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Government's policies for ensuring absorptive capacity of aid

by Prof. C. Suriyakumaran

There is tremendous concern on at least three major crises that could negate the entire Tokyo support. One is quasi political; the other two are purely economic.

North -East refugees - some of the “deprived”

The first is the mechanisms for direct involvement of the LTTE in the North and East. I do not take space on that, having written clearly more than once, last on June 8, (including therein also the clear elements of an ultimate national political solution.) Briefly, there need be little doubt, given this, that the mechanisms for the North and East will deliver the results in terms of (i) meeting the objectives of relief, rehabilitation and reconstruction; (ii) providing for the LTTE's essential central role therein; and (iii) utilizing fully the Tokyo funds allocated in the North-East for these purposes.

The second and third are more serious, even though the above 'totally unnecessary impasse' as I called it, has been made into one.

They relate to the Government's (all governments) known past incapacities to utilize aid resources for development - a matter also noted at the Tokyo conclusions. Second, at least as known so far, the Prime Minister's intention to overcome this by inviting foreign specialists to spearhead reformations to this end should be considered a matter of serious concern. An article by me of April 25 in the Daily News, which discussed the fifty year experience of our 'Disastrous South Model' explained in detail the reasons for our sustained failure. Unless we address these, no number of committees will serve.

Before going on to the substance, one is tempted to recall what the brilliant first Foreign Minister of Singapore, Rajaratnam, under Lee Kwan Yew stated: that the favourite pastime of governments that fail seem to be, rather than addressing the problem appointing committees to solve them. It was he who also on visiting the United Nations for the first time, with some dismay, including in his speech for the General Assembly the observation that 'here in the UN, when we have a problem, it seems we do not look for a solution, but look for a resolution!'

It is, thus, not committees, but policies, that we need - and that needs more effort. Primarily we must learn to switch from mere single stage production to developing machinery, tools and equipment (MTE) capacities in all sectors and at all levels, from the smallest to the highest, giving as I said in that article, the capacity to the economy (a) to become structurally 'self reliant', and (b) to enlarge GDP in the only way that at last we can envisage at a time when we borrow - and repay.

These are not new. That was the experience in post war Germany in 1949/'50 as I saw personally - (sophisticated manufactures were sold under tents worse than at Clock Tower Road, Pettah, but with technology based factories ensuring highest values; and farms keeping abreast. And so in Japan.

These thoughts have been repeatedly cited even if only by a few - for example myself, in 'The Wealth of Poor Nations,' LSE 1984, and successive writings. The following excerpts, based on them, should enlighten us, we hope.

by II going away from 50 years of failure

Over the years, a strong school of thought developed which held simplistically that what was wrong with the developing countries was that they do not export enough and have not pursued policies that make for these exports. These policies were termed 'structural adjustment policies', but did not refer to anything like the 'physical production structures.'

Rather, they mean simply the fiscal, budgetary and related monetary policies, designed to depreciate currencies, eliminate social expenditures, and bridge budget deficits by reduced expenditure and increased revenue, in the process hopefully containing inflation, stimulating exports and curtailing imports.

That basically was the policy stand, and the one applied to developing countries by the IMF and the World Bank. In reality these measures had three effects. By their draconian nature, they crippled basic socio-economic levels of income availability and levels of living. By their contradictions, especially, on the currency rating, they created new inflation. By their devotion only to fiscal, monetary 'structures' they left the particular country's export base much the same, especially in nature as it always was and, therefore, unable to meet the demands of any but a poor economy.

The struggle for growth by poor countries (variously called autonomous, self-reliant, or self-sustaining growth - for which I shall use the word 'non-dependent') - has increasingly come up against chronic, or recurring budgetary, trade and balance of payments deficits, internal and external debts of high order, currency devaluation/ depreciation, and inflation.

The struggle to contain them has taken the form of fiscal, financial and monetary measures - blessed, or pressed, by the international agencies concerned - that have left these countries hardly better off, often worse off. These measures, on the fiscal and monetary side, have been to rectify budgets by reduced spending, including elimination of subsidies and other supports, devaluation, fight against inflation and re-structuring debts. On the 'physical' side, the major policy plank has been 'bland' export promotion, i.e., pumping life into an export sector which, as it is, cannot attain the scale required by the economy.

'Restructuring' is a word often used in the process. But when it is used by the international agencies concerned, it does not refer to the physical structure, but to the fiscal and monetary structures. The former (subject to the position of the export sector mentioned) was supposed to follow the latter, though it rarely did.

In experience, countries pursuing these policies have found themselves unable to be 'non-dependent', relying on rich partners for much of current financing support and virtually all of Capital Development - that is that part of the goods flow into an economy, not only of basic or essential nature, but representing the items carrying the greatest value added component, namely, machinery, tools, equipment, intermediaries and the like, covering all sectors. With all these virtually imported, albeit in the name of development, the capacity for autonomously steering growth simply disappeared.

