South Asia’s insiders benefit from crony capitalism: economist

ECONOMYNEXT- South Asia is practicing insider-outsider economics, where a small group benefits from the economy while excluding the majority, but technology could end the status-quo World Bank’s Chief Economist for South Asia said.

“South Asian economies are based on insider-outsider policies. Another name for this is crony capitalism,” Hans Timmer said at public lecture organized by the Central Bank of Sri Lanka.

“What you see in most countries is that a relatively small group of the society has created a preferential system,” he said.

“This is true for state sector workers as well as companies which have created a shielded position.”

Central Bank Governor Indrajit Coomaraswamy said insider-outsider policies were active in Sri Lanka.

In Sri Lanka, state-sector workers get duty free cars, state-sponsored pensions and raises without a link to productive work.

Companies use political patronage to create protection from international competition through high import tariffs and local competition through licensing systems.

Insider-outsider economics has led to a large informal sector across South Asia which has no social safety net, Timmer said.

“The problem is so big in South Asia, that more than 80 percent is in the informal sector. It’s not realistic to think that this is the way to go.”

“The formal sector has created a set of benefits which cannot be extended to the rest of the economy due to resource constraints, and this will ultimately be detrimental for the entire economy.”

He said the insiders get the benefits because the group is small, and everyone outside wants to enjoy similar benefits.

“When I went to a university classroom in Colombo, I asked the students what they want to do in the future, and they all said they want a job in the state sector,” he said.

Low female labour force participation too is another policy along similar veins, he said.

“Those on the inside don’t see the need to involve women in this respect.”

Timmer said the outsiders need to be plugged into the economy better, as they have potential to deliver higher growth.

“There is so much potential among the outsiders if they are involved in the economy.”

“But no one sees this as a primary problem on their list.”

“People are being pushed to the informal sector and underperforming in international markets, maybe because of how the formal sector is performing.”

He said South Asia exports just one third of its potential, because the informal sector is not able to access the tools and support needed to develop and trade.

Many others point to problems along borders, paratariffs and geopolitical situations instead, Timmer said.

However, he said technology is able to narrow the gap in benefits enjoyed by the insiders and outsiders.

“Tech is changing markets. It’s flexible. There’s no need for economies of scale anymore. It’s about plugging into value chains.”

“So then, the informal sector might be able to advance, because they are people who are used to flexible working conditions.”

“So, the tuk tuks in Colombo is an example of tech enabling the informal sector, not an exception.”

Timmer said policy makers must think of how technology can help bring greater economic activity to the informal sector, thereby providing them with a social safety net.

Even in agriculture, he said politicians should look at how technology could enable productivity gains and help farmers find clients in foreign markets. (Colombo/Dec06/2019)