Lessons for developing countries

K. Abeywickrama

Many economists have been warning the US government that this level of debt is unsustainable. But others have openly declared that since the dollar is the reserve currency the world would have no option but to accept the increasing US public debt.

In the present situation, this may not be assured.

Russian Premier Vladimir Putin speaking at the World Economic Forum in Davos called for the end of the role of the US dollar as the main international reserve currency and called for the acceptance of other leading currencies in that role.

Former President Bill Clinton, addressing the conference, accepted the statement of the Chinese Premier that the US created the financial crisis but exhorted other countries with large reserves, particularly China, to help the USA by buying US securities, assuring them that this will help sustain their exports to the USA. In short, export your solid manufactured products and services for unsecured paper which you have paid for. That is the Alice in Wonderland world we live in today.

Sincerity

The sincerity of President Barak Obama to solve the crisis in the USA is unquestioned. But he is mandated to solve the problems in the USA, not the consequences the problem the US has created for the rest of the world. The US has the greatest pool of talent in the world drawn from every country due to its liberal immigration policies: scientists, academics, researchers, inventors.

It has immense natural resources. It has the best educational institutions and research facilities. It could easily lead the world with these assets. Yet it chose to seek further expansion based on financial speculation, reminding us of Marlowe’s Dr. Faustus: “What profits Man to gain the World and lose his Soul”?

What are the lessons of the financial meltdown in the USA and the problems of the EU for developing countries? The most important is that the economic and political theories propagated by the Western powers and supported through the international and bilateral aid agencies they control should not be accepted at face value. Countries must prepare their own development plans based on their country situation.

Financial Crisis

The structural adjustment and trade liberalization programs the West sponsored have often been based on self-interest rather than pure charity. Take one example. When the East Asian financial crisis broke out in 1997/98 due to a heavy reliance on speculative international finance flows for massive investments that went bad, the Washington Consensus (comprising the World Bank, IMF, US Treasury) advocated rigid adherence to market principles: Failing corporations and financial institutions must be allowed to fail or be acquired by Western investors: aid money would only be provided to repay foreign creditors; credit must be tightened; interest rates must be increased, etc. But when the recent financial crisis hit the Western powers, the medicine is the very opposite of all these they recommended to others.

The second is that developing countries should not be heavily export-oriented towards the USA and the EU, neglecting the development of their own national markets and inter-regional trade.

China, sending a possible crisis, had started investing in developing their huge national market for some time. India, with its own big population, is also well placed in this regard. Both these countries can help the smaller countries in the Asia region to be integrated within more organised regional trade and economic development networks. Both the ASEAN and SAARC organisations are still far from integration compared to the EU.

Developing countries need to avoid speculative finance and unregulated markets while fostering private sector-led economic growth. Sri Lanka’s first ill-conceived venture into the derivatives market over oil price stability should be a hard lesson on the operation both of derivatives and the international banks that sponsored the project.

Infrastructure

Apart from the infrastructure development work already in progress in Sri Lanka, which is highly commendable, the government also needs more investment in rural agricultural development. One of the handicaps faced by rural producers is the insufficiency of marketing services for rural products.

This only be improved by the provision of more wholesale market facilities in the production areas that will be able to attract buyers from outside the region to break the monopoly of the main traders who tend to control markets and producer prices.

But a very important factor is the need to invest in quality higher education and research.

The modern world economy will always be led by countries that have high level technology and the capability for technological innovation.

The national investment in research, both in the private and public sectors, is minimal. Sri Lanka universities, with its main focus on a limited range of Liberal Arts, lags behind many other developing countries.

The universities are insulated to a large extent from learning and research that has been developed elsewhere. The academic courses and teaching is inbred.

Every big university in the USA has leading academics from other countries in their faculty. Even when I was in the Ceylon University in the 1950s we still had a number of outstanding foreign professors. Sadly, the situation is now quite different.