Open economy: A friend or foe of the poor? | Daily News

Open economy: A friend or foe of the poor?

The Deputy Leader of United National Party and Minister of Housing Sajith Premadasa recently called for an open economy with a human face. He said it is the right way to establish a just society.

Mr. Premadasa added, “It must be understood that full-blown capitalism is not the order of the day. A just and fair society can only be established through systems, structures and procedures that are based on benevolence capitalism. To use a more apt phrase, a just society could be established through capitalism with a human face.”

Sri Lanka has over four decades of experience in open economy. Economists since Adam Smith and David Ricardo, writing in the 18th and 19th Centuries, recognized the benefits of open economies for consumers, investors and nations as a whole. Today, most nations operate open economies to varying degrees and are quite aware of the benefits it brings in.

For consumers, the advantage of an open economy is a greater variety of goods and services from which to choose. At the same time, competition among producers results in lower prices and improved services. These are the two major advantages for consumers.

The benefits of an open economy are not limited to consumers. Global interaction allows companies to gain access to customers in other nations. U.S. brands as McDonald’s, Apple and Starbucks, and Finnish communications giant Nokia, amongst others, have established worldwide customer bases including Sri Lanka

For investors, an open economy expands their opportunities to invest in companies of other nations having open economies.

Yet, there are also drawbacks in open economies.

Since open economies are interdependent, they are exposed to certain unavoidable risks. For example, fluctuations in income, prices and employment etc., originating in one economy, will spread to other economies also.

And, there are also “footloose” funds. Large amounts of footloose (or highly speculative type) funds are moving around the world in search of places where they can be “parked” (that is, invested temporarily) within reasonable level of safety and return.

Certain varieties of imports can expose an open economy to undue political, economic and cultural risks. Examples are imports essential for defence, health care, energy needs, food needs, and the like.

Finally, large scale increase in international capital flows has resulted in problems like heavy indebtedness of certain developing countries and their inability to repay their debts. Sri Lanka is a good example.

These are the major pluses and minuses of open economy. Being a veteran politician, Mr. Premadasa would have been fully aware of those points.

Disparity in wealth

Therefore, for any sensible person, it is quite appropriate for him to talk of a human face for open economy. Unlike many politicians, Mr. Premadasa has not forgotten the Government’s prime obligation to the people – which is, to provide a dignified life to many millions who do not enjoy even the basic necessities of life.

Past four decades’ experience in our country would have shown him that when the space for economic activity expands for the private sector, it is the people with the necessary resources that profit best. Hence, their incomes rise faster than those who do not possess such advantages.

That is why Matale, Matara, Kegalle and Ampara have country’s high unemployment rates while Colombo, Kalutara and Gampaha do not. That is why, rural and estate sector contributes 92 per cent for the total poverty in Sri Lanka while urban areas contribute only 8 per cent. The so-called “benefits” of our open economy have not proportionately flowed down to the rural and estate sectors where the most of the poor live.

Dilemma

Open economy also comes with a requirement that the government shrinks itself. When it happens, it reduces the scope for the government to intervene on behalf of the weak and needy. The ability of the government to bring more people to participate in economic activity is curtailed.

Therefore, if we are to accede to Mr. Premadasa’s request, a type of conceptual dilemma will arise for both reforms - withdrawing the government from activities that the private sector could carry on profitably - and also to create a human face - redoubling the involvement of the government where only the government can mediate.

The problem for Sri Lanka economic experts is to translate the concept into reality.

Human face

What exactly, is meant by “open economy with a human face?” Economists have their own high-wrought definitions. But in simple terms it means pro-growth reforms which are strengthened by pro-human resource development programmes.

While the former means withdrawal and disengagement of the government, the latter requires (as Mr. Premadasa rightly said) re-defining the systems, structures and procedures of the government. One important item of the re-definition is the drastic restructuring of the governmental organisations.

Politically, is the Government ready for this difficult task?

Even currently the government is disposing funds and resources meant for strengthening the poor. Therefore, one might ask whether there is much purpose in pushing more resources through a corroded and clogged delivery channel that the Sri Lanka’s top-to-bottom bureaucratic machinery is.

Bureaucracy

Bureaucracies are not by nature bad. They are available in every country in the world – developed and developing. In general, there is a wide range of thinking about the value of bureaucracies and work done by bureaucrats; it leads some to devote thought to how bureaucracies can be made more effective in what they do.

Here in Sri Lanka, our problem is our bureaucracy is not built for crisp decision making. However, we must not confuse our public bureaucracy with slow thinking public officers because they have functions that are largely not associated with decision making. Our bureaucracy is focused on decision rights, not decision making.

Most governmental bureaucracy is the result of crossed purposes and multiple groups who disagree on the desirability of certain results. They keep on pushing papers round and round, and then the actual decision goes to a person who does not understand the subject at all.

Action plan

In business today, effective processes for decision making are associated with words like speed, agility, and ambidexterity - characterized by fewer filters through which decisions have to be processed and fewer people who have veto power over ideas, good or bad. Authority is delegated along with responsibility. Everyone acts in the best interests of the organisation, assuming knowledge of the objectives and acceptable ways of achieving them.

That is in contrast to our bureaucracy, which is, according to this writer “an administrative system in which the need or inclination to follow rigid or complex procedures impedes effective action.”

In this situation, our immediate issue is clear. We have to find ways of capturing the deliberative advantages of bureaucratic decision processes without paying the price of so many meetings, delays, decision screens, and vetoes.

Unless the government has an action plan to make bureaucracy responsive like the private sector, the concept of open economy with a human face would remain an empty and worse, a misleading slogan. If a good action plan can be implemented with commitment, before long, bureaucratic delivery channels can be cleared of the debris.

The question for Sri Lanka is whether the ruling alliance would stand united in shrinking, re-sizing and restructuring the government to present its human face.

If it does not, open economy with a human face would not only fail to deliver on human resource development but would also pull down the economy’s growth impetus.

 


 

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