Economic Recovery under All-Political Party Governance - It is feasible only with a new macroeconomic governance system implemented through the Constitution.
These days, everybody waits for an all-party government to be formed and a magical recovery of the economy and general public from the catastrophic economic crisis by same group of political leaders under whom the crisis developed to this stage.
While there is a strong hope for some economic recovery
facilitated by the power stability in an all party government, a sustainable
recovery will depend on the extent to which the new government implements a new macroeconomic
governance system capable of resolving acute economic problems such as rising
poverty and economic inequality confronted by the public in a fairly short
period so that the living standards can be improved to forestall the next wave
of social protestors, agitators and leftist ideologists because poverty and inequality
are the founding pillars for such social activists.
However, it appears that the government is trying to follow the already failed number-based macroeconomic management system led by the
monetary and fiscal policy reform agreed under the IMF programme to come after the
debt restructuring. If the all-party government and the general public are to
wait for the IMF programme to commence its work for the economic recovery
within the existing system, the collapse of the new government also will not
take months, given the power greed and malicious intensions of the political
leaders.
Therefore, the objective of this article is to highlight the inappropriateness of the present macroeconomic management system for the recovery of the economy and the urgent need for a new publicly accountable macroeconomic governance system implemented through the Constitution in order to recover the economy and general public from the present economic crisis.
What is meant by the number-based macroeconomic management
system?
The present macroeconomic management system is the
combination of the fiscal policy, monetary policy and market regulations aimed at certain macroeconomic
benchmarks or targets. These policies contain a number of policy instruments
mainly on level and flow of distribution or utilization of financial resources in
the economy through many state institutions incorporated under the Constitution
and legislations empowered under the Constitution including the Article 27.
However, policy decisions are taken from time to time on the
targets of certain aggregate levels of economic data, so called macroeconomic indicators such as
GDP growth, consumer price inflation, unemployment rate, growth of money supply
and credit, movements of interest rates, exchange rates, foreign currency
reserve, external trade deficit and balance of payment, fiscal deficit and debt
ratios and foreign investment flows. In addition, many data variables
underlying the above indicators also are used to understand the trends of the
economy.
Accordingly, policy instruments are fine-tuned to drive the economy
towards number-based benchmarks as preferred and judged by the relevant public
officials. Therefore, government policy statements are seen often referring to
the GDP growth, inflation, fiscal deficit, debt ratio, exchange rate, trade
deficit, etc., to support the success of the government while same numbers are
used by the opposition to criticize the government.
However, this system is not helpful to ensure the economic
welfare to the general public as expected from the government under the Article 27 of
the Constitution due to the following fundamental issues.
- First, those macroeconomic economic numbers do not reveal the distributional inequality of living standards and economic opportunities among the public. The numbers are mostly statistical exercises and can be fixed or manipulated to show better results as accountable data governance systems are not available.
- Second, policy decisions are scattered or compartmentalized among various state institutions for different objectives in line with their governing statutes and policymaking authority. Therefore, policies and performances of state institutions cannot be aligned to national economic targets such as GDP growth, inflation and fiscal deficit. Further, instances of policy conflicts among the state institutions are ample as they follow different economic concepts and medels. The most popular conflict is the Kenesian fiscal policy expansion to help living conditions of the general public whereas the Friedman style monetary policy in opposite tightened to control macro level inflation as seen at present in Sri Lanka. Accordingly, the economy is full of conflicing policy models that hamper inclusive and sustainable development of the country.
- Third, the President or Cabinet or the Parliament cannot laydown legally enforceable national economic targets and secondary targets for respective state policy institutions aligned to the national targets because of the specific policy objectives and discretions authorized by the respective statues to specific public officials employed in different institutions. Therefore, it is evident that policymaking officials of key institutions such as the Central Bank tend to antagonize with the government policy priorities by referring to their professional qualifications and independence to suit their personal agendas. The best example is the excessive increase in interest rates at present by the Central Bank for so called inflation control while causing bankruptcy among the fiscal and private sectors aggravating the present economic collapse. Further, the Secretary to the Treasury and the Governor have defaulted government foreign debt for restructuring outside the Active Liability Management Act and given the fiscal, monetary and state enterprise reform policies in agreement with the IMF staff requirements without the approval of the Parliament.
- Fourth, although private business institutions and organizations have a major role in driving the economy in response to the government policies, the government lacks the legal authority to require and supervise such institutions and organizations to fall in line with national policy targets. However, these entities have got a habit of mostly seeking fiscal and other policy support for their individual economic benefits while trying to negate the policy objectives.
Therefore, the momentum required for the recovery of the
economy from this catastrophic crisis cannot be provided by the present number-based,
disaggregated system of macroeconomic management. The fondly envisaged IMF
programme is also a byproduct of this system and is very likely to fail due to
above management issues as before in 16 occasions.
Is the present macroeconomic management system supported
by the Constitution?
