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Tuesday November 29th, 2022

Protectionist taxes plunder the weak, destroying potential new jobs in Sri Lanka

ECONOMYNEXT – Sri Lanka is planning an ‘anti-dumping’ law to protect businessmen from exercising their power in markets. The anti-dumping law is the latest trick perpetrated by businessmen and politicians with the help of the coercive power of the state on helpless citizens.

In some countries anti-dumping laws are enacted to stop businesses and rent-seeking oligarchs from heaping even more burdens on poor consumers and plundering them without mercy.

Just weeks before Donald Trump slapped a tax on Canadian lumber forcing US consumers to pay more for their timber. Building costs in the US will go up, allowing timber merchants to plunder ordinary American families trying to build a house.

Not unlike the taxes slapped by steel oligarchs in Sri Lanka on steel used in construction.

The collapse of the Wellawatte building also needs to be examined in detail. Did they skimp on steel because of import duties?

Nationalists like Donald Trump base taxes on a false idea that free trade simply eliminates jobs and that it is some kind of zero sum game. Free trade in fact is a major driver of job creation, as well as being a force in raising living standards of the lowest income earners.

In Sri Lanka, the prices of a variety of building materials including tiles, sanitary ware, steel and electrical products are kept excessively high by the political class through import duties, to give billions of rupees of profits to a few rent-seeking oligarchs.

There are more cronies in shoes, and foods like rice are also kept high, with import duties to protect the profits of farmers and a few rice-milling oligarchs.

The plundering import taxes, which protect the pockets of oligarchs, do not protect ordinary citizens.

Import plunder taxes date back to the false economics of Mercantilism in 16th century Europe.

Infant Industry

Alexander Hamilton, one of the founding fathers of the US, promoted import duties to help start-up domestic industries. Supposedly the taxes would be taken away after the infant became adult. This was called the ‘infant industry’ argument.

In the US, which was a large country with many states, where many firms competed with each other, it did less harm to the people than in other countries.

Ironically, when large domestic firms in steel and oil became so competitive and gained a large market share by selling lower priced goods, uncompetitive businesses lobbied and invented ‘anti-trust’ laws to push prices up, claiming that monopolies were keeping prices down.

As can be seen, these state interventions lobbied for by businessmen who want high prices have neither logic nor reason.

However some also point out that it is no accident that John D Rockefeller, who owned Standard Oil, that was broken up by ‘anti-trust’ laws, was a Jew, a minority in the US. In Sri Lanka parallels can be drawn where businesses owned by the minority seems to attract price controls by the state, while majority-owned businesses are getting import protection.

Infant industry ideas spread to Europe from the US, pushed by nationalist ‘economists’ like Georg Friedrich List (The National System of Political Economy), leading to German historical economics.

Riding on the back of earlier ideas propagated by the likes of Georg Friedrich Hegel, Germany eventually ended up in minority hate and Nazism along with other types of hate directed at foreigners.

Ideas of Hamilton and List were fully embraced in Sri Lanka during the latter part of British rule and are seeing a major revival in the US at the moment.

It is amazing that the most illiberal and hateful policies developed in the West are fully embraced in Sri Lanka while any idea or concept that gives a least bit of freedom to the citizens is reviled as ‘Western’.

Sri Lanka also re-embraced the Mercantilist ideas of the 16th century on which the Dutch and British East India Companies were based on, after independence. These firms which profited from state backed monopolies operating with the threat of violence, were demolished during the second part of British rule, along with the rise of freedom and classical liberalism in the UK.

In Sri Lanka industries like ceramics are not infant but geriatric and continue to enjoy protection.

The Sri Lanka Ceramics Council is a horrific example of a rent-seeking business lobby that reaches out to politicians to make profits by plundering homeless Sri Lankans with import duties.

Geriatric plunder

The plunder by geriatric industries is justified by the jobs argument. Geriatrics convinces the people that ‘cheap imports’ will kill domestic jobs, even though the ‘infant industry’ argument can no longer be peddled.

They claim that foreign goods, sent after paying freight charges and even reasonable taxes are too ‘cheap’ for the poor people in Sri Lanka and massive taxes are needed to put them out of their reach.

