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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2705

Budget 2008 from a Political Economy Perspective

Professor Laksiri Fernando - University of Colombo

There was a significant statement by President Mahinda Rajapakse which highlighted the political economy approach of the budget 2008. “I invite all to join hands to generate an economic growth in excess of 7.5 percent during 2008,” he said in his budget speech. To my reckoning this is the first time that Finance Minister of Sri Lanka, and in this case the Head of State himself, invited the people of the state or country to join hands to achieve the most significant developmental goal of economic growth. He further said at the end of the speech that “I invite the entire public service to mobilize the working class, the entrepreneurs and the taxpayers to work towards country’s development.”

The cynics might say that the statements are mere rhetoric, couched in political populism. Already some have stated that many of the pronouncements in the budget are not worthy for a budget speech and those could have been made by any minister or in a gazette notification. They terribly miss the point; the significance of politics in economic planning and development.

Sri Lanka is now definitely in the critical threshold of rapid development and what is essentially required is people’s active participation in the developmental process. If this participation or economic mobilization could be achieved, not only the targets of the budget but also the long term objectives of development could be fulfilled.

War and Economy

The target should be to achieve a double digit growth (a 10 per cent and beyond) in a most equitable and even manner possible, and all indications are there to predict that this possibility lies below the surface. The one who highlighted this ‘hidden factor’ during the budget debate, by accident or by purpose, was another Rajapakse, namely Basil. He said that this budget is presented amidst of various challenges.

“The first challenge was the distancing of one part of the country from sovereign rule of the Government.” This implies in my argument the excessive defense spending that has been required which could have been possibly utilized for development investment, if that challenge was not there.

As he further said, “The other challenge was that one part of the country was away from the development process. Those areas especially the sea areas were not accessible for development.” He highlighted the fishing industry. There were many more industries and cultivation sectors that were not only inaccessible but completely destroyed by the war in the North and the East.

A double digit growth is normally considered the indicator or impetus for an ‘economic takeoff’ in a developing economy. What has denied this impetus for Sri Lanka largely is the separatist war waged by the LTTE. There can hardly be any doubt about it while the way the war is perceived is different from one approach to the other. The war is not something that can easily be ignored in a political economy approach to the budget and the long term development of the country. The budget has thus increased the defense spending by nearly 20 percent or 28 billion rupees. It was 139 billion in 2007 and it would be around 167 billion in 2008.

This could be considered as a ‘new investment’ to bring back the North and the East to the development process. If the potential economic contribution of these two provinces could be considered in the range of at least 2 percent growth, then Sri Lanka would definitely be in the two digit growth path very soon. Sri Lanka has commendably sustained an average of 7 per cent growth in the last two years. If the war is over, the contribution of the rest of the country would undoubtedly increase by at least 1 per cent in the immediate future.

Defeating the LTTE militarily is not in doubt in the way that that the struggle of the humanitarian intervention is now proceeding. What might be questionable is the sustainability of a GoSL victory after a LTTE defeat for long term peace. Edward Azar, whose analysis of conflict management always went far beyond the simplistic assertions of many of the Western authors, has insisted that ‘peace is development.’ By implication, what could bring a sustainable peace after a possible defeat of the LTTE are not merely the security arrangements but economic planning and development of those areas which were devastated by the war. The additional requirement undoubtedly is democratization.

Considering the policies for the ‘Eastern Resurgence’ aftermath of the Thoppigla capture, the country can be rest assured that the GoSL is well within this line of thinking to achieve sustainable peace. The other main ingredient undoubtedly is the address of particular minority political demands in a manner commensurate with their political aspirations. This is part of democratization. It could be in the direction of extensive devolution and power sharing if not federalism per se. If those political conditions also could be assured with or after a defeat of the LTTE, then a possible resurgence of a cycle of violence or minority insurgency thus could be broken down.

Investment and Welfare

It was Ranjith Siyambalapitiya, Minister of State Revenue and Finance, who stated on the day before that “this year’s budget proposals would concentrate on long term plans for development by keeping an acceptable balance between development and social welfare.” This is confirmed by the supplementary accounts and the budgetary figures themselves.

The social welfare is something that the international monetary institutions have been pressurizing the GoSL to always cut down at least since the economy opted to go open in 1977. Before that they hardly had a chance even to propose those cuts with finance ministers like Dr. N. M. Perera or Prime Ministers like Sirimavo Bandaranaike staunchly opposing the unreasonable international pressure. Thereafter the story was slightly different and more so when the UNP took over the Cabinet in 2001. What were dominant in our economic planning under those UNP regimes were monetarism and at least a hotchpotch version of neo liberalism.

The governments were so scared to spend even to expand the terribly needed educational facilities or the health services let alone providing employment opportunities for graduates or non graduates. What is overturned completely in this budget is that kind of defensive thinking through an alternative rational political economy perspective. Welfare is not good for the sake of welfare per se, unless it is necessary for the alleviation of poverty or some such hardships experienced by the public. Welfare should be an incentive to bring the people into the development process and contribute tangibly to increase production and other economic activities. .

There is no question that Sri Lanka is experiencing an unaffordable inflation as at present. There may be some monetary measures that could be implemented to curtail at least the present high levels of inflation, although I am not competent enough to comment on that matter. However, what is proposed in the budget to cushion out the effects of the inflation is real and commendable. First is the reduction of tax on petrol which would limit the inflationary rate of many of the consumer items and service charges.

