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The Marga Institute, since its inception in 1972, has been researching and publishing regularly on issues relating to Sri Lanka’s socio-economic development.This monograph on Good Governance-the Research Questions, prepared by Dr.Lloyd Fernando, a former chairman and currently a member of the Board of Governors, is the latest initiative, available for widespread dissemination in all three languages.

Asoka Gunewardena,Chairman

October 25, 2018

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CONTENTS

Foreword iIntroduction 1Good Governance- the Concept 2Development Models 3Greek paradox 6Short-term program 7Long Term Development Plan 8The Nine Cs 9The Development Paradigm 11Economic Growth and Development 12Good Governance Principles 14Vision ,Equity 16Transparency, Accountability 18Predictability 20Productivity 21National Development Perspective 22Savings-Investment 22Macro-economics 23Infrastructure, Commodities and Services 24Cross-cutting Issues 25Education and Health 26The way forward 27The Cabinet Size and Structure 28Cabinet Sub-Committees 30National Economic Advisory Council 30Committee of Secretaries 31Administrative Reforms 31Conclusions 33

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Foreword

The main focus in Dr. Lloyd Fernando’s monograph is the practice of good governance. He has provided us with a lucid exposition of the essential components of good governance and designed a framework of analysis that helps us to identify all these components and apply them in our evaluation of Sri Lanka’s ongoing policies and performance.

To achieve this he has organized his monograph in a well-defined sequence. He begins by placing the issues of good governance in the broader context of development and the competing models of development – the neo-liberal, the socialist and the social market economy models. He comments on the lack of definition and clarity in the vision of development underlying current policies in Sri Lanka . He then takes us through the managerial fundamentals of planning which he has called the 9 Cs ; next he goes to the basic seven principles of good governance and from there on to what he terms the national perspective and agenda of development . The analysis is accompanied by diagrams which depict the different components and their interdependence in a visual format which can be readily grasped. The last diagram is purportedly the paradigm of development that includes the two other diagrams and presents the holistic framework containing all the fundamentals of good governance.

Dr Fernando rightly argues that good governance must first of all have the institutional foundation of accountability in a democratic system and proceeds to elaborate on these elements This foundation will then uphold the seven principles of good governance. These in turn will guide the practice of good governance and the multi- dimensional development agenda.

In his conclusion Dr. Fernando poses several questions the answers to which require further inquiry and research. In his questions he points to a number of critical impediments to development which include deficiencies in key institutions like the judicature, the Cabinet, the institutional framework for planning and decision making at the apex and the relationship between the political executive and the high level bureaucracy .

All in all, Dr Fernando’s monograph is a very valuable contribution to the ongoing discourse on good governance in Sri Lanka and provides an excellent opportunity for both policy makers and scholars to address the questions and issues that he has raised.

Dr.Godfrey Gunatilleke,Chairman Emeritus, Marga Institute

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Good Governance- The Research Questions.

Lloyd Fernando

“for forms of government let fools contest; whatever is best administered is best.” Alexander Pope

The country is today faced with an impasse not less challenging than what it faced in 1976. Then, our external reserves had dropped to rock bottom level. We had lost our import capacity, production of essential commodities could not meet growing consumer demand and there were widespread shortages of goods, which threatened social and political stability. The 1977 election results were a blessing in disguise. Otherwise, there would have been street riots leading to more authoritarian outcomes.

Today there are no shortages but basic consumer goods prices are up, and are expected to go up further. There is a slow growth of production of essential goods. The exchange rate is moving up. The authorities fear that any interference to throttle it could be counterproductive. The reason is that, apart from the danger of releasing the low level of external reserves to counteract demand, an overvalued domestic currency itself would continue to encourage imports while discouraging exports. In addition, international oil prices are likely to increase further and global interest rates are likely to follow the US example. All these factors will exacerbate and put further pressure on the cost of living.

The answer to rising domestic prices is not price controls. We have enough lessons from our own experience in this regard. Price controls, unless they are used to mitigate temporary fluctuations, become counterproductive promoting black-marketing and discouraging efficient production. The ultimate answer as confirmed by international experience lies in rapid economic growth and equitable distribution of incomes.

Economic growth, as we will discuss later, will depend on a number of factors. Most important among them is savings and productivity of investment. In a situation where economic growth is modest there are serious constraints to

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mobilizing domestic savings. In the past, we had the benefit of foreign aid to fill the gaps. We could borrow today in the financial markets. But there are limits, since in the ultimate analysis we have to generate enough surplus income to pay them back. This is why there is an unprecedented reliance on foreign investment, which, however, must be meaningful and the country must be competitive to attract the desired levels.

Ad hoc piecemeal interventions, usually based on foreign advice, will not only prove futile but also dangerous in that they could exacerbate structural problems. We need a short term and a long term plan which are consistent and complementary. The short term plan is meant to cushion the people against rising prices. We need a long term plan to address structural problems of the economy to stimulate economic growth, provide employment opportunities and enhance family incomes.

The objective of this paper is not to outline the content of these plans but how to determine and implement them; that is, to provide an account of the legal and institutional framework as well as the technical and managerial capacity needed to do so. In essence, it is about the content of good governance- effective, efficient and equitable management of economic and social progress.

Good Governance-the Concept

It is now well accepted that the concept of governance goes beyond the definition of government. Governance is the way in which stakeholders in society interact with each other in pursuit of common goals. Good governance is a system through which societal needs are achieved effectively and efficiently.

In a modern democratic society (subject to definition) this happens through representative bodies which interact with each other to identify issues, formulate policies, take decisions and implement them. Good governance, therefore, is a system of stakeholder interaction that leads to the achievement of common development goals. The platform for good governance is provided by a country’s legal system (rules, regulations and procedures), institutional framework and human resource capacity. The purpose of this note is to identify the current status of this platform in Sri Lanka by engaging in a collective thought process the vast

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pool of subject specialists, researchers, academics as well as practitioners drawn from the government, private sector and civil society.

