WEDNESDAY November 11, 2015 www.ft.lk 17

Opinion Six lessons in policy reform This year Sri Lanka has its best oppor- pens much more in cities and sub-national tunity for market reforms since 1977. The regions than it does in national capitals, let presidential and parliamentary election alone in faraway regional and international results give the Government a mandate for organisations. Policy-making is more prac- it, alongside constitutional reforms and tical, flexible and adaptable to changing reforms to repair ethnic relations. In a pre- external conditions the closer it is to the cit- vious Daily FT column (‘A new global eco- izen. This is the real secret of Switzerland’s nomic strategy for Sri Lanka,’ 17 September success. It is a small country, but it still has 2015), I set out my views on what needs to be the world’s most decentralised political sys- done. Priorities should be macroeconomic tem. Most policy competence resides in its stabilisation, domestic liberalisation, and cantons and municipalities; they compete liberalisation of foreign trade and invest- vigorously with each other, not least on tax- ment. Medium-term reforms of education ation. and state-owned enterprises are also impor- Cities in particular learn from each other tant. and adopt best international practice bet- This is what should be done. But what can ter than nations do. What makes cities even be done given Sri Lanka’s Byzantine politi- more important is urbanisation – mass cal realities? This takes us into the politics movement from the countryside to urban of economic reforms – political economy, in areas. This is happening at an unprecedent- other words. For those who live in the real ed speed and scale. Over half the world’s world, this is at least as important as eco- population is now urban; it accounts for nomics. It is the art of the possible, not the over 80% of world GDP. About 2.5 billion science of the perfect. people will urbanise by 2050, almost all of In many ways Sri Lanka has become a them in developing countries. Moreover, cit- more parochial, inward-looking country. ies are nodal points of global value chains At independence the outlook was differ- – vast production networks centred on mul- ent. But S.W.R.D. Bandaranaike, and then tinational companies. Their value-adding Sirimavo Bandaranaike, took the country activities cluster in and around cities. on a navel-gazing course with their Sinhala- This is one reason, among many, why cit- Buddhist nationalism and command- ies attract smart people who congregate to economy policies. And many UNP leaders exchange ideas and innovate. followed suit. Argentina is another navel- Cities, sub-national regions and even gazing country; it was full of initial prom- Special Economic Zones are the best places ise, but itruined itself over the course of the to experiment with rules and institutions. twentieth century. “Argentines,”so the say- Deng Xiaoping started China’s industrial ing goes, “like to compare themselves with reforms not in Beijing but in Shenzhen, themselves.” So it is with Sri Lankans. bordering Hong Kong. It was a sleepy fish- But now Sri Lanka has a chance to look Prime Minister Ranil Wickremesinghe ing village until the late 1970s; now it is a outwards again. It should scout better prac- metropolis of seven million people. It was tice abroad and see what can be parts of the ex-Soviet Union employers and unions imposed a straight- tion, and so on. Institutions always matter, China’s first SEZ; its success spawned many applied at home, tailored to the show. And while a crisis might jacket of protectionism in developing coun- but a poor country with weak institutions more SEZs, before reforms were rolled out local context. Intelligent emu- trigger some reforms, it is no tries. Mostly this benefited unionised urban can still enjoy strong catch-up growth by nationally. lation is what a small multi- guarantee of further reforms manufacturing industries, employing a tiny getting some policy basics right (such as Successful SEZs succeed import market- ethnic island, right along an My down the line. Sri Lanka is a minority of workers and producing shoddy prudent monetary and fiscal policies, lib- friendly rules from outside the country. So ancient maritime trade route, maestro in squandering reform goods for the domestic market. Agriculture eralising the domestic market, opening to do many successful cities. One example: should be doing. In this spirit, I opportunities. Macroeconomic and tradable sectors suffered. India’s the world economy, and investing in educa- Dubai’s International Financial Centre will highlightsuccessful policy incontinence – populist welfare license raj was its most notorious incarna- tion and infrastructure). But institutions operates under English common law with reforms