By S. P. Chakravarty –

Prof. S. P. Chakravarty

Some of the new economic initiatives announced by the Sri Lankan government about integrating the economy with the wider world, initially acquiring land to create special economic zones where large scale investment projects from India and China are to be invited to locate, are a refreshing departure from an economically dysfunctional post-independence mindset of nationalist pre-conception of the national interest as a zero sum game with the world beyond: their gain is our loss and our gain is their loss. Sri Lanka at the time of independence boasted an economy more prosperous, a population that was better educated and a society which was largely free of the worst dysfunctional aspects of religion which characterize the neighbouring countries of the sub-continent. Yet the country became ensnared by angst over identity and suspicious of opening up the economy to the world at a time when development was fueled by trade. The changed mindset informing recent economic initiatives holds out prospects for greater prosperity.

There is danger of a reversal in the political climate unless the problem of the distribution of economic gains from globalization are addressed. The result of the recent British referendum on continuing membership of the European Union is a warning sign that even those that benefit from an economic policy may vote against their own economic interest by rejecting that policy. They do so if they perceive their benefit to be an unfair share of the total benefit accruing to society. This is what experiments on what psychologists call ultimatum games demonstrate. Unfortunately, a valid disquiet amongst the electorate about unfair distribution of gains from globalization can be exploited by the purveyors of simplistic solutions invoking the false narrative of an imaginary glorious past.

Britain has become more prosperous since the start of the collapse of the empire. The economic opportunities for the masses in Britain were held back during the heyday of the empire, but glorified in the narrative of English nationalism. The retarding impact of the nationalism of the past on economic prosperity for the masses in Europe began to be realized during the second half of the 20th century, but the post-war trend is unfortunately in danger of being derailed by the failure to take adequate account by governments of the distributive consequences of globalization.

It is in the context of an analysis of this development that I wish to comment on the new direction of Sri Lankan economic policy. If I sound critical on occasion, it is not because the policies are not laudable. It is to warn against complacency about fairness in the distribution of gains in the details of the design of policy. Analyses of the Brexit vote suggest that many of those who voted to leave the European Union lived in poorer areas of the country, and would suffer from their chosen outcome of the referendum as economic growth slows down due to uncertainty about the future direction of the economy. The burden of economic decline falls disproportionately on the poor. Notwithstanding headlines in the press suggesting immigration as the issue, some of these Brexit voters live in communities where the percentage of foreign-born people is considerably below the national average. People living in these communities have been left behind as others have prospered. Unfortunately, their plight cannot be addressed by pining for a glorious past that never was when the British public were alleged to be in control of their destiny.

The average growth rate of per capita income (GDP per person) in Britain from 1870 to the start of World War 1 in 1914 was a meagre 0.9 per cent per annum. With the start of the dissolution of the empire after the second world war, growth rate of per capita income accelerated to 2.4 per cent per annum between 1950-1973. The quadrupling of oil prices in 1973 dealt a sudden shock to the industrial sector, contributing to a sharp deterioration in the balance of payments. A period of industrial strife ensued as the economy tried to adjust. Yet the growth rate remained well above that which was achieved in the days of the empire. Per capita annual increase in GDP between 1950 to 1979 was 2.2 per cent, much healthier in comparison with the anaemic record of the imperial past. Post war prosperity was accompanied by increasing trade with neighbours, discarding dependence on colonies. Even in 2014, when the Eurozone economies went through a grim period, around 45 per cent of British exports went to the EU. Half of British exports go to the European Economic Area, which is slightly greater than the European Union. Share of imports from these neighbouring countries account for more than half of the imports into the UK.

Pre-war nationalism, to borrow from the US political scientist Karl Deutsch, was characterised by groups of people with a false memory of their shared past coming together with a common hatred of their neighbours. After the second world war, the age-old obsession with nationalism in Europe began to give way to a desire for economic cooperation with erstwhile enemies to the greater prosperity for all. The British social philosopher Isiah Berlin hoped that perhaps “the phenomenon of nationalism would … be destroyed by the irresistible advance of enlightenment, whether conceived in moral or technological terms – the victory of reason or of material progress or both – identified with changes in the forces and relations of production, or with the struggle for social equality…”. Yet, as the benefits of global cooperation has become egregiously unequally distributed, especially since the late 1970s, the struggle for greater equality has given way to a resurgent nationalism, culminating in the politics of identity overtaking the politics of prosperity in the Brexit referendum.

The bold economic experiments in Sri Lanka may deliver great prosperity in the long term if they are not derailed mid-course by the emergence of xenophobia stoked by a backward looking nostalgia of past failures disguised as great successes. Rise of the Brexit movement in the UK and the success of Donald Trump in poisoning the political discourse in America, feeding on resentments of large swathes of the population dealt an unfair hand by globalization, is a warning that the government in Sri Lanka must heed. Government cannot not rely entirely on the markets for ensuring fairness in the distribution of national prosperity because the weak could be marginalized in unfettered operations of market forces. A sense of fairness has to prevail for the exciting experiments initiated by Sri Lanka to succeed.

For example, companies, whether they are from China or India or from the island itself, that set up shop in the designated economic zones must be made to pay their share of the cost of running the public space in which they thrive. Industry will come to Sri Lanka to avail of an appropriately educated labour force, a credible quality of the physical infra-structure, and a stable legal system of property rights. The taxation system, whilst being kept transparent and simple so as not to discourage investment, must not be seen to be transferring resources from the countryside to new industry. To begin with, emulating the Chinese model of appropriating agricultural land to offer to domestic and foreign companies to set up manufacturing facilities is not advisable in a democratic country. The policy of land acquisition in a democratic country must be seen as manifestly fair by those that had cultivated the land in the past, even if productivity was low in their hands, so that their consent can be sought without coercion. A high-handed approach was attempted in 2008 by the government in the Indian state of West Bengal when they tried to secure a contiguous parcel of land of about 1000 acres to be handed over to Tata Motors and ancillary manufacturing units. Farmers were going to be compensated and much of the land was acquired without difficulty. There were problems in reaching the desired target of 1000 acres. The government attempted to reach the target using powers vested in it by colonial era legislation passed in 1894. Resort to coercion hijacked rational discourse about the fairness in the terms of compensation, rendered non-transparent due to the poor quality of land records, into one of romantic views of agriculture and social identity. As a result, the prospect for re-industrialisation of the state was set back for decades by ushering in a government led by a mercurial and authoritarian populist in the election that followed.

*S. P. Chakravarty – Emeritus Professor of Economics, the University, Bangor, Wales