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by Chris Rodrigo

Now that prospects of peace, however uncertain, loom visibly on the horizon, it is worth visiting again the question of how best to promote faster growth.

The word 'tiger' here indicates stellar economic growth like that of South Korea, Taiwan, Hong Kong and Singapore, the four 'East Asian Tigers'. These economies have shown that 'miracle growth' is possible.

This means that starting from per capita income below that of Sri Lanka, it is feasible to catch up with advanced industrial countries in 30-40 years. Singapore and, to a lesser extent Hong Kong, made good use of multinational companies to achieve success. But growth in Taiwan and Korea - complete economies like Sri Lanka - derived from extraordinary efforts by domestic industrial companies; many of these are now multinational firms extended over even North America and Europe.

East Asian strategies

All Asian tigers and Japan, which showed the way, pursued distinct strategies with some features in common. All of them were strong exporters of manufactured goods to the markets of advanced countries. This enabled domestic firms to break out of the limitations of small domestic markets and realize scale economies in production and related services.

They also cooperated with foreign firms in marketing their products internationally, in product design, quality control, technology acquisition. Such cooperation was needed to achieve international competitiveness, at least at the beginning when these skills were not well developed at home. As domestic capability was built up, more high value added skills such as product and process design were executed in-house.

It is not that 'industrial independence' is necessary or an end in itself. Today there is just as much cooperation between Asian firms and Western ones in all areas except finance. This is now a part of the ever-widening web of international 'production fragmentation' that is taking even higher value added economic activity to poorer countries like the Philippines and Malaysia. It is just that such co-operation is based on substantial domestic industrial capability in the Asian tigers, which nations like Sri Lanka can only dream about at present.

Imperatives

But dream about it we must, since that is the first step towards generating rapidly rising living standards in Sri Lanka and thereby laying a solid economic foundation to any political settlement. Given the long and bitter history of ethnic conflict going back almost a hundred years, it is clear that sustainable economic growth cannot begin until a broadly accepted political framework for cooperative coexistence and the settlement of disputes is accepted by all parties.

But even a good political settlement will not hold unless militants and soldiers nurtured in decades of conflict are rapidly absorbed into jobs that build skills and raise living standards indefinitely into the future.

The above point brings up the second important feature of the East Asian growth strategy: it was not just an aggressive pursuit of external markets. The domestic markets expanded at rates rarely seen before in development history, driven by rising real incomes.

This became possible because national labour productivity grew at astounding rates of around 5% or more per year. In a recent Sri Lanka Economic Journal article I estimated that we need to sustain a per capita growth rate of at least 6% per year for a couple of decades at least if we are to bridge the employment deficit and absorb the enormous backlog of unemployment that exists presently.

From the early 1980s China has been pursuing all growth strategies developed in East Asia with the exception of strong internal market growth. It has achieved growth rates that match the best achieved so far in East Asia for the last two decades. It draws in about half of all foreign direct investment (FDI) that goes into developing countries, testifying to its attraction for international companies.

This prosperity has greatly benefited its ruling elite, but not led to a commensurate rise in living standards for its people or even the industrial workforce. This is because industrial action to raise wages is blocked by lack of political democracy, unlike in South Korea or Taiwan. China also keeps its currency undervalued to maintain super-competitiveness in global markets.

China's 'beggar-thy-neighbour' policies spell disaster for other developing country exporters of manufactured goods, not least Sri Lanka as regards its garment exports. Almost all manufactures that appear on shelves in the USA and require high labour input in production are made in China. Given that even countries such as Thailand, Indonesia and Malaysia cannot switch overnight to technology and capital intensive goods, China's restrictive labour and exchange rate policies are extremely damaging to the rest of the developing world.

Furthermore they are totally unnecessary since a rapid development of China's internal market can provide a powerful stimulus to growth everywhere. The loss in competitiveness that exports from China may suffer, will be more than offset by the explosion of domestic demand. If China can benefit from the exploitation of market forces internationally, then market forces should be permitted to raise domestic wages and allow appreciation of the exchange rate to more realistic levels. Both measures will raise 'domestic absorption' which means that domestic living standards will rise.

Global context

Apart from the mobilization of the necessary political discipline to ensure success, charting out an effective programme of economic development is a complex strategic task. In the earliest days economic advisors saw development as simply a matter of mobilizing sufficient savings or capital flows from abroad.

In a later period, the Bank and the Fund emphasized macroeconomic fundamentals such as conservative fiscal and monetary policies, liberalization of markets and privatisation of public enterprises. The value of physical infrastructure and education have been well understood at all times in Sri Lanka. But these alone have not been enough.

Nobody would argue against good economic fundamentals of course. But hasty liberalisation of financial markets has often led to crises and economic collapse in Argentina, Thailand, Mexico and other countries. Privatisation has often led to the enrichment of political cronies, though it has delivered success in some sectors such as telecommunications. The financial crises in Asia and Latin America have demonstrated that fixed exchange rates are not consistent with the free flow of finance.

