A Letter to Professor Ricardo Hausmann
Posted on January 29th, 2016

Kanthar Balanathan DipEE(UK), GradCert(RelEng-Monash),DipBus&Adm(Finance-Massey), C.Eng., MIEE, MIE(Aus) CPEng, (Retired) Former Director of Power Engineering Solutions Pty Ltd, Consulting Electrical Engineers

Professor Ricardo Hausmann

Director of the Centre for International Development at Harvard University John F. Kennedy School of Government
Mailbox 34
79 JFK Street
Cambridge, MA 02138

Dear Professor Ricardo Hausmann,

Introduction

I am a SriLankan (SL) Australian who left SL in 1967, however, I worked for seven years and left SL for good in 1977. I have lived and worked in the UK, Nigeria, Zimbabwe, SriLanka, New Zealand and Australia. I have visited a few European countries, Canada, and lived in India for a few months. I am a past student of St. Thomas College and Hartley College in SL and an old boy of current University of Staffordshire in the UK.

Being a resident of the above countries in the past, I have studied their culture in various dimensions. I am able to think of a mind map”, a long list of memorable boring irregularities: constraints that restrict economic growth& employment, bribery& corruption, siphoning funds away from public services and investments, development limitation, wealth distribution pattern, taxation, lack of public confidence on investment, deterring patriotism, and increasing costs.

Professor Ricardo Hausmann: I watched the two days Sri Lanka Economic Forum”conference on the 7th and 8th January 2016. We highly appreciate our Prime Minister’s positive, constructive comments on economic development, the optimistic and productive ingenuity andresourcefulness he possess, however, he has missed several key factors that he did not highlight.

Your leadership at the conference in facilitating contributors to provide detailed analysis to the point is highly appreciated. Professor, your creativity and originality is unchallengeable. Subsequently, I read most of your publications, focussed on underdeveloped and developing countries.

While appreciating our PM’s comments and ideas, I still have reservation, whether the SriLankan ethnic group’s culture, mindset of conflicting what is right and wrong”, will allow the Government of SriLanka (GOSL) to formulate a strategic initiative Framework to implement the items structured around the four key areas. Further, the mindset to admit and acknowledge influence and dominance of the western powers, including that of India, has not been addressed by GOSL. The political & cultural distinction between the so called powers and the recipient country is so wide. SriLanka is a small island, and the British left the country with a dormant obstacles with intent to control the island on a continuous platform.

Before I proceed, just a comment:Although every male is born with 1.5 kg of brain, humans perceive different effects about the same state, as perceptions vary from person to person. People assign different meaning to what they perceive. This is the reason why conflicts arises. Most have shortfall in perception (Balanathan)

Quote: Perception is an active mental act. It is a dynamic, a dialectical conflict between the self-perspective transformation and external vectors of power bearing upon us. That which we perceive is a balance between these antagonists”. (Ref:Understanding Conflict and War: vol. 1: the dynamic psychological field, chapter 11, by R.J. Rummel)

I would like to discuss two aspects in governance, unravel and highlight the hidden mindset and the rigidness of our community here in SL.

Political Atmosphere since Independence

SriLanka was granted independence on the 4th February 1948. One of the Tamil Minister, GG Ponnambalam, who had a portfolio responsible for Industries commissioned three plants. (i) Cement Factory in Kankesanturai, (ii) Chemical Factory in Paranthan, (iii) Paper Mill in Batticaloa. Along with this other economic development centered on agriculture was done in the East. However, in 1949, another egoistic Tamil Politician, known as SJV Chelvanayagam (SJVC) inflicted a diehard manifesto called Federalism for the North & East. Although people in the North and East speak Tamil, their lineage is of different ethnic group from India.

Since 1949, the inflicted racial hatred by the Tamils, caused a deterring effect on economic development in SL. Since 1970, the political party inflicted that trauma of armed conflict as the right tool to the youngsters caused further restraints on economic development. From 1970 to 2009, the Tamil terrorists caused billions dollar worth of damage to GOSL assets and Property Island wide. The cement factory constructed by GG Ponnambalam was obliterated. I worked in this cement factory for seven years. Several ministers, civilians and responsible citizens were murdered, including late Mr. Rajiv Gandhi.