Since the proposed discourse will not be confined to professional economists, every attempt will be made to avoid unfamiliar economic jargon. There is, however, a need to invoke basic economic theory (positive economics) which operates independent of the various ideological models and approaches. It is useful, however, to know the basic models of development referred to by economists and political scientists and learn from their experiences, even though it is the writer’s position that no single model fits Sri Lanka’s needs.

Development models

An economic model is a collection of development policies and approaches guided by a particular ideological stance. Among a plethora of such models, what stands out in fundamental terms, are the following.

a. The Neo-liberal Modelb. The Socialist Modelc. The Social Market Economy Model

a. The Neo-liberal model is based on the belief that the market mechanism, if unbridled, could deliver development results more efficiently. It is, in the ultimate analysis, a growth model based on private enterprise with minimum government intervention. It eschews, in general, systems of price control and subsidies.

The best known examples of neo-liberal policies were provided by the Regan and Thatcher Administrations in the USA and UK, through which they were able to resuscitate their dormant economies. This is until such time as social discontent started emerging, principally due to the removal of consumer protective measures. No country today adopts neo-liberal policies as a compact whole, even though one could discern elements of it in the approach to managing fiscal, monetary and balance of payment policies.

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The IMF, in particular, is accused of promoting neo-liberalism using its financial facilities. IMF policies are directed mainly towards achieving price stability through fiscal consolidation and interest rate policies. Economic growth is expected to be the outcome of efficient private sector operations guided by trade and exchange rate liberalization. The policy packages, supported by short term lending programmes are apparently aimed at releasing controls which inhibit growth. Yet, without the platform of long term structural reforms these policies tend to fall by the wayside creating social and political tension.

For instance, the IMFs insistence on fiscal consolidation, that is reduced budget deficits, though makes good economic sense, in most instances, have ended up creating social and political problems, mainly due to the way in which governments have tried to achieve this objective in an easy way. In the attempt to reduce budget deficits, governments have resorted to indiscriminate cutting of subsidies, including those which are aimed at promoting health and education.

b. The Socialist Model is fundamentally based on state ownership, at least, of the ‘commanding heights of the economy’. Economic and social infrastructures, major industries, market channels, in particular export/import trade, the banking sector and even agricultural farms (such as the collective farms in the Soviet Union) are owned and controlled by the state. This system is reinforced by a network of national planning, with a central planning authority determining regional as well as enterprise plans.

After the collapse of the Soviet economy and transformation of the Chinese economy, only Cuba and North Korea appear to be following the old model. While many theories of political conspiracy have been attributed to the collapse of this model, the most important and the fundamental reason could be found in the weaknesses of the attempts to substitute market based distribution mechanisms with ‘dirigiste’ centrally planned allocation of productive resources and distribution of outputs.

Public enterprises in all the socialist countries, unfortunately, became havens of bureaucratic inefficiency and corrupt practices. What is indicated

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therefore is not the abandonment of the ideals of socialism but a quest for a new form of economic management which combines market efficiency with social justice.

c. The Social market economy model, often referred to as the German model, which the ‘Yahapalana-unity’ government is supposed to be following, is a hybrid system of development management which attempts to combine the best elements of a market economy with social welfare. It is based on private enterprise without ruling out, where necessary, public investment, including public enterprise, based on the criteria of social efficiency. Market regulation is deployed principally to maintain competitive conditions and free trade.

There is, however, neither free trade nor protectionism but a combination of policies guided principally by the need to maintain efficiency of resource allocation and higher productivity. Though the German model did not deploy dirigiste national planning that is characteristic of the socialist model, it was able to guide economic policies through a system that displayed the best practices of indicative planning.

While the ‘Yahapalana-unity’ government is touting the social market economy model, what it has failed to acknowledge is that it lacks the basic prerequisites. The social market economy model is dependent on an effective governance structure led by a visionary government which is supported by a strong administrative system and a collaborative private sector and civil society.

This is where Alexander Pope’s admonition quoted at the outset becomes relevant. What matters is not the form (model) of government but whether it is effective in delivering the results desired by society.

All the above mentioned models contain both positive and negative elements. The message, therefore, is that without trying to copy any foreign crafted models, while learning from their experiences, Sri Lanka

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should try to develop its own approach to addressing, concretely the development challenges facing the country.

What follows, therefore, is an attempt to identify Sri Lanka’s contemporary development challenges, the socio-political and economic constraints that have to be overcome and the role of government in removing them.

The Greek Paradox

While Sri Lanka tries to develop its own strategy or model of development one clear lesson it cannot afford to ignore from the experience of other countries is the need to follow objective economic laws. One country that tried to defy this principle recently due to socio-political pressure and paid a heavy price for it is Greece. It was ultimately forced to be realistic, since even its friends who were willing to bail it out demanded realistic economic management so that their assistance would ultimately bear fruit with long term stability and dynamism.

Greece is fortunate to have a Godfather that was quite ready and willing to help it. This is the European Union, to which it belongs. However, no significant help would come from it unless Greece showed capacity to use the support effectively and efficiently by putting its house in order. In the first instance, Greece could not ignore the reasons for its huge persistent budget deficits and increasing balance of payment gap, which were maintained through generous international loans. The lenders were now knocking on their doors. The EU asked Greece to take corrective measures. The IMF, which was prompted by the EU was prepared to offer financial assistance but with conditions.

The Greek Government had no option but to take measures to consolidate the Budget by increasing taxes and cutting subsidies, pensions and public service staff. When these measures were first mooted, left-wing parties, led by Alexis Tsipras, leader of Syriza Party and formerly head of the Communist Youth League, protested strongly. On the crest of the popularity gained Tsipras was elected Prime Minister. Given the responsibility to deal with the situation he again consulted the people through a referendum in which 62 percent rejected the rescue package conditions. Meanwhile Tsipras lost the majority in Parliament,

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went into elections and won again, this time with a more solid vote. Yet, in the face of an exacerbating situation where large numbers of people were laid off from their jobs and prices escalated further, Tsipras had to finally buckle down to reality and accept most of the reforms suggested by the rescuers.

