Why ‘Efficient Welfare Capitalism’ is the Right Choice for Sri Lanka’s Future
As an advocate and a believer of neo-liberalism, I believe in the power of the free market to drive innovation, growth, and prosperity. Neo-liberal policies, with their focus on privatization, deregulation, and minimal government intervention, have undeniably delivered economic success in many parts of the world. However, in Sri Lanka’s unique context, pursuing neo-liberalism without restraint might lead to deeper social inequalities. What we need is not extreme welfare capitalism but a balanced, efficient form of welfare capitalism—one that provides the necessary safety nets to protect our middle class while allowing the market to drive growth. The goal must be to create a prosperous middle class that enjoys an increasingly better quality of life. ‘Efficient Welfare Capitalism’ is the way forward.
Sri Lanka’s Historical and Social Context
Sri Lanka has a long history of social division and unrest, stretching back to early British colonial times. During British colonial rule, economic policies favored a small elite, creating deep economic and social divides. The legacy of these policies has lingered, contributing to ongoing disparities in wealth and opportunities. Economic inequalities and ethnic tensions have repeatedly fueled instability, and today, these divisions persist. The free-market policies of neo-liberalism, while effective in driving growth in many countries, risk deepening these inequalities in Sri Lanka. We cannot afford an approach that leaves a portion of our population behind, exacerbating divisions. Instead, we need a model of welfare capitalism that ensures no one is left behind while promoting efficient market growth.
The Risks of Extreme Welfare Capitalism
Before advocating for welfare capitalism, it’s crucial to acknowledge that extreme forms of welfare capitalism, where the state plays too large a role, can also stifle growth. Systems where the government takes on too much responsibility for welfare and economic control—such as the UK’s National Health Service (NHS), which has faced chronic underfunding and long wait times—can result in inefficiencies. Over-reliance on the state can lead to bureaucratic stagnation, inefficiency, and a system that cannot keep up with demands. Therefore, the key is to strike the right balance—Efficient Welfare Capitalism that protects citizens without suffocating economic dynamism.
The Neo-Liberal Success Story: At What Cost?
Neo-liberalism’s success in countries like Bangladesh shows how a market-driven approach can drive rapid economic growth. Bangladesh’s GDP has surged over the past decades, becoming a key player in the global textile industry. However, this growth has come at a high social cost. Social unrest, labor strikes, and economic inequality are rampant. While the wealthiest citizens have prospered, a significant portion of the population remains vulnerable, working in low-wage jobs with little protection or upward mobility.
Economic growth alone is not enough if it does not uplift the middle class and provide security for the broader population. A successful economy is one where the middle class expands, becoming wealthier and more secure over time. Economies fail when the middle class shrinks and economic gains are concentrated in the hands of a few. This is where neo-liberalism often falls short—the growth it promotes frequently leaves behind large segments of society, fueling inequality and social unrest.
The Risks of Neo-Liberalism for Sri Lanka
Neo-liberal policies, though effective in some contexts, come with inherent risks, especially for a country like Sri Lanka. First, they often lead to market failures in critical sectors such as healthcare and education. Look no further than the United States, where a largely market-driven approach to healthcare has resulted in skyrocketing costs and unequal access. The wealthiest receive top-tier care, while millions of Americans struggle to afford basic services. The U.S. education system suffers from the same flaws—astronomical tuition fees have burdened a generation with crippling student debt, limiting social mobility.
Despite being one of the wealthiest countries, the U.S. experiences incredible social divisions and rising unrest. The gap between the rich and poor is so stark that many describe the U.S. as having developing country-like characteristics. Homelessness, poverty, and a shrinking middle class have contributed to widespread discontent, leading to frequent protests and political instability. For Sri Lanka, adopting a similar model without safeguards could lead to the same outcome: widening inequality, shrinking opportunities, and deepening social tensions.
The Case for Efficient Welfare Capitalism
This is why I believe Sri Lanka should move toward a model of Efficient Welfare Capitalism, where the market drives growth but the state plays a vital role in providing social protections. Welfare capitalism balances the benefits of a free-market economy with essential safety nets that protect citizens, particularly the middle class. It is not about stifling economic freedom, but about ensuring that economic growth benefits everyone—not just a privileged few.
Singapore is a strong example of how Efficient Welfare Capitalism works. While Singapore is often seen as a neo-liberal success story, its government plays an active role in providing affordable public housing (over 80% of Singaporeans live in government-subsidized housing) and ensuring access to healthcare through its Medisave program. Singapore’s success lies in its ability to blend market-driven growth with state-supported social protections, creating a competitive economy that is also inclusive.
