Backyard Vs The Bank
The price of a Malu Paan in 2020
In Sri Lanka the surest investment seems to be burying your money in the backyard or putting it on a plane. This month inflation is almost 20%. It seems that the government has gone completely apeshit and started financing debt with a credit card. I hope we get frequent flyer miles or something. Mahinda must be doing something fantastic to take food out of peoples mouths before they swallow. In 2005 the ‘average’ family spent Rs 4,286 per month. In 2006 that amount is about Rs 5,000. That is the concrete increase in the cost of living under this administration. What’s is more scary to me is that this rate of inflation unchecked makes any cash savings worthless, which makes me wonder how a person saves for marriage, children, education, or a midlife crisis. If there is even 15% annual inflation, it is still impossible to find a bank account that will even break even. You might as well buy gold and bury it in the backyard, which is what a lot of Sri Lankans do.
Inflation
Loosely, ‘In mainstream economics, inflation is a rise in the general level of prices, as measured against some baseline of purchasing power (Wikipedia).’
Some inflation is actually good for an economy in that it means that ‘sticky’ wages get lowered naturally. And hence good for business. At rates like 10-20%, however, it literally robs money from working-class people and savings accounts. At that point it’s all bad scene.
Anyways, In Sri Lanka the purchasing power measure is “The CCPI [,] the country’s official cost of living component of the wages of both the government and private sector employees and to measure the rate of inflation (statistics.gov.lk).” All the stuff’s available at the Statistics site. It’s a pretty mundane measure, comparing the price of rent and food and all from one year to the next. Here’s what inflation has looked like (PDF),
2000: 6.2%
2001: 14.2%
2002: 9.6%
2003: 6.3%
2004: 7.6%
2005: 11.6%
Inflation looks like it’ll be 13% this year, up from 11.6% last year. That was also Mahinda/SLFP bullshit though, inflation has been below 10% since 1997, barring the war blip of 2001. Regardless of whatever lip-service and subsidies the government distributes to a few people, inflation robs from everybody. It basically means that the money you earn buys you less food. It means the money you save is worth less when you withdraw it.
In this case Mahinda is pretty directly responsible for inflation, increasing the size of government and borrowing 100 billion rupees (1 billion dollars, wtf) from the Central Bank. So, the government prints money to wipe its ass and we get the bill. Meanwhile, I get to see 100 billboards that I paid for while Mahinda’s convoy flicks me off in traffic. Fantastic.
Long Term Savings
Besides the daily cost of food and rent, inflation also effects the value of savings. Let’s say inflation is an average of 10% over ten years. If I put Rs 5,000 in the bank at 6% then I can collect Rs 9,000 in time. Which is cool. Because I saved I can now feed my family for an extra month. Or not.
By the time I withdraw the money it’ll cost 13,000 to take care of a family. So I’ve saved like my mother told me too and as a reward I get… less value than I put in. If I spent the money ten years ago I could’ve fed my family for a month. Now I can’t even do that. It’s not that saving doesn’t gain you money, you actually lose money with inflation this high. For every 6% that interest gives, inflation takes 10%. Or, for ever 6% the bank gives, the government takes 10%.
Long term cash savings are basically pointless in a country with this high a inflation. In the States (2.5%), Canada (1.9%) or India (5.5%) you can save some money at a modest return and count on being able to buy more stuff in the future, or at least the same amount. When the government is doling out subsidies, advertising itself, and keeping Ministers in the style to which they’re accustomed, however, inflation skyrockets. The most obvious culprit is when you print money you don’t have. That takes money directly from people’s futures to paper over the government’s short term cock-ups. The people who are hit the worst are pensioners and people on fixed incomes (like government employees).
Mainly, however, I am personally pissed cause there’s no incentive to save in Sri Lanka. If I just put my money into Loonies (Canadian Dollars) and bury them in my backyard I’ll have more money in 10 years than if I’d put Rupees in the bank. That means, as an individual, I have an incentive to take money out of the Sri Lankan economy entirely. Money in the bank is getting invested or something, but money in my backyard isn’t doing anything. It’s bad for the country, but good for the individual. That’s bad for everyone in the long-term.
Other Investments
Stocks: Stocks theoretically self-adjust for inflation cause they’re pegged at whatever people are willing to pay. However, rampant inflation suddenly means that a company revenue sheets are all fucked up. A company’s revenue rises with inflation, but they’re not creating any value for that dollar amount. It’s just air, but you can claim 20% growth without doing anything. As an investor it makes it harder to read annual reports, but I guess stock investors don’t get totally screwed by inflation.
Gold: Traditional Sri Lankan investment is gold and jewelery. A nice ‘fair girl with property and jewelery’ is still advertised in matrimonials. Gold effectively takes money out of circulation and it’s not especially good for national growth. However, in this messed up environment it makes for a sensible individual choice.
Foreign Currency: Then there is always the possibility of investing or saving abroad. This is another good option that’s also bad for the country.
This whole scene is bad because it all involves betting against the Rupee. If you don’t want to go down with the ship you either have to take your money out of the Sri Lankan economy, or directly invest in the private sector. The latter seems like a good option, but stocks aren’t something ‘average’ Sri Lankans are going to do. They’re going to contribute to EPF, maybe open a Bank of Ceylon account, and finally collect a pension that won’t buy them a boiled egg. All because the government spent their money and left them the words ‘Pro-Poor Development’ as a receipt. Try to cash that in 20 years.
It’s the worst it’s ever been!
Funnily enough the closest I felt to how it is today, was in 2001-after the airport attack in July and before 9/11.
For some reason 9/11 saved us from ourslelves and the economy started picking up again.
God help us. It’s a f…ing mess.
I like your article Indi….but unfortunately Mahina needs money…lots and lots of money to be borrowed to buy lethal weapons to bomb those people living in North & East. When we go bankrupt, we have no option other than to let the wold police to come and take our Trincomalee & rest of the island……we are not too far away.
Yeh they are already here…acting like training our army, already visited our harbours, they wants it like they took over Diego Garcia! Thy have been digging places in Jaffna in the name of removing mines. China wants a bit too, Indians have put their food down already. I am so sad why can’t we live peacefully with our Tamil neighbours than selling out our assets to other countries. I am starting to think that it must be these countries who have stired up the war between us & Tamil, so they could take what ever they want.
In answer to Naz’s comment, the current inflation is pretty bad but not as bad as the cash crunch of the late 80s – early 90s. I was wondering how things compared between the two eras and it turns out that inflation hit a high of 21.5% in 1990 – consistently 11%+ for about 5 years during that period. That seems about right from what I recall too. These are all official figures – which I have always suspected of underestimation. The same is true today – the number I hear most for inflation is closer to 20% [19.6?] for 2006.
Also, inflation means a rupee depreciation which in turn makes our exports more competitive. Anything that will inch our balance of trade towards the positive is a good thing [We're consistently between 25% and 30% in the red against exports]. And another thing, how much more is a dollar sent via foreign remittances worth in SL currency now? My point is that inflation has never been below a rather dubious 4.7% for the past 20 years and 20% is high, but not excessively so for SL. If I gave the CB any credit for a coherent monetary policy, I’d look at the interest rates with more care because they tell the real story of what the CB is trying to control…
There are (I quote Krassimir Petrov here) three types of inflation. Low (not us), High (probably us) and Hyperinflation (think Latin America a few years ago or Zimbabwe now, not us yet). As long as we don’t hit the hyper stage AND the economy keeps growing, things aren’t all bad.
What I really fear is that we’re going to see a repeat of the late 90s and early 00s when the stock market was flatlined AND there was comparably high inflation. Not a lot of economic activity + high inflation is worse because there is no way out of the hole. Inflation on its own? It’s much harder to say if that’s a good thing or a bad thing; economic consequences to people on fixed incomes notwithstanding.