The harsh lesson to be learnt is that you cannot defy economic laws all the time however progressive you are and wish to protect the people against adjustment costs. The previous Greek government had done the damage with profligate borrowing which was no longer sustainable.

Short term program

Sri Lanka’s challenge in the short run is to find ways of cushioning the effect of increasing prices. The solution lies in tapping unutilized production capacity, particularly in the agricultural sector. There is also the need to help the destitute and vulnerable sections of the population by rationalizing the subsidy schemes such as the Samurdhi program. Better government services could help micro and small industries, as well as better water supply and marketing facilities.

The Government has recognized the importance of raising agricultural productivity, as reflected in the repeated pronouncement made by the President, Prime Minister as well as some Ministers. Schemes to boost agricultural production will not only help stabilize, even reduce, in some instances, food prices but also promote exports, if properly managed. They could help increase rural incomes which could cascade to other sectors.

Agricultural scientists have estimated that post harvest losses amount to about 30-35 percent of production. A 10 percent reduction of such losses could be as good as an equivalent increase in production. This is not a secret where the policy makers are concerned. Yet no consistent measures have been introduced to deal with the associated problems. Consistent policies can be put into effect only through an integrated plan and serious measures to implement them.

An integrated plan for agriculture and rural development would, apart from dealing with matters concerning land, labour, water supply, technology, capital, markets, roads, transport facilities, also address issues relating to government administrative services that are of concern to the rural communities, including the management of health and education services. This is why integrated planning

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and implementation should bring together all the actors in the field including private sector representatives. What is urgently needed is the establishment of a competent coordinating body, headed by an official who could have the ear of the President and the Prime Minister and capable of motivating and engaging all those who are entrusted with specific tasks.

A long term development plan

Sri Lanka needs a long term development plan and a sustained effort to implement it since most of the country’s development problems emanate from structural problems which need time to resolve. The external debt problem, for instance, could be traced to such weaknesses. We keep on borrowing because we do not produce enough. Production, however, has to be for a market- domestic or foreign. Since the domestic market is small, both in terms of population size and purchasing power, we have to also produce for export. However, Sri Lanka’s export incomes as a percentage of GDP have been declining. From 30 percent of GDP in the year 2000 it has dropped to 13 percent in 2015. Meanwhile import expenditure has been steadily increasing.

There is no surprise therefore why Sri Lanka has been incurring balance of payment gaps. Workers’ remittances from abroad have helped to mitigate the problem to some extent. So have earnings from tourism. However, earnings from tourism will eventually depend on our capacity to produce goods and services locally. We cannot depend forever on worker remittances, which show signs of declining.

Thus, Sri Lanka’s structure of production must change in line with expanding domestic and foreign demand. This needs new technology, new skills and additional capital which can be fulfilled only through a long term economic strategy, planning and effective implementation.

Unfortunately, Sri Lanka has earned a reputation for producing lofty plans which are mostly government propaganda documents, with low credibility. Even those that are seriously crafted lack technical quality and implementation capability. This has helped those advocating neo-liberal approaches to discourage the

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Government from giving sufficient attention to developing capacity for planning, let alone writing a plan.

The Nine Cs

The conditions necessary for successful planning and implementation will become obvious when we consider the analytical framework embedded in the diagrams that appear below. To start with, it would be useful to keep in mind some essential conditions for successful planning which are presented in the diagram below for both analytical convenience and memory, as the 9 Cs: conceptualization, cohesion, consultation, coordination, collaboration, commitment, capacity, correction and continuation.

A plan must be based on a clear and realistic conceptualization of the expected outcomes of policies and their implementation. Outcomes must be distinguished from outputs. The government could build thousand houses (outputs) for distribution but they are of little value and could be a waste of resources if they are inhabitable. Outcomes like outputs must be, as far as possible, quantifiable and have a clearly defined time horizon for achievement. They should, however, not be based on wishful thinking but hard assessment of existing strengths, opportunities for change, weaknesses to be overcome, which include external threats.

The principle of cohesion takes into account the symbiotic linkages that exist among development indicators and forms the basis for stakeholder commitments through a process of consultation, coordination and collaboration.

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Very often the best efforts of planning become counterproductive because of lack of commitment by authorities, particularly by ministers, to adhere to collective decisions. The result is that plans become obsolete before the ink runs dry.

Capacity refers to overall ability, in particular of the bureaucracy, to plan and execute. There is a discernible deficiency in this regard today due to neglect of training needs, as well as motivation for performance.

No plan, however well designed, could remain a blueprint forever since socio-economic situations change. The planners must be prepared to take such changes into account and make the appropriate changes.

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Continuation of planning and implementation efforts become an invariable problem when there is regime change and even reshuffles of cabinets. There could be similar problems when there are unplanned bureaucratic reshuffles.

The Development Paradigm

Sri Lanka’s development process is heavily influenced by global conditions which could provide opportunities as well as threats. On the trade front we have to decide what we could sell, where and how? What is the role of FDI in this regard? What is the role of international economic organizations and how do they affect us? What is the role of trade and economic cooperation pacts? What is the role of the controversial ETCA with India? What are the implications of the intended pacts with China, Singapore and several other countries? In short, these pacts cannot be considered in isolation of the country’s development strategies and plans.

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Economic growth and development

There is now universal acceptance among economists that economic growth is only “a necessary condition but not a sufficient condition of development”. It must be consonant with the characteristics of development. There is a range of symbiotic relationships between economic growth and the other characteristics of development, while there are similar links among them, an example being the relationship between education and health and vice versa. Planning must take into account all such linkages.

