Political and social consensus - the need of the hour

Sri Lanka has been engaged in market oriented economic reforms for over 25 years and has made considerable progress towards achieving a more liberal trade policy regime. Moreover, it has achieved a high level of human development due to the heavy investments by the successive Governments in social infrastructure.

Despite such progress in human development, the country has continued to have high incidence of poverty, currently with about 22 to 30 per cent of its population living below the poverty line.

Insufficient economic growth and redistributive effects have largely contributed to this situation.

What is more, the civil war that lasted for over 20 years has also caused immense human suffering and deprivation. The figures show the poverty incidence is highest in the estate sector (30.0 per cent), followed by 24.7 per cent in the rural sector and 7.9 per cent in the urban sector.

One may question the successive Governments' policy prescriptions, but at its root the reasons for Sri Lanka's unsatisfactory record may lie in its political and institutional weaknesses that have made poverty reduction difficult to achieve.

This then is the challenge for the new President, namely, to achieve a social and political consensus on viable growth strategies and to bring these policies to fruition.

In striving to reduce the number of people that are currently below the poverty line, the new President will need to devise comprehensive solutions that will lead to a permanently higher growth path. Yet, even if he is successful in raising our growth path closer to its potential, changes in the political economy will be necessary to share those benefits more widely in a fiscally sustainable and socially beneficial fashion.

Observers point out that another reason why Sri Lanka is underachieving compared to its potential is that we are slow in adjustment to internal and global shocks and the ensuing overhang of debt and fiscal lethargy. It is natural that volatility is greater when economies are open, as Sri Lanka increasingly is, but there are no viable alternatives in today's world.

Highly competitive trade and increasing competition, accelerated by faster information flows, request for more rapidly adjusting markets. For Sri Lanka with little fiscal space, soft safety nets, one-third of the population below the absolute poverty line, and few sources of counter-cyclical finance, the costs of capital flow stoppages can be staggering.

Choices for the coming decade should include a renewed emphasis on overdue structural reforms leading to higher savings rates and higher productivity, and political decisions to govern more equitably and share both the gains and burdens of internationalization more evenly.

The aim should be to achieve at least 8-10 per cent real growth continuously over the next decade, to reduce the level of poverty to no more than 15 per cent, and the number of absolute poor to no more than 5 per cent of the population.

The policy agenda should broadly shift to fiscal equity issues-who pays taxes and who doesn't pay and who benefits from social expenditures and who should.

The area of tax incidence is a perennial one in which the Government should aim not only to seek a larger tax effort but also more fairness. Areas requiring attention include tax evasion, Government bailouts of bankrupt social systems, and poorly targeted public expenditures.

Sri Lanka, at the same time, need to take better advantage of its proximity to India, a market that has shown remarkable growth in recent years. To be competitive, it is necessary for the Government to invest in infrastructure, try to lower logistics costs and penetrate export markets with success. The future is with newer industries, requiring venture capital from the private sector and infrastructure supported by the public sector.

To deal with rural poverty, evidence points to the need to provide the poor with assets-land titles, proper higher education, and infrastructure. Lack of access to clean water and sanitation is shockingly high for a country with higher per capita income than many parts of Asia.

The notion that these problems will be solved by the private sector alone is misguided as neither the regulatory frameworks, nor the financing are adequate to solve them without a strong government role. And perhaps most importantly, a national consensus or social compact needs to emerge to carry whatever techniques anti-poverty battle forward.

Such a consensus requires smooth democratic transitions, and an awareness of what government's role should be in the next decade.

The Government should be seen to the country as a regulator of markets, as an income redistributor, as a guarantor of civil liberties, and as an integrator of labour and business interests.

The lessons of the past and prescriptions for the future are quite clear.

The issue now is whether, this time at least, we can step forward as an undivided nation and implement right decisions based on a political and social consensus.