The "JRJ" and Premadasa 'mega' programmes (as also differently. Mrs. Sirimavo Bandaranaike's Guaranteed Prices for Subsidiary Production), had their impacts, but could not 'sustain' in a self-reliant future by themselves.

It was Arthur Lewis who stated in 'The Case for Development', "In developed countries.... even though external events will call for adjustments... the origin of growth is in the home market... The undeveloped economy with its origin of growth in exports is at the mercy of the.... industrialized countries."

It was clear that a prime cause of our current failures was the reliance by international policy-makers on fiscal and monetary measures, and an 'over-simplified' reliance on export promotion, in place of a strategy for the entire physical structure.

What the new, still absent, process does create, in effect, is an enlarged domestic supply base, and in many surprising areas, a base for a different, new range of exports, whose 'value added' components are much larger than the traditional. A new domestic production base (DPB) with machinery, tools and equipment (MTE) industries playing a lead role, is thereby created that never existed before. (These are the cases, historically, with variations, of Japan, Korea, Taiwan and later India in Asia; Singapore and Hong Kong too, save that they also 'special cases' of enclave development). It is this central characteristic that informs the 'Non-Dependent' structures of economies.

The policy consequence is that in place of debate in terms of import substitution (IS) versus export promotion (EP), we shall need to be talking of 'IS', 'DPB' and 'EP' viewed together and, in that sequence, leading to expanded 'EP', both in volume and value, adequate - along with an expanded 'DPB' also supplying the domestic market - to carry comprehensive development successfully. 'Yesterday's IS produces today's DPB for tomorrow's EP foundation'. As of now, both domestic, and international aid policies are as likely as not both to perpetuate aid and to perpetuate dependence. Under the new policy view, the issues, that had hitherto been made to look 'confrontational', cease to be so.

As mentioned, the experience itself is not intricate. The countries that have succeeded, in fact, adopted these policies and none other. Their variations in success would have depended on political awareness, application, and other factors of size, endowments, etc. But the evidence, and the results, are clear.

Import substitution is thus not of decades ago, (which was attacked by the export promotion protagonists), with superficial substitution of imports of major categories and setting up of industries, themselves heavily import-loaded with little net export values. Import substitution is creation of the domestic base which will allow future larger export expansion, even as they provide the 'infrastructures' to domestic development. The exponents of 'EP' have created an unnecessary opposition out of 'IS', as if they were contradictory. Properly seen and carried, they are complementary.

Given the seriousness of our national problem, we may give below excerpts of contributions on the same thoughts by two of the world's leading economists who have researched on this - Bradford De Long and Lawrence H. Summers - some years ago.

What makes economies grow? they ask. finding the answer to that question is the continuous aim of economists worldwide, and their studies over the years have suggested a mix of many factors, with major roles assigned to investment in plant and equipment. "Economic historians have seen the richest countries as those that were first in inventing and applying capital intensive technologies, in which machines embody the most advanced technological knowledge" they write.

"The problem with earlier analyses by economists of the role of investment in growth", they argue, "has been a failure to examine separately the role of investment in equipment and investment in structures. Equipment investment has far more explanatory power for national rates of productivity growth than other components of investment, and out performs many other variables included in cross-country equations accounting for growth". They point to the example of Japan, where high rates of equipment investment can account for nearly all of that country's extraordinary growth performance.

The authors specifically compare the effects of factors such as literacy and education rates on growth with those of equipment investment. Such factors have only modest explanatory power, they say. For the 1960 - 1985 period, for example, their results suggest that a 25-percent-point increase in both primary and secondary education rates, has the same relationship to growth as a one-percentage-point rise in the equipment investment share of national output.

Equipment prices in India were relatively high in the 80s, they say - more than twice as high in relative terms as in Korea, in 1980, for example. as a result, Indian equipment investment then, as a share of GDP was about half the average of the other countries covered in their study, even though Indian real non-equipment-investment as a share of GDP was slightly greater than the sample average.

"From our standpoint according to which equipment investment is crucial, India did not appear to have made good use of its high savings rate".

'From our perspective, the key difference between countries ruled by 'interventionist' governments in South America and Asia - despite the similarities in the rhetoric used to justify intervention - lies in their quantities of equipment investment".

Poor performers in South America, and also in Africa, "have confused support for industrialization with support for industrialists .... Policies that try to increase the health of the equipment sector by enriching producing industrialists end up raising prices and reducing quantities, and so are counterproductive.... The divergence between Latin American and East Asian outcomes and the divergence in their relative quantity and price structures carries an important insight into what a successful 'industrial policy' is, and how it should be implemented", they conclude.