The partnership

The private sector, which is often referred to as the engine of growth has to play the key role in development as it covers more than 80 percent of Sri Lanka’s production of goods and services. However, the private sector has to operate within the economic, social, administrative and political environment created by the government. Planners must take this condition into account and provide salutary conditions for the private sector to make its contribution to development.

When the government taxes the private sector, it preempts resources that could be invested in development activities. Hence, such resource transfer must be justified on the basis that their use by the government would yield more productive outcomes such as effective and efficient infrastructure facilities, education and health facilities, maintenance of law and order, as well as social welfare benefits, from which the private sector too could benefit. Even the spending on social welfare, if effective, could benefit the private sector by reinforcing political stability.

Almost all the developed countries scoop out a higher level of resources from the private sector as a percentage of GDP to finance government operations than Sri Lanka. The average for OECD countries is 34.8 percent of GDP, compared to Sri Lanka’s 11.4. What is further problematic is that about 80 percent of government revenue comes from indirect taxes, paid by all. It indicates that the government will have to introduce more effective and efficient methods of collecting revenue.

Salutary conditions for private sector performance are made available by government not only through maintenance of law and order and provision of

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infrastructure facilities but also by reducing bureaucratic red tape. It is to highlight these conditions and to help investors to assess prospects for business operations that the World Bank does an annual survey tracking countries by an ‘Ease of Doing Business’ index. According to the latest Survey, Sri Lanka ranks 111, behind some South Asian Countries such as Bhutan (75), India (100) and Nepal (105). ‘Ease of Doing Business’ is a fundamental issue of good governance.

Good governance principles as technical imperatives

The government, private sector and civil society relationships operate within the governance structure provided by the government. The principles of good governance should be viewed not only from the point of view of their ethical values but also, more importantly, from their contribution to development. This is why the principles of good governance are considered ‘technical imperatives of development’.

A collective vision is a primary requirement of effective partnership. Equity- equality of opportunity- transparency and accountability reinforces this process. The principle of predictability (of policies and their implementation) is embedded in the Rule of Law concept and is applicable to all except under specified conditions. This is also extremely important in the quest for both local and foreign capital. No investor would like to risk his capital in a ‘change of goal post’ situation. Thus good governance becomes a prerequisite for economic growth and shared prosperity.

The seven principles of good governance

The seven principles – participation, vision, equity, transparency, accountability, predictability and productivity operate like conduits through which the three actors – government, private sector and civil society interact with each other to produce development results. As mentioned earlier they take the form of technical imperatives of development which go beyond the ethical and moral objectives of good governance associated with the popular anti corruption function.

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Participation

Participation is the foundation of good governance. It could take many shapes and forms. What emerged at a UNDP sponsored forum on partnership systems, held a few years ago is the following taxonomy of 5 partnership types:

1) Consultative partnership;

2) Coordinative partnership;

3) Complementary partnership (parallel initiatives with a common vision);

4) Collaborative partnership and

5) Strategic partnership.

These categories could be refined based on different country experiences. They could be further refined by looking at the following typologies:

Internal partnerships Grass roots partnerships Macro level partnerships

The need for strong internal partnerships within the public service is not given sufficient treatment in the literature, perhaps due to the assumption that this must invariably happen. By internal partnerships within the public service we refer to inter-ministerial, inter-departmental and inter-institutional participation in activities classified above under the five categories.. The traditional method used is the committee system- meetings to share information, take decisions, avoid duplication of effort and engage in coordinated activity through a sharing of responsibility.

Even though meetings are useful and are often an imperative for collective decision making and action, however, could become a waste of time and effort if unplanned. They may even cause confusion. It is extremely important that they are well planned, with the objectives well defined, the agenda results oriented and each participant’s role clearly identified. Good leadership is required to steer a meeting to achieve the desired outcome.

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Many of the objectives of time consuming meetings today for which government officers often travel long distances could be achieved through e- government processes, which include e mail and video conferencing facilities. This is a question which needs further study

Vision

A vision of development, with a long, medium and short term perspective, that is collectively developed, is of paramount importance not only to give a sense of direction for policy but also hope to the people. Most importantly, it could indicate business opportunities for both local and foreign investors. To be credible, it must be consistent with the four conditions that are identified under the well known SWOT analysis (strengths, weaknesses, opportunities and threats).

We have had many vision statements announced by various governments but the question is their consistency with the real situation and future prospects. Such consistency could be achieved only through the formulation and committed implementation of national plans. Unfortunately, most of these vision statements have been confined to mere expressions of good intentions.

Political parties aspiring to office too should articulate their vision in concrete terms, sans the usual rhetoric that is often confined to mere criticism of the incumbent government policies.

Equity

Equity is not equality. It is equal access to opportunities. It is the opposite of discrimination and deprivation perpetrated by one set of people against another, because they are different due to race, religion, caste, gender or social status. Equity poses both a moral question and an issue concerning development. Discrimination prevents people not only from enjoying the fruits of development but also from contributing to development through participation.

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The “ethnic problem” is very much a result of the different perceptions of equity which divide, principally the two main communities in Sri Lanka. This is not a problem that could be resolved by arguing which side is right and which side is wrong. It is a problem that could be resolved only by convincing all sides to the conflict that there is equity, by addressing practical issues that give rise to the different perceptions. However, such issues cannot be addressed by good rules and regulations alone. Implementation plays a big role. There are numerous examples of procedural delays frustrating good intentions. This must be kept in mind by the public service when assisting the political leadership, in finding a solution to the so called ethnic problem.

The legal position regarding equity is contained in Article 12 of the Constitution which prohibits discrimination. However, in practice it is difficult to be subjected to judicial scrutiny. Discrimination exists in a very subtle form, particularly in the dispensation of administrative facilities. This occurs often in the form of privileges confined to certain segments of society, usually the rich and socially and politically powerful.