Economist types (Ru?) can jump on the comment and tell me what I got wrong now :)
First off, ghostwriter, what you got wrong was the fact that 20% is not all that bad. If it is sustained, it is bad. It’s very very bad. True, it’s not as bad as hyperinflation, but the term hyperinflation is reserved for describing those truly extreme cases, like post-War Germany where people had to literally take a wheelbarrow-load of money to the bakers to buy a loaf of bread, and the next morning, they’d have to take a cart-load to buy the same loaf. In that siutation, money quickly becomes worthless, and you have to start bartering again.
You brought up Zimbabwe. This morning I heard on BBC World of a Zimbabwean (journalist I think) who is over 70 years old, and still can’t retire, cos the inflation in Zimbabwe has made his his retirement savings worthless. He’s forced to keep on working even at that age. That’s a pretty extreme circumstance, where you can directly relate the state of man’s life to one thing: inflation. Sri Lanka hasn’t come to that stage yet, and maybe that’s why not enough intelligent people realise, how bad inflation can be when it’s silent and not as noticeably devastating as in Zimbabwe.
Secondly, the seriousness of this depends on whether this is a short-term increase in the rate of inflation or not. I don’t know whether this 20% thing is going to be a midium-term trend, or whether it’s going to settle. True, it was 17 or 18% last month, and it’s 19.8% month, but the 12-month rolling average is still below 13%. The rupee exchange rate dip in the last two months may have led to this sharp increease, I would guess. If the exchange rate continues to dip, then inflation will presumably stay this high. If Nivard “Hotel-Accountants-Can-Run-Central-Banks” Cabraal gets his f-ing act together and does something useful for a change (like resign), then perhaps we can go back to a stable rupee, and not a wildly fluctuating one, which is actually what is most important for our exports, or the economy as a whole.
One of the costs of inflation is uncertainty and what are referred to as “menu costs”. Imagine a restaurant where the menu has to be reprinted every month because of inflation. Now extrapolate that same situation to every other business. Exporters can’t even quote a firm price and feel comfortable that they’d be making a profit delivering at that price in the future. Especially for the agriculatural sector (like tea) where margins are slim as 1 or 2% (on bulk tea, for example) this is deadly.
The other thing you assume when you suggest that the depreciation of the rupee is good for exports is assuming that our raw materials and inputs are local. This is not true. Especially in the garment industry much of the inputs, especially the textiles, that go into the garments, are imported since we no longer have a textile industry to speak of. So, when the rupee depreciates sharply, the cost of production goes up, and worse, it becomes unpredictable. Risk is also a cost. This does not help us become more competitive.
Let alone not having studied economics, if Nivard Cabraal had at least run an export business, he’d know you can’t let the rupee fluctuate this wildly from day-to-day. Much of this government is economically illiterate. Sorry, I’m ranting.
I don’t really know a lot about this. Although I studied econ at uni, it’s a pretty complicated subject, and I never studied international economics or development economics, and this was some time ago anyway You really do need to have a a guy who knows his economics running the institutions like the Central Bank thoough. Putting Chartered Accountant in charge is pure lunacy.
Allow me to clarify. I said, it’s not all bad :) hairsplitting, but true. Historically (and if you look at the numbers, they back up my hypothesis) the SL central bank has put tackling inflation somewhere near the low end of its priorities. At least one reason for this is that every government has had to resort to printing money (thus devaluing the currency) in order to sustain a raft of subsidies and welfare schemes. Unlike Indi, I do not argue against subsidies; but merely point out that such schemes require money which has to come from somewhere, most often the printing presses. This is true today, it was true in the early 90s and it was probably true before.
I think you give the intelligent people of Sri Lanka inadequate credit. Many do realize their retirement funds are worthless, or in fact worth less than they could be. However, those close to retirement age in particular have lived for 25+ years with inflation rates well above what you might call “bad”. (Again, the numbers are a useful reference. I myself do not remember inflation being as bad in the mid 80s but stats give the lie to my recollections). I’m stressing the fact that high inflation is not a new order of things for SL. It’s not limited to the economic policies of a single government and as far as historical data shows, the danger is not in inflation as much as it is in a stagnant economy.
I also dispute your claim that raw material being imported somehow dilutes the point that a weak rupee is good for exports. I err.. (excuse the pun) don’t buy it. Local labour will cost less in dollar terms. Every single rupee spent on production of any export good in SL will cost less in dollar terms because the rupee is cheaper. It’s even better for service industries (which are slowly but surely beginning to take over as the main breadwinner of SL exports).
Uncertainty? I wholeheartedly agree. I don’t think a wildly fluctuating rupee is in anyone’s interest. I have absolutely no clue about Nivard Cabraal’s capability or lack thereof but suffice to say that the rupee has been through devaluation crises before, inflation has been this high (or higher) before and Friedman disciples notwithstanding, the government is not going to stop pumping money out. If he is as inept as you say he is, then he should go, but from what I can see his performance is no better and probably no worse than his (better educated, more experienced?) predecessors.
Short termism has been a feature and facet of every single government I remember from the time I was old enough to vote. I won’t forget the monstrous arrogance of some random minister who insisted that hedging on oil prices wasn’t useful (and thus consigned us to paying over the odds for months). Other examples of economic illiteracy (and just plain stupidity) abound. But I dispute the claim that this state of affairs is somehow new or unique to 2006. It isn’t.
The easiest way to rein in inflation is to check spending. Can you see this government doing that, even if they could? I cannot. Nor have I seen any other do so. The only hope is to gain more currency through a positive balance of trade. Again with the historical data (though it is incomplete), I see that a dip in the inflation rate is almost always accompanied by a surge in the export volumes.
[...] indi.ca on inflation in Sri Lanka and how burying money in the backyard is a better investment than saving it in a bank. “In Sri Lanka the surest investment seems to be burying your money in the backyard or putting it on a plane. This month inflation is almost 20%.” Neha Viswanathan [...]
Ghostwriter,
Read this:
http://www.centralbanklanka.org/Price-Stability.pdf
And where are you getting your figures from?
First, my sources: http://www.statistics.gov.lk/trade/index.htm and the PDF linked by indi above which tabulates inflation numbers. In fact, most of the statistics.gov.lk site (they have interesting figures for trade and import/export but only till 2002).
That’s an interesting pamphlet, thanks for the link Ravana. Without being overly skeptical though, I would like to point out that this is an informational pamphlet. Written policy actually getting translated into actions is another matter, entirely.
Now for the counterpoint (monkey say, monkey do etc):
removal of duty on potatoes and onions and higher T-Bill rates.
I’m probably the only person who thinks this is a slightly cynical move to make the figures look good on paper… Why potatoes and onions in particular? Because they’re used in the CCPI measurements. They do little to address the balance of payments, they do absolutely fuckall to curb spending (see the 2nd link). Flooding the market with imports to lower prices is a nice move, but even the CB admits that it can only last till January.
Umm.. unimpressed. I can say this because I am not an economist and it’s easy to toss rotten potatoes and wave placards from the sidelines :) but I can still critique, right? :) I reiterate, short termism. I’m not going to complain about the drop in prices and neither will anyone else – it’s just that these price drops are achieved by fiddling the books or diddling the treasury in the short term and that’s bad. Yup, worse than inflation, IMHO.
I don’t understand your point, ghostwriter. Did you say price controls are worse than inflation?
Price controls lead to inflation. This is because price controls are generally funded through subsidies or cutting taxes, both of these measures mean that the budget deficit gets larger. When the government borrows money to fund the budget deficit, that’s when money is created. When money gets created without a corresponding creation of GDP, that’s when prices rise i.e. inflation.
