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Ravi Karunanayake And Commercial

Air Transport in Sri Lanka

by Ruwantissa Abeyratne

( February 7, 2015, Montreal, Sri Lanka Guardian) It is heartening to read in the Daily
News that Finance Minister Ravi Karunanayake has confirmed that State governance
in Sri Lanka will be aligned to a culture associated with private enterprise. The
Minister has made clear that this does not mean that State enterprises will be
privatized. The sensibility of this approach is laudable, at least from the authors
perspective. 32 years ago, when the author was Senior Legal Executive at Air Lanka
he wrote an article to the Daily News entitled How to Run the Government Like the
Best Private Company which encouragingly, was published in 1983. In that article,
the author espoused a similar principle. In the authors view, this approach would still
stand and make eminent sense particularly in the context of a pathetically run national
carrier that has hitherto been dictated to by political interests and political

appointments. The operative slogan for the air transport industry in Sri Lanka has
been, and should incontrovertibly be competition. It is well known by now that
commercial aviation cannot be sustained in a successful manner if it is ruled by
political considerations. Nobel laureate Paul Krugman is of the view that while a
depression of the nature of the 1930s might not return, what he calls depression
economics has returned and is with us. Krugman says: for the first time in two
generations, failures, on the demand side of the economy insufficient private
spending to make use of the available productive capacity have become the clear and
present limitation on prosperity for a large part of the world. (Paul Krugman, The
Return of Depression Economics and the Crisis of 2008, Norton: New York, 2009 at
182..
This irrefutable principle, when applied to air transport, brings to bear a compelling
shortcoming of the industry in government control on foreign private spending. Many
airlines in India, such as Kingfisher, suffered because of this trend and their foreign
operations folded. As Michael Spence, Nobel Laureate and Professor of Economics at
New York University observes in the example of India: Indias earlier slow growth was
partly attributable to a distrust of foreign investors and a relatively low level of foreign
investment by multinational firms. If you look at the data for India and China for
example, the differences are dramatic. Of course this is changing now with Indias
growing options (Michael Spence, The Next Convergence, Farrar, Straus and Giroux:
New York, 2011 at 7)3.
Commercially, if this view applies to the industrial world in general, there is no reason
it should not apply to air transport. Niall Ferguson, Professor of Business
Administration at Harvard University draws the interesting parallel of Marco Polos
visit to China in the 1270s when he was impressed by the volume of traffic in the
Yangzi. Polo observed that the quantity of merchandize carried up and down made the
Yangzi looked like a sea rather than a river. In comparison to this Ferguson argues
that the Thames in the early fifteenth century was the backwater . Ferguson goes on to
suggest that one of the reasons for the success of European States in the 16th Century
onwards was its opening out to commerce and competition . It was Adam Smith who
said: a country which neglects or distrusts foreign commerce, and which admits the
vessels of foreign nations into one or two of its ports only, cannot transact the same
quality of business which it might do with different laws and institutions (Adam
Smith, The Wealth of Nations, (1776) cited in Niall Ferguson,Civilization- The West
and the Rest, Penguin Press: New York, 2011 at 19).
Despite the encouraging privatization trend in the Western world of the 1970s through
the 1990s, the somewhat rash privatization binge introduced by Boris Yeltsin in
Russia in the 1990s taught that indiscriminate privatization is dangerous to an

economy. What is now wildly popular is the Keynesian philosophy of State controlled
growth, where economic downturns caused by capitalism and globalization could be
mitigated by State support both in the areas of hard infrastructure (such as roads and
bridges) and also soft infrastructure involving public and private corporations
China seemingly underwent, in the 1980s through the 1990s a similar experience to
that of Europe with a radical change in the advancement of competition which was
spontaneous and speedily executed. The change came in transferring agricultural
property from communes to households. Jeffrey Sachs, an internally renowned
economic advisor to many countries says this of his experience with China: There was
nothing gradual about this change. Around seven hundred million individuals in farm
household were suddenly farming on plots assigned to the household rather than to
the commune. This new household responsibility gave massive incentives to
individual farmers to work harder, apply inputs with more care, and to obtain higher
yields (Jeffrey D. Sachs, The End of Poverty, Economic Possibilities of Our Time, The
Penguin Press: New York, 2005, at 160).
While China has shown positive growth (of around 9%) throughout the past decades,
followed by steady South Korean growth over the past 20 years, Europe is teetering
despite a second bailout of 130 billion Euroto Greece with 1 trillion bank loans from
the European Central Bank. As stated earlier, it is now on the fence between a pull
towards austerity from the Germans anda cry for growth by the French the two
major European powers (with Britain rather comfortably out of the Eurozone). A
pullout of Greece from the Eurozone could bring to bear a contagion spreading to
countries such as Spain, Portugal, Ireland and Italy. Europe needs a firewall against
such a contagion, more investment, a more flexible monetary policy, reforms to
inflexible market policies and structural reform.
Although in 2011 Germanys exports increased by 34% and it has expectations of
achieving 2 million Euro by 2020, its economy shrank n the first quarter of that year
and could suffer a setback if there were to be a contagion following a pullout of Greece
and perhaps other States mentioned.
Although out of the Eurozone, Britains economy was stuttering, where in April 2012 it
discovered that in the first quarter of 2012 its GDP had been reduced by 0.2% and that
it was still slap bang in a recession. There were palpable drops in household
consumption and inflation rose by 3.5%.The World Bank, in its statement in January
2012 stated that developing countries should prepare for further downside risks, as the
Euro debt crisis and weakening growth in several big emerging economies were
discouraging for global growth prospects.
Despite the encouraging privatization trend in the Western world of the 1970s through