We SriLankans salute and appreciate for the courage and audacity of our former President Mr. Mahinda Rajapaksa, and Mr. Gotabaya Rajapaksa for eradicating terrorism that prevailed in SL for 39 years. The western military command was present in Vanni giving guidance to the SriLankan military. It could be implied that it was a conspiracy to eliminate LTTE command, and implicate the President & Co so that the west could imbed a group that will accept their influence and dominance, knowing that there will be casualties in the war.Could anyone prove that there will be no civilian casualties in a war? Well, India has no right to attempt to penetrate into SL politics and talk about HR, because India has the worst record ofHuman Rights violation. Every country wants to dominate SL and siphon funds out of it. It is considered a shame for the west to penetrate into a small country like SL. When the SriLankan military has a military court for disciplinary actions against its staff, it’s shameful to note that foreign judges are ordered by UN to sit in judgement of the SriLankan military. Can an African or Asian judge sit in judgement of the US military?

Today the entire dynamic equilibrium of SL has been brought to a near standstill because of the title War Crimes& human rights”. The Tamils are up in hand, without patriotism, no sense of economic development, fervent for punitive action against the military, and attempt to divide the country. The West and India has strong influence on Tamils, and are exploiting the Tamils to achieve their objective. India, to cover up their human rights violations, is redirecting its voice on SL. It could be implied that UN’s actions is regarded as impediment to the progress and economic development in SL? A big theme to address. Why is US Asst. Secretary of divisions flying into Colombo frequently? Why do these people fly into Jaffna and meet Tamil politicians? What has Tony Blair got to do with SriLankan affairs, and why does he fly into Jaffna and meet Tamil Politicians? Tony Blair himself is being accused as a war criminal because of the WMD war in Iraq. Could these be interpreted as a process of indoctrination and intoxication of the Tamils by the West and India?

I have outlined the above components so that you could have a bird’s eye view of the elements that are causing obstruction to economic growth and introducing political & economic volatility.

uman Rights Violation.Hu

Since 2009, former President Mr. Mahinda Rajapaksa was embarked on several facets of development:

  • Development of infrastructures
  • Augment the port city of Colombo
  • A vital nodal point in the South was chosen for the Port and Aviation, which is Hambantota, an airport and port was constructed. This raised unwanted criticism from unintellectual quarters.
  • Remove constraint from the captured terrorist group boys, by rehabilitating them and releasing them in
  • to the community,
  • Had election and formalized the Northern Provincial Council (NPC) and allocatedNPC with the required funds to carry out small scale development
  • Implement the Mega Polis development of the city of Colombo and others,
  • Clean the city of Colombo free from underworld gangs, crimes, shanty temp. Dwellings,

It implies that the above preliminary work was in preparation for a high gradient economic development in SL. However, it is inferred that the opponents who wanted to remove GOSL parliamentarians with the help of the west used different tactics to capture power. The Tamil issues were introduced into the election campaign, which is cheap politics of the third world. To the Tamils, economic development means nothing. Since 8th January 2015, the current GOSL has done nothing, but talk. Promise of limiting ministerial position to not more than 30, ended up with several. Every MP wants a minister position. Whatever said, nepotism and corruption cannot beeliminated.

On the other side Tamils want equal rights and more power to the North which is inhabited by less than one million people. Since 2013, the Northern Provincial Council (Jaffna), a Provincial Administration,has not done any development work in the North. Tamil MPs are unpatriotic and not interested in the welfare and employment of their people. The Tamils are more interested in punitive and revengeful acts by bringing in a panel to hear on war crimes. People who died are those who were caught between the army and the terrorists, and those who were transplanted as human shield to protect the hierarchy of the terrorists. Why were the 350,000 people kept as human shield in Mullivaykal is a question the Tamil politicians have not answered. Even after the billions of dollar worth of assets destroyed, civilians and politicians murdered by the terrorists, the Tamils or the Tamil politicians have not given serious thoughts of tendering an apology, but go on fighting, and have become an impediment to economic development.