On your previous point, about the fact that we’ve had higher inflation before, and somehow this makes the current situation less bad: yes, we’ve had annual rates of inflation that were higher than 20%before – in 1981, and 1990. In the early ’80s, the UNP government was setting out on a period of large fiscal spending on large projects which justified the budget deficits and the resulting inflation, because it put us on a higher growth path . In 1990, coming out of the JVP insurrection of ’87-’89 probably had some effect on the inflation rate in some way. This does not anyway justify the view that 20% inflation is not that bad. The reason we are not much much worse off now is because these were two exceptional years, and not a longer term trend.
No, I said price controls were worse than inflation precisely because of the reasons that you mentioned… Further that the CB is rushing to make these price drops precisely because they want to curb inflation in the short term at the cost of looting the treasury.
As part of my overall point, I maintain that high inflation is not good but as a byproduct of a growing economy, it’s tolerable. My fear (to repeat myself) is that we have the condition popularly termed stagflation, zero (or low) growth coupled with high inflation. This was precisely the situation which occured in the late 90s + early 00s – provided you choose to take the stock market as the sole barometer of growth.
The airport and the highway proposals don’t count as captal investment towards infrastructre projects? Never mind then. As much as I may think the airport business is silly, your argument that there are no (or limited) projects with growth potential now is disingenuous to say the least. And this is quite apart from the 130 billion rupee defence budget which in all likelihood dwarfs expenditure during the previous eras :) To quote Sophist, the people dispensing laxative and short circuiting the fan don’t interest me. This is where we are now and I want to put more money into growth projects. To focus on inflation as the be-all and end-all of badness in the SL economy is overly simplistic, leads to precisely the sort of short term inflation lowering book fiddling that the CB is adopting now and quite frankly, misses the point in my view.
The early 90s were a growth period, despite high inflation (yes, 11%+ inflation consistently over 5 years was nastier than what we’ve had so far). Inflation is not as big a problem as the lack of growth incentives in the economy. That’s been my point all along.
I see.
Okay, first of all, I assumed you realised that neither NKR or Indi or I or any other person who might get accused of being a Monetarist would ever advocate price controls to reduce inflation. Price controls are typically a tool used by left-wing governments, who normally don’t think controlling inflation is a priority. They don’t think it’s priority, so it rises, when it rises, they get worried, and do things like control prices of essential commodities to try and keep the masses from realising it, or possibly, as you said, the index from rising – which actually doesn’t mean shit in reality.
This is not the way to keep inflation down, since it adds to the problem in the long run, and is unsustainable as a policy measure.
Don’t take the stock market as the sole barometer of growth. The stock market represents a small % of the population, and all though it is the future, Real GDP is a better bet.
High rates of inflation are acceptable with high rates of growth. However, we are not getting high enough growth to justify this rate.
The fiscal exapnsion is planned for next year. At the end of this year, we have 20% inflation, how high do you think inflation will be as a result of the fiscal exapnsion next year? The UNP went into the infrastructure development projects at a time of relatively low inflation. Inflation increased as a result of the deficit because of the infrastructure development. Now, we haven’t even started on the fiscal expansion and we’re having 20% inlfation?! WTF? Massive difference.
Excuse me for not jumping up and down in joy about the fact that my tax rupees are going towards funding another war whcih will destroy more of the economy. And yes, this is partly the present government’s fault. They have no consensus in their party about what to offer the Tigers. There is no set of concrete proposals on the table. There is no plan to resolve the issue. Just as appointing Nivard Cabraal to the Central bank was a bad idea, sending Nimal Siripala de Silva to negotiate for us was even worse.
I’m saying if they don’t bring the rate of inflation under control, they are not ever going to see the results of those fiscal projects – the military expansion or the roads and airport. Sustained 20% inflation will cripple the economy, businesses will be affected, tax collections will fall, and then they just won’t have enough money to spend on their plans. If they proceed anyway, by creating money, we’ll be in hyperinflation. And then we can say bye bye to our savings, along with our new infrastructure and we can heloo to newly created Republic of Eelam.
Well,
This is a situation which certainly worries people. Borrowing so much money from the Central Bank would definitely push prices by increased pressure.
I wonder why the Govt. did not undertake alternative measures to protect the wealth of the small investors.
Another suggestion is to introduce inflation adjusted wages for the employees.
The “it’s not all bad†argument is a bit like a patient slowly bleeding on the operating table and thinking its ok.
The “intelligent†people of Sri Lanka, actually don’t have a clue about economics and the proof of this is just how their savings are in low bank account rates as compared to t-bill rates. After all simple economic arguments about subsidies being bad and how a tiny island like Sri Lanka needs to rely on comparative advantage is lost on them. Despite our literacy rates basic economics wasn’t something that was taught in schools (at least not while I was doing my O/Ls) and we are such great practitioners of parrot learning that it wouldn’t matter.
As for the weak rupee being good for exports it’s only a temporary solution that leaves you worse off in the long run. Noone will invest dollars in your country if you have an exchange rate that keeps edging downwards.
It’s sad you don’t realize how good A.S. Jayawardena (the CB governor before Cabraal and the ridiculous ex-Hayleys Sunil Mendis) was. We are still living on the lag effects of his good policies and the stability we got in the ceasefire.
You don’t seem to realize that the UNP government did rein in spending and that people were significantly better off for that short period of time. The Mahindians managed to subvert the economic issues and won the election on being hardline on the ethnic issue.
Sri Lanka is a developing country and we’ve grown at 5-6% even during the dark 90’s. It takes an enormous amount of stupidity to impact economic growth to levels below this and hats off to Anurddha Ratwatte for managing to do this.
The point is that growing even a percentage point higher makes a huge difference to where you are economically in the long run. Smart economic policy is essential to fighting the war against the LTTE and resolving differences with the Tamils (note the distinction). Sadly as you rightly point out we are the worst at long term planning.
There is no excuse for being fools. We missed the bus big time when Mrs.B took us into socialism when the Koreas and the Taiwans were getting into state assisted export led growth. But clearly noone cares.
NKR, with all due respect this is bullshit. I fly no flag for Mahinda or his government but honestly what sickens me the most about some of you people is that every single mistake is seen as the fault of the party in power. You’re unwilling to acknowledge that the very same mistakes and the very same short termism was present in a previous government and a previous era. I carefully avoided making distinctions between one government and the other. There was a reason for this. I don’t think either government has a clue. If you want to swallow the happy pill about the UNP being the only game in town (it is the better of the two, but they make horrendous blunders in economic policy themselves) feel free.
Sorry, this is becoming a bit tedious so I’m not going to respond to even well meaning trolls on this topic hereafter. Not all bad because I don’t set monetary policy and neither do you. Not all bad because I don’t claim to understand the complexity of a coherent monetary policy and based on your post alone (feel free to correct), I doubt you do either. To take your operating table analogy, if I’m bleeding I look to staunch it. Saying the doctors are incompetent may make me feel better but does not stop the bleeding. I’m on the operating table, after all. Do I really care if it’s my guy (A.S Jayawardene) or the other guy (Nivard Cabraal) holding the bloodied scalpel? What the fuck? Do you go into hibernation for six years when the government changes into something that you don’t like? Pick up your toys and go home by all means, but don’t expect everyone who “lost” the election to stop caring. I’m sure your apparent bias away from the current ruling party will give you loads of credibility in influencing decisions. Let me know how that works out for you.
Economics was taught in schools during O/Ls. At least I was taught it. If you were asked to parrot some line in school (as you’re apparently doing here) then I feel sorry that you haven’t figured out how to think independently so many years after school. Regardless of what you may say about a little knowledge being a dangerous thing (it probably is), I want to learn more and I want to understand what makes our economy tick. The SL economy is a fascinating case study in resilience and hell, it’s worthy of study because I participate in it. If the “intelligent” people of Sri Lanka invest in pyramid schemes or don’t perform due diligence on their investment portofolio, there is only so much anyone (including a government) can do to dig them out of that hole. Education about diversifying assets, perhaps? In my personal experience, as cited earlier, many people do employ savings instruments beyond bank accounts. Perhaps this isn’t the norm. Don’t know. Don’t care. I can’t educate everyone in SL and I’m not going to try. Inflation edging down to the lowest point in the last 20 years (4.7%, FYI) still won’t make the “intelligent” people you cite any smarter.
