New strategy to withstand global economic recession

Text of speech by Constitutional Affairs and National Integration Minister D. E. W. Gunasekara on ‘The need for a new international economic order and strengthening international co-operation to facilitate the recovery of world economy’ at the 5th International Co-operation Summit held in China from August 31 to September 3, 2009.

As you are well aware, Sri Lanka is a small player in the global economy of $60 trillion ($ 60000 billion) with only a G.D.P. of $ 35 billion. Though it had a fairly impressive social development record, with a G.D.P. growth rate of 6 - 7 percent in the last 3 years, and a higher per capita income, it faced daunting challenges in its march towards socio-economic progress on account of a prolonged arms-conflict and also of external factors of its economy.

Sri Lanka, being a country highly trade-dependant accounting for about 70 percent of its G.D.P. was naturally vulnerable to the vicissitudes of the world economy.

The current global financial crisis hit our economy badly at a critical moment when the armed-conflict was at its height in May this year. In the fourth quarter of 2008, the external sector of our economy was affected adversely by the global financial crisis. It was expressed in many ways.

Sudden withdrawal of investments in Treasury Bills and Bonds by foreign investors, Hasty claims on short-term credit, sharp drying-up of commercial financing, Valuation losses arising from the sharp depreciation of major international currencies against the U.S. Dollar.

Foreign exchange

As a result, our balance of payments turned into a Deficit and our Foreign Exchange Reserves sharply dropped from $ 3.5 billion in July, 2008 to $ 1.2 billion in March 2009, within a matter of 8 months.

Of course, due to our prudent and flexible financial and monetary policies, we were able to safeguard our economy and its financial system.

I am happy that by the time I left Sri Lanka to attend this Summit, the reserves have topped almost $ 4 billion, much faster than we anticipated.

We were also able to withstand the pressures imposed on us mainly by virtue of our new economic strategy initiated in 2006 - strategy aimed at, increased domestic production, regional development, development of rural economy, infrastructure and small and medium enterprises.

Global economic recovery is of special importance to a smaller developing economic such as Sri Lanka, in the context of our need to enhance our exports, tourist industry, greater inflow of foreign capital, bi-lateral and multi-lateral assistance and sustenance of remittance from employment abroad.

Financial institutions

The current global financial crisis that has engulfed nations across the world has renewed our focus on the oligarchy of multi-national financial institutions.

The finance industry has created instruments such as derivatives, hedge-funds, futures etc. expressedly as a means of managing risks but with the sole objective of maximizing their profits, without caring for their negative consequences.

The Banks too resorted to the use of financial instruments such as securitization.

This led to the collapse of the world’s largest financial institutions, wiping out their values in the current financial meltdown.

This is the crux of the problem. You cannot talk about the global economic recession, without touching upon the fundamental factor of speculative capital which has become a scourge to the global economy’s financial system.

As a result, the developing countries such as ours were placed in the most vulnerable position. For example,

The U.N. Millennium Development Goals are affected, developing countries are crippled by huge debt burdens, resources meant for relief are now being diverted to endless bailouts in the developed countries and donor organizations are dried up.

This situation has brought about a hot debate once again on the ‘free markets’ or the ‘unfettered markets’.

After the oil shock of 1970s, the regulated markets were totally abandoned in order to pave way for so-called liberalization. I would prefer to call it neo-liberalism in its ideological terminology, which was in force in the last three decades.

The authors of ‘free markets’ went so far as to prescribe to the democratic governments, the need to abandon their role completely in the affairs of the economy.

The redeeming feature of the current crisis is that only those countries who did not fully liberalize their capital and financial markets have been spared of the major brunt of the present crisis.

I believe that wiser counsel would now prevail in order to ensure recovery, rebuild confidence, brings growth back into the system. I am happy that there is now a growing consensus for regulatory reforms in the banking and financial system in order to prevent risks, more so excessive risks.

Absence of transparency and accountability too has been recognized as among the major causes of systemic failures.

More voice and power should be given to the emerging countries. The central demand for reforms in U.N., I.M.F., World Bank and W.T.O. is back on the agenda with added force. This needs highest priority - for a safer and better world.

G 20

Specifically, you would see the emergence of G 20 in this crisis in place of G 7 - this is recognition of the new reality - the existing reality.

I believe that emergence of G 20 in place of G 7 is the starting point of the impending paradigm shift.

Once again to be specific, the Quota and Vote at the I.M.F. needs urgent readjustment.

The South Asia to which Sri Lanka belongs, as a whole accounts for only 2.8 percent of the total votes at the I.M.F., representing nearly 2 billion people, while Belgium with a population of only 8 million has a vote of 2.1 percent.

For that matter, take North-East Asia, the hosts of this Summit. With its 50 percent of the world population and almost 20 percent of the world economic value, this region accounts less than 15 percent of the I.M.F. vote. Is reality of the world economy reflected in the I.M.F.? No.

Then another specific the question of international reserve currency.

In the context of the world’s new economic realities, this question also needs to be reconsidered more urgently. It is our acceptance that no national currency should be given the unique privilege of enjoying the status of international reserve currency.

I am inclined to agree that its implementation needs time.

But we must from now onwards consciously work towards that goal of creating a new international reserve currency.

Here, I quite appreciate the bold position taken by the former French Prime Minister Dominique de Villepin. He was quite candid and objective in his assessment of the realities of the world economy. He said “West dominated the world economy for 500 years. We have now reached a new turning-point in history”. This is the stark reality. This is the time for a paradigm shift.

Economic centre

The world is moving from unipolarity to multi-polarity evidenced by the following developments:

Firstly, emergence of several new economic centres in the world economy as expressed through G 20.

Secondly, G.D.P. of Six Asian Economies amounts to $ 17 trillion (of the world’s G.D.P. of $ 60 trillion), the biggest grouping.

This provides evidence in support of the fact that world’s economic centre is shifting from the United States of the American continent to the continent of Asia in the 21st Century.

Thirdly, Sources of funds today are concentrated in Asia (including Middle East).

Fourthly, Formation of new economic blocs, alliances and organizations.

Fifthly, Key sources of energy in Euro-Asia region.

Sixthly, Awakening Latin America, moving away enbloc from neo-liberalism.

Seventhly, The Asian developing countries are moving out of the recession faster than the developed countries.

This is why a new world economic order is strongly felt and urgently needed. Specifically, the need for a new architecture of the international financial system is imperative.

Reality dictates this need.