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by Kumar David

Deng Xio Ping's quip that "It doesn't matter whether the cat is black or white if it can catch rats" has now attained the status of the quote of a century.

Therefore it is puzzling that while China's experiment with market forces since 1978 unleashed one of the most stunning productive explosions in economic history, a near simultaneous (starting about 1975 and accelerating after the 1977 UNP election victory) Open Economy in Sri Lanka has been "bound in shallows and in miseries".

Improvement of living standards is predicated on economic growth, though growth does not necessarily guarantee benefit for the poor since the absence of equity may skew distribution of society's economic surplus. The converse, however, can be asserted with certainty; without growth the living conditions of the population at large can show no improvement.

Growth in turn is predicated on how the economic surplus created by society is apportioned and managed; how it is apportioned between activities and classes, and how it is invested.

Delivering a lecture entitled "Distribution of Surplus Value in Sri Lanka" in December last year at the N.M. Perera Centre, Professor Sivaguru Ganesan focused on the apportioning, the surplus between economic sectors and social groups in Sri Lanka and touched on how it was managed.

It doesn't need rocket science or familiarity with all three volumes of Marx's "Theories of Surplus Value" to appreciate that that if the total social product is X and if society consumes Y (frugal or profligate aside), the amount left over for investment is X-Y. Fiscal borrowing (deficit budgeting) adds a dimension to the possibilities and external balances and foreign direct investments contribute a quantum.

Nevertheless, the use of the national economic surplus is the primary determinant of economic growth.

Ganesan's argument drives home with a plethora of statistics the point that all is not well with the appropriation and utilisation of surplus value in Sri Lanka.

The Table reproduced in this article gives the distribution of the GDP by different sectors for selected years. Since the author has used current rupees (nominal rupees of the year) some mental fine-tuning is necessary when comparing rupee values across years. The percentage values, however, are not encumbered by this difficulty and are meaningful across the years.

The numbers really tell a story. (See graph.) Let us look across the time spectrum. In 1978/79 household income, government revenue and private income (profit, interest, rent, and depreciation) were 64%, 27% and 9%, respectively, of GDP. In 2003/04 these numbers had changed to 45%, 17% and 39%, respectively, of that year's GDP.

As percentages of current GDP household income had fallen by almost 20% and government revenue by 10%, and the entire 30% had gone to the item, which in a rough kind of way, we can call capitalist and corporate revenue.

The trend is unmistakable; an increasing proportion of the national product has been transferred to the control of the economic classes newly empowered by the J. R. Jayewardene Open Economy. Now this is where the story of the cat and the rat becomes really interesting.

We need to go beyond Ganesan's thesis to ask questions comparing our experience with the Asian Tigers, South Korea, Singapore and Taiwan in the 1960s and 1970s and with Malaysia and Thailand more recently. Is it not said that these economies were 'opened', market forces let loose and splendid growth resulted? Is it not theorised that Japan led a flock of geese that soared into the sky in open-market formation?

One look beneath the superficial statement and it is evident that this is a distortion, an assertion that conceals more than it reveals. The economic model that the Asian Tigers adopted was unabashedly capitalist, no doubt about that, but it was not an open economy, it was a strictly controlled and state regulated model of capitalist development. The South Korean and Singaporean development models have no more in common with Sri Lanka's Open Economy than cats with rats, or flying geese with lions and tigers.

The post-1977 Sri Lankan economic model is laise faire of the IMF-Washington promoted variety. The mantra goes; open up markets, let business set directions, let foreign investors do as they please, reform currency and foreign exchange regimes and tighten up on labour. In contrast the Asian Tiger's adopted a dirigisme economic model - a rather abstruse term of French origin meaning a state directed (not state owned) economy.

The business classes, the banking sector and foreign investors were regulated to defined directions of productive prioritisation and economic activities; the heavy hand of government led macro-level decision making and policy planning.

Sri Lanka's economic model since the late 1970s is truly an open economy. Local business and foreign investors had near carte blanche in the belief that setting these forces free would lead to rapid and sustained growth. The consequence has been an obsession with commerce as opposed to production, high added-value import-export trade, tourism and services.

The only productive sectors which have shown strength are textiles and the construction industry. Light and medium industry, which elsewhere blossomed in numerous directions serving local and export markets, agro-industries and the IT sector, have all been dismal disappointments.

The failure of the Sri Lanka style Open Economy may be illustrated by a few figures for the 10 years to 2002; mean household income grew at a mere 2% per annum on average, in real terms, (foreign remittances grew at 13.7% and that tells another story about outsourcing one's failures); 50% of households subsist on less than $2 per day; public investment expanded at a snails pace of 1.7%; and labour productivity grew at a mere 1.5% in terms of real output.

Employment creation, the determinant of social stability, was dismal. While GDP growth averaged 4.5% domestic employment expanded at a mere 2.7% because of the intrinsic commercialised character of the Open Economy.

Although Sri Lanka has allocated substantial resources to poverty alleviation in subsidies and welfare measures, long term economic management has failed and the condition of the poor has not improved.

(Graph reproduced with permission from S. Ganesan, "Distribution of Surplus Value in Sri Lanka", a lecture at the N.M. Perera Centre, December 2005.)

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