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Sri Lanka should fix basics, picking winners may create cronies: economist

ECONOMYNEXT – Sri Lanka has to fix basic conditions that provide stability and freedom for business to invest and grow, instead of trying to ‘pick winners’ bureaucratically, which may lead to crony businesses, an economist said.

To ‘pick winners’, governments need technical capacity, Ganeshan Wignaraja, an economist at Asian Development Bank based in Manila, said at a forum organised by Advocata Institute, a free market think tank based in Colombo.

"I think it’s hard for governments to pick winners, particularly at our level of technological, managerial and government capability.

"So the better thing would be that we get a few basic things right – monetary policy, fiscal policy, the exchange rate – and try to make sure that these things are predictable and stable."

"I think the government is trying to do that. Then we have to do second generation reforms that make it easier to do business."

Sri Lanka’s economy was progressively closed after independence, after a money printing (soft-pegged) central bank created in 1951 generated ‘foreign exchange shortages’, leading to exchange and trade restrictions.

The creation of the central bank and abolishing a currency board ended a ‘hard budget constraint’ that was in place during the latter part of the British rule.

Money printing (manipulating interest rates) gave post-independence rulers the ability to run budget deficits at will and avoid sovereign default by depreciating the currency.

The worst economic restrictions in Si Lanka came after the collapse of Bretton Woods in the early 1970s.

Although Sri Lanka opened the economy from 1978, it continued to print money and deficit spend, leading to economic instability and cycles of high inflation and currency depreciation.





Meanwhile, Wignaraja said Korea and Taiwan had seen some success in state so-called ‘industrial policy’ aimed at ‘picking winners’, with the government giving subsidised credit and other subsidies to selected industries based on their export success.

But such policies failed in Africa and led to the creation of crony businesses in some countries.

In Asia, Japan industrialised rapidly from 1860s, after the so-called Meiji Restoration broke the then feudal Tokugawa Shogunate and transformed the society using Western tools including freehold land, free trade, industrialisation, and military and management techniques, economic analysts say.

However, increasing interventionism and militarisation automatically led to nationalism and war.

By the turn of the 20th century, Japan was an industrialised nation, and Korea and Taiwan were colonies of Japan, where some of the structures were transplanted.

Big Japanese conglomerates also set up plants in Korea that were considered useful to Japan.

But other countries had different experiences.

Singapore completely freed trade and invited foreign investors.

China (1978 under Deng Xiaoping) and Vietnam (1984 Doi Moi) also abandoned state planning and gave freedom from foreign investors and domestic entrepreneurship for capitalism to flourish, analysts say.

In countries like Vietnam, there were no crony domestic industrialists to oppose free trade and ask for protection to exploit poor consumers, which led to rapid falls in poverty and unprecedented consumer choice.

Hong Kong had no state interventio, or stimulus at all, which became fashionable after the end of World War II in the Anglo-Saxon world despite being a British colony.  (Colombo/Jan16/2016)

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