Home grown economic model

Jayampathy MOLLIGODA

Sri Lanka has a superb window of opportunity, namely other countries to exploit the latest scenario with the announcement of the G20 countries $ 3 million recovery package offered as a solution to the current global financial crisis. Contrary to the popular belief that Sri Lankan economy will shrink with all its exports already declining and industries/business establishments closing down, the writer is of the opinion that if we are able to obtain foreign funds and fast track “on going” infrastructure development projects the country could drive the economy out from the current temporary downturn.

As Indian Prime Minister said at the G20 Summit held on 2nd April, the current global financial crisis was created by the Western countries especially by the US, but the leaders have now agreed to pump in as much as US$ 3 trillion as a fiscal stimulus package. It is also reported that one trillion US $ would be made available to IMF and another US $ 800 billion would be available for other international lending agencies to be granted for developing countries needs. On the other hand, the US congress has recently passed the American Reinvestment Act which contains “Buy American” clause. This clause is protectionist an also discriminatory as all funds in future must be used to buy steel, iron, etc. under Government procurement code; even though it costs 25 per cent more than those imported from say, companies from China.

The banks in the US and the Western countries will now be able to lend more fund to the customers and as US President Obama himself predicted after the summit there would be more industrial activities and more job creation. The good news has already started flowing thus indicating manufacturing activities expanding for the fist time in six months pointing towards stabilising economies not only in the West, but in the Far Eastern countries also. The writer is of the opinion that the global financial crisis would end sooner than later. And it is a matter of time that Sri Lankan exports will find their lost market share once again. So the challenge is to meet the difficult in the “Balance of Payments” in the current year 2009 until the world markets recover. It could come by way of capital flows for reconstruction and rehabilitation projects especially in the North and East with the liberation of the areas in addition to Southern infrastructure development projects. The real challenge here would be to find counter part funds from the Government Budget in order to obtain funds from the international lending organisations.

Free Market

The writer on July 27, 2004 published an article in the Daily News titled “Buy Sri Lankan, be Sri Lankan” arguing the need to adopt a more people oriented, regulated market economic model for Sri Lanka, as opposed to Free Market economic model as there is clear and sufficient evidence to conclude that Sri Lanka has not been able to achieve its desired objectives having implemented such economic policies for nearly 26 years. In June, 2007, the “Maubima Lanka Foundation” launched its campaign in collaboration with the Government of Sri Lanka to promote the idea islandwide and it has now become a powerful organisation encouraging local industries and production.

In late 70s, Sri Lanka attempted to transform its economy towards more open market system and reduced the role of the State in economic and business activities. Since then we have been following more market oriented open economic policies. Today in the year 2009, after 32 years of implementing these policies, there is sufficient evidence to show that the end results have been disappointing (in terms of achieving the originally set objectives of economic development). One of the key parameters of assessing the economic progress is to measure the growth of the economy in terms of real increase of the Gross Domestic Product in constant rupees. In fact, the main objective of transforming the economy into open market policies was to achieve a rapid economic growth. However it should be mentioned at the very outset that measurement of economic performance using GDP growth rate has its limitations and therefore should not be taken as the sole criteria in evaluating the economic development.

From the above ratios, it can be seen that even after adopting open market policies, there have been no-significant increases in the growth rates as originally predicted, except during the recent years 2006 and 2007 and also 1968 and 1978.

Another objective of the open economic policy is to have an export led growth strategy and to accelerate international trade and investments. This would enable the country to eventually have a positive trade balance (exports to exceed imports) and a surplus in the current account of the Balance of Payments. They also believe that trade liberalisation would enhance a country’s income by forcing resources to move from less productive uses to more productive uses.

However what actually happened was that most of the so called inefficient industries and other agricultural or “service” ventures had to close down under pressure from international competition. It had destroyed existing jobs, but no new job opportunities in the so-called productive ventures were created. This is mainly due to the fact that there is a shortage of capital and entrepreneurship. Further there was a lack of infrastructure facilities available for smooth functioning of businesses.

Today even the World Bank and the IMF have accepted that they have pushed liberalisation process too far and in fact, it had contributed to the global financial crisis, Joseph Stiglitz, former Chief Economist at the World Bank and winner of the Noble Prize for Economics 2001. In his book titled “Globalisation and its discontents” mentioned “Globalisation today is not working.... for many of the world’s poor... for much of the environment.....” He argued that trickle-down economics was never much more than just a belief. The Free Market capitalist policies, if not managed properly, are undesirable in terms of achieving true economic development and improve the quality of life of the people.

According to Central Bank reports, since 1977, there had been not a single year with a positive trade balance. Also, there was always a deficit even in the current account of the Balance of Payments.

The writer is of the opinion that the main challenges faced by us namely. The economic down turn and the North-East problem could be addressed through a vision driven approach as opposed to adopting problem driven approach hitherto practised. Also it is a necessary pre-requisite that we create and build a new socio/political culture based on our traditional values., heritage and our expertise and it is necessary to make attitudinal changes in the hearts and minds of the people.

Balance of payments

The conclusion here is that the Free Market capitalist policies, if not managed properly, are undesirable in terms of achieving true economic development and improve the quality of life of the people. Therefore what is desirable is to continue the present economic policies based on socially-=oriented market economy. However, as can be seen from the above figure debt as a per cent of GDP is around 85.8 per cent compared with 96. per cent in the 1990s.

Also part of the problems faced by the Sri Lankan balance of payments difficulties are due to the liquidity crunch faced by the foreign customers of our exporters on account of current global financial crisis. In the circumstances, there is nothing wrong in borrowing long-term can cessionary funds for capital development projects where repayment terms include grace periods and low interest rates. (It is likely that more Foreign Direct Investments (FDIs) may flow into the country followed by these funds once infrastructure is in place.)

It appears that a more positive private/public partnership and greater participation by “people’s organisations” at village level in the infrastructure development activities are necessary pre-requisites to drive economy out from the current temporary downturn.