Part of the problem is created by the ignorance of opportunities. There is also the problem of deliberate discrimination because the poor are incapable of “returning a favour.”The poor appearing in the portals of bureaucratic power, are kept waiting for hours or even days, and are often asked to return several times to receive a simple dispensation which is theirs as a legal and constitutional right.

With regard to bureaucratic delays, it has been suggested that government institutions adopt ‘front office management’ methods based on management information systems, whereby all queries and requests from the general public are recorded and referred to the appropriate desk for attention.

The feasibility of establishing front office management systems could be an important question for research.

The broader questions of equity could form a special area of investigation. Are the existing legal provisions adequate to deal with questions of equity? What is the remedy against bureaucratic apathy and discrimination?

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Transparency

Transparency is a key element of the link that binds all stakeholders. It provides the necessary information for understanding each other’s role and forms the basis for accountability. In particular, the business community and the citizenry must be aware of the laws, rules, regulations and institutional procedures that must be adhered to. However, transparency mechanisms must be accessible and visible to all stakeholders.

Ensuring transparency entails recognizing and respecting the right of citizens to information. The recently enacted Right to Information Act attempts to deal with this requirement. A fundamental question, however, that needs to be addressed is whether the legal provisions are adequate and whether the institutions that are required to implement them are sufficiently geared to do so.

Accountability

The OECD Code of Ethics refers to accountability mechanisms, thus establishing a connection between the two concepts. There is also a link running through accountability, transparency, predictability and participation. What is accountability? The OECD Code gives an indication. It says that public servants should be accountable for their actions to their superiors and the public. For what? For compliance with rules and ethical principles, as well as for results that should be achieved. The latter emphasizes the importance of the outcomes of actions taken by public servants.

The principal aim of accountability is to prevent corruption - the abuse of public office for personal gain. The rules and regulations are made in order to make public officers follow ethical standards and account for their actions. It applies particularly to the handling of financial transactions such as procurement and sale of government assets.

There is enough evidence quantified in surveys conducted in particular by Transparency International and World Bank that corruption has a corrosive effect on socio-economic development. There is on the other hand, a commonly held

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view that ‘corruption merely greases the wheels of commerce ‘and that without it there would be no transactions and no growth.

This view is held on the basis of observation of economic growth in some East Asian Countries (excluding Singapore) where corruption and growth appeared to be on a parallel course. The point, however, is debatable for nobody has calculated how much more better off these countries would have been in terms of economic, social and indeed political indices, if there was less corruption. Further, it would be both interesting and useful to see the link between corruption and repression, particularly in the form of intimidation.

Corruption has many corrosive effects on development. Firstly, it discourages investment, for in the presence of corruption, businessmen are often made aware, that an up-front bribe is required before an enterprise could be started. This is an additional financial burden to them. Corruption also misallocates resources, particularly foreign aid and foreign private investment. Large scale infrastructure projects provide better opportunities for corruption than educational or health projects. Even where educational and health projects are concerned, an increase of construction activity enhances the prospect of kickbacks.

It has been generally observed that for accountability to have an impact on corruption, the following elements must be effectively in place:

a) Well defined rules, norms and procedures to be followed by public servants;

b) Institutional arrangements for timely reporting, scrutiny and apportioning of responsibility; and

c) Deterrent penalties for violations.

Accountability in respect of the use of public funds (finances) is clearly laid down in the form of Parliamentary allocations through the Annual Budget and the system of reporting through the Treasury to the Public Accounts Committee. Ministries and departments are not permitted to exceed the expenditure limits set out in the Budget, neither are they allowed to switch expenditures. However, governments often have recourse to “supplementary estimates”, which vitiate the principle of public accountability; even though one might argue that it is

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proper practice in terms of the law. The problem is that supplementary estimates are not fully debated and rushed through Parliamentary proceedings, often in depleted sittings.

What has been described so far is accountability to ensure that there is no corruption. Yet, in the new ‘public service paradigm’ it is important that government systems are not only corruption free but also efficient and effective. The traditional system is biased towards ‘playing safe’. The traditional system lays emphasis on behavior patterns, processes and inputs as against the outcomes of actions by public servants. Accordingly, one may follow procedures and rules diligently but fail to bring about the desired impact.

Thus, there is the need for a system of accountability based on the best principles of ‘program and project evaluation’ which are focused on desired results outcome, rather than on the mere compliance with expenditure guidelines. Such a system of evaluation starts at the project preparation stage and continues through the implementation process, ending finally with post-evaluation and feedback.

Predictability

Predictability assumes that laws, rules, procedures and policy decisions, once adopted are followed diligently. To change them in midstream is like shifting the goal post when the match is in progress, to influence the result. Predictability is based on the cardinal principle of the Rule of Law, which means that decisions made by government are not arbitrary, instead are founded on well defined rights and duties. It also means that rules are applied without exceptions. Where rules appear to be inappropriate due to changing circumstances, their annulment or amendment must be provided ex-ante, giving sufficient time for stakeholders to adjust their plans.

Think of the award of a government tender, which is later quashed by the courts, because proper procedures have not been followed. Far worse are examples where tenders have been received, processed and decisions taken, only to discover that the terms of reference are not consonant with the objectives of the project, resulting in fresh tenders being called. Who compensates the bidding firms for the expenses incurred in producing the original bids?

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It must be appreciated in this regard, that a predictable regulatory framework enables firms to calculate the return on their investment. On the other hand, uncertainty regarding the application of regulations raises the cost of capital by increasing the risk of investment. Investors need to be assured that bidding processes are fair and free from undue political influence, bureaucratic discretion or serious negligence. It means that results of public bidding must be honoured and implemented.

Rule of Law therefore becomes a crucial condition for the promotion of private investment, both local and foreign. It is, therefore, worth investing in seeking answers to the question of ensuring rule of law in the system of governance.

