Tuesday May 07, 2024
Tuesday May 07, 2024
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By C.R. de Silva
Corroboration is important when presenting an unconventional case to a potentially sceptical audience, schooled in much publicised pro-IMF ideology and development practice for decades, as in Sri Lanka – an ideology embraced by its political class and top bureaucrats. Therefore, it is important to point out that the Nobel Laureate in Economics, whose views on the questionable economic theories underlying the Washington Consensus and IMF-sponsored neo-liberal strategies, which were articulated in the first part of this feature story, has a substantial following among development thinkers and academics.
Professor Dani Rodrik of Harvard University, who has acquired an intimate familiarity with ‘tiger’ economies, has confirmed in his prolific writings, that none of the seven miracle economies, whose development strategies were analysed, “with the possible exception (of the historically free port of ) Hong Kong, even came close to being a free-market economy…their strategies mirrored Japan’s…and required a government that was single-mindedly focused on economic growth…removing the obstacles to private investment : excessive taxation, red tape and bureaucratic corruption, inadequate infrastructure and high inflation (cumulatively, characterised as the ‘investment climate’)…equally important were interventionist (State) policies, government incentives to stimulate investment in modern manufactures…in priority sectors, and businesses stimulated with generous subsidies…in Korea, these largely took the form of subsidised loans, administered through the banking system…in Taiwan, tax incentives for investments in designated sectors…in both countries, bureaucrats often played the role of ‘midwife’ to new industries, they coordinated private firms’ investments, supplied the inputs, twisted arms when needed and provided sweeteners…neither country exposed its nascent industries to much import competition until well into the 1980s…they enjoyed protection from international competition…were goaded to export…by a combination of explicit export subsidies…(and) bureaucratic pressure to ensure that export targets were met;…they would be beneficiaries of State largesse, but only as long as they exported and did so in increasing amounts…at loss-making prices early on… which could be recouped by the subsidies and profits in the home market…another example of an ‘unorthodox’ development strategy was China’s shift from a predominantly rural, centrally planned economy to the industrial giant we know today”(extracted from Dani Rodrik, ‘Getting Globalisation Right: The East Asian Tigers,’ 3 May 2012).
Likewise, Dr. Stanley Fischer, one-time First Deputy Managing Director of the IMF, who de facto managed that institution, has also written about “the development strategies followed by the eight East Asian tigers (he includes Japan)…they had much in common…exchange rates were pegged against the dollar, high savings rates, combined with fairly accurate price signals, helped fuel high levels of productive investments…complementing high physical investments was investment in people…educational standards were, and are, extremely high…literacy is over 85%...Japan and Korea (unlike China) discouraged FDI (foreign direct investment),…in less orthodox parts of the strategy…East Asian economies had successfully intervened in markets…intended to accelerate industrialisation and growth of trade…through exchange rate policies to favour exporters, export incentives, selective tariff protection, ‘financial repression’ (slowing financial sector development), and consumer lending to provide cheap financing to industries for exports…and a high level of consultation between bureaucrats and business…and in most cases, a very slow opening of the capital account” – so, no Financial City hub between Dubai and Singapore, no open capital account or free markets as in the IMF/Sri Lanka model! – “bureaucrats were of very high calibre, responsive to the needs of business, yet isolated from corruption or undue pressure from special interests…governments were pragmatic rather than dogmatic…trying to steer the economy as a whole…the State intervened to improve on market decisions…East Asian economies maintained supra-normal growth rates for so long…human capital accumulation was essential to East Asian growth…better trained, more educated labour…more productive…As to East Asian industrial policy, I believe the World Bank’s view over a decade ago remains sensible : that some degree of government involvement can in principle be successful, and that it was successful in practice…to allow new industries to overcome coordination failures and exploit economies of scale…the country should NOT open the capital account to short-term capital flows…to say the exchange rate should become more flexible is NOT to say it should necessarily float freely …for most countries holding foreign reserves is costly. (Extracted from Dr. Stanley A. Fischer, Development Strategy for East Asian Countries: A Korean Perspective – a Paper presented at the Annual Meeting of Asian Development Bank, Cheju, Korea, 15 May 2004).
