Sri Lanka: Semicolonial Economy In Crisis

Economic crisis brewing in 2008
Economists and industrialists this week predicted that 2008 will be a difficult year for business given rising fuel costs and other financial burden. Company bottomlines are already reeling from the regular fuel increases, and the experts say the government, which is embroiled in a war, will be unable to do anything about it.
Coupled with poor policies and long term development strategies, it is up to the businesses to bring about a turn around, the experts said inefficient policies, a lack of planning and the absence of a long term development plan have created the current energy and food crisis the country is
experiencing.
At an exclusive panel discussion on the food and fuel crisis organised by The Sunday Times FT on Thursday at the newspaper office, Sirimal Abeyratne, an economist from the University of Colombo, said he does not see any relief from the escalating fuel costs and only expects prices to
increase further in the future.
The only respite that may arise is a comprehensive global alternative energy solution. He also said the government must stop artificially controlling fuel prices and allow domestic prices to reflect world prices in order to encourage conservation and lower consumption. Dr Abeyratne urged the government to seriously look into curtailing wastage and reducing consumption. Managing Director of Nippolac Paints, Raja Hewabowela, reflecting the views of small industry, said business is being adversely affected by the fuel increases. "We can't bear the costs. We can't increase the price of our finished products everyday."
Mr Hewabowela explained that freight charges have increased by 46 percent and local transport charges from the port to the factories have increased by 52 percent. Foreign suppliers are only willing to sign short term sales agreements based on LC terms due to the situation in the country.
Chairman of the National Chamber of Exporters, Rohan Fernando said that despite efforts to hold discussions with the Ministry and the Treasury
Secretary to address the energy crisis, attempts have been futile. Mr Fernando said he does not expect the government to reduce energy costs so
businesses should find ways to deal with the escalating costs on their own and not depend on the government to lower prices.
He said the government must stop subsidizing the Ceylon Electricity Board, which he described as one of the biggest messes the country has created
which is dragging all of ‘us’ down.

Inflation: No light at the end of the tunnel
By the Economist
The control of inflation is becoming increasingly illusive. The inflation rate has now jumped from near 20 to near 30 and some of the factors exerting an
important influence aren’t slowing down. Meanwhile theories and statistical calculations are aplenty. But these are of no avail in the practical task of
controlling prices. In fact these theories and calculations impliedly tell us that prices cannot be controlled.
One of these statistical concepts is core inflation that the Central Bank of Sri Lanka continues to focus on rather than the general level of price
increases estimated by the price indices. Core inflation in the words of the Central Bank is: “The measure of underlying inflationary pressures,
compiled by removing food and energy prices from the consumer price index.”
A few months ago the Central Bank of Sri Lanka began speaking of core inflation being of a single digit and now tells us that it has declined slightly.
Core inflation on an annual basis is running at 9.3 percent at the end of March. In a context of economic propaganda, it is very likely that readers
would think that the concept of core inflation is an ingenious invention of the Sri Lanka Central Bank.
This is not so. In fact many central banks the world over are focusing on the calculation of core inflation, including the Federal Reserve Bank of the
US, the Bank of England and the Central Bank of the Philippines that announce the rate of core inflation. The concept of core inflation is one of
removing those items in a price index that are subject to high price volatility. Food and oil prices have been excluded in the calculation of core inflation
on the grounds that these are subject to high price volatility.
The argument for adopting core inflation as a measure of inflation is that by excluding food and energy prices from a price index a better measure of
underlying inflation is obtained. It is argued that including food and energy prices that are subject to wide fluctuations either way in an index give the
impression that general prices are rising or falling more rapidly than they really are owing to the wide price fluctuations of these two items. Economists
have pointed out that environmental factors that can damage crops of one year could have an impact on prices that would not last.
Again in the case of oil prices that are also excluded, it is argued that fluctuations in the oil supply from the OPEC cartel or war in petroleum producing
areas of the world could affect oil prices temporarily. Another corresponding argument for excluding changes in food and energy prices from measures
of inflation is that their prices are quickly reversed and so do not require a monetary policy response. This latter contention has substance, in that
monetary policy can hardly do anything to quell prices of these items. However monetarists argue that this is not so as the control of the money supply
could temper and tame this impact on prices.
In contrast some economists contend that measures of inflation that incorporate food and energy prices are still useful and are closely followed for
clues to the behaviour of the overall price level. They view the sensitive nature of food and energy prices as a symptom of future overall price
increases. A rise in aggregate demand that might set off a period of higher inflation may initially show up in increases in certain sensitive prices.
If these prices are ignored because they are ˜volatile”, these early signals of inflation may be missed. In addition, these price increases feed into other
price increases as they are important in the cost of production of important items of consumption and tend to remain at these levels even after
decreases in the prices of the inputs. This is the well known ‘ratchet effect’ in price behaviour that tends to move prices in one direction.
To recognize the validity of the argument that food and energy are more sensitive to price changes, there must be an acceptance of the notion that the
prices of those goods may frequently increase or decrease at rapid rates and that their price changes may not be related to a trend change in overall
prices. The contention that changes in food and energy prices are more likely related to temporary factors that may reverse themselves later is
questionable in the current context of price trends of these two items.
In the light of the experience of rising food and oil prices in the last twenty four months, it is unrealistic to consider the uptrend in either oil or food
prices as temporary. It is even more difficult to think that these prices would be reversed. It may be granted that there could be a temporary fall in
prices, such as a drop in oil prices due to a lesser demand during the coming summer months or a somewhat better harvest of grains next season.
However, much of the increase in prices of food are demand driven and increasing demand for food would continue to sustain and enhance food
prices.
Apparently, everything is fine if core inflation is coming down and food and fuel prices that are not included in the core inflation index are rising!! In
reality core inflation is of little relevance to people when they are experiencing increasing prices on an almost daily basis. Their concern is the rise in
prices that they have to face. Everyone knows that it is the energy and food prices that are most important. By removing food and energy prices from
the consumer price index the most pertinent items of consumption for people from the basket of consumption is excluded. Core inflation is an
irrelevant statistic to the public as it excludes inflation generated by other than these two important drivers of current inflation that affect the livelihoods
of people the world over. Such an index number does not matter to the general public for whom prices of food and utilities are those that matter most.
In reality prices are rising fast. Core inflation is of no significance to people. Admittedly the government is in a difficult situation as import prices are
rising and generating inflationary pressures. International oil prices have now reached around US$ 130 per barrel. Rice and wheat prices, as well as
milk are continuing to increase. These imports have an important bearing on the domestic price level both directly and indirectly. The Central Bank’s
tight money policy will not help much in this context. The plain truth is that the cost of living is unbearable for the poor and there is no light at the end of
the tunnel.

