by Analyst
The Governor of the Central Bank has said that the Russian economic crisis will be resolved soon and that there was no cause to panic.

Russia is undoubtedly a country rich in national resources with oil and gas etc. available for export. A financial crisis in Russia will not necessarily mean the collapse of the Russian economy. The west will no doubt assist Russia to recover if their leaders carry out essential economic reforms.

The logical implication for us is that we should not sacrifice our tea exports to that country, built up over many years by taking a myopic view of the crisis. The rouble has been devalued and Russia is temporarily unable to honour dollar payment. What is required is to ensure that our exports are kept going.

It is not the fault of our exporters if they are unable to obtain payment in dollars. But they should be able to obtain payment in roubles. The Russian importers of our tea will have to surrender many more roubles if they are to honour their contracts in dollar terms. But they should be able to pay the roubles.

The exporters and their banks are no doubt facing a major loss.

The government must step in to resolve the crisis and at least ensure that credit for further exports is not halted.

The banks would naturally be reluctant to extend further credit to the local exporters until they receive the dues from the Russian importers against the outstanding bills. The banks will have to be re-assured by the government, at least, in respect of the rupee value of the cost of tea.

The government will have to step in to ensure that future export proceeds will be received in foreign currency - the US dollar. We cannot afford to lose a market which absorbs nearly 30% of our total exports.

These days the world economy is slowing down. The Economist of London in a recent issue has quoted what Keynes said in 1931 "We are today in the middle of the greatest economic catastrophe of the modern world". Japan and most of East and South East Asia is in recession. GDP is expected to fall by as much as 15% in Indonesia and by 6-7% in South Korea and Thailand. Even some developed economies like Britain and Canada are slowing.

The world economy which grew at an average of 4% in 1996 and 1997 is not expected to grow at more than 1.5% this year. If America dips into recession, world output could decline next year for the first time in 60 years.

Commodity prices have fallen. This of course is no bad thing entirely since it has cheapened our imports of oil, flour, sugar etc: The Economist's commodity Price Index has fallen by 30% since mid-1997, its lowest in real terms for 25 years.

Our exports of commodities like tea, rubber and coconut will not recover until the world economy grows again at a reasonable rate. Industrial commodities have also fallen in price, threatening our industrial exports like garments. The garment industry is increasingly apprehensive as the big buyers in USA and Europe turn to cheaper sources. Quota items of garment exports may hold but their margins may be squeezed by the foreign buyers.

The government must involve itself actively to tackle the Russian crisis. Have the Russian buyers defaulted on their debts? Since the World Bank, USA and the European Union are bound to keep Russia afloat, Russia need not default on its debts - a moratorium perhaps but not an outright default.

In any case as a poor developing country the government must take up the issue with the Russian government and ensure the continuance of the tea exports to Russia. Our voluble Minister of Trade should take the initiative.

He has rightly come under fire for allowing the CWE to import onions and potatoes on the eve of the local harvests. All countries that have developed have given priority to the interests of the producers over that of consumers. We cannot afford to follow any different policy.

Exchange Control
Several governments in South East Asia have become disillusioned with the policy prescriptions of the IMF. Its policies now seem to have been too contractionary. Its insistence on tight macro-economic policies and the restructure of banks and corporates have led to mass unemployment. The free fall of their currencies has caused inflations and the recovery of the affected economies has not taken place.

Several governments have tended to agree with the Malaysian Prime Minister that large speculative movements brought down their currencies. These currency speculators have made enormous capital gains. So the Malaysian government has introduced exchange control on capital movements and given up capital account convertibility of the Malaysian currency.

The Hongkong government too has intervened in the currency and stock markets. The trend seems to be for the Central Banks of these countries to determine their exchange rates without leaving them to be determined by the market.

But government determined exchange rates have been tried before. The invariable tendency is for the government to maintain the rate ignoring the inflation in the economy. Soon the exchange rate becomes overvalued and a black market emerges. Governments try to maintain internal stability and balance of payments deficits emerge.