What makes me sad is that you responded to my facts and figures with an emotive post in which you say that “I don’t realize” several things – regardless of if I gave you that impression or not. If you want to convince me, you’ll need to try better than that. Examples? I stand by my hypothesis that in narrow field of inflationary measures (which we were discussing till you chose to shotgun your political points in), the current rate is high but we have gone higher than this on more than one occasion previously. You’ve given me your commentary and how sad you are at my obliviousness to what’s going on, I’ve given you numbers. As the Americans might say, shit or get off the pot.
One last gem of internal contradiction:
“After all simple economic arguments about subsidies being bad” …
and
“when Mrs.B took us into socialism when the Koreas and the Taiwans were getting into state assisted export led growth
Because subsidies are clearly wasted government money while state assisted growth is money from the magical tooth fairy. Incentives and incubator funds are subsidies by another name. Will dressing them up as “something other than evil subsidies” make you breathe easier? I hereby move to rename them, in that case.
Ghostwriter – the problem with responding to you is twofold -
1) We’ve only got a Bachelors degrees in Economics, and we know enough to know that you really do need to be an economist working in the SL economy to be able comment with a degree of finality on its particular peculiarities
2) You’ve never studied economics (this is an assumption based on presuming you meant you had studied economics as a part of Social Studies in the Sri Lankan OL, which is not really studying economics at all) – and therefore it’s a bit like arguing with a dude who’s only studied Sri Lankan O/L Science who insists that a blackhole can’t exist – you know he’s wrong and you know you can explain it to him, but it’ll take two f-ing long. Further, knowing economic theory is one thing, but knowing the emperical data to understand the Sri Lankan context and to explain it, is quite another, and frankly, I don’t have the time to give you, or myself, an education in it.
The reason why having had 20% inflation in the past has not crippled us totally is because they were one-offs. Only happened twice in isolation – in 1981 and 1990, and as I said before, it’s the longer term trends that count. If you have 20% inflation year on year prices will double every 4 years. If you have 10% inflation year on year, prices will double every 8 years. That’s a big difference in terms of buisness uncertainty.
When we find ourselves in a situation where we have 20% inflation, that IS a cause for grave concern, if only because it might continue. If it continues, we’re f*cked. The reason we weren’t f*cked in the past was because the govts presumably did something about it.
However, it appears that this government is not very concerned about inflation, as long as they keep a few commodities artificially affordable via subsidies for the poor. I gather that they plan to increase the budget deficits further next year, which will in turn make inflation increase, not decrease. This gives us cause for further concern, because unlike in the past, the inflation may not be brought under control after all.
Your allegation that the UNP and the PA are equally bad at tackling inflation is not substantiated by evidence related to recent experience.
Just take a look at this graph and note how the rate of inflation has varied with the changes of government. For most of the UNP period of government until April 2004, inflation is below 5%, and after the PA takes over we experience high inflation. I wish I could find the chart that showed previous years from, like 2000, since it clearly shows how the ranil govt brought inflation down.
http://www.cbsl.lk/cbsl/prices_chart.html
I don’t think the UNP is without fault, but the Ranil government brought 3 years of peace, a temporary solution to the power crisis, and a reduction in the rate of increase of cost-of-living (i.e. inflation). They also took over the government after the first year of economic decline ever, and brought it back up to 7 or 8% growth.
The main argument against their government was that:
1) that they didn’t give a shit about the poor
Despite popular belief, the figues show that the UNP is better at controlling the cost of living than the PA. this is undisputable. The PA control certain news-worthy items artifically to keep people quiet. The UNP quite correctly does not want to waste our money like that, but it’s better at keeping prices as a whole from increasing as fast as under the PA.
What the UNP did wrong was to manage the “losers” badly. They privatised, they didn’t give out boru jobs in the government secotr to their goons. This pissed off unions, and the people who had worked for the UNP campaign. They did the right thing economically, but not politically. Any any form of reforem there are winners and losers, and you have to manage the losers. The UNP did this spectacularly badly. The losers made such a noise about it, it looked like the UNP was doing a shit job, but they weren’t.
2) they allowed the LTTE to become more militarily powerful by their pacifism
This is also a myth. To my memory, the LTTE has never looked weaker. Where are the bombs that people insisted where going to go off under every bridge and street corner when the LTTE resumed war? Utter bull.
Both the PA and UNP have disadvantages, but the suggestion that they are equally bad at handling the economy is nonsense.
*Jeees… please excuse the typos.
Funny how you call my post emotional when you obviously flew off the handle there.
Perhaps you feel its ‘proper’ to refrain from making this a political discussion but there comes a time when you have to acknowledge that one side has a clue and the other doesn’t.
>> what sickens me the most about some of you people is that every single mistake is seen as the fault of the party in power
Not every single mistake but certainly the broader economic policy of this government is deeply flawed.
>> If you want to swallow the happy pill about the UNP being the only game in town (it is the better of the two, but they make horrendous blunders in economic policy themselves)
Both sides made stupid mistakes. The UNP didn’t come up with proper plans to develop individual sectors of the economy, (they had very little time). But they got the broader macro policy right and this government has not.
The way the central bank suddenly restricted overnight borrowing sending money market rates sky high (as high as 20%) and then easing back when they finally sorted out their liquidity at the last minute, the way they were about to change parate laws so that banks would have stopped making housing loans are all signs that these guys don’t have a clue.
>>Do I really care if it’s my guy (A.S Jayawardene) or the other guy (Nivard Cabraal) holding the bloodied scalpel? What the fuck? Do you go into hibernation for six years when the government changes into something that you don’t like?
I really don’t know what you’re trying to say here. Nothing we say on this blog is ever going to change policy. It’s not a case of ‘your guy’ and ‘my guy’, having an actual economist and long time CB staffer as CB governor is far more credible to investors than Cabraal.
>> I stand by my hypothesis that in narrow field of inflationary measures (which we were discussing till you chose to shotgun your political points in), the current rate is high but we have gone higher than this on more than one occasion previously.
I’m not disputing that we’ve gone higher than the current rate and survived. All I’m saying is that your obliviousness to the danger of 20+ inflation is wrong. Inflation is unavoidable, but 20+ is huge and destroys the average person’s income.
It can potentially wreck the bigger system and the scary thing is that this government is ill-equipped to try and cut it down.
>> I’ve given you numbers. As the Americans might say, shit or get off the pot.
Your numbers mean fuck all. All they show is that inflation used to be higher intermittently. The only justification you can give for inflation is that debasing the rupee will make your exports cheaper.
>>One last gem of internal contradiction:
“After all simple economic arguments about subsidies being bad†…
and
“when Mrs.B took us into socialism when the Koreas and the Taiwans were getting into state assisted export led growth
Because subsidies are clearly wasted government money while state assisted growth is money from the magical tooth fairy. Incentives and incubator funds are subsidies by another name. Will dressing them up as “something other than evil subsidies†make you breathe easier? I hereby move to rename them, in that case.
Ok I’ll concede that I was wrong. Subsidies are ways of keeping uncompetitive sectors of your economy afloat so that they will end up more competitive in the longer term. They are in general bad because the State is legendarily bad at picking the ‘worthy’ sectors.
Sri Lanka doesn’t have a clue about how to use subsidies.
Last year’s 25 billion rupee fuel subsidy was more than the money required to build the Colombo-Katunayake Expressway. And even out of that 74.9 percent of the money spent on fuel subsidies by the government of Sri Lanka went to 60 percent of the highest income classes.
