Ranil-Sirisena V2025 economic vision

Social vs Socialist Market Economy

The meanderings of a haphazard and unplanned economy

(Source: Colombo Page October 2016)

by Kumar David-October 21, 2017

The Governments Vision 2025 document is titled a Dynamic Social Market

Economy (plus sexy adjectives Knowledge-Based and Highly-Competitive added
for good measure) in addition there are three subtitles; A Country Enriched; Hub
of the Indian Ocean; A Modern Dynamic Economy. If wishes had wings, pigs
would fly. But no more uncharitable comments, this essay will be measured and
meticulous.

Socialist Market Economy is how post-Deng China describes itself. The word
Socialist is chosen to appease tens of millions of Communist Party cadres. The
Ranil-Sirisena duumvirate chose Social so as not to annoy much sought after
foreign investors, pacify domestic business lobbies and mollify the liberal
middleclass. No harm is done, words are not that important; my task is to
apprise V2025 and reflect on how likely it is to succeed.

I have studied the Chinese economy for two decades rather intensively from
1997-2000 when I had to prepare a lengthy paper. For want of a better term I
employed the appellation state-capitalism; but this is misleading. It denotes
capitalism (the principal noun) with meek adjectival state influence. State-
capitalism does indeed describe features of the early Singaporean and Korean
experiences, and fits fascist Italy, Germany and Peronist Argentina to a tee. In
China, however, the Party-State leads, capitalism and the capitalist class are
subordinate.

Chinese economic architecture has six cardinal features.

* Management and decision making is dominated by the Party-State

* Power is monopolised by the Party which dictates to Central and Provincial

governments.

* Basic factors - land, banks, finance, energy, mining and large industry are state
owned.
* Village land is de-facto peasant owned but nominally administered by
county/village entities.

* A dynamic, technically vibrant, capitalist sector drives growth and dominates

exports.

* Rich and super-rich classes devour economic riches but want of political
power.

Paradise Island

This introduction was necessary to make the point that though labels Socialist
and Social sound similar, the Chinese economy and the vision in V2025 are
dichotomous. A Social Market is defined in V2025 as an efficiently functioning
market plus social welfare for the "vulnerable". Leave aside whether you think
that good or bad, the two models are different. I will next summarise V2025;
what the text says, challenges to implementation, and credibility of the vision.

V2025 is a vision-driven manifesto; it is not an implementation plan. We have

had no discourse on economic perspective for 30 years, hence the document
will initiate dialogue at three levels: (a) priorities and perspectives, (b) are
targets realistic and achievable within proposed time-frames, and (c) what
about the fundamental outlook. In the next subsection I will deal with (a) and
(b) in the subsequent one. Readers who have done me the kindness of perusing
my pieces will be prepared for differences on (c). I will reserve that for the
closing paragraphs.
Perceived as a vision document initiating discussion of development
perspectives, the drafters have to be congratulated for coverage. They have
enumerated and broadly grouped Lankas economic concerns. True, you will
find all the issues touched on explored someplace in a thesis or study, reported
in some NGO or IMF publication, or discussed at a conference or seminar. What
makes V2025 useful, at least as a study tool, is that it has brought them
together into a single short report and assembled them in categories. V2025
does not advocate concrete plans for taking forward the vision, but it contains
many topics useful for PhD study there, there, the stupid academic in me is
getting the upper hand.

In order to give readers who do not have the patience to read through the
document a flavour of its scope, let me enumerate some important chapter
titles.

* Constraints on growth (Chapter 2)

* Strengthening the macroeconomic framework (Chapter 5)

* Growth framework (Chapter 6)

* Land, labour and capital markets (Chapter 7)

* Social infrastructure (Chapter 8)

* Technology and digitisation (Chapter 9)

* Agriculture and sustainable development (Chapter 10)

This is only half the story; there are seven more chapters on delivery,
governance, coordination, a social safety-net, an introductory chapter on vision
and a conclusion. To delve a little deeper allow me to list the bullet points
defining Chapter 5 on the Macro-economy: Fiscal consolidation, fiscal reforms,
rationalised expenditure, reducing debt to 70% of GDP, prioritising capital
expenditure, ensuring price stability and sanctioning market driven exchange
rates.

A similar deconstruction of Chapter 6 on Growth reads: Ease of doing business,

investment policy predictability, encouraging private-public partnerships,
integrating small and medium enterprises into the formal sector, simplifying
and clarifying trade policy, expanding use of Free Trade Agreements,
encouraging and diversifying exports and emphasising service sectors. Tourism
gets considerable mention. Making Lanka a global and an Indian Ocean logistical
hub gets a bullet point. I was surprised it did not get a whole chapter as it is a
subtitle of the main document. The elephant that was absent was coverage of
industrialisation and industrial policy the opposite of Modi next door.