The smarter governments engage in competitive devaluation or depreciation in order to maintain or improve their export earnings and with it full employment in their countries while exporting deflation to other countries. This policy was practised by the industrial countries in the 1930s and was called 'beggar my neighbour' policies.

To counter such policies in export countries, other countries resorted to protectionism. Will the world retreat towards protectionism? Well known Economists like Paul Krugmann are now arguing for capital controls to enable the governments to reduce their interest rates with a view to reviving economic growth.

Our own Central Bank has rightly pursued low interest rate policies, although the bad debt hangover of the two state banks prevents them from extending credit as liberally as they should.

In the months ahead, our exporters will face very stiff competition and our exports, both commodity exports as well as industrial exports will suffer. Foreign buying houses are increasingly turning to cheaper sources like Bangladesh. Other countries in South East Asia can afford to cut their prices.

What is significant about our industrial exports is that these industries employ a large labour force. Any reduction in world demand for our exports will lead to unemployment among the workers in this industry.

The Central Bank is pleased that inflation is slowing down. This is no doubt desirable. But will it be accompanied by a downturn in the economy? Public finances will worsen as war expenditure keeps on climbing. Demands for wage increases by public servants will swell the budget deficit and the government will be hard put to bring down the deficit.

With elections expected there is likely to be the usual spending spree by the government which will worsen public finances. Monetary policy is loose and the Central Bank has reduced the interest rate on repos. But loose monetary policy alone cannot bring about higher investment and growth as the South East Asian countries and Japan are finding out.

The Central bank has revised downwards its projection of the growth rate for this year. Government revenue will suffer from a slowdown of the economy. The government will also find it increasingly difficult to borrow from the public although the banks being flushed with money and not having credit worthy borrowers to lend to, will prefer to put their money with the government.

The slowdown in the economy will mean lower imports, which although bad for growth is good for the Balance of Payments. With the reversal of the capital inflows of the last few years, the current account of the Balance of Payments will improve.

But public finances cannot improve unless the structural problems of the budget are attended to. There is the excessive and mounting cost of pensions and the unproductive expenditures on politically motivated welfare schemes like Samurdhi. The public service is overstaffed. Recruitment goes on in the over-manned state corporations like the Port Authority and the Petroleum Corporation.

The perks of politicians at all levels of government are excessive and are also abused. Staff numbers in the public sector must be cut down and the government departments and agencies must be better managed. Discipline in the public service must be restored and the top officials must be held accountable for the failures of their departments.

They cannot always make excuses such as the political interference. They must take responsibility. Those who cannot run their departments efficiently must be fired. There must be greater transparency in government.

The break-down of law and order must be stopped. Democracy and human rights must be respected by the government. No government with a bad record on such rights can hope to attract foreign investment.

The record of the United National Party on democracy, human rights and corruption was infinitely worse. But it's is no justification for the government to emulate. A government which violates fundamental fairness in the treatment of its own nationals, cannot expect foreign investment.

Democracy, human rights, the rule of law, the speedy enforcement of contracts are the essential features of an environment that promotes investment, both local and foreign.

Economic conditions could worsen by next year although the commodity prices downturn has led to favourable prices for our imports of wheat, oil and sugar. The Goods and services takes away 12.5% of personal disposable incomes. Since the tax has been shifted on to the consumers, contrary to the expectations of the government, the trend may also emerge where businessmen may prefer to buy goods from those who are not liaable to pay GST.

This trend may worsen the structural weakness in our economy where there is imperfect competition rather than perfect competition. Workers can no longer be fobbed off by putting the blame for their economic hardships on the World Market where prices have tumbled.

While the world moves into recession our economy may move to stagflation. - Stagnation with inflation however modest. However modest the rate of inflation, it still means that prices will continue to rise not be static or come down. If there were to be 10% inflation, then prices will go up by 10% by the end of the period, while incomes stay put.

