By Analyst
The Deputy Minister of Finance preens himself on the alleged success of his government's economic policy. He should remember that extreme macro-economic instability can arise almost overnight as we see in the world today. The government might imagine that it is in control of the economy and that it is heading in the right direction. But they can lose the grip almost in a flash. This works partly through the expectations that people form about how things will turn out. Their expectations are by no means optimistic. Consider the collapse in the stock market which has now gone below 500 points for the All Share Price Index. It was only during the time of the JVP conflict that the All Share Price Index fell below 500. The foreign portfolio investor has largely written off our stock market.

Stock Market Collapse
The fall may have been sparked off by the crisis in South East Asia in July-August 97. But the continued fall cannot be explained away as the result of this crisis and the sanctions imposed on India and Pakistan after their nuclear bomb explosions. The Pakistan economy may be on the verge of collapse but the Indian economy is able to take sanctions in their stride. The reasons for the collapse of our stock market are not merely a failure in market sentiment. The investors seem to have at last grasped the fact that the fundamentals of the economy have weakened and will worsen in the months ahead.

In the South East Asian countries the collapse in their stock markets was preceded by a collapse in the prices of real assets like land. It was followed by a collapse of their currencies. All these countries devalued their currencies although some Central Banks as in Thailand sold their reserves trying to maintain the value of their currency.

Foreign Investment Falls
It is likely that there will be much less direct foreign investment this year. The Deputy Minister of Finance undertook an investment promotion visit to Singapore and proclaimed success. He is billed to do a similar promotional visit to India to meet businessmen there. The Deputy Minister of Finance has stated that Indian businessmen want to invest in cement, software and textiles. The Indian textile industry is itself in the doldrums. As for computer software we hardly have the institutions to produce computer professionals. Our educational system is so backward that there is little hope of producing youth who have the aptitude for computer programming. Several U.S. computer firms have set up in India because she has the computer literate people and they have trained tens of thousands of software personnel. We have been told that Microsoft wants to set up here. But the credibility of the government and of the government controlled press is very low. The incentives we offer may be lavish. But the political and economic environment is fast deteriorating. Any visitor to the city of Colombo will notice, its resemblance to Beirut in the mid 1970s' - a city giving the appearance of being under siege. Our hopes of attracting tourists are naive indeed. The hotels are heavily in debt with little hope of paying them off soon. Now we have the collapse of the Russian economy. Over 25% of our tea exports are taken by Russia (the C.I.S. countries). This will undoubtedly reduce the disposable incomes of the people.

External Sector
Once an economy starts to go visibly wrong as in Peru in 1987, local capital also flees abroad. The only stable factor in our external sector is the remittances from our workers who have gone abroad for work - the housemaids and other workers. In 1997 these transfers increased by 10% due mainly to the US $ 64 million received as compensation for the Iraqi war displaced workers in Kuwait. As for official foreign aid, it must be noted that although substantial amounts are pledged at each Aid Group Meeting, the actual inflow depends on utilisation of such aid for various projects. The bureaucracy is so lethargic and their political masters, the ministers are so incapable of getting them to work, that aid inflows will remain at more or less the same level as in the previous year.

Any economy can grow only if there is a leading sector to spearhead such growth. Agriculture is notoriously weak as a stimulant of growth, not even plantation agriculture. It has not been growing in any significant way. In 1997 although agriculture grew it was by comparison with 1996 when it had actually declined significantly. We have placed our hopes on exports. Export promotion enables a country to achieve efficiency gains as well as to obtain the benefits of the international division of labour. But with the crisis in South East Asia and the consequential devaluations of their currencies our exports face increased competition. With the devaluation of the Russian rouble the possibility of a competitive devaluation by China looms on the horizon. We cannot expect any significant growth in exports. At best they may maintain the same level as in 1997. But with the threat to the export of tea to the C.I.S. countries owing to the collapse of the Russian economy, our export earnings may even decline.

Even foreign investment has declined considerably as evidenced by the collapse of the stock market and the fall in direct foreign investment inflows. Direct foreign investments cannot be repatriated as easily as foreign portfolio investment. Capital inflows have sustained our economy for the past two decades. Capital inflows are generally welcome because they supplement our meagre national savings. Our savings rate is only 15-16% of G.D.P. Much poorer countries like India and China have much higher rates of savings, exceeding 20%. Why is our savings rate so low. Is it because of our welfare state which has dampened the incentive for personal savings. People in other countries save to provide for the education of their children and for retirement. Our welfare state provides free education and free health care however poor the quality of such education or health care. Its only recently that the middle class is able to educate their children in fee levying schools the so-called international schools. But these schools do not feed into the university education system and not all parents can afford to send their children abroad to universities.

