THE IMF IN SRI LANKA – PART III -The Development Strategy of The ‘Miracle’ Economies of East Asia
Posted on February 21st, 2017

by Chanaka R. de Silva Ex-World Bank

Introduction – Resurgent Nationalism vs Globalization in Decline.

Today, nationalism and its fellow travelers protectionism and populism, are sweeping across the Western world, ever since the global financial crisis of 2007-8, which started in the U.S., essentially on Wall Street, in a paroxysm of financial greed for quick enrichment, resulting in a financial apocalypse significantly not forecast by either the IMF’s or the World Bank’ phalanxes of Ph.D-qualified specialist economists!

Nationalism presents a major backlash against globalization, and its far-reaching, underlying economic philosophy, which is the foundation on which the neo-liberal dogmas of the ‘Washington Consensus’, and now-obsolete IMF policy prescriptions applied to its clients, like Sri Lanka, have been grounded and developed. In retrospect, it would almost seem that the authorities in the several countries in East Asia, who pioneered a novel development strategy forecast future events, including the waxing of globalism and the emergence of protectionism.

An important victim of this new protectionist wave is so-called liberalized trade, now translated into IMF-advised, preferential trade pacts, which Sri Lanka is currently negotiating with several economies, more industrialized and developed than Sri Lanka (about which, later essays will provide analyses), interpreted by knowledgeable critics to symbolize the victimization by the globalized elite of the economic interests of the unsuspecting middle and working classes of developing countries, struggling to improve their living standards. At the very early stage of their development, the miracle economies adopted protection and import substitution, and shunned liberalized free trade, until their industrial bases was developed and stabilized.

Following on this anti-globalization tsunami, the current phenomenon is of some 350 protectionist measures entered into recently by members of the Club of G-20 rich countries to safeguard their own productive enterprises from global competition, through changes in trade regulations and anti-dumping procedures; while the virtual collapse of Obama’s brainchild, the abortive Trans Pacific Partnership (TPP) and the impending emasculation of the North American Free Trade Agreement (NAFTA), operating since the Bill Clinton era in the 1990s, but a likely early casualty of Trump’s obsession with protectionism, will collectively lead to a reinvigorated, western wave of serious new barriers to international business, trade and migration. In addition, if Brexit is followed by UK’s withdrawal from the EU single market as expected – all these current developments will send a very negative signal to developing countries like Sri Lanka, whose politicians and bureaucrats seem unable to visualize the tea leaves, meaning that even well-established free trade pacts are collapsing in the wake of the rising anti-globalization wave, also purposefully unrecognized by the IMF, which is still urging preferential trade arrangements on an unsuspecting Sri Lanka.(See Anti-Globalization on the March, Free Trade Under Fire, The Economist, 2016, which recently convened an economic pow-wow in Hong Kong, which the Prime Minister also attended). After all, we’re all nationalists, we’re all patriots, but none claim to be statesmen, an absolute prerequisite to the economy “taking-off” to the next level of development – a hollow promise by the IMF when its EFF was approval in June 2016.

Read the musings of a perceptive local commentator, waxing eloquent in colourful prose: “Globalization was the poster child of Imperialism; free trade, open markets, (free) capital movement, curbing wages and workers’ rights, eliminating tax on multinationals and removing currency restrictions. For decades, this was the IMF, Washington (Consensus) and (U.K.’s) Whitehall chorus, the refrain of learned economists, some of them Nobel Prize winners, now strangely deaf and dumb, and of course our very own J.R. and his mouthpieces (now in power?). Then what on earth went wrong? Unexpectedly, millions in the West were left out and left behind; globalization did not work in the Appalachian coal mines, Detroit (in the U.S), industrial regions of France and in the north of U.K., The sorcerer’s apprentice, capitalist globalization, turned on its master, globalization per se, and devoured it? Brexit, Trump and the rise of the European far right manifests this wrath, but none have the foggiest notion how to stop this slide…Globalization has gone sour” (except in Sri Lanka, thanks to the IMF)…”Obama laments: ‘globalization needs course correction’”(Dr Kumar David, It’s Back to the Drawing Board for Globalization, Sunday Island, 27Nov2016).

