by Analyst
Economists argue for reform in order to make the economy competitive - to break the monopolies, to level the playing field so that honest business enterprise can succeed.

One has only to read the Annual Reports of the Chairman of Singer to understand how honest business enterprise suffers through the dishonest activities of their competitors. The corruption in the Customs means that the unscrupulous either do not pay customs duties or pay much less than they should.

A well-known businessman was caught falsifying invoices on his imports. The matter seems to have been quietly dropped. The duty free concession is abused and another importer and manufacturer of refrigerators was caught by the Customs. A large manufacturer of poultry food was caught by the Customs abusing the duty free concession.

For each such detection by the Customs there must be at least ten such violations which go undetected. The duty free allowances given to those who return after a long stay abroad is abused. Traders send carriers abroad to bring in goods without paying duties. So the honest business enterprises suffer. We have an economy in which honesty does not pay.

Corruption in tender procedures is galore. New ways of limiting competition are daily being formulated. The line item tender is the usual form in tenders enabling a tenderer to quote for one or two items out of a list of items.

Recently the NIBM called for a tender from computer suppliers which required quotations not only for computers but for audio visual equipment and for furniture as well. No computer supplier is in these businesses. So they have to join up with the furniture suppliers if they are to tender for all items. This will limit the number of tenderers and thereby competition.

A state owned Bank has called for tenders to supply computers and fixed an extra ordinarily large sum of Rs. 500,000 as a bid bond requirement which is far above the 2-3% of the value of the tender that is the normal practice.

Then there are allegations of purchases for defence without any tenders being called at all.

Many businessmen don't pay income tax. Fudging accounts is done with the blessings of auditors. Loans are taken from the state banks without any intention of repaying them.

Adam Smith when he argued that men should be allowed to seek their self-interest which would promote the collective interests of the consumer, did not envisage that businessmen should cheat or deceive the consumer. He assumed that they would practise honesty in business dealings.

In fact business deals required trust on the part of the two parties to a transaction. Economists who argue for free enterprise and open markets do not suggest doing away with ethical values such as honesty. Ethical values such as honesty and truth must govern all human activities, be it business or politics.

The positive side of the market economy is not the ability to buy goods without standing in a queue. Rather, it is the freedom to decide on a host of individual activities such as freedom to chose one's occupation, the free choice of what to buy or sell, the freedom for the producer to decide what price to charge for his produce - in short the fullest extent of liberty in ordinary economic activities.

The catch however is that there must be money to enjoy this liberty. But this is an inherent constraint in any economic system. Under socialism it is only those who exercise political and bureaucratic power who enjoy the good things of life.

We have seen how during the 1970-77 era the politicians and bureaucrats obtain the goods in shortage without standing in queues like the hoi polloi Rules didn't apply to them and they did not have to take their turn in queues.

On the other hand, in a free market economy rules and regulations must be enlightened one's which understand the workings of a market economy. It is pointless blaming the open economy when businessmen racket or exploit loopholes.

An economy with a weak and corrupt customs administration cannot possibly permit loopholes like duty free allowances and duty free imports side by side with dutiable goods. If there is a loophole to be exploited by businessmen, it will be exploited. Hence the need for enlightened policy with general rules and regulations which give no discretion to government bureaucrats.

Any discretion given will be used corruptly to benefit some and not others. Opportunities for corruption arises when public officials have discretionary power.

As the World Bank study 'The role of a National Integrity System in Fighting Corruption' states - there are two cases; the first where services or contracts are provided 'according to rule'; the second where services or contracts are 'against the rule'.

In the first case an official receives private gain illegally for doing something which he is required by law to do anyway. This is greasing the palm and is practised extensively in the Customs and Port. In the second situation the bribe is paid to obtain services which the official is prohibited from providing like granting contracts which would otherwise not be awarded on its merits.

In the former case people after a time take it for granted not because they approve of it but because they think it is the most workable way to do business. Even semi-government institutions like the CWE fall in line in making such payments in the port.

Freedom and development
Individual freedom, it has been demonstrated in Western societies, unleashes creative forces that best foster economic development. Repression stifles creativity. Those in charge in East Asia and South East Asia who justified their denial of political and civil rights on the ground that they are concentrating on satisfying the economic aspirations of their people, have now failed to deliver either.

The recent collapse of their economies and the prolonged recession have exposed the corruption and cronyisim which to a large extent undermined their economies. The economic achievements of the so-called NICs of yesteryear have evaporated while their suppression of freedoms increase as evidenced by the removal of the Deputy Prime Minister of Malaysia.

