The stock-market speculators who rushed to buy shares in the first few days of December, when a UNF victory seemed probable, must be a bitter lot now. Six weeks later, with a UNF government firmly in the saddle, nothing has happened to boost market confidence. The treasury is broke, taxes cannot be collected, debt servicing is dicey, growth is negative and there is no silver lining in sight.

Thankfully, the UNF's ministers have been slow to insult our intelligence by blaming the nation's ills on the PA government. Everyone knows it was the folly and corruption of the Kumaratunga administration that drove the country to the dogs. That said, what is to be done now, apart from the ministers in charge wringing their hands helplessly?

A good place to start is by stimulating investment. Not just foreign investment - foreigners are loathe to invest in unstable countries - but local investment. The best form of stimulating investment is by providing industry with tax incentives and stability incentives. In addition to 20% taxation by way of GST and NSL, Sri Lankan industries pay 30% to 40% by way of income tax on profits. This tax on value addition means that companies are able to pass on to their shareholders rather less than 50% of the profits they make. What greater disincentive could there be to investors?

Bandula Gunawardana is an astute man. He spotted the problem right away and was not ashamed to articulate it. Speaking on national television soon after becoming deputy minister of finance, Gunawardana pledged to remove taxation on capital investment. A bold step, indeed. Ronnie de Mel did much the same thing when he was finance minister by introducing the lump sum depreciation scheme, where investors could deduct the entire cost of industrial-production plant and machinery from their profit and loss account in the year of purchase. It led to a spate of investment and abuse.

Abuse however, is something developing country governments have to learn to live with. Relax controls a little, and a minority of people will succeed in slipping a fast one over the tax man. The danger is when just so as to thwart that minority, draconian systems that deter the majority are put in place. Gunawardana took the example of constructing a building. This involves investment in labour, building materials, architects and the like. Money changes hands, people get employed and the country, at the end of the day, has one more building. But what happens the moment you start construction? The income tax man knocks on your door and asks you to furnish a return. So what does the builder (investor) do? He quickly realises his folly, rushes off to Pettah, converts his millions into dollars and invests them safely in the Virgin Islands, far from the reach of the ablest tax inspector. Net gain to mother Lanka: nil.

Gunawardana proposed instead a complete amnesty for capital investors in development activities such as housing. No questions asked. The government could benefit instead, he said, from the GST and NSL on building materials, and from similar taxes on expenditure by construction workers. Clever, imaginative thinking, but will he do it? Wait for the budget, and see.

Our mention of stability incentives refers, for example, to Sri Lanka's ridiculous labour laws. In a fast-changing world, the skills requirement of industry too, changes rapidly. Yet Sri Lanka's labour law prevents a turnover of labour. While a ruthless 'hire and fire' system is clearly unacceptable, we need to look at a system when industry can hire in good times and thereby stimulate growth, and shed employees in bad times. In order to make this work, the country needs a social security insurance scheme that transcends the archaic EPF system. People out of work at any time in their career and not just at retirement should be able to draw immediately on social security until they find a new job. They could turn the misfortune into an opportunity by learning a new skill such as information technology. That is how a labour market is created, and that can only be good for the economy. So long as people who do get a job hold grimly on to it without performing and with legal immunity from dismissal, the economy can never flourish.

There are several hard decisions the government must take, and soon. One is to relax taxation on beer and spirits. Ridiculously high taxation on soft alcohol, such as beer, has resulted in more and more people turning to hard liquor, engendering the adverse social consequences that go with that. However, arrack is taxed even more, putting the legal brew out of reach of the majority, who turn to illicit moonshine or kasippu. The net result is that increased taxation actually reduces government revenue. Chandrika Kumaratunga slashed taxes on beer in 1995 and this led to a flurry of investment and took a sizeable number of tipplers away from arrack into the safer beer. Then, capriciously in 1996, she jacked taxes up again, sending investors fleeing and beer-drinkers back to the hard stuff.

Likewise, the defence budget. One can but hope that the March budget will be balanced on the basis that the cease-fire with the LTTE will hold. If it does not, the government could always go back to parliament for a supplementary estimate or introduce special taxes to take care of military expenditure. The need of the hour however, is to save Rs. 30 to 40 billion in capital expenditure on defence and pass this on instead to industry by way of investment incentives. Tough luck for the arms dealers, but given the state of the economy, there really isn't much choice.

What ever it is that the UNF government plans to do, it had better do it soon because the public is already growing restless at the lack of results. Having criticised the People's Alliance for not having put through a single development project in its seven years in office, fifty-something UNF ministers have been in their seats for a full month now without uttering a murmur about a major development project. What were they thinking of these past seven years? If there is one thing that Prime Minister Wickremesinghe needs to do urgently, it is to appoint a competent review board to make sure that ministries perform, and help remove obstacles to performance. The 100-day programme was meant to make a start, but given the lack of imagination on the part of most of his ministers, this has now turned into something of a damp squib.