Human rights and freedom needed for economic development

Article from Island 16-03-2014 Sunday Newspaper

by R.M.B Senanayake

To a great extent the reputation of a government depends on the cohesion of the country over which it presides. If a nation is divided by race, language religion or cultural myths and assumptions as we are, then these animosities and disputes will poison politics, making it hard for the Government to avoid alienating one group or faction or another. The Government may think they don’t matter. But a country cannot be held together by force alone. It needs the willing support of the minorities.  Majoritarianism does not help.

The Government is wooing the Sinhala Buddhist majority but should it pit it against the minorities and the liberal intelligentsia? It knows that the UN cannot take punitive action without the approval of the UN Security Council where both Russia and China will exercise their vetoes in our favor. Sustainable development is only through empowering the people and allowing them freedom as pointed out by Dr Amartya Sen. So, isn’t it better to restore the independence of the democratic institutions and the Rule of Law and win the support of the liberal intelligentsia and the minorities, never mind the UNHCR. 

There are some jobs only a government can do such as the enforcement of law and order and the upholding of justice by maintaining the Rule of Law rather than the rule of persons, be it the President or  the Ministers. These tasks are easier if the government is not held in contempt. The UN Human rights Council Resolution now seems to be extended in its purview from the last stage of the war to include human rights violations after the war as well. The present draft includes issues of human rights violations and accountability in the entire country, rather than in the North and East alone and does not limit those issues to the last phase of the war. 

It is the economy that will ultimately determine the popularity of the Government. The economy is not at the beck and call of the Government. The Government will have to recognize its vulnerability to external factors. The level of short term foreign debt is too high in relation to our Gross Official Foreign Reserves, which are largely borrowed on which we have to pay a higher rate of interest than generally available for their short term investment in the Treasuries of foreign governments which are held low by Quantitative Easing in the USA and the EU. 

The foreign debt service payments as a percentage of exports of goods and services jumped to 21.2% in 2012 from 12.7% in 2011. ( Annual Report of the Central Bank).The Government  will have to come up with a credible plan to reduce foreign debt and increase its foreign Reserves to cover a much larger percentage of the short term foreign debt. Otherwise we remain vulnerable to a foreign debt default if the Western Powers decide to tighten up on us. They do control the international payments and settlements systems and can take action on their own if we do not co-operate with the UN Human Rights Council Resolution. Iran had to succumb to U.S sanctions and was forced to change its attitude and resume talks with the USA when its economy suffered. 

If the Ukrainian crisis drags on the price of oil is likely to go up. We are presently going through a drought which will reduce the electricity generation from hydro power. We will therefore need to import a larger quantity of oil and at a higher price. Our oil bill accounts for nearly 25% of our imports and this would mean a worsening of our current account deficit in the balance of payments. We could fund it by drawing down our Official Foreign Reserves or by more foreign capital inflows. But this would mean more foreign debt.

We need foreign inflows of equity by way of direct foreign investment. Foreigners require credible and stable policies to invest long term in the form of equity. We have been able to attract direct foreign investment mostly to the hotel sector and to the real estate sector where foreigners are willing to construct  apartments. But our erratic policies will not attract them. The foreigners particularly those from liberal democratic countries want a judicial system which will be neutral in disputes between the State and private business. They want the Rule of Law and an independent judicial system which holds the scales evenly and is not subject to pressure from the Executive arm of the State.

To attract foreign direct investment the Government needs to govern according to law, restore the independence and integrity of the democratic institutions and the Rule of Law. These very matters will be the focus of the proposed new Resolution of the  UN Human Rights Council. Recommendations to improve governance are already contained in the Lessons Learned and Reconciliation Commission report. The Action Plan of the Government however has largely ignored them perhaps on the ground that they were beyond the terms of reference of the LLRC.

It will be a win-win situation for the Government if it acts on these recommendations for the improvement of governance. It will help the Government to maintain its popularity without limiting its appeal to the Sinhala Buddhists and alienating the minorities.  The protests in several villages by people show that it is no longer possible for the Government to depend on the centralized model of governance. The schools will have to be given a larger degree of power and it is necessary to involve the local people in matters affecting their village school or health clinic.

Devolution is required not only to the Provincial Councils but to a much lower tier so that the people can have a stake in the management of their day to day affairs. Development economists have long realized that the only way to develop the rural communities is through empowerment, not patronage of  the  central government. Rajiv Gandhi once said that about 50% of the central government funds disbursed to the rural people through its welfare schemes leaked out to government employees and political hangers on. He was wrong for a subsequent study by the Planning Commission showed that only 15% of the funds of the government reached those to whom they were intended!

A recent study by a Research Officer of a Bank showed that there is little or no gap between the actual growth rate and the potential growth rate in the economy. So there is no justification to boost growth artificially by expanding government capital expenditure.  They need to be based more on demand rather than as a stimulus to higher growth. Are the expressways providing a return which will even cover the interest costs of the capital investment on them? It would seem to be so only in the case of the Katunayake Expressway. We should carry out new infrastructure projects based on a feasibility analysis where the anticipated demand is taken into consideration.

If the oil price goes up and we have to import more oil at higher prices due to the drought, then the budget deficit will worsen in absolute terms. Can we afford to expand the budget deficit? It will mean pre-empting credit from the private sector. It will also mean a larger current account deficit in the balance of payments. But this would mean running down our Foreign Reserves unless we get more foreign equity capital inflows. In 2012 direct foreign investment was a net of US $ 813 million. The rest of the inflows were foreign debt. We had an overall balance of $151 million including an Errors & Omissions figure of -$617 million.

The Government is hung up on growth but the recent Household Income Survey shows a wide gap in the per capita income as per this Survey and the GDP Per Capita. The mean household income per month was computed at Rs. 46,207 for Sri Lanka for a household of 3.9 persons or Rs 11,848 per capita. During the previous Survey in 2009/10 the mean household income was Rs 36,451 for 4.0 persons- an increase of 21% over 3 years or 7% per year. The mean household expenditure per month for Sri Lanka is Rs. 40,887 showing that the income earners are spending their entire income and a little more.

But consider the GDP/Per Capita which was in 2012 Rs 31,083 per month. There is a big difference in the per capita income as per GDP figures and the Household Survey. A controversy has sprung up among local economists after Mr. W.A Wijewardene drew attention to this discrepancy. Of course there are good reasons why the two figures differ and the Central Bank as well as Mr. Wijewardene himself has drawn attention to them.

What strikes me is that the Household Survey of Income doesn’t include the value of the free education and free health care provided by the government. We stress too much on the per capita GDP figure but we must keep in mind this difference when we draw conclusions about the improvement in living standards.
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