Restoring Economic Democracy: Is it

an elusive goal?

President Maithripala Sirisena

Promised delivery of economic democracy to people
Monday, 27 February 2017

One of the pledges made by the present

Government in its election manifesto titled The Five Point Plan for
creating a new country in 60 months has been the delivery of
economic democracy to people. In the preamble to the manifesto,
the party has emphasised that the restoration of the proposed
social market economy is akin to the expansion of the frontiers
of the economy alias delivery of economic democracy to people.
A concept not properly understood

This is a noble pledge, but no one had properly comprehended

what economic democracy meant. Hence, in order to educate the
public as well as the Government party politicians what it meant,
this writer wrote a commentary on economic democracy in a
previous article in this series (available at:
http://www.ft.lk/article/472845/Part-II--Delivering-Economic-
Democracy-will-lead-to-controversy-unless-it-is-defined-properly ).

In a nutshell, economic democracy means that economic choices

are made by people and not by politicians or Government
officials. Hence, what is necessary is to restore a proper
consultation process whenever the Government moves for a new
economic policy or changing an existing economic policy.
Economic democracy means that choices are made by
people

This is what this writer said in the article under reference: If

people are to enjoy economic democracy, they should have the
right to choose economic policies that serve them well. This is
valid irrespective of whether a country is pursuing a free market
economy policy or a planned economy policy. Under any system,
making economic decisions should not be left to politicians or
bureaucrats who are simply interested in promoting their own
self-interest and not the interests of the people. As such, many
large infrastructure projects that have been undertaken to
promote the self-interests of top political leaders or groups of
people associated with such political leaders have ended up in
failure. Many examples could be found in this regard from Sri
Lankas recent economic history.
Consultation with public a must
This calls for introducing suitable mechanisms to have wide
consultations on economic policies that are being implemented by
the government. That applies to micro-level policies as well as to
macro-level policies. In the case of micro-level policies, people
who have a stake in that policy should necessarily be given an
opportunity to express their views on the policy. Once these views
are known, the policy could be abandoned completely if there is
wide public opposition to it or implement it with suitable
modification having taken the public views into consideration. At
macro-level, even the monetary policy being implemented by the
Central Bank should come under this public scrutiny. In the
present circumstances, the Central Bank implements its policies
ex parte without giving a chance for people who are affected by
its policies to express their views on them.
Use civil society organisations and social media for
consultations
But one difficulty that may be encountered in a wide public
consultation is the diversity of views of people and their ability to
make a logical evaluation of Governments economic policies. It
will also be costly and time consuming to have a wide public
consultation. To overcome these problems, two mechanisms could
be suggested. One is to allow civic society organisations to
represent the public. The other is to use the social media to
gauge the views of the public on the policies being proposed.
When the internet penetration becomes universal in the country,
it will not be difficult to seek the views of the people on economic
policies through social media.
Prime Minister Ranil Wickremesinghe
Sri Lanka has fallen to Mostly Unfree category

Thus, economic democracy is nothing but economic freedom.

However, as revealed by the data compiled by the Washington
DC-based Heritage Foundation in its Index of Economic Freedom,
Sri Lanka has been slipping down in the index over the past few
years meaning that its people are becoming less and less free
when it comes to making economic choices.

In the index for 2016 covering the period from mid-2014 to mid-
2015, Sri Lanka had slipped from a Moderately Free economy to a
Mostly Unfree economy, but being placed at the threshold. The
new good governance government that had promised to deliver
economic democracy to people was expected to halt this process
and reverse it. Yet, the index for 2017 that covers the period from
mid-2015 to mid-2016, during which the present Government was
in power, Sri Lanka has further slipped down in the index and has
become a permanent resident in that category. This is not a
development about which the leaders of the present Government
could be happy.

Yearning for merciful dictators

There has been a section in Sri Lankas society which has argued
consistently and resolutely that Sri Lanka should have a merciful
dictator. Such arguments are a public demonstration of the
frustration of people aloud about the deteriorating economic,
social and political conditions.

A dictator, although a one-track man unmindful of and oblivious

to peoples wishes, would usher in a new era to Sri Lanka, they
argue, if he keeps the nations interests above his personal
interests. They quote the example of Singapores Lee Kuan Yew as
a role-model who has proved its success. So, why not create a Sri
Lankan version of a Lee Kuan Yew?
Frustrations have led to love dictators

Interestingly, the first to say so in the recent era was an erudite

Buddhist monk, Rajakeeya Panditha Venerable Henpitagedera
Gnanaseeha Thero, who wrote a book in Sinhala in the late 1960s
under this theme arguing for the need for a benevolent dictator
for the country.

The objective was to deliver prosperity and enable the country to

regain its former glories. The book became an instant bestseller
with many supporting its views, while only a handful had the
courage to oppose them at that time. It would have been sweet
music to the ears of the then politicians because the book
provided the moral and ethical justification for an authoritarian
regime in the event of their choosing to have one under their
control sometime in the future.

Since then, many have subscribed to this view. They have

diagnosed that Sri Lankas economy since independence has
underperformed and the reason for that underperformance is the
laziness of the people. The laziness of people has been attributed
to the democratic freedom which does not compel people to work.
Hence, it is necessary, they argue, that an authoritarian ruler
should force them to work hard.
Authoritarianism does not work in the long run

Such an authoritarian rule based on coercion instead of

motivation can generate higher performance immediately. But it
cannot sustain that high performance over the years. It would be
like the hump of the back of a camel which rises at the beginning
but falls later. That is because, as this writer had argued in a
previous article in this series (available at:
http://www.ft.lk/article/141268/Authoritarian-regime-for-economic-
prosperity--Not-even-a-little-bit-will-work-in-the-long-run),
continued human prosperity depends on continued invention,
innovation and entrepreneurship and they cannot be made
possible unless people enjoy freedom of thought, expression and
action.
Economic freedom brings in prosperity

The Index of Economic Freedom has documented how economic

freedom will help nations to prosper continuously. There is a
positive relationship between economic growth and economic
freedom as such the higher the degree of economic freedom, the
higher the per capita income or PCI, measured in terms of its
purchasing power value where wellbeing is gauged not by the
level of nominal income but by its ability to buy a designated
basket of commodities.

