Development strategy of the ‘miracle’ economies of East Asia?

By C. R. de Silva 

The IMF’s unproductive, slow-motion prescription for development, followed for many decades by Sri Lanka and even more obsessively today, was not given any recognition or respect by the most successful development practitioners in economic history – the original miracle economies of Korea, Taiwan, Hong Kong and Singapore, which emulated Japan’s example to achieve first-world prosperity, nor by the later miracle economies that followed their unique strategy closely thereafter, Thailand, Malaysia, Indonesia, and in some respects, China. All these countries determined that the IMF’s prescription based on economic liberalisation, privatisation, open markets, fiscal discipline, price stability, founded on the utmost confidence in unregulated markets, to lead a poor country’s development effort, to the near exclusion of a dominant government role, was destined to fail in a reasonably short time frame.

Several world famous economists, including Nobel Prize winner in Economics Professor Joseph Stiglitz, former Senior Vice President/Chief Economist of the World Bank (1997-2000) and now Professor of Economics at Columbia University; Professor Dani Rodrik, Economics Professor at Harvard University’s Kennedy School of Government, a prolific writer on development economics; as well as Dr. Stanley Fischer, one-time First Deputy Managing Director in charge of the IMF itself (1994-2001), later Governor of the Bank of Israel (2005-13), have all articulated the unique attributes of what has come to be called the “Development State”, as the right answer to the IMF’s slow-motion, numbers-centric, outdated, people-impoverishing development strategy, which has left many poor countries, like Argentina, Mexico, etc. – and right now Greece, still in the throes of an economic tailspin – in an economic shambles at one time or another – and Sri Lanka today is now well on the road to emulate this brand of development failures, which the IMF has micro-managed by their application of the sheer supremacy of “numbers”. Such countries are destined to fall by the wayside, causing untold suffering to many millions of middle and working class people in these targeted countries.

Where IMF strategies fail

In 1993, the World Bank identified the unique strategy to speedy, sustainable development with equity, of the ‘miracle’ economies, to a vast majority of whom it was making development loans for decades, and commissioned a path-breaking study (with Prof. Stiglitz’ participation) which expressly recognised the merit of their new philosophy. In mid-2016, an internal revolt among three senior economists in the IMF itself has brought into the open, the realisation that the earlier mentioned three distinguished economic thinkers were right after all, and they have articulated their dissident views of IMF strategy in IMF’s own internal publication “Finance and Development”. More about these express as well as implied criticisms later.

These distinguished scholars of development economics diagnosed that the IMF’s strategies (born mainly out of the Washington Consensus), based essentially on a purely numbers game (into which its beneficiary client countries get involuntarily sucked in!) in watching GNP growth, fiscal correctness data, foreign reserve accumulation, etc., did not – 

1. arise from a correct understanding of economic structures in developing countries; e.g. the pervasive spread of the cash-intensive, booming, informally employed rural communities and huge expansion of urban communities in secondary towns, the satellites of provincial centres in Sri Lanka, resulting from the expansion of a considerable countrywide consumer base, mainly fueled by emigrant worker remittances to dependents, for many years now, the largest source of the country’s foreign income, and often transferred through non-banking channels, which have raised standards of living generally, but not reflected in IMF/Central Bank-monitored data bases or per capita GNP figures;

2. appreciate that there were “invisible dynamic processes” at work at the very heart of development strategy (which IMF’s obsession with national data fail to catch); e.g. GNP per capita and other numbers do not pick up, nor does enhanced VAT encompass, unrecorded/unreceipted small and medium-sized business earnings, or the high levels of underground “black” money generated by the fruits of rampant, unchecked corruption at political, and other levels of society, as well as the substantial, untaxed incomes which make many so-called ‘poor’ economies like India, Sri Lanka, Pakistan, or Bangladesh very wealthy at the upper echelons of the largely urbanised social ladder; (this is an appropriate place to comment that the IMF-advised new draft income tax legislation in Sri Lanka, incorporating an outsourced – possibly, foreign origin – tax collection provision, may possibly paralyse tax collection countrywide, due to trade union action and completely diminished morale, among responsible officialdom);

3. nor admit that governments had a very active and vital, interventionist role to play to steer the “Development State”;

4. IMF applies standard, well worn out by now, one size fits all formulae, which do not individually account for the distinctive attributes of each developing country’s set of circumstances, unique to each economy, and varying from one district to the other, in material respects; (for example, the operation of sharecropping contractual obligations taxing farmers 50-66%, especially in South Asia, which deplete public savings); 

5. the realisation that the IMF’s obsession with “market fundamentalism” does not lead to economic efficiency; ignoring distributional concerns leads to poverty escalation, occurring right now in Sri Lanka, where 40% of the population, over 8 million, a staggeringly large number, receive incomes which are below the poverty line; the IMF belief is that political remedies (sometimes unexpected ones, may also well follow) should accommodate the vital and impoverishing consequences of its development model;

6. IMF’s minimisation, following neoliberal dogma, of the state’s role in development, stands out in stark contrast to the dominant and essential role of the ‘Development State’, which steered the ‘miracle’ economies to prosperity on the basis that policy intervention was essential to a successful development process; and, therefore, 

7. a proper balance should be struck between the government’s role and the market’s unforeseeable vagaries, which could irreparably damage vulnerable economies at the earlier stage of development, if left alone, e.g. probable in Sri Lanka in due course.

