Controversy among different schools of economists never ends as to whether state is primarily responsible for the current welfare of the masses or welfare should be generated as a spillover effect of economic growth of a country. A basic characteristic of welfare-based economic strategy is the state intervention in economic affairs of a country leaving narrow leeway for the market forces to operate on their own in addition to the heavy emphasis placed by the Government on distribution parity of income.
In the context of Sri Lanka, it appears that there is a sort of trepidation among academia as well as political leadership to engage in open discussions on the subject due to vested interest or fear of possible boomeranging effect that may befall on their academic and political fortunes. However, the need of the hour is an apolitical and objectivity driven open discussion on the results that have been accomplished financially and socially springing from the major welfare programs encompassing Samurdhi, Janasaviya and financial subsidies at an enormous cost, both opportunity and financial, to the country as well as to the taxpayers. The current situation in Sri Lanka finds a perfect analogy in boiling frog scenario.
As Wordsworth submits that the Government exists to provide for the needs of the people, and when it comes to choose between profits and property rights on the one hand and human welfare on the other, there should be no hesitation whatsoever in saying that the Government is going to place the human welfare consideration first and let property rights and financial interests fair as best they may. For the purpose of contrast, a statement by Margaret Thatcher, Prime Minister of the UK of yore expressing a diametrically opposite view to the first statement, on the same subject quotes that “the problem with socialism (welfarism) is that you eventually run out of other peoples’ money.” The subject itself sounds like a Pandora’s box.
It is an uncontestable proclamation to make that one of the most important characteristics of human development is the accessibility to a satisfactory and sustainable standards of living. The recipe of the “economic miracle” of many countries that have high standards of living, in fact, is simple and quite obvious as all those countries have gone through the cycle of high and sustained development of national economy accompanied by low unemployment and above average growth of income and consumption.
It is axiomatic that economic growth paves the way for an increase in the wealth of a country as a whole, enabling a country to extend its strength in the fight against poverty and unemployment while solving the problem of disparity in income distribution as well. That is why a high level of economic growth is considered as a prime target of economic policy in many countries around the world.
Sri Lankan economy
Right from the inception, Sri Lanka has been experimenting with different economic development strategies particularly after 1956; however, the level of success it achieved in the endeavour is a subject of diverse opinions which makes it interesting as well as justifiable for conducting an in-depth analysis both in the interest of cognitive investigation and discovering remedial measure as a solution to the current economic quagmire encountered by the country. Proper understanding of the paradoxical economic experiments of Sri Lanka is virtually impossible in the absence of a comprehensive knowledge of the country’s economic and political trailing at least in the past two decades.
Being a mixed economy, Sri Lanka’s economic activities hinge upon both the private sector and the state sector that perform an active role parallelly in the production process in the economy.
Successive Governments since 1948, the year of receiving independence from Britain, have launched multimillion dollar worth of investment projects ranging from free trade zones to large scale land development and hydropower generation ventures.
The country’s financial network is well developed and in good shape, so that both foreign and local financial institutions function in the economy playing their expected role. From the inception, Sri Lanka has adopted the free market ideology with some insignificant deviations accompanied by changes of political regimes, in particular, with the control by regimes leaning on left oriented political ideology.
Sri Lanka by definition is a mixed economy, in which both the private sector and the state sector parallelly engage in the production process. Foreign investments are encouraged by all the regimes as a principle of policy which resulted in the establishment of several free zones and foreign funded projects. Sri Lanka has committed itself to maintain a free market ideology and been governed by liberal foreign trade regimes which can be contrasted with such regimes in the world.
This accounts greatly for what the Sri Lankan economy looked like during the first three decades after the country gained independence from the Great Britain. Manufacturing was left as an insignificant activity, confined to limited sphere of production in the economy with no encouragement received from the Government.
In the 1970s, the situation started a turnaround; the economy has been gradually converted into high degree of diversification; it has established rapidly growing manufacturing and service sectors while agricultural activities have been modernised, and the country has reached nearly self-sufficieny in rice production.