Although the President and Parliamentarians swear in to
protect the Constitution, it does not cover or guarantee the basic economic
rights required for people to live in the country. The Constitution provides
for the law and order and administrative system that help people to live in the
country. However, people also need economic welfare and opportunities guaranteed
in the administrative system if they are to live peacefully as expected in the Constitution.
It is the global experience that political and social crises
including breaking of the law and order occur against the Constitution as a
result of wide economic disadvantages confronted by the general public. The
recent social up-rise that led to the expel of the constitutionally elected
President and disarray of the constitutionally functioning Parliament in Sri Lanka
is a good example. The underlying economic crisis that has shattered the public
economically and socially is not just an external shock unexpected, but a gradual
result of the poor macroeconomic management system adopted and boasted by the
government during the past decades.
The Constitution sets out the government’s duty in providing
for the economic welfare for the general public under the Directive Principles of
State Policy and Fundamental Duties in Chapter VI of the Constitution. However,
the relevant provisions do not confer or impose legal rights or obligations and,
therefore, not enforceable in any court or tribunal.
Therefore, anybody economically aggrieved by the state
policies also has to seek relief under the Articles 17 and 126 of the
Constitution on the ground of unfairness or defects of the administrative decisions
of the relevant state authority. Accordingly, certain applications have been
filed in the Supreme Court in respect of economic disturbances confronted by
some parties due to the failure of certain public officials such as the
Minister of Finance, Secretary to the Treasury, Central Bank Governors and Deputy
Governors and Monetary Board Members to take early policy action to forestall
the present economic crisis.
However, these petitions are very weak before the law as the
economic losses cited in the petitions are mostly conceptual estimates whereas the policy
discretionary powers conferred by the relevant statutes upon respective public
officials are strong and wide. Further, the nature of the public policy
decisions is such that they are favourable to some group of the public while resulting
unfavourable outcomes to some other groups of the public simultaneously or in
lagged times. Therefore, such petitions find a weak position in courts unless
the petitioners are able to establish fraud or irregularities behind policy decisions
beyond the doubt through documentary evidence because the judiciary has no means to judge on economic principles and concepts and economic data behind economic policy decisions that are in the petitions.
However, if Directive Principles were enforceable, the
public could have economic fundamental rights guaranteed in the Constitution sworn
in by the President and Parliamentarians.
Therefore, it is hard to believe why the Constitution
contains economic duties of the government that are not enforceable in law.
As such, swearing in to protect the Constitution does not impose any binding or duty cast upon those swearing in to protect and facilitate basic economic needs and welfare for the general public.
What are the Constitutional Provisions prevailing for the
public economic welfare rights?
The attachment below is the Chapter VI of the Constitution that
covers economic related rights that are laid down as the state policy and
fundamental duties for the establishment of a just and free society. A few highlights
of this Chapter are as follows.
- These Directive Principles shall guide President, the Parliament and the Cabinet of Ministers in the enactment of laws and the governance of Sri Lanka.
- The democratic socialist society pledged by the state to establish in Sri Lanka covers several objectives. Therefore, the state must enact laws and the governance to ensure that the public enjoy those objectives. Accordingly, many of objectives relate to the economic welfare rights of the public as highlighted below.
- Equitable distribution of resources,
- Adequate and continuous improvement of standard of living,
- Rapid development of the whole country by means of public and private economic activity,
- Prevention of the means of production, distribution and exchange being concentrated and centralized in the state, state agencies or in the hands of a privileged few, but are dispersed among and owned by all the people of Sri Lanka,
- Elimination of economic and social privilege and disparity and the exploitation of man by man or by the state,
- Ensuring that the operation of the economic system does not result in the concentration of wealth and the means of production to the common detriment,
- Protecting, preserving and improving the environment for the benefit of the community,
- Recognizing and protecting the family as the basic unit of society,
Therefore, the Constitution recognizes the principles for
the duty of the government to guarantee the basic economic opportunities and
welfare to the people through state policies but does not impose them as legally
enforceable. As a result, the public has to accept whatever economic opportunities
and welfare provided by the state institutions and regulations in the existing macroeconomic
management system.
Therefore, the state has been unable to ensure those policy
principles and objectives set out in the Constitution in the past decades. That has
led to the present economic crisis. There is no controversy that the present
social and political up-rise is attributable to the failure of the government to
provide the public with basic economic welfare and rights ensured in the Constitution
although there are many legislations passed by the Parliament to do so.
As such, the present macroeconomic management system of the
government has failed to uphold the Constitutional principles and objectives in respect of economic life of the public.
What is the macroeconomic governance system now required?
It is the economic policy implementation system falling
within the Constitutional governance system to guarantee economic welfare
rights of the public. Accordingly, the economic policy system should integrate
all policymaking authorities to statutorily contribute to the national economic
targets mainly focusing on living standards of the people and families to be achieved
through all public and private economic activities. This requires following innovations
without delay.
- Making above Directive Principles enforceable through the Constitution amendment already in the process.
