Although
I teach economics at the University of Peradeniya for
my bread and butter, I have been quite distant from
the discipline for some time and my readings on the
subject has been limited to the two courses I teach
at the university. My principal research work is on
conflicts. Hence, it was not strange for people to call
me oftentimes as a teacher attached to the Department
of Politics. However, in the last three-four months,
I had to re-enter this interesting area of work as I
was invited to make comments on two books, one in Sinhala
(Sri Lanka Arthikaya edited by O G Dayarathna Banda
et al) and one in English (Development and Conflict
by Kumar Rupesinghe). I had to refresh my knowledge
and do some additional readings in the course of my
preparation for the two presentations. The more I read
on the subject, the more I got convinced on the ineffectiveness
and the incorrectness of the economic policies proposed
by the neo-cons and the international trio—the IMF,
the World Bank and the WTO. All successive Sri Lankan
governments since 1977 adopted those incorrect policies.
When I say 'incorrect' I mean not some elements of the
policy package but the policy package in toto and its
underlying theoretical premises. The policy package
includes inter alia the following:
- The government should adopt free trade regime
with lower tariff rates: Annual Report of the Central
Bank of Sri Lanka 2007 boasted that 'the depth of
openness continued to remain high as reflected in
the low average tariff rate of 4.1 per cent in 2007.'
- The government should maintain lower budget deficit
(something like 5% of the GDP) since inflation is
the main evil: Annual Report of the Central Bank
of Sri Lanka 2007 lamented that the government managed
to reduce the budget deficit to 7.7 per cent in
2007; it was not able to do it adequately because
of constraints beyond the control of the government.
- The government should liberalize both current
and capital transactions of the balance of payments.
- The government should close down inefficient state
enterprises.
- State enterprises should be privatized.
- Interest rate should be maintained at higher
level in order to discourage wasteful investments.
- Labour market imperfections should be corrected.
Of course, some of these measures taken separately
make sense. For example, Cuba reduced its budget deficit
to 3.8% in recent years in order to counter inflationary
tendencies although inflation may not be attributed
only to budgetary policies. Leon Trotsky commenting
on the development policies of the USSR in the late
1920s and 1930s emphasized the prime importance of
maintaining stable currency for development. However,
the policy prescription of neo-liberals in its totality
is absolutely flawed. The policy package is based
on three principles and the three principles characterize
the neo-liberal economic theory. The following are
the three principles:
- Free trade enhances economic growth and all economic
activities tend to reach equilibrium through the
operation of the market. This is what I call the
Smithian Principle as the neo-classical writers
attribute this view to Adam Smith and his book,
The Wealth of Nations. Although, by free trade Smith
means the absence of monopolies, neo-classicists
do not put much emphasis on private monopolies.
- The countries engaging in free trade get benefits
if they produce least ineffective goods or, in other
words, goods with comparative advantage. This is
what I call the Ricardian Principle.
- Governments are ineffective and their intervention
in the economy invariably creates disequilibrium
and has adverse effects. This is what I call Friedmanian
Principle since Milton Friedman revived this anti-state
perspective.
From a development perspective, all these three
principles are theoretically incorrect, and not substantiated
by contemporary experience and/or supported by historical
data. However, this flawed theory supports the needs
of the industrially-developed economies and benefits
the world capital markets. This theory works well
when an industrially developed country interacts with
an industrially undeveloped country and invariably
works in favour of the former and against the latter.
None of the present-day industrially-developed countries
(England, the USA, Germany, Japan, and Australia),
however, adopted economic policies based on these
three principles when they were in their early phase
of industrialization. Countries such as South Korea
were able to break the trap of underdevelopment in
the 1960s and 1970s by consciously adopting economic
polices that countered these three principles. Those
under-developed countries that adopt these policies
and base their economic thinking on the above-mentioned
three pillars of neo-liberal theory will fail to break
the vicious circle of underdevelopment.
Capitalistic growth needs specific social relations
and structures (Karl Marx) within which the operation
of the principle of increasing returns, technological
change, and synergy and cluster effects (Schumpeter)
are made possible. The presence of market and availability
of capital, by themselves, do not provide an adequate
basis for capitalistic growth. A country can develop
if, and only if, it produces more commodities that
encompass the three elements of, increasing returns,
technological change, and synergy and cluster effects.
Free market and lower tariff structure do not help
but rather hampers production of such commodities.
No country in the world has developed without tariff
barriers and protection for its infant industries
that were characterized by increasing returns, technological
change and synergies. Sri Lanka’s economic policies
of 1977 are flawed not because those policies reactivated
internal market mechanisms by eliminating restrictions
imposed by the dirigisme regime but because those
policies were detrimental to industries that are characterized
by increasing returns, technological change and synergies.
The whole exercise has been trade-based not production-based.
It favours merchant capital not production capital.
Take the case of Sri Lanka’s principal export products.
The production of tea by nature is subject to diminishing
returns, and the production process does not require
constant technological changes to reduce the unit
cost. Moreover, it has a very few synergy or cluster
effects. One may argue that it is different in the
case of garments. Up to a certain point, the production
of garments involves increasing returns and technological
change. Since there are backward and forward linkages,
it can possibly link with other production processes.
Therefore, it was not incorrect to build such an industry
at the early phase of development. But we have to
keep two things in mind. Garment production depends
still on an extensive use of labour and the sectors
that can be mechanized are limited. Still one person
needs one sewing machine. So, Sri Lanka entered garment
production when advanced capitalist countries gave
it up because it had reached a technological saturation
point. When an industry reaches its technological
saturation point, its market competitiveness depends
on the availability of cheap labour. Hence, we do
not compete with other garment producing countries
in the world on the basis of technology but on the
basis of the cost of labour, an advantage we are losing
at an increasing rate. The second factor is that no
important steps were taken to advance the synergy
and cluster effect element when the garment industry
progressed in the last three decades. Countries that
began with garment and textiles have gradually moved
to technologically more advanced sectors with more
synergy effects by producing goods that are characterized
by increasing returns. These success stories showed
that these countries gave reasonable protection to
their ‘infant’ industries ignoring the advice by international
organizations. Flying geese model explaining East
Asian industrialization is a good example of such
successes. We have followed, in the last two decades
or so, what is known in development discourse as dead-end
model. There is no fundamental difference now between
the tea industry and garment industry.
The whole debate on GSP+ today signifies the flawed
economic policies adopted by the successive governments
including the present one since 1977. The principal
issue discourse on GSP+ should be: Will Sri Lanka
continue to follow the dead-end formula of the IMF,
World Bank and the WTO or will it adopt a new formula
that brought development to today’s advanced countries
in the world?
It is better to do what the developed countries did
in the past rather that what they tell us to do today.
July 7, 2008.
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* The writer teaches political economy at the University
of Peradeniya. E-mail: sumane_l@yahoo.com
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