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Tuesday November 29th, 2022

Sajith promises Hayekian, Keynesian policy mix for Sri Lanka

ECONOMYNEXT – Sajith Premadasa, who is pushing to be the presidential candidate for Sri Lanka’s United National Party said he wanted to employ a mix of Hayekian and Keynesian economic policies.

“On one hand we have the Keynesian aggregate demand management model,” Premadasa said speaking at a think tank in Colombo.

“At the other end we have the Frederich Hayek new model. I believe we need a mixture of these models to have the major attributes of economic growth.”

Premadasa was perhaps the first senior level politician in Sri Lanka to publicly mention Hayek.

Hayek proposed classical liberal policies based on sound money that had earlier laid the foundation for the industrial revolution (gold standard at the time) protecting the incomes of the poorest of the poor, while keeping house prices low and affordable by preventing inflation and asset bubbles .

Housing bubbles and mal-investments generally come when central bank enforce rate cuts with printed money, leading to collapse of currencies and investment bubbles.

Keynes proposed a remedy to boost after a central bank creates a bubble, and causes depression.

Sri Lanka has generally followed Keynesian policies after US ‘New Dealers’ pushed a central bank on Sri Lanka to join the failed Bretton Woods soft-peg after World War II, breaking a classical liberal currency board.

Sri Lanka had been consistently following Keynesian money printing models except for a brief period when Central Bank Governor A S Jayewardene and Nivard Cabraal and with W A Wijewardene as Deputy Governor, analysts have said.

“We have to follow an export based economic model,” Premadasa said. “When it comes to growth I firmly believe the greatest value addition is to be achieved from growth based on manufacturing, this has been proven to be the case in the 80s and 90s.”

Premadasa’s father helped set up over 100 apparel factories using the multi-fibre agreement to push exports.

“If you observe the progress made by the Asian Tigers in the late 90s and early 2000s, manufacturing based industrial development for economic growth has been proven to be the most sustainable economic growth that can be achieved,” he said.

Singapore, which used Hayekian monetary policy, eschewed Keynesian ideas.

Goh Keng Swee, independent Singapore’s first finance minister and head of the currency board said money printing led to balance of payments troubles, inflation and political instability.

“When nearly two-thirds of our citizens’ expenditure is spent on imported goods, a strong Singapore Dollar helps to keep consumer prices down,” explained Goh Ken Swee, Lee Kwan Yew’s first finance minister and the economic architect of the country.

“Third, we wanted to indicated to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore.

“A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.”

Another export powerhouse Japan, saw inflation explode soon after World War II, under General Douglas McAurther due the influence of American New Dealers, who were Keynesian.

“To cope with output collapse and unemployment, the Japanese government printed money to finance subsidies while imposing price controls,” explained Konichi Ohno later in his book, Development of Japan.

“Clearly, this strategy could not be sustained for long. Monetization of fiscal deficits created triple-digit inflation from 1946 to 1949. Black market inflation was even higher, especially in the early period. This was the highest inflation that Japan ever experienced, before or since.”

General McArthur’s staff in Tokyo were also Keynesian New Dealers, who did not want big bang correction, Ohno said.

“But this debate within the US government was ended when Washington sent Joseph Dodge to Tokyo in early 1949. Dodge was the president of Detroit Bank and a strong believer in the free economy,”

Under the Dodge stabilization package the Yen was fixed at 360 to the US dollar. Sri Lanka’s rupee is 180 from around 4.70 after World War II.

Korea was not so lucky. It went to the IMF 18 times until the central bank was fixed in the early 1980s following disasterous real effective exchange rate targeting exercise and wage suppression that led to mass-strikes and protests.

Japan’s 360 to the US dollar was fixed until 1971 when the US dollar collapsed under President Nixon’s Keyensian ‘Great Society’ program when then-Fed Chairman Arthur Burns printed money to close an output gap. The Yen is now 105 to the US dollar.

The collapse of the Bretton Woods led to Sri Lanka’s closed economy of the 1970s. Following the economic and rise of unemployment to around 20 percent, in Sri Lanka Sajith Premadasa’s father became Prime Minister under J R Jayewardene.