- Empowering the President, Cabinet and the Parliament to decide the national economic priorities and targets based on household level economic welfare and living conditions for a minimum period of continuous 10 years. Conventional macroeconomic numbers should be used only as a subsidiary set of targets.
- Prescribing activities of state policy institutions relating to each national priority and target as appropriate and mandating time-bound policy targets for the operations of the respective institutions aligned to national targets as appropriate.
- Carrying out an annual fitness and propriety assessments of Boards and executive officers of respective state institutions based on the performance of institutional targets given in line with the national level targets.
- Requiring the state institutions to disclose their operational targets and performance to the public on a monthly/quarterly basis before the end of the next month.
- Requiring the Auditor General to examine the data governance and compilation systems of state institution to ensure that statistical data are reliable for policymaking and assessment.
- Appointing the proposed Parliamentary Committees to oversee identified sectors of activities of the economy and society covering both state institutions and private institutions and empowering them to summon respective key officials of institutions quarterly/half-yearly for examination and propose actions to the Parliament including new legislations required. Committee members must be provided with technical facilities to submit new bills to the Parliament to address national issues in respective subject areas. The risk of these committees is that they often tend to destabilize the government with the help of some officials of institutions under scrutiny.
- All appointments of high-ranking public officials should be cleared by the relevant Committee upon examination in person.
- A national policy committee chaired by the President with the members of Cabinet and heads of leading state institutions such as Treasury, Central Bank, Customs, Inland Revenue, state banks, agriculture department, BOI, EDB and ministry secretaries should meet at least quarterly to monitor performance of national and institutional targets. The system of consultants and external advisory committees should be confined to advise the President and Cabinet as they do not have the statuary powers to supervise state institutions and markets or to implement policies.
- A similar committee consisting of leading business institutions and associations should meet quarterly to monitor the performance of the private sector towards national targets.
- Protecting high ranking public officials from criminal charges and prosecution on the corruption allegations connected to implementation of new policies. This requires Constitutional provisions to establish a public service inquiry commission to investigate a prima facie case on such allegations before law enforcement authorities so that those officials can establish their evidence for innocence. The prosecution could be permitted only by the recommendation of the Commission. However, the present system is the prosecution with sudden arrests by the police as influenced by the political leaders. Therefore, public officials are not prepared to implement new public policies as they are generally alleged by the opposition political leaders with the help of the media agents as corruption where relevant public officials are politically victimized and prosecuted for the rest of their lives. Therefore, all party government will serve no purpose to rescue the economy if the public officials are not protected to take the risks of new policies. The new government should know that it will miserably fail unless the key public officials carry out new policies without fear.
- Ensuring that key decision-making officials appointed to the public institutions are fully trusted by the President. Such officials behaving with own concepts of professional independence and policy agendas with the help of social media groups will destabilize the new government where the President again has to flee as the political leaders will break up at any movement for self-interest at the first the opportunity. However, that risk could be largely controlled if the President has a trusted team of key public officials who fall in line with national targets and policy approaches. There is no room for testing the trust now.
- Following a clear macroeconomic approach such as modern monetary theory to integrate and drive all policies in one approach in place of present diverse approaches with different objectives and targets followed by respective state institutions.
- A new economic recovery bill covering provisions for the proposed national economic governance system would be more appropriate for fast-tracking the recovery policy actions. Best examples from the US are the Cares Act in 2020 to deal with the Corona pandemic and the present Inflation Reduction Act.
The recovery of the economy and general public from the present crisis which is the utter failure of the government itself is not similar to the financial statements-based restructuring and recovery of a bankrupt business firm. It involves in recovering of socio-economic living standards of people back to pre-pandemic levels within a reasonable period of time in the middle of rapidly rising global inflation and envisaged recession.
Therefore, the recovery as proposed under conventional economic concepts based on public finance restructuring per se is not feasible at this crisis stage since the government is not a business entity but the country's overall governance system for living standards of the public. Therefore, radical public finance restructuring for the government to operate within the means of its revenue as proposed in line with conventional macroeconomic concepts not empirically established yet will no doubt cause far reaching consequences and another wave of social agitations that can cause further destabilization of the country because people do not want a government that only attempts to manage affairs of its members only, i.e., political appointees and state employees, through tax revenue levied from the public.
Therefore, the proposed new macroeconomic governance system should focus on the utilization of the country's resource base for creation of real output and employment while lowering the poverty and inequality that can recover the economy and living standards from the current crisis within an identified period of time. As such, the new economic governance system at the initial phase will take form of an economic disaster management system specifically designed for Sri Lanka.
Otherwise, present efforts and initiatives taken by the President to recover and stabilize the economy in the current model will end up as another political show where the public has no option but to struggle in the crisis for decades to come.
(This article is released in the interest of participating in the professional dialogue to find out solutions to enormous economic difficulties presently confronted by the general public consequent to the global Corona pandemic and subsequent disruptions and shocks.)
P Samarasiri
Former Deputy Governor, Central Bank of Sri Lanka
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