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News Features  


 

REALISM AND PRAGMATISM IN ECONOMIC POLICY

Economic policy discussions have tended to be highly ideological in the country. This ideological bias has not been confined to politicians alone, but economists, social scientists, academics and the general public as well. In this context, the interview of Dr Harsha de Silva, the new nominated Member of Parliament in last Sunday’s Nation was a sobering one. His telling point was that there were only two kinds of economics - good and bad economics and those observations and arguments should be evidence based.

Dr Harsha de Silva, an economist by training, made the powerful point that there was no need to be concerned with various labels given to policies or adhere to ideological positions. He said there were only two kinds of economics: good economics and bad economics. For far too long, this country’s economic thinking has been clouded by ideologies and ‘isms’ rather than realism and pragmatism. Even those who advocate pragmatic policies are often the slaves of a defunct ideology. In fact, the country is notorious for moribund ideologies.

IMF Policies
There is no better example of this today as the attitude of many to IMF policies. They are opposed merely because they are from the IMF. There has been an antagonism to the IMF by the left movement for a long time and is a widespread phenomenon in the country. This is not altogether unjustified as many of the policies pursued by the IMF too were ideological and rooted in a framework of thinking that was not suited to the economies of many countries that they prescribed for. IMF policies of the past have had a monotonous uniformity, so much so that some economists have described them as the IMF theology. This has changed to a good extent. They are now focussed on fundamental principles leaving the countries to achieve targets in their own way.

Fundamental issue
The most important current issue is that of the fiscal deficit. The IMF wanted the country’s deficit to be brought down to reasonable proportions. It also accepted that the costs of rebuilding and reconstruction could be kept out of the requirement. This displayed a great degree of flexibility and realism on the part of the IMF.
Many are of the view that the control of the deficit is an IMF imposition. Therefore, they are opposed to it. The plain truth is that containment of the fiscal deficit is not merely good but imperative. The country must contain the fiscal deficit, not because the IMF requires it but because it is sound economic management. Containing the fiscal deficit is good economics, its ballooning simply bad economics.

Fiscal Management Responsibility Act
In fact, the country has accepted this as far back as 2002 when the Fiscal Management Responsibility Act was passed by Parliament. Although this Act of Parliament was effective from 2003, the targets specified therein have not been conformed to. The Fiscal Management Responsibility Act targets were, in fact, more stringent than the IMF figures. The fiscal deficit should have been 5 percent of GDP in 2006 in accordance with it. According to the agreement with the IMF, it was to be 7 percent of GDP. As it turned out it was far higher at 9.75 percent of GDP last year.

Reduce fiscal deficit
The government must reduce the fiscal deficit not because the IMF says so, but because it is essential for economic stability, growth and development. That is the pragmatic perspective that Dr Harsha de Silva advocated. The sooner an economically pragmatic approach is adopted, the sooner the country will achieve economic development. The choice is clear. Remain with outworn policies and progress slowly or eschew them and adopt policies that work and achieve rapid economic growth.
The international economic history of the last decade is one of dispelling ideologies for pragmatic policies. This experience has clearly demonstrated the benefits of economically sound pragmatic policies. Economies such as China, India and Vietnam have grown rapidly owing to their departure from long held ideologies to pragmatic polices for freer trade, liberalisation of economies and reform of economic institutions.

Initial peace dividend
The country has reaped the first installment of the peace dividend. The end of the war has resulted in a resurgence of several sectors of the economy. There has been an increase in agricultural production in the North and East with increased areas of cultivation. The greater trade relations and the opening of markets have provided incentives. This impetus is likely to grow in the coming months. The improvement in transport services and a more conscious effort on the part of the government could enhance productivity in agriculture. There has been an increase in fisheries with the opening of the seas in the North to fishing.

Both these initial developments could grow in momentum and enhance the country’s food production and perhaps reduce the costs of food. Tourism is the other sector that has already shown signs of significant increase. Tourism has grown at around 20 percent this year and promises to be an important source of foreign earnings once gain.

The IMF has noted encouraging signs of development in the post war period. Its assessment is certainly encouraging. The IMF has observed significant steps in the government’s economic programme: “They are also considering concrete steps to improve the investment climate. With the near-term external vulnerabilities eased, the government is shifting its emphasis toward more forward-looking, growth-enhancing policies that address some of the economy’s key structural weaknesses.”

Economic development at risk
Despite these positive developments, there is a serious risk of economic growth reaching a plateau if the fundamental problem of the fiscal deficit is not addressed. The inflationary pressures from both the developmental expenditures and the fiscal deficit as a consequence of the crushing debt servicing costs could jeopardise rapid growth. It is, therefore, vital that revenue and expenditure measures are undertaken to reduce the fiscal deficit.

Good and bad economics
The only way to resolve the problems facing the economy is to follow the principles of good economic management. These are well known and have been articulated over and over again by the Central Bank, the Secretary to the Treasury and the Institute of Policy Studies. The business community and economists have reiterated these. It is now the responsibility of the government to be bold and resolute to take the needed steps towards fiscal consolidation and economic reforms. It must have the long-term interests of the country in mind in its pursuance of economic policies.