The significance of the three major export crops (tea, rubber, and coconuts) as the main source of export earnings has fallen (from 90 percent in the 1950s to 16 percent in 1999) and the position of manufacturing in the GDP has risen (from 1 percent of exports in 1950 to 60 percent in 1999). The changes that emerged in the structure of the economy are a result of varying economic policy measures adopted by the Governments since independence.
Distribution of income
However, a notable shift in the economic policy with more emphasis on achieving social parity based on justifiable distribution of income was clearly visible, beginning from 1956, which gathered an irreversible momentum and became a centrifugal force in economic policy determination irrespective of the subsequent regime changes at regular intervals. With the shift of policy priorities from development orientation to social parity orientation, the economic landscape and the contours of the country underwent drastic changes marking continuous adherence of the country’s economic outlook towards popularity based, politically driven and myopic destination which in general is antithetical to the approach of sustainable economic development.
Even a casual glance on the vital statistics pertaining to the economic performance of Sri Lanka narrates this episode that started unfolding in 1956 and furnishes sufficient evidence to affirm the onset of a negative relationship between economic growth and the welfare flavoured economic policy.
The Table 1 that includes cross sector economic indicators from 2014 to 2020 bears evidence on the inverse relationship between economic growth and unsustainable welfare expenditure of Sri Lanka. The foreign exchange rate which stood at Rs.131.5 per $ in 2014 reached the phenomenal rate of Rs.186.4 in 2020 indicating weak position of rupees which reflects on the entire structure of economic activities including, inter alia, export, import and the balance of payment. Government debt percentage over GDP has reached 101.0 from the reported percentage of 72.3 in 2014.
Welfare expenditure in Sri Lanka has been a man-made economic monster which eats into the economy by attracting a large chunk of scarce resources for making transfer payment on one hand and it, on the other hand, simultaneously renders the economy crippled due to the fact that the funds are made available meagerly for capital investment after allocation of resources for welfare.
Since independence, the country has been governed by different regimes moulded in welfare dogma vying with one another for political supremacy, but the country remained stagnated or as some point out has been deteriorated in contrast to the rapidity of development achieved by Singapore and Thailand which were behind Sri Lanka in terms of GDP and per capita income in the 1950s.
The welfare policy objectives of Sri Lanka have been miscontrived and the long term objective of welfare is to strategically use welfare facilities as an instrument in transforming a welfare state into a state where welfare is no more needed. Stated in different terminology, the objective of the welfare state is to create a state in which welfare is deemed to be redundant since the relative position of social poverty has been minimised due to the past welfare expenditure.
According to data published by the Department of National Budget and the Department of Fiscal Policy, the breakdown of recurrent expenditure in 2020 indicates that subsidies and transfers alone represented 27 percent while salaries and wages siphoned off 30 percent which totalled up to 57 percent of the total recurrent expenditure. The balance amount is apportioned between interest payment of 36 percent and goods and services at seven percent.
The welfare economic policy has directly or indirectly contributed to certain lopsided developments which are demonstrated by bloated public service, proliferation of government institutions, bizarre free service demand, the Government being recognised as the ultimate saviour/deliverer which as a whole moulded the social attitude and penetrated into the inner core values of the people in a way fait accompli.
Welfarism in Sri Lanka can be compared to the well-known folklore of riding the tiger, where mounting is easy but dismounting exposes the rider to fatal casualty; similarly, welfare facilities can easily be granted at will if resources are available in adequate quantities but withdrawing an already operating welfare facility is virtually impossible due to the political sensitivity of such a decision and the arm twisting tactics employed by a well-organised trade union network against the withdrawal of an ongoing facility.
Collateral damage
Welfare and politics are like conjoined twins and politicians need poverty so that they pledge to the poor that in the event that they are elected to power, poverty will be alleviated. However, the irony of the welfare political caricature is such that welfare should perpetuate over the years for politicians to thrive in; if not the survival of political parties is in jeopardy. Another unforeseen outcome created by welfarism, sometimes referred to as populism, is it widens the social divide and develops hatred towards the “haves” and the ‘have-nots’ believe that it is the responsibility of haves to look after the have-nots, the concept of which finally gets established as rights of the have-nots.
