The Role of the Public Sector in Promoting Economic Growth in Sri Lanka

H. N. Thenuwara

Sri Lanka recently announced the establishment of a National Audit Commission – which was preceded by the establishment of a few other commissions; Right to Information Commission, the Elections Commission, and the Independent Police Commission.

Establishment of such commissions is a significant step toward improving governance in the country. This is especially noteworthy in view of Sri Lanka’s low international rankings in governance and competitiveness. The Global Competitiveness Ranking of 2017/18 shows that Sri Lanka ranks 85 out of 137 countries. They also list 17 factors that are most problematic (Table 1). Among them, the topmost problematic factor is the inefficient government bureaucracy, followed by labour problems and policy inconsistency. Table 2 provides further measures of inefficiencies pertaining to Sri Lanka.

According to the World Bank, Sri Lanka ranks 111 among 190 countries in the ‘ease of doing business’ index. The top three most problematic areas are enforcing contracts, paying taxes, and registering a property. Table 3 further illustrates the areas where Sri Lanka has fallen behind.

Meanwhile, according to Transparency International, Sri Lanka ranks 91 out of 180 countries in terms of corruption perception.

Poor governance and ineffective government have caused economic growth in Sri Lanka to slow down. During the last 66 years, Sri Lanka’s average per capita income growth has stagnated at around 3.6 per cent – insufficient for a country to enhance the standard of living of its population. At this rate, it will take around 20 years for an average person in the country to double real income – which is a rather long time. However, if Sri Lanka could grow at 7 per cent, the time taken to double income is 10 years, and if it were 10 per cent, the time would shorten to 7 years.

As such, Sri Lanka is planning to enhance its growth considerably, as stated in the Vision 2025. To this end, improving governance is essential to enhance the effectiveness of the government’s role in the economy.

The Role of the Government

Any government performs at least four major functions. It resolves market failures through policies and regulations, provides public goods, ensures equity, and provides safety nets. The Sri Lankan government faces several challenges in carrying out these functions. First, the government has to identify areas of market failure, the need for public goods and measures needed to ensure equity, and to provide safety nets. Then, it has to identify public problems arising from those failures, design public policies and regulations, finance public goods and safety nets. It is vital that Sri Lanka strengthen institutions to implement policies and regulations, especially if it wants to improve its competitiveness and ease of doing business to attract foreign direct investment. Further, the institutions have to be staffed with suitable personnel who are efficient and qualified. With some government employees and elected officials, Sri Lanka faces the classic bureaucratic obstacles, which result in bribery, corruption, and other growth inhibiting problems.

The government has to perform its role effectively for the engine of economic growth in Sri Lanka to function well. The Vision 2025 policy document outlines a comprehensive set of objectives and some strategies to achieve them. The document recognizes the country’s low ranking in international competitiveness and promises to raise its ranking. It states that the government will stamp out corruption by encouraging competition and enabling transparency. If this is to succeed, the government should step forward and outline the institutions responsible for achieving the objectives and detail the strategies and timelines in achieving them.

Policymakers should recognise that the private sector responds to incentives in the system. As such, the system should be designed in such a way as to promote a genuinely hard working private sector. Government employees also respond to incentives in the system. Therefore, the system needs to be refined to avoid typical bureaucratic problems, and to make sure that government institutions function effectively. The regulatory regime can also be further refined by deleting redundant regulations, strengthening existing regulations, and adding missing regulations.

How to Solve the Bureaucratic Problem: Lesson from the USA

The bureaucratic problem in government institutions can be resolved by establishing a system similar to the USA. This system was established when the trust in the US government hit a low point in 1978, in the aftermath of the Watergate scandal. To rebuild trust in government agencies, the US Congress established a system of Inspector Generals (IGs) overlooking government institutions. Their role is to detect and avoid waste, fraud, and abuse in government institutions.

There are over 70 IGs appointed either by the Congress or the President of the USA. Their presence and their work in government institutions ensure that politicians running the government, politically appointed heads of institutions, or career heads of institutions have very little incentive to use their powers in any abusive manner. Those heads of institutions have to perform as per guidelines laid down for those institutions.

IGs investigate government employees, external government contractors, and any recipients of government assistance. They have the authority to issue subpoenas for information and documents, administer oaths for taking testimony, and hire staff and contract personnel. IGs are often alerted of abuse in government institutions by employees of the institutions and sometimes IGs conduct their own investigations. They are overseen by a committee called Integrity Committee of the President’s Council on Integrity and Efficiency (PCIE). They report their findings to the head of the government institution, to the Congress and to the Attorney General.

IGs have come under pressure from time to time. For example, the National Public Radio of the USA reports that “in 2003, the IG of the Department of Health and Human Services, Janet Rehnquist, resigned after charges that she delayed a Florida pension fund audit at the request of then-Governor Jeb Bush. She denied the charge”.

Sri Lanka could benefit from establishing a system of IGs. However, Sri Lanka has to be cautious of IGs becoming subservient to politicians and heads of institutions. If that happens, IGs will become a mere fiscal burden on the country.

Despite unresolved governance problems, Sri Lanka has many positive attributes. It is a functioning democracy with a considerable institutional independence. Its major cities are safe compared with many crime ridden cities in the world. Its problems are well understood and documented, and only needs the people to come together to provide lasting solutions.

Table 1 – Most Problematic Factors in Doing Business in Sri Lanka

Table 2 – Further Indicators of Poor Competition of Sri Lanka

Table 3 – Ease of Doing Business Ranking of Sri Lanka

*Article courtesy Talking Economics.

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