LBO
I don’t think you should have conceded that point at all, NKR. There are good subsidies and bad subsidies. Giving subsidies that help long term econo0mic growth in the right direction is not necessarily a bad thing. But giving unsustainable fertilizer subsidies as a one-off bribe to voters is definitely a bad thing. It’s expensive, it’s a waste of our money, it doesn’t increase farmer’s incomes.
Why doesn’t it increase farmers’ incomes you ask? For the simple reason that just because they produce more rice, it doesn’t mean we’re going to eat it. So what happens? Excess supply, glut in the market place, prices plummet – hey presto – less income. Agricultural commodities behave like that because they are have a high price elasticity of demand.
You keep hearing about farmers now who can’t sell their produce. There isn’t even a proper scheme set up to buy the excess stocks and keep it, store it, export it, or market it. they just give out subsisdeis and expect things to work. It’s just bribe for the voters – a complete misuse opf taxpayers’ money.
Ravana, a careful reading of my responses will show you (or not) that you’re going after a strawman.
I know there are both good subsidies and bad subsidies and I also know (via NKR if I didn’t before :) that the majority of subsidies in the SL sense are carrots which are designed to win over a voter bloc rather than provide a growth to a specific industry.
That wasn’t my point. I knew this already. I was calling out the allusion (indi, original entry and NKR in the first quote) that subsidies as a whole are negative. They are not. In some cases (second hand experience speaking) they are the only compensation for a relative lack of infrastructural development in SL.
SORRY – I meant that they are inelastic, not elastic.
NKR, sorry if the post seemed emotional to you… I am still firmly attached to the handle though, as I was throughout the first response. I confess to treating rabidly political posts (as yours seemed to be on initial inspection) with a certain amount of contempt, however.
Call it an attempt at common ground if you like but I don’t see a whole lot of things to disagree in your reply… Yeah, the economic policy of this government is flawed. In my personal opinion, this is true of most leftist governments (that means pretty much everyone who has to promise “easing the burden of the masses” to get into power)…
Where you and I differ is that I don’t think that the UNP has done a whole lot better in controlling inflation. Initial hypothesis, unchanged. Have they done more to grow the economy? Sure they have, but that isn’t the point I am arguing (ie: backyard vs bank being the title of the post). As my source, I took the same PDF linked in the original blog entry and showed (you can read it too, no charge :) that inflation figures have not necessarily been better under previous regimes. Ergo: I postulated that the CB doesn’t really care fervently about dropping the rate of inflation and further, that I personally would be a lot more worried if the economy stopped growing.
My point, as borne out by the statistics (I’m sorry to be banging on about this, but it’s really simple): inflation bad. YEAH. agree. But it’s not a Mahindian, Blue government or Red government monopoly of stupidly high inflation. Never has been. Do you dispute this? The numbers speak for themselves. You can build up as much of a backstory as you want about mitigating circumstances but in the narrow view of inflation statistics, the numbers bear out this hypothesis.
How do the following numbers compare?
1989 11.6
1990 21.5
1991 12.2
1992 11.4
1993 11.7
versus
1994 8.4
1995 7.7
1996 15.9
1997 9.6
1998 9.4
1999 4.7
Huge difference? I think not. Tell me I need an economics degree to say that one set of numbers is worse than the other and I will duly sign up for remedial economics posthaste.
Why don’t you put the monthly figures up for this decade and then we can debate those? Those figures will clearly show the beneficial effect the last Ranil government had on inflation vis a vis the Chandrika governments immediately before and after it, and the Mahinda government now.
Also, you said yourself that inflation with growth is justifiable. You also say that we had inflation and no growth under Chandrika, and inlflation and growth under the UNP regime of 1990-1993. How does that make the UNP equally bad at handling iflation. Surely, justifable inflation, is better than unjustifiable inflation?
Ahem. Ravana:
Why? What is unclear about the annual figures? My sample size is roughly equivalent in both cases and I am making the claim that the UNP and the PA regimes have proven equally idiotic at handling inflation. Errmm.. sorry, but this sounds a bit like
to me..
I set out to assert that both parties have been culpable in letting inflation run rampant. It is my belief that the figures I stated substantiate this hypothesis. Further, there is no argument from me about which is better… But that still does not affect my initial hypothesis that both governments are equally lackadaiscal in their handling of inflation. Which one is better (justifiable or otherwise) is not material because we are talking about inflation alone, right? As far as the valuation of my savings in the bank go, a green based 11% annual rate and a blue/red alliance 11% makes absolutely no difference. Do I pick the (justifiable) inflation over the other? Sure. Still doesn’t change the fact that I advocate picking a better metric to hit panic stations than inflation currently is, for SL.
Now don’t be difficult, ghostwriter, darling.
I wanted the monthly figures, because governments don’t always change at the end of the year, and when you’re talking about the a shorter period of time, you want more observations than 6 (the years in this decade) to justify your case. Take a look at Indi’s chart- you’ll clearly see why I wanted the months.
See my comment below as well.
But Ravana cupcake, I’m not confining myself to the Ranil of the 00s vs the Chandrika/Mahinda of the 00s but making a party political point, if that. So, no.. annual figures illustrate my point adequately. That you don’t dispute it but choose to fixate on a specific period with (that awkward phrase again) mitigating features (the peace dividend of 2001 onwards) is your call to make. Just don’t expect me to play by your rulebook :)
If you want to zoom in on a particular month or even day and say that inflation was 0.00% during the UNP era and 1200% during Mahinda’s, that’s entirely your prerogative. But err. see my one-size-fits-all response to NKR below :)
But ghostwriter, sweetie, I don’t care if you don’t confine yourself, because all I need to illustrate that the UNP is better at controlling inflation are the figures for this decade. And Indi’s chart does just that.
Checkmate.
But ghostwriter, sweetie, I don’t care if you don’t confine yourself, because all I need to illustrate that the UNP is better at controlling inflation are the figures for this decade. And Indi’s chart does just that.
Check, mate.
So, you’ll prefix your statement with “for this decade, for this month, for this day, for this hour” and the UNP will be provably superior :) How does this in any way change my (sorry! repeating myself) initial assertion that both parties are equally bad at controlling inflation? Hell, take 1985 as your loaded example, proclaim that the UNP is the all-time champ at controlling inflation (1.5% that year).
You’ve moved the goalposts yet again from a provably false general assertion to a specific point in time, have you not? :)
I’m not saying you’re wrong. Unfortunately for your line of argument, I’m not saying I am either :) I am saying that the UNP is bad as the PA in controlling inflation. This was based on the initial figures cited by the blog post, not I.
Do you also say that Sri Lanka is a desert if it doesn’t rain for a week? Sounds awfully like those arguments are equivalent to me.
I don’t think anybody was capable confusing the terms IS and WAS. One is the present tense, the other is the past tense. The UNP’s policies and objectives are different now, and the leaders of the past governments are mostly dead. I didn’t think this needed much explanation, but clearly, your refusal to concede in this obstinate I always referred to the Ranil government, and yes, I meant the Ranil government that was elected in 2001. Governments have different policies under different terms. It is ridiculous to compare the Keynesian policies of the 80s with the Monetarism of the the present UNP. This is why I said it’s difficult to explain to someone who doesn’t understand the basics.
I don’t know how you can look at that graph that changes the very month the PA got back in power, and still hold on to your view. You clearly aren’t used to losing an argument are you?
By the way, even if you don’t accept the past vs. present thing, you shot yourself in the foot when you said that economic growth was higher during the time of PA governments although the inflation was similar. Controlling does not mean reducing, necessarily. If the UNP government kept inflation at the same rate as the PA and managed to get higher growth in return, that’s better control of inflation. As we know, leftists governments resort to things like price controls a lot more than laissez-faire governments. That’s not a good control of inflation. That’s just artificially keeping the index down.
Irresistable force of Stubbornness meets Immovable object of Pig Headedness. Honestly both you buggers need to be beaten with a big stick.
