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Home grown model - The way forward

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.

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