Guardian rulers

The case for rulers who are enlightened guardians was first made by Plato. But in almost every case tried out, such rulers have done as much harm as good.

As Alexander Hamilton one of the Founding Fathers of the American constitution, said that if men were angels no government would be necessary. If men were governed by angels there would be no need for checks and balances. But men are not governed by angels and checks and balances are absolutely essential if there is to be good governance. Power certainly corrupts and absolute power corrupts absolutely as we saw in the previous regime.

Democracy is not only for adoption at the level of the nation state or the central government. It must be practised at the grassroots level, in Pradeshiya Sabhas and Provincial Councils. It must also be practised within political parties - there must be internal party democracy and freedom to criticise.

Economic Reform
The purpose of economic reform is to encourage business enterprises to become competitive by stripping away unfair privileges enjoyed by a few and to level the playing field for a competitive economy to emerge.

A competitive economy is one which exports goods and services profitably at world market prices. Just as a firm can become uncompetitive, so can an economy. The depreciations of currencies in South East Asia have made our economy less competitive.

Firms making goods for export find it more difficult to export at a profit while those producing for the home market face stiffer foreign competition.

Prolongation of the war will render our economy less and less competitive if the war is financed by indirect taxation or through the inflation tax. The scope for direct taxation is limited not because people already pay too much but because tax evasion is a national habit and the administration is too weak to make tax evaders pay.

The government has carried out some de-regulation and much privatisation. The main thrust of de-regulation and liberalisation was carried out by the Premadasa regime. He liberalised shipping, did away with exchange control restrictions on exporters, removed the requirement for surrender of exchange earned by exporters to the banks.

The UNP government allowed new entrants into the fields of banking and insurance which had earlier been the monopoly of the state. They liberalised foreign investment. They did not touch the labour laws which gave excessive protection to workers and was a disincentive to the creation of jobs.

The present government has concentrated mainly on privatisation since it needed additional income. The government has not carried forward the process of liberalisation. It has reduced tariffs without putting in place any safeguards for local industry or agriculture to face upto foreign competition.

The government has cut income tax and corporate tax rates. This tax cutting is against the background of massive budget deficits. Privatisation proceeds have been used to finance the deficits without putting in place a credible long term strategy to cut budget deficits. The Laffer curve, an economic theory that says tax cuts can lead to higher tax revenue has not been borne out here.

Administrative Reforms - A failure
The government is still seen by many people as the solution to most economic and social problems. But the politicians and bureaucrats are more the problem than the solution. Although the government set up a Presidential Task Force on Administrative Reform to formulate recommendations, nothing at all has been achieved.

The World Bank wanted the excessive numbers in the public service reduced. So voluntary retirement schemes with compensation were formulated. But this has led to the loss of the more useful public servants both in the upper ranks as well as the bottom grades. The lame ducks, the thieves, the bribe takers have remained.

As for ridding the public service of excess staff, it has been nullified by fresh recruitment. How many retirement schemes were carried out in the CTB and the Ports Authority? Haven't there been fresh recruitment after each such retirement scheme?

As for administrative officials, they have ceased to be politically neutral public servants and have turned themselves into lackeys of the government ministers. Some of them had cultivated the present ministers whilst they were in the opposition and were rewarded by the new administration.

The officials who held important posts in the previous regime were ipso facto marched out to provide room for the new place-seekers. Owing their high posts to the ministers, they can continue to hold them only by being servile to the ministers. Everything they look forward to, be it a promotion, a scholarship, a trip abroad depends on the goodwill of the minister in charge. This situation has bred abject servility to ministers among the higher ranks of the administration. So they aid and abet ministers in their corrupt activities, concealing them from the public and the press as far as possible.

Some fill their own pockets and are not far behind their ministers in resorting to corruption. But outright corruption by bureaucrats is not the main issue. The real problem is that owing to their excessive servility, bureaucrats do not give impartial, objective advice to the ministers. Instead they tailor their advice to the needs or desires of the minister or the president.

Of course those officials who give impartial advice run the risk of antagonising the minister as happened to Mr. B. C. Perera, the former Secretary to the Treasury not so long ago. So officials who want to give honest advice will require high moral courage.

To the majority of honest officials, this is the key issue. The predominant feeling is one of helplessness in the face of orders from a minister or a president who can make or break a career. The big difference between here and Britain is that there the minister cannot order your transfer or punish you otherwise. Transfers and disciplinary action are both left to the Civil Service Commission, an independent body not obliged to the minister or the incoming government. This provides strength and enables the public servant to stand upto politicians.

