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Monday, May 20, 2024

A draft left programme: Part II Lanka’s economic options in the age of the New Depression

Dr. David

Dr. Kumar David
Part I, last week, discussed the political background, international tensions and a few class related issues and made an evaluation of political parties. Part II continues and concludes the document.

Year 2012 opened with substantial impact on local and global economic conditions. Locally, devaluation, upward price movements, a crisis in the nation’s foreign accounts, and lacklustre foreign direct investment have been compounded by political setbacks in Geneva and the loss of Indian backing. The government is desperate, early parliamentary elections in 2013 and 2014 are discussed in the media. One theory for Sarath Fonseka’s release is that the regime wants to set a cat among the chickens by promoting a SF-Sajith-Karu led challenge to split UNP votes. This is unlikely to work out but desperation on the economic front may prompt early elections as a diversionary tactic.

The Eurozone crisis has blown up. In May 2012 there was what can be called a national electoral revolt against austerity in Greece and France, and at the local level in Italy and Germany. The mid-May G8 meeting in the US failed to resolve the Keynesian versus austerity debate. The crisis in Europe will fester for the rest of this year. The OECD lowered its forecast of 2012 European growth to -0.1% on 22 May. The Chinese and Indian economies are slowing down and the next three years will not be bright. These factors form a bleak outlook for Lanka’s economy in the medium term.

A crucial question is the economic model for Lanka. The current IMF imposed strategy should not be confused with the strategy used by Taiwan and South Korea during their rise, and now by China and Vietnam. In these cases the state controlled economic movement and undertook macro decision making. Capital and foreign investment were incorporated but are not free agents. They are managed and directed. Stalinist state ownership of everything collapsed resoundingly with the Soviet Union and has to be abandoned. In the age of internationalism, autarchic and inward looking models offer no space for growth, trade, employment or technology. Hence we need to draw from all international experiences in evolving a model.

Short to medium term perspectives

The trade balance is alarmingly negative (without worker remittance Lanka will be in bigger trouble) and the level of sovereign debt is still over 80% of GDP. The foolish attempt to hold up the rupee exchange rate has failed and price inflation though still slow is inevitable, and interest rates will begin to climb. It is not true that foreign reserves in hand are at a healthy level to cushion imports. A large portion of short term debt consists of sovereign or corporate foreign instruments of over $2 billion, foreign holdings of Treasuries and IMF disbursements. Of the $5 billion reserves, less than a quarter is non-borrowed money. Heavy loan interest payment and loan repayment becomes due this year and the next, hence foreign reserves are not healthy since “reserves” themselves are loans.

Sovereign indebtedness, local and foreign overall, is in excess of $40 billion in longer term bonds and project loans. There is secrecy about the large infrastructure loans from China hence the accounts are surely worse than meets the eye. The government is making a killing by selling prime city, beachfront and wilderness land – one-off sales of the family silver. A part will disappear as bribes, a large part will enter the local economy giving an appearance that “there is money around”. What it is doing is mortgaging the future to survive today.

The election cycle is over for now, hence the subaltern classes will move on economic issues. The strong military establishment built through the war will be used to crush resistance, fear has been instilled into all, and the Rajapaksas hope the IMF’s programme will yield results to satisfy public expectations before conflict becomes serious. This is illusory, hence a macro and sector-by-sector alternative left program is crucial. This document is a sketch of some ideas; no more than partial and draft proposals to be fleshed out through discourse.

Agriculture and transformation of the rural economy

While the contribution of agriculture to the economy (including fisheries and rural handicraft) is growing in absolute terms, its share of national GDP is just 12% and declining – this is a worldwide trend. Mankind’s effort to produce its basic food requires less and less people and food and basic commodities account for less and less of consumption as other more sophisticated “needs” rise. This draft proposal must be further developed to include a more extensive discussion of agriculture, fishing, animal husbandry and rural society.

