THE ECONOMY

CAPITALISING ON LABOUR
The challenge for Sri Lankan enterprises is to recognise the production process in its entirety. R. M. B. Senanayake elaborates.
The old joke that if there are 12 economists in a room, there will be 12 different opinions - and 13 if John Maynard Keynes is also there - is no less true now. Jeffrey Sachs had this story (in the Economist of 29 June 1996) about why Africa could not develop. A peasant goes to the village priest for advice on saving his dying chickens. The priest recommends prayers. The chickens continue to die. The priest then recommends music for the chicken coop. But the deaths continue unabated. The priest then ponders the dilemma and recommends repainting the chicken coop in bright colours. Finally, all the chickens die.

"What a shame!" the priest tells the peasant, adding: "I have so many more good ideas." Our politicians are like that priest. They are still believers in socialist economics, although the former communist countries have dumped statism and revived price mechanisms and free-market economies.

We also suffer from another syndrome, which was diagnosed by Joan Robinson, a renowned economist who was invited to assist in formulating the first 10-year plan in the 1950s. She remarked that Sri Lankans want to eat the fruit even before planting the tree! Robinson was referring to the state's welfare measures such as free education, free rice and free health care - policies adopted by a benevolent but economically illiterate government.

The Bandaranaikes of the last century had this bizarre idea that it is possible to distribute wealth without creating it first. To achieve this, they nationalised ports, bus services, foreign-owned oil companies, banks, insurance companies, schools, and tea and rubber-plantations. They set up a plethora of state-owned enterprises and poured public money into their bottomless pits - as we still do;
When the leftists joined Sirimavo Bandaranaike in the 1970s, they imposed rigorous controls: price and exchange controls, rationed foreign exchange and essential commodities, and vested essentials in state monopolies. And politicians still manage to fool a lot of illiterate people, just as the UPFA did at the recent election with the Mahinda Chinthana - a lot of pro-poor rhetoric and populist promises that are incapable of fulfilment without printing massive sums of money, unleashing runaway inflation and causing a foreign-exchange crisis sooner or later.
For thousands of years, economies everywhere in the world were stagnant: they didn't achieve growth, although output fluctuated with weather patterns. Angus Maddison, in Phases Of Capitalist Development OUP, says that during the 1,000 years between 500AD and 1500AD, GDP grew by only 0.1 per cent a year. Growth began to accelerate around 1500AD, and by 1700AD, had doubled. In Britain, growth was just one per cent per year, and it took some 200 years to reach developed-country status. France and Germany took 150 years, the US 125 years and Japan 75 years. But East Asian Newly Industrialised Countries (NICs) such as Singapore, Hong Kong and Taiwan took only 50 years, while China has taken just 30 years to reach its present status - and it is expected to be the number-one economy in the world in another 10 years!

Adam Smith pointed out that to achieve natural economic growth, nothing fancy is required. According to him: "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and tolerable administration of justice - all the rest being brought about by the natural course of things." To achieve faster growth, as in the case of the NICs, a special and vigorous effort is necessary.

Paul Romer says: "Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable." Labour is our most plentiful resource. But labour alone cannot produce. Labour must be combined with capital and land. And the organisation of the production process requires and entrepreneur who must also take the risk of forsaking his or her capital if he or she cannot sell output at a price that derives a profit.

Karl Marx thought that all value is created by labour alone. But raw labour can produce little. Silicon is available in sea sand, but no amount of labour can produce a silicon chip from it. Unless capital and technology are applied to convert the raw Eppawala phosphate into a form that is marketable, there is no wealth creation. So labour requires capital and technology. Fortunately, we do not have to invent technology.

Part of the existing stock of capital wears out each year. Hence, if output is to be sustained, the worn-out capital must be replaced. So a country needs replacement investment as well as new investment - and it is this new investment that will determine the increase in output or GDP.

When labour works with more capital, it becomes more productive. Similarly, with trained and skilled labour, more sophisticated industrial products can be made. So a country must invest in training its labour force in the skills required. What about education? Economists think primary and secondary education play a role in improving the performance of labour. They downplay the role of university education. Part of the improvement in labour productivity is due to capital investment in machinery and equipment, and also investment in the knowledge and skills of labour.

So who will invest in this? There is plenty of capital around the world. The trick is to attract investors. But how can this be done without a stable and peaceful environment? Can there be a stable business environment with militant trade unions dictating to a weak government - where strikes are endemic, where workers are overprotected and have to be paid expensive social-security contributions? How do we produce entrepreneurs who must take responsibility for the whole process of production?
