Home grown model - The way forward
by Jayampathy MOLLIGODA
The much awaited the first “BRIC” summit was held recently along with
Shanghai Cooperation Organization (SCO) in the Russian city of
Yekaterinburg to discuss measures to deal with the global financial and
economic crisis. BRIC refers to four fast-growing developing economies,
namely Brazil, Russia, India and China.
The world’s newest economic grouping has ended its first major summit
by calling for a more diversified international monetary system. The
term BRIC was coined by US investment bank “Goldman Sachs” which used it
to describe the growing power of emerging market economies. The bank
suggested that the four developing economies could be amongst the worlds
strongest by 2050.
The leaders of Brazil, Russia, India and China stopped short of
criticising the world’s dominant currency, the US dollar. But Russia has
stressed that the emerging and developing economies must have a greater
voice and representation in international financial institutions. Now
that the leaders of the Shanghai Cooperation Organization (SCO), which
include China and Russia (India, Iran and Pakistan observer status only)
agreed to grant SCO delegate (observer) status to Sri Lanka, the
writer’s own view is that Sri Lanka would be eligible to get enrolled
into “BRIC block” also if Sri Lanka could truly demonstrate its
capabilities as an emerging economy by working out and adopting a new
economic model in line with “Mahinda Chintana” policies.
Natural Resources
As for their economies, in the first quarter of 2009, China’s GDP
increased by 6.1 percent whereas US economy was down by 5%. India’s
economy also grew. Although Brazil’s economic growth rate stood at zero
percent and Russia’s economy dropped sharply in the recent past, they do
possess huge un-tapped natural resources such as gas, oil, largest
amazon rain forest, other minerals etc. Notably Brazil and China have
become the largest trading partners after 50 years replacing United
States of America. It is reported that if not for Chinese US $ 850
billion investments in US treasury bonds, US dollar would have been
under tremendous pressure and the economy would have been in much more
difficult situation. That would have prompted United States Treasury
Secretary, Timothy Geithner to visit China recently and requested them
to continue to invest in US treasury bonds.
On the other hand, consistently high and sustainable growth rates
have been the order of the day for Indian & Chinese economies in the
recent past. Foreign capital has played a major role in driving the
economic development in particular the export growth in both countries.
Between 2000 and 2007, Chinese inward investments increased by almost
50% to $68 billion in the year 2007 whereas its out-ward investments
figure in 2006 was recorded at US$17.6 Bn only. It goes without saying
that China is one of the largest providers of investor capital to Sri
Lanka’s recent development drive. According to a research done by an
Indian Professor of economics, China’s foreign exchange reserves are
earned, whereas India’s are borrowed. In summary, “BRIC block”accounts
more than 15% of the $60 trillion global economy, which will command the
world economic order by 2020.
“Within weeks”
Undue delay in IMF facility IMF spokesperson Caroline Atkinson said
on June 19 that “whenever there is final agreement, then a program would
go to the Executive Board.” However, in May she said a deal would be
presented to the IMF board “within weeks”. “We are not threatening to
block the loan and we will carefully assess any program in light of the
conditions in Sri Lanka at the time,” state department director public
diplomacy in South and Central Asia said. The latest US comments imply
that negotiations are ongoing. On the other hand, Sri Lankan authorities
have insisted that negotiations with the IMF are complete and a
staff-level deal has been reached for a `stand-by arrangement’ of at
least 1.9 billion US dollars.
International pressure
In May, US Secretary of State Hillary Clinton declared that until
there is a resolution of the conflict this was not the appropriate time
for Sri Lanka to receive the International Monetary Fund loan. However,
the UN Security Council refused to withhold funding to Sri Lanka,
despite growing international pressure for the funds to be delayed. The
LTTE global network was largely responsible for the pressure. It seems
that the standby facility from IMF was getting delayed further. The US
has the largest vote share at the executive board level, though not a
majority.
In my article in Sunday Observer published in April titled “Home
grown economic model” I argued that despite global economic downturn,
Sri Lanka could receive large sums of funds of capital flows for
humanitarian assistance after the liberation of the north and thereafter
for the reconstruction & rehabilitation projects in north/east areas in
addition to southern infrastructure development projects. In terms of
the famous Harrod-Domar model of the development economic theory, it is
likely that more Foreign Direct Investments (FDI’s) may flow into the
country followed by these funds, as the return on investment of those
funded projects would essentially be higher with more efficient
infrastructure in place. According to the Central Bank it’s already
happening now and some US$300 Mn have come into the system by way of
inflow of funds in addition to normal remittances to the country during
the last five weeks.
Need for a regulated market economy as for the economic policies
adopted by Sri Lanka, one can argue that the implementation of the open
economy during the last 27 years has created social unrest among the
less privileged people in the country. There is sufficient evidence to
show that the quality of life of the people has not improved even with
the loans and massive debts obtained to develop the economy under open
economic policies introduced in 1977. According to the World Bank
development report, 42% of our population is below “2$ a day” which is
an accepted international poverty line, whereas in Malaysia, only 10%
was below “2$ a day” poverty line.
From the table given below it can be seen that 50% of the income is
enjoyed by the 20% of the higher income earning category of the people
whereas, only 16% of the income is accrued to the 40% of the population
in the lower income category. In fact the situation has deteriorated
after implementing the open economic policies. That would have prompted
the present administration to plan out and implement policies based on
Mahinda Chintana. Gini ratio indicates that the poor has become poorer
(increased to 0.49 in 2006/07) and rich has become richer, a common
feature that we could expect in any economy having open market
operations. However, one of the positive features of the economy is the
rapid development of the welfare of the people measured in terms of life
expectancy and the infant mortality rates. One can argue that Sri Lanka
has been able to achieve encouraging results in these areas (Infant
mortality in 2004 was decreased to 12 for 1000 births) mainly due to the
continuation of the welfare activities, despite adopting a market
economy during the last 27 years.