There are a number of lessons to be learned from the experience (i.e. mainly the mistakes) of the last two decades. Ritual genuflection to the power of market forces does not stop policymakers from making disastrous mistakes. Yet that is the way knowledge develops. All of the above are necessary conditions for growth that emphasize the supporting framework. They are not sufficient conditions that will ensure rapid growth. Economic fundamentalists extol the power of market forces to meet any challenge and overcome all obstacles. But what exactly are 'market forces' and what do they need to do to generate rapid growth? What is the role of the state apart from the maintenance of sound macroeconomic fundamentals?

Input

Market forces will work well when enterprises based in Sri Lanka produce increasing quantities of goods and services that residents and foreigners want to buy. Since the home market can grow only slowly, the lions share of production must be export oriented. Since existing export markets are saturated or face strong competition, they can grow only slowly at best.

It is then necessary to seek out and develop new products and services, a task that must draw on the business creativity of domestic entrepreneurs. The role of the government is to provide the best possible supporting structure, this being the 'public goods' activity that is essential to the production of marketable 'private goods' by profit-seeking firms. The state can also provide good information about trends in world markets and encourage business entrepreneurship.

The above is a strategy that calls for the mobilization of maximum business creativity. Influential policymakers seem, however, to feel that only foreign companies can play the leading role. FDI worked well for Singapore not only because it was a small city state, but mainly because the state produced a supporting social and physical infrastructure unmatched anywhere. Singapore-style public goods production is quite unrealistic for Sri Lanka, or most other countries for that matter. The strong state in Singapore also stifled domestic entrepreneurship.

Some feel that the $ 4.5 billion on offer will automatically generate growth. Politicians naturally like large foreign loans and grants; these can be converted into large projects with proportionate patronage opportunities and commissions. In the absence of a clear plan of public and private investment, such flows can be counterproductive as observed in many countries. It leads to inflation, widening inequality, corruption and political and economic instability.

Others argue that Sri Lanka should promote the sequence of industries that brought success in East Asia or turn to software exports which worked for India. Strategies that worked somewhere else at an earlier point in the evolution of the global economy, are not guaranteed to work here.

It is unlikely that industries that worked for Korea and Taiwan in earlier stages will work for Sri Lanka today. Of course every country must build up domestic capability in electronics, computer hardware and software. But a Sri Lanka based export facility in these industries can work only if it drew on the skills and experience of established foreign producers. No start-up facility would be able to compete independently with companies established in the world market over decades.

Innovative exports

Given the difficulties involved in entering existing global value-chains of production by selling our low-wage advantage, it is advisable to break out into areas where competition is not direct. The task of identifying viable export lines is a task mainly for entrepreneurs, not professional economists.

But it would be useful to point to some examples at least to establish feasibility. It is well-known that many small firms in Northern Italy are able to do quite well by specializing in high value-added fashion products, for which there is no direct competition. Value added tourism is another booming market area; this involves package tours organized mainly for retired people and students organized around quasi-educational and cultural sensitivity development themes. As incomes, educational levels and leisure times rise in rich countries, the demand for such tourism is bound to increase.

Whatever the prospects for established export lines, new business opportunities are constantly emerging. A few companies have already woken up to the rapidly rising demand for Ayurveda type health-care products. Exports of canned fruits, vegetables, prepared foods and spices, are growing steadily, though prospects of spectacular expansion here are small. The air-freighting of fresh fruit, vegetables and flowers is more lucrative. Export prospects of high quality furniture are barely tapped so far. Numerous non-traditional exports are steadily growing in niche markets.

What matters for economic significance is not whether an export item is 'technology intensive' but whether the value-added per worker is high. High value added exports everywhere invariably draw on a high level of skill in design, production and marketing personnel.

Examples of high value-added products that are potentially within the capability of highly-skilled Sri Lankan crafts-people, are the piano and the violin. High quality musical instruments sell for very high prices. But could the required skills be realized within Sri Lanka? When violins were first produced in Italy over 500 years ago, its technological level was not high. Today, machine made violins sell for as little as o 100, but good hand-made instruments fetch around o 10,000.

LTTE in a 'tiger' economy?

The idea that Sri Lanka cannot achieve international standards in selected lines of activity is of course nonsense. Success in international cricket and the effectiveness of the LTTE decisively refute that proposition. The example of hundreds of highly successful Sri Lankan expatriates in the USA and Europe, also indicate that the requisite human potential is certainly there.

It is just that within the country innovation and innovative thinking are inhibited. Exceptional motivation, such as what drives the LTTE, or relocation to foreign lands seems necessary to bring out latent serendipity. That certainly applies to my friends in the Left movement.

With respect to the LTTE itself, an interesting thought presents itself, appropriately for an article on Sri Lanka's prospects as an Asian tiger. What if the creativity, dedication and energy of LTTE militants were diverted to economic innovation from totalitarian violence? They could contribute disproportionately to economic renaissance in the whole country.

Sinhala supremacists dread the loss of land in the North and East; but the alienation of an educated and productive segment of the country's youth was the greater loss to the South's economy. A lasting peace will reverse this colossal loss and contribute more to general prosperity than the donors billions.

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