Sri Lanka should have simple, clear, predictable economic policies: Razeen Sally

Razeen Sally

Aug 05, 2015 (LBO) – Sri Lanka should have policies that are simple, clear and predictable for the economy to move ahead rather than a plethora that hold businesses back, an economist said.

“Simplicity is the key,” Razeen Sally, an Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore, said at the Economic Summit 2015 held in Colombo.

“If we are to learn one general lesson from the East Asian miracle, we will learn that policy is not rocket science. It should not be terribly complicated.”

“The main lesson from the East Asian miracle is that simplicity is key, and it is imperative we get the basis right.”

For a decade under the last administration, Sri Lanka had de-liberalization, not liberalization with the combination of increased state intervention in the domestic economy and increased external protection.

“Whatever the nominal rate of protection we might see from our import tariffs, it has possibly doubled in the past decade according to some estimates. This is because of a whole host of extra tariff barriers, para tariff barriers, non-tariff barriers, cesses and a big increase in agricultural protection.”

“There is arguably a more politicized environment for foreign investments, particularly when it come to big projects,” he said.

The nominal average for Sri Lanka’s tariffs is about 10 percent which does not look bad when compared with South Asian countries, but it compares badly with East Asian countries, he said. The East Asian average is roughly five percent.

Sally says the next government should have a programme to bring them down as close as possible to zero on industrial goods.

According to neoclassical economic theorists, tariffs are viewed as distortions to the free market.

Typical analyses find that tariffs tend to benefit domestic producers and government at the expense of consumers, and that the net welfare effects of a tariff on the importing country are negative.

Normative judgements often follow from these findings, namely that it may be disadvantageous for a country to artificially shield an industry from world markets and that it might be better to allow a collapse to take place.

“So that where protection of imports exists, it exists by means of the ad valorem tariff,” Sally said.

He added that Sri Lanka should also bring down import protection in terms of ad valorem tariffs, and have one single uniform tariff of average five percent by 2020.

“The target I would propose is not several bands. Make it as simple as possible,” Sally said.