The Chapter on Technology and Digital advances was a disappointment. It starts

by flaunting the term "disruptive innovation technologies" a term fashionable
with business types for artificial intelligence, data mining and business
computer applications. Palpably, the chapter is not the handiwork technologists
but of business people familiar with computer applications in business. The
chapter title is Technology but there is no reference to energy*, power*,
industry, or productivity enhancement except via ICT (Information &
Communication Technology). *Power and energy are mentioned in Chapter 11
under Sustainable Development.

Time Compression
I have difficulty in believing that the drafters intended their target dates to be
taken seriously. To raise per capita GDP from the current $4,000 per annum to
$5,000 by 2020 (2.5 years; start 2018 to mid-2020)) requires an annual growth
rate of 9.3%, assuming constant population. Currently growth is running below
5% and Central Bank Governor Coomaraswamy told a Madras Hindu reporter:
"We want growth to be close to 6%, if possible. This year it is between 4 and
4.5. There is a temptation for people to try to accelerate growth through
unsustainable macro-economic policy". He was demurely hinting at the
Rajapaksa governments antics with the Chinese credit driven splurge which
induced a brief high, trailed by a painful debt overhang. To put it bluntly; an
annual growth rate of 9.3% in the immediate years ahead is pie in the sky.

To become a "rich country" by 2025, as promised, begs the question what is

rich? The lowest per capita income in all of rich-Asia, that is omitting Japan,
Singapore and Hong Kong, is Taiwans $24,000; surely this is no realistic target.
Or are we looking at Turkey, Argentina and Hungary? Today (2016) the average
of these three is $11,850. But to rise from an optimistic per capita $5k in 2020 to
$12k at end 2025 (constant 2016 dollars), that is a full six years, calls for an
average growth rate of 15.7%! A glacial improvement in growth rates is credible
but the authors of V2025 are gazing at the stratosphere!

We have no choice but to discard stargazing and settle for growth (net of
population change) of 6% for two years up to 2020. Then if all goes well lets
hope for 8% for the next six years though thats ambitious. Then nominal GDP
per capita in constant 2016 dollars will rise from $4,000 in 2017 to $4,490 in
2020 and reach $7,125 in 2025. This will make us, in 2025, about as wealthy per
capita as a poorer Eastern European country, say Bulgaria, today.

I have spent time on growth to make a point. The same decompression has to
be done for other targets; employment, expansion of exports and foreign
investment. V2025 envisages one million new jobs (not unreasonable; the
document says 430,000 have been created since 2015); expansion of exports
from todays unimpressive $10 billion to $20 billion; and FDI of $ 5 billion by
2020 from its base of less than $1billion in 2016 and 2017 (projected). There is
no point asking questions like "how are you going to achieve this?" in the face
of so much irrationality. Mind you, this doubter prefers the yahapalana lot to
the vile Joint Opposition and he aligned with the Jan 8 Movement to overthrow
the Rajapaksa presidency.

The doable alternative

V2025 is a vision not a plan. Thats ok; you must have a vision (preferably with
realistic targets) before planning execution and organisation. I would like to
believe that data gathering, implementation studies and organisational
structures, backup the V2025 vision. It would be uncharitable to say this
background does not exist; but I am not aware of it. What I do know is that
there is no national planning agency and no units empowered to drive
implementation.

My deeper critique is that V2025 is located on the wobbly terrain. Its

unvarnished expectation is that the private sector will deliver and that
entrepreneurship, not the directive role of the state, will be the determinant.
("Private investment will be the key driver of growth in Sri Lanka,
complemented by increased inflows of FDI" Ch. 6. "We will (provide an)
incentive regime for private investment led growth" Ch.4). The government
is to implement tax and labour reforms and create a conducive environment for
domestic capital and foreign investors, who are envisioned to take the ball and
run. Now leave aside ideology; I will back off if this is likely to work. But the
lesson of decades is that this is a dead end. Even in the last three yahapalana
years domestic capital has been impotent. Meanwhile the IMF "finds no
evidence that making the rich pay more tax leads to lower growth" IMF half
yearly Fiscal Monitor, Oct 2017. Need I say more?
The success stories of recent decades are when government led by directing and
intervening, in albeit capitalist development vide early Korea and early
Singapore. Then non-capitalist Vietnam, Central Asian ex-Soviet -stans, and
recently a few East African countries. V2025 contains too much hangover from
JR; it does not boldly break free of the umbilical cord. The January 8
Government did restore democracy, but in the economic arena it has been
unsuccessful.

Nevertheless I do not wish to conclude on a sour note because as a vision,

though not a plan, the document has virtues. An outward-looking approach,
knowledge-based activities, capital market management, preventive health
care, youth empowerment, transport systems planning, sustainable
development, these are attractive keywords.

After the intellectual sterility of Rajapaksa desertification and decades of toxic

neo-liberalism V2025 is a stimulating upgrade. Next should come concrete
planning, building organisations and the cardinal requirement, directive
intervention.
Posted by Thavam