A previous Pathfinder Foundation (PF) Economic Alert (64) argued that the Sino-Lanka FTA has the potential to be the ‘Jewel in the Crown’ in the bilateral economic relationship. It can have a transformative impact not just on market access for Sri Lanka’s exports to China but also on inward investment and technology transfer. Internal trends within China also reinforce the prospects for an encouraging future in the bilateral economic relationship. Furthermore, China’s Maritime Silk Road initiative provides a framework for a multifaceted strengthening of the partnership. High priority should be attached to taking advantage of the existing close bilateral Sino-Lanka relationship to shape the economic links between the two countries to serve Sri Lanka’s development priorities. It is important to elaborate briefly on these themes.

The Pathfinder Foundation (PF) congratulates H. E. Maithripala Sirisena on his assumption of duties as the sixth President of Sri Lanka. It is encouraging that momentum seems to be building up in support of the important constitutional and governance reforms contained in his 100-Day Program. Every effort should be made to consolidate the consensus which seems to be emerging on these issues. Reform of the Executive Presidential system; the establishment of the Constitutional Council and independent commissions; the strengthening of the Parliamentary Oversight System of Committees; new electoral laws; the Right to Information Act; the National Drugs Policy; and the National Audit Bill are all measures which are very much in the national interest. The proposal to form a National Government of all parties represented in Parliament to govern for two years after the General Elections, in April, is also commendable as a measure to overcome the negative effects of the highly adversarial political system which has served to constrain the reforms necessary to address some of the major challenges which have confronted the country for decades.

This article is being written on the eve of the elections. By the time it is published the outcome would be known and the country will be looking forward to the Papal visit. His Holiness Pope Francis has proved to be a remarkable Pontiff. As an Argentinian, he is the first person from a developing country to grace this eminent position. His refreshing approach has undoubtedly been influenced by his Ministry in his homeland which would have given him first hand exposure to the challenges of living in the developing world.

The Budget Speech 2015 was a very well formulated document which provided benefits for important segments of the population and allocated resources/provided concessions to priority sectors of the economy. It was certainly a good political document in the run-up to the anticipated Presidential election in January 2015. In pluralist polities all over the world it is usual to have some parting of the ways between good politics and good economics in pre-election budgets.

The anticipated national elections have spawned a spate of misguided and unaffordable claims and counter claims. There have been calls for price controls for ‘essential commodities’ and a higher guaranteed price for paddy farmers as well as the introduction of a guaranteed price for fish. When considering such requests, it is important to learn from the mistakes of the past. Repeating policies, which have undermined the development of the country and ultimately imposed additional burdens on the people, would not serve anyone’s interest, particularly those who need ‘relief’ the most. In this connection, it would be useful to examine why price controls and subsidizing ‘essential commodities’ was a failed policy in the past. There is also merit in considering what the best instrument is for providing relief and how it can be targeted to those most in need. Finally, one needs to understand how best to treat the causes rather than the symptoms of the ‘cost of living problem’ which are triggering the pressure for these distortionary policies.

Akin to figures painted on a wall
Friends do not dodge at all
May he be in joy or grief
Hedge of genuine friends no brief
(Salalihini Sandeshaya- Thotagamuwe Sri Rahula Thero

The Prime Minister Abe’s visit to Sri Lanka offers the chance to reflect upon the fact that Japan has been a steadfast and generous partner throughout Sri Lanka’s post-independence era. At the San Francisco conference Sri Lanka drew upon Lord Buddha’s teachings to plead for the magnanimous treatment of Japan at the end of the World War II. This constituted a landmark in the bilateral relations between the two countries. Since then, Japan has been generous in its support to Sri Lanka at both the bilateral and multilateral levels. Prime Minister Abe’s visit can serve to open a new chapter in bilateral economic relations based on sharply increased flows of Japanese FDI.

As a factor of production, land is a crucial determinant of a country’s economic prospects. Under-utilized land undermines opportunities for gainful employment and wealth creation. It is important to recognize that the real value of land is not in itself but in the economic activity it facilitates. It also self-evident that land cannot be taken out of the country. In an economy, which is characterized by both a savings-investment gap and a deficit in the current account of the balance of payments, it can be counter-productive to introduce legislation which would deter foreign investment that can release the full value of large extents of under-utilized land. Discouraging foreign investment in a crucial factor of production, such as land, can transmit negative signals more broadly which will discourage much needed non debt-creating external inflows which are essential to achieve the government’s growth targets. It is a matter of concern, therefore, that the government is bringing forward legislation which could reduce foreign investment which can address the savings gap and the current account deficit in a sustainable manner.

Prime Minister Modi’s elections were hailed as a resounding victory for his pro-growth/pro-business agenda. There was an expectation among pro-market economists and business that Finance Minister Arun Jaitley’s maiden effort would lay out a vision for five years; introduce major structural reforms; and administer some necessary but bitter medicine in pursuit of fiscal consolidation. Instead, critics claimed that the budget seemed to have been prepared by incumbent bureaucrats and represented unimaginative continuity rather than a bold new vision.

Political stability and social harmony are crucial for creating a conducive enabling environment for sustained development and upliftment of the lives of all Sri Lankans. Any instability on these fronts has serious adverse implications for development. The recent violent disturbances in the country should, therefore, be a matter of the utmost concern to all Sri Lankans.

There is an emerging consensus that this is likely to be an El Nino year. Experts have indicated that there is a 58% probability that it will begin to take effect in 3Q 2014; there is an 80% chance of it materializing in the last quarter of this year.

Narendra Modi’s dramatic victory has given him a resounding mandate to pursue his pro-growth / pro-business agenda. He campaigned unreservedly on a strongly developmental platform. The results indicate that the majority of Indians want higher growth, lower inflation and less corruption. The Prime Minister-elect has built up a strong administrative track-record during his tenure as Chief Minister of Gujrat. This is cited to demonstrate his capacity to implement robust reforms to revive the stalling growth in the Indian economy, which has declined from 9% to 5.5%. The Congress Party played an important part in introducing reforms which gave India 15 years of 7% - 8% growth. However, in its last term the Congress Government presided over a period of ‘policy paralysis’ and was also dragged down by a series of corruption scandals, which ironically came to light largely because of the Right to Information Act that it introduced. It is reported that the ‘policy paralysis’ was triggered due to pressures mounted by minor parties in the Coalition Government mostly on ideological grounds. From an economic perspective, the election of Mr. Modi is timely for India, Sri Lanka and the region. His pro-growth/pro-business agenda is what is needed at this point to revive the Indian economy. A return to higher growth rates is important not only to meet the aspirations for greater prosperity among the Indian population, particularly the rising middle-class, but also to protect important social legislation enacted by the Congress Government. The National Rural Employment Guarantee Act (NREGA) and the Food Security Act are only affordable, if growth rates are high enough to generate sufficient Government revenue to fund them. Hence, after a period when the Congress Government introduced social protection measures, the time is now ripe to focus on restoring growth to meet the twin objectives of wealth creation and social welfare.