by Analyst
The Deputy Minister of Finance has argued that the economy is doing well because the savings deposits in the state banks have gone up considerably. But it could equally well be argued from this increase in financial savings that the people have less confidence in the economy and that they prefer to put their money in the safe savings deposits rather than in the risky assets like property or shares. The stockmarket is in the doldrums with little hope of recovery this year, inspite of the rosy forecasts of GDP growth by the Central Bank. In any case it has always been observed that savings in the form of financial assets more from one type of financial asset to another in line with relative interest rates. What is relevant is the total savings rather than its composition in various forms of financial assets. The most important relationship is between increases in income and increases in total savings.

GST
The General Sales Tax (G.S.T) has led to increases in prices contrary to the opinions expressed by Economists and Tax department officials. This phenomenon has arisen from the fact that our economy still lacks sufficient competition. This is particularly so in the unorganised or informal economy. The vegetable traders, the wholesalers of foodstuffs in Pettah, the transport contractors, have enough market power to raise prices for their services without fearing a reduction in profits. The demand for food is as the economists say, inelastic. The organised sector too lacks competition. The entry of newcomers to a particular trade or industry is still hamstrung by regulations. Small entrepreneurs find it impossible to raise capital. Nor can they borrow easily from the banks. Consider the passenger transport service. The authorities lament that the bulk of the bus operators own only a single bus. But yet they limit the number of licences on a route on the basis of promises made by such single bus operators to run a schedule which they frequently fail to keep. Why not increase the number of licences on the basis of the actual schedule operated by them rather than what they promised to operate. This of course requires monitoring by the authorities. Do they do so and warn operators who fail to keep to the schedules submitted by them. Rules, regulations and even laws abound. But does anybody monitor or check whether they are complied with. What is the point of having rules and regulations if they are not enforced. It's time the public organised themselves and demanded implementation of rules and regulations. As for a better transport service, doesn't it require more licensed operators on a route so that capacity in the form of seats will increase with the demand.

Consider the banks and competition among them. Several of them still suffer from the hangover of bad debts. Unless they clean up their balance sheets by fore-closing on the collateral, recovering whatever money from forced sales and then writing off the shortfall, they cannot be effective lenders. At least one state bank has too little capital in relation to the assets. Many of the bankers seem to have poor judgment in their lending decisions. The size of the collateral, often over-valued, rather than the charter and competency of the borrower, is the only factor taken into account in lending. At the recent banking conference it was pointed out that the authorities are preventing the payment of interest on savings deposits. Will the authorities ignore such criticism to prop up the state banks.

Corruption
Corruption exists not only in the public sector. Corruption by paid managers in the private sector undermines the prosperity of private firms. The free market economy requires at a minimum the honouring of contracts and the settlement of debts. A modern economy is oiled by credit. Expansion of business is driven by credit. But credit can increase only if credit periods are strictly followed and settlements made on due dates by everybody including the state. The adverse consequences of corruption on the economy have been analysed by the Economic Development Institute of the World Bank in a publication "The Role of a National Integrity System in Fighting Corruption." It proposes a comprehensive system to fight corruption comprising eight pillars - public awareness, public anti-corruption strategies, public participation, "watching agencies, the judiciary, the media the private sector and international co-operation.

Corruption, the study points out, engenders wrong economic choices. It encourages competition in bribery, rather than in quality and price of goods and services. It inhibits the development of a healthy market place. It increases the cost of goods and services, promotes unproductive investments and leads to a decline in the quality of infra-structure services, for years, people had to pay bribes to obtain a telephone and gratuities to have them repaired when they went out of order. Then there is institutionalised corruption as in the port and the customs. As the report states "corrupt officials have an incentive to demand larger bribes, engendering a "Culture of illegality that in turn breeds market inefficiency".

Who pays the cost of corruption. Too often it is the poor, the consumer, who pays for the corruption of these officials and of companies from developed countries. Corruption if not contained, tends to grow. The public impression is that if corruption reached dizzy heights during the last regime, it has even climbed to higher levels in recent years. Corruption is alleged by the press in almost every large transaction carried out by the state. The on-going war has provided a fertile field for the growth of corruption. Allegations are made of corruption in arms procurement undermining the morale of the ordinary soldier. Their perception is that the war has become a source of enrichment for some.

