Uthum Herat, Homo economicus la excepción (1957-2009)

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Uthum Herat, PhD., Deputy Governor of Central Bank of Sri Lanka is no more. At the relatively young age of 52, an unexpected stroke took the life of this brilliant economist, only few months after he assumed duties as the senior most non-political appointee with the old lady of Janadhipathi Mawatha.

This is no ordinary obituary as Herat was no ordinary human being. He was an economic man – of a different breed.

Parents couldn’t have named him better. He lived upto the name. Uthum (Great) was everything he did.

The term ‘Economic Man’, says Wikipedia, is largely associated with the works of John Stuart Mill on political economy. Mill proposed an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained. In ‘The Wealth of Nations’, Adam Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Herat was different from Smith’s butcher, brewer and the baker – or for that matter many of us ordinary economic men and women. His contribution to society was not purely in self interest. Never did exist the ‘smallest quantity of labour’. He selected to pay irrationally more, and thus fell out of the typical definition. In ‘The Logic of Life’, Tim Harford may argue that too is rational, but one may not necessarily agree. Spending billable time sharing one’s knowledge with postgraduate students at a local university for a fee of three thousand rupees a day is hardly economical.

Herat believed in markets in his profession, but when observing Sabbath, appreciated the importance of charity. He did both with a passion.

He was a legend, even in his university days. Anecdotes galore. His batchmates remember how they avoid smoking in front of Herat, out of sheer respect – reciprocating the respect he showed others. An assistant lecturer of his was recruited to the Central Bank in the same batch. Herat never stopped calling the former teacher ‘sir’. It was with great difficulty he was convinced such formal addressing is no more necessary between equals.

Having never played the political game, he may not have gained the fame of a typical Sri Lankan economist, but his mastery of the subject was exceptional. Deductions were based purely on evidence, never on politics. Presenting the Annual Report of 2003, to a packed audience, as then head of Economic Research, he denied the popular theory of ‘poor becoming poorer’ under the Wickremasinghe government that was hastily losing its popularity: “I am not kidding anyone. The rich have become richer, but poor too are better off.” Even when challenged by the equally distinguished peers during Q&A, Herat firmly stood on his grounds.

His loss will be felt seriously at the Central Bank. Having entered to fill the vacuum created by the departure of W. A. Wijewardena and Rani Jayamaha, two of the most experienced Central Bankers, who retired recently, Herat now will not serve for eight more years, as expected. The intellectual capacity these three took with them is not something the old lady will easily satiate from its second ranks, even after considerable amount of training.

Larger will be the loss to the country. With a dominant and politically biased Monetary Board (Read the latest Annual Report, if you doubt) the sole consolation to the nation was the professionally trained Central Bankers behind them carefully scrutinizing every move and safeguarding the national interests. Thank them for Sri Lanka still not following Mugabe’s footsteps. The highest currency note is LKR 2,000 not LKR 1 billion. The demise of Herat, unfortunately, will take away this sense of security. The coming years will surely see currency notes with larger denominations and no prizes for guessing whose smiling face will decorate them.

Herat was someone who has certainly made his due contribution to the nation. May his soul rest in peace.

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Sri Lanka’s Economic Independence: A Distant Dream?

Political independence in 1948 economically meant little to Ceylon. It was more a declined economic opportunity – to be a part of a trade empire on which the sun never set could have been far advantageous. Still independence was no excuse for failure. Not every post WWII-independent Asian nation took the wrong turn. Then most were behind us. Now they have surpassed us not just in GDP terms, but even in human development – what we used to boast about. Memoirs of Lee Kuan Yew, who once dreamt emulating the Ceylonese economic model, describe why and how we failed, in style.

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The true independence, if anyone cares to celebrate, gained not in 1948, but in 1170 AD – give or take few decades. That was when Parakramabahu the great –the greatest to ever rule us – not only liberated the isle from the mighty Chola Empire but converted it to an economic powerhouse. Contrary to popular belief, agrarian self-sufficiency was not Parakramabahu’s goal. His futuristic strategy was to be the trade hub of South Asia. Indian, Roman, Arab, Javanese and Chinese traders were frequent visitors to Serendib. The twelfth century ‘granary’ of Asia, probably was the equivalent of modern Singapore.