The above views expressed by IMF’s former top manager are very divergent to current IMF staff’s advice being dispensed, and complied with in every detail, by Sri Lanka today, and by other poor countries in financial crises, to their economies’ peril. What are the World Bank’s views (which Dr. Fischer so readily endorsed), and were articulated in its ground-breaking 1993 research study referred to earlier in this story? The World Bank’s economists examined the public policies of eight ‘high-performing’ East Asian economies from 1965 to 1990, to discover the unconventional and unique role – deviating from IMF (and even previous World Bank) advice – a role played by their Governments in “the dramatic economic growth, improved human welfare and more equitable income distribution in Japan, Hong Kong, Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand”, and concluded that –
i. these ‘miracle’ economies primarily “adopted policies at variance with the notion of the level playing field of open market free enterprise” or a neutral incentive regime, an important pillar of western development ideology; (which, of course, is very beneficial to advanced industrial economies);
ii. activist public policies established a unique relationship between governments, the private sector and the market;
iii.these governments “were better able than most to strictly manage the allocation of physical and human resources to highly productive investments” - by selective interventions through multiple channels, targeting key industries, subsidising credit for selected and declining industries, protecting domestic import substitutes, holding interest rates below market-clearing levels, establishing financial support through the government banking system, making public investments in applied R&D, specifying firm- and industry-specific export targets, and establishing government institutions to market the trade in manufactured exports;
iv. tax, tariff and exchange rate policies were applied, which kept the relative price of investment goods below market norms, with the result that output increased and investment returns were higher;
v. these governments shared widely, information between public and private sectors, “established and monitored appropriate economic performance criteria to evaluate specific, contest-based interventions”, using commercial criteria, within constraints set by government priorities;
vi. their experience “reinforces the view that economic policies and policy advice must be country specific to be effective”. (In other words, not IMF’s standardised numbers-centric, one-size-fits-all, approach to development); -
vii.these eight economies were unusually successful in sharing the fruits of growth – rapid growth and improved equity were the defining characteristics of the East Asian miracle; South Asia, the Middle Eastern countries and Latin America grew at less than half the speed of the miracle economies in 25 years (1965-90); East Asian strategies of selective promotion of industries generated high rates of productivity growth; and
viii.improved the integrity of the banking system to make it more accessible to non-traditional savers;
ix. Agriculture, while declining in relative importance, experienced rapid growth and productivity improvement, stimulated by light taxation of rural economy incomes;
x. Human welfare improved dramatically, with average life expectancy increasing from 56 years in 1960 to 71 years in 1990; while the proportion of people living in absolute poverty (lacking clean water, adequate food and shelter) dropping – in Indonesia from 58% to 17%, and in Malaysia from 37% to 5% – during the same period;
xi.specialised development banks were established to provide long-term finance for investment (e.g. a Government Technology Development Corporation in Korea, (KTDC), funded venture capital providing seed-money to entrepreneurs to promote innovation, (assisted substantially by several World Bank loans), this idea originating in Japan, but later replicated in Indonesia and Taiwan;
xii.The miracle economies applied “financial repression” to aid the banking system or bolster ailing industries, (not shut them down following market signals); but
xiii.they improved the institutional framework for capital market development much later, and this was not responsible for the economies “taking off” during the period covered by the research.
Following the epochal research effort and foregoing conclusions arrived at by the World Bank in 1993, motivated partly by the early ‘graduation’ or cut-off of Korea from that institution’s lending in 1992 – having achieved surprisingly speedy per capita income growth and sustained prosperity with equity for its people – more than two decades had to transpire before some senior economists in the IMF have begun to question parts of the Washington Consensus, and therefore, IMF dogma, on which its development prescriptions are based. Three senior IMF economists, including a department director and a division chief, have recently committed their divergent views to writing in the IMF’s official quarterly publication, ‘Finance and Development’ in June 2016.
Their significant departures from the standard IMF path Sri Lanka has been, and is now treading, may be summarised as follows:
1. Capital account liberalisation and fiscal consolidation, or “austerity”, being policies to reduce fiscal deficits and levels of public debt, have three specific consequences: (a) there is no evidence of resulting increased economic growth; (b) increased inequality ensues prominently; and (c) such inequality inhibits the level and sustainability of growth.