Forms of grand corruption as alleged, have to be contained for practical reasons. No country can afford the inefficiency that accompanies corruption. Corruption increases the cost of living. The illegal payments that have to be made in the port on top of the excessive legal charges by way of rent and dues, overtime etc. add to the cost of goods. Recently it has been decided to operate the port for 24 hours to expedite the clearing of cargo, an eminently productive suggestion in an economy where transport is seriously hampered by security checks. But it is equally important to streamline procedures and monitor them to curb corruption.

Corruption also undermines the power of those who legitimately exercise it. When those who are corrupt become too rich, they seek state power and they will have no scrupules as to how they obtain it. Democracy itself comes under threat.

What is corruption
Corruption in its simplest terms is the abuse of power for personal gain by politicians, public officials and others. Corruption at the top sets a bad example to public officials in the lower rungs who have to be paid to expedite a service, a phenomenon described as "greasing" the palm.

Traditionally we have not had the concept of public office as a trust. Rather, it was accepted that those in authority had to be given gifts at least once a year. Nor was a distinction drawn between state funds and the private wealth of the ruler. We see this situation even today in some of the Arab Sheikdoms and Sultanates. The public have been tolerant of corruption. But this does not mean that they approve of it. They take for granted that those at the top are invariably corrupt and they must pay those at the bottom if they are to obtain the services provided by the state. But as warned by the World Bank this perception may give way to anger if prices rise too fast or if consumers come to believe that the underlying scarcities are artificially contrived and that they can be changed. Such a perception arose in the 1970's and contributed to the overwhelming defeat of the ruling party in the 1977 polls.

The recent 'No confidence' debate on Minister Samaraweera petered out as a damp squib. But none of the issues were debated. It was argued that the Minister had not done anything which other Ministers in previous governments run by the Opposition had not done. It's all a matter of business as usual. The public are aware that it is the pot calling the kettle black. The public know that Ministers consider such behaviour as accepting gifts or hospitality from businessmen a usual mode of conduct of politicians. After all, they themselves give such gifts to obtain employment and other favours.

But can this situation be allowed to continue. Who will change it. The Opposition may decry such behaviour now but will no doubt practice if when they get into power. There apparently is a Code of Conduct for Ministers laid down by a cabinet decision. But the public are not aware of it. Even if there is such a Code, will it serve a purpose if it is not enforced. Who will enforce. Such a Code. The World Bank report points out that failure in combating corruption is due to the absence of commitment at the top: "without demonstrated commitment there is a lack of moral authority to enforce laws and to punish the corrupt, an absence of confidence among the rule enforces that enforcement actions against powerful people will be supported by the top leadership, and an absence of public belief that the leadership is serious." In India the Supreme Court had to give directions to the Central Bureau of Investigation not to take orders from the then Prime Minister in the investigations into the Havala scandal. An ex-Prime Minister and several ministers have been charged for corruption and even jailed. In Britain Ministers who in the eyes of the media and the public have enjoyed hospitality from those to whom they should not be obliged, have been forced to resign although the Prime Minister thought that such hospitality had not compromised his Minister - David Mellor Jonathan Aitken and his Saudi friend were arrested in May this year for lying about the hospitality provided to the Minister in the Ritz hotel in Paris, a mere matter of a few thousand pounds.

In other countries there are enforcement authorities to enforce anti-corruption laws. In Hong Kong there is the Independent Commission on Bribery and Corruption, an institution on which our now defunct Permanent Commission was modelled. The Scandinavian countries have the Ombudsman Commission.

The accountability of Ministers to Parliament, the principle of Ministerial responsibility is hardly operative. Parliament is in theory to exercise supervision over the Executive and to hold the Ministers accountable. In both Britain and USA this supervisory control of Parliament is exercised through Select Committees of Parliament. Their powers and procedures are laid down. Recently the Chairman of the Committee on Public Enterprise refused to summon officials of the Port Authority to appear before the Select Committee. No reasons were given for the decision. What does this mean for the accountability of the Executive to Parliament.