Bus Fares
The private bus operators want to raise bus fares by 15%. They have a case since inflation is 10% and the last bus fare increase was 3 years ago and GST of 12.5% has also been introduced. Bus fares cannot be constant when there is inflation and tax increases.

What is not justifiable however is the protection of routes given to bus operators. Since the majority of private bus operators are single bus owners, why not permit some excess capacity at least on the populous routes?

People come to the city because it offers better economic prospects. If bus fares are subsidised and do not reflect the economic costs, then travel is promoted, adding to congestion. A lot of the journeys to the city involve taking kids to schools and back home. These trips should not exist if the area rule for school admission is followed.

Cheapening bus transport increases the trend to unnecessary trips and affects adversely the development of suburbs where people could do their shopping in the neighbourhood and send the children to neighbourhood schools..

Good Governance
As for the public finances, the government should cut down unproductive expenditure - especially on its own sumptuous perks and those provided to politicians. Its time to assess critically the work done by the politicians to determine whether the public is getting value for money.

The Ombudsman is expected to inquire into the complaints of the public regarding injustices caused by the bureaucracy. His report is tabled in Parliament. Has there ever been a debate on the report of the Ombudsman which highlights the injustices suffered by the public at the hands of the bureaucracy?

The President has berated the bureaucracy for its lethargy and insensitivity. Won't the Ombudsman's report provide a good basis for studying the faults of the bureaucracy?

The government is carrying our a similar exercise through the so-called Presidential People's Serve, which undoubtedly costs a lot. Shouldn't the Ombudsman be provided with greater resources to enable him to look into the grievances of the people on a more systematic basis?

The present government is perhaps the most incompetent we have had since Independence. Previous SLFP governments had that dynamic leader, Felix Dias Bandaranaike who could not only handle any crisis but who was able to manage the bureaucracy and force the public service to implement the decisions of the government. Most of the present ministers are weaklings in administration unable to push their decisions through a lethargic and indifferent bureaucracy.

The new IGP who has been promoted over the heads of several seniors, denies that political interference with the police functions is a problem. He owes his own appointment to political patronage. He should be aware of now Police Inspectors who raided illicit distilleries were transferred out at the instance of politicians, how the police look the other way when meetings of the Opposition are stoned, of how journalists who criticised the government have been shot at and the police are unable to detect the criminals. No political interference with the police. What humbug!

Despite the general malaise, the people are not enthusiastic about the Opposition, because their record in office on corruption, human rights, democracy was infinitely worse. The same gallery of rogues who held office in 1977-94 period, still are the front rankers, the shadow cabinet that repels rather than attracts - including the ones that looted foreign aid and imported buses at highly inflated prices.

Is there any hope of good governance? Is it a mere accident of history that democracy and development took place in the West and not in the East? The Judeo - Christian ethical values are the basic condition for both to emerge. But other religions have similar values although not the same world outlook.

The mission to improve the world, to establish a new heaven on earth, a belief in the future are as important to democracy and development.

If there is one lesson to be learnt from the crisis in South East Asia, it is that it is necessary to create an honest business environment and to separate business from politics. Cronyism has been blamed for much of the trouble at the bottom. In spite of the President's call for reform and transparency, cronyism still flourishes.

The two state banks do much to finance business cronies of the ruling politicians and if they are to continue in the public sector they should be required to conform to the disclosure requirements of the Stock Exchange by turning them into quoted companies. This will at least ensure greater transparency.

The second lesson to be drawn from the South East Asian crisis is that governments should not spend on lavish extravagant projects which eventually turn out to be white elephants. This applies to the private sector as well.

The bankrupt golf parks in Thailand, the empty shopping malls in Kuala Lumpur and Hongkong bear testimony to the social waste that the companies engaged in, because money was easy to obtain. There cannot be oases of wealth in the midst of widespread poverty.