The dark ages that followed the fall of Polonnaruwa kingdom saw less political stability, more power centers, more civil wars and less trade. Arya Chakravarties of Nallur, arguably the most powerful in the interim period were said to have a large naval force, but still no records that business was their forte. Meanwhile in the South it was more a battle among each other.

Like it or not, it was the Portuguese followed by Dutch, who brought the lost glory. Spices suddenly became hot products; cutting a cinnamon plant was punished by death. British, after capturing Kandyan kingdom in 1815, introduced coffee, tea and rubber – the new economic crops. This gave birth to two classes of entrepreneurs – first British but towards the end of nineteenth century, domestic. The transition from feudal to modern economy materialized many dreams – highways and railways, commercial sea ports, administrative system, fixed income jobs, developed corporate sector, postal service, communication system followed by even quality education and proper healthcare. By the middle of the last century Ceylon successfully eradicated a predicament as serious as foreign invasions to ancient rulers: Malaria

Thus strictly speaking, it was not the Europeans who robbed our independence. Rather it was them who brought it back directing us to a new age. Otherwise Seylan could have easily ended up another Burma, Cambodia or Nepal.

Post independence economic reveries were short lived. The Colombo Plan, which aimed to ‘uplift’ neighbours to our own level, is long forgotten. First Central Bank chief John Exter’s objections to subsidies in the middle of rubber-crisis were met with a Hartal to be followed up with the first populist government in 1956. The rest is history.

To cut short, Singapore had Dr Goh Keng Swee and we had Dr. Nanayakkarage Martin Perera. Both were products of London School of Economics – students of legendary Harold Laski and no doubt, brilliant economists. Strangely they acted in ways diametrically opposite. Their footprints were long seen in the respective economies. By mid 1970s Singapore had a first-rate airline and one of the busiest airports. We had kerosene smelling t-shirts, transparent sarongs (aptly named ‘Ganta mark’) and maniocs – to be eaten twice weekly.

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J.R. Jayawardena, sadly the typical scapegoat for every woe, was the one who took us out of that mess. 1978 economic reforms were the beginning of a new era. It made possible almost every economic benefit we enjoy today; banking facilities, garment industry, tourism and information and communication technologies. Post-1978 Economic liberalisation brought more employment opportunities than ever imagined. The impact was so strong that even the SLFP, a political party that traditionally vowed closed statist economic policies, had to embrace open economy in 1994. JVP- the extreme statists hitherto, settled for a hybrid.

Unfortunately, J.R. Jayawardena could not complete the revolution he began – in the backdrop of ethnic tensions and the second JVP insurrection. Reforms in education, power, railway and even agriculture sectors hardly happened. (Interestingly, Dr. Sarath Amunugama, a former finance minister later called four of such sectors as ‘paraassayaas’ or demons, that suck the blood from the national economy) Decision making power, in spite of the 13th amendment, has sacredly maintained at the centre. Enthusiasm in infrastructure building was lost on the way. A sizable fraction of state income has continuously been spent in education and healthcare subsidies. Government grew till it provided job opportunities for every one in sixteen of the population – again, a large section is political henchman. Money printing, at the cost of thumping inflation rates became the norm of the day.

The only break in this vicious system was the two brief years from 2002-3. At least the first year saw a systematic approach in building the economy. We saw Sri Lanka starts shining after a long period of suppression. Then the masses rejected the system – it did not meet their short term goals; government jobs and fertiliser subsidies.

This brings us to the days of ‘national economy’ – whatever it means. Patriotism has many facets. We are back to 1970-77 times, sans queues and barriers. Government takes pride in the number of jobs newly created within, and has absolutely no shame in imposing high taxes (tax on petrol is 189%) and printing money to support war efforts. We believe in isolated economic models that can be ‘plugged out’ from international trade. Protectionism is more a religion. Be Lankan; buy Lankan is the theme of the day. Just like in any sub Saharan African state the opportunities for new ventures are traded under the table. Private sector is looked with suspicion. Bribery remains the best strategy, and centralised now, the process perhaps is less cumbersome. (Just bribe one big man, not five on the way!) The masses are insensitive, as long as they receive their fair share. Money is not the only commodity that makes a mass exodus; brains too do so.

