves and their luggage through all the formalities of an airport and requiring them to take a taxi both from home to the airport and from the airport to their destination, when it doesn’t take more than a few hours by car? Aren’t there other priorities in a country like Sri Lanka? (The Government is now pretending that people are worried only about the particular locations it had selected, but this is of course nonsense.)

Similar concerns have also been raised with regard to the network of expressways that are already under construction. I too enjoyed the smooth one hour ride to Galle soon after the much-delayed opening of the Southern Expressway, but I didn’t see very many other people enjoying it – they were still travelling by bus on the free coast road.

It would seem that the public are finally wising up to the need for vigilance. Soon they’ll be refusing to vote for liars and criminals, and then Mervyn Silva really will be in trouble.

This article was published in the Midweek Review on 1st August 2012. The internet version can be accessed here.