abroad and extract les- View spending, foreign aid-fuelled tion. But Mrs Bandaranaike’s license raj in need strengthening as real incomes rise British judges – separate from the juris- sons for Sri Lanka today. I have corruption and inflation – over- the 1970s came close. and growth depends more on efficiency and dictions of Dubai and the UAE. These six lessons in mind. whelmed J.R. Jayewardene’s In many countries, a crisis was used to productivity gains. Otherwise countries imported rules have attracted scores of market reforms. So did his overcome interest-group opposition and get stuck in a middle-income trap. Only international banks, private-equity groups Lesson 1: Leadership contribution to ethnic conflict. push through liberalising reforms (as in stronger institutions can fos- and hedge funds, helping “Cometh the hour, cometh This toxic cocktail poisoned India in 1991 and Sri Lanka in 1977). In ter trust, lower business costs to make Dubai the Middle the man.” Individuals matter. subsequent opportunities right some countries, protectionist coalitions- and support more sophisti- East’s financial hub. A good leader has a clear vision up to and after the end of the slowed down, halted or even reversed lib- cated, value-adding transac- Leadership, timing, What does this mean for of where to head, a roadmap of war. eralisation. Russia is but one example. tions. interests, ideas and Sri Lanka? The Sri Lankan how to get there, and an iron Now Sri Lanka has a combi- Elsewhere, radical opening shifted econo- Weak public institutions state is far too Colombo- will to succeed. He or she must nation of golden opportunity mies in favour of tradable sectors. That we are Sri Lanka’s Achilles Heel. institutions are all centric; Provincial Councils also have a good team, a clear and looming crisis. The defeat see especially in Eastern Europe and East Politicisation has degraded indispensable ingredients and municipalities have division of labour among them, of the Rajapaksas and a new Asia. Traditional protectionist interests them for decades, but it got of policy reform. All need little power. Devolution Global of power to Provincial and a practical sense of getting mandate provide the opening. were weakened, and countervailing coali- so much worse under the direction from Colombo – policies implemented. And minds should be concen- tions – exporters, users of imported inputs, Rajapaksas. The State is mas- Councils is a long-standing, Singapore’s Lee Kuan Yew Economics trated by a brewing balance-of- multinationals with global production net- sively overstaffed; there are from the PM and his key highly charged political was such a leader. He was a By Razeen payments crisis – unsustain- works, cities and regions acting as magnets far too many ministries and ministers and officials. issue. But cities and SEZs political superman – one who able foreign borrowing, capital for international business – emerged. These regulatory agencies; and, But Colombo politics will as growth poles are more appears rarely anywhere in Sally flight from emerging markets, new interests lobby for further market through blatant political promising for economic the world. Among his qualities higher global interest rates reforms. favouritism, the wrong peo- always obstruct doing progress. was excellent team-building. around the corner, alarmingly Sixty years of government intervention ple have risen to the top. The the right thing. Which is Ranil Wickremesinghe’s Singapore would not have soared if not for depleted foreign-exchange reserves, pres- in Sri Lanka has bred a monstrous army of Sri Lankan State is a hugely why decentralisation and pet project is the Colombo Lee’s team of first-generation leaders. A sure on the exchange rate, and widening fis- crony interests, all lobbying and bribing for magnified version of many Megapolis. He has veteran Singapore elite insider told me it cal and current-account deficits. favours and protection against their local politicians: disgustingly reforms “from below” – announced plans to develop was down to five individuals in key posi- So now is the time to act. Monetary poli- and foreign competitors. And all defraud- obese, severely diabetic, alco- from cities and SEZs – are second-tier cities and new tions, working well as a team, with practi- cy should be tightened, the rupee allowed ing the consumer with inferior goods and holic, wracked with venereal so important. But they SEZs as well. So far so good. to devalue further, and tough decisions But it is easy to see how cal implementation skills, and with Lee as services at artificially high prices. They disease, with clogged arteries will only succeed with their coordinator and political frontman. made on taxation and public expenditure. speak of the national interest and invoke and running