This belief, in turn, rests on the premise that many of those at the lower end of the economic spectrum are victims of bad luck, while many of those at the upper end owe their prosperity to a more fortunate toss of life’s dice. This premise is firmly rooted in Sri Lankan culture. Thus, today’s debate centres not on whether the Government should provide for the needy, but rather on exactly how much (and of which needs) it should supply.
Apart from misconceptions in welfare beneficiaries, the state intervention not only disturbs the natural process of market forces but also distorts the quality of services provided under welfare programs. For instance, as more public money is spent on socialised medicine, the quality and quantity of care deteriorates. It seems that whenever the state steps into alleviate a problem, the effect is to make the problem worse. In line with this polemic, it is argued that in Sri Lanka, quality of the services provided as free services by the Government including inter alia, education, health, transport, has been at substandard level in contrast to the similar services supplied by the business sector organisations.
Since transfer payments are mobilised to the needy through bureaucratic system, it is alleged that corruption is rampant at different stages of implementation and naturally promotes irregularities and injustices in the selection of recipients of welfare benefits and in the disbursement of benefits both in money and kinds to the underprivileged groups of society.
For instance, the welfare program known as Samurdhi, (prosperity) has been afloat several decades in the country but its long-term impacts both in terms of economic development and poverty alleviation are a subject of controversy among researchers who conducted empirical studies on the program. It is ironical to observe that the Samurdhi program with the employment of over 25,000 officers of different hierarchies has also become a political apparatus in the hand of the ruling party for achieving their political goals such as providing employment to the jobless and transferring public funds to politically favoured persons in society.
Some social and academic groups appear to be of the view that welfarism gathered momentum with the surfacing of Marxism, however sufficient evident cannot be found to support this view if Marxist literature is intensively scrutinised. In 1875, Karl Marx stated the principle underlying the welfare state quite succinctly: “From each according to his abilities, to each according to his needs” which has been misconstrued, wittingly or unwittingly, as the foundation philosophy of a welfare state.
The welfare state is founded on the proposition that it is necessary to take the property of those who have it to meet the needs of those who do not. However, it appears that Karl Marx has been misconstrued and misquoted in the afore parroted statement when Marx is stamped as one of the forefathers of welfarism since he never advocated the disbursement of transfer payment to idle, lethargic and lazy persons who prefer to thrive a parasitical life based on the toiling of other working people. Nevertheless, left leaned political parties, with the support of vociferous trade unions, maintain that the present consumption, distribution and equity are the utmost priority objectives of the Government while development needs of the country are optional needs which can be placed on the backburner for leisurely action.
Long-term outcome
Based on the facts and the studies by the academia, one can conclude that the following negative outcomes appear to be associated with the welfare driven economic policies, not only in Sri Lanka but also in many other countries in which income distribution has taken precedence over creation of wealth in the choice of development strategy.
1. Welfare begets more welfare as experience of many developing countries reveals. When money transfers are made to underprivileged groups, numerous other social elements that possess some similar characteristics take cudgel against the Government accusing that they are being discriminated against.
2. Welfare siphons in a large quantity of national resources while depriving funds for development needs.
3. Welfare programs widen the social divide and internalise hatred among different social strata.
4. Welfare promotes idle behaviour, dependent mentality and non-entrepreneurism.
5. Welfare policy is a political tool rather than a means for achieving social justice.
6. Welfarism has not offered a solution to the problem it intends to address.
7. Welfare state, if devices of control are not in place, will lead to economic mayhem and political wilderness.
8. Welfare facilities increase the tax burden.
9. Welfarism is a rich country’s tool.
10. Welfare state creates proliferation of state agencies and enlarges the size of the state.
11. Welfare programs create welfare depended bureaucratic layer which thrives on poverty.
12. Welfarism conditions the mind of the poor that poverty is a desirable disposition or asset and therefore the struggle against poverty is mollycoddled.
13. There is no assurance that funds allocated for welfare objectives de jure are totally mobilised de facto to the hands of eleemosynary groups without being subverted in the process.