Productivity

Productivity is ultimately the most important factor of development, particularly in the case of a resource starved economy. It is the result of both effective use of resources and their efficient use. The latter is of little use when the investment is in an area which has little linkage effect to the rest of the economy. Nikita Sergevich Khrushchev gave an apt illustration of the two terms when he said that “politicians are very good at building bridges where there are no rivers.”

Thus, what is important is to choose the right areas for investment based on resource availability and socio-economic priorities. This could be done only by assessing all the resources that are available: land, labour, capital, technology, as well as market characteristics. Given the symbiotic relations that exist among all sectors of the economy, the government of a developing country, where the market institutions, particularly capital markets are not sufficiently developed and responsive, must have a strong institutional framework to identify needs, assess resources and intervene through policies, programs, projects and capacity building.

These issues will be re-visited later, in Section II, when we consider the role of the Cabinet of Ministers, the National Economic Council and the Administrative Service.

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National development perspective

The institutional foundations of development planning and their composition are illustrated in the ‘Greek Temple’ which appears below. The pillars of the temple represent the sectors (broadly defined) and their connection to the ultimate goal of development. The symbiotic links that bind the sectors are not adequately reflected, though their identification is very important for integrated development.

Savings-investment

The savings/investment pillar draws attention to the crucial need to generate and mobilize capital for investment. Sri Lanka invested, on the average, only about 30 percent of its GDP during the last few years, to generate an annual average growth rate of 5 percent of GDP. This reflected a capital/ output ratio of around 6. On this basis, if the Prime Minister’s desire of reaching a 7 percent growth target is to be reached, in order to generate one million jobs, as he says, we will have to invest about 42 percent of GDP- a 12 percent jump.

The capital/output ratio, broadly speaking, reflects the productivity of capital. If through increased productivity measures we could reduce the ratio to 5, which is quite unlikely given the investment structure that is highly concentrated on infrastructure development, we would still need 35 percent of GDP to reach the 7 percent target.

How do we fill the gap? Obviously not by generating domestic savings (at least in the next decade) but by inviting FDI (foreign direct investment). But FDI flows which reached an unprecedented level of 1.9 per cent of GDP, mainly due to Chinese investment in Hambantota, do not show signs of reaching the 5 percent gap target in the near future.

The question, therefore, is what should be done to attract FDI flows to Sri Lanka, in the context of a fiercely competitive global environment. International experience shows that a clear cut long term development vision, to which the government is committed, would help attract FDI as indicated in the case of Malaysia and South Korea. ‘Ease of doing business’ also becomes a significant attraction. Tax holidays on which Sri Lanka governments relied heavily in the last four decades may be unnecessary and even costly. Most important, however, is

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the competitive advantages of production which the country could offer. In Sri Lanka’s case the most important factor could be the quality of labour, which, however, will have to be upgraded to meet international requirements through a consolidated human resource development plan.

Unfortunately, all governments for the last three decades, at least, have been aware of it and have been waxing rhetoric without a purposeful effort to bring this crucial requirement to fruition.

In promoting FDI, the country must be also aware of the pitfalls of indiscriminate inflows. What is the type of FDI we should entertain? Should they be allowed to submerge local industries? Should they be allowed to enter the field of retail trade or any other area that provides employment opportunities to local people? These are questions that need continuous, in depth, analysis.

Macro-economics

This segment basically covers the fiscal and monetary sectors, as well as balance of payment transactions. Budgetary management is severely impaired by high debt servicing requirements. There is also a large public service of around 1.4 million persons to be sustained from budgetary resources. Two thirds of current expenditure in the Budget is devoted to financing interest payments and salary payments. On the other hand, there is a sharp decline in revenue. In 1978, tax revenue amounted to 24 percent of GDP. This has gradually declined to 13 percent of GDP by 2016.

The Prime Minster has observed that the tax structure is lopsided putting a heavier burden on the general consumer (the poor included) through indirect taxes. He wanted the indirect taxes which amounted to 80 percent of tax revenue to be brought down gradually to about 60 percent, starting with the 2016 Budget. But a few weeks after the Prime Minister’s statement the 2016 Budget raised the indirect taxes to about 87 percent. The pattern is the same in the case of the 2017 Budget. On the other hand direct tax revenue has been falling, as a result of tax exemptions, tax avoidance and weak tax administration.

In the case of the balance of payments the government has to confront the problems of a very low export earnings base and increasing repatriation of capital

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and interest payments (debt service) which would continue to afflict the country in the next few years.

Infrastructure

Infrastructure covering roads and highways, ports and airports as well as power and energy sub- sectors has been the main areas of foreign funding, mostly through loans. Infrastructure development is extremely important for future economic growth. Yet, to be productive, it must be cost effective and developed within the framework of linkages with other sectors of the economy. This is why multi-sectoral linkage based development planning becomes a crucial factor of ensuring meaningful economic growth. The instrument that had proved to be useful in this regard was the rolling five year public investment programme (PIP), which was quite effective also as an instrument of fiscal discipline. But that was almost two decades ago.

Commodities and services

This pillar covers the production structure which has undergone significant changes in the last decade, where the services sector has emerged as the dominant sector of the economy. This is a characteristic of the growth process of all developed countries which have moved from agriculture via the manufacturing sector to the services sector. In those economies, both agriculture and industry continued to grow though at a slower pace than the services.

In Sri Lanka, it is observed the change has been due to declining agricultural output or extremely slow growth. The contribution of the agricultural sector has declined in 2016 to 7.9 percent of GDP from about 12.3 percent a decade ago. The task of policy makers and planners is to tap the full potential of the agricultural sector on which a large segment of the population relies for its existence. This is not to neglect the potential of manufacturing industries which are, however, heavily dependent on external factors.

An integrated plan for agriculture development will be helpful to explore not only the potential for linkage effects with other sectors such as manufacturing,

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transport, infrastructure etc, but also the opportunities to widen the export base through the deployment of modern technology and management practices.

