The main reason for the Sri Lankan economy to fail
Economy can be
considered as the blood of the country as it is the mechanism of which match
the limited resources with unlimited needs and decides how the limited resources
are allocated within the country. And combination of economics and politics
will decide that how will be the social, technological, environment and legal
environment is going to be. Therefore it is crucial for the country success
with the economic aspects.
However the main issue
with Sri Lankan economy is lack of contribution from professional economic policy
makers to lead the economy and run the mechanism in the country. What I am
saying is if the economic policies implemented was success, we should have be
in a much better place in the world. This emphasize that whoever the person/s
made policies in the economy had to be much more competent to make strategies
with a clear long term plan.
Issues in Sri Lankan economy
In 1977 the
constitution changed by creating an executive presidency in the country and a
prime minister run the country including the economy. With that change
liberalization was introduced to the economy. There to now Sri Lanka used open
market economy. However I have identified these issues in the economy.
·
Sri
Lanka couldn’t diversify the export products or couldn’t success in specializing
a product or service that the economy could rely on.
In the recent past
Sri Lankan government has identified some key focal areas to address the
external imbalances of the economy, especially with regard to reducing its high
and increasing trade deficit (Appendix 1, Figure 1) in order to make the
economy comply with the Marshal-Lerner condition (Sinha, 2010.). Sri Lankan’s oil import bill
accounts for an estimated 27% of the imports while investment goods import
component of 24% of total imports. These inelastic import components in the
economy as well as less specialize in product or service and inability to
compete with foreign products had led to imports of the country exceeds exports
of the country throughout the period. Because of this reason, Sri Lanka's
Export goods price elasticity + Import goods price elasticity totaling less
than 1, resulting in the country not complying with the Marshall–Lerner
condition. Because of this reason Sri Lanka couldn’t gain the advantage of the
rapid rupee depreciation which happened after 1977 due to moving into a
flexible exchange rate system.
As the solutions for the above stated
problems, I prefer that Sri Lanka should have a clear plan to specialize in
diversified fields. If I take an example, for the purpose of attracting tourists
to Sri Lanka we should promote our culture (events like Sinhala and Hindu aluth
awrudda, Vesak celebration, unique religion available for us etc.) and with a
proper infrastructure facilities covering all the areas with the purpose of
attracting such tourists. 2nd solution is the economic decision
makers should identify the importance of moving back to an agricultural based
economy. As we have a proper irrigation projects given by our great ancestors,
perfect weather conditions and geographical conditions to grow variety of
agricultural products in all around Sri Lanka we should have emphasize the
importance from the contribution agriculture sector. And the 3rd
solution is to improve the contribution from the textile sector by making
ambitious foreign trade agreements with Sri Lanka’s top export destinations
such as European countries.
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Social
welfare activities were not directed to the right persons.
In Sri Lanka,
welfare projects such Janasaviya, Samurdhi, Mahapola, Bursary was undertaken by
different political regimes with the purpose of eliminating poverty and
inequality in distribution of income, improving health and education in Sri
Lanka. But it is uncertain that the objectives those welfare projects was
achieved.
According to appendix 1, figure 2, the income
inequality in Sri Lanka is high and has remained more or less unchanged, for
more than three decades. While the share of household income of the poorest
decile has remained less than 2 %, the corresponding share of the richest
decile has remained around 38 % throughout the period from 1990/91 to 2012/13.
Even in the 9th household income decile, the share of total household income,
is only 15%, while the share of the richest decile, is more than twice the
share of the 9th decile, indicating that it is the people in the richest 10 %
of the households, who hold the major share of household income. The gini
coefficient is almost same throughout the period from 1977 to 2010 (Appendix 2,
Table 1).
The other major
problem is alleviating poverty. Poverty reduction in Sri Lanka has been uneven
across sectors. Rapid in the urban sector, but slow or stagnant in rural and
estate sectors. National poverty rate reduced from 26% in 1990-91 to 23 percent
in 2002. While urban poverty halved during this period, rural poverty declined
by less than five percentage points and poverty in the estates increased
significantly (Kelegama, 2001). Sri Lanka however experienced a
major decline in poverty between 2002 and 2009 from 23% to 9% of the
population. But on that time it has identified that an estimated 9% of the Sri
Lankans who are no longer classified as poor live within 20% of the poverty
line and are thus vulnerable to shocks which could cause them to fall back into
poverty (Department of Census and Statistics, 2015).
