The Myth of the Open Economy

The Sri Lankan left (and it's modern-day 'mainstream' apologists) often point to 1977, the year when Sri Lanka started liberalizing the economy to describe anything 'bad' to do with Sri Lanka, from moral degradation, the persistence of poverty and occasionally as the root cause of the war.

Recently, when I pointed out that the partial liberalization in '77 has in fact, increased per-person income levels of Sri Lankans, a reader (and my friend) Andy, left the this comment:

Ya, it has increased incomes. But This can be hardly called great development. Countries like Singapore, the Asian Tigers have grown much faster.

Open Economy in Sri Lanka has not worked well enough. Maybe it's the war.

Now, I don't like the phrase, "Open economy" for two reasons. one, it somehow gives this notion that being open or not open to international trade is the only concern in a modern economic system, which is clearly not true. Two, in Sri Lanka the term is used as a catch-all-phrase for market liberalization. I prefer the term a free-market economy, but Sri Lanka isn't much of a free-market either, nor is it all that 'open' under any sort of definition.

To answer Andy, if at all the "Open Economy" has not worked, it's because the economy hasn't been open enough or if you ask me, isn't free enough.

Sri Lanka still has a mediocre socialist attitude towards policy.

In recent times, policymakers proposed using (and have used) price-controls to tackle inflation, we have a string of failing state enterprises, and if that's not enough we start more disasters. Investing in Sri Lanka is made difficult, with excessive restrictions on capital transactions, so on. The Central bank has lost all credibility as an independent institution and comes up with absurd theories to justify 20+% inflation. The labor market is heavily regulated, wasteful subsidies and welfare schemes which are nothing but political support systems

Entrepreneurs in Sri Lanka face high taxes, all sorts of restrictive licensing requirements and bureaucratic red tape, which results in heavy corruption. The World Bank doing business report in 2008 ranks Sri Lanka 101 of 178 countries, down 1 place from last year. We are with the worst lot when it comes to ease of doing business and things are not getting better.

We have a bloated government, the largest cabinet of ministers in the world and possibly the largest bureaucracy in the world with over a million state-sector employees for a country with 21 million people - one bureaucrat for every 20 people. India, often thought of as the worst bureaucracy only has about a 1:54 ratio of bureaucrats to people. The government spends most of our taxes on paying salaries to keep this massive bureaucracy alive, not on infrastructure, education or health, and no, not even the war effort. We simply can't afford this.

So no, Sri Lanka isn't much of a free-market. Yes, there are things we have managed to right and It's great that Sri Lanka still manages to grow, despite the government and despite the war, but things can be so much better.

There are two indices which measure how "free" an economy is. One published by the Heritage Foundation/Wall Street Journal ranks Sri Lanka 90 out of 162 countries. They are kinder, whereas the report published by the Fraser Institute ranks Sri Lanka 101 out of 142 countries. (pdf link) . The two reports differ on approach with the Heritage foundation depends on a more subjective analysis using a group of experts while the Fraser Institute relies on purely statistical analysis to come up with the rankings.

In both cases, Sri Lanka's rating is nothing to write home about, and that should tell the story why we are still a poor country. Economic Freedom promotes economic growth and prosperity and if we can have that, we can still progress despite having a war, like Ireland and so many other countries have.