To understand what went wrong, it’s important to critically evaluate
the practical implementation of the concept of liberalization and how it
works in the developing countries. The proponents of the free economy
argue that the best way to help the poor is to make the economy grow.
They also believe that trade liberalization 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 & entrepreneurship. Further
there was a lack of infrastructure facilities available for smooth
functioning of businesses. Even the World Bank and the IMF have accepted
that they have pushed liberalization process too far and in fact, it had
contributed to the global financial crisis of the 1990’s. Joseph
Stiglitz-former Chief Economist at the World Bank and winner of the
Nobel Prize for Economics 2001, in his book titled “Globalization and
its discontents” mentioned “Globalization 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. Growth in
America provided the most dramatic example: while the economy grew,
those at the bottom saw their real incomes decline. The Clinton
administration had argued strongly against trickle- down economics; it
believed that there had to be active programs to help the poor. “If this
had not worked in the United States, how would it work in developing
countries?” he argued. 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.
It seems that if a country over a period of time, draws out super
profits derived by exploiting labour (so called technological
advancement and associated labour productivity gains)without reinvesting
back, then the society’s total liabilities exceed total assets of the
society and that leads to serious credit crunch. It reminds me the
famously known Maxian thesis during the Russian revolution; Technique is
dead without living labour and cannot, by itself, constitute a source
for creating productivity. We get the larger part of growth not from
capital investment but from investments in men. We get from men pretty
much more than what we invest in them (Quoted in productivity, N P C
Journal of India Volume 2, No. 1, Nov-Dec 1961 Page 6.) Business Models
The writer published an article in 2004 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 organization encouraging local industries and
production.
China’s economic growth
The dramatic economic growth in China, Malaysia and India in the
recent past was not due to a “miracle of the market economy”. It is
therefore important to study and learn the lessons from those countries
so that we could formulate a new/alternate economic model.
This is not merely a concept only. There could be a number of
business models available for Sri Lanka which falls within this
alternate macro model. Let us take up one example: The primary business
idea here is to embark on commercial forestry aimed at organising “multi
purpose forestry/timber based business activities” utilising the
existing uncultivated land (approximately 2,000,000 ha) The land in the
up country and low country (both wet & dry zone) could be utilised to
grow Eucalyptus species and other exotic timber species, eg: Mahogany,
Teak etc. for the production of timber (logs). On the same land area,
short rotation crops such as Calliandra, Acacia species, will be
inter-planted (under storey) as fuel-wood. The Fuel-wood would be used
in the “Fuel wood based dendro-thermal electricity generation plants as
a separate component of this project. The electricity power so generated
could be used in the existing factories located in close proximity to
the plants and for future rural electrification schemes. Since this
project has identified different intermediary products, it will cater to
a wide range of timber based markets, eg: planting fuel-wood to be used
in the factories and planting other different species for the production
of timber logs, rafters, wooden railway sleepers etc.
Following aspects are given due consideration in developing the
project. Possibilities of adopting out grower model for expansion of
dendro thermal power generation, Estate model which provides residential
facilities for workers to retain the supply of labour throughout the
year. Possibilities will be sought to establish a mechanism to utilize
Carbon trading considering the fact of huge Carbon dioxide sequestration
taken place in a large plantation like this. US Government report says
this week that the harmful effects of global warming are being felt here
now.
Existing activities
The special striking feature of this project is that the envisaged
activities do not become hostile to the existing activities and
community but in fact support them. It is expected to bring
socio-economic benefits to the community at large generating employment
opportunities and improving quality of life of estate workers and the
neighbouring village youth.This social & commercial forestation is an
environmentally friendly project as this will fall within the national
forestry policy. According to the national forestry policy, the
establishment and management of industrial forestry plantations on the
state land will be entrusted progressively to private sector and to
rural communities etc. A more positive private/ public partnership and
greater participation by “people’s organizations” at village level are
also necessary pre-requisites to drive this. There could be a number of
business models such as integrated diary farming projects in the
north/east, agro-based tourism projects fall within this macro economic
model. Conclusion.
Financial crisis
The conclusion here is that the free market economic policies if not
managed properly, are undesirable in terms of achieving true economic
development and improve the quality of life of the people. It is
interesting to note that United Nations, Food & Agricultural
Organization (FAO) has last week reported that agricultural sector is
more resilient to global financial crisis than any other sector of the
economy. Our farmers have been working on this premise anyway. As I
stated the carbon dioxide emissions per capita in metric tons, based on
2004 figures : Sri Lanka- 0.6(Low); India-1.2; Brazil- 1.8; China-3.9;
we are even better than “BRIC” countries and US figure was as high as
20.6 per capita in metric tons (World Development Report 2009).
Therefore what is desirable is to formulate a new/alternate economic
model (based on socially- oriented market economy) where the benefits of
economic development are not concentrated in a few but shared by all.
Coming back to the Russian summit, BRIC refers to four fast-growing
developing economies, namely Brazil, Russia, India and China. Now that
Sri Lanka has been granted delegate status at the Shanghai Cooperation
Organization, we would be eligible to get enrolled into “BRIC block” if
Sri Lanka could truly demonstrate its capabilities as an emerging
economy by working out and adopting this new economic model which is in
line with “Mahinda Chintana” policies. |