Well, Tamils could be itemized as a factor for economic volatility.

Cultural improvement, advancement in socio-politico-economic knowledge, and political knowledge in democracy of the 21st century have to be demonstrated by the people and GOSL. Tamils in Europe, North & South America, and other countries where Tamil is not a language study the country’s language and live. What stopsthem from studying the local language, and integrate with the SriLankan culture and language?

Views on the economic Development Structured around the four key areas

It is most welcome that the SriLankan Government convened a conference on the economic development based around four key areas as follows:

  1. Macroeconomics and Fiscal Stability
  2. Structural Transformation and Competitiveness
  3. Urbanization and Development
  4. Regional Development and Social Inclusion

The views expressed in this letter is not to disapprove or criticise the theories and principles discussed in the conference, but to highlight how better SL could perform. Let us look at the definition for clearer understanding by all SriLankans. I would like to discuss the first two items only in this letter.

Fiscal Stability

The government have to adjust its spending levels and tax rates to influence the nation’s economy. The Central Bank influences its nation’s money supply in its monetary policy. To direct the country’s economic goals, the two policies are used in different combinations

First Step: Let us consider the tax system in SriLanka.

The major shortfall in the economic framework of SriLanka is the tax revenue. I would like to refer the informal system in the North. Except the government, corporation and large registered company’s workers, it is likely that at least 90% of the breadwinners (informal) do not pay tax. However, they are engaged in fulltime work generating income to meet purchasing movable and immovable assets. The owners of such enterprises can be classified under microenterprises.

I like to give a few examples.

  1. Masons who claim they are builders in the North, start with low capital, and a few workers in their team. The so called team may not have a business name but operate with its leader’s name. There are significant number of such building teams. They do not take liability for what they build and complete, no insurance, and further none of the workers’ or the business pay tax.
  2. Farmers growing vegetable, paddy etc. No tax is paid to the government on the yield or any profit.
  3. Fisherman do not declare what they catch, sell, and collect as revenue. No tax is paid.
  4. Small scale tea boutiques, shops, operate with may be, two tax receipts books. One for the tax department and, other, the actual.
  5. The major portion of individual (microenterprise) revenue is generated from smuggling. The smugglers also employ a few people in their team. They are the richest is the North.

This is the situation island wide where the country loses on billions of tax income. The social inequality widens, because the smugglers and non-tax paying become rich, like millionaires, whereas a government service engineer, accountant, doctor or clerk remains poor. The government, corporation, and corporate’s employees contribution to the country is enormous, in supporting and development, however, the owners of microenterprises who do not pay one cent tax contribute nothing.

SriLanka’s priority in its economic development is to overhaul the tax system and the tax department. The tax Commissioner should be empowered by the Public Service Commission to recommend/appoint staff to the tax department. The clerks in the tax department are not to be inter-transferable within other departments, as their knowledge and service should be considered special. The tax department should be given special powers by act of parliament. Tax Commissioner should be given special power to conduct audits and checks on individuals if he considers such person has acquired wealth indirectly and or illegally. The salary to the tax department staff should be adequate to cover their responsibility and work.

  1. Every breadwinner in a family should have a tax file number, and a simple system of tax return should be in place. The tax framework could have a ceiling below which tax need not be paid, however, tax returns should be made.
  2. Every microenterprise should request and operate with a business number allocated by the Tax department or the Provincial Council. (In some countries such informal business is known as Sole Traders)
  3. Every Province is to have the tax department provincial headquarters to manage the tax system.
  4. It is a belief that with the current technological advancement, SriLanka could have a complex computerised system to manage the tax system.

Currently the country may have a shortfall in the revenue collected, however, expenditure remains on the increase. People should understand that SriLanka provide its people, free health, free education, some free goods, and subsidised items. They also should understand that SL should generate the revenue to meet the expenditure, have a sound GDP, low inflation & interest, to provide quality life to its people.It’s the duty of citizens to pay the required tax on their earnings. Politicians should not think that such rigid and sustainable tax system will compromise their victory to parliament.

