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Business


The rule of law and economic growth

The Rule of Law is usually thought of as a political or legal matter, rather than an economic matter. Yet a school of Economics called Institutional Economics has developed in the last few decades and they have pointed out that the right policies represented by the Washington Consensus and recommended by the World Bank and the IMF such as balanced budgets, low public expenditure and sound exchange rate policies failed to prevent the East Asian financial crisis of 1997, although these countries by and large followed such sound economic policies. There were also the former Communist countries which had adopted market oriented economic policies. But with the collapse of Communism there was also a failure of the Rule of Law. Gangsters and underworld mafia extorted money from businessmen under President Yeltsin. Good economic policies could not be implemented because the bureaucracy was found to be both incompetent and corrupt. They dampened economic incentives for entrepreneurial activity and distorted markets. The politicians were not accountable for their action and were on the take from businessmen. State economic activity was driven by corruption rather than the public welfare. State resources were converted for private benefit of the ruling politicians. Institutional economists began to see a correlation between the rule of law and economic growth and argued that no amount of tinkering with macro-economic policies would produce the desired economic results unless there was a functioning state. Economists began to rank countries on a scale for good governance and came out with the proposition that a country’s income per head rises by 300% if it improves its governance standards by one standard deviation in a normalized income per capita scatter diagram. There was good correlation between the effectiveness of the Rule of Law and the level of per capita incomes. All the economically wealthy countries had effective Rule of Law. So, multilateral lending agencies like the World Bank began supporting legal reform and judicial institutions. Money was given for training judges, strengthening prosecutors and computerization of court records. Foreign aid was made conditional on a country being committed to a minimum rule of law by the American Millennium Challenge Corporation. But economists found that different organizations and even policy makers had different ideas about what the Rule of Law meant.

What aspects of the Rule of Law would matter for economic growth? Should it be concerned with human rights, democracy and public morality or should it be defined more narrowly as those laws and institutions that protect property rights and freedom of contract. The latter group focuses on the importance of transaction costs and the establishment of trust among individuals who could ultimately fall back on the exercise of the law to vindicate their contractual and property rights. Stable and efficient administration of justice is stressed by them rather than human rights or political morality. They stress effective governance for the protection of property rights and contractual rights. Stable and predictable laws encourage investment and economic growth they say.

But another group says a country can be considered as having established the Rule of Law only if the state power is constrained by the law, that the citizens’ rights against the state are protected and that liberty and democracy are functioning with freedom of speech and the freedom of the media upheld by the state and its institutions. The rule of law they say, should safeguard and advance the civil and political rights of the citizen. This version of the Rule of Law requires political morality as well. Amartya Sen says that if you give people freedom to be creative they expand people’s capabilities. This requires lifting unnecessary rules & regulations and the guaranteeing of certain basic rights particularly freedom of thought, speech and publication.

The distinction between these two versions and their impact on economic growth is based on different views of the nature of the process of economic growth. The latter see economic growth as essentially driven by new ideas which get embodied in new inventions and innovations. Freedom to innovate is critical in their eyes. As one writer stated the Rule of Law is an open ended concept which is subject to permanent debate. But one thing is certain and that is its importance for economic growth.

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  Iranian connections: Keeping politics out of economics 

Late last year, Sri Lanka’s President announced a US$1.5 billion dollar deal with Iran, which will see around US$450 million pumped into a hydroelectric project in Uma Oya, and a loan worth around US$700 million offered for expansion of the Sapugaskanda Oil Refinery.

For the ailing oil refinery the money comes just in time. Only last year there were talks of closure over the failure of the government to ensure badly needed upgrades.

The expansion is expected to double the island’s only oil refinery’s output to around 100,000 barrels per day, which the government anticipates will fulfill domestic demand.
It is believed that the Sapugaskanda loan, for which full details are not available, has been offered with a five year grace period, thereafter repayable over ten years.

No doubt, many in the Sri Lankan business community, who are slowly seeing both the benefits and extent of possible Iranian investment in the country, are secretly pleased at this talking-down.

“In my opinion, from speaking with Iranian businessmen and officials, there is possibly US$ 10 billion that Iran could invest in Sri Lanka,” said Ifthikhar Aziz, Managing Director of Bartercard Lanka.

Aziz is well-placed to know such information as he was instrumental in organizing the Iran Trade Exhibition that took place in Colombo at the end of January earlier in the year

By Samantha Whybrow
Iran popped up in news headlines, across the word last week, as Hillary Clinton, made threats about nuclear attack, while senior Indian officials politely requested that, the US butt out of India’s affairs, with regard to its relationship, with the oil rich nation.

All this comes at a time, when Iran’s President, Mahmoud Ahamdinejad, whose name will no doubt, make more headlines this week, will embark on his first ever Asian tour, which includes a two day stay in Sri Lanka, along with a stopover, lasting a few hours in India.

An Iranian Head of State has never visited Sri Lanka, according to an official from the Iranian Embassy in Colombo who said, he was unable to provide specific details, about their President’s tour.

What is known is that, President Ahamdinejad’s visit to Sri Lanka, comes at the invitation of Sri Lanka’s own Head of State, who himself visited the Iranian Republic in November, last year.

The reciprocal visits reflect the strengthening of the relationship, between the two nations, something, that is not without controversy.

Iran has long been viewed as recalcitrant, and potentially dangerous, particularly by Western nations, who, latterly, see the country’s nuclear development, as a threat to global security.

In this context, the US has been sending out gentle, but deliberate cautions, to countries entering into agreements, with Iran.
Earlier in the week, US State Department spokesman Tim Casey, had this to say, on the eve of the Iranian President’s tour.