We still cheer for independence and a government that failed to carry out a single economic reform since the day it took office in November 2005.

Is our economic independence a distant dream? You tell me.

Will the puritans – Media and Central Bank – now step forward and cast the first stone at Sakwithi Ranasinghe?

Sakwithi Ranasinghe is virtually crucified. Stable gates are tightened. That should make everybody happy – at least till next such event. Time to wipe out the entire episode from mass reminiscence and move to cricket, if not Kilinochchi.

So this might be my last post on Sakwithi. (BTW, I will appear in TNL’s Bihidora on Wednesday 9.30 pm to speak on the subject.)

Nalaka Gunawardene disrobes the media prostitution. The very media now chastise Sakwithi sir, once willingly slept with him to build his larger than life image. Media moguls could have been a bit more discretionary on advertisements to minimize the damage. Apparently they did not care and the gullible mice followed the Pied Piper. So how ethical is it for media to wash its hands and shed crocodile tears now? (Ironically, ‘Lankadeepa’ of Sept 28 simultaneously brands D. K. Udayasiri of Sakwithi’s ilk as a bogus or ‘hora’ investor in its lead news, and carries a half page ad for him inside!)

Let me take on the other puritan – The Central Bank of Sri Lanka.

I do NOT – repeat NOT – blame Central Bank for not playing the role of the regulator, it isn’t. Central Bank ‘s mandate is limited only to supervise registered finance companies, and Sakwithi sir was not within that category. He should have been taken care by the Police, but what use blaming a force headed by an IGP who expects video clips from rape victims? I hear few SPs and ASPs are among those who were taken for a ride by Sakwithi sir. I am not surprised.

I blame Central Bank for a different reason – creating the breeding ground for Sakwithis.

It is simple arithmetic. Inflation is as high as 25-30%. Maximum interest commercial banks pay for fixed deposits is 16-18%. Registered finance companies go a little further but still cannot catch the inflation demon. So even a fifth grader can figure out if you leave your money at a bank, by the end of the year you are worse off.

Investing in real assets is the only intelligent option to beat inflation, but not everyone is wise. Plus there are issues with real assets. Lands do not come in customizable sizes and gold is difficult to protect. So when Sakwithi says he offers Rs. 4,000 per month for a deposit of Rs. 100,000 (that is about 50% annual interest) they jump in without thinking twice.

It is not that they are greedy. They are made to run non-stop for mere survival. When the formal financial sector cannot address their needs they turn for informals. Sakwithi Ranasinghe, strictly speaking, might not have been a crook- he could have been an investor who failed by taking risks too high. (not that I endorse it) An interest rate of 50% is not as high it seems for an investor in construction industry. Minus inflation it is about 20% and building material prices escalate at a higher rate.

If Central Bank thinks they can stop Sakwithis by placing advertisements in newspapers and exposing few like him once in a while they are badly mistaken. It is like trying to control Dengue by killing mosquitoes. No matter how many killed, mosquitoes will be there as long as their breeding grounds exist. So do risky investments.

None other than W. A. Wijewardene, the very Deputy Governor of Central Bank, recently equated ‘Inflation’ to ‘terrorism’. If so, Sakwithi is a suicide bomber. Sheer vigilance is necessary, but not adequate to prevent him. Death of one suicide bomber does not prevent others. It is a larger game. Whether it likes or not Central Bank should take the inflation bull by its horns, sooner than later. Unless it does so, there is little use in blaming Sakwithi Ranasinghes.

Central Bank of Sri Lanka: A donkey doing dog’s work but not its own

A colourful half page advertisement in Daily News says it all. Central Bank plans a new currency museum at Anuradhapura.

This adds to Central Bank’s innumerable current functions; researching oil drilling, conducting lectures for A/L students, micro-managing micro finance, insisting so called ‘good governance’ on others but not on itself, publishing books on Sri Lanka’s heritage and branding those question them ‘terrorist sympathisers’.

Are these what a Central Bank supposed to do?

