Last Sunday's Business pages were mostly devoted to a review and assessment of Sri Lanka's economy in the fifty years after independence and our economic prospects.
We published the views of several economists, among others. They captured different facets of the country's economic development, gave their prognosis for the inadequate economic growth and their prescriptions and perspectives for the future.
Dr Lal Jayawardena, the Economic Advisor to the President and the Vice-Chairman of the National Development Council, focused on the relatively slower economic growth of Sri Lanka in comparison with East Asian and South East Asian countries. He pointed out that over the 1970-93 period Sri Lanka's economy grew by only about 4 per cent while East Asian countries' grew by 7 to 8 per cent per year. Consequently the challenge for the future is daunting. In Dr Jayawardena's words it is "nothing less than the compulsion to compress into a 15-20 year period, the kind of development achievement that East Asia has registered over a 30-35 year period.
To achieve this growth, the investment ratio has to increase from the current 25 per cent of GDP to 35 per cent of GDP. How can this be achieved? Dr Jayawardena has spelled it out as comprising the elimination of domestic borrowings, which would save 5 per cent of GDP, a reduction in subsidies, privatisation of loss making public enterprises, reduced expenditure on the public service wage bill and pensions, reduction in defence expenditure by 2 per cent of GDP through "the negotiated cessation of hostilities", and increased foreign investment from the current 0.5 per cent of GDP to at least 3 per cent of GDP. The underlying imperative for achieving most of these targets is peace and harmony.
There can be only limited debate about this prognosis or prescription. First and foremost, there is no doubt whatsoever that peace would bring in handsome dividends. It would not only cut the costs of defence - a huge burden in recent years - but increase output in several sectors and regions of the country, increase foreign investment and increase tourist earnings. Without it a growth of more than 5 per cent per year is hardly possible. But can we really achieve this pre-requisite.
Another economist, Dr Saman Kelegama, Executive Director of the Institute of Policy Studies struck an optimistic note, though his prognosis was similar. Citing the ADB projections for Sri Lanka, he was of the view that we "should not lament over the missed opportunities of the past 50 years but look ahead with optimism for it (economy) still has a good foundation for a rapid economic take off".
Prof W. D. Lakshman, Vice-Chancellor of the University of Colombo traced the different economic regimes and said that the country's GDP growth was "a comparatively poor performance, averaging 4 per cent upto 1977 and 5 per cent since then". He was of the view that privatisation, liberalisation and private sector economic growth "have not necessarily improved the overall health of our economy".
He focused on the unsatisfactory distributional aspects of our growth and the expectations generated by globalisation being far higher than the benefits. Increased production of goods and services and better distributive mechanisms were the means to meet these expectations.
Dr Nimal Sanderatne, President of the Sri Lanka Association of Economists and Chairman of the National Development Bank, was of the view that a multitude of pre-conditions had to be established to achieve higher rates of economic growth. The level of domestic savings had to be raised appreciably.
He was of the view that "we lack technological as well as managerial skills" and that "we have to increase our labour productivity" and added that "A strong bureaucracy and neutral law enforcement agencies are essential for economic development".
It is often said that when two or three economists are gathered together, there is bound to be four or five views on the economy. The four economists who discussed the issues were, however, more or less of the same view. In fact there does not appear to be that much divergent views on what needs to be done, but an incapacity to get it done.
We are a people good at analysing the problems and dishing out the prescriptions, but incapable of effectively implementing our prescriptions, policies, plans and programmes. That in the final analysis is our national weakness.
It is imperative that we acknowledge this weakness and find ways and means of being more effective in implementing our policies. Perhaps the country could adopt some of the strategies which corporate bodies adopt in implementing their corporate strategies to achieve results.
In the face of [the] challenge (of the Asian financial turmoil), our first job is clear: to help stabilize the immediate crisis.
Yet, to make the most of the opportunities and limit the risks of the new global financial system and to have a viable situation for the years ahead, we must also modernize the architecture of the international financial markets that we helped create and that has served us so well for the last fifty years.
No single factor would likely have produced a financial crisis. While economies usually adjust in a relatively orderly fashion to market swings, in this case the combination of factors proved combustible.
When these crises began, foreign investors started to withdraw capital, local companies sought to hedge hard currency exposures, exporters stopped bringing their export earnings home, and citizens moved their savings abroad.
The international community has been involved in a major effort to focus countries on these underlying problems and to assist them in addressing them.
These issues have been a central focus of the IMF as well as of our interactions with these countries.
The programme we have supported has focused on four key elements: supporting reform programmes in individual nations; providing temporary financial assistance when needed; encouraging strong action by Japan and the other major economic powers to promote global growth; and fostering policies in other developing and emerging economies to reduce the risk of contagion.
First, and most important, our approach requires that these countries take the concrete steps necessary to reform their economies. These programmes, which are designed with the IMF, address the specific causes of each nation's crisis and can be adapted as the situation changes.
These are not austerity programmes. These are primarily programmes of structural and financial reform. It is the crisis and the ensuing loss of confidence —not the reform programmes that leads to economic hardships.
The second element of our approach is to support these programmes of reform with temporary financial assistance. When a nation's financial stability is at risk, this money provides the breathing room for a nation to establish the conditions to restore economic confidence, attract private capital and resume growth.
The third element is to encourage the major industrial countries to act to strengthen their own economies and take the steps necessary to promote the strong economic and financial environment globally that can contribute to resolving the crisis in Asia.