2. There are “genuine hazards” of foreign financial flows to developing countries, especially portfolio investment and ‘hot’, or speculative inflows, which may result in greater economic volatility and increasing crisis frequencies; since 1980, 150 capital inflow surges were recorded by IMF in over 50 emerging economies, ending partly in financial crises and causing large declines in GNP output;
3. Financial openness has effects on distribution, and inequality intensifies when a crash occurs. (Now there is increasing IMF acceptance of capital controls to limit short-term inflows, which compound financial crises. Therefore, full capital inflow liberalisation is not always an end-goal);
4. IMF is concerned with the pace of government’s reducing fiscal deficits – but too fast could derail economic recovery;
5. accompanying “austerity” policies (tax increases and expenditure cuts) generate substantial adverse welfare ‘costs’ – also hurts consumer demand, worsens employment, and increases unemployment;
6. Episodes of fiscal consolidation have been followed, on average, by GNP output drops rather than by expansion in GNP output;
7. Economic damage from greater inequality, associated with following the neo-liberal agenda, can be mitigated by increasing expenditure on education and training – expanding equality of opportunity; and
8. therefore, the bottom line is “no fixed agenda delivers good outcomes for all countries at all times. Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked” (extracted from Ostry, Loungani and Furceri, ‘Neo-Liberalism Oversold?,’ IMF’s Finance & Development, June, 2016).
The views of these three senior IMF economists are not unique in that institution, although IMF staff now ‘dictating’ to Sri Lanka are trotting out the same-old-same-old, ineffective, unproductive theories.
Maurice Obstfeld, the Chief Economist of the IMF currently in overall charge of IMF’s economics complex, states: “The global financial crisis (2007-8) led to a broad re-think of macroeconomic and financial policies in the global academic and policy communities…Nobody wants needless austerity. We are in favour of fiscal policies that support growth and equity over the long term. What those policies will be can differ from country to country, and from situation to situation…this requires us to recognise situations in which excessive budget cutting can be counter-productive to growth, equity and even fiscal sustainability goals…it is important always to consider the most vulnerable when planning fiscal adjustment. Of course, there are limits to the pain economies can or should sustain, so in especially difficult cases we recommend debt re-profiling or debt reduction, which requires creditors to bear part of the cost of adjustment…capital inflow surges could have destabilising effects…when the direction of capital flow reversed and money headed for the exits…(finally) changes in income and job distribution, many countries have addressed inadequately.” (‘IMF Survey: Evolution Not Revolution: Rethinking Policy at the IMF,’ 2 June 2016).
It is clear from the obvious thrust of the foregoing policy realities, that ‘reasonable doubt’ has been clearly cast at the numbers-driven, neo-liberal ideology leading to the slow road to unsustainable development, Sri Lanka is being goaded to follow by IMF staff, as a quid-pro-quo for a paltry ‘conditional commitment’ of $ 1.5 billion EFF, one tiny drop in the vast ocean of Sri Lanka’s foreign debt obligations! IMF’s prescriptive conclusions become still more incredible when serious doubt has been cast for decades by insider stories of the reliability and correctness of the basic economic data being churned out by the authorities, which the IMF staff keep analysing ad infinitum, and pronouncing almost daily to the public, massaging every decimal point change in growth numbers, which have absolutely no impact on uplifting over the short- or even long-term, the lot of the middle and working classes, who are the country’s backbone, and suffering grievously under the severe strain of IMF-inflicted tax and allied neo-liberal fiscal policies.
This seemingly outrageous assertion about data unreliability, becomes very credible when a former top official of the Central Bank himself charged that “there was a deliberate attempt at massaging the main economic numbers painting a rosy picture about a fast-growing, vibrant economy”…and confirmed very recently that “…economic data was manipulated,…starting from growth numbers and then poverty and unemployment numbers. Growth was shown as a super achievement, but the actual growth was pretty much lower than what was publicised…foreign borrowing numbers were cooked and published in a special debt report by the Central Bank to show a rosy picture…the growth numbers had been massaged by the top economic policy makers to suit their petty objectives…” (Dr. W.A. Wijewardena, former Deputy Governor, Central Bank, in ‘Economy 2017: The alarming signs should not be ignored,’ Daily FT, 27.12.2017). Since no contradiction has been issued on behalf of the authorities, this case too may be shelved, unless it is another alleged ‘scam’ amenable to “unspecified” action, following closed circuit snooping of suspected staff sources, now the prevailing drill – with suspected bond-related delinquents, whoever they may be, still very much in business, unaffected by the said “unspecified action”!
