Public and private sector partnership for accelerated growth

by Prof A D V de S Indraratna

According to several discussions published in the printed media and broadcast and telecast in the electronic media, there seems to be some confusion, and even some misunderstanding, about the nature and characteristics of a mixed economy vis-a-vis a closed economy, and the role of the public sector in such economy. The purpose of this article is to clear this confusion and misunderstanding.

To give a very simple definition, an economy could be termed open, when market forces are allowed to determine the movement of goods, services and even capital between national frontiers without, or hardly, any restriction or barrier.

However, there is no 100 per cent open or closed economy in the real world, in this sense. Even USA or Japan, held out as typical open economies are not that open. There are restrictions, both tariffs and non-tariff barriers, to their trade. The value of their total trade as a percentage of their respective GDP is less than 20 per cent, whereas in a country like ours this is much higher.

What we see in the real world are mixed economies of different degree, namely the extent of openness varying from one country to another. Notwithstanding this, in all these economies the public sector has to play a key role in the growth and development of the country. Neither the public sector nor the private sector can go it alone

This, per se, should not, in any way, be misconstrued that the economy is moving towards a closed economy. It can remain a mixed economy with the public sector as an equal partner with the private sector, performing the roles of a service provider, facilitator and moderator of the growth process.

How these roles are expected to be performed is explained below.

The public sector as a service provider

Accelerated growth rests on two pillars, increase in physical (productive) investment and increase in physical productivity. The latter depends upon improvement in economic infrastructure (transport, communication, energy, irrigation, water supply and sanitation) and social infrastructure (education, health and social security etc.) and S & T capability (science and technology) (increase in R & D etc).

The private sector would be reluctant to invest in the economic and social infrastructure and S & T, because of their high private costs relative to their private benefits. If, on the other hand, the public sector invests in them, the costs of private sector productive investments would be less and their returns would be correspondingly more because of the external economies associated with such investment.

In this scenario, by undertaking such investment, the Public Sector plays the role of service provider leaving the role of manufacturing entrepreneur to the private sector. Public sector investment should then increase unlike what happened in the post-liberalization period.

This would, instead of crowding out private investment as some may erroneously believe, should actually promote it. One should then actually see a symbiotic relationship between increasing public investment and increasing private investment.

The public sector as facilitator

The public sector could also promote private sector investment by creating an enabling environment, more or less as a facilitator. An enabling environment presupposes a both politically and economically congenial and conducive environment.

Politically, it requires a strong government and absence of confrontational politics, an efficient, honest and impartial public service, law and order and the practice of the rule of law, and above all, good governance. These are all markedly lacking in our country.

Confrontational politics entered the political arena of our country since the breaking away of the late Mr. SWRD Bandaranaike and his allies from the UNP and forming their own party, SLFP, in 1951.

Since the promulgation of the new constitution in 1977, and the introduction of the new electoral system, there has been no strong Government and confrontational politics has been accentuated with the ruling party very often succumbing to the demands of the minority parties, even though they have been often unreasonable.

This was done in order to cling to power and regrettably was at the expense of the long-term interest of the country and its people.. A change in the electoral system is imminently needed to change this pitiful situation.

Sri Lanka had a very efficient and honest public service with an independent public service commission. The 1972 Constitution rang its death knell. Politicization of the public service was accepted almost as a matter of policy beginning with the appointment of ministry secretaries and heads of departments by the Cabinet of Ministers. Thereafter public servants have generally become sycophants or servants of the ministers instead of servants of the public.

With the 17th amendment to the constitution an attempt was made to resurrect the independent Public Service Commission by getting the Constitutional Council to appoint its members.

However, it has also not worked well because of the heavy political weightage attached to the very composition of the Constitutional Council. Another amendment to the constitution would therefore be necessary to reduce, if not altogether eliminate, this weightage so that the appointments by the Constitutional Council would be free of politics.

Our country is plagued with violence, crime and terrorism. There is no law and order or the practice of the rule of law is almost non-existent. The elitist few can commit any act of misdemeanour and get away. Our so called leaders have the license to break the laws of the country, but expect the common man to observe them. Examples are too numerous to mention. In short, peace ( and not the type of peace prevailing under the CFA) and security must prevail in any country for sustained economic development.

For the environment to be economically conducive, the Government must have in place a core of consistent macro-economic policies. In brief, the tax system, while not denying the Government its much needed fiscal revenue, should not reduce the incentive to work, risk-taking and investment, and must be based on the capacity to pay. The monetary and interest policies must be in place for management of consumer demand and containment of inflation.

Above all, good governance is a sine qua non for an enabling environment. Today, at every level, waste is galore, corruption and bribery are rampant, and indiscipline is the hallmark. These are a few manifestations of bad governance.

For good governance to exist, there must be four strong "pillars", namely accountability, transparency, predictability and participation. Where there is no efficiency, discipline, honesty and patriotism, in administrators and legislators, these pillars do not exist and there is no good governance; where there is no good governance or there is bad governance, no development can be sustained.

An enabling environment of the type I have briefly described here is necessary not only to promote domestic investment but also to attract foreign direct investment. It is also in such environment that tourism can thrive and market access can be enhanced.