Second is the resurrection of the cooperative societies which would make available many of the consumer items at reduced price rates to the low income citizens. To achieve this objective, the cooperatives are exempted from many of the usual taxes. There are many other merits of the new cooperative schemes now envisaged to mobilize the support of the ordinary people to actively participate in the productive and developmental activities. It was on the same lines that Samurdhi benefits are increased, the government servants are given an inflation allowance and the annual year five scholarships are increased from 10,000 to 15,000.

Sri Lanka at present is over a 3,000 billion economy. It was because of its current growing strength that the country could obtain around 55,000 million foreign capital in terms of government bonds to utilize them for developmental and other essential activities. This monetary injection definitely would boost the economy in no uncertain terms by the next year. The gross domestic product expected for the next year would be nearly 4,000 billion. This also means an expansion of the economy and the increase of the per capita income. There is no question that this expansion would tangibly be meaningless because of the high inflation. But the growth in the economy is very clear to see for any observer not prejudiced by partisan politics.

The government projects an investment of nearly 300 billion as capital expenditure. This is commendably targeted mainly for infrastructural development such as the Norochcholai Coal Power Plant, Upper Kotmale Hydro Power Project, Moragahakanda Irrigation Development Scheme, the Southern Highway, the Hambanthota Port, the Weerawila Airport, etc.

One may argue that this is not sufficient for a growing economy as it represent only little over 10 per cent of the GNP. While this may be the case, one should not underestimate the private sector investments. One short coming of Sri Lanka’s budget proposals or economic forecasts is the non prediction of private sector investment or growth for the people to judge where they would be heading in terms of overall economics. There is no question that the interest rates at present are high discouraging the private sector investments. While the high interest rates are an incentive for the people to save, they discourage the investors to barrow. Be those rather secondary weaknesses as they may, the overall political economic fundamentals are clearly on a rational ground in the proposed budget.

Balance of Budget

There is a clear financial discipline demonstrated in the proposed budget whatever criteria you may employ to analyze it. Only incorrigible monetarists might disagree. Of course there is going to be a budget deficit which cannot be avoided under the present circumstances of the economic or political developments in the country and outside.

The budget deficit however is reduced to around 7 percent. Even for the year 2007, the predicted deficit of 9.2 percent is now adjusted to 7.9 percent showing some clear financial discipline on the part of the Treasury. The projected deficit for 2008 is entirely on the account of the capital expenditure. There is no question that irrespective of its capital nature that deficit is going to have some inflationary impact. However the government intends to manage its recurrent expenditure solely on the basis of the projected income and not on the basis of borrowings. There can even be a surplus revenue of about 40 billion for the next year on the current account. This is highly commendable.

The projected income for 2008 is around 750 billion. This is a clear increase of about 150 billion from the 2007 revenue of 600 billion. There are sharp increases of import levies on luxury items like motor vehicles and widescreen television. There is a new environmental tax on some luxury consumption items. Liquor and cigarette taxes are also increased. It is on the basis of the increased revenue that the expenditure on education, health and social services are enhanced in the budget.

The overall proposed budget is around 1,350. As it stands, 55 per cent of the budget or 750 billion covers recurrent expenditure while capital expenditure or public sector investment is around 22 per cent which in itself is modestly a healthy indicator. Of course there are debt repayments which accounts for the difference. There is no doubt that the percentage of capital expenditure should be uplifted perhaps up to 35 percent or so to take Sri Lanka decisively to a rapid developmental path. That was the case in Japan in early 1960’s which achieved a commendable growth rate of 14 percent.

Political Economy Approach

There are very many commendable aspects of the budget, but perhaps its overall political economy approach is the most noteworthy. In contrast to a monetarist or a neo-liberal approach, the political economy approach takes into account not only pure economic rules but a host of economic, political, environmental and even cultural factors into its consideration. While political economy is the most classical approach in economics, this approach has been neglected or discarded with the neo-liberal and monetarist ascendancy in economic planning in recent times. Political economy approach has now emerged or emerging in a better form, enriching many academic disciplines.

With the people at heart in the Mahinda Chinthana policies, it is not surprising to see the resurgence of the political economy approach in the budget planning, although it is not articulated that way. Perhaps theory is not that important for practitioners. What is important is the praxis itself. While this is not the opportunity to explain the political economy approach in detail, some of the relevant elements pertaining to the budget are as follows.

The political economy approach does not allow the economic future of a country or the people to rely purely on the blind operation of the market forces, internal or external. The state becomes pivotal in economic planning and directing even the private sector or the foreign investments to achieve the overall developmental goals of a society. The state looks into the equitable distribution of income and ensures the people’s welfare and other needs. In this sense, the state takes into account not only economic factors but also political, environmental and even cultural factors into consideration in its planning and execution of budgets and economic blue prints.

However, the political economy approach does not mean the state control of everything. The private sector should be allowed to contribute its full potential. The state’s encouragement and guidance are necessary but not the control. It is again important to highlight a crucial statement by the President in his budget speech in respect of achieving the growth rate in excess of 7.5 percent in 2008 to bring the political economy approach to a practical focus. “I invite the entire public service to mobilize the working class, the entrepreneurs and the taxpayers to work towards country’s development,” he said.

One may say that the invitation per se might not be enough. There should be a mechanism to mobilize the private sector, the trade unions and the civil society to achieve a higher growth rate in excess of 7.5 percent. If we take an example from Japan’s ‘second miracle’ in the 1960s, the MITI was instrumental in coordinating and mobilizing the necessary sectors for the growth objectives. In Japan, the MITI in fact was a ministry, the Ministry of International Trade and Industries. The conditions in Sri Lanka of course are different. But what is important might be to develop a similar mechanism taking the best people from the public service and the private sector for the task.

- Asian Tribune -

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