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?

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?

Bull shit. Straw man and misunderstanding of basic grammar.

If no one else is interested in my specific set of statistics, then that’s fine with me… does it worry you so much?

Appeal To Widespread Belief (Bandwagon Argument, Peer Pressure, Appeal to Common Practice)

You are basing your case for the present on a two year period, not even a full term.

Argument From Small Numbers

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?

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.

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.

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.

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.

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

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.

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,

As of now, [... ] 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 [ ... ] . But they are better than what we have now

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

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.

Check, mate.

Checkmate.

“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

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 :)

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.

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.