sores. these ideas could go wrong. Other examples come to mind: Margaret The tax system needs to be radically sim- patriotism. But, as J.S. Mill also said, this How an earth are even good market-friendly rules and The Colombo Megapolis Thatcher’s premiership in the UK in the plified and public expenditure reined in. is “the last resort of the scoundrel.” Now is policies going to be imple- institutions. If done right, could grab most of the 1980s; the Reagan presidency in the USA at Microeconomic reforms to free up mar- the chance for pro-competition reforms – to mented by such a beast? they could be Sri Lanka’s attention and resources, the same time; the PM-Finance Minister kets should complement macroeconomic weaken these interests and allow new open- Slimming it down and restor- sucking oxygen from duos of Hawke-Keating and Howard- reforms. Red tape should be cut, starting economy interests to emerge. But does the ing it to health will take time, silver lining – its answer to Kandy, Galle, Jaffna and Costello in Australia from the 1980s to the with licenses and permits; so should protec- Government have the will and courage to do but it must be done, for if not Shenzhen and Dubai’s IFC. Trinco. All these projects, 2000s, and Lange-Douglas in New Zealand in tionism against imports and foreign invest- it? it will block economic regen- If done wrong, they will add starting with Colombo, the 1980s. ment. Not least, a “do no further harm” eration. In the meantime the could easily be ruined by Sri Lanka, in stark contrast, has mostly injunction should apply: the government- Lesson 4: Ideas beast should be denied extra to Sri Lanka’s long list of political interference – Sri examples of piss-poor leadership. Now Sri should desist from monumental blunders Ideas matter. To quote Mill again, “it is supplies of sugar, fat and policy failures Lankan “politics as usual”. Lanka has a Prime Minister who is instinc- such as ad hoc taxes on businesses, subsi- the word in season that does much to decide alcohol. I would highly rec- Hence urban policy and tively more pro-market than any of his dies to the tea industry, price controls on tea the result.” Prevailing ideas, interacting ommend an Ayurvedic diet, decentralisation should predecessors. But that is neither true of and hoppers, and legislating wage increases with interests and events, can sway policies but that is too much to expect politically. have three guiding principles. First, don’t the President nor most cabinet ministers. in the private sector. All are examples of Sri one way or the other. A consensus on import let Colombo divert attention and resources Are there five or six really competent indi- Lanka’s never-ending “auction of non-exist- substitution, state planning and foreign aid Lesson 6: Decentralisation and from second-tier cities. They might well be viduals in key positions who can drive criti- ent resources,” as Lee Kuan Yew put it. It is was entrenched in developing-country gov- reform “from below” more promising venues for policy experi- cal reforms? No – or at least not yet. Most extreme economic illiteracy – political med- ernments and international organisations Policy reform gets more difficult the far- mentation – precisely because they are at a appointments seem to have been made on dling gone mad. up to the 1970s. The pro-market Washington ther removed it is from the citizen. It is most distance from Colombo politicians. Second, political grounds, not on merit. Of course not all necessary reforms can Consensus overturned it between the 1970s difficult in countries with very large popu- SEZs should be small in number and large be done at once, or even in the first year or and ‘90s. The pendulum has swung the other lations; political and administrative obsta- in size – the lesson from Chinese and other Lesson 2: Timing two. All market reforms are difficult. But way again, especially after the global finan- cles are greatest in the national capitals of SEZs in East Asia. A large number of small “Events, dear boy, events.” So said some are more pressing than others. These cial crisis. Now Keynesian macroeconom- big countries. Just think of Washington SEZs will end up as tax boondoggles – the Harold Macmillan, a former British Prime I have just listed. They make up a critical ics and government intervention to rectify gridlock, constricting Delhi bureaucracy lesson from India. Third – and most impor- Minister. The practical politician, official mass of reforms for the next two years. If alleged “market failures” are back in fash- and Kremlin skulduggery. Even in authori- tant – think hard about importing good or businessman knows that choices are dic- implemented, they will establish a bridge- ion. tarian, politically centralised China, the rules and institutions for cities and