The amount of Middle East money channelled to the rural sector is in the region of $3.5 to $4.5 billion or over 8% of GDP. The amount may be difficult to quantify with accuracy but the impact of remittances from domestic helpers in the Middle East on the transformation of rural economy and society is huge. Therefore one third to 50% of the monies already circulating in the rural and semi-urban sectors is from the Middle East; this is an “internationalisation” of Lanka’s rural and semi-urban economy. The government would like to see remittances rise to $20 billion in a few years. This, however, is ephemeral as political conflict may erupt in the Middle East, or tensions mount between Lanka and the Muslim world due to incidents like the attempt to demolish the Dambulla mosque. Long term planning must take into account the undesirability of depending, for the long term, on worker remittances from abroad.

Industrial development

Industrialisation and participation in regional and world markets are the engines of growth. Industry has been making progress but is overshadowed by the service sector, not healthy for a country at Lanka’s stage of development – currently the service sector accounts for 58%, industry 29% and agriculture 12% of GDP. Industry fails to prosper in the absence of directive policy and lack of intelligent state guidance in the economy. The state has no strategic economic perspective; ours is a rent seeking government, interested in pocketing financial and political returns.

The cornerstone of a new industrial development policy must be the formulation of a plan with strategic perspectives and broad targets. The word plan frightens people because it is a reminder of the bad days of rigid Stalinist central planning. No, that has been laid to rest; I am referring to perspective planning as a guide to long range state policy making, the term dirigisme is sometimes used to denote this. Recall my previous remarks about East Asian development models; there are lessons to learn.

Key decisions pertain to giving industry priority over services and tourism; choosing “winning” sectors and setting growth targets, and prioritising employment creation. Local needs and the export market need to be balanced and local capitalism encouraged. Regional trade has been absurdly neglected by all governments. “Deep” rather than “shallow” regional trade agreements are vital. Foreign investment must be encouraged within clearly laid and stable parameters of the dirigisme programme.

Foreign investment

Foreign investment, to be beneficial, must conform to the directive principles of economic policy or the dirigisme programme. Foreign direct investment (FDI) in 2010 at about $400 million was only one third what was expected. In the first half of 2011 it was estimated at $415 million, still short of target. The basic conditions for attracting FDI (as China and Vietnam have excelled at) is to provide clarity, security and overall stability.

Rule-of-law is in shambles; there is interference with the judiciary, political abuse extends to contracts and bourgeois property rights, and corruption is widespread. The big sufferer is the local economy, but foreign capital is not blind. The FDI peace dividend has not materialised, except in tourism, and will not, till these problems are put right. Counter examples abound; the government has used EPF funds to take control of banks; Rajapaksa lackeys have been appointed to boards, and so on. There is liquidity floating in the world seeking investment opportunities, but this kind of muck has to be cleaned out first; but the ghastly press after UNHRC-Geneva in March 2012 is the type of disincentive whose bitter taste will be long prolonged.

The service sector and tourism

The lesson that growth led by the service sector (financial services, tourism and commerce) easily evaporates has been well learnt by successful Asian economies. To imagine Sri Lanka transformed into a financial hub competing with Tokyo, Hong Kong, Singapore, Shanghai and Shenzhen is daydreaming. Hambantota port will never be competitive because a world class port and transhipment point is not only a breakwater; it must be backed by world class business houses, IT skills and an English savvy workforce. This white elephant will languish as a bunkering location.

There must be a forward looking but realistic attitude to financial services and tourism. The Colombo stock exchange is minuscule compared to established Asian bourses and the rupee is not an internationally traded currency. Hence our role as a financial hub will be on a correspondingly small scale. Too rapid a flow of hot money in and out of a small foreign currency pool like that of our Central Bank can be destabilising.

Tourism must be developed cautiously. There are the usual negative cultural implications to be handled with sensitivity since a few negative incidents can make the trade dry up in an instant and investments rendered idle. There is an aspect of tourism development by the UPFA government that must be opposed, that is selling or long-leasing the choicest locations in Colombo City, along the beach front in the south, the east and west coast, to foreign companies, thereby alienating and excluding local people. The current rush to tourism is disproportionate and unwise; it must be rethought in consultation with local people, local capitalists and overseas investors. A new approach needs to be worked out.



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