Relationship between Politics and Economics

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This research article analyses the relationship between Politics and Economics. Politics and Economics go hand in hand. The central argument here is there is no precise and observable relationship between these two variables by studying the practices of past elected Governments.  All elected Governments of the past and present engage in the practice of skipping the technical and going straight to the politics.

Unemployment

According to trading economic global macro models and analysts expectations, unemployment is expected to be 5.00 per cent by the end of the second quarter of 2022. The unemployment rate in the first quarter of 2022 was 4.6 per cent according to the Trading Economics website. The unemployment rate decreased to 4.60 per cent in the fourth quarter of 2021 from 5.20 per cent in the third quarter of 2021. According to the Trading Economics website, this figure was the lowest unemployment rate since the fourth quarter of 2018.

These figures must be interpreted in the light of the economic and political situation. A five per cent unemployment figure is not critical and is not indicative of large-scale unemployment. However, the problem with relying on this statistic is that it is far too simplistic. It does not account for the different types of unemployment that persist in the  economy-frictional unemployment, seasonal unemployment, structural unemployment and cyclical unemployment. Unemployment of youth, particularly among recent university graduates and students, is of greater concern than unemployment of people who are much older. The next stage in this analysis is attempting to set-up a link between unemployment and politics.

During an Election campaign, including the 2020 Parliamentary Election and the 2019 Presidential Election- tackling unemployment and job creation was the central issue. What actually happens is that no sooner the Elections are over, the party and internal political machinations take charge and unemployment takes a back stage. History has no record of a strategic attempt to tackle unemployment and to address this crucial issue which rots our economic structure.

Inflation

According to Bloomberg, Sri Lanka’s double digit inflation is likely to remain at least through the first quarter of 2023. According to their latest survey consumer prices will likely increase to around 20 per cent in the second and third quarters of this year. This is nearly double the projections made in January. Coupled with soaring inflation, growth forecasts were cut by 50 basis points to 2.8 per cent in 2022. The rise in inflation has increased the cost of basic commodities such as rice, wheat, sugar and flour. In addition there are long queues at gas and fuel stations. Many struggle to afford basic food and petrol costs.

The inflation figures for 2022 and 2023 are worrying and are indicative of a serious economic crisis unprecedented in the nation’s history. They are also indicative of failing Government and political policies ineffective at tackling soaring consumer prices and bringing the cost of living under control. It remains to be seen what Prime Minister Ranil Wickremesinghe is going to do about inflation but there is a worrying pattern emerging in politics, with the inability to bring inflation under control. This highlights the introductory argument in this article the lack of an adequate relationship between politics and economics.

International Debt

Based on projections produced in the 2020 Annual Report of the Central Bank, Sri Lanka is attempting to restructure a debt of nearly $50 Billion and its foreign debt obligations for 2022 alone are approximately $7 billion. However, the country’s foreign exchange reserves as of March 2022 were $1.6 billion. The Government announced that Sri Lanka will default on all of its debt this year and is seeking an urgent IMF bailout coupled with further financial assistance from helpful countries.

So how did Sri Lanka get into this debt trap? This problem has accumulated over the past years. The key issue is that successive Governments borrowed from private international capital markets by issuing international sovereign bonds. This type of capital borrowing at extremely high interest rates accounts for the majority of Sri Lanka’s international debt. Then of course there is country-country lending, for instance bilateral loans taken from India and China, two key lenders where Sri Lanka is concerned. These loans are taken out at commercial rates and must be repaid.

This type of borrowing is connected to rising inflation, unemployment and aggressive taxation in a bid to raise the funds to repay the debt that has been accumulated. Sri Lanka therefore needs to confront its debt problem squarely, without aggravating the problem any further. It needs to restructure its debt in a similar manner to the Ecuador debt restructuring programme or the Argentina debt restructuring programme, guided by IMF assistance, in the recent past and introduce a sensible sustainable plan to manage its international debt in the future. Sri Lanka’s failure to manage its debt is a clear example that flows from its failure to properly develop a relationship  between politics and economics and apply this relationship in practice.