Other claims are made that they are subsidized by foreign governments.

The claim is made that domestic jobs are lost by imports.

It is true that some businessmen that overcharge customers will lose market share and their monopoly status and some may even go out of business.

If 500 workers lose jobs, with a factory closure, their individual loss is large and visible. But if twenty million people are exploited their individual losses are small.

It does not make economic sense for individual consumers to lobby ministers or even write to a newspaper if a 100 rupee product is sold at 200 rupees with import duty protection. But an industry that makes a 100 million rupee profit a year has the economic incentive to launch a PR campaign and fund the election campaigns of rulers.

Cheaper goods themselves create more jobs, but that phenomenon is not seen.

Before Adam Smith and David Ricardo, the Mercantilists attacked trade deficits and imports based on this simple reality, just like plundering rent seeking oligarchs do now.

Indian cotton cloth imports for example were severely resisted in Europe, and there are historical accounts of women wearing Indian cloth being stripped naked.

Eventually however cotton displaced linens, woollen and other material and became a leading driver of the industrial revolution in Europe.

Unseen Jobs

Let’s say someone is building a bathroom in his house. He decides he wants 250 square feet of vitrified tile, which is a strong tile used all over the world. In India online retailers are offering vitrified tiles ranging from 30 Indian rupees (about 72 Sri Lanka rupees) upwards for a 2×2 tile.

Due to massive taxes in Sri Lanka such tiles cost about 260 rupees a square foot or 1000 rupees a tile. A 2×2 polished vitrified tile is about 1600 rupees. Arbitrary prices are charged for different designs.

An Indian would build his bathroom spending 18,000 rupees for 250 square feet of tile. A Sri Lankan would have to pay 65,000 rupees. To block the economic freedoms of Sri Lankan and undermine consumer sovereignty, the rulers charg excise taxes per square foot, not on value.

If imported tiles were available after paying a reasonable tax rate of say 15 percent, and the bathroom was tiled at 100 rupees a square foot, which is 38 percent higher than India, it would cost only 25,000 rupees. .

Even that is 40,000 rupees cheaper than buying the overpriced tiles in Sri Lanka.

The 40,000 saved would not disappear. The consumer will spend it elsewhere, increasing his living standards, and creating jobs in the process.

He may decide to paint a room in the new house, which he planned to move in leaving bare because he did not have money, giving a job to a painter.

His wife may decide to buy some furniture, giving jobs to carpenters. She may install curtains giving money to weavers and a tailor.

Or he may spend it on services, many of which are springing up now as small businesses.

He may take his kid to see an amusement park. Or the entire family may go on a trip, as many Sri Lankans are now doing, and stay in a small hotel.

His wife may hire an interior decorator to advise her.  They may pay a gardening service to professionally design the garden.

She may go to a hair dresser, and spend some of money.

Or he may decide spend it on a three-month, computer course for his eldest daughter, giving jobs to IT teachers and raising the child skills and making it easier for her to get a job.

None of these activities that happen when you remove protectionism, are counted, when people claim that ‘jobs are lost’, due to free trade.

The family may buy a refrigerator, a washing machine, go shopping and buy any number of things boosting the retail sector and giving more taxes to the government.

The plundering protected business generates tax losses for the government. The plunderers profits primarily by selling an overpriced goods and taking the tax that would otherwise have gone to the government. This is called tax arbitrage.
Long term effects

Protectionist food taxes (which even nationalists like List did not advocate) are among the worst. The underdevelopment of the brain and stunting that takes place in children when milk and maize (protein malnutrition) is taxed, cannot be undone.

In East Asia, after free trade reduced food prices (especially in former Communist nations, where improved land rights also boosted agricultural productivity and output) an entire new generation of children who are much taller than their parents are now growing up.

Protection for building materials, which push up the cost of capital stock, also have long-term consequences that will continue to harm the population and business.

Overpriced steel pushes up all building costs. In Sri Lanka there is no protection for cement. Significantly cement manufacture is dominated by minorities and foreigners.

When building costs go down with free trade, the capital investment is reduced. An hotelier for example will build a hotel cheaper and become more competitive internationally, when steel, sanitary ware and electrical cables are cheaper.