Bleak Future
A current account deficit in the balance of payments means a net inflow of resources from outside. Economists talk of foreign trade as an engine of growth. But the South East Asian crisis and now the collapse of the Russian rouble will put paid to such hopes. People have analysed the South East Asian crisis in several ways; macro versus micro factors, domestic versus external factors, market sentiment versus fundamental factors. The external factors include persistent current account deficits of over 5% of G.D.P. We also have similar deficits although they have been coming down.

Any mishap such as a weakening of our exports or a reduction of remittances from workers abroad, could set in motion a vicious circle. Normally the foreign portfolio investors find it difficult to get out of an illiquid market and foreign investors were reluctant to dump their shares at a loss. But in recent weeks they have dumped them taking huge losses, and got out of the market. There are no privatisations possible to obtain foreign capital inflows as in 1997. Nor will there be any significant inflow of direct foreign investment. Industrial exports are likely to decline in the second half of the year as economic conditions in South East Asia return to some normalcy, with the likely fall in tea prices and a drying up of the Russian (C.I.S.) market, the economy may be leading for a considerable slowdown if not a recession.

Quoted companies in the financial sector like the development banks, the merchant banks and even some commercial banks will have to write down the value of their stock market investments. This will mean lower profitability for them. Then there is the so-called wealth effect of stock market investments. When stock prices go up people feel they are richer and spend more lavishly. Conversely when stock prices fall, they feel poorer and cut down on their consumption, setting in motion a contraction in incomes for those who would have sold to them. The introduction of the General Sales Tax is another contractionary factor on the macro economic scenario.

Inadequate Market Reforms
The failure of the Russian economy is blamed on the policy-makers not carrying out market reforms speedily, the basic rationale for economic reform is to level the playing field for more honest and more productive enterprises to emerge and carry on their business successfully. In the last analysis the ability of a people to develop rests upon its ability to increase production through hard honest work. The will to learn new methods, and to engage in hard work is intimately connected with the faith that the rewards of such efforts will accrue to them. We have obviously failed to establish such a framework for honest businessmen to emerge. Corruption is galore. We hear stories of rags to riches of arms dealers and cronies of politicians. Even when they are caught by the customs for violating the law, they are allowed to carry on regardless. Ministers obtain favours from businessmen, blatant acts of dishonesty and they take cover under technicalities or put out the ridiculous defence that the previous political rascals did worse. Are there no standards, no permanent moral values. Are politicians not bound to observe the basic moral values of honesty and truth.

Just because one set of politicians disregarded moral values in the conduct of the business of the state, does it mean all politicians are to be free to be dishonest and corrupt for the future as well. Doesn't this imply that only a violent revolution rather than reform is the solution. Ofcourse all revolutions which proclaimed high principles have invariably been betrayed. But new revolutionaries always think they will be different.

There has been very little economic reform which has levelled the playing field for honest enterprise. The businessmen who borrowed large amounts from the two state banks have still not paid back. There has been a fraud in the Bank of Ceylon which has apparently been going on for ten years, according to a press report. It is further evidence that the state banks are not going to play any significant role in promoting honest business enterprise. In fact with the switch over to I.T. oriented banking such frauds are likely to increase and be less detectable, given the poor quality of management and lack of supervision. The state banks recently signed a Memorandum with the government which promised commercial autonomy. But it is doubtful whether such promises will be honoured.

Ever since 1956, the year when the divorce between politics and ethics began and politicians decided that no moral principles will guide them in statecraft, ministers of all governments have treated state corporations as their private property to be milked by them. They park their stooges as directors and then get them to do their bidding. These lackeys oblige them at the expense of public funds. Excess staff drawn from the Minister's kinsmen or his party supporters are put on their payrolls, never mind if there is work for them or not and even if there is work to be done, whether they are capable of doing such work. The morale of the staff is then shattered by promoting such political favourites over the heads of long serving employees who have worked with any dedication. The political stooges then set about milking these corporations. The staff, the vehicles, the holiday homes and other assets of these corporations are used by the minister for his private benefit or his political party interests. So the promises of autonomy for the state banks is hardly credible. Good intentions are only to be announced not translated into practice.

But even if autonomy is conceded can a set of officials who owe their appointments and promotions to politicians even act with independence. We saw how the retiring I.G.P. was censured twice by the Supreme Court. In colonial days he would have been sent home. In post Independence Sri Lanka such censures qualify for extensions of service if not promotion as in the case of a D.I.G. under the former U.N.P. regime. Honest and independent action by officials requires moral courage. Such values cannot be ensured by institutional safeguards alone. Men of integrity are hard to find as the Greek philosopher Diogenes who went round the city with a lamp, noted. From a broader macro economic view, the banking sector could face even greater trouble from the mismatch between short term liabilities and long term assets. This mismatch makes banks and financial intermediaries valnerable to panic. The exposure and risk are greater for the private banks since there is no guarantee of their deposits by the government. But large scale frauds can undermine the confidence of those who do business with such banks. Some time ago it was reported that money had been withdrawn or embezzled through an ATM card of the chairman of a private bank.