Then, increased PCIs lead to reduce poverty levels and improved

human conditions such as life expectancy, literacy, health,
education and overall quality of life. The compilers of the index
have found that innovation, social progress and environmental
conditions also improve along with the increase in economic
freedom. Accordingly, advancing economic freedom is a
necessary condition for true progress of mankind.
Sen on freedom: A must for development

This has been echoed in broad terms by Nobel Laureate in

economics, Amartya Sen in his 2009 book, The Idea of Justice, as
follows: In assessing our lives, we have reason to be interested
not only in the kind of lives we manage to lead, but also in the
freedom that we actually have to chose between different styles
and ways of living. Indeed, the freedom to determine the nature
of our lives is one of the valued aspects of living that we have
reason to treasure. The recognition that freedom is important can
also broaden the concerns and commitments we have. We could
choose to use our freedom to enhance many objectives that are
not a part of our own lives in a narrow sense (for example, the
preservation of animal species that are threatened with
extinction). This is an important issue in addressing such
questions as the demands of environmental responsibility and of
sustainable development (p 227).
Main categories of economic freedom

The index for 2017 has taken into account 12 different attributes
which enhance the economic freedom of people and they are
broadly categorised in four areas.
Rule of Law (property rights, judicial effectiveness and
Government integrity)

Government size (tax burden, government spending and fiscal

health)

Regulatory efficiency (business freedom, labour freedom and

monetary freedom)

Market openness (trade freedom, investment freedom and

financial freedom)
Countries have been ranked in terms of the above 12 attributes
and marks have been assigned to them, 100 being the best and
zero being the worst. Sri Lankas score table in 2016 (covering the
period from mid-2014 to mid-2015) and 2017 (covering the period
from mid-2015 to mid-2016) has been presented in the table.

It also gives the overall score for each of the years, ranking of the
country from among the countries in the index, categorisation of
the country according to economic freedom and a separate
calculation done by compilers of the index as to the size of the
shadow economy of Sri Lanka in 2006 and 2007 as reported along
with the index for 2016.
Tax burden is not a burden today

Sri Lanka has scored relatively high for tax burden and
Government spending meaning that they at present do not inhibit
peoples freedom. That is because the average tax revenue and
the spending of the Government are very low in terms of GDP at
the present levels of public finances of the country. But this is not
an achievement since this score could reverse when the tax to
GDP ratio and the level of the Government spending are expected
to increase in terms of the policy of the Government.
Poor fiscal health of Sri Lanka

What is really stressful for Sri Lanka is its poor fiscal health in
terms of stubborn budget deficits and growing public debt. Budget
deficits have become the norm of Sri Lankas public finances with
every successive fianc minister resorting to this tactic in order to
maintain the ever increasing public services. Hence, it has to
borrow more in order to service the existing public debt, that is,
repaying principal and paying interest thereon.

Since these obligations are almost equal to the Government

revenue, Sri Lanka has to borrow again and again in order to
avoid having to default its debt obligations. The corollary is the
continuous growth of public debt pushing the country to the wall
from which there is no escape. Thus, it is like something written
on the wall that Sri Lanka has to default its public debt one day
without any further resources at its command to service its debt
obligations. Thus, the index for 2017 has assigned a very low
score to Sri Lanka on this count, namely, 31.2. This should be a
warning to all Sri Lankans about the destiny which is marked for
them in the years to come.
Fighting corruption has been a failure
Sri Lanka has done very badly in its fight against corruption. In
the index for 2016, pertaining to the period from mid-2014 to
mid-2015, Sri Lankas score on this count was very low at 38. The
country was expected to eradicate corruption with the election of
the good governance government to power in early 2015.

However, the index for 2017 covering the period from mid-2015
to mid-2016 shows that its score on account of Government
integrity has fallen to 30, a sad state depicting the waste of the
countrys scarce resources, on one hand, and the plight of the
citizenry at the hand of politicians and bureaucrats, on the other.
Sri Lanka in fact strengthened the institutional arrangements for
fighting corruption in the initial period. Yet, the poor score warns
that those measures have not been effective in attaining their
objectives.
The large shadow economy is a problem

The high size of Sri Lankas shadow economy should be another

frustrating experience for policymakers. When the shadow
economy is high, in Sri Lankas case it is about 42% of the total
economy, the level of corruption is high, while tax revenues are
low. It also reduces the overall welfare of citizenry since income is
distributed in favour of a few people in the country. Thus, the
Government is compelled to introduce costly poor relief schemes
to safeguard the group of people that do not benefit from the
shadow economy. It makes the inclusive growth which the
Government is planning to attain a mockery.
Deteriorating economic freedom is a worry
The country is continuously ranked low in terms of the economic
freedom of its citizens and in the most recent year, it has further
deteriorated. Thus, restoring economic freedom has become
elusive and it should definitely worry the top leaders of the
Government. The implications are that it has adverse impact on
growth, poverty eradication, improvement of environment, human
development and social mobility and development. Hence, if Sri
Lanka is to attain true development, it cannot ignore the
deteriorating state of the economic freedom of its citizens.
(W.A. Wijewardena, a former Deputy Governor of the
Central Bank of Sri Lanka, can be reached at
waw1949@gmail.com)
Posted by Thavam