ECONOMY: East Asia Debacle Has Lessons for Sri Lanka

By Feizal Samath Reprint | | Print |

Feizal Samath

COLOMBO, Mar 3 1998 (IPS) - East Asia’s battered economies may be confident of bouncing back to shape, but the process of rebuilding faith in their model of development could take much longer.

The Tiger economies were role models for developing countries like Sri Lanka, which took lessons in development from East Asia, building up business ties with the region, particularly with Malaysia.

But the slide in its financial fortunes have forced Malaysia to put on hold most projects in Sri Lanka and Colombo has been looking for new investors. Whether it must also seek a new role model is only conjecture.

Academics attending a recent international symposium in Peradeniya University, argued that despite the East Asia “meltdown”, the Asian miracle held out many positive lessons for developing countries.

High growth rates, productivity and human resources enhancement, industrial discipline, a strong work ethic and interventionist state economic policy, are important for aiding economic growth, they said.

“At the same time the more recent trauma (in East Asia) exemplifies the dangers of being sucked deep into the global capitalist system. The Asian crisis has thus provided less developed countries with some timely lessons about how to secure their national economic independence and avert complete prostration before the IMF and global capitalism,” pointed out Prof. Kumar David of Hong Kong’s Polytechnic University.

Prof. Tee Jogaratnam of Peradeniya University recalled that Sri Lanka’s economy at independence in 1948 was more buoyant than most East Asian countries. But between 1960 and 1980 while East Asia notched up growth rates of 8 percent and more, Sri Lanka’s average rate of growth was 2 percent, he said.

The reason, he said, was “stagnant agriculture” and the worsening problem of rural poverty. Estimates of the number of poor vary between 30 and 50 percent, with nearly 80 percent of the island’s population living in its villages.

“Given the preponderance of (rural) poor, the performance of the agriculture sector is crucial in terms of its impact on the poor. Rural incomes in the non-plantation crop sector depend substantially on what happens to paddy,” Jogaratnam said.

“Recent studies show that paddy prices have declined substantially by 17 to 20 percent from the early eighties to the early nineties,” Jogaratnam noted. He said that several policy programmes designed to develop agriculture have been implemented but the government’s land reform policy did not result in any massive redistribution, as happened in the East Asian countries.

Sri Lanka’s price support programmes have remained largely ineffective while attempts to provide cheap and easy credit have been negated by large scale defaults. Sri Lanka should now concentrate on market liberalisation and export promotion, he recommended.

Discussing the causes of the East Asian debacle, Prof. David challenged the tendency to hold immature local markets (indigenous investors and entrepreneurs) responsible for the financial mismanagement, saying that the truth is that international investment capital was a knowing accomplice.

“Large banks and financial houses in the U.S, Europe and Japan ‘thoroughly investigated’ these projects before lending, risk was analysed and in the case of countries like Indonesia, graft and gift was offered,” he said. “The reference to weak local financial institutions, is therefore, thoroughly misleading,” he added.

Cautioning developing countries like Sri Lanka, David said that the relationship between their growth strategy and participation in the global capitalist economy must be monitored and controlled with great care.

“One immediate lesson is that both the arrival and departure of volatile hot-money can cause immense disruption in a small economy. Governments and central banks effectively lose all control of monetary policy and much control of economic policy when exposed to these titanic events,” he stressed.

What governments have to understand is that “the glitter of stock markets and foreign portfolio flows have pernicious side effects and that though more healthy, even foreign direct investments need to be carefully judged in relation to national economic strategy,” Prof. David said.

According to him, the market-socialist structure in China has shielded that country from the economic crisis that swept East

Asia. The macro-economics of reform in China, partly fortuitously, had to take into account the balance of class relations between the rural, urban working class and the emerging middle and capitalist classes, he explained.

“This structure insulated China from excessive exposure to global markets and the regional imbroglio,” he argued.

“Perhaps the most important lesson for countries like Sri Lanka is to break with the prejudice that public and collective enterprises are pathologically moribund and incapable of flexibility, efficiency and commercial success,” he concluded.