The future of public sector

Speech delivered by Dr. Sarath Amunugama, Minister of Public Administration and Home Affairs at the Dr. Nandadasa Kodagoda Memorial lecture last week.

PUBLIC SERVICES: Dr. Kodagoda was my friend and his premature death came as a great shock. His was a multi-faceted personality medical doctor, public speaker, communicator of ideas through the mass media, proponent of the popularization of science, a meeting point of two cultures - the sciences and arts, he was also a great lover of literature, art and music.

In addition, he was a great recontour and I recall with pleasure the many trips out to the countryside with him when we were advocating family health and planning.

As a product of his times when the state, after independent, loomed large in both economic growth and social welfare, Dr. Kodagoda set an example to the public service in which he served.

He did his job unstintingly with great commitment for the benefit of the needy and the underprivileged. In view of the current debate on strategies of growth I believe the above subject to be topical.

The challenges that we face now are much more complicated than when we were idealistic young men floating down from the University. The alternatives before us now could not have been perhaps envisaged then.

So I would like to take this opportunity at the outset to remember with gratitude and admiration all those fine men like Dr. Kodagoda who believed in and gave their esteemed services all to the public service and for public welfare in this country. Nevertheless, we have to recognize that we live now in a different age and the options before us are quite different.

This is no doubt that the South Asian Post-colonial state put its faith in the public sector as the engine of growth in the aftermath of independence.

The reasons for this phenomenon are many and varied. Firstly ours were 'successor states' which took over from the colonial Raj, where political administrators controlled the economy. That control was used to further the interests of imperial commerce and trade.

For example the land laws which were enunciated during British times such as the Crown Lands Ordinance, Forest Ordinance and Buddhist Temporalities Ordinance helped to shake loose the traditions of land ownership and usage patterns thus making many of those lands available for alienation to coffee, tea and rubber plantation companies which were largely British owned.

Whether this was good or bad in terms of the transformation of a feudal, agrarian, small holder land ownership into a modern commercial agricultural economy will probably depend on whether we view it from: moralistic or economic point of view.

Many of the leaders of these successor states were like Jawaharlal Nehru who flirted with Marxism and were sympathetic to the statist policies of the British Labour Party of their time.

They all believed in the strength and power of the leviathan state. They all looked with great fascination at the transformation taking place in two of the most backward countries - USSR and China.

Backward, Big and blessed with abundant natural and manpower resources, these countries had no alternative but to mobilize the resources of the state through Central Planning and large scale state owned enterprises, particularly in the key sectors of power, transportation, finance, education and health.

Politics meant nothing believed these elite leaders, if it did not better the lives of the poor and the underprivileged. So it was that a leading radical Labour Party Minister like Aneurin Bevan could say that he would sacrifice his political future to ensure that there would be "free false teeth and reading glasses" for the poor under the British National Health Scheme.

Turning to Sri Lanka, I will quote two economists Malathy Knight - John and Wasantha Athukorale regarding the push towards the Public Sector and its consequences in the mid 1950s to 1979 period.

When liberalisation began in 1977, the state sector played a significant role in all spheres of the country's economic activities, reflecting the highly interventionist policies adopted from the mid-1950s to the late 1970s.

During this period, the government set up new public enterprises, nationalized several private entities, and created state monopolies.

The state secured public support for these policies by emphasizing such populist goals as employment creation, price controls on essential goods and services, distributional equity and regional development in SOE operation.

According to Kelegama (1977), as a percentage of GDP, the SOE sector grew from about 5.7 per cent in 1961 to 12.2 per cent in 1974, and to more than 15 per cent in 1977. By 1977, the public sector accounted for about one-third of investment and 40 per cent of formal-sector employment.

Even after 1977, the state sector continued to expand as a result of the large donor-funded infrastructure projects implemented and the political economy factors that restricted the government's ability to carry out intensive public-sector reforms.

Many of these public enterprises became lose making entities, plagued with problems of overstaffing, mis-management and corruption, inefficient procurement systems, and excessive government intervention and politicization.

Budgetary transfers to SOEs, averaging about 10 per cent of GDP in the mid-1980s, were highly unsustainable.

Although budget speeches of the then government mentioned privatization, the final push came only after the World Bank highlighted the urgent need to address the massive burden that the state sector imposed on the budget.

In 1987 civilization was announced as a state policy, with the primary objectives of alleviating fiscal burden and improving enterprise efficiency through private sector norms.

The end result of this Public Sector led growth Strategy has been a stagnation. While social welfare measures led to a rapid growth in population, economic growth could not keep pace. While South Asia saw increasing poverty and declining growth, newly emancipated East Asian countries were following a different path with great success.

The growth rates of India, Sri Lanka, Pakistan and Bangladesh, were far from satisfactory. Economists referred contemptuously to our region's slow growth as "The Hindu rate of growth".

The flip side of this of course, was the investment in human resources and equity - which have now been reincarnated as the Millennium Development Goals.

Our poverty reduction approaches and PQLI have been admired by socially committed economists like Nobel Prize Winner Anartya Sen.

Even in the UK where Labour Party statism and reliance on state enterprises had led to it becoming in economic terms "the sick man of Europe", the voter - the man in the street, found that state enterprises simply could not deliver.

Hence the political slogan that brought Margaret Thatcher into power. "Labour isn't working." Like in our country today, state enterprises in UK were inefficient overmanned, bureaucratic and corrupt.

The country was not getting value for money from the public sector and it became clear that unless a reform package was undertaken the country would go into terminal decline.

Margaret Thatcher took on the Trade Unions led by Arthur Scargill, defeated him, and opened up a new era in British political and Economic history.

The main causative factor for this transformation was the growth of technology.

The rapid advance in technology which marked the second half of the twentieth century not only disproved Karl Marx's dismal predictions but also revitalized capitalism as a radical new agent of economic transformation.

It changed the means of production and distribution and took human civilization to a higher plane of prosperity. Countries had to adopt to this new phenomenon or perish.

Just as the Industrial Revolution gave a head start to those nations which were imaginative enough to see what was happening, the new Scientific revolution changed power relationships and strongly favoured those who took bold steps to change existing patterns.

Thus those who charged like the Western countries and the Eastern Asian states became winners while the old state enterprise led countries were heading towards extinction like the dinosaurs who failed to adopt.

Today all these Socialist countries that believed in the invincibility of the state sector are changing their policies.

Tony Blair's Labour party which is now called 'New Labour' is an example closer to us. So has Nehru's India. Post Gorbochav, Russia and now the Chinese CP has subjected their state sector to reform and market forces and are thereby transforming their economies. This process is irreversible.

A consequence of reform, privatization and the market forces in India and Pakistan have been phenomenal and has led to sustained growth.

Let me quote from a recent speech by the Prime Minister of Pakistan Sartaj Azeez: "In the economic sector, our reforms have based on the three pillars of deregulation, liberalization and privatization.

As a result, our economy is now on high growth trajectory, within the range of 6%-8%. Our industry is expanding, our agriculture is growing, with rising employment and declining poverty. Emergence of a robust and expanding middle class signifies the success of our reforms, dynamism of our economy and the potential of growth."