Public Sector as moderator

Marked regional imbalances in employment, incomes, economic and social infrastructure are also not conducive to sustained growth. Sri Lanka is a notorious case of such regional imbalances. The mean monthly income per household in the Western province is Rs. 26,000 in comparison with incomes ranging from Rs. 11,000 in Uva to Rs. 15,000- 16,000 in Northern, North Central and North Western provinces. Most of the industries and employment (nearly 30 %) are concentrated in the Western Province.

There is also a marked imbalance in the road network, education and health facilities, electricity and water supply and sanitation, among the provinces. For example, Western province has 92.4 % of its people supplied with electricity, whereas this percentage is less than 65 % for most of the others; 52 % of the people of Western Province have pipe-borne water, while this percentage is less than 20 % for North Central, North Western and Eastern provinces. There is also a wide gap, in respect of these, between the overall urban and the rural economy.

Generally, equity without growth is as unsustainable as growth without equity. The benefits of development must seep down. The masses would participate and contribute to development only if they would be enjoying the benefit of that development. After nearly three decades of market or open economy, one fifth of Sri Lanka's households are still poor and the Gini coefficient of income distribution is almost 50 (on a scale of 0-100).

The village reawakening scheme (Gam Udawa), the project of 200 garment factories spread out in the rural areas, and the Janasaviya/now renamed Samurdhi were all directed at specific target groups to reduce the regional and rural-urban imbalances and promote equity. Equity in general can also be promoted by progressive tax systems, in addition to direct income redistributive measures such as those referred to above.

Then there would be the need for regulatory bodies, such as the Telecommunication Regulatory Commission (TRC) and the Consumer Affairs Authority (CAA) to have a moderating influence on monopoly prices. They fall within the domain of the public sector and their work also helps to somewhat enhance equity.

Reshaping of agriculture to resurrect small scale farming and to concentrate better on arable agriculture, and establishment and promotion of SMEs by provision of micro finance would also go a long way to achieve greater equity and poverty reduction.

Lastly, there is another important area, area of linkages which the public sector, meaning the state, has to handle. This includes, inter se, the creation of linkages with the rest of the world by establishing regional trading groups (like SAFTA) or making bi-lateral trade agreements (like ILFTA etc.) for improving market access.

It also covers provisions for Special and Differential Treatment (SDT) under the WTO for securing level playing field in trade and investment. All such linkages would help to effectively integrate Sri Lanka with the rest of the world in the globalisation process. These tasks the private sector cannot simply undertake. The sole responsibility for them lies with the public sector.

Conclusion

Asia is the most hunger and poverty stricken region in the world, barring Sub-Saharan Africa. It contains two thirds of the world's poorest people, 700 million, living below the poverty line of US $ 1 a day. In this region also live 70 % of the world's poor without access to adequate sanitation , 60 % of the world's poor who lack safe water, more than 50 % of the world's undernourished and slum-dwelling, and more than 40 % of the world's children who die before the fifth birth day.

Of Asia, South Asian sub-region of which Sri Lanka is a part, may be even worse than Sub-Saharan Africa. For it has more undernourished , more people without access to proper sanitation and more people living in slums, than Sub-Saharan Africa.

There is, however, one silver lining in this dark cloud. For it is the Asian Region which contains the highest performing or fastest growing economies of the world as well. China and India, its two largest members, and for that matter, of the entire developing world , each having more than 1 billion people, are growing around 10 % and 7 % respectively. They have achieved this after they opened their economies, meeting the challenges, and availing of the opportunities, of globalisation.

Malaysia, which is very similar to Sri Lanka in many respects, but was very much behind her when the latter obtained Independence, has now entered the club of upper middle income countries, whereas Sri Lanka is languishing with a quarter of its households still living below the poverty line with a similar proportion malnourished.

Dr. Mahathir, the former Prime Minister of Malaysia who recently visited Sri Lanka threw the challenge at us asking why Sri Lanka cannot do it if Malaysia did it. We should have the correct approach, management and the will like Malaysia to do it, he, in essence, asserted.

The priorities of development have changed. Developing countries have now set before them eight development goals to achieve by 2015 that is in another ten years, the so called Millennium Development Goals (MDGs)3. Sri Lanka has already achieved or is near achieving the targets set by the social goals relating to education and health. However, it has a long way to go in halving poverty, which is its most pressing problem and number one priority.

Average annual economic growth of 8% -10% in the next 10 years is the only answer to this. The past experience has shown that this cannot be achieved by one lead sector. There must be an equal partnership between the public and the private sectors.

As we have argued, the partnership of the public sector must be in the form of a provider of infrastructure services, a facilitator of creating an enabling environment and moderator of achieving equity, regional balance and environment compatibility.

For no growth can be sustained unless it is equitable, regionally balanced, environmentally friendly and integrated or linked with the rest of the world in the globalisation process in which Sri Lanka like any other developing country is caught up.

To take off into this sustained growth, Sri Lanka does not need a miracle to occur. Fortunately, she is well endowed with the natural and human resources necessary for the task. All she needs is a disciplined, efficient, honest and patriotic leadership to direct it.