Jayewardene, who set up the Central Bank after independence, did not reform it, leading to high inflation, finance companies collapses and political unrest in the 1980s, while Britain and US both stabilized and had low inflation under Thatcher’s Hayekina policies and Volker’s tight monetary policies.

The UK, the birthplace of John Maynard Keynes, where he was a Treasury official, suffered terribly. The UK went to the IMF 11 times suffering with rationing, exchange controls and Sterling crises, until Thatcher came stopped printing and abolished all controls.

In post-war Germany, Hayekian policies were implemented by Wilehm Ropke and Ludwig Earhard to implement the Federal Republic’s Social Market Economy creating the so-called German Economic Miracle overtaking UK which won the war.

“Stability is not everything,” Geman Economic Minister Karl Schiller once said. “But without stability, everything is nothing.”



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Sri Lanka rubber farmers to get boost from France, Michellin

ECONOMYNEXT – Sri Lanka will start a project supported by France and Michellin group to support 6,000 rubber farmers, cabinet spokesman Minister Bandula Gunawardena said.

Rubber farmers in Badalgama and Medagama in the Moneragala district will be supported improve their capacity and supply chains at a cost of 726,700 Euros.

Financial support will be provided by France’s Michellin group which has a subsidiary in Sri Lanka and the government of France.

The project will be implemented by France’s Ksapa group under the guidance of Ministry of Industries.

The cabinet of ministers had cleared a proposal by the Plantations Industries Minister to enter into an agreement to implement the project. (Colombo/Nov29/2022)

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A new Sri Lanka monetary law may have prevented 2019 tax cuts?

ECONOMYNEXT – A new monetary law planned in 2019, if it had been enacted may have prevented the steep tax cuts made in that year which was followed by unprecedented money printing, ex-Central Bank Governor Indrajit Coomaraswamy said.

The bill for the central bank law was ready in 2019 but the then administration ran out of parliamentary time to enact it, he said.

Economists backing the new administration slashed taxes in December 2019 and placed price controls on Treasuries auctions bought new and maturing securities, claiming that there was a ‘persistent output gap’.

Coomaraswamy said he keeps wondering whether “someone sitting in the Treasury would have implemented those tax cuts” if the law had been enacted.

“We would never know,” he told an investor forum organized by CT CLSA Securities, a Colombo-based brokerage.

The new law however will sill allow open market operations under a highly discretionary ‘flexible’ inflation targeting regime.

A reserve collecting central bank which injects money to push down interest rates as domestic credit recovers triggers forex shortages.

The currency is then depreciated to cover the policy error through what is known as a ‘flexible exchange rate’ which is neither a clean float nor a hard peg.

From 2015 to 2019 two currency crises were triggered mainly through open market operations amid public opposition to direct purchases of Treasury bills, analysts have shown.

Sri Lanka’s central bank generally triggers currency crises in the second or third year of the credit cycle by purchasing maturing bills from existing holders (monetizing the gross financing requirement) as private loan demand pick up and not necessarily to monetize current year deficits, critics have pointed out.

Past deficits can be monetized as long as open market operations are permitted through outright purchases of bill in the hands of banks and other holders.

In Latin America central banks trigger currency crises mainly by their failure to roll-over sterilization securities. (Colombo/Nov29/2022)

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Sri Lanka cabinet clears CEB re-structure proposal: Minister

ECONOMYNEXT – Sri Lanka’s cabinet has cleared proposals by a committee to re-structure state-run Ceylon Electricity Board, Power and Energy Minister Kanchana Wijeskera said.

“Cabinet approval was granted today to the recommendations proposed by the committee on Restructuring CEB,” he said in a message.

“The Electricity Reforms Bill will be drafted within a month to begin the unbundling process of CEB & work on a rapid timeline to get the approval of the Parliament needed.”

Sri Lanka’s Ceylon Electricity Board finances had been hit by failure to operate cost reflective tariffs and there are capacity shortfalls due to failure to implement planned generators in time. (Colombo/Nov28/2022)

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