Optimizing investment by public and private sectors:

Link for growth and prosperity

Continued on 2009/10/15

There is growling and cajoling but to no avail, and a variety of excuses are trotted out to explain the lack of progress. If the BOI is helpless in moving projects with foreign investment, just imagine the plight of the local businessman trying to move the strangler.

The problem from one view is simple. Strangler should be kicked and all will be well. But is it that simple? The legislation does not spell out clearly the conditions that have to be met to automatically get approval. Neither does the legislation specify a time frame within which decisions have to be made. Too much is left to the interpretation and discretion of the officials of the relevant departments.

Many years ago I listened to a presentation by a malaysian professor of Sociology. He said many developing countries try to control and regulate many things but the human skill base was not there to manage these processes efficiently.

Therefore, he said, the whole thing will grind to a halt. The only thing that lubricated the wheels and kept them turning was bribery. His plea was that if you want to regulate and the skill base was not there then please do not eliminate bribery.

The interface between the entrepreneur and the strangler illustrates the huge influence the behaviour of the public sector has on investment by the private sector. Looked at by segments the strangler certainly impacts all major foreign investment projects.

It also affects the investments by the major firms in the chambers and the major private firms. This is not a big firm syndrome. It goes right through to the rural village and captures in its tentacles the rural farmer who wants to build a small house.

As I am looking at the interrelationship between the two sectors and not endeavouring to propose new processes to manage this relationship I will reluctantly ignore the fascinating question of how to slay the strangler.

General link on two sectors

The first step was to look at the general link between the two sectors and investment. The progression from there was to examine the relationship in the context of the various segments of the economy. The final part is to probe the links when pursuing a model for growth and prosperity. This is the real issue that matters.

I described as a negative the role of the strangler in making foreign investment difficult. However if the strategy in the economic model is to keep out foreign investment (without giving it publicity) the strangler becomes a positive and not a negative.

Therefore it is important is to see relationship between the sectors in the context of specific economic models that will lead to growth and prosperity.

I will argue strenuously that a rural centric economic model is the optimum that will provide both growth and prosperity. There is no scope in this presentation to develop fully this concept.

I will provide a rather rudimentary version and use this to unravel the links when pursuing a model for growth and prosperity.

Growth does not equate to prosperity. You can have economic growth and no prosperity. The fundamental essence of prosperity must be the alleviation of poverty.

If you do not achieve this a model does not create prosperity. India is a good example of a country with strong growth and no prosperity. India has delivered impressive figures of GDP growth.

The benefits unfortunately have been largely confined to the urban areas. The urban middle class is becoming better off but the rural poor who outnumber the urban middle class by a ratio of around five to one still remain poor. India is a two in one syndrome. It is a rich country with a much larger poor population.

Therefore India had growth but no prosperity!

What is prosperity? My definition is, a nation is prosperous when every citizen has the following;

* A good house

* Drinking water

* Good sanitation

* Three good meals a day

* Access to good education

* Access to good healthcare

* Electricity

* A TV and computer

* A knowledge of English

* A bicycle

It will not be possible to deliver all of this in one year. It will take many years. Progress can be measured by the total numbers who pass the prosperity test each year.

As everything cannot be achieved simultaneously; the measurement should be a weighted basket. This will give progress by segments. For example 10 percent have got 100 percent, 30 percent have reached 65 per cent etc.

Rural economy

The important question is what is the best path or model for Sri Lanka to create both growth and prosperity.

Sri Lanka is basically a rural economy. 85 per cent of the population are in rural areas. Therefore we must build upon what we have, where we have it. it is fanciful, or even worse, lunatic, to imagine that you can transplant this vast rural community in urban areas to work in a host of new industries. We can never afford the cost of creating these new industries or the cost of relocating the rural population in urban areas.

The advocates of globalization will contend that if you open the economy and remove all tariffs that foreign investment will flow in to make this happen, and a new industrial Sri Lanka will emerge! They have no answer to the vital question of what will we make that the world will want to buy? We do not have unique competitive advantages to support a mass of new industries that will provide goods or services that the rest of the world will buy from us.

We have to reject the globalization theory and keep our tariff protection to protect our agriculture and our consumer goods industries simply because if we destroy them we will have nothing to replace them with that will absorb the displaced population.

The way forward is to develop our rural economy. The rural economy is private sector owned. Growth depends on investment and investment requires capital.

The rural population owns a mountain of capital as they own the land they live on and own the land they cultivate. But, it is dead capital, as they do not have proper title to these assets. This must be converted to live capital. This will create an explosion in growth and prosperity.

To give them access to their capital and to transform dead capital into live capital the state must put in place a massive and rapid land titling project. This has to be supported by a banking system that will lend on this collateral to the rural population. If the private sector views this as high risk and is reluctant, the public sector must come in with development banks.

Whilst the rural private sector will be ready for take-off when it has access to capital, to stimulate this take-off a number of supporting inputs are essential. Most of these inputs will have to come from the public sector.

Agricultural practices must be improved with better seeds, better methods and more mechanisation, to generate higher yields and inter cultivation in tea and rubber lands.

The public sector agricultural extension service must operate in overdrive to provide the inputs to create the agro revolution. The rural sector is also dependant on the public sector to provide the supporting infrastructure.

Infrastructure

Most roads, better fishing harbours, cold storage facilities, for both agriculture and fisheries, access to channels of marketing etc. With growth there will be an increase in national income, and this will create an increase in tax revenues.

This will provide the funding for the public sector to provide good healthcare and good education facilities, to provide electricity and the essential infrastructure. It creates a virtuous cycle of growth and prosperity.

It is appropriate to pause at this point and to reflect on the web of interrelationships that are required to enable this model to work successfully.

The rural sector is the private sector. The state must provide land titling to provide access to capital. The private sector will use the capital. To make investments in the rural sector productive, the public sector must provide support services.

Incremental growth will create incremental income in the private sector and the private sector will pay more taxes.

The public sector will use this to provide better healthcare and educational facilities and more infrastructure for the rural economy. The private sector will provide better connectivity and the rural areas will have access to TV and computers. This brief journey through a rural-centric model for growth and prosperity demonstrates that a public sector private sector partnership is essential even in our private sector owned economy.

The links between the public sector and the private sector go way beyond what was covered in this paper. However I think it is adequate to illustrate that economic wealth has to be created by the private sector as this is a private sector economy.

Without the public sector providing the infrastructure and essential services there will be no growth and prosperity. The public sector cannot provide these inputs without funds.

These funds are provided by the private sector through tax revenues. To achieve growth and prosperity a permanent dialogue is essential between the two sectors, and a recognition of the unalterable fact that neither sector can deliver growth or prosperity alone as the link that govern them make the partnership the only way forward.