Hidden snare
Welfarism is a rich country’s tool. Social security in developed countries typically combines three different elements—social assistance designed to relieve poverty, social insurance concerned with the provision of security and the spreading of income over the life cycle, and categorical transfers directed at redistribution among specific groups. The developed countries, having got over their stage of underdevelopment, are endowed with all the economic wherewithal required for maintaining an expensive social security system using their economic power base made up of technology, resource endowment, institutional infrastructure and other factors of production; however in the case of developing countries, the effort to emulate the welfare model of developed countries is destined to be ended up in failure since they possess neither the same launching pad used by developed countries nor the preconditions required for implementing a social welfare program with a substantial coverage of under privileged social groups.
Another dimension of a welfare state is its size that can be measured using different criteria. The size of the welfare state is usually measured by the ratio of social spending to GDP. Size is an important dimension because it is linked to a country’s tax burden and, to some extent, fiscal fragility and the frequency of fiscal crises, all of which matter for long-term economic growth. However, Sri Lanka compared to economic dimensions of developed countries, occupies relatively weaker position in the context of the economic characteristics demonstrated by the developed countries.
Welfare states differ not only in their size but also in their design or structure. To be certain, structure is related to size: countries with large PAYGO pension systems and publicly funded health services tend to have large welfare states. However, they can be designed or structured in various ways that bear important implications for their future growth; the idea of mimicking the welfare programs implemented by developed countries, is guided by misnomer and its implications.
A noteworthy difference in the design is the inclusion of less fiscally important components of the welfare state, which matter for the strength of the perverse incentives and the resulting social traps they produce. A perverse incentive is an incentive that is created by a certain event or change that is unintended, and generally negative and hinders the provider’s objective. Such incentives are something that functions against the anticipated plans of the provider, and commonly, it’s something that works against their intentions.
These microstructures increase the relative utility of nonworking income and include the ease of access to, the duration of, and the replacement ratios of various social benefits. All those weak characteristics included in poorly designed welfare programs are apparently infiltrated into the structure of some of the major welfare programs in Sri Lanka such as, inter alia, Samurdhi, Janasaviya and subsidised educational assistance programs.
A case of interest in this respect is the assistance program for young schoolchildren in which school uniforms, free lunch, text books are all provided free to almost every pupil, thus inculcating the habit of dependency in childhood for everything in life once they become adults.
International experience
The structural issues of the welfare state include the distinction between the welfare state, which consists of many social programs, and the universal welfare state that would include the guaranteed income proposal (a negative income tax) originally proposed by Milton Friedman and developed by Charles Murray. The main argument for the latter option is that it would abolish the extended social bureaucracy and the pressures related to the possibility of lobbying for special social benefits. Conservative critics would object that social benefits should be “deserved” (i.e., at least means tested), and not evenly distributed.
There are also some serious practical problems, especially regarding the transition to the system of guaranteed income in countries with large PAYGO pension systems. Even if such a transformation succeeded, there would still remain the issue of how to prevent politicians from reintroducing the special programs and politicising the level of guaranteed income.
Due consideration must be focused on the structure of taxes necessary to finance the welfare state. All taxes harm economic growth but direct taxes are worse in this respect than indirect ones. In assessing the impact of the welfare state on economic growth, it should, therefore, be considered the differences in the tax structure.
In looking at this issue from the point of view of political economy, one would, perhaps, prefer to have a worse tax structure on the assumption that increasing direct taxes generates more taxpayer resistance than relying on indirect taxes. Besides, even if it were politically more difficult to increase direct taxes than indirect ones, the pressure for increased spending could overwhelm taxpayers’ resistance. In other words, the strategy to “starve the beast” may not be effective.
It appears again that there is no good substitute for civic efforts aimed at the source of the problem—namely, the pressure to increase social spending. Paterson (2021) on the American welfare system said that the one of the factors that affected the increasing number of family breakdowns is the availability of generous welfare assistance extended to single mother families.
Some programs (welfare) actively discouraged marriage. Welfare assistance went to mothers so long as no male was boarding in the household. Access to food stamps and Medicaid was automatic only if the welfare assistance met government approval. Once a family income crossed a specific threshold, access to these resources disappeared. Marriage to an employed male, even one earning the minimum wage, placed at risk a mother’s economic well-being. The meaning of which is welfare encourages single mother families and discourages the reunion of spouses living separately.