Yes, Sophist we probably do at that :)
No, Ravana.. call it obstinate and/or stubborn if you like, but I don’t concede that I’ve lost the argument I started :) I graciously concede that you’ve won yours though, but you and I are not arguing the same thing. I’ll tell you the reasons for it:
a) I don’t need a degree in economics to read the numbers that have been produced by an independent third party (ie: stats.gov). In those, I see no reason to draw a correlation between UNP doing better at reducing inflation vs PA doing worse. If anything, the mid 80s and 90s (pre 93, I don’t really think DB’s brief tenure counts for all that much) gave the UNP a clear run at implementing the economic policies of their choice (Keynesian, you say … I’m not entirely sure you can classify them in that way and yes, I do have more than a passing familiarity with the types of policies :)
Is it ridiculous to compare the policies? Maybe it is but it is definitely not ridiculous to compare one of the outcomes which is what I was doing. Inflation rates are one such outcome and I compared them. I’m sorry, but the numbers still back up my claim that the UNP is not stellar at handling inflation. Were they dramatically better at handling inflation during the 01/02-04 tenure? Sure they were. It’s not difficult to soar like an eagle when you’re surrounded by economic turkeys. If there was a great burning of the books that engulfed all the records before 2000 then I’d offer an unqualifed yes, the UNP is better at handling inflation, period. However, having more data at my disposal, I still do make that claim that historically, it is inaccurate to say that the UNP has necessarily handled inflation better.
b) The fact that growth is related to inflation is, in my opinion, still besides the point. That they are related is without question however, I am STILL comparing the single objective – inflation. Even if the economy is growing at a steady clip, the rate of inflation does decide how much value is expressed in a single rupee. In those absolute terms (to which I always confined myself), 21% sandwiched by 11%ish isn’t good reading.
You may know (and I know for a fact) that the PA may be tempted to artificially keep the index down. I actually introduced that factoid into the argument because I wanted to make absolutely clear that I wasn’t looking at your sacred Ranil-cow with beady eyes :) Alas, that message has not taken effect.
If this was an argument I wanted to “win”, I wouldn’t keep peppering each of my statements with ifs and buts and other trapdoors. I’m uninterested in winning, I am however more interested in learning something and I have… One thing that I’ve learnt however, is that even you cannot explain away the horrendous inflation figures (nothing else, just inflation figures) of the UNP in the 80s and 90s.
All I ask (arguments aside) is that you consider this if you’re prepared to do any canvassing on how superior the UNP is vis a vis the PA. If you talk inflation, someone else is going to make the same argument. To you, it may seem like I’m a neophyte at this economics game… But it might be useful to bear in mind that the people you’re trying to convince (you don’t need to convince me, I already know which “side” will do better at reviving the economy) will make the same argument.
Will your arguments work on them? To me (sorry), they just sound like weasel words. “No, look, look, look. They’re not the same thing, trust us on this it’s very complicated.. No, look, look, let’s confine ourselves to 3 years of data when we have 30+. No, look, look, the policies of the 80s are different from now”.
The only difference between you and I on this position, Ravana, is that you’re comparing the UNP of Ranil in the 00s vs my comparison of the UNP as a whole. I myself have reasons to believe that their performance in the early part of this decade may (I present this merely as a probability) not be reflected in subsequent attempts. Does this seem like a reasonable assumption to make? To you, it doesn’t :) To me, the magic numbers say otherwise :)
My next theory is that the performance of the economy rests entirely on Ranil W. choosing tighty whiteys over boxers on the day.
Really what magic numbers say otherwise?
Ravana, no offense but patronize much? You know I’m wrong. It’s quite likely I am, I presented a hypothesis based on data available to me and conclusions thereof… I never made any claims to being right, regardless of my education in economics or anything else :) I actually do have more experience than the Sri Lankan O/L economics education which you dress as the equivalent of illiteracy but that isn’t relevant here – I am not a professional economist and I made that clear at the outset.
But as you say, it would take too long to explain… So, you’re saying I’m wrong but it would be much too complicated and I should trust what people are telling me is right? Do you have a newsletter? I’d like to subscribe to it. Your methods sound particularly scientific. The blackhole analogy is apt because Stephen Hawking got it wrong at first too. Is it even conceivable that gasp! you might be oversimplifying based on personalities rather than the ground situation? No, of course not, right?
As a simple question about how previous governments dealt with rampant inflation, do you have any remembrance of what they did? Was it by increasing interest rates? Was it by providing additional subsidies to key inflation indicators? I (anecdotally) remember it as being the latter, regardless of the party in power. Also, I did not allerge that both governments are bad at tackling inflation, but rather that both of them don’t have a clue… But how exactly is your allegation not substantiated by the inflation statistics? The absolute numbers say something very different from your claim about the UNP being better at it. Are the stats.gov.lk numbers invalid? Or are you going to start introducing extraneous factors to explain away a few bad years during the UNP regime? ’80 to ’84 and ’88 to ’93 look particularly horrific from where I’m sitting now.
The rest of your “the UNP is better, rah rah rah” speech is probably to the choir anyway. I’m not disputing any of it. My main point (fourth time in the thread, but whatevs) is that inflation is nowhere near as bad as a dip in growth in the economy, we need a positive balance of trade from somewhere and I would personally put inflation at a very distant third on the list of things to worry about. Your opinion can and does differ, which is fine by me… but the introduction of party politics irks me because the numbers that I see don’t really enthuse me about either party in the specific topic of controlling inflation.
I don’t think the ‘high inflation is bad’ issue is hotly debated among economists. If 20% is sustained or grows it’s horrible for life and business. Let’s say I’m working a government job and making 15,000. If that 15,000 buys me 20% less food next year I’m pretty fucked. Not to mention business, etc. Inflation is actually probably the biggest direct threat to Sri Lankan people. I only tend to write about things that directly intrude on my life, and inflation is beginning to do that. So I’d put it first among economic problems, cause it’s right in my face.
Anyways, it’s also not exactly radical to say that inflation is lower under the UNP.
and on inflation and growth, here are the figures from 2005.
It’s also not radical to say that inflation hurts growth, but I guess the debate is fun.
Like I said before, put the monthly figures up for this decade and then we can debate which party is better at controlling inflation. IS better, not WAS better. I’m talking about this decade.
But nevertheless, even in reference to the the previous decades, I think I can end this debate by highlighting a contradiction, (or shall we call it a misunderstanding?) in your argument.
You said to NKR:
“I don’t think that the UNP has done a whole lot better in controlling inflation. Initial hypothesis, unchanged. Have they done more to grow the economy? Sure they have, but that isn’t the point I am arguing.”
If inflation is accompanied by growth, it is justifiable to some extent, as long as the inflation rate is not too high. Periods of rapid economic growth are often accompanied by inflation. So, when someone says a particular party is better at controlling inflation, they don’t mean just keeping the index numbers down (which can obviously even be manipulated by price controls). Questions such as “what did we get in return for inflation?” are valid, when assessing which party was better at controlling inflation. This is why we use the word “controlling” inflation, and not “reducing” inflation. Did we get lower unemployment in return? Did we get more GDP? Did we get a better balance of trade? It’s all related.
So, if you admit that during the UNP time we had higher growth and similar inflation rates, and in the PA time we had lower growth and similar inflation rates, then basically you’re admitting that the UNP was in fact, better at controlling inflation.
>>My main point (fourth time in the thread, but whatevs) is that inflation is nowhere near as bad as a dip in growth in the economy, we need a positive balance of trade from somewhere and I would personally put inflation at a very distant third on the list of things to worry about. Your opinion can and does differ, which is fine by me… but the introduction of party politics irks me because the numbers that I see don’t really enthuse me about either party in the specific topic of controlling inflation.