In summary, in the prophetic words of a Nobel Laureate in Economics (none produced by the IMF in nearly 70 years; nor was IMF able to forecast the 2007-08 global financial meltdown, despite deploying over one thousand Ph D. economists from 189 countries, probably due to absence of original thinkers among them?); the bottom line is that: “There is no theoretical underpinning to believe that in the early stages of the development cycle, markets by themselves lead to efficient development outcomes” –Joseph Stiglitz.

Experimenting with development models

Since the development practitioners of the ‘miracle’ economies of East Asia were convinced that the IMF-dictated strategy was a slow-motion road to near stagnation, the ‘Development State’ sponsored and practiced the winning strategy of reaching sustained, high income levels for a broad-based population in three decades by essentially experimenting with a totally different development model, based on – 

(a) the significant role of grass roots, village level organisations in the development ‘war’, viz. publicly owned township-level and village enterprises in China, and the kabupaten (village improvement) government-funded program in post-Sukarno Indonesia after 1968, both mechanisms of vibrant development success, especially in accelerating agricultural productivity, at the early development stage;

(b) active, government-directed subsidised, initially heavily protected industrial policies, frowned on in IMF theology, but practiced by Taiwan, Korea, etc. (the writer was told in Seoul how the embattled lady president’s father General Park Chung-Hee, who as president, laid the very foundation for Korea’s development, had regular meetings with nascent “chaebols” (now giant industrial conglomerates) like Hyundai, Lucky Goldstar (now LG) and Samsung, and assigned specific tasks/roles to each in a designated sub-sector of industry, and monitored progress periodically and personally; likewise, Korea fought the development battle on a ‘war’ footing;

(c) high public savings rates, rising to 40% of incomes, not copying IMF dogma to indirectly ‘kill’ savings by applying an unlimited variety of indirect taxes like VAT, impoverishing the middle and working class backbone of the country. In comparison, Sri Lanka’s public savings rate is at a low 17%;

(d) governments of the miracle economies supplied subsidised capital through the state banking system to propel export industry development, principally in high value sectors like technology, electronics and automobiles, turning out world beaters like Samsung in semi-conductor electronics, LG in home appliances and TV, Hyundai and KIA in automobile production; these industries, protected in their formative phase, quite unknown in the IMF playbook, had spillover or secondary benefits into many other sectors, like supply of parts and components; (again, the writer learned in Seoul that to gain insights into advanced technology, where reverse engineering was not practical, Korean companies flew Japanese engineering talent to Seoul, handsomely compensated, during weekends to informally achieve technology transfer. The writer also remembers Korea being granted World Bank loans to subsidise the cost of repatriating Korean engineers and experts in technology, who had earlier migrated to the US, to build up a sophisticated talent pool);

(e) trade protection, easy credit and import substitution, therefore, characterised early stage development of industry in the ‘miracle’ economies for all export-oriented subsectors, to give them a valuable kick-start before cutting them loose to global competition, obviously not the case with IMF-advised preferential trade agreements being pursued by Sri Lanka, (which has only the nucleus of a narrow industrial base at the very low end of the export ladder. Can Sri Lanka compete even under FTAs with China (with whom US industry has miserably failed to compete with and is carrying a huge adverse trade balance), Singapore, a world class high-tech manufacturing and entrepot centre (and one of the four original tiger economies) or India, whose industry was developed under heavy protectionism in its formative decades;

(g) good infrastructure availability, specifically a sound road system, for which the last regime in Sri Lanka is frequently faulted; (the writer was told, again in Seoul, that when the Korean government first requested a highway loan from the World Bank in the early-1980s to build the trunk highway from the Seoul industrial zone to Pusan, the only large port Korea had in the far south end of the peninsula, the World Bank’s western-educated transport economists reacted that the low traffic count did not generate an adequate cost-benefit to justify the project; and the then cash-strapped government built a basic road which soon became congested with heavy traffic, and became inadequate as the export economy gathered steam rapidly);

(h) conversely, Latin American and sub-Saharan African economies followed IMF-dictated economic reform strategies in the decade of the 1990s, just like Sri Lanka, and fell short of the resounding prosperity of the East Asian miracle economies; (i) conversely again, IMF-advised open capital markets policies exposed developing countries to the “volatility of international capital movements” that directly led to the global, but mainly Asian, financial crises of 1997-98, due to the sudden flight of speculative capital, including from the miracle economies of East Asia, testifying to the failed reform strategies of the ‘openness’ ideology. Victims were first Mexico (despite fiscal balance) in crisis, later Russia and Argentina, and Greece, still in the economic doldrums after a first $ 350 billion IMF/EEC bailout in 2010. There is also mounting evidence that capital market liberalisation did not contribute to economic growth (see IMF Occasional Paper #220 of 9/2003). But who in Sri Lanka is sensitive enough to react to these IMF-designed disaster scenarios of the recent past?