When steel is cheaper, factories will be cheaper, making Sri Lanka’s exports more competitive.  

When a houseowner’s loan is lowered with free trade, the bank may make less profits, but his disposable income will be higher throughout the repayment period, allowing him to consume more and create more jobs.

When smaller loan is taken to build a house or factory, more money is released for investment in another industry or sector, creating more jobs and value.

Job Loss Fallacy

The job loss fallacy can be seen most obviously in countries with near complete free trade. Dubai, which has free trade, for example, has created jobs ten times its population.

Millions of Indians, Bangladeshis, citizens of former Soviet states, Philippines, also Britishers and Americans are working in the UAE.

It was not just oil that created jobs in Dubai and other countries in the Middle East. Enough countries with oil ranging from Venezuela to Nigeria to Iran and Iraq has ended up as basket cases.

Singapore has massive volume of expat workers. Hong Kong has seen long term in-migration with free trade.

Countries like Vietnam has leapt ahead and poverty went crashing down much faster than China and Korea, as it had to free trade to join the ASEAN.

Even money spent on foreign countries will come back.

If Sri Lanka buys an Airbus, French and British aviation workers may buy more Sri Lankan apparels.

When Sri Lanka buys cars from India, more Indian tourists can come from that country.

If free trade destroyed jobs, North Korea should be a net importer of labour, instead of being a self-sufficient hell. Sri Lanka should have been net importer of labour in the 1970s during our most ardent autarky effort.

The Nazi autarky was also not a heaven. Germany became a much bigger economic power after it abandoned autarky and Nazis were defeated.

Capitalism, unlike the earlier economic systems like Mercantilism and feudal serfdoms, lifted millions out of poverty and raised consumption due to competition that made it impossible for producers and merchants to exploit the fellow human being.

Capitalist competition promoted innovation, reduced costs and improved the utility of goods and services.

The problem with free trade is that, not all of the effects can be seen readily seen, unlike a factory closure. Mercantilists and protectionists use the fact to mislead the general population.

"Trade that is unusually disruptive for some workers is trade that is unusually beneficial for consumers and other workers," explains Donald J. Boudreaux, Professor of Economics at George Mason University.

"Abnormally large and widespread price cuts in domestic industries that compete with imports mean both abnormally large gains for consumers of those products and the release of resources for the creation of new industries and jobs elsewhere in the domestic economy."

"Economists’ greatest service is to help the public see economic consequences that otherwise remain unseen."

This column is based on ‘The Price Signal by Bellwetherpublished in the April 2016 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.


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Sri Lanka opposition MP asks government to clarify “domestic creditors” for restructuring

MP Harsha de Silva (l) with President Ranil Wickremesinghe at the tea party hosted in parliament after the president’s throne speech. Image credit: President’s Media

ECONOMYNEXT – Sri Lanka’s opposition lawmaker Harsha De Silva asked the government to clarify “domestic creditors” in the debt restructuring amid a wait and see approach by markets.

Sri Lanka government has started discussions with its external creditors for debt restructuring, but some of the external debts are held by local investors as some local banks have bought international sovereign bonds (ISBs) and Sri Lanka Development Bonds (SLDBs).

Speaking at the Foreign Ministry’s budget debate in the parliament, De Silva, an economist by profession, citing a local paper report said there are conflicting reports in “domestic creditors”.

“One (report) where the governor of central bank Nanadalal (Weerasinghe) saying that Sri Lanka will be able to get IMF board approval by January 2023. And the second by Standard Chartered CEO Bingumal Thewarathanthri saying perhaps by March,” he told the parliament.

“And I quote ‘when there is clarity on the haircuts that is going to be borne by the foreign bond holders, bilateral creditors and domestic creditors’. Who does he (Thewarathanthri) referred to as domestic creditors? Local banks and individuals who have invested in ISBs and SLDBs or those who invested in LKR (Sri Lanka Rupees).”

“There has to be clarity on this. There are so many conflicting stories on how well the restructuring discussions are moving forward.”

Sri Lankan economists and financial experts have said a local debt restructuring could have adverse consequences in the economy including banking sector collapse and people coming to street against respective banks and government if they go for a hair cut.

