Monday, July 18, 2022

SRI LANKA, THE CASE FOR POPULAR THINGS NOT BEING RIGHT

In the last week we watched with jaws to the floor as the Sri Lankans overrun the presidential palace in Colombo and sent their president fleeing from the country.

This is the climax of months of protests at the poor handling of the economy and the general corruption of that government.

Looking back the government of Gotabaya Rajapaksa in anattempt to win some cheap popularity points, following elections in 2019 scrapped or reduced a raft of taxes including PAYE and VAT. In addition, he got the hairbrained idea to turn the country in to an overnight producer of organic crops and banning inorganic ferterlisers to push this agenda.

 

"In the 1980s some dismissed US President Ronald Reagan’s economic policies, leaning heavily towards liberalization of the economy, as voodoo economics. But Reagan would not hold a candle to Rajapaksa...

By cutting taxes government revenues were severely affected and government capacity to deliver services – security, health and education, hampered. Also, their ability to service their obligations, not only to foreign lenders but to the local private sector as well. By banning the use of ferterliser they affected food production and just as important the exports of tea their major foreign exchange earner. With exports receipts in the toilet, they failed to pay for their fuel imports.

As a result, the Sri Lankan economy has imploded triggering the worst crisis in the country, which won independence in 1948.

As we watched the masses taking “power” it occurred to me that many of the people who celebrated the cuts in taxes are the very ones trying to run the president and his cronies out of town. The irony.

These events cement the truth behind the saying “What is popular is not always right, what is right is not always popular.”

It offers a good lesson for countries all around the world facing unprecedented economic stress. Following the near universal lockdowns due to Covid of the last two years, countries around the world are trying to fire up their economies, which had slowed to near zero, a situation not helped by rising prices globally.

Its understandable that in the face of such pain people will come up with suggestions like government should reduce prices or that government should forgo taxes to keep prices down or that businessmen should be arrested for increasing prices.

"It is basic economics that when you try to subvert the laws of supply and demand, it never ends well. At best you can only provide temporary relief but even that relief will be washed away by the pain when the laws of supply and demand eventually prevail...

What is true is that if an economy has been run prudently and the gains from growth are equitably distributed to economies will be more resilient in such cases and even have intervention options that lessen the pain even for a little while.

While it serves little purpose to cry over spilled milk, such crisis expose gaps in our processes.

As a country we need to be more determined in collecting more taxes. And not through loading more and more taxes on existing tax payers but by roping in more economic players into the tax net. ON the flip side we need to take a microscope to our public expenditures, flush the excesses and keep only those expenses that work towards development.

As in everyday life so is with countries and governments. If you costs are under control, in hard times you will be much better able to survive and even thrive than your neighbour, who is borrowing money he doesn’t have, to buy things he doesn’t need, to impress people who don’t care.

The truth is that the economy is cyclical, as day follows night, when the economy is booming, as impossible as it seems during the good times, you know that bad times will follow. When you embrace that reality you will operate differently. You will spend prudently and save aggressively when times are good in anticipation of the inevitable bad times. You will then find that the bad times are not as bad for you as your neighbour is suffering and in the good times you will thrive spectacularly.


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