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Sri Lanka should have a pragmatic non-ideological post-Covid economic strategy: Pathfinder

ECONOMYNEXT – Sri Lanka should have non-ideological pragmatic post-Covid economic strategy, avoiding the mistakes of the past, Pathfinder a Colombo-based think tanks has said.

“Sri Lanka can draw lessons from its own past and international experience to formulate a new economic vision for a post-COVID-19 economy,” Pathfinder said.

“The refined strategy should be pragmatic and non-ideological in nature.”

“It should draw lessons from the low growth, muted investment, high unemployment and black-market prices associated with the inward-looking policies of the 1970-77 era as well as the increased vulnerability to external economic shocks, climate risks, increased inequality, reduced social protection and pandemics of the period since the opening up of the economy in 1977.”

Sri Lanka closed its economy as the Bretton Woods system collapsed in 1971-73 as theUS Fed succumbed to Keynesian-led money printing, soon after the Bank of England fell victim to Sterling crises for the same reason.

Sri Lanka went into full import controls and subsistence level economy, pushing up unemployment and malnutrition.

In the 1970s and 1980s Sri Lanka failed to reform its central bank after the Bretton Woods collapse unlike the US, UK and others like Hong Kong and Korea which ended monetary instability.

East Asian nations like Singapore, Malaysia and Thailand and Japan avoided instability even in the 1970s requiring no subsidies.

The opening of the economy brought jobs in the 1980s to Sri Lanka but currency collapses and inflation reduced real wages, weakening living standards, leading to frequent strikes and unrest as well as calls for subsidies.

State Bank of Vietnam was reformed in 1989, and the People Bank of China in 1993 to end monetary instability.

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Korea’s strikes ended with the Great Workers struggle in 1987 after the final Bank of Korea reform, China also saw Tienamen Square protest after the currency collapses of the late 1980s and early 1990s.

Cambodia is dollarized after Vietnam as if failed to fix its central bank and is going through a strong growth phase.

Sri Lanka’s, LOLC a company that was set up in the open economy to pioneer leasing in the country has made over 800 million dollars in one Cambodian firm it invested in after the country dollarized, showing the potential Sri Lanka has lost to monetary instability.

Sri Lanka however continues with monetary instability and reversed partially to 1970s policies.
Partial central bank reforms in Sri Lanka 1995 reduced strikes, but monetary instability has worsened in recent years, analysts have said, reducing growth to ‘Hindu’ levels and ratcheting up calls for import substitution and import controls.

“In recent decades, influential voices have argued that the role of the state in managing the economy should be downsized,” Pathfinder said.

“However, the COVID-19 pandemic demonstrates that when societies face massive challenges, it is only the state that has the capacity to respond effectively.”

Sri Lanka has one of the most dispersed public health systems dating back from the epidemic battles of the British period, which has been improved over time unlike other public institutions which have been broken, analysts say.

A public health inspector covers every household literally and each house is also approved by the PHI before and after it is built.

“Sri Lanka has an institutional legacy which can be modernized for this purpose,” Pathfinder said.

“However, careful consideration should be given on resetting the role of the state in the new normal of the post-CORVD-19 world. It should be calibrated in such a way that inefficiency and corruption are minimized and the role of the private sector as the primary engine of growth and wealth creation is not stifled.”

One of the countries that managed the Covid pandemic with some degree of success is Hong Kong, which has one of the smallest governments in the world.

Vietnam, probably the global leader in fighting the pandemic has been downsizing the state unceasingly from 1986 after self-sufficiency and central planning led to a decline.

However until the central bank was reformed in 1989, people went though severe hardships, triggering a new wave of boat people. Its gross domestic product collapsed to about one sixth of the controlled-era output as the Vietnam dong plunged mostly due to central bank re-financed credit from state banks.

Download the full Pathfinder strategy report from here

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