the 1990s, the somewhat rash privatization binge introduced by Boris Yeltsin in
Russia in the 1990s taught that indiscriminate privatization is dangerous to an
economy. What is now wildly popular is the Keynesian philosophy of State controlled
growth, where economic downturns caused by capitalism and globalization could be
mitigated by State support both in the areas of hard infrastructure (such as roads and
bridges) and also soft infrastructure involving public and private corporations
At this point, it is interesting to look at some global trends that would certainly affect
Sri Lanka in terms of trade. The need for defragmenting air transport with a systemic
approach should be considered in the context of conflicting commentaries. The 2011
Report of the World Bank stated that the world economy has entered a very difficult
phase characterized by significant downside risks and fragility. The financial turmoil
generated by the intensification of the fiscal crisis in Europe has spread to both
developing and high-income countries, and is generating significant headwinds.
Capital flows to developing countries have declined by almost half as compared with
last year, Europe appears to have entered recession, and growth in several major
developing countries (Brazil, India, and to a lesser extent Russia, South Africa and
Turkey) has slowed partly in reaction to domestic policy tightening. As a result, and
despite relatively strong activity in the United States and Japan, global growth and
world trade have slowed sharply.
This somewhat gloomy picture, however correct it might be, brings to bear an illusory
perception which seemingly belies reality in terms of market economics, where
development reflects an upward trend.
Fareed Zakaria, a respected commentator and leading expert on international affairs
and economics says: Over the last two decades, about two billion people have entered
the world of markets and trade a world that was, until recently, the province of a
small club of western countries. The expansion was spurred by the movement of
western capital to Asia and across the globe. As a result, between 1990 and 2010, the
global economy grew from $22.1 trillion to $ 62 trillion, and global trade increased by
270 %.
Against this scenario, another distinguished commentator Ruchir Sharma says of the
future: Over the next decade, growth in the United States, Europe and Japan is likely
to slow by a full %age point compared to the post World war II average, owing to the
large debt overhang, but that slowdown will pale in comparison to a 3 to 4 %age
average slowdown in China. The big story will be that China is too big and too middleaged to grow so fast. And as it starts buying less from other emerging nations, the
average pace of growth in emerging markets is likely to slow from nearly 7 % over the
past decade to the 1950s and 1960s pace of around 5 % (.Ruchir Sharma, Breakout
Nations In Pursuit of the Next Economic Miracles, Norton: 2012 at 242.)

Added to this factor is the contagion effect the Euro debt crisis was having on China
and India where the decrease in demand for their goods was being felt worldwide and
the effects were being felt as far as Australia which is the only G-20 economy that was
not affected by the recession of 2008.
The woes of the air transport industry have always centered on the claim of most that
aviation is effectively precluded from entering the free market due to government
meddling. This seems to go contrary to the Keynesian view of the advantages of some
degree of government control of the free market economy. Harsh restrictions on
ownership and control of airlines and market access are stringent tools of government
control. The argument for deregulation, as against government control, pervaded the
economic crisis of 2008 where some argued that the bubble burst because the markets
had not been free enough from government meddling and that the US Congress
pushed lenders to have unfettered ability to lend to those who could not pay back their
loans, leading to a housing bubble. Pankaj Ghemavat, referring to the 2008 bubble
says: Media magnate Rupert Murdoch blamed the Government for the debacle,
stating: Its very easy to blame the free market but how did we get to the housing
bubble? We got it because of Congress pushing Fannie Mae and Freddie Mac into
lending money to people who couldnt affordit and blowing up the price of housing.
(PankajGhemawat, World 3.0 Global Prosperity and How to Achieve It, Harvard
Business Review Press:2011 at 12).
In the air transport sector this principle is reversed in that governments meddle in
fettering the freedom of air carriers by imposing political and economic restrictions.
This trend seems to continue, much to the disappointment of the air transport
industry. Anne-Marie Slaughter of Princeton University speaks of a new world order
where the State will not be the only actor in the international system but will still be
the most important actor; the State will not disappear but will disaggregate into its
component institutions, which will increasingly interact principally with their foreign
counterparts across borders; these institutions will represent distinct national or State
interests, even as they also recognize common professional identities; and government
networks will exist alongside and sometimes within more traditional international
Organizations. (Anne-Marie Slaughter, A New World Order, Princeton University
Press:2004 at 18). For air transport this is good news in that The State will not be the
only actor in the international system, which hopefully mean that International
Organizations may be more empowered and that government networks may exist
within international Organizations, promoting interest groups within such
Organizations to push liberalization of air transport. These are all trends that air
transport in sri Lanka are inevitably profoundly influenced by.

Posted by Thavam

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