Cross-cutting issues

These refer basically to concerns regarding poverty, gender and environment issues, which are inter-sectoral in their coverage. A new emerging concern is the growing aged-population.

The point here is that these concerns must be incorporated into sectoral and project planning, while being adequately coordinated through the national level plans. Ad hoc, piecemeal interventions could be often costly and counterproductive.

There are a large number of ambitious projects to deal with poverty, gender and environment issues. Many of them have been launched without proper ex-ante evaluation and with little concern for efficient implementation. One of the fundamental problems of implementation is the lack of inter-ministerial coordination.

Education and Health

These two are areas which are covered under integrated human resource development plans. Human resource development is both a means and an end in development policy. In a country such as Sri Lanka, where natural resources such as coal, gas, crude oil as well as other mineral resources are almost non-existent, at least on the basis of current knowledge, the human resource factor becomes the crucial element of its competitive advantage. Sri Lanka has comparatively done well in the fields of education and health, as reflected in the international calculations of the human development index, yet to compete in the global arena, apart from enjoying the benefits of better health and education, there must be a concerted, consistent approach by the government.

There has been no lack of wisdom regarding the content and direction of health and education in Sri Lanka. Knowledge of what should be done has been greatly

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enhanced by the numerous studies that have been carried out, often with international expertise. Unfortunately, in spite of the advice given, all efforts so far have been piecemeal, ad hoc and un-coordinated with extremely poor implementation. There is a Human Resource Development Council established by a Prime Ministerial directive. Unfortunately, it has failed so far to map out an integrated plan to be implemented through coordination with the relevant stakeholders. A particular shortcoming is the absence of a coherent policy framework to promote private sector participation in delivering meaningful education and health programs.

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The way forward

The ‘Greek Temple’ of development shown above is built on the solid foundation of good governance principles. As mentioned earlier, these principles go beyond the oft repeated good intentions and ethical considerations to performing the functions of technical imperatives. The provisions of the 19th Amendment, as well as the newly enacted Right to Information Act provide salutary support to the adoption of these principles. Yet, there are serious institutional deficiencies that must be urgently addressed if the country is to be put on a meaningful path of sustainable development.

The Cabinet- size and structure

The first major constraining factor is the size and composition of the Cabinet of Ministers. Sectoral functions have been splintered to accommodate political requirements. A good example of this negative approach, which almost became an international joke, was the political expediency that led to allocating highways and higher education under the purview of one minister.

Cabinet size and structure is very much linked to the role of government and style of governance, particularly the scope of functions to which ministers must confine themselves. They should be concerned with policy making and implementation and not arrogate to themselves administrative functions which should be the responsibility of ministry secretaries and their subordinate staff.

Too large a cabinet certainly adds to costs and also creates confusion. It makes coordination ineffective. Fragmentation and duplication of functions among ministries exacerbate the situation. According to the 19th Amendment to the Constitution the number should not exceed 30 ministers unless it is a national government, which though is not clearly defined.

Ideally, the cabinet structure must follow the principle of inter-sectoral and intra-sectoral coordination. For instance, agriculture (crops), lands and irrigation policies and functions must be coordinated by one minister. The plantation sector can stand on its own, in view of its unique system of management and skills requirement. In most countries industry and trade are together, in view of their linkages.

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Time and space do not permit a detailed discussion of portfolio distribution. The following is suggested as a feasible arrangement, based on the requirements for effective national planning and implementation..

1. Administrative Reforms 16. Livestock Development2. Agriculture, Lands, Irrigation and Mahaweli 17. Plantation Industries Development3. Cultural Affairs, Gender Issues and Mass 18. Ports and Shipping Media.4. Defence 19. Posts and Telecommunication5. Development Monitoring and Evaluation 20. Poverty Alleviation and Social Welfare6. Education (primary and secondary) 21. Power and Energy7. Environment, Forestry and Disaster 22. Public Administration, Home Affairs, Management Provincial councils and Local Government8. Finance and Planning 23. Rehabilitation and Reconstruction9. Fisheries and coast conservation 24. Religious Affairs and Buddha Sasana10. Foreign Affairs 25. Rural Industry and Small Enterprise 11. Health, Nutrition and Children’s affairs Development12. Housing, Construction and Urban 26. Science, Technology and HRD Planning

Development 27. Trade, Industry and Consumer Affairs13. Interior 28. Transport and Highways14. Justice and Legal Reforms 29. Tourism and Aviation15. Labour, Technical Education and Vocational 30. Youth Affairs and Sports. Training

It would be noticed that there are two new ministries- the Ministry of Administrative Reforms and the Ministry of Development Monitoring and Evaluation. The need for a separate Ministry in charge of administrative reforms will be clear when we discuss the need for a paradigm shift in public administration. An equally important need, which has been almost totally neglected so far, is the establishment of an effective system of project and program monitoring and evaluation. Some attempts made in the past to introduce effective systems failed mainly due to lack of patronage from the head of government and the cabinet collective to enforce the necessary discipline and compliance at the implementing agencies which came under different ministers.

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Cabinet Sub-Committees

The Cabinet, however well endowed it is with professional capacity, cannot deal with the plethora of issues it is confronted with each week, within a short period of usually 2 hours. It needs help through sub-committees that could devote more time, focus and analysis.

There must be at least two sub-committees, with members chosen for their ability to deal with technical issues. Broadly, there must be two sub-committees, one dealing with issues relating to political relations- both local and foreign and the other dealing with economic growth and employment, covering mostly macro-economic, sectoral and project concerns.

It is obvious that one cannot put political and development issues into separate water tight compartments; yet for better focus of attention the division becomes necessary and feasible. Ad-hoc sub-committees, when necessary for greater in -depth analysis and consultation must not, however, supersede the two fixed sub -committees.

National Economic Advisory Council

Even the best of Cabinet-sub Committees, however, need technical and professional support, with a group of individuals examining each case holistically, deliberating collectively on different aspects of policy and reporting. This is where a National Economic Advisory Council could be helpful. Its task would be to advise the ministers, inter-alia, how the 9 Cs enumerated earlier could be put into practice.

