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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Economy’s resilience will depend on reform

Economy’s resilience will depend on reform

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Written by The Nation

The economy is no doubt facing a balance of payments crisis which requires policies that are contractionary. So the Central Bank has raised the interest rates and floated the Rupee, allowing it to depreciate by nearly 20% since last November. Tariffs have been raised on vehicles and administered prices which failed to recoup costs, have been increased. All these measures could reduce Aggregate Demand and reduce the growth rate from 8% last year to below 7% this year. Such slowing down of growth should however be only temporary and the economy has shown remarkable resiliency in the past. It has bounced back to high growth from such temporary setbacks, without causing too much hardship to the people.

This resiliency was due to its adaptability. But such bouncing back will depend on correct policies being followed by the authorities. If substitution effects are to operate the market forces should be allowed to function without hindrance through controls. At a minimum economic growth requires the rule of law, protection for individual property rights and upholding of contracts. Of late there seems to be some erosion of these fundamental institutions. There is an increase in violent crimes, extortions, kidnapping and holding people for ransom and rape.

The Police despite employing over hundred thousand men seem to be ineffective in both prevention and investigation of crimes. The enforcement of the law must be improved. Justice delayed it is said is justice denied. Punishment can be a deterrent to crime only if here is speedy punishment for offenders of the law.

Our courts are notoriously slow and the ratio of offenders convicted of their offences is only about 5%.In Japan this ratio is as high as 95%. Something has to be done to improve the speed with which cases are disposed of in our lower courts. Judges should sit for longer hours and also be given a target of cases to be disposed of for a given period, say a month. The number can be determined by an empirical study of the highest number disposed of in the more efficient courts. Such target should be enforced by those who supervise and administer the lower courts.

The factors that promote long term economic growth are different from those that affect short term growth. Long term growth depends on factors like demography, technological innovation, skills and education of the work force. Government policies are critical for most of these factors. Our education is not suited to satisfy the needs of the economy. But before reform of curricula takes place the schools must be freed from bureaucratic control and handed over to the parents. The recent Economist magazine refers to the success of schools which have been freed from bureaucratic control. There are the Charter schools in USA and the Academies or ‘free schools’ in Britain. They have freedom from the bureaucracy and are independently managed by the parents. They have been pronounced as a success in imparting education to poor students in these countries. Reform is often resisted by the teachers’ trade unions. This is a curse in our country where special interest groups are too powerful and resist change. Similarly university education cannot be improved unless private universities are allowed.

The entirely free system of university education will have to be changed to more acceptable model like say, interest free student loans to be recovered once the graduates pass out and are employed. The university authorities will then have the funds to develop the universities for no improvements can be made, without spending more money by way of higher salaries to teachers and better facilities by way of libraries, laboratories and research grants. The universities should have freedom to manage the institution and should not be subject to controls by either the government bureaucracy nor the trade unions or student unions.

Our future lies in knowledge based service industries and this requires improvement in our education and higher education. We also have a future as a transshipment hub and the development of the Colombo port must be completed speedily. We can be a transshipment hub for South Asia as well as for the Far East including China.

We have to improve our slow moving bureaucracy, our inefficient courts, poor schools and state supported pockets of the economy projected from competition. Our state corporations must recover costs at a minimum or better still earn a return on the capital invested. Businessmen and foreign investors bemoan the rigid labor laws which require reform. These reforms do not require money but they could promote growth to compensate for the slowdown in growth caused by circumstances beyond our control.
http://www.nation.lk/edition/business/item/8224-economy%E2%80%99s-resilience-will-depend-on-reform.html

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