The UNP (of Ranil’s time) was MUCH better at controlling inflation. Look at the monthly stats from stats.gov.lk for inflation and see it with your own eyes. It was the happy coincidence of Charitha Ratwatte as Treasury Secy and Jayawardena being CB governor and the party allowing both dudes to do their jobs. It was an unusual period of good monetary and fiscal policy management, taking into account BOTH UNP and SLFP regimes over the last 20 years.
You’re right about inflation not being as important as a dip in the economy’s overall growth rate. Inflation goes hand in hand with rapid economic growth and trying to finetune it for a developing economy like ours is stupid and counterproductive.
But here’s the thing. There’s very little that a government can do to influence long term economic growth rates apart from good fiscal and monetary policy management. This means that you provide an environment of stable inflation and controlled government spending. You provide settled conditions that attract foreign investment which helps your balance of payments (there is a difference between balance of trade and balance of payments). If you have money flowing into the country you don’t need to worry as much about whether you import more goods and services. If foreign money comes in to finance a factory you should end up producing more than you import.
This is the only way you can sustain high long term economic growth rates. This is not political ideology, it is simple common sense. You can choose economic growth which will cause income disparities (chief problem of capitalism) or you can decide to cut the pie fairly instead of growing it.
Faster economic growth matters. 1 or 2 percentage points increase over a decade long periods doubles your income a lot faster. If you want to worry about distributing the pie and propping up unsustainble sectors you will slow the engine down and keep people poorer.
As of now, (and forget about the 80′s and 90′s) the UNP (for all their corruption and limp wristed political skills) are the best positioned party to acheive this. They suck on a phemomenal scale and its a theoretical point since they are now out of power for a possible 12 years. But they are better than what we have now.
NKR, a couple of observations in a comment that I broadly agree with …
The UNP of Ranil’s time (by which I assume you meant the early 00s) did function better than the PA governments of the time. No need to argue about that from my perspective, I agree. I do not, however, endorse your view that a UNP which rolls into power tomorrow (if such were to happen) would be similarly good at fiscal policy. Happy coincidence is a good phrase to use because I have no idea if the same people will be given the same posts, nor if a peace dividend such as that enjoyed during the early 00s would exist by then. Neither, I suggest, does anyone else debating the point here.
That said, what I set out to refute is that the UNP (as a party political) is somehow better than the PA at controlling inflation. This was (and still is) a provably false assertion. They’ve had fits and spurts of brilliance but inflation as a whole isn’t something that they spend a lot of time worrying about either – the stats speak for themselves on this score. Confine it to a specific quarter, hour or day and you can say something different if you please :) However, I do remember UNP regimes before Ranil’s abbreviated tenure and inflation was pretty damn high then too. As an absolute statement, the UNP is just as bad as the PA. My anecdotal view has been reinforced with the statistics (which Ravana hasn’t actually been able to dispute in any meaningful fashion, sorry mate ;)
As for the rest,
quoted for truth. I can only agree (yet again).
But magic bullet for inflation (the whole point of this post), umm.. no. That’s why the 80s and 90s are important from a statistical sense. I’ll see it when they show me because they’ve been just as bad previously and I see no reason to trust any political party to bail me out, flash in the pan couple of years notwithstanding. I’ve participated actively in the economy during previous UNP regimes (perhaps others debating the point have as well) and I see no reason to give them a free pass because they’re the fricking UNP and will rock your socks!.
Does this end it? I hope so. I apologize for the lack of fancy graphs and for repeating myself near ad nauseum but I’ve tried to explain the basis behind my assertions at each step. This is a touch better than the “it’s all very very complicated, you wouldn’t understand without several degrees and years of specialized knowledge but the UNP is better. trust us!” approach, is it not? What the hell are economists doing near computers anyway? Leave computers to the Computer Scientists then :p
If it’s provable then prove it. All the data is available, I’ve even provided a graph for the last 5 years. I understand if you don’t have time, but in this case you’re honestly provable wrong. The UNP sucks and they’re no magic bullet, but they have been better at controlling inflation.
From my previous comment
1989 to 1993 was a UNP government, first Ranasinghe Premadasa, thereafter D.B. Wijetunge.
1994 was the year of the landslide followed by PA government. I’ll even remove the abherration that is 1999 to compare 6 years to 6 years of government :)
How do the following numbers compare?
1989 11.6
1990 21.5
1991 12.2
1992 11.4
1993 11.7
avg over period : 13.68
versus
1994 8.4
1995 7.7
1996 15.9
1997 9.6
1998 9.4
1999 4.7
avg over period: 10.2
It is historically inaccurate to say the the UNP is better at handling inflation. We have 30+ years of data, you actually had to stretch to monthly inflation numbers to get enough data points to make your own case. I am comparing 6 years worth of aggregate data and you can’t make them much plainer than that.
Ick. I keep saying 6 years when I mean 5. apologies.
It doesn’t matter that the UNP didn’t keep the numbers low historically, when they weren’t targetting inflation as a priority (Keynesian). Nobody except you seems to have been interested in the historical performance of past governments and past leaders who are mostly now dead. What matters is who is better. And what we mean by who is better is who is better in the present time. Get it?
Ravana, come on… If they weren’t targetting inflation as a priority at any point in time, then don’t trumpet how the UNP dominates all comers in inflation handling because it is not true. Qualify it as a two horse race between Mahinda and Ranil and I’ll be the first in line to agree with you. I object to the general statement of the UNP being better than the PA.
If no one else is interested in my specific set of statistics, then that’s fine with me… does it worry you so much?
You are basing your case for the present on a two year period, not even a full term.
Ranil W was also a member of the Premadasa regime (was he in cabinet? I remember he had either Trade and/or Industry as a portfolio). I got your point perfectly. Did you get mine?
This seeming aggression is rather unbecoming and really rather unnecessary :) My emotional well being does not rest on scoring any points off you for this or anything else :) In my own mind, I tend to distrust absolutes, especially so about political parties. This doesn’t seem to mirror your own approach to this debate so I’m perfectly willing to concede that you’ve made your points with great aplomb and authority … and let the matter die.
can we move on, please?
“Ravana, come on… If they weren’t targetting inflation as a priority at any point in time, then don’t trumpet how the UNP dominates all comers in inflation handling because it is not true.”
Bull shit. Straw man and misunderstanding of basic grammar.
GW also said:
“We need a positive balance of trade from somewhere and I would personally put inflation at a very distant third on the list of things to worry about. ”
Yeah, but like I was saying, it’s all related. Increasing budget deficits, which increases inflation, also is related to a current account deficit.
“Many economists have argued that prolonged fiscal expansions contribute to current account imbalances. The purpose of this paper is to explore this phenomenon in the case of Sri Lanka during the period 1970 to 2003. In this study, the autoregressive distributed lag (ARDL) model and the bounds test for cointegration (Pesaran et al. 2001) were used to assess the long-run dynamics between the twin deficits in Sri Lanka. The empirical analysis in this paper supports the Keynesian view that there is a long-run relationship between current account imbalances and budget deficit. The empirical results also show that the direction of causality runs from the budget deficit to the current account deficit. Thus, any policy measures to reduce the budget deficit in Sri Lanka could well assist in reducing the current account imbalances. Strategies and policies to manage the twin-deficits are discussed in this paper.”
From:
The Twin Deficits Problem in Sri Lanka
An Econometric Analysis
Ali Salman Saleh
Mahendhiran Nair
Tikiri Agalewatte
South Asia Economic Journal, Vol. 6, No. 2, 221-239 (2005)
DOI: 10.1177/139156140500600204
© 2005 SAGE Publications
Keynesians prioritise unemployment, Monetarists prioritise inflation. The UNP of the 80s and 90s was Keynesian. The UNP of this decade is Monetarist. Anybody who understood the basics of both grammer and economics would have understand that when we say the UNP IS better at controlling inflation, we meant the present tense. (You may also note that most, if not all my examples, refer to the “Ranil government”).
I didn’t think this needed much explanation, but clearly, your refusal to concede in this obstinate fashion, indicates that it does.