Opposition parliamentarian Eran Wickremeratne said the country’s first priority should be to make sure the banking system stays stable. ‘

“I have taken the position that I’m against the local debt restructuring we have negotiated our way. I understand that there are gross financial requirements and issues. In the negotiation the time is going to be the issue,” he told EconomyNext on Friday.

“We won’t be able to push through some reforms as fast as we think. We may have to take more time if going to basically not allow an immediate local debt restructuring. What I mean by restructuring is restructuring is not the problem, but I’m not for a haircut.” (Colombo/Nov28/2022)

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Anwar: Not Malaysia’s Mandela, but something more

ECONOMYNEXT – Something extraordinary happened in Malaysia this week. After a bitterly fought general election with no clear winner, the King had the wisdom and the courage to appoint Datuk Seri Anwar Ibrahim as Malaysia’s 10th Prime Minister.

To those observing from the outside, it was a remarkable sight. So, one can only imagine the gravity of the moment from the point of view of Malaysia’s new Prime Minister.

Anwar Ibrahim travelled to Istana Negara for the ceremony on Thursday from Sungai Long with his wife, the accomplished and independently remarkable Datuk Seri Dr Wan Azizah Wan Ismail, who for 24 years, has taken her husband’s crusade against corruption and bigotry in Malaysia and made it her own. When Anwar was imprisoned, she stood in for him and embodied his cause with an authenticity and ferocity that saw her become Malaysia’s first ever female opposition leader.

When they arrived at the ceremony, one of the many dignitaries assembled for Anwar’s swearing in was Malaysia’s Chief Justice, Tun Tengku Maimun Tuan Mat, the first woman to hold that office, who herself has long stood out as a judge with little patience for corruption or abuse of power. Whether in the 1MDB appeals or in holding firm against other powerful special interests, she has embodied the kind of judicial independence for which Anwar has fought.

As Anwar, the Prime Minister in waiting, took the instrument of his appointment into his hand and began reciting his oaths, he must have felt the weight of every word he swore of the pledge he has long dreamt of taking. Perhaps no Malaysian politician has distinguished himself on the world stage as Anwar did as Malaysia’s finance minister between 1991 and 1998.

His outstanding performance in transforming the Malaysian economy and navigating the perils of the 1997 financial crisis, while lauded across the globe, threatened entrenched interests, leading not just to his sacking and repeated imprisonment, but to a systematic 24-year long campaign to tear him down, destroy his name, and vanquish the causes of good governance and egalitarianism that he stood for. It was a campaign that was almost comical in its corruption.

Beginning in September 1998, every time it ever looked like Anwar was raising his head and might score a major political victory, either an arrest, a court ruling, gerrymandering or some other element of state machinery interceded to intercept him and keep him from power.

His multiple imprisonments on what the world agrees are trumped up charges are well known, as is the black eye bestowed on him by the fists of Malaysia’s chief of police. However, it is often forgotten that his Pakatan Rakyat won a 51.4% majority of the popular vote at GE13 in 2013, “losing” the election in practice only because of the first past the post electoral system by which the votes were apportioned. Whatever else Malaysia’s elite entrenched special interests disagreed about, they all seemed to agree on one thing: stopping Anwar at all costs.

Most of those who sacrificed their conscience and integrity over the years to keep Anwar down are now out of the spotlight, shunned by the electorate, recognized for their crimes by the judiciary, or cast aside by their political handlers once their utility expired. None were present in the corridors of power at the royal ceremony last Thursday to witness the totality of their failure.

It was heartening to see the local markets react to Anwar’s appointment with the biggest rally they have shown in two years, and to see the world market respond through the Ringit seeing its best day in the currency market since 2016. As Anwar prioritizes tackling the skyrocketing cost of living for ordinary Malaysians in the backdrop of a looming global recession, these signals of confidence are a promising sign.

As he begins to combat poverty while forming his cabinet and steering a fragile coalition, the new Prime Minister will have to grapple with bringing about good governance, combatting corruption and ensuring judicial independence. With corruption as deep-rooted as Anwar himself has charged, he should expect and be prepared to combat the fiercest opposition and subterfuge. To those who live on graft, this is not just a matter of policy. They stand to lose everything, their livelihood and their liberty, if he succeeds.

