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| Sunday, 18 July 2004 |
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Why did Sri Lankan voters reject 'Regaining Sri Lanka'? Continued from last week Regaining Sri Lanka contains the following Washington Consensus conditionality, though presented as of author's voluntary choice. All three key elements mentioned in the Government's Programme, ie, privatisation, legal reforms and tax reforms (p2 & 12) are Washington Consensus conditionalities. Under the unwarranted government interferences are included those interferences that were successfully effected by Korean government to achieve high growth rates (p9). Four of the five interferences mentioned as distortive, have been successfully applied in Korea and Taiwan to achieve high growth. The fundamental defect in this document is that the authors have not been able to cognise the difference between the state-led capitalist system and the Washington Consensus system, or having cognised the superiority of the state-led capitalism were reluctant to recommend that in fear of rejection of the model by the donors, and as a result have misguided not only themselves but also the readers by not showing the differences in performances under the two systems, or have shown an opportunists attitude sacrificing the long term interest of the country. The premise that government must provide a conducive environment in which private sector has the freedom to make necessary decisions to continually improve productivity (p14) is the philosophy of the Washington consensus and has failed in most countries in Africa, Latin America and Asia. The experience elsewhere has shown that the state's role has to be more direct, aggressive and discriminative to achieve rapid growth. (Korea, Taiwan, Thailand, China and Mexico etc) In this document the main emphasis is placed on the reduction of the budget deficit (p16). However, what is pertinent is to rationalise the expenditure rather than to reduce the budget deficit. Drastic reduction of deficit might have a backlash, mainly in a developing country. Majority are poor and live on state subsidies, average wage is low at the subsistence level. When the state's expenditure is pruned to reduce the deficit, first victims would be free education, free health and food subsidy; poor people would fall from proverbial 'prime fan to fire'. Malnutrition, ignorance and poverty will be widespread with their all debilities. The reversal process of improving the economic condition of the poor as a result of this strategy (Kuznet Curves) would take too along a period, by then the poor would have reached annihilation. On the other hand, converting domestic debt to foreign debt, in order to reduce the interest burden of the budget, as the international interest rates at the moment are low, is a self-defeating strategy. Theoretically burden of the domestic debt is minimal in the sense resources do not go out of the country, whereas servicing of foreign debt involves resource outflow. Already trade deficit is enlarging to disturbing magnitudes. If exports do not perform as expected due to an international recession, Sri Lanka will face 'Thailand style' international liquidity problem generating pressure on the Sri Lanka's Rupee. " Regaining Sri Lanka" has cited Singapore, Thailand and China as fast growing countries (p1). These countries have achieved such high growth rates under the 'state-led capitalist system' and not under the Washington Consensus system, the philosophy that underpins "Regaining Sri Lanka" ; as stated earlier the authors have misconceived the reality. Table 1 (p7) convincingly prove our point that up till 1995 most of the countries such as Thailand, Korea, Malaysia, Indonesia, etc, except China which continued with the old system, grew rapidly under the state-led capitalist system, and with the introduction of the Washington Consensus in 1995 to liberalise the financial sector, including the capital account, a financial crisis started in 1997 reducing overall growth rates. "Regaining Sri Lanka" envisages "moving towards a stable, low uniform tariff rate...", which is completely the opposite the Korea, Singapore, Taiwan, China etc have adopted to achieve the miracle. The most dangerous policy attempt, in view of the experience of far-eastern countries after 1997 collapse, is the "reform of exchange controls, including capital controls..." The document says "Important laws defining employment, labour and human resources policy are being reviewed" (p18) these laws were to be reviewed with the idea of attracting FDI by weakening the position of workers. In a country in which the average wage is at the subsistence level the suitability of such reforms is questionable. The financial sector reforms, as stated, were being handled with the support of the World Bank and the IMF (p19) and would overlook poor farmer, artisan or small trader and disadvantaged but would favour 'hot capital' and trans-national corporations whose sole objective was the quick return for their investment rather than long-term stable growth of the host country. Agricultural reforms were aimed at commercialisation of agriculture, (p21) which eroded into food security. Experiences in African countries show that famines are the final result of such a strategy. Privatisation or full cost recovery of water was a part and parcel of this package, which would hit mainly the women and children of the rural poor. One of the major challenges presented in "Regaining Sri Lanka" is overcoming public debt crisis. "Regaining Sri Lanka" states, " The truth is that Sri Lanka is in the thick of an economic crisis-a crisis born of deep and deadly indebtedness" (p1). Debt service burden of external debt has risen from Rs. 9 billions in 1991 to Rs. 48 billions in 2002. An interesting feature is that both interest and amortization values have increased consistently over the years since 1991. If foreign loans were to strengthen the country's investment potential there should be a surplus, if not in individual year basis, at least over a period of time, after the debt service payments. However, recent experience in Sri Lanka is not very encouraging. In 1999 debt service payments were 120.8% of the foreign loans, in 2000 this fell marginally to 117.9%; a further fall was recorded to 101.1% in 2002. Quite surprisingly, in 2001 which was the worst ever year recorded since independence, the debt service payments were only 79.5%. Net out flow of foreign resources through debt service payments of foreign loans was 5% of the foreign loans received during the four-year period. Current account of the balance of payments has not recorded a surplus during this period; hence, this deficit would have been filled by either further borrowings, or diverting foreign investments. This shows that foreign loans have not enhanced the resources of the country rather it has depleted it. When Tokyo aids package debt service payments commence this situation deteriorate further, unless a dramatic upsurge of exports is achieved. "Regaining Sri Lanka" is based on the 'Washington Consensus' that is underpinned by neo-liberalism, in which minimal state interference on economic activities is the foundation. Hence, under this system high growth rates cannot be expected in Sri Lanka. The voters were aware that no developing country has grown consistently at 8-10% annually under, SAF, ESAF or PRGF (Washington Consensus) over the last 18 years. All the developing countries that have developed, such as Singapore, South Korea, Taiwan, Mexico, (even Japan) etc initially followed import substitution policy and later the 'state led capitalist system'. In fact Korea joined OECD group recently by following that path. (Professors K. Ohono, H. Imaoka, L.E Westphal, K.S.Kim,etc). The SAF, ESAF, policies were responsible for 1995 Mexico crisis, and 1997 Far-Eastern crisis that began in Thailand. The debt crisis of the African countries was worsened by PRGF. Our voters were intelligent and well informed to realise this difference. That is why they voted for a party that promised to revitalise the role of the state in economic development. |
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