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.