Similarly, Australia demonstrates the advantages of welfare capitalism done right. While it operates a market-driven economy, it also provides universal healthcare through its Medicare system, ensuring that essential services are available to all citizens. Australia’s Superannuation system, which mandates retirement savings for all workers, ensures long-term financial security. These policies allow Australia to maintain strong economic growth, low inequality, and a high quality of life. Efficient Welfare Capitalism in Australia has created a growing, thriving middle class, which is essential for long-term stability.
Why a Thriving Middle Class is Key to Economic Success
A thriving middle class is essential for economic success due to its significant impact on consumer demand, investment in education, and social stability. The middle class typically constitutes the largest segment of consumers in an economy, driving demand for goods and services. This robust consumer spending stimulates businesses to grow, expand their workforce, and invest in innovation. According to the OECD, middle-class households account for nearly 60% of consumption in advanced economies, illustrating how a growing middle class boosts aggregate demand and spurs broader economic growth. Moreover, a strong middle class is more inclined to invest in education and skill development, leading to a better-trained workforce that enhances productivity and drives long-term economic advancement. Countries with a substantial and prosperous middle class, such as Germany and the Nordic nations, benefit from some of the best education systems and highly skilled workforces, which directly contribute to their economic success and high living standards. Additionally, the thriving middle class promotes social stability and political cohesion. Individuals who feel economically secure are less likely to engage in protests, strikes, or civil unrest. In contrast, when the middle class diminishes and wealth becomes increasingly concentrated at the top, social tensions rise, often leading to political instability. This dynamic underscores the critical role of a thriving middle class in maintaining both economic health and societal harmony.
Greater levels of savings and investment from the middle class play a pivotal role in fostering economic growth and enhancing overall economic health. When the middle class saves and invests more, it directly impacts both their personal financial stability and the broader economy. Higher savings rates enable middle-class households to accumulate wealth, which can then be channeled into investments. These investments typically take the form of purchasing stocks, bonds, or contributing to retirement accounts, all of which provide capital to businesses. Over time, these positive effects compound. A financially secure middle class that participates with the real economy and corporate profits, contributes to sustainable economic growth, creating a robust cycle of investment, business expansion, job creation, and increased consumer spending. This not only benefits individual investors but also enhances the overall economic landscape, fostering a more dynamic and resilient economy in the long term. By promoting higher levels of savings and investment among the middle class, economies can achieve greater stability, sustained growth, and widespread prosperity.
The Impact of Neo-Liberal Policies on the Middle Class
Neo-liberal policies, characterized by deregulation, tax cuts, and privatization, are intended to stimulate economic growth by liberating markets and reducing government intervention. While these policies can indeed spur economic expansion, they often disproportionately benefit the wealthy and large corporations, frequently leaving the middle class behind. One significant consequence of neo-liberalism is the concentration of wealth at the top. Tax cuts for high-income earners and deregulation typically favor the wealthy, leading to an increase in income inequality. As a result, the rich accumulate more wealth while the middle class diminishes, exacerbating wealth concentration. For instance, in the United States, neo-liberal policies implemented since the 1980s, particularly under Ronald Reagan and his successors, have resulted in substantial economic growth but also a marked widening of income inequality. By 2019, the top 10% of Americans controlled nearly 70% of the wealth, with the middle class’s share of income steadily declining since the 1970s, contributing to a shrinking middle class and escalating social unrest.
Furthermore, neo-liberal policies often lead to stagnating wages for the middle class. As profits soar for the wealthiest, middle-class wages frequently remain stagnant due to weakened labor market regulations and diminished union power. Deregulation undermines unions, which traditionally safeguarded workers' rights and supported wage growth. Concurrently, privatization and austerity measures reduce public services, placing a greater financial burden on middle-class families for essentials such as education, healthcare, and retirement. Evidence from the Economic Policy Institute highlights this issue: between 1979 and 2019, U.S. productivity increased by 69%, yet typical workers' hourly pay rose by only 11.6%, illustrating the widening gap between corporate profits and worker wages. This stagnation contributes to political and social instability, as a shrinking middle class leads to growing social discontent. When people perceive their economic prospects as limited and believe the system disproportionately benefits the wealthy, they are more likely to engage in protests, demand populist reforms, or support political movements that destabilize democratic systems. This cycle of discontent further underscores the challenges posed by neo-liberal policies on social cohesion and economic stability.