Then again, more sense by the very same author: “The underlying concerns about the economic consequences of globalization and accelerating technological change are understandable. We need to put this alongside the financial crash which brought home that a very few individuals in the financial sector accrue huge rewards and that the rest underwrite that success, and pick up the bill when their greed goes astray. We are living in a world of widening, not diminishing, inequality, in which many people can see not just their standard of living, but their ability to earn a living disappearing. It is no wonder that they are searching for a new deal…the opposite of what we have been force-fed for decades…Events have verified that the working and lower-middle classes are in revolt…it is at one and the same time the expression of real suffering and a protest against real suffering…” (Confronting the Advance of New Populism,SundayIsland,25Dec2016). Welcome to the consequences of IMF dogma! Several countries in East Asia had much earlier found the “new deal” referred to earlier, and prospered from a different economic development strategy, the substance of which will be detailed below.

Development Strategy of the ‘Miracle’ Economies of East Asia. (delete dividing line here)

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 liberalization, privatization, 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, compared to the ‘miracle’ economies of East Asia..

In 1993, the World Bank identified the unique strategy to speedy, sustainable development with equity, of several ‘miracle’ economies, to most of whom it was making development loans for decades, and commissioned a path-breaking study (with Prof Stiglitz’ participation) which expressly recognized 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 realization 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 in later parts of this eassay.

These distinguished scholars of development economics diagnosed that the IMF’s strategies (born mainly out of the Washington Consensus), based essentially on a basic 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 –

(i) arise from a correct understanding of the unique 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, partly 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, including per capita GNP figures;

(ii) 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 urbanized social ladder; (it is appropriate 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 likely trade union action and understandably diminished morale, among responsible officialdom);

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

(iv) 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 vital public savings);

(v) the realization 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, could also well follow) should accommodate the vital and impoverishing consequences of its development model;

(vi) IMF’s minimization, 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 actively steered the ‘miracle’ economies to prosperity, on the basis that policy intervention was essential to a successful development process; and, therefore,

(vii) 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, as current events unfold.

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 2007-8 global financial meltdown, despite deploying several hundred or more 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).

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 organizations 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, subsidized, 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 single-mindedly 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, doubling cell phone charges, 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 subsidized 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 enriching 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 recollects Korea being granted World Bank loans to subsidize the cost of repatriating Korean engineers and experts in technology, who had earlier migrated to the U.S, to build up a sophisticated, indigenous talent pool);

(e) trade protection, easy credit and import substitution, therefore, characterized 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 U.S. 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, 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 now, 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 liberalization 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 the results of 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 vehicle duty exemptions and irrational increases in politicians’ emoluments) and the IMF’s insistence on increased total revenue, none of that will pass muster; the carrying out of IMF’s policy advice on enhanced indirect taxation and privatization/PPP have already led to social tensions and may lead progressively to civil strife in due course, as recent events in the deep 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, U.S.A. to establish also an International Bank for Reconstruction and Development (popularly called the World Bank) – mainly to mobilize 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; and,

(n) lastly, at the top political level, these successful East Asian regimes, mostly under authoritarian rule at their formative stage, kept the super-structure simple, with few Ministers who fully delegated the responsibility for planning development projects, financing and implementing them, to a small cadre of qualified and experienced bureaucrats, who were left completely independent of political interference once policies were formulated. Staff in external aid agencies, like the World Bank, interacted on development issues, negotiated loans and obtained government decisions, directly from these top bureaucrats, never at Ministerial level. Governments maintained peace, law and order, while the bureaucrats executed the regimes’ development policies. (For example, in post-Soekarno Indonesia, in the first two decades of concerted development, the Generals entrusted the entire development program to the so-called ‘Berkeley Mafia’, a small set of U.S. qualified economists; and a super- Minister, drawn from their own ranks, appeared in charge of Finance, Economic Affairs and Trade, only in the third decade of the country’s development, once a solid foundation had been laid, and purely to achieve an excellent level of agency coordination as development activities needed greater fine-tuning, to expedite ‘take-off’ of the economy, which duly occurred). It is unfortunate that such a very successful politico-administrative system is not feasible in the highly politicized milieu of today’s public sector in Sri Lanka.

(The writer, a member of the former C.C.S was later responsible at World Bank Headquarters for program development in, and loan negotiations with, several governments of ‘miracle’ economies in East Asia Region)

 

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