Welfare, contrary to the objectives of its godfathers, is overwhelmingly of negative entropy resulting in dependency syndrome, tax burden, laziness, family breakdowns in addition to the economic crises it creates.
Pandora’s box
Welfare resembles the mythical Pandora’s box with is mysterious contents, magical powers and fait accompli nature of the already granted facilities since such facilities wield significant influence both in toppling a government or saddling a new political regime, in the welfare state. In an egocentric society like that of Sri Lanka, welfarism is not only illusive but also entropic since everyone, the rich and the poor, in the society expects the Government to emulate the role of a benefactor by distributing pogeys and free gifts.
To fulfil the expectations of an egocentric society, the state needs to possess a bounty base of natural resources since welfare very often is a one-way movement that does not produce visible return on investment in the short run. In a welfare addicted society, government revenue becomes nobody’s concern, but expenditure has become the cynosure of everybody since it produces free goods, services and concessions by way of benefits to everybody. It appears that welfare journey once commences has no return unless Governments are prepared to introduce austerity fiscal policies which may cause many hearts to burn in the short run, but produce more benefits in the long run for everyone; however, this is the task of belling the cat.
As Athukorala (2021), points out, the economic strategies adopted by Sri Lanka is an emulation of Ostrich Strategy under which, ostrich hides its head under sand in the face of an impending danger to save it while exposing its entire body to the danger.
Government entanglement in expansionary monetary and fiscal policy and its reverberation has surfaced with spinning adverse effects in all the sectors of the economy particularly in the balance of payment, depleting foreign exchange reserves, downward spiraling of local currency and other related sectors with no solution in the foreseeable future unless drastic austerity measures are adopted on a priority basis.
Data show that in 2020, of total recurrent expenditure of the Government, 36 percent spent for interest payment, 30 percent for salaries and wages and 27 percent for transfer payment while at the same time, government revenue is in a steep decline. Nevertheless, no regime dares to touch the Pandora’s box, the unbridled growth of welfare expansion, since making an effort to rein the spiraling welfare expenditure means self-political extermination.
The resultant economic crunch has started making inroads into the economy by way of import restrictions, foreign exchange controls, unbearable loan and interest payments, scarcity of consumption goods and plummeting credit ratings. The IMF in its annual observation reports makes similar reflections and comments that are in agreement with the findings of the current research.
Observation of economic variables with a parallel analysis reveals that welfare programs, even in the global perspectives, have surfaced their impacts in multifaceted forms which can be clustered under dependency syndrome, reduced capital investment and exponentially increasing of recurrent expenditure which are all collectively and singularly push the economy into the economic abyss. In this context, Figure 1 illustrates in a nutshell the relationship between welfarism and economic stagnation that is aptly demonstrated by time series data and the qualitative description included in this article.
The analysis in this article bears unchallengeable evidence to corroborate that the economy of Sri Lanka is in a midst of a severe and prolong economic stagnation that has been attributed mainly by lavish and perpetual welfare expenditure that is beyond the capacity of economic wherewithal available in the country. Uncompromisingly, the situation faced by Sri Lankais akin to being taken a hostage between the devil and the deep blue sea.
In addition, evidence on the operation of welfare state, all over the world, proves that welfarism causes to establish a handicapped mindset and helps impoverished people in finding consolation in pauperism as it provides a basis of survival among lower income social segments. Although the noble objective of godfathers of welfarism seems to aim at making everybody rich, in practice what happens is vice versa, that means welfarism makes entire society relatively poor and establishes social inequality as a force fait accompli.
Welfarism, by its intrinsic nature, is a poverty maintenance system rather than poverty elevation mechanism which is often politicised by the partisan forces to advance their political agenda with cheap popularity at the coat of long-term interest of many developing as well as developed countries. Discernibly, Sri Lanka finds itself caught in a Catch-22 situation whilst being sandwiched between the polarising forces of popularity driven politics and the need for long term economic prosperity.
The writer is a former Senior Consultant, the Sri Lanka Institute of Development Administration and Director of College of Banking and Finance, IBSL.