III - Back to Tokyo and government policies

We make no apology now for these emphases below, on what we need in development policies. We can be brief:

I. - Do not expect 'committees' - even foreign - to solve your problems.

- Do not figure on ability to 'trim' down the public services as a solution. The 'damage' has been done; and the scale and nature of these trimmings can come - certainly with prescience from now - but only over time.

- Do not figure on cutting down welfare services and expenditures. (They are the only life-line in most cases for the 'deprived').

II. - Do not confuse any expectant buoyancies of our bourse (nor their stocks configurations as now) for 'growth'.

- Do not confuse mere multiplication of service of consumer industries for growth.

- Do not muster up a 'catalogue' of various 'projects' ('mega' or 'micro') in your shelves, to add up to the 'Tokyo Funds Supplies' - including many listed in to satisfy parties, regions or areas.

III - Institute, immediately, from grassroots up a comprehensive resources assessments and production opportunities process, in widest and deepest senses, from rural/micro to across the board macro opportunities - ("Resources Based; People's Participatory; and Production Oriented").

- Include, at all levels, their machinery, tools and equipment manufacturing needs and potentials.

- Link All training, education and trade/investments agreements with countries to the foregoing, before all else.

- Eschew 'Desk Planning' at all costs.

- Set Up, from rural community up to macro levels,

(a) Mechanisms for the foregoing;

(b) Action groups (without 'non-economic' intrusions) to put together Sri Lanka's Development Response, worthy of the peace efforts of all; and of the Tokyo bounties!

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Robert's indictment

Subathiran of Chavakachcheri, better known by the code name of Robert, and of the EPRLF - Varatharajaperumal faction, is no more. He had been gunned down by a murderer, while exercising from the roof-top of his flat June 14.

I had got to know him when my institution required some help from the Army and the EPRLF and the EPDP were the only groups that could do anything for the people in the North East. Regardless of their politics and ours, many of us Tamils went to them and later on kept quiet about whose help we had got.

I got to know Robert as a caring man, an idealist. He went out of his way to help and showed how much heart he had. My assessment of his character proved correct when he rose to the needs of the times and demonstrated his mettle working closely with the TNA in running the Jaffna Municipal Council within a refreshingly democratic framework and serving the Tamil public in many ways.

By accident of history, like many other idealistic Tamil youth of the early nineteen eighties, Robert had joined a liberation movement that was not to be ascendant and then fell victim to the Tamil fascist politics of joining the bandwagon or being deemed a traitor and being damned as one. Many took the easy way out by leaving the country.

It was not an option for a leader like Robert on whom many of the cadre depended. He could not abandon them. He chose to stay on and work for democracy and political space for the Tamil people.

In the process, he, and others like him under physical threat had to make alliances with the Sri Lankan Army.

It was a no-win situation. The dynamics of Tamil politics is tilted against any idealist who seeks the Army's protection from the LTTE. Thus we simultaneously have an endorsement of Robert's high calibre and a revelation of the cynicism of Tamil politicians in the remark of a man from a nationalistic faction of the TNA. "Yes, everyone in Jaffna says that Robert was a good man who helped the public in many ways. But why was he with the EPRLF (V)?" It was a callous endorsement of Robert's murder and a revelation of how many Tamil politicians use murder by their proxies as their route to power.

The last time I saw Robert, his movements were largely restricted to his party offices, and the lean young man I first knew had become overweight through confinement. His was the lonely life of a hunted man that did not permit the comforts of a wife or the pleasures of children. As I conversed with him and recognised the courageous idealism he showed - idealism that I markedly lacked. I realised that he was likely soon to be killed, like his father and by the same determined people who had killed his father. I was moved to a quiet tear or two which I quickly wiped away. And he did not comments and seemed politely not to notice. But if in those brief moments, he realized that there are those who loved him and recognised the humanity in him, it would ease my bereavement at this dark hour.

I wished to write a longer tribute describing how Robert helped me and sign my name to it. But my family has strictly enjoined me not to jeopardise my safety when I have a wife and children depending on me. I understand that Robert's body now lies at a funeral parlour in Kanatte and his only sister is arriving from Canada. I then wished to at least pay a courtesy call at the parlour. But the family has reacted fearfully by getting senior TULFers to tell me that they themselves failed to attend his funeral in Jaffna despite the warmth they felt for him and that I should not take the risk of being noted.

I am now resigned to accepting that I am a very ordinary man, a cowardly pigmy by the side of the toweringly courageous Robert, fired by his youthful idealism. Even in death he indicts the entire Tamil community and forces us to think about what kind of people we have become, when we cannot acknowledge friends; not even in death.

To his sister and other members of the family, I say this: There may not be many non-EPRLF people at the funeral. But in truth there are many of us cowards who respect and value what Robert stood for and acknowledge his humanity. One day, surely, we will be able to call ourselves openly his friends. As Robert meets his maker, be assured that Robert will be judged far more kindly than the Tamil community.

Tamil Coward

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