Poverty amidst prosperity: UN millennium goals seem elusive
By Thalif Deen at the united nations
TOKYO - A long-term UN plan to reduce by half the number of people living in "extreme poverty and hunger" has hit a roadblock. The target date,
set by world leaders to achieve the UN's Millennium Development Goals (MDGs), is 2015. But as of now, that target seems elusive.
The UN estimates that more than a billion people live in "absolute poverty" worldwide and about 800 million people go to bed hungry every night. But
the rise in the price of petroleum and food is threatening to undermine the best laid plans of the world body to fight both poverty and hunger.
Japanese Emperor Akihito (L), Empress Michiko (C) and Japanese royal family members toast with African leaders at the Imperial Palace in Tokyo
on May 30, 2008. Africa's leaders and Japan pledged May 30 to ramp up the continent's food production, seeking to put the crisis of spiralling prices
firmly on the agenda of the Group of Eight rich nations. AFP The region which is lagging far behind in reaching MDGs is the perpetually trouble-plagued Africa. The Japanese government, which is currently
hosting more than 50 African heads of state at the Tokyo International Conference on African Development (TICAD), has pledged to increase its
assistance to the African region. But here in Tokyo, development activists are dismissing the pledge as too little too late.
The World Bank says the shortage of food and skyrocketing prices for staple commodities -- including rice, wheat, corn and sorghum -- are likely to
increase, by an additional 100 million, those living on the edge of poverty and starvation. With very few exceptions, most countries in the world, and
specifically in Africa, are not expected to meet most of the MDGs.
The MDGs include a 50 percent reduction in extreme poverty and hunger; universal primary education; promotion of gender equality; reduction of
child mortality by two-thirds; cutbacks in maternal mortality by three-quarters; combating the spread of HIV/AIDS, malaria and other diseases;
ensuring environmental sustainability; and developing a North-South global partnership for development. A summit meeting of 189 world leaders in
September 2000 pledged to meet all of these goals by the year 2015. But the goals have become a moving target.
But Dr. A.T. Ariyaratne, founder-president of the Sarvodaya Shramadana Movement, one of the most successful grassroots movements in Sri Lanka
celebrating its 50th anniversary later this year, is sceptical about reaching that goal.
"Poverty and powerlessness go hand in hand — both at the political and economic level," he said, on the sidelines of an international conference in
Hiroshima last week. In most developing countries, Ariyaratne told The Sunday Times, the gap between the rich and the poor continues to widen by
the day. And Sri Lanka is no exception.
He dismissed as a "bunch of lies" some of the statistics doled out by various national governments to bolster the argument that poverty is on the decline
in their respective countries. "I have met a number of political leaders -- even at the cabinet level -- who don't even know what the Millennium
Development Goals are," Ariyaratne said last week during an interview in Hiroshima.
At the same conference, Kul Chandra Gautam, a former assistant secretary-general and deputy executive director of the UN children's agency
UNICEF, said that global poverty is thriving -- rather ironically -- amidst one of the most prosperous times in human history. He pointed out that
world economic output reached a high of 60 trillion dollars last year.
At this time of unprecedented global prosperity, in which someone new becomes a billionaire every second day, "we have the contrasting situation of
nearly one billion people living on less than a dollar a day and 800 million going to bed hungry every night," he added. And according to the US-based
Forbes magazine, the number of billionaires worldwide reached 1,125 last year.
But they emerged not only from rich countries such as the US, Germany and Japan but also from developing countries, such as Egypt, Nigeria,
Indonesia, Malaysia, Brazil, Belize, China, India, Mexico and Venezuela. With less than seven years to meet the MDGs deadline of 2015, the failures
seem to far outweigh the limited successes achieved so far.
And the positive results, says the United Nations, are in danger of being wiped out by critical new threats, including skyrocketing food and fuel prices,
increasing transportation costs, a decline in development aid and a shortage of health workers. "More than halfway to 2015, the MDG track record is
mixed," admits Secretary-General Ban Ki-moon. He cites the "undeniable progress" in the field of health care worldwide: three million more children
now survive each year; an additional two million people receive treatment for HIV/AIDS; and millions more children are in school.
Since 2000, says Ban, macroeconomic fundamentals and policy implementation have improved markedly, with growth averaging more than 5 percent
across Africa alone. "The challenge is now to replicate these successes in more countries," says the secretary-general. But the political prognosis is
grim.
Gautam is confident that, globally, the MDG of poverty reduction is likely to be achieved thanks, largely, to rapid progress in China, India and several
other countries. "But if we measure country by country, it is not likely to be achieved in many of the poorest countries of sub-saharan Africa and the
world's 50 least developed countries," he added.