Spotlight: Econ Op-eds in Summary (Week ended 29th January'20)
1. A child’s guide to price determination in the market: Tax cuts won’t always reduce prices
By: W.A. Wijewardena
· The government had introduced a number of new tax reforms with the objective of pushing the market prices of most consumer goods down and provide relief to consumers. To the dismay of everyone, this effect was not seen in the market, leaving the policy makers worried.
· The worry is mainly due to a misunderstanding of how prices are determined in the market. What we had failed to account for is the fact that market prices are not only dependent on supply but also on how the consumers respond to price changes. The market demand in this case is expected to change in the near future due to a number of reasons.
· Among the reasons are the increase in money printed and the increase in disposable income resulting from the recent tax reforms. The proposed tax reforms will help us in the long run. But in the immediate future, despite a rise in consumer spending due to these reforms, managing the economy without causing a major damage to it is challenging.
2. Sri Lanka at tipping point?
By: Rohantha N.A. Athukorala
· Sri Lanka has faced numerous economic challenges recently. While short term economic injections such as the 1-year debt moratorium on SMEs can boost market sentiment, they also carry potential negatives; straining public finances, downgrade in sovereign rating and fiscal indiscipline are among these.
· While the direct benefits of such measures are yet to be fully realised, the private sector has displayed confidence in an economic turnaround, despite shrinking household consumption. This is supported by the 4% increase in advertising spending of Rs. 125 bn during 2019, despite adverse economic developments and a 4% contraction in the FMCG segment.
· Maintaining private sector confidence by ensuring sound macroeconomic fundamentals is necessary. In turn, the private sector must drive the market with innovation in response to economic growth, and look to penetrating export markets to ensure sustainability.
3. The economic benefits of the digital economy
By: Dinesh Weerakkody
· The concept of the digital has revolutionized how government and businesses operate. Today many governments promote a cashless economy. Most recently, India withdrew large denomination notes from circulation to withdraw black money in the economy, and in effect also supported digitizing of transactions.
· Most black money is either converted into assets such as gold and real estate. With demonetisation the money flowing into gold for such purposes reduces. However, since India was the largest gold consumer, this win for digitization had a negative impact on the real economy.
· Digital transformation can lead to social issues such as increased poverty and identity theft. Banks and companies therefore will need to work together in promoting digital payments. This can help SMEs to migrate to digital payments and other technologies enabling them to have easy access to capital and increased knowhow.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara, Asel Hettiarachchi & Eshan de Mel)