Sri Lanka can slash corruption with more economic freedom, less bureaucratic discretion

ECONOMYNEXT – Sri Lanka can slash corruption, boost economic activity and prosperity by expanding economic freedoms for the people making clear just rules without giving discretion to bureaucrats, an economist said.

The 1970 to 1977 period was a time where people had very little economic freedom and corruption rocketed due to controls and permits, Rohan Samarajiva, head of LirneAsia, a policy research body said.

"To understand what economic freedom is we can remember what it was like when freedoms were taken away," Samarajiva told participants of the Advocata Institute Economic Freedom Summit in Colombo, hosted with Fraser Institute of Canada, which compiles a global index on Economic Freedom.

"During that time the government decided what we ate.

"We went to the co-operative shop and if they had harlmasso (dried sprats) we ate harlmasso. If they had karawala (dried fish) that week we had karawala for our meal," Samarajiva said speaking in Sinhalese.

"If for the New Year the government allowed sardine (tinned fish) into the country, we had sardines."

If rice was transported in a controlled day, police confiscated it giving rice to the harl polla (road block for rice) and miris pollar (road block for chillie)

Tinned fish, infant milk powder were luxury goods.

Sri Lanka’s worst controls, starvation of beggars and children of the poor, was in the early 1970s when the Bretton Woods soft-peg system broke after money printing and loose monetary policy (lack of sound money) by the Nixon administration.

Nixon also imposed trade controls on the US, known as the ‘Nixon shock’ but the administration was forced to remove them. The US dollar and many developed nations floated their currencies. Sri Lanka’s central bank still has problems with excessive money printing.





In Sri Lanka the co-operative system and those who ran it became extraordinarily powerful at the time as rulers gave it special access to goods. Trade restrictions and price controls, by the state automatically created shortages and black-markets.

Officials of the co-operative system made large sums of money by selling rare items through the back door and feeding the black market created by the price controls.

The privileged classes, politicians and high powered officials, had special access to goods.

"When infant milk powder was not available, parents became helpless," Samarajiva said. "They went to almost any lengths to get some milk powder."

"Someone who later became a minister in the last administration built his links with the politicians by handing out milk powder."

Samarajiva said corruption rose as people tried to get around the controls.

While ordinary people, and children of the poor suffered the hardest, businesses also suffered. Permits were needed to import virtually anything and even inputs to produce a good here required a long process.

Firms were given foreign exchange entitlement certificates (FEECS) and different people were sold foreign exchange at different prices, Samarajiva said.

"In the industries ministry there was a place called ‘Yen alley’ where bribes had to be paid in Yen," he recalled. "At another place they demanded Deutsche Marks."

With the ‘permit raj’ being scaled down many opportunities for corruption came down. But permits and many controls are still there despite several rounds of liberalizations, he said.

Analysts say there was large scale corruption in ‘fabric import quotas’ by apparel manufactures in the 1980s and early 1990s until the Kumaratunga administration slashed import taxes. Some apparel factories more money selling tax free fabric in the black market than by exporting, analysts say.

One of the strongest drivers of corruption came when bureaucrats had the discretion to say ‘yes’ or ‘no’, such as to approve or deny a permit or some control that took away the economic freedom of a citizen.

"To get a ‘yes’ people had to pay a bribe," Samarajiva said. "To stop discretion (abimathaya) you have to make clear rules."

"The greater the discretion the more corruption there will be."

According to the Economic Freedom Index compiled by Canada’s Fraser Institute there was a clear link between countries with greater economic freedom and higher incomes, Samarajiva said.

The Fraser Index measures sound money (a low inflation currency), openness to trade, regulations on business, credit and labour. Compared to other Asian countries like Korea and Singapore, Sri Lanka and India had more controls on people and lower income levels. (Colombo/Oct14/2017).

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