“We would hope that, the Indian Government or any government, that was engaging with the Iranians, including with President Ahmadi-Nejad, would call on him, to meet the requirements, that the Security Council and the international community has placed on him, in terms of suspending their uranium enrichment activities, and complying with the other requirements, regarding their nuclear program.”

“We’d also certainly encourage them to ask Iran, to end its support for terrorism, which includes organisations like Hezbollah and Hamas, and to become a more responsible actor, on the world stage.”

The Indians did not take too kindly to the statement, rebuffing the US for poking its nose in where it was not required, and stating that neither India nor Iran needed guidance on how to conduct diplomatic relations.

Big deals

No doubt, many in the Sri Lankan business community, who are slowly seeing both the benefits and extent of possible Iranian investment in the country, are secretly pleased at this talking-down.

“In my opinion, from speaking with Iranian businessmen and officials, there is possibly US$ 10 billion that Iran could invest in Sri Lanka,” said Ifthikhar Aziz, Managing Director of Bartercard Lanka.

Aziz is well-placed to know such information as he was instrumental in organizing the Iran Trade Exhibition that took place in Colombo at the end of January earlier in the year.

The trade exhibition attracted more than 80 large Iranian companies who were in Sri Lanka to showcase their wares and discern the potential for joint ventures to set up production and manufacturing facilities on the island.
As a direct result of the exhibition, one MOU has already been signed for the manufacture of boats and yachts in Sri Lanka—with investment to the tune of US$500,000—and more deals in the pipeline.

However, this type of investment reflects just a small piece of Iran’s growing interest in investing in Sri Lanka.
Late last year, Sri Lanka’s President announced a US$1.5 billion dollar deal with Iran, which will see around US$450 million pumped into a hydroelectric project in Uma Oya, and a loan worth around US$700 million offered for expansion of the Sapugaskanda Oil Refinery.

For the ailing oil refinery the money comes just in time. Only last year there were talks of closure over the failure of the government to ensure badly needed upgrades.
The expansion is expected to double the island’s only oil refinery’s output to around 100,000 barrels per day, which the government anticipates will fulfill domestic demand.

It is believed that the Sapugaskanda loan, for which full details are not available, has been offered with a five year grace period, thereafter repayable over ten years.

Meanwhile, the Sri Lankan government has also announced it has signed agreements to purchase around US$750 million worth of oil from Iran, for which it will not be required to pay any interest on for around seven months.
It is just these sorts of deals that are making Iran an increasingly attractive economic ally for Sri Lanka.

Trade Balance

Iran has a lot of money to invest, but finds it hard to invest in many foreign countries due to various—mainly political—reasons.
Meanwhile, Sri Lanka needs a lot of investment but has been struggling of late to attract it—again, largely attributable to political factors.

However, much as in India, Iran’s importance as a trading partner to Sri Lanka has a history that extends beyond each country’s respective troubles.

According to the Department of Customs, bilateral trade turnover between the two countries increased to US$902.1 million in 2007. This represented the highest recorded value between the two countries, in both directions, ever.

Significantly, Sri Lanka sources most of its crude oil from Iran, to the value of around US$750 million last year. While Iran sources a good deal of its tea—more than 50 percent of its consumption—from Sri Lanka.

These two commodities make up the bulk of trade between the two nations, although the favour remains firmly in Iran’s direction—to the tune of US$666.7 million dollars.

Sri Lanka’s exports to Iran totaled US$117.2 million in 2007, with Sri Lanka importing goods to the value of US$784.9 million from the Middle Eastern nation.

This is something the Sri Lankan government is hoping to change as it sets its gaze on the Iranian domestic market.
“Iran has a very diversified economy and a huge domestic market, with a population of around 70 million,” said a source from Sri Lanka’s Board of Investment (BOI).

Aziz, who has had extensive contact with Iranian delegations in the past and is well aware of the potential, agrees, stating, “Trade has typically been biased in favour of Iran, but there is plenty of opportunity to increase our exports to Iran, particularly in tea, rubber, and garments.”

High hopes are also being held with regards to increasing tourist traffic from Iran to Sri Lanka, with BOI sources pointing out that Iranians have increasingly high disposable incomes and that Sri Lanka is perceived by them as a friendly country to travel in.

Attitude problem

With the visit of the Iranian head of state to the island this week to inaugurate the Iranian-financed Uma Oya hydroelectricity project at Wellawaya, the two countries are on course to forge even stronger ties.

According to Aziz, the Iranian trade exhibition has already helped to foster closer business links between the two nations, providing an opportunity for Sri Lankan businessmen to meet with Iranian counterparts on an individual basis to dispel any misconceptions.

Although Aziz points out that some improvements do need to be made in terms of facilities if Sri Lanka hopes to attract even more investment.
“We are investment friendly, but we could be more investment-friendly,” says Aziz.
Those who have been involved with previous Iranian business delegations are looking forward to the visit, and are hoping the rest of the country is too.

Aziz points out Sri Lankans should be welcoming the Iranians with genuinely open arms without biases.
“Iran is convinced Sri Lanka is a good place to invest, and their investment can spur more economic activity and contribute to the development of the country,” says Aziz who points out transparent and genuine transactions should be accepted.

“We are a small country and we cannot afford to take sides. Investment like this is essential for the development of the country and for the survival of our people.”

Mimicking what seems to be on the lips of Indian officials who are hoping to broker a deal worth more than US$7 billion for an Iran-Pakistan-India pipeline when they meet with the Iranian President, Aziz asserts, “It is about economics not politics.”

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