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| Sunday, 11 July 2004 |
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| News Business Features Editorial
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Why did Sri Lankan voters reject 'Regaining Sri Lanka'? The Regaining Sri Lanka was the medium term Poverty Reduction Strategy Paper (PRSP) under Poverty Reduction and Growth Facility (PRGF) prepared by the UNF government at the instigation of the IMF-World Bank. Although the attached conditionality, either party does not specifically mention, the policies stipulated leave little doubt that they are the 'Washington Consensus' conditionality. At the last general election people rejected this economic development strategy. In the early post-war period, the raison d'^tre of the IMF-World Bank aid disbursement was the 'cold war' rhetoric. The regional wars resulted in the division of some countries into two parts, northern socialists and southern capitalist; a competition between socialist and capitalists countries ensued as a result, allowing even the capitalist countries such as Singapore, Philippines, Indonesia, South Korea and Taiwan etc. to deviate from the free market ideals and to implement 'state-led capitalist system' to record a faster growth, beating their counterparts in the socialist world, in order to demonstrate to the world the invincible capabilities of the capitalist system. The critical role was played by an activist government intervening in key areas of the economy, focusing on industrialization in order to escape the fate of being simply agricultural or raw material producers, protecting the domestic market from foreign competition, tightening controls on foreign investment. South Korea is a case in point. South Korean government offered incentives to the private sector in the form of import control policies, concessional interest and fiscal incentive policies. Special incentives were offered for exports, while maintaining a reasonable degree of protection to domestic industries. General Park transformed South Korea from a backward agricultural nation into a modern industrial nation by using the central government to play the key role in economic development because as he felt that no other South Korean institution had the capacity or resources to direct such a drastic change in a short time. The resulting economic system incorporated elements of both state capitalism and free enterprise. The economy was made to dominate by a group of chaebol, large private conglomerates and was supported by a significant number of public corporations. The government guided private industry through a series of export production targets utilizing the control of credit, informal means of pressure and persuasion and traditional monetary and fiscal policies. The situation in Sri Lanka at the moment is similar. However UNF government failed to grasp this reality. In 1961 Korea extended government control over business by nationalising the banks and merging agricultural cooperative movement with the agricultural bank. In the late 1980s the power to allocate resources and credit was restored to the functional ministries. In 1990 the Economic Planning Board primarily charge with economic planning, coordinating and directing economic functions of government ministries was complemented with Korean Development Institute, an independent economic research organisation funded by the government. Government combined a policy of import substitution with the export led approach. Policy planners selected a group of strategic industries to back. New industries were nurtured by making the importation of such goods difficult. When the new industry was on its feet the government worked to create good condition for its export. As a result of these policies annual industrial production grew by 25% and exports by 45%. In fact, World Bank Staff Working paper No.263, August 1977 states, (p0-4) "Industrial incentive policies, (during the export-growth regime) particularly affecting import substitution and export expansion, played a major role in bringing about Korea's economic transformation." By 1975 exporters had enjoyed cash subsidies and interest subsidies and importers import tariff protection. Korea never had a low uniform import tariff system during this period as claimed by "Regaining Sri Lanka". The blessings of the World Bank and the IMF stimulated this system. In fact, The Wall Street Journal vilify the World bank as one of the villains behind weakening of the North's global position by "promoting socialism" in the Third World via its loans to Southern governments. This system has to be distinguished from the import substitution industrialisation strategy (ISI), which Korea adopted much earlier in 1950s and Sri Lanka in 1960s and early 70s; in the case of the latter, the orientation was solely on the domestic economy, whereas the former has placed emphasis both on the domestic economy and the international economy. On the other hand, under the Washington Consensus system the emphasis is on the international market only. This difference is very significant in framing development strategy; last system does not make way for independent indigenous development strategy. By mid 1980s, according to the statements made by US Treasury officials, US had realised their mistake of facilitating these countries to follow the 'state-led' strategy, as the industrial exports from these countries started competing American goods in the world market, which was one of the major causes of huge balance of payments deficit in US. When President Reagan came to power in 1981, his mandate was, inter alia, to discipline the Asian Tigers. What unfolded over the next six years was a prong strategy at dismantling the system of the state-led capitalism, which was seen as the domestic base for Southern national capitalists. The opportunity came soon in the form of global debt crisis in 1982, which drastically weakened the bargaining power of Southern governments in dealing with Northern states and corporations and Northern-dominated multilateral agencies. USA is the highest individual country stakeholder of both the World Bank and the IMF. World Bank was advised to change the strategy of aids disbursement. ('Washington Consensus'). New aid package is structural adjustment programme (SAP). Unlike the traditional World Bank project loans, a structural adjustment loan was intended to push a programme of 'reform' that would cut across the whole economy. A survey in 1988 carried out by UN Commission on Africa concluded that the essence of (SAPs) was the reduction/removal of direct state intervention in the productive sectors of the economy. This model is underpinned by 'market fundamentalism' philosophy. The main conditionality, such as, privatisation of state ventures, liberalisation of imports and exchange rates, minimising the state's interference on economic activities, creation of a 'level playing field' for foreign direct investment (FDI) 'prepare the roadmap' for the trans-national corporations to exploit developing country markets. As the cold war wound down from mid-1980s US began to redefine its economic policy toward East Asia as the creation of a 'level playing field' for its corporations via liberalisation, deregulation, and more extensive privatisation of Asian economies. However, Japanese capital was relocating many of its operations to East and South-East Asia to offset loss of competitiveness in Japan owing to the rapid appreciation of the yen triggered by the Plaza Accord in 1985. Access to this capital allowed Korea, Thailand and Indonesia and other East and Southeast countries to ignore the formal structural adjustment programmes (SAP) that foisted on them by the World Bank and the IMF. Thus, the Asian Tiger's miracle was the upshot of their timely prudent decisions to shun the medicine of the Breton Woods twins. A comparative study by Center for Economic and Policy Research (CEPR) Washington D.C, of the state-led system (1960-1980) and the structural adjustment system (1980-2000) has revealed that the fall in economic growth rates in the latter period was most pronounced. Life expectancy too has fallen during the latter period. Not only fall in infant mortality has slowed down, progress in education too, has slowed. Accordingly both (SAP) and (ESAP) have failed to deliver the goods. Most of the economists show that PRGF is the same as Sap or ESAF. US Treasury Secretary, Larry Summers stated, this new IMF package must have as one of its priorities "strong support for market opening and trade liberalization." Accordingly the IMF has sought continued compliance with existing trade obligations and to further commitments to market opening measures as part of a strategy of spurring growth. Both Indonesia and Zambia had to reduce import tariff and open up markets at the instigation of the IMF. To be continued next week |
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