SEZs. tated by responses to often unanticipated head to harder, politically more costly Under the Rajapaksas, idiot economics – central government in Beijing always has Staff new administrations with clean and events. reforms – none more so than in the public or caveman economics – was the governing problems implementing its edicts in the competent people. Depoliticise governance Major episodes of economic-policy sector -- later in this parliamentary term ideology. It harked back to the dark days of provinces. Not surprisingly, small coun- as much as possible: insulate administra- reform have occurred mostly in response and beyond. But without them all else fails. the 1970s, when the Finance Minister had to tries tend to be the most successful policy tions from grabbing politicians. Rules and to crises. As Dr. Johnson said, “When a And the window of opportunity is nar- approve every permit for an imported vehi- reformers. But reforms also get stuck in institutions are where thinking should man knows he is going to be hanged in a row – two years at most. Reform’s deadliest cle. Much of that idiot-caveman economics the national capitals of small countries. start; detailed masterplans for urban fortnight, it concentrates the mind wonder- enemy is Sri Lanka’s perennial complacen- survives in Government today. Now those Singapore is an outstanding exception – but planning should follow, not the other way fully.” A macroeconomic crisis, with symp- cy. “Happy is he to whom Nature has given who know better must argue vigorously for it is the world’s last surviving city-state of round. toms such as extreme external debt, hyper- a sparing hand,” said the poet Horace. Sri sensible economics. And it is as important any significance, whose government com- inflation, a severe payments imbalance, Lanka’s stupendous bounty – its luxuriant for at least a few senior politicians, from bines national and municipal functions. Conclusion capital flight and a plummeting currency, natural endowments – is also its biggest the PM downwards, to make a simple case Policy reform has a better chance of suc- Leadership, timing, interests, ideas and provides the classic backdrop. This is when curse. for markets, economic freedom and limited cess when it is decentralised, closer to the institutions are all indispensable ingredi- “normal politics” is suspended, and when a Government to ordinary people, beyond citizen and with smaller populations to ents of policy reform. All need direction period of “extraordinary politics” can pro- Lesson 3: Interests Colombo’s elites. work with. Think of city-states in medieval from Colombo – from the PM and his key vide a window of opportunity for market John Stuart Mill, Britain’s pre-emi- Europe, whose competition for merchants, ministers and officials. But Colombo poli- reforms. Examples are legion: Britain in nent nineteenth-century political econo- Lesson 5: Institutions skilled artisans, goods, services and ideas tics will always obstruct doing the right 1979; Chile in 1973/4; Mexico in 1986; Brazil mist, said “a good cause seldom triumphs Institutions are the economy’s decision- generated a commercial revolution and a thing. Which is why decentralisation and and Argentina in the early 1990s; India in without someone’s interest behind it.” making framework, the arena for policy “European miracle”. Hence the old adage reforms “from below” – from cities and 1991; Central Europe and the Baltic states in Economists from Adam Smith to James choice and implementation. Generally, the Stadtluftmachtfrei – “city air makes you SEZs – are so important. But they will the early 1990s; Australia and New Zealand Buchanan tell us that interest groups drive more prosperous a country, the better its free”. And think of coastal city-states – only succeed with market-friendly rules in 1983/4; and Sri Lanka in 1977. policy choices. Minorities of well-organ- institutional quality: a better rule of law Calicut, Cambay, Malacca, Macassar and and institutions. If done right, they could But a crisis is no guarantee of successful ised producer interests, not the majority (in terms of enforcement of property rights many others --- that were hubs of Indian be Sri Lanka’s silver lining – its answer to reform; it simply provides a political open- of unorganised consumers, lobby govern- and contracts), a better legal system, public Ocean and Southeast Asian archipelago Shenzhen and Dubai’s IFC. If done wrong, ing. Crisis opportunities have often been ments for their preferences. administration and corporate governance, trade before Western colonisation. they will add to Sri Lanka’s long list of pol- squandered, as Russia, Ukraine and other For decades, politicians, bureaucrats, better regulatory agencies, less corrup- Today, successful policy innovation hap- icy failures.