During the address by the PM, he said that SL has a surplus of paddy this year. Has the Minister for Trade & Commerce in SL thought of export of the surplus rice?

  • Overhaul of fiscal system should be prioritised. The Finance Minister should become more active in the structuring the fiscal system, and take up the tax system as a priority.

Therefore, the priority for SriLanka is to overhaul the Tax System.

An excerpt from Citizendium, the Citizens’ Compendium: (The concept of fiscal sustainability is often used in discussing fiscal policy but it is absence is not directly observable. Fiscal instability, on the other hand, can be observed from the conduct of the CDS and bond markets).

I wish to refer to an article in Wikipedia on the Governor of the Central Bank of SriLanka: (Controversy: In February 2015 CBSL advertised the sale of Rs. 1 billion in 30 year government bonds at an indicative rate of 9.5%.[11][12][13] The sale was oversubscribed with 36 bids of totalling Rs. 20 billion.[11] The majority of bidders, 26, bided for Rs. 100 million or less at a rate of 9.5%–10.5%.[11] However, a few bidders, including Perpetual Treasuries Limited, wanted interest rates of 11%–12%.[11] On 27 February 2015 the CBSL accepted Rs. 10 billion in bids at rates of 9.5%–12.5%.[11][13] The issuing of ten times the advertised bonds, and at a higher than expected rate, was alleged to cost the Sri Lankan government an additional Rs. 40–45 billion ($300–$340 million).[14][15][16] Perpetual Treasuries was issued, directly and indirectly, with Rs. 5 billion in bonds at 12.5%.[17][18][19][20] Perpetual Treasuries was one of the primary dealers in the sale and is owned by Mahendran’s son-in-law Arjun Aloysius).

It is a liability noted now, for a worse economic condition in 30 years of time, where the same people may not be in power or else? This is where we could perceivelack of strategic thinking by our Tamil people. (Impulsive decisions based on nepotism or?)

On the question of Sustainability, Professor, I need not outline the Debt Trap Identity” formula, which is Δd = f + d(r – g). Such actions can be regarded as factors that introduces budget deficit, cost increase, recession, political and economic conflicts& instability.

Professor, in your paper: Does controlling corruption really lead to higher economic growth?” Could this be one of the facets that will limit economic growth? Of course-Yes.

Informal and Formal Micro-Enterprises

This has a large impact on the fiscal policy of the country. In the paper The demand for, and consequences of, formalising among informal firms in SL”, Dr Suresh de Mel, David McKenzie, &Christopher Woodruff discuss on the informality and its impact. This paper reveals that, quote: Even among firms employing paid workers, the majority are unregistered with one or more pertinent agencies”, and only one-fifth of firms operating without paid workers are registered with any government agency”.

In the 70 s I attended a seminar on Financial & Cost Information for business administration” in Colombo. The discussion was focused on informal money management at the Pettah Fish market, where lenders offer money at 300% interest without collateral to the fish traders. Hundreds of thousands of Rupees is exchanged between traders and lenders. How does the government manage tax revenue in such case? The country operates informal (illegal) pawn broking with no tax collected. This could also be categorized as money laundering.

  • GOSL should focus on formulating strategies to address the informal business systems and to make them formal. Making the business formal, will self-motivate the business owners to increase productivity.

Miriam Bruhn,a Senior Economist of the World Bank categorizes informal business as: Many firms in developing countries are informal, that is they operate without registering with the government”.

Structural Transformation

The National Bureau of Economic Research defines Structural transformation asreallocation of economic activity across the broad sectors agriculture, manufacturing and services”. Although the PM stated that SL has surplus of paddy this year, it may be from only a sector. For example the North is an area for agriculture. However, the restraining factor is water. The North is fertile, but dry land. Large area(s) of barrel land is unused &just go waste. During rainy season rain water collected, runs down to the sea. Paddy cultivation and agriculture is seasonal during the winter season only. If GOSL could construct a reservoir with large catchment area, agriculture could be made a continuous productive output. In the South there are rivers, and the First PM of SL late Mr. DS Senanayaka embarked on constructing irrigation distribution systems, which was useful for the so called structural transformation of the 40s. So, what has SL proposed to do with Structural transformation on Agriculture Island wide?

