Shifting from Washington to Beijing consensus – have we got it right?
View(s):By Eran Wickramaratne
The Sri Lankan economy grew at an average of about 5 per cent over the past two decades. However it achieved a GDP growth rate of over 8 per cent in 2010 and 2011 which has declined to 6.5 per cent by the third quarter in 2012. The post-war growth rates were achieved largely due to the integration of the North-East Economy, and the public investment programme of 6 per cent of GDP over the last three years.
The GDP growth has decreased in 2012 and a sustainable high growth is questionable. To sustain a growth over 8 per cent per annum will require an investment of US$ 3-4 billion per annum. The net Foreign Direct Investment (FDI) in 2010 and 2011 has been $435 million and $896 million, respectively, falling far short of the required investment. Sri Lanka’s domestic savings rate as a percentage of GDP has been between 15 per cent-20 per cent, while public savings as a percentage of GDP has been minus one to minus 4 per cent due to inefficiency and losses in government corporations. India and China with domestic savings rates of 31 per cent and 53 per cent (World Bank data) are foregoing present consumption for future growth, unlike Sri Lanka. China’s huge trade surplus of $231.1 billion in 2012 is testimony to its export-led economic growth. In contrast Sri Lanka’s exports have declined from 24.3 per cent in 2006 to 17.8 per cent of GDP in 2011. Increased investment would be needed to fuel and sustain economic growth. The public investment programme at 6 per cent of GDP is increasingly under pressure as export revenues drop and the oil import bill keeps rising. Foreign investors are not queuing to invest given the sorry state of governance evidenced by irresponsible legislation and executive actions in expropriating private property, even though these properties were previously given by Government as concessions to investors. The unjust and illegal removal of the Chief Justice and the appointment of a Presidential Advisor as the new Chief Justice, have destroyed any remaining semblance of an independent Judiciary. The new Liberal economic model has dominated the world economic order since the 2nd World War. The rise of the Communist states and the Socialist economic order was the potential ideological challenge, but that folded up more than two decades ago. Over the past three decades, the free market economic model influenced reforms and governance in developing countries. The World Bank and IMF’s acceptance of its power made it known as the Washington Consensus. The financial collapse of 2008 has eroded the confidence in the Neo-Liberal economic model. While Joseph Stiglitz believes that the underlying market fundamentalism is ‘dead’, other economists are less convinced as there in no apparent ideological challenge to the Liberal market model. The Chinese and the BRICS are different models of capitalism. While the US and Europe have demonstrated the power of private sector-led economic growth, in Brazil, Russia, India, China, and South Africa, the state has taken an activist role in economic development. New forms of state capitalism are emerging. It is important to note that the new forms of state capitalism are distinct from the traditional socialist state where the means of production and distribution was to be in the control of the state. The practitioners of modern state capitalism are participants in the global economy, they are dependent on market access to the advanced economies, they import or copy technology and own global financial assets. Modern state capitalism embraces competition, stock markets, unequal pay and bonuses for corporate executives and trading with global partners irrespective of perceived ideological differences. State domination of the economy is detrimental not because of ideological differences but due to practical considerations overridden by political imperatives rather than economics The Chinese economic model is by far the dominant state capitalist model.
Historically both Imperial and Communist China have had a clear preference for state domination. The imperial elites, now succeeded by those of the Communist Party have favoured a state-centric approach to economic management. China’s state-led capitalism has been meshed with middle to small entrepreneurial capitalist business organizations. Openness to foreign investment and trade has also integrated China into the global capitalists’ economic model. Important sectors such as oil and gas, minerals, telecommunication and airlines, have been reserved for the state. It distinguishes from other forms of capitalism where it prefers state guidance to market determination, discourages privatization and manages the parity of its currency. The Chinese model utilizes the market forces as a pragmatic measure rather than its ideological belief in the market. This model has implications for economic governance.
Eran Wickramaratne
China’s model is encouraging a more state-centric and controlled approach to global economic governance. The exploding corruption within the Chinese political economy and how it will be minimized post-Bo Xilai is an open question. China’s insecurity seen in the maintaining of one-party rule will always be accompanied by its ‘non – intervention’ doctrine in matters governing other states. Beijing will inevitably end up supporting authoritarian regimes at the cost of social justice and civil liberties. As the Sri Lankan state becomes more authoritarian like the Chinese state, its model of economic management will become unsuitable for the lack of checks and balances on good governance. Unlike China who is the second largest global economy which has differed domestic consumption to increase investment, and accumulated large foreign reserves due to its export model, Sri Lanka has to depend largely on attracting foreign investments. FDI requires political stability, rule of law, enforcement of contracts and confidence in the macro economy. Clearly, the Beijing doctrine which shelters regimes with poor economic and financial governance, will not suit Sri Lanka.
Way forward
The blind adherence to the Washington consensus was rejected by the electorate nearly a decade ago as it did not shield the vulnerable and the poor. Economic growth with equity is needed. But state capitalism without the checks and balances as evidenced in China will also not work for a small economy like Sri Lanka which will have to mainly depend on FDI to give high rates of GDP growth. Sri Lanka, a friend of the West, India and China, while remaining within the global economy has to evolve into a social market economy where the fruits of its market-driven economic policy will be distributed disproportionately to the vulnerable and the poor. The country cannot afford to distribute its prosperity to a privileged few, who represent business and bureaucratic elites supported by the regime without disastrous socio-political consequences. A new administration will pursue a social market economy which is distinct from the Washington consensus and Beijing consensus, where the banishment of poverty and corruption and the establishment of social justice will be its main pillars; a radical programme where education, health and social security would be prioritized. The state should be both regulator and interventionist, when market forces fail to deliver on poverty reduction and social justice.
(The writer is an opposition
Member of Parliament)
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