Only the other day, Dr. Saman Kelegama, Executive Director of IPS, reminded his listeners of a World Bank quote, as follows: “Why do statistics matter? In simple terms, they are the evidence on which policies are built. They help identify needs, set goals and monitor progress. Without good statistics, the development process is blind; policy makers cannot learn from their mistakes, the public cannot hold them accountable” (Keynote Address, Institute of Applied Statistics, Sri Lanka, 20.12.2016).
Consequently, it appears that the real story about the economy today is not as publicised in almost daily public IMF-staff pronouncements derived from suspect data, but as follows: “Sri Lanka is sitting on an economic volcano which is to erupt at any moment, destroying everything in the vicinity…the economic volcano is the deep economic crisis which the country has been going through since 2012…the symptoms took the form of a worsening external sector, unusual growth in money and credit, suppressed inflation, slow-down of economic growth and an undisciplined budget, causing the accumulation of public debt…The external sector is fragile today with mounting pressure for the rupee to depreciate against the dollar in 2017…Sri Lanka, without sufficient foreign exchange reserves, cannot avoid a massive depreciation of the rupee in 2017…The year 2017 and beyond is not rosy for Sri Lanka” (W.A. Wijewardena, as cited above).
Latest reports indicate new money printing passing the Rs. 300 billion mark to provide funds for local debt repayments (increasing inflation over 4% and rising), and that Rs. 56 billion equivalent in foreign funds have just exited the securities market. For a more comprehensive and accurate picture of the country’s economic condition, reference should be made to the ‘State of the Economy’ Reports issued annually, the latest in 2016, by the Government-supported and highly-respected Institute of Policy Studies (IPS).
In a previous feature story titled “Sri Lanka – Avoiding the ‘Road’ to Greece” in The Island of 13 June 2016, this writer analysed important issues arising from the IMF-aided $ 1.5 billion EFF program, which should be addressed to prevent Sri Lanka descending into the deep economic crisis now forecast by several local economists, and to avoid the disastrous fate Greece and its 11 million people have suffered, following seven years of IMF’s “intensive surveillance”, two IMF/EEC financial bail-outs amounting to over $ 350 billion, and with one more (for $ 75 billion) currently in the works. What has hundreds of billions of borrowed dollars and continuing, gratuitous IMF advice since 2009 bought for Greece in 2016?
What follows is the consensus of well-informed Greece watchers and astute commentators : “It is the year (2016) of the slow grind…squeezed by the IMF and Germany…wages have fallen significantly…manufacturers hard hit by falling domestic sales and a desperate lack of bank credit to finance export drives…small producers are the worst hit by capital controls and the squeeze on bank liquidity, especially to import raw materials…Senior IMF officials have rejected claims it is seeking to impose more fiscal austerity on Greece…which is struggling to meet strict fiscal targets in a recession-scarred country, weary of austerity...main IMF worries are that Greece is pursuing policies ‘unfriendly to growth’ and that Greece’s debt is highly unsustainable…workers are protesting creditor demands for labour reform…Greece remains the cradle of European dysfunction…its multiple challenges seemingly buried under a tide of bailout cash…For the Greek drama’s failure to reach a denouement, blame the scriptwriters…the IMF and the nation’s Eurozone partners. Year after year, each contributes a farrago of actors’ lines and stage directors. Yet, the curtain never falls and the play drags interminably on” (extracted from ‘Greece’s New Year of Living Dangerously’, The Greek Crisis, 21 December 2016).
We end with the following last thoughts: Should Sri Lanka revise its basic development strategies? If it does not, will Sri Lanka deserve the unfortunate fate of Greece? Should Sri Lanka, at a very minimum, negotiate foreign debt rescheduling – at the least, with China – to ease its debt repayment burdens? Is the IMF still assuring Sri Lanka of economic “take off”, following its $ 1.5 billion EFF commitment? (See analysis by the writer in ‘Sri Lanka – Case for $ 3-4.b Billion in IMF Funding’ in The Island of 13 May 2016)
(The writer is a member of the former C.C.S. who was later at World Bank headquarters and responsible for program development in, and loan negotiations with, several ‘miracle’ economies in East Asia Region, for some 20 years).