In the case of manufacturing and services, SL should promote SL Diaspora investors to invest on several industries. The sea could be exploited and exported if proper services were installed. Chicken and Cattle farms Initiation Island wide could result in exports. Our natural resources raw materials coming out of Coconut, Palmyra could be utilised for products for exports and local consumption.

Investment in IT College(s) in the North and IT Industry is a good option. Similar to Bangalore, the Diaspora could outsource IT contracts to SL.

Well, if aminister demands 25% cut from investors, then I have to refer to your statement in your article:Does controlling corruption really lead to higher economic growth”.

  • Well, the economic activity could be reallocated across various sector.

Competitiveness

Industries, informal and formal business should be able to perform to supply and sell goods and services at a competitive price in relation to the performance of others in a market driven economy.

SriLanka has been a country of monopoly, where most large productive organisations were owned by the state for long years. People have lack of knowledge in market driven economy and competitiveness. SL should embark in educating the masses on competition and market driven economy.

Flexibility is a key factor that is required for people to change, and if people are rigid then first step is to prepare a strategy for a time frame for transition. How can this be achieved has to be analysed and decided.

  • One key aspect is that people should, rather seeking government jobs, create their own business and industries, formal of course.

Conclusion

  • Speakers at the forum were mostly from foreign Universities. It is regretted that the Economic Forum did not consider inviting any one of the academics from the SriLankan Universities. We have highly qualified and competent economists in SriLanka, however, SL does not recognize their own intellects. This is one of the weakness of the SriLankan Administration. No wonder, why academics and intellects leave the country, go and serve foreign countries. I am aware that SriLankan academics are contributing in the west, Australia and New Zealand. With due respect, I think, our economists and academics would be in a better position to understand the issues in SriLanka with respect to constraints on economic development. Further, the invited experts did not offer their services free of charge. In 2015, I recommended to the Dean of a SriLankan University, of forming an Advisory Council” constituted with Professors and academics drawn from various Universities in SL. Again with due respect, you are an employee of Harvard University. I do not see any issues as to why SL did not draw speakers from the SL Universities. I see no reason why SL academics cannot form an Advisory Council” to guide & recommend on various economic affairs in SL to GOSL. I have seen this as a shortfall in the third world and developing countries.
  • Awareness is one thing people should be given. Socialism and Communism will not develop a country as it is a monopoly and dictatorial. People should be taught appropriate subjects, and conferences should be held periodically for employees and business owners.
  • High level economic language will be understood by qualified people, not ordinary people. Topics should be put in simple words for people to understand.
  • High level priority is: UN should understand that they are a constraint to economic development in SL. Tamils should become flexible and learn how to co-exist in a multicultural environment.
  • Cost Benefit Analysis should be taught to engineers and project managers.
  • It is recommended that SL prepare the plan for execution of the economic development based on the four key areas on a Critical Path Method” (CPM). Knowing the time and the critical items it could be easily done. GOSL should seek guidance from the Professors of the SriLankan Universities.

I thank you for reading this letter. I shall be grateful if you could be kind enough to give a reply please

Kind Regards

Yours Sincerely

Kanthar (Nathan) Balanathan

One Response to “A Letter to Professor Ricardo Hausmann”

  1. Sarath W Says:

    I admire you Kanthar, a true patriot and gentleman for your analysis of the Sri Lankan tax system. It is going to be a very difficult task initially to collect tax from a fisherman, a farmer or any trades person as they are not registered as businesses. Initially the best and the only way to collect any tax from them is to increase the value added tax to every product and compensate the low income and unemployed people.

    The only thing I disagree with you is blaming the LTTE for the murder of Rajive Ghandi. He and his mother both deserve to die the way they did for the crimes they committed against our country.

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