It is difficult to argue against anti-corruption initiatives or transparency in government, so his opponents will try, as they did throughout his time in the opposition, to paint Anwar as an outsider, unpatriotic, anti-Malay, anti-Islam. It will be up to Anwar and those around him to ensure that from the bully pulpit of the Prime Minister’s office, he can show a larger swath of Malaysians who he is and unite them.

Anwar has the most essential quality of a unifying politician, in that he is a “we” politician and not a “me” politician. Notwithstanding the formidable cult of personality that has been built around him, he is quick to redirect any personal praise or flattery by sharing credit with others and putting them in the spotlight and doing so with a humility and sincerity that endears him to other leaders.

While Anwar Ibrahim is fond of calling himself a ‘village boy’ due to his affection for the simplest pleasures of life, there is nothing simple about his pedigree. He was born with UMNO in his blood, with an UMNO parliamentarian for a father and political organizer for a mother. He is accused of being anti-Malay for his egalitarian politics, even though his entire undergraduate education was devoted to the study of Malay culture, history and literature. The idea that he would oppose the legitimate interests of Malays is unthinkable.

So it is important that he succeed as Prime Minister where he failed as a candidate, in persuading more Malay people that they have nothing to fear from him. In fact, their interests are better served by a level playing field that would enable them to thrive and compete not just in the shelter of the cosy, subsidized affirmative action bubbles that other parties have tried to woo them with, but in the world at large.

Anwar’s in-depth study of the Bible does not make him any less devout a Muslim, but a stronger, more confident one. An unapologetic ally of the Palestinian people, Anwar’s opposition to the suffering imposed by Israelis on Palestinians is only sharpened, not blunted, by his assertion of Israel’s right to exist. He is confident in who he is. Even torture, and years spent in the darkest depths of solitary confinement in a gruesome prison cell were not able to make him waver in his values or political principles.

It is already evident that Anwar’s appointment has raised Malaysia’s standing in the world. Several governments who either vocally or privately protested the way he was treated over the last quarter century have responded to his appointment with a new vigor and eagerness to engage with Malaysia and deepen political and economic ties with the country. Anwar demonstrated in opposition that he has a gift for advocating for Malaysia on the world stage. As Prime Minister, this is a gift that will serve him in good stead.

Wherever they sit on the political spectrum, no Malaysian could deny the sincerity that Anwar brought to his first press conference on Thursday following his appointment. He means to do the job, and do it well, responding thoughtfully and obediently to the King’s direction to form a unity government. He has clearly taken to heart the words of the monarch that “those who won did not win everything, and those who lost did not lose everything.”

The lesson in that message for every politician is that Malaysians are sick and tired of political knife fighting, of “moves”, from Kajang moves to Sheraton moves. No doubt some confederacy of politicians are already plotting the next creative ‘move’ to bring Anwar down, but they may find themselves outmatched by history.

Pundits have quipped that Anwar’s journey this week was one of “prison to palace”, forgetting that he earned that particular honor on 16 May 2018, when he was released from prison and had to deal with the dizzying experience of being driven directly to the palace for an audience with then Yang di-Pertuan Agong Muhammad V. He has been dubbed Malaysia’s “Nelson Mandela” as both men were imprisoned for their politics and came to power soon after. But such reductions do little service to Anwar, whose time in prison, as horrific as it was, is not what defines him or best qualifies him to govern Malaysia in such perilous times.

Prime Minister Anwar was born Malay and has always been a devout Muslim. Unlike the African Mandela in white apartheid South Africa, Anwar was born to power. And he was not directly elected to his office by a clear majority as Mandela was, but instead, Anwar was appointed Prime Minister after no one won a majority. He is not Malaysia’s Mandela, or Malaysia’s Barack Obama. But history has examples more fitting of Anwar’s pedigree, principles and intellect.

There was another politician once, who, like Anwar, had the privilege of sailing into politics through an established political party. That politician too, like Anwar, was from the majority community, but over time grew to vocally oppose discriminatory policies and helped form a new political party. That politician too, like Anwar, was an accomplished orator and compelling communicator. And he did not directly win nomination for the American presidency in May 1860. Instead, he was selected following much debate after no candidate secured a clear majority. And just like Anwar will have to do in the coming days, President Abraham Lincoln had to assemble a broad coalition, a team of rivals, to get his country through the most perilous of times.