Fourth, and finally, we have worked closely with the IMF to encourage other emerging markets to make policy adjustments to reduce their vulnerability to contagion from the countries now in crisis.
The IMF is the right institution to be at the centre of these support programmes. With tremendous expertise and technical resources, the IMF has the ability to shape effective reform programmes.
As a multinational organization, it is able to require an economically distressed country to accept conditions that no contributing nation could require on its own. Finally —and critically important— the IMF internationalizes the burden during a global financial crisis by using its pool of capital.
The American people should also know this: over the past fifty years our contribution to the IMF has not cost the taxpayer one dime. When the IMF draws on our commitments, we receive a liquid, interest bearing offsetting claim on the IMF.
There are no budget outlays. Our contribution does not increase the deficit, or divert resources from other spending priorities. Support for our periodic pledge to the IMF, and support for a new emergency fund, the New Arrangements to Borrow, which supplements the IMF's resources to deal with crises such as this one, is critical.
The financial instability in Asia involves enormously complicated problems and presents challenges the global financial system has never faced. I am confident that overall these are strong well-crafted programmes and the best and probably the only viable way to help these countries re-establish stability and confidence.
The global economy needs architecture as modern as the markets. That is why, even as we have tried to confront the immediate crisis in the Asian region, we have also begun an intensive effort to improve the global financial system to both better prevent crises from occurring and better deal with them if they do occur.
To build on these efforts, we have begun an intensive internal effort with the (US) Federal Reserve Board and others, to identify and analyse possible mechanisms for dealing with new challenges to the international financial system.
This initiative will focus on four objectives: improving transparency and disclosure; strengthening the role of the international financial institutions in helping to continue to deal with the challenges of today's global markets; developing the role of the private sector in bearing an appropriate share of the burden in times of crisis; and strengthening the regulation of financial institutions in emerging economies.
"Policymakers who for years have sought to pre-empt spiralling inflation must now be active in fighting spiralling deflation." This is stated by Robert Reich in an article, entitled "Deflation: the real enemy" contributed to the London Financial Times.
The writer says that the old war was against inflation and that that war is largely over. But a new enemy is approaching from the opposite direction. It is spiralling deflation. He reminds the reader that the seeds of depression were sown in the late 1920s when demand began to fall.
By 1927 the sales of cars, houses and consumer durables were in the decline, commodity prices had turned downwards and industrial production had begun to fall.
Reich says that we are entering a similar era. But, he says, we have been so accustomed to the danger of excessive demand that we no longer appreciate the danger of inadequate demand. Nor, he says, do we feel the urgency of pre-emptive action .
He points out that a deflationary spiral can be as dangerous as an inflationary spiral. Falling prices reduce profits, causing companies to reduce wages and cut employment. This in turn results in workers having less money for goods and services causing prices and profits to drop further.
An important consequence of this development is that "the value of property bought on credit declines until it is worth less than the debt owed resulting in defaults. Lenders are unable to make further loans. The crisis deepens."
Furthermore, he says a vicious deflationary cycle can also produce a vicious social cycle worsening the economic one. Weak or receding demand causes higher unemployment and falling wages. There could be strikes, changes in democratically elected governments or violent forms of unrest.
Reich says that "a large unco-ordinated global contraction is under way and we are experiencing only the beginnings." He observes that demand is contracting is south-east Asia and the consequences are rippling outwards.
Many Japanese banks are technically insolvent; Japanese companies have lost a large portion of their south-east Asian customers and US companies that had expected east Asian growth to continue "are frantically revising their plans."
Reich cites as an example: one third of the backlog of orders for Boeing aircraft is from Asian airlines. Another deflationary development is the shrinking of demand in much of Latin America, he says.
Brazil's contraction is" rippling through much of the rest of Latin America." In Europe too, he points out, demand is listless, Budget deficits are being slashed in order to qualify for a common currency a year hence and European interest rates remain relatively high.
Orders for German exports, a rising share of which had gone to developing countries including Asia have been tumbling for months and German unemployment shows no sign of improving. In France despite there being 3 million jobless, the budget continues to be cut.
In the Unites States, says the writer, the economy is "supremely healthy". Unemployment is lower than it has been in almost quarter of a century. The economy grew by nearly 4 per cent in 1997, largely due to consumer spending and to large business outlays for new equipment in anticipation of even greater demand.
Spending, says Reich, pushed corporate profits to their highest levels in 30 years but US wages have hardly risen. This means, says the writer, that the economy is being propelled largely by household debt which includes credit cards, personal loans and mortgages.
The writer states that household debt has reached record levels and, in turn personal bankruptcies have also risen to record levels as have defaults on credit cards. In fact, says Reich, household debt is starting to slow down, as households cut back their borrowings, and as they do, the most important source of demand in the US will shrink.
Reich outlines a scenario - east Asia with toppling currencies and bank insolvencies, rising unemployment in Latin America's largest economy and falling real wages throughout the region, stagnation and unemployment in Europe and a rapidly approaching limit to the capacity of US consumers to take on more debt.
This unco-ordinated global contraction, he observes could lead to a deflationary cycle. He says that central bankers, finance ministers and the IMF acting rationally in their own spheres of responsibility may be failing to see the larger picture.
He urges that they discuss what steps they could take to have a significant effect in the opposite direction and at the very least draw up contingency plans. And as regards the IMF's loans to Asia, while they may be conditional on financial restructuring, he says the IMF must balance its demands for sharp cuts in public budgets and for higher interest rates against the strong contractionary forces under way.
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