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Heading toward a crisis, economist warns

| by Samantha Nayakarathna
Courtesy: Ceylon Today

( January 26, 2104, Colombo, Sri lanka Guardian) A study by the Economics Department of the University of Colombo has cautioned that multiple issues with regard to governance and transparency could lead the economy into a crisis situation.

A study conducted by an economist showed that country could head into tough times with the Right to Information Bill defeated, the 17th Amendment to the Constitution repealed, restriction on the presidential terms removed, bribery and corruption taking place freely, government institutions overloaded with relatives of government politicians, intellectual community in silence-mode, unsolicited projects implemented, and religious fundamentalism growing.

The recent research done by an economics professor at the department of economics in the Colombo University shows that Sri Lanka has failed to maintain an average growth rate of 6.4% after 2003 even though the country witnessed the political and economic freedom after the war.

Ceylon FT spoke to Dr. Priyanga Dunusinghe to obtain more information on this research.

"There are four break years one is in 1960 and one is in 1990 and other one is in 2003. If you look at 1960 the average growth rate is at 31%; then in between 1960 and 1990 we had an average growth rate of 4.3%, but in this period we didn't have an economic break even though we experienced trade liberalization in 1977.

The second break we found in 1990 due to increase in manufacturing exports and some structural policy changes in President Premadasa's time. During that time, the mean growth rate shifted from 4.3% to 5.2% and we continued this growth path until 2002/03. Then, again the economy witnessed a structural break and the mean growth rate shifted from 5.2% to 6.4% and that was possible due to service sector orientation,"
Dr. Dunusinghe explained.

Continuing he said, "From 2003 onwards even after the war in 2009 we still continue at this level of mean growth rate. We witnessed growth rate below 6.4% and above that, but what I want to emphasize is that the mean growth rate has not changed, which means the end of the war has not created a situation to shift the economic growth above 6.4% of mean growth rate permanently."

When asked why were we not able to witness a structural break after the war, he said, "Behaviours of economic agents are influenced by incentives, and the nature of the incentives are determined by economic and political institutions. If the institutional structure is not conducive to economic growth, that may lead to a situation where we may not be able to increase the growth rate to a sustainable level of 8% or beyond. From time to time we may experience 8% growth rate but we cannot sustain in the long run over a period of time like 20, 30 years and this is the point.

"There are two types of political and economic institutions; one is extractive institutions and other one is inclusive institutions. If you take extractive economic institutions you may see lack of law and order, insecure property rights, entry barriers and regulations preventing functioning of markets and creating a non-level playing field.

In extractive political institutions you may experience political institutions concentrating power in the hand of a few, without constraints, checks and balances of 'rule of law'. Inclusive institutions are the exact opposite.

"Basically, extractive economic and political institutions do not provide sufficient incentives for businessmen to start business. It discourages people. And the 'doing business cost' is really high because you have to bribe officials people don't want to do business in this environment. People do not innovate, there will be a situation where people wait and see or get away from the country."

So where are we heading?
"One of the possibilities is that our institutional structure may gradually lead towards extractive political and economic institutions — there are enough and more evidence for that."

"The right to information bill is defeated, the 17th amendment to the constitution repealed, restriction on the presidential terms removed, bribery and corruption are taking place freely, government institutions are overloaded with relatives of government politicians, intellectual community in silence mode, "unsolicited projects" are getting implemented, and religious fundamentalist groups are emerging," the professor revealed.

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