The National Economic Council should not comprise political cronies but professionals covering various sectors of the economy. Representation of the major chambers of commerce and industry would help achieve the government’s much touted slogan of PPP (Public Private Partnership).

However, even the best constituted economic advisory council needs technical support. This emphasizes the need for a competent technical secretariat. There

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are two options- either establish a new set up, usually with highly paid professionals or upgrade an existing organization such as the National Planning Department to perform the defined functions. It is not a secret, however, that the technical capacity and morale of the National Planning Department staff have been seriously eroded due to neglect during the last decade. With appropriate capacity building and motivation, the staff could be quickly upgraded to match international standards of technical competence.

Committee of Secretaries

An institution that functioned very effectively as a regular policy coordinating body that helped the National Planning Department as well as the Ministry of Finance and Planning, was the Committee of Development Secretaries in the 1980s and early 1990s chaired by an eminent Cabinet Secretary and later by highly competent Finance Secretaries. Of course, the current set of ministry secretaries is too large a group (about 47) to form an effective collective for serious discussion. A new manageable group, however, could be formed comprising carefully selected sectoral representatives, with provision for co-opting where necessary.

The old Committee of Development Secretaries met every Tuesday, Wednesday being the Cabinet day, establishing a link between a policy-advisory and a policy-making body. The National Planning Department which coordinated all sectoral and project related functions at the technical level, streamlined through the Public Investment Program, which was a rolling five year plan, performed the functions of a secretariat of the Committee of Development Secretaries, preparing the agenda for discussion, writing minutes and follow up of decisions.

Administrative Reforms

It is, however, a time tested realization that whatever decisions are taken at the top they have to be implemented by organizations down the line. This was fully appreciated in 1986, which resulted in the appointment of an Administrative Reforms Committee chaired by an eminent public servant, Shelton Wanasinghe.

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The establishment of the Committee was the result of a struggle by the Minister of Finance, urged by the National Planning Department, to convince President Jayewardene of the crucial need. Normally, administrative reforms would be implemented at the behest of the Ministry in charge of public administration. In this instance, it was the National Planning Department that took the initiative due to lack of planning and implementation capacity in the periphery which affected its efforts to achieve effective inter-sectoral coordination.

The 10 volume report of that committee adorns the libraries of many reputed organizations, both locally and abroad. Its recommendations regarding recruitment, training, performance appraisal and motivation of public servants are still valid. It warned, however, against piecemeal implementation of its recommendations saying that it will not only be counterproductive but also “dangerous” as it could create new problems. Yet, that is exactly what all governments since then did, mostly pushed by political considerations.

Sri Lanka, however, cannot go forward without an effective and efficient public service. The private sector may be the ‘engine of growth’ but the ‘engine driver’ is the Government. Administrative reforms therefore have become a crucial issue of good governance which needs priority attention. Yet, politicians will only give lip service waxing eloquent about the need and admonishing public servants to be efficient and righteous. The problem is that there are no short term political gains from comprehensive administrative reforms, while they could be also disruptive of entrenched administrative and political structures and privileges.

The need of the hour, therefore, is a new administrative reforms council, which will be taken seriously by the government. It will have to focus attention on the following fundamental questions:

a) Recruitment policies;

b) Relationship between the Minister and the Secretary;

c) Training of cadre;

d) Performance appraisal; and

e) Reward for performance.

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The rising cost of living has eroded the incomes of public servants. Yet, the solution is not an overall increase in salaries; but an effective remuneration enhancement scheme linked to individual (or collective) performance.

Conclusions

The main thrust of this presentation is that, in the ultimate analysis, what matters is not the ideology or development model a government proposes to follow but its adherence to the principles of good governance. These principles perform the function of technical imperatives of development. For their operation it is necessary to have a legal and institutional framework that is backed by an effective and efficient public service. Thus, what is fundamentally required is to examine whether Sri Lanka is endowed with such conditions.

Principles of good governance such as vision, equity, transparency, accountability, predictability and productivity are fundamental requirements. Are there any other requirements which are not subsumed under these categories? What are the legal (constitutional) facilities that promote adherence to good governance? How serious is the question of ‘laws delays’ caused by an archaic and cumbersome legal system? What is the role of IT and modern big data management in this regard? Is the Right to Information Act or the Audit Act sufficient to ensure transparency and accountability? Does the 13th Amendment promote equity? Is the 19th Amendment adequate to deal with the question of Cabinet size and composition?

Is the current institutional structure led by the National Economic Council and Cabinet Sub- Committees conducive to effective policy making and development leadership? What is the role of the public administration system, in particular, the role of the ministry secretary? What is his administrative relationship with the minister? Should the role and function of ministers in the administrative system be clearly defined?

Frustration with the current system of governance in Sri Lanka has led to some influential business leaders and civil society activists (as well as some political leaders) to suggest that good governance could be better served by ‘a little bit of dictatorship.’ Unfortunately, that could prove to be like ‘a little bit of pregnancy and not stop growing’.

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Winston Churchill speaking in the House of Commons in 1947, acknowledged the deficiencies of democracy, which is the foundation of good governance. He said: “It has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.”

Democratic systems vary according to the socio-political system and historical factors in each country. Whichever form of government is adopted, democracy requires, in the ultimate analysis, that it is based on the principles of good governance. There is thus a symbiotic link between good governance and democracy.

Democracy is based on systems of political parties. What matters is not whether there are many parties or a single party operating in the country. But no political party in power could dispense good governance to the country unless it practices it within its own domain. In short, there must be inner-party democracy.

To ensure such practices are followed the electorate must be educated, made knowledgeable and well informed. This is where non-partisan civil society organisations have a big role to play. They could empower people with objective information and analysis in order to appreciate what is in their best interest, ultimately.

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