High Taxation
The public seem to have opened their eyes to the broad applicability of the General Sales Tax. So there are complaints it is being levied for funerals. But isn't the provision of funeral service, a service consumers complain about the levy of G.S.T. on essential processed food like cakes. What is wrong however is not the G.S.T. but general taxation on commodities which is too high. High taxation is a damper to economic growth. A small import-export economy which depends on exports for economic growth cannot afford to have high taxes. Both Singapore and Hongkong deliberately followed low tax regimes in order to keep their goods competitive in world markets. The general public doesn't realise that import taxes adversely affect exports unless exporters are compensated by some duty draw back scheme as in South Korea. Otherwise high taxes on imports raise the cost of production of export products and make them uncompetitive. The high taxes may be to finance public expenditure on welfare services like free education or free health care or to dole out money to Samurdhi beneficiaries. Or the high taxes may be required to finance the war. In either case the high taxes retard economic growth. When referring to high taxation the government has hitherto been concerned only with the high rates of income tax and corporate tax. But it is far more important to reduce indirect taxes like customs duties or the General Sales Tax. But far from reducing G.S.T. the government will perhaps be forced to raise the rate in order to obtain adequate revenue to finance the war. But the general public are still unaware of the adverse economic consequences of the war, particularly the indirect consequences like growth being stifled or the cost of living being raised and the standard of living being reduced for the ordinary people. There are ofcourse the direct consequences of war and terrorism in the form of destruction of lives and property and the multiplication of refugees who cease to be productive workers and instead become consumers who have to be fed and looked after by the state which again means by others in the economy. It is difficult to assess the damage to the economy by high taxation. But the people's resentment of high commodity taxation will manifest itself sooner or later. Higher defence spending is an increase in government spending. It increases the role played by the government in the economy.

Hidden cost of Taxes
Economists use the standard supply and demand curves to depict how government taxes reduce the welfare of both producers and consumers. Usually as the price of goods comes down, the quantity demanded increases - the downward sloping demand curve. Usually as the price of goods goes up, the supply of it rises too; so the supply curve slopes upward.

Economists state that there is consumers surplus and a producers surplus. Every unit sold when supply equals demand is sold at the market price. But smaller quantities of the goods could have been sold at a higher price. Only for the last unit sold (the marginal unit) would the market price be the top price the consumer is willing to pay. He is willing to pay more for a lesser number of units. Similarly when producers receive the market price they are receiving more than what they were willing to accept for that supply.

Now when a tax is imposed the market price goes up, raising the price paid by consumers and lowering the price received by suppliers. At this new market price less quantity is demanded and less is supplied. Tax revenue of the government is the tax multiplied by the quantity sold. This was to be expected. But there is something more the consumers surplus and the producers surplus together shrink by more than the amount taken away in tax revenue. So the economic surplus has diminished and is a pure loss to the economy and known in economic jargon as the dead weight cost of the tax. If the tax rates are raised the dead weight cost and the loss to the economy increases even more. Often the dead weight cost increases rapidly as the tax rates rise; but government revenue may not increase that much and could in extreme cases come down as is said to have occurred in the taxation of cigarettes. The general point is that the dead weight cost of a tax on a commodity rises exponentially as the tax goes up. So high commodity taxation will reduce output and diminish welfare. The lessons of history - in the former Soviet Union, in China, in Eastern Europe suggest that when the allocation of resources is left to the market, the results on the economy are always better. The dead weight cost of taxes together with the inefficiencies caused by the lack of competition and the massive corruption in the public sector explain why the economy is slowing down inspite of the rosy expectations of the Central Bank.

The traders and service provides big and small (the small are exempted from G.S.T.) will pass on G.S.T. to consumers and where they are not liable to the tax will pocket it themselves. A weak state with a demoralised public service can hardly enforce law and order judging from the incidents of violence occurring in every part of the country. Can such a state implement and enforce a sophisticated general sales tax. The burden of financing the war will no doubt be spread widely among the people, with the introduction of G.S.T. If the war expenditure has to expand, no doubt the rate of G.S.T. can be jacked up to finance the increase. The people have still to appreciate the trade-off between the war and economic growth. Can a war economy integrate into the global economy. Can it even integrate into a reprisal bloc like S.A.A.R.C. There is defence expenditure in other countries as well. But do they have the burden of war as well as an extensive network of welfare services like ours. Are we heading for economic decline slowly but surely.