(j) While Sri Lanka and the IMF staff fine-tune GNP/GDP growth numbers every few weeks – that is not the end objective of a sensible development strategy – which is sustained improvements in living standards and the achievement of broad-based, equitable development. But the IMF considers distributional concerns as issues for politics – otherwise, onerous indirect taxation through VAT, etc. (while turning a blind eye to expenditure profligacy at the political level, unconscionable duty exemptions and irrational increases in emoluments) and the IMF’s insistence on increased total revenue, none of that will work; the carrying out of IMF’s policy advice on enhanced indirect taxation and privatisation/PPP have already led to social tensions and may lead progressively to civil strife in due course, as recent events down south forecast;

(k) IMF pushes for institutional transparency in beneficiary countries, while it is the least transparent, most secretive, of the international financing agencies, where Board of Executive Directors’ (edited) summaries of minutes of meetings are issued years later, mainly to forestall, and also safeguard, effective staff criticism from adverse publicity. In fact, coincidentally, the current as well as last two heads of IMF, have run into legal problems of their own in their home countries;

(l) in recognition of the reality that developing economies varied widely in their resource endowments, both physical and human, and the ever present prospect of market failures, the wise decision was made at the post-WWII, Bretton Woods Conference of 1946 in New Hampshire, USA to establish also an International Bank for Reconstruction and Development (popularly called the World Bank) – mainly to mobilise surplus capital from advanced and oil-rich economies by issuing (soon to be AAA) bonds, and transfer resources for investment projects and programs in poor countries. So, the world sees one institution which applies and fine tunes pure numbers as theoretical yardsticks of development to relieve temporary financial crises, and a World Bank that is concerned with the advancement of higher and sustainable living standards of a broad cross-section of people in the real world, charged primarily with the demand for poverty alleviation of targeted populations; its latest $ 75 million IDA credit for improving welfare and existing safety nets in Sri Lanka, should be commended for focusing on the topmost priority for the urban and rural poor, being progressively impoverished by the adoption of IMF policies;

(m) IMF’s one-size-fits-all standard policies, applied uniformly to every crisis, are often doomed to fail, since every country, people and set of circumstances are unique and development practice has proved to be not mechanically transferable like that. In recognition of this dynamism and uniqueness of countries and peoples, the East Asian ‘miracle’ economies grew rapidly following a totally different development strategy their governments crafted, which deviated fundamentally from IMF dogma. 

To summarise, Korea, now an OECD (the rich countries’ club) member and aid funder through its own KOICA agency (with a development program In Sri Lanka), which spearheaded the “Development State” strategy of government-led, subsidised, protected, exchange-controlled, first import substitution-then-export led economy, directed by a state selected conglomerate-centric (chaebol) growth strategy, admittedly under authoritarian rulers, along with three other original ‘tiger’ economies (Taiwan, Hong Kong and Singapore), with several in East Asia (viz. Malaysia, Thailand and Indonesia) copying and following them, sped ahead in their economic development, leaving IMF’s disciple countries behind. For example, Sri Lanka had a slightly higher per capita income than Korea after WWII ended in 1945, but today, following IMF-type, conventional, western development strategies has limited Sri Lanka to under $ 4,000 in per capita income, while Korea’s ‘Development State’ has generated nearly $ 28,000 in per capita income, or a seven-fold increase in sixty-five years; both these countries having had destructive, intervening wars in some of those years. Urbanised South Korea, a rocky peninsula with almost no natural resources except its obsessively energetic population, was almost flattened during the Korean War, when the country was divided by the big powers, but soon became an export power house with mostly US and World Bank assistance and advice, and an insignificant FDI role. Lights are completely out in satellite photos of North Korea, under a destructive, militarised, communist-type autocracy, with lights blazing brightly throughout the now democratic South, where corruption is frowned upon and heavily penalised, even at presidential level, with several of them convicted and imprisoned. Sri Lanka would do well to emulate that model, if it wants to develop speedily.

The Nobel Laureate in Economics of 2001, Professor Joseph Stiglitz, has commented: “If there were fruits of the Washington Consensus (identical with IMF ideology) they are yet to be enjoyed, at least by the average citizens in many of the (developing) countries. Countries like Bolivia which were early IMF followers are still asking: ‘we have felt the pain, when do we get the gain?’ If the reforms exposed these countries to more risk, they did not evidently provide them with the strengths for a rapid recovery; in Latin America, as a whole, there followed almost half a decade of declining per capita incomes.”

(The writer owes a debt to the above-named, since the foregoing is substantially a summary of ideas and points made in his lengthy paper titled “The Post Washington Consensus”, presented at the Initiative for Policy Dialogue, Barcelona, Spain, September 2004.)

To be continued.

(The writer was a member of the former CCS, who was later responsible at World Bank headquarters for program development in, and loan negotiations with, several miracle economies of East Asia Region, for some 20 years.)