THE SRI LANKA STORY
A PERENNIAL WELFARE STATE
Tharindra Gooneratne charts a national path to self-sustenance
On 22 May 1972, Ceylon officially became the Democratic Socialist Republic of Sri Lanka in a colourful ceremony where, according to The New York Times, “musicians blew conch shells, yellow robed Buddhist monks chanted and guns were fired in salute.”
The ’70s were defined by the continuous tug-of-war between capitalism and socialism from the Vietnam War to the Cold War. By including the term ‘Socialist’ in the official name of the country, it seems that Sri Lanka’s leaders picked a side in this debate – despite all the rhetoric of believing in nonalignment.
This is not surprising considering the abundance of left-wing politicians of that era such as Dr. N. M. Perera, Colvin R. de Silva and Philip Gunawardena all of whom were members of the Trotskyist Lanka Sama Samaja Party (LSSP).
Given that the world has changed drastically over the past 50 years however, should we be proud of our status as a Democratic ‘Socialist’ Republic?
To be fair, there are several examples of thriving welfare states, the most notable being the Nordic countries where three (Norway, Denmark and Iceland) of the five were ranked in the top 10 in the Human Development Index published by the UNDP in 2015. All three countries have comprehensive social safety nets and remain committed to ideals such as free education and universal healthcare.
However, there is a major difference between these three welfare states and Sri Lanka.
Last year, both Norway and Iceland achieved budget surpluses while Denmark ran a very small budget deficit of 0.6 percent of GDP. In contrast, Sri Lanka’s budget deficit in 2017 was estimated at 4.8 percent of GDP. We cannot rely on debt fuelled growth forever; we’re already in a debt trap that has culminated in Sri Lanka sharing the same sovereign credit rating as Rwanda and Uganda.
It can be argued that the present regime is attempting to solve this problem. Yet, whilst a strategy is in place to cut the budget deficit to 3.5 percent of GDP by 2020, the inconvenient truth is that the fiscal deficit (which reflects the actual financial status of the government compared to the budget deficit – a forecast) in 2017 was 5.5 percent of GDP and not far from the 5.7 percent deficit in 2014.
In terms of government expenditure, the major constraint imposed by debt servicing obligations is often discussed. However, another area of concern is Sri Lanka’s bloated public sector, which expanded by almost 40 percent between 2006 and 2016, and employs one in four paid workers in the country today.
This would be a perfectly acceptable scenario if not for the bureaucracy and inefficiency that has plagued many public sector institutions.
For example, according to a report published by the Department of Census and Statistics in 2016, almost two in five public sector employees aren’t computer literate.
Government revenue as a share of GDP has risen over the past three years from 11.6 percent to 13.8 percent. Yet, we continue to remain below the world average of 15 percent.
In terms of sources of revenue, we’re overly reliant on indirect taxes such as VAT. Such taxes account for over 80 percent of Sri Lanka’s tax revenue compared to 33 percent on average across OECD countries in 2014. This is important to note as indirect taxes (which are levied on expenditure rather than income) are regressive in nature – they impose a more severe burden on lower income segments of the citizenry.
We need to accept that we’re a small country that cannot remain a fiscally irresponsible and bloated welfare state forever. However, the bitter truth is that campaigning on fiscal responsibility is unlikely to win elections at the national level.
So how can we chart a path from extravagance to moderation?
At the outset, you have gotten your facts mixed up. On 22 May 1972, the Republic of Sri Lanka was born. Lavish it may be but that was when the dominion state became a republic.
After 160-odd years of colonialism, a new independent state began to blossom. Yet the constitution of the Republic of Sri Lanka didn’t last that long.
In 1978, a new constitution was adopted. The country was renamed with no science behind it to read Democratic Socialist Republic of Sri Lanka. There was no lavish ceremony but the executive presidential system was introduced.
From the expenditure perspective, yes, government employment has been a dumping ground in which pre-election promises are fulfilled; these are also points to score for upcoming election campaigns. Census data bears proof of this.
Then ministers too can manage to do their part effectively for a small percent of the cost – i.e. by not indulging in luxury but they too can serve as employees without excessive benefits, with limits on fuel, the number of vehicles used and more, and staff. This can save a massive amount of Sri Lanka’s public expenditure.
The debt trap too has been a result of appointing incapable people to positions of responsibility but who have limited capacities to make such projects viable.
The Sri Lankan economy also opened in a way that was too quick and not in a way that is sustainable. Some substitutes and complementary products of good quality can be manufactured locally. Import costs can be cut down on nonessentials (for example, do we need 30 types of imported noodles here?) – most of them are dumped especially from China with inferior quality products. These will contribute to the reduction of the budget deficit.
Although some satisfactory increases in the level of foreign reserves have been reported especially through the issuance of international sovereign bonds (ISB) by Central Bank of Sri Lanka (CBSL), in this state of continuing political uncertainty, Sri Lanka’s economic risk can be seen as high.
I agree. We can’t afford to waste money on people who don’t appreciate what they get for free.
Well said! When our politicians hit the campaign trail, the welfare state gets bigger; not because they care about us but because they have a hunger for power and money.
Dear Tharindra,
I agree with you on the ground that at least part of the public sector is ‘welfare’ or simply ‘doles’ as in the First World. However, I sincerely do not understand the link between your reasons and the conclusion.
For example:
1. “…this would be a perfectly acceptable scenario if not for the bureaucracy and inefficiency that has plagued many public sector institutions.”
But at the end you ask to cut down the ‘welfare.’ In fact, the useful way forward would be to eliminate inefficiency and bureaucracy.
Likewise:
2. “…according to a report published by the Department of Census and Statistics in 2016, almost two in five public sector employees aren’t computer literate.”
And you suggest getting rid of them to cut down on welfare. Your assumption that they were not computer literate because they were lazy (or whatever) might need to be tested against the fact that most school children in Sri Lanka do not get to see a computer until they leave school. The structural issues won’t go away that soon. So why don’t we train them and get them to work on a computer.
3. “…important to note as indirect taxes (which are levied on expenditure rather than income) are regressive in nature – they impose a more severe burden on lower income segments of the citizenry.”
And do you see any connection between welfare and indirect tax? This is more of a reason for the government to have some level of welfare at least until it can come up with a method of collecting taxes from the rich and companies. A company can get away with a tax rate of 10 percent when an individual has to pay up to 28 percent. We have inherited it from places like where you study now.
Tharindra, it is unfortunate that you have to write as if or at least imply that supporting the youth of the country with some form of employment in order to support their existence is something unprofitable and an unwelcome economic measure. If we are to extrapolate from your argument, then free education and free healthcare should also be considered burdens and losses rather than investments.
Look at the health indices of this country. With peanuts, we have done miracles. If you do not believe me, go to the World Bank website and read. Or ask someone in the WHO.
Recently, one of my friends who studies economics at a local university told me that even if we eliminate (mind you, eliminate) corruption and have an ideal capitalist market situation, the wealth of the one percent will increase and the poor will become poorer. If you want a reference, read Thomas Piketty.
Regards,
B