Going political skipping the technical 

Thus far, this research article has analysed three indicators- unemployment, inflation and international debt and looked at the connections between these economic variables and politics. However the question this article poses is what really is the technical relationship between economics and politics and is there any relationship at all? it appears there just isn’t one: successive governments have come in with confusing economic policies that are haphazard, ineffective and not suitable to our needs.

However, there is another analysis of this phenomenon. Imagine a thought experiment where there are two boxes- one box (Box A) representing economics and the other box (Box B) representing politics. A good government and a good leadership will first look inside the economics box to decide the economic policies that are technically necessary for its country to succeed. This is the first stage of this experiment. The second stage is an analysis of the politics box to decide on the set of economic policies in Box A which are politically workable.

However, is this practice what Governments and leaderships do? Let us take the analogy of President Gotabaya Rajapaksa’s populist tax cut in 2019 which resulted in VAT being slashed from 15 per cent to 8 per cent and the abolishment of a variety of other taxes. The objective was simple- a populist, political move, designed to shore up popular support among the electorate, designed for political and/or electoral reasons. But was this the technically correct decision? The tax cut slashed Government revenue by a considerable margin and even led to a downgrading of Sri Lanka by international credit rating agencies the following year in 2020. This is a classic example of skipping the technical and going straight to the political.

Let us develop this idea further. Let us assume that a Government assembles a team of economic experts and looks into the technical box. It identifies a series of economic policy measures which are technically necessary- measures X, Y and Z for the sake of example. It then looks into the politics box and decides that measures X and Y are politically workable and can be introduced but measure Z will be too unpopular and therefore cannot be introduced (For example, an aggressive increase in income taxes which will obviously be unpopular). Thus by looking into both boxes but of course the technical box first it is possible to pick and choose and develop a workable economic policy platform which could form the third box- economics plus politics combined (E + P).

Thus the observation one is compelled to about the relationship between Politics (P) and Economics (E) is there is no clear, precise relationship that can be identified between these two variables. P and E are treated as two separate variables which are exclusive and independent when in theory they should be treated as interconnected variables which are embryonic and symbiotic, constantly applied together and in unison, reinforcing each other and complementary- synonyms describing the same core idea.

However, few Governments in developing economies  and in particular not a single Sri Lankan Government in history has resorted or have applied  this technique and so in the short-run and in the long-run it is extremely unlikely or impossible that a relationship between P and E will develop assuming future elected Governments follow their current patterns of behavior. P and E will continue to be treated as independent variables in the future instead of symbiotic, inter-connected variables and this phenomenon will impact the future economy due to this theoretical and strategic mistake or oversight.

The consequences it is argued here are disastrous for the overall performance of the economy.  What is needed is for the elected Government to first decide on a set of economic policies that are technically correct and then decide which of these policies are politically workable. The argument is that a complete recalibration is therefore in order and a re-evaluation at how Governments approach the relationship between politics and economics if they are to succeed.

Counter-argument

There is a counter argument to the above position which is that Sri Lanka is still too immature, under-developed and unstructured as an economy and a country to have a clear relationship between politics and economics unlike in mature western developed countries and economies. This argument makes the simple and persuasive point that one is expecting too much from a poor, under-developed country such as Sri Lanka to have a sophisticated, nuanced relationship between politics and economics. However, in response to this counterargument is the point, that developing the relationship between P and E (at least to some extent) is necessary if Sri Lanka is to implement technical economic policies which are effective at tackling the problems the country faces. Some kind of technical approach is needed without focusing so acutely on politics alone and a starting point to adopting a technical approach would be to develop the relationship between P and E.

Conclusion

In conclusion the relationship between economics and politics is a crucial one, but it is not possible to identify a defined relationship between these two variables in Sri Lanka.  Governments appear to be engaging in the practice of skipping the technical and going straight to the political. This argument was developed by analysing three economic indicators-inflation, unemployment and international debt. A counterargument to the main argument was considered, followed by a reply which indicates that the counterargument does not hold or at least does not dilute the main argument in this article.  Looking ahead  Governments  must  better understand and develop the relationship between economics and politics to ensure that Sri Lanka experiences sensible, effective economic policies which are grounded in effective political choices.

About the author:

The One Text Initiative (OTI) research unit  is an independent, non-partisan research institute. The website of OTI can be located at onetext.org and the team leader for this project can be contacted at [email protected]

By The OTI Research Unit