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Under
different political regimes there was no consistency and coordination in
economic policies
Throughout the
year’s citizen of Sri Lanka elected different political regimes in to the power
to run the mechanism of the economy. Under each regime different ministers was
elected by the president to run each sector. But the problem is if there was a
goal or a target to be achieved as a government of Sri Lanka in the long term.
The policies
implemented were according to personal agendas. As an example there was no
rational to build Mattala airport, Hambantota harbor in the Hambanthota area.
The purpose was just to improve the standard of living in the hometown of the
president Mahinda Rajapakse. And under many regimes, the state owned
enterprises was overstaffed with no purpose, just as an act of a political
promise. The companies that was privatized under a one regime was reestablish
as state owned enterprise can also be taken as an example for inconsistency in
policies. Sri Lanka Insurance, Sri Lankan Airline is the examples.
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The civil war (1983-2009)
According to Nisha, Sisira (1999) the country had to the government
had to incur direct costs such as military costs and cost of damages to social
and physical infrastructure and also indirect cost such as loss of income due
to forgone investment, lost income of reduced tourist arrivals, loss of income
due to forgone investment, loss of investment due to lost human capital. During
this time EU revoked GSP plus preferential tariļ¬s from Sri Lanka due to alleged
human rights violations, which cost about USD 500 million a year.
Consequences of having issues in Sri Lankan economy
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High
government debt
Due to unavoidable
military and defense expenditures during the civil war period, due to the
budget deficits and trade deficits throughout the years and due to high
expenditure by the governments that an objective was hardly achieved or which
barely brought an value to the economy, the government had to experience huge
amount of amount of debt from local and foreign sources. This situation leads
the country liable and had to incur significant amount of interest payable
making the government into a serious situation. (Appendix 1, Figure 3)
·
Youth
unemployment
Youth unemployment is a major issue in Sri
Lanka in which many qualified youth who have the technical skills or
appropriate academic qualification does not have jobs. Mismatch of education
and job market is a major reason brought forward for the unemployment of
educated youth in Sri Lanka. This is absolutely true that the kind of jobs
created by the corporate sector is not matching with the expectations of
graduates. Corporate sector often wants individuals who are prepared to do
exactly what the employer says without raising many issues
·
Loss
of foreign investment
Sri Lanka lost its
investment potential due to the uncertainty created by civil war. As an
example, two electronic manufacture giants, namely Motorola and Harris
Corporation which obtained BOI approval to establish plants inside Katunayake
free trade zone in 1982, withdrew their investment projects from Sri Lanka with
uncertainty created by the ethnic war. Peace and security are necessary
conditions, but not sufficient conditions to attract foreign investment. Many
other conditions have to be put in place to attract FDI. It is important to
ensure an attractive investment climate. Consistent macroeconomic policies,
good governance, economic stability, guarantee of property rights, rule of law
and absence of corruption are among the conditions required to attract FDI.
Consistency and predictability in economic policies and political stability are
preconditions to attract FDI. However it is not sure that Sri Lanka is able to
attract such foreign investors into the country by comparing with other
countries easiness of starting and doing a business (Appendix 2, Table 2).
·
Migration
of skilled workers
Brain drain can be
described as the process in which a country loses its most educated and
talented workers through migration. This situation leads most highly skilled
and competent individuals to contribute their expertise to the economy of other
countries. When the people who didn’t get satisfied with the situation in the
economy, the working conditions, infrastructure they always finds an
alternative. Finding a job in a developed country become a better solution for
them. With the availability of high quality infrastructure facilities and with
high salary will ensure them to live a luxury life. But how this brain drain of
skilled workers affect to the economy. The economy is loss of tax revenue, loss
of potential future entrepreneurs, shortage of important and skilled workers,
loss of innovative ideas and country's investment in education etc.
