Are we empowering the poor or hurting them? The Feb 18th 2006 issue of Lanka Business Online, under the caption “Killer Kindness” conveyed very appropriately, that uninformed South Asian governments squander money on consumption subsidies and hurt the poor. In 2005, the Ceylon Petroleum Corporation is estimated to have spent about Rs21 billion on fuel subsidies, Lanka IOC Rs7.4 billion and the Ceylon Electricity Board is estimated to have lost about Rs18.8billion – all of which was said to amount to more than 2 percent of GDP.
Investing in the less than privileged or subsidizing the rich
The same news item referred to a World Bank study, which had found that South Asian governments spent more money on fuel subsidies, than on either heath or education and that, the larger part of the subsidy, was going to high-income earners. Shantayan Devarajan, a World Bank economist specializing in South Asia, had mentioned that in studies done by the Bank in India, Pakistan and Bangladesh it had been revealed that 92% of the consumption of Liquefied Petroleum Gas (LPG) is by the richest 40% of the population and that 57% of the diesel subsidy goes to the richest 40% of the population.
He had pointed out that “if you eliminate the kerosene subsidy, take the money you save from that and give it as a cash grant just like a transfer payment to people, even if there is a leakage of a significant 40% of that cash grant, you still will be helping the poor more than you would with the kerosene subsidy.” Apparently three East Asian countries; the Philippines, Thailand and Indonesia have all adjusted their domestic prices of oil products to international price levels. Indonesia was the last to do it and had suffered badly by continuing to subsidize. We in Sri-Lanka began doing it but abandoned it.
Should CEB’s subsidies be refinanced or re-directed?
Dr Devarajan had made an interesting point about the Ceylon Electricity Board. Referring to the Rs. 50 million a day power subsidy, or the losses of the CEB, which would be the equivalent of one rural hospital a day, he had said, “if you didn’t have that subsidy you could build 365 hospitals in a year!” At a power sector reform workshop organized by ITG, (now known as Practical Action) last Friday, March 10th, a CEB engineer responding to my comments on this issue, explained the rationale for the subsidy and perhaps correctly suggested that it be regarded as owing from the GOSL as part of the latter’s attempt to subsidize the electricity consumer whose capacity to pay is poor. Nevertheless, I believe that, some form of rationalization or reallocation or perhaps part re-financing of the subsidy is due. If not, CEB, whose long overdue Balance Sheet restructuring, which has been already carefully thought out for at least 4 years that I personally know of, will for the foreseeable future be unfairly perceived as a loss making public sector enterprise.
A greater role for Government?
As an active proponent of strengthening small and medium industries; encouraging entrepreneurship; setting up institutions for SME’s and as a founder director of the country’s largest venture capital company, may I add that I have over the years submitted many recommendations to successive governments and engaged in discussions with policy planners and bilateral and multilateral donors in this regard. However, I am concerned with the multiplicity of public sector institutions and hope that the banks set up anew for SME’s and other areas, while remaining in GOSL ownership such as is the case with the Bank of Ceylon and Peoples Bank, will be managed prudently. While giving these institutions the time they deserve in shaping a new future, let me share with readers, a few historical global experiences on state led economic growth initiatives.
An outdated policy
State led strategies for economic growth were popular in the 1950s, 1960s and even the 1970s, when the public sector was regarded as the engine of economic growth. In addition, State Owned Enterprises (SOE’s) were a vehicle to generate jobs. Furthermore, the SOE’s were a medium through which the state engaged in regional development and acted as a hedge against what was then perceived as an undesirable control of the economy by the domestic or foreign private sector. Thus at the start, governments were the sole shareholders of enterprises in major sectors such as fertilizer, steel, telecommunications, banking, automobiles, petrochemicals, hotels and airlines.
This trend continued in many developing countries such as in Zambia, Burma and Venezuela, which by mid 1980 had SOEs which accounted for over 50% of gross domestic investment. Tanzania had over 350 SOEs more than half of which were loss making. In Mozambique in 1986, 35 percent of total government expenditures went toward subsidizing SOEs. In Argentina, SOE losses between 1989 and 1991 amounted to 9 percent of gross domestic product (GDP) — approximately US $8.4 thousand million.
A new realization
Many countries which recognized the need for reform then began Privatization programs to achieve fundamental economic reforms. A survey of economic reform in 32 countries, by the Center for International Private Enterprise (CIPE) in 1990-1991, revealed that countries which were successful in launching privatization programs—such as Malaysia, Chile, Mexico, Jamaica and Argentina—were among the more successful reforming countries.
A few historical examples in the early 1990’s
After Carlos Menem launched Argentina’s privatization program, the country reported a major improvement in its non- financial public sector deficit, which declined from 7.2 percent of GDP in 1989 to 4.9 percent in 1990 and around 0.7 percent in 1991. Chile, after running central government deficits every year from 1982 to 1986, enjoyed a surplus every year for at least 5 subsequent years. Mexico’s non-financial public-sector deficit which was as high as 16 percent of GDP in 1987, declined to 3.9 percent in 1990, with a surplus of around 1 .8 percent in 1991. In Jamaica, central government deficits as high as 14 percent of GDP in the early 1980s gave way to a surplus that reached almost 5.0 percent in 1991.
The Way Forward
Perhaps the challenge is to strike the right balance between public and private sector investment, while also ensuring as far as is practical, that subsidies if continued with, are enjoyed by those who need it. Furthermore, a subsidy, in an enlightened pro-poor environment, will only be an investment if the “dividends” of such subsidy empower the poor not simply in a static sense but in a progressive dynamic sense. In essence it must propel the poor beyond being poor to a higher level of income and opportunity.
Ranel Wijesinha., FCA (Sri Lanka), MBA (USA), was a Founder Director of Lanka Ventures and has served as consultant/advisor to the Frederick Neumann Foundation of Germany, UNESCAP and the United Nations Development Programme in New York with regard to trade and investment issues, foreign direct investment, entrepreneurship and SME’s. He has served in senior roles in industry in a large and diversified local conglomerate; in consulting with globally represented professional services firms operating locally and overseas and has specialist experience in Privatizations and Restructuring. He has also served in Government Advisory and Regulatory roles. He is currently in independent consulting, serving overseas and local clients.