Higher Taxes: A Worthwhile Trade-Off for Efficiency
Critics of welfare capitalism often argue that it requires higher taxes, particularly on the wealthy and corporations. But higher taxes are a small price to pay if the outcome is a more equitable society where social tensions are reduced, and everyone enjoys a higher quality of life. Efficient Welfare Capitalism ensures that tax revenues are used wisely to fund targeted social programs that prevent market failures—such as in healthcare and education—while still allowing the private sector to thrive.
Higher taxes do not have to be a drag on economic growth if they are efficiently managed. In countries like Singapore and Australia, higher taxes are carefully balanced with market-driven policies, ensuring that public services remain accessible and high quality, while the economy remains dynamic and competitive.
Avoiding the Tax Burden: Innovative Solutions for Welfare Funding
Critics of welfare capitalism often argue that it leads to higher taxes on citizens and businesses. However, this doesn’t have to be the case. Australia’s Superannuation system is a prime example of how governments can reduce their welfare burden by empowering citizens to save for their own retirements. The Superannuation system mandates that employers contribute a percentage of their employees' wages into a retirement fund. This ensures that workers accumulate savings throughout their careers, providing financial security in retirement without the need for excessive government spending.
Improving the existing system in Sri Lanka would allow us to support our aging population without raising taxes to fund pensions. By mandating employer contributions and encouraging personal savings, we can reduce the pressure on government resources while still ensuring that retirees are financially secure.
Similarly, running a smaller, more efficient government—one that eliminates unnecessary bureaucracy and focuses on essential services—can also free up resources. By streamlining public services, leveraging digitalization, and reducing redundant layers of administration, the government can cut costs, making it possible to invest more in welfare programs without increasing the tax burden. Efficiency is key to ensuring that welfare systems work without overburdening taxpayers.
Conclusion: Striking the Right Balance with Efficient Welfare Capitalism
Sri Lanka needs a model of Efficient Welfare Capitalism that balances market efficiency with social protections. Extreme neo-liberalism, which focuses solely on economic growth, risks leaving too many behind, leading to inequality and social unrest. At the same time, extreme welfare capitalism, where the state overburdens the economy, can stifle growth and innovation.
The solution lies in finding the right balance—one where the government provides targeted support for healthcare, education, and social services, but allows the market to drive economic growth. The goal is to create an economy where the middle class thrives, where no one is left behind, and where the benefits of growth are shared across society. This is the future that Efficient Welfare Capitalism can deliver for Sri Lanka: a prosperous, stable, and inclusive society, where everyone has the opportunity to succeed.
From Neo-Liberal Advocate to Proponent of Efficient Welfare Capitalism: A Personal Evolution
As an advocate of neo-liberalism, I have long championed the principles of free markets, privatization, and minimal government intervention. I firmly believe in the power of market-driven innovation and competition to drive economic growth and prosperity. Neo-liberal policies have demonstrated their effectiveness in various contexts, fueling rapid development and economic success.
However, my experience and analysis have led me to recognize that an unrestrained application of neo-liberalism may not be the optimal path forward for Sri Lanka. While neo-liberalism has indeed spurred growth in many parts of the world, it has also exposed significant limitations and challenges, particularly in contexts with deep-seated social and economic inequalities.
Why Neo-Liberalism May Fall Short in Sri Lanka:
Social Inequality: In Sri Lanka, the benefits of neo-liberal policies have not always been evenly distributed. The rapid economic growth driven by market forces has often failed to reach marginalized communities, exacerbating social divides. The risk of leaving behind large segments of the population, particularly those already vulnerable, is a critical concern.
Historical and Social Context: Sri Lanka’s unique historical and social context demands a more nuanced approach. The country’s history of social unrest and economic disparities suggests that a model solely focused on market efficiency might deepen existing inequalities rather than address them.
Sustainability of Growth: The focus on market-driven growth can sometimes lead to unsustainable practices and neglect essential social protections. For instance, sectors like healthcare and education, which are crucial for equitable development, may suffer under a purely neo-liberal model.
Embracing an Alternative Approach:
Recognizing these limitations, I have come to believe that while neo-liberalism has its merits, Sri Lanka needs an alternative approach that balances economic dynamism with social protections. Efficient Welfare Capitalism offers a promising solution. This model combines the strengths of market-driven growth with targeted social safety nets, ensuring that economic benefits are more widely shared and that critical services are adequately provided.
Efficient Welfare Capitalism is not about abandoning neo-liberal principles but about adapting them to fit Sri Lanka’s unique needs. It represents a pragmatic evolution—a way to harness the benefits of the free market while addressing the gaps and challenges that neo-liberalism alone cannot resolve. By adopting this balanced approach, Sri Lanka can pursue a more inclusive and sustainable path to prosperity, ensuring that growth benefits everyone, not just a select few.