To repeat what I said above:
I don’t know how you can look at that graph that changes the very month the PA got back in power, and still hold on to your view. We are not comparing a day, a month or a year. We are comparing many observations over a number of years. You clearly aren’t used to losing an argument are you?
By the way, even if you don’t accept the past vs. present thing, you shot yourself in the foot when you said that economic growth was higher during the time of PA governments although the inflation was similar. Controlling does not mean reducing, necessarily. If the UNP government kept inflation at the same rate as the PA and managed to get higher growth in return, that’s better control of inflation. As we know, leftists governments resort to things like price controls a lot more than laissez-faire governments. That’s not a good control of inflation. That’s just artificially keeping the index down.
I made that second point before, but you conveniently seem to have ignored it.
*understood
*grammar
Interesting debate. As a professional economist, let me add a few observations.
1. Ravana made some very valid points; he was very theoretical in his responses, to the point he almost lost the audience, I thought. All in all, he made a theoretically sound argument. Ghostwriter was looking to learn and I thought he got his lesson.
2. Ghostwriter on the other hand also raised a lot of relevant issues. However, his self-selected 5 year comparison regimes were not in the sprit of academic debate (which I think this certainly qualified as one). The high rates of inflation towards the late 80s and up to 90 were actually due to the JVP activity at the time which this is not the forum to go in to detail. The same goes when interested parties include 2001 in growth samples purposely to bring down the average due to the outlier -1.5% that year.
3. Some interesting reading in this context would be the work of Edmund Phelps who won the Nobel Prize for Economics for 2006. One of his key contributions was to show that, as opposed to the Philips Curve argument, inflation and unemployment were necessarily inversely correlated; i.e. that a country can actually have high growth and low inflation. India is a good current example; growing at rates over 8% (9.2% last quarter) while holding inflation below 5%.
4. Ghostwriter made a comment about why a depreciating currency (due obviously to inflation) is actually good for exporters. Why I bring this out is because it makes a lot of sense on the surface and many people believe this to be true. Actually what one needs to do is to consider what economists refer to as the “real effective exchange rate†which uses the net depreciation-inflation differential between countries to understand competitiveness gains or losses due to nominal depreciation. The Central Bank website has a good explanation on it, and as a person interested in learning, I suggest Ghostwriter takes a look at it to see how overvalued the LKR is.
5. I feel there is less to do with whether the party in office is UNP or PA/JVP/JHU, but a lot more with their policy and its implementation. The policy of the UNP is more open, trade-led growth, targeted subsidies and low inflation whereas that of the current regime is more closed, agriculture and SME led growth and not necessarily low inflation. Nivaard Cabraal has openly taken credit for this so called MC economic model as both the senior economic advisor to PM and subsequently President MR. Now he has been made Governor CBSL to implement it! The fact is that Cabraal is an accountant and has very little understanding of neither monetary policy nor fiscal policy. It is as if the Ghostwriter’s proverbial scalpel is with a software engineer and not a surgeon! What will happen if a Lawyer is made a CTO of a tech firm?
6. There is no argument that inflation is bad. There is no argument that in countries like LK, where there is so much underemployment and productivity is low, growth can be achieved without high inflation. The only argument is what policy is best to achieve this growth and of course subsequent equitable allocation of the same: a globalized, trade led, service economy or a nationalized, agriculture led, balanced economy?
oops: “inflation and unemployment were NOT necessarily inversely correlated”, sorry about that!
Hi all,
I was reading this blog with much interest. Wish there were more blogs like this with lots of informed comment. Even name calling is at a different level here. Cupcake was good i thought :)
Looking at post-independant history, the UNP had not been a low inflation party after 1977 except in 2002-2004. The statistics bear it out as has been shown above by several people.
However they have been for investment rather than unproductive subsidies in general. In the early 80′s they printed money to finance capital expenditure and inflation went up. Under Premadasa poor people got houses so the very poor was protected from inflation to some extent, but he was subsidy happy. So was Dudley.
However even printing money for capital expenditure is not good, as living standards fall dramatically when you do that. The economic development game is about improving living standards on a sustainable basis. So you are shooting yourselves on the foot by printing money and driving inflation up, and destabilizing the economy, through undermining the national currency.
Neither is it good for businesses (read jobs) to become strong and globally competitive in the long term.
The inflation we have here is similar to hyperinflation, with the same destabilizing effects – only the numbers are smaller, so the extent of the problem is smaller.
In the short term profits will rise because real wages are compressed in real terms and interest expenses fall (see booming stock market, this happened during Premadasa as well), but when monetary tightening begins, either in response to a balance of payments crisis or due to excessive inflation or both, businesses would be under severe pressure. So even businesses do not benefit from inflation even in the medium term.
Even if monetary tightening is not there, like in Zimbabwe, businesses (and ordinary people) will be reduced to fighting for survival instead of planning for growth when the exchange rate collapse, even if interest rates are below inflation.
Monetary policy driven growth is tempororay. Zimbabwe is an extreme case. But it shows in Sri Lanka also. GDP growth is slackening already. It happened in 2004 also, as per graphs above in indi’s post.
If the UNP printed money for infrastructure and SLFP stood for subsidies in general, it is also true that the UNP stood for opening the economy in general. As a rule of thumb then the UNP allowed the exchange rate to fall, in response to printing because they did not want to hurt exporters, as exports were a central part of their strategy. They also do a lot of reforms to open up in general which allows economic activity to pick up.
Under Chandrika the SLFP did reforms as well, especially in telecoms. So we had relatively low inflation and fairly good growth like in post 77 UNP times. In addition trade was liberalized by cutting import duties so that was really a ‘UNP’ like administration but which, in addition also tried to bring in economic stability through lower inflation.
In general the SLFP printed and tried to hold the rupee through exchange controls, like Zimbabwe. Naturally it cannot be done. But what printing and exchange controls do is that (through the overvaluation of the real effective exchange rate) it hurts exporters and gives an unfair advantage to importers versus domestic producers.
Then you try to curb imports as well. You put all kind of trade restrictions and jack up import duties. The 1970′s was a good example. This is what we are tying to do now. But in the process you tie the economy in controls and things eventually grind to a halt.
Printing or central bank credit hits the exchange rate in two ways. First it causes domestic demand pressure, because more purchasing power is given to players in the economy.
This will either pull in more imports, or push up domestic prices, or usually do both, . That is what happened when central bank credit rose from 50 billion to a 100 in the last 8 or nine months.
When printing pulls imports, central bank will have to supply dollars from its reserves to pay for the imports if it wants to hold the rupee. So your reserves fall, and you have the first step your common or garden balance-of-payments crisis.
But this will overvalue your currency, because your inflation is higher than your trading partners and eventually imports will grow and exports will fall, and the exchange rate will be eventually forced to collapse, when the reserves run low as is happening now, in the second phase of the BOP crisis.
This is what Dr Goh Keng Swee, who was Lee Kwan Yew’s finance minister and considered to have been the architect of Singapore’s economic revivial once said.
“Financing budget deficits through Central Bank credit creation appeared to us as an invitation to disaster. There was no effective way of exchange control in an open trading economy like ours to deal with the inevitable balance of payments troubles…. The way to a better life was through hard work, first in schools, then in universities or polytechnics and then on the job in the work place. Diligence, education and skills will create wealth, not Central Bank credit….”
(By the way Singapore opted not to have a central bank with money printing powers so that it’s government would not be tempted to use central bank credit and continued with the colonial currency board system. )
“But if the electorate misled by soft-headed opinion makers, persists in wanting the good life without working for it, constitutional safeguards cannot stop foolish behaviour for all times. What will happen if the electorate chooses this option is that after a brief period of high living, Singapore will spiral downwards and eventually become another miserable developing country.”
Interested people can find his entire speech at LBO at this link ;
Why a currency board?