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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.

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