We have one most over-staffed Central Banks in the world. One Central Banker for every 10,000 in population. Its per capita staff cost is on par with those at developed countries like Japan, Canada and UK. Majority of this gigantic workforce is doing things nobody expects them to do. Why need a Central Bank for managing provident fund? Where else in the world Exchange control is considered a Central Banking function? (In manpower terms, the largest department of Central Bank of Sri Lanka is Security Services!)

Any Central Bank is supposed to ensure two and only two things:

(a) Financial stability
(b) Price stability

How successful in Central Bank of Sri Lanka in these two functions?

Dreadful. I would not even consider a C minus.

Financial stability?

One day we cannot wake up to find our banks not returning deposits due to a financial system collapse. That is why we pay to have Central Banks. They are supposed to guarantee that financial system is alive and kicking. They are supposed to supervise, catch and stop any culprits.

The banking system in Sri Lanka still stands on its feet not because of Central Bank. The private banks are cautious. The state banks need not be cautious because they are backed by treasury – thanks to tax payers. Had it not been for the treasury support one of the state banks would have taken the system down drains long ago – given the somersaults they do. Pramuka Case is adequate illustration for Central Bank’s ability to prevent a financial institution under its supervision taking enormous risks. Attempts to micromanage micro finance (with less than 1% aggregate capital within system) show their ‘expertise’ in financial systems.

Price Stability?

Ha Ha Ha Don’t make me laugh!

As the sole currency issuing authority (Prabhakaran or Pillayan have not got the idea yet!) Central Bank of Sri Lanka is supposed to maintain the price of Sri Lanka Rupee against international currencies and also its own. It cannot control the rise of price of bread, but if everything costs more than what it was last week, surely there is something wrong with monetary policies. That was what Nobel laureate Milton Friedman said: Inflation is everywhere and always a monetary phenomenon.

Right now Sri Lanka records the highest inflation rate in South Asia and within the top ten countries worldwide. (To be fair, we are still better than Zimbabwe) For the last year it was from 20 – 25%, and now nearly 30%. Markets prices of all goods and services, including essential services are of continuous rise. It has risen to such uncontrollable levels Central Bank of Sri Lanka even unsuccessfully changed the Colombo Consumer Price Index, to diverge the blame. High prices spoiled even the annual Avurudu celebrations throughout the country. Every evidence points that Central Bank is not of control. It has failed to stop printing money (=increasing money supply) in bulk. It has failed to tighten monetary policy. The inflation is so bad the Minister for consumer affairs admits his inability to control prices. A hyperinflation situation is on the cards. This could lead to protests as happened in other countries under similar circumstances.

Inflation is common symptom of a war. Any war needs money, in bulk and fast. The only solution most governments have is to print money in bulk. This brings down the value of money, as there is no increase in the supply of goods and services. 

The negative correlation between the war and economy is not readily understood by the politicians. That is why we need Central Banks. One key role of any Central Bank is to be government’s economic advisor. It is supposed to give independent opinion. We pay for that. Central Bank of Sri Lanka has an Economic Research Department of more than 100 researchers to do just that. Had a single researcher in Central Bank ever pointed out the cause of this inflation? Did they ever advise the government to stop this meaningless war and enter into talks with rebels?

Perhaps it is useless blaming Central Bank as a whole. Its head is a political appointee whose only task seems to be justifying every stupid act of the government. It is unfortunate that Mr Ajith Nivad Cabraal, whose only qualification is an unsuccessful local government politician, sits in the same chair once held by eminent economists of the land. He is not an economist. His knowledge of economics, or rather lack of it, was amply demonstrated when he said he did not print any money and all currency notes in circulation were autographed by the previous governor. What can be expect from somebody who does not even know that in economics ‘money printing’ means an activity far more complex than mere physical print of money?

In UK, the Governor of Bank of England was supposed to write to exchequer informing the remedies if inflation rate crosses mere 2%.  If that cannot be brought under 2% within a period of six months the Governor has to submit his resignation. Mervin King now behaves as his pants are on fire. Fair enough. That was what he is being paid for. Unfortunately no such good governance is practices in this side of the Suez canal.

The evident neglect of duties by head of Central Bank can only lead to a definite economic crisis. What plans government has to stop it? Does at least Mr Ajith Nivad Cabraal admit that it is his fault? Or will we have to continue blaming government for appointing this hapless individual for such a responsible post?