The failure of ministers to obtain impartial objective advice is a serious matter for the public. Ministers are selected for appointment owing to their seniority in the party and their political clout; not for their competence in administration or intellectual capacity for policy making. So both policy making and administration suffer without correct objective advice.

The President has blamed the public service on several occasions. But she should hold the ministers responsible for administrative failures. A competent minister should be able to get things done through the Heads of Departments in his Ministry. As it is, he has the power to remove lethargic and errant heads of departments. He should exercise his power.

Administrative structures are hierarchical and there is a pecking order. If the minister holds his top officials accountable, they in turn will control, supervise and hold their subordinates accountable. As it is, there is no accountability of any public servant to any superior offices.

The decline in standards of political conduct has brought a parallel decline in the standards of public servants. Few officials want to annoy politicians and prefer to sacrifice their principles instead. Public officials have been beaten up and threatened by politicians and the police have looked the other way.

The police prosecute only those who are supporters of the opposition party. The police force has become the strong arm of the ruling political party. This situation has made a mockery of the rule of law and led to the breakdown of law and order. Rival political parties resort to their own force of thugs and criminals. Force is no longer the monopoly of the state to be used to maintain the rule of law.

Make Honesty Pay
Western societies have developed mainly because their political and economic environment is such that it pays for people to be honest rather than dishonest. It is the exact opposite in our society. Our political institutions, laws and practices do not promote either justice or the rule of law.

We believe in maxims like that nobody should be a judge in his own cause and that justice must not only be done but must be seen to be done. But a Minister of Justice, a professor of law to boot says it is up to the individual to decide for himself whether he should follow such maxims or not, maxims designed to benefit the society.

Manicur Olson, the Swedish sociologist, is a leading analyst of the weakness of democratic governments. He sees that the centuries long pattern of economic growth in Europe as intimately linked to the earlier development of democracy and fundamental freedoms.

After the revolution of 1688 in Britain rights to property were more secure with a limited monarchy and an independent judiciary, than anywhere else. Britain not long after was where the Industrial Revolution began. In the same spirit, other work has discovered a strong correlation between absolutist rule and economic stagnation in Europe's cities over the seven centuries to 1800.

All this may seem remote from the issues of political and economic reform that now confront us and other developing countries. It is not. The claim that authoritarian government works best for development was based on evidence from the so-called NICs of East Asia and South East Asia over a comparatively short period of time in the post war era.

But these economies have collapsed before our very eyes. The East Asian miracle is over Accordingly to Paul Krugmann there was in fact no miacle at all. Malaysia, Singapore, Hong Kong, Taiwan were authoritarian. Whatever facade of democracy they had seems to be disappearing as in Malaysia where the Deputy Prime Minister Anwar Ibrahim has been sacked.

We have had a facade of democracy since the 1970s. Elections have been held but every government after 1970 has sought to extend its term of office undemocratically. The rule of law does not operate. Human rights are violated. Fundamental freedoms are denied to the opposition. Criticism of the president is not allowed in parliament unlike in Britain or USA. The president is above the law, unlike any other democratic country. Can you imagine an America where criticism of the president is barred in Congress or where the president is not attacked in the press and the media? But in Sri Lanka criticism of the government and its policies is frowned upon and the journalists indulging in such actions are attacked by thugs in uniforms. The police can't trace the culprits.

Ministers defend conflict of interest situations where they enjoy hospitality, as mere technicalities. MPs violate every perk and privilege they are given. They misuse the free postal facility, free telephones, duty free vehicles imported purportedly for their use which are surreptitiously sold.

There is said to be a code of conduct for ministers which the previous presidents never enforced on his errant ministers. Ministers claim they are not bound by Financial Regulations as they decide on tenders and government contracts by pressurising officials.

In the UK politicians who are corrupt are prosecuted by the police. The Economist of 15/8/98 refers to corruption by local government councillors of the Labour Party in Doncaster, Hull and Birmingham. The police are investigating abuse of expenses by the councillors and the Labour Party Executive have suspended them alleged irregularities in the award of contracts are investigated by the police.

In Australia there is the Independent Commission on corruption which publishes a report tabled in parliament giving the facts and findings of each allegation of corruption. We adopted a similar institution although it included bribery as well. Any reports of our Permanent Commission on Bribery and Corruption don't seem to have been tabled in parliament nor published, both requirements under the law in Australia and perhaps here as well.

Whatever reforms undertaken have failed to produce the environment for honest enterprise in business, the professions and in economic activity generally. It is not an environment for economic development.