Political Instability
The interaction between politics and economics is a subject largely ignored in both political science and economics. The classical economists called economies, political economy, realising that the two could not be compartmentalised. Anyway, political factors affect the economy and economic factors in turn affect politics. It is in the face of a bleak economic future that the government has decided to postpone the provincial council elections indifinitely. There are those who would argue that this is no greet loss since these councils are unnecessary and cost too much. But the government cannot take this view since it offers devolution of power as the solution to the problems of the Tamil ethnic minority. The ostensible reason for the postponement of elections is the war situation in the north which precludes the withdrawal of army personnel to provide security for the elections. But the franchise is a fundamental right which a political party cannot tamper with. No parallel can drawn with the postponement of elections in Wartime Britain. That decision was taken by the national government and not by a single party government. Further the situation in Wartime Britain was different with bombs being hurled on London and the government itself being under-ground as it were the need for deployment of armed forces for the elections arises only because of the violence perpetrated by the politicians themselves. If the police were allowed to function independently such violence could be considerably reduced. Will foreign investors or tourists be attracted to a violent society as we have today where the government has failed to maintain law and order. Businessmen are killed or robbed. The planters in the southern province have been reported as complaining about the lawless state of the estate sector in the south.

The police and the public service have collapsed although the government doesn't seem to notice it. The officials in the ranks of management do not carry out their duties of supervision and getting work out of their subordinates. They dodge responsibility. Whatever excuses they give for their failure to supervise and manage; such as political interference, they have to be held accountable. The ministers who are now all powerful should dismiss officials who cannot or do not manage their departments and agencies. It is upto the ministers to see that the departments under them perform well. If their departments are inefficient, if their officials are indifferent or lethargic, if the subordinate staff are rude to the public, it is the duty of the ministers to take corrective action. If they are unable to do so, they should remove themselves or be removed. Good governance is their responsibility primarily.

Some would interprit the indefinite postponement of the Provincial Council elections as the reaction of a government under siege for its incompetence and corruption, being afraid to face the people. The truth is that after Dudley Senanayake no political leader has shown respect for the democratic values or fundamental freedoms. The United Front Government of 1970 continued beyond their legitimate term and so did the UNP under President J. R. Jayewardene. President Premadasa was despotic in his governance. The provincial councils are a check on the exercise of power by the central government particularly where such council is controlled by the opposition UNP. Our political leaders don't like checks and balances on power. The dissolution of these councils removes a check on the excessive power of the Executive Presidency. The economic turmoil on the horizon will make the task of governance increasingly difficult. Violence will worsen, strikes will proliferate and security tensions will be heightened. The temptation will be to resort to extra-legal force since the courts are upholding fundamental freedoms and human rights. Journalists including editors have been terrorised by armed gangs. President Premadasa resorted to such tactics to enforce his will on all and sundry. Democracy and human freedom were saved not only by Lalith Athulathmudali's heroic resistance to his despotic ways, but by the assassin's bullet. The main opposition party the UNP has an even more tarnished reputation for corruption and failure to uphold democracy. Many people shrug their shoulders and say corruption and violence of politics runs so deep that there is no hope. The leader of the UNP has not succeeded in cleaning up his party. Corrupt ministers of yester year still dominate the party. Criminal elements still play a role.

The abolition of the provincial council; for indefinite postponement is tantamount to abolition, will only play into the hands of the JVP. They will be forced to resort to violence to counter the violence unleashed on the opposition by private gangs. Their new found faith in the democratic process may well evaporate in the face of such attacks. The youth constitute a substantial percentage of the population and the electorate and they can be easily disillusioned with the democratic process as practised by both the mainstream political parties. The JVP may not present a serious threat to the government at present. But with the recurrent failure of the two mainstream political parties to uphold democratic values, the argument that the country needs an entirely new political system and that it requires a violent revolution, is strengthened.

The Tamil terrorists will be ever willing to sell arms. Perhaps there are sufficient arms already available from leakages from the armed forces through the deserters. Those who oppose the government are likely to resort to street demonstrations, strikes and other violent actions if they begin to believe that the government does not respect democratic values. A politically bankrupt government fearing the future with the looming economic collapse, will slide down the gadarene slope. The crisis in Russia is at bottom a crisis of leadership. In U.S.A. President Clinton has many woes but nobody doubts the political stability of the US government. But in the Philippines which elected a flamboyant actor as President, the markets have lost confidence. Is the crisis in our country at bottom a crisis in political leadership.