Why our crony capitalism cannot deliver sustainable growth

From Sunday Island 23/03/2014

by R.M.B Senanayake

The President declares open the Expressways and impressively shows them to the people as achievements of the government. No doubt they are. They do facilitate development of the economy. But their contribution to the wealth of the country must include a valuation of the net value of the asset after deducting its cost of construction. The accrual basis of accounting and the presentation of a balance sheet along with the performance evaluation of the budget is not only followed in the case of private sector firms but also in governments as in the case of New Zealand.

Budgeting for the full costs of providing government services will enable both Parliament and the community to ensure that the government is living within its means and is able to deliver sustainable services in the future. Net worth provides a more comprehensive picture of the government’s overall financial position. It is calculated as total assets (both financial and non-financial) minus total liabilities. It also draws attention to the provision for annual maintenance costs and depreciation for otherwise the government may fail to provide for adequate maintenance expenditure to preserve the value of such assets.

Doing away with tender procedure

The opposition has drawn attention to the enormous escalation of costs from one Expressway to another. They have faulted the acceptance of unsolicited proposals for new projects without calling for tenders which provide a mechanism to obtain the cheapest price. Yes the tender procedure matters. If not, public procurement and construction contracts will allow what economists call rent seeking – the sort of money making due to political connections and influence. It does not work for the benefit of the economy and good economic performance becomes impossible. It merely gives rise to ‘oligarchs’ who build their empires using influence.

Several countries including the USA have gone through this stage but corrected themselves later to break their monopolies through Anti-trust legislation since they don’t contribute to economic efficiency.

The lack of good governance means the lack of competitive efficiency and leads to waste and mismanagement of the resource base. The Economist of 15/3 2014 in "The New age of Crony Capitalism" says crony capitalism is bad for long term growth. "Such growth requires that markets work better which means competition not its elimination. Oligarchs make their money on some special sectors" like the infrastructure investments. But the scope for infrastructure will be exhausted. Then a country needs investment in innovative sectors where technology drives growth. It concludes that "Governments need to be assiduous in regulating monopolies, in ensuring that public tenders and asset sales are transparent and in prosecuting bribe takers".

Growth prospects for emerging countries

There is presently a debate about emerging countries’ growth prospects. The US Federal Reserve’s tapering of its purchases of long-term assets, has already affected growth in several emerging countries like India, Brazil and Turkey. So far we have not had any impact from such tapering and there has not been any dramatic reversal of capital inflows. But the Central Bank has drawn attention to the so-called ‘middle income trap’ where second and third generation structural reforms are needed to maintain sustainable growth. There are also the limits to "catch up" growth outside of manufacturing. Optimists argue that the potential for rapid growth remains in the emerging world owing to the promise of introducing latest technology.

But recent events in some emerging countries point once again to the importance of good governance and responsive political systems, a familiar topic in studies of long-term economic growth. Countries that appeared successful for a long time, such as Turkey or Thailand, suddenly seem to face obstacles related to governance and the ability to forge domestic political compromises. We too have failed to do so and problems with ethnic and religious minorities are still with us.

Rent seeking

It is the nature of governance that determines whether people deploy their talents and energy in pursuit of innovation, production, and job creation, or in rent seeking and lobbying for political privileges and protection. We see all round us the special privileges enjoyed by our politicians and their business friends. They are favored in the disbursement of public funds and in the award of public contracts. The cost of the political establishment by way of their salaries and benefits are a heavy burden on the economy. Enterprises like Mihin Air are run purely for the benefit of the ruling politicians and they run up huge losses to burden the public. Enormous amounts of money are also disbursed on foreign travel by government luminaries who take with them huge contingents of officials and politicians who make no contribution to the work of such missions.

In Egypt, the old regime under Hosni Mubarak, having failed to democratize, collapsed in the face of massive protest. A low-turnout election gave a plurality of the popular vote to the Muslim Brotherhood which came to power alone and proceeded to ignore good governance and alienate all except its most fervent followers.

The Brotherhood’s approach to governance also explains the mess it made of the economy and is an object lesson to us. Instead of trying to build non-partisan and competent regulatory institutions, all positions were stacked with political followers.

To counter the devolution provision in the 13th Amendment, a dual administration was introduced by President Premadasa to destroy Provincial Councils as institutions of self governance. Originally the Divisional Secretaries (then called Assistant Government Agents) were under the Provincial Councils and they were made the Secretaries of the Pradesiya Sabhas but he reversed it and returned them to the central government. So how can the Provincial Council carry out its work in the divisional and village level? They have to depend on these same officials but they are no longer under their administrative control. No government since then have taken action to remove this dual control which is not workable according to the tenets of public administration. Unless this institutional change is made the Provincial Councils cannot work.

The government has ignored the need to build durable institutions that could foster political reconciliation and deliver inclusive growth through empowering the village people. The country is in dire need of foreign capital inflows and there are Tamil expatriates willing to invest in the country at least in the North and East provided they are issued dual passports since they do not wish to give up their foreign citizenship. The government has facilitated the restoration of development in the North through its infrastructure investment. But the problems of livelihood of the people there will need investment in industry, agriculture and services and local businessmen cannot fill this need. Why not allow dual passports to Sri Lankans abroad?

If the administrative obstacles to the work of the Northern Provincial Council are removed (they don’t require new laws) stability will take hold, markets will function, the North and East will attract investment, and tourism will thrive. Development in any part of the Island is bound to spill over to the rest of the country as the economy gets more and more integrated through the expressways.

At the heart of the difference between what is needed and what is followed by the government is a vision of governance that makes such compromise impossible. Such a vision presupposes an assurance that a winner-take-all system will not be established as well as broad agreement that regulatory institutions should be reasonably non-partisan and staffed with competent professionals.

China’s success is sometimes given as a counter-example to the importance of good governance for economic performance. "The Chinese example certainly calls into question a strong correlation between multi-party democracy and economic growth. But, there is a huge difference between dictatorial regimes, where a single individual or a single family monopolizes all power –and China, where there has been competition and contestability within a large communist party". The Communist Party operates as a fairly inclusive and meritocratic institution, not an autocratic leader, that has governed in the post-Mao period. http://www.project-syndicate.org/commentary/kemal-dervi—searches-beyond-specific-policies-for-the-roots-of-sustained-growth#A9SFIfi8LKArI74m.99

Lack of reasonably independent regulation and competent public administration, lead inexorably to economic waste and inefficiency and eventually to political turmoil. In the complex global economy of the 21st century, sustained good economic performance requires well-functioning institutions that can operate with reasonable independence where their expertise can be deployed without political interference.

For example, successful economies require a reasonably independent central bank, and competent bank supervision free of short term politics. They also need regulatory agencies in sectors such as telecommunications and electricity with appointees selected according to nonpartisan criteria who then exercise their authority in a non-partisan way that fosters competition among the firms involved.

When credit decisions, public procurement, construction contracts, and price determination reflect only short-term and purely political goals, good economic performance becomes impossible. The economy needs to be driven by innovation, competitive efficiency, and a focus on production rather than rents. All these require is good governance.
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Food for thought. But in reality very few politician wwill understand the above content let alone the implementation.   

In simple Non-accountability.   
If the culture of accountability can be installed, then the things will fall in places correctly.
Otherwise, we will stay a poor nation until the end of the Universe.