Prime Minister Anwar shares other qualities with America’s most revered President. Lincoln too was known for having little patience for pettiness, and to extend a hand of friendship to sworn rivals. The American President’s devotion to his children was also legendary. Anwar rarely responds to questions about his ordeal in prison without sharing his anguish that his five daughters and only son had to endure in watching their father suffer and be persecuted.

Having either taught or studied at schools of the calibre of Oxford, Georgetown and Johns Hopkins, an astute student of history such as Prime Minister Anwar has no doubt already drawn some of these parallels and knows how to take the right pages out of Lincoln’s book to thread the political needle and form a stable government. As a battle-tested politician, there is little doubt that if any Malaysian can rise to the challenge and hold together a team of rivals, it is Anwar Ibrahim.

For Anwar to truly succeed, he will have to transform Malaysian politics and bring about the paradigm shift in Malaysia’s political culture that his supporters have rallied behind for so long. Anwar may be the first Malaysian Prime Minister since independence who does not plan to leave behind a legacy for his children of titles, property, monuments or fortunes.

Anwar’s own oldest daughter, Nurul Izzah Anwar, in her congratulatory message to her father, said that the legacy she expects to be left for the next generation is not a material one, but one of “ideals, principles and values that cannot be bought or sold.” Over the last 24-years, Anwar, his family, his party, and their supporters have braved unimaginable odds to take this simple message to Malaysians.

Whatever policy compromises Anwar may have to make to assemble a stable coalition government, he, like Lincoln, will be defined by whether he is able to remain true to his core principles while governing effectively. After so many years of struggle, so many years of trying to awaken Malaysians to the future that could await them if they unleashed the potential of all Malaysians and empowered grassroots industries and businesses to thrive, Anwar will finally get a chance to show them through deeds instead of words.

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Sri Lanka contemplating law to limit grace period offered to state university students

File photo of IUSF protest

ECONOMYNEXT —  Sri Lanka plans to introduce legislation limiting the grace period offered to undergraduate students at state universities to complete their degree to no more than one and a half years, an official said as student unions cried foul.

State Minister of Higher Education Suren Raghavan told reporters on Monday November 28 that said discussions will be held with university students and student leaders in this regard, even as the Inter University Student Federation (IUSF) expressed vehement opposition to the move.

“Some students who were selected to the degree programme, are doing anything but the degree,” the state minister said.

If the proposal becomes law, students following three-year and four-year undergraduate programmes at state universities will be able to take only up to four-and-a-half and six-and-a-half years respectively to finish their studies.

Raghavan said the grace period is generally offered to students who need more time to complete their degree due to health reasons, problems at home or social issues in the country at large.

“We will discuss this with students and student leaders. I think the time given is sufficient,” he said.

IUSF Acting Convenor Terance Rodrigo was quoted by a daily English-langauge newspaper as saying that the student body is holding internal discussions on their position on the government decision but it is already of the view that the move is an attempt to stifle the political activism of student unions.

The IUSF played a leading role in Sri Lanka’s youth-led Aragalaya protests that ousted ex President Gotabaya Rajapaksa over his and his government’s handling of the worst currency crisis in decades.

IUSF convenor Wasantha Mudalige is currently in detention after being arrested under provisions in the controversial Prevention of Terrorism Act (PTA). Mudalige has been an undergraduate student for nearly a decade, with his politics and student activism purportedly getting in the way of his education.

Incumbent President Ranil Wickremesinghe, who has been criticised by human rights defenders and opposition lawmakers for an alleged crackdown on the Aragalaya protests, insinuated in a speech in parliament last week that Mudalige is no university student as he has still hasn’t finished his studies.

Wickremesinghe is not alone in this sentiment, however. Critics of the IUSF and even some sympathisers have spoken critically of what they call Mudalige’s “state-funded overstay”. Others, however, have defended him and other student leaders as those doing important and necessary work by fighting in the trenches to protect and uphold the people’s rights. (Colombo/Nov28/2022)

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