Why is the Economic Miracle So Elusive and How Can We Achieve it? | Daily News


 

Why is the Economic Miracle So Elusive and How Can We Achieve it?

How South Korea has changed over the decades
How South Korea has changed over the decades

Part 1

In the past five to six decades, a few countries in North East Asia transformed their economies from virtual stagnation to economic power houses thus alleviating poverty, bringing in wealth and economic wellbeing to millions of people. It took these North East Asian countries (NEACs) under a quarter of the time to achieve what some developed Western countries took almost 200 or more years to achieve. These countries, the NEACs – Japan, South Korea and Taiwan are considered the miracle economies. Sri Lanka having had slightly higher per capita GDP than some of the NEACs in the early 1950’s, was not able to achieve the miracle despite having the most potential and being the country that some Asian leaders aspired for.

When compared to the NEACs as well as to the South East Asian Countries (SEACs) such as Thailand, Indonesia and Malaysia, Sri Lanka’s economic performance has been dismal. (Singapore and Hong Kong being entrepots have been left out of this analysis because they lack the agricultural sector that is essential for direct comparison.) Whilst political instability has played a role in Sri Lanka’s lacklustre development, it is not the sole cause why it is not a miracle economy today. On careful examination, especially in comparison to NEAC’s economic development, the role played by the wrong economic policies in Sri Lanka throughout the last five to six decades also becomes heavily evident.

Comparison of Growth Performance of Sri Lanka and the NEACs


Lee Kuan Yew transformed Singapore

Sri Lanka’s GDP/capita has been growing at the lower end of the single digits for far too long. Since 1950’s, its compound annual real GDP/capita growth rate has hovered around 2.8% at 2011 US dollar terms (These figures are from 2018 Maddison Project Database (MPD) which provides information on comparative Real GDP/Capita over the very long run for 169 countries.) At these growth rates, Sri Lanka’s real GDP/capita doubles roughly every 26 years. In comparison, Taiwan which had a lower real GDP/capita to that of Sri Lanka in 1950, grew at a compound annual growth rate of 5.4%. For Taiwan, it takes only 13 years to double its real GDP/capita. (Comparison with Taiwan is useful since both countries had similar populations in 1950: Taiwan - 7.45 million, Sri Lanka - 7.53 million.)

Overtime, that is from 1950 to 2016, this difference has amounted to Taiwan having a Real GDP/capita almost four times that of Sri Lanka (See Table-1.) Today, Taiwan is a successful high income developed economy, while Sri Lanka, a struggling upper middle-income economy. (With a GNI/Capita of US$ 4060 as of July 2019, Sri Lanka has been assigned to this new income group according to the World Bank). The story is similar when South Korean economic performance is compared with Sri Lanka’s.

These statistics show the importance of attaining high growth rates, since compounding over longer periods makes a huge difference in the final values. The importance of base values of real GDP per capita too needs to be factored in when comparing different countries (e.g. Japan and Singapore.) Although real GDP/capita is not the best of indicators, these statistics show that in 2016, the wellbeing and standard of living of a Taiwanese is as four times that of a Sri Lankan, that is, on the average a Taiwanese can afford almost four times the goods and services that a Sri Lankan can afford – better education, better health care, better transport facilities and more.

The graph above indicates when the miracle economies “took off”. Japan, starting with a higher real GDP per capita base, accelerated its growth in the middle and latter part of 1950’s. Taiwan and South Korea began their expansion in the beginning and latter part of 1960’s respectively. Sri Lanka, on the other hand, even with its open economic policies that started in the late 1970’s didn’t show any noticeable growth until the middle 2000’s. Sri Lanka has achieved high growth rates only after the end of its civil war.

The economic policies followed by Sri Lanka post-independence didn’t bring in the high growth rates that the NEACs achieved. The two main political parties, the UNP and the SLFP and their hybrids have governed the country with economic policies that have been popular with the times. These ranged from import substitution and less open to more open and liberalised economic policies espoused by the neoliberal Washington consensus under Parliamentary democracies (Washington Consensus emerged in the 1980’s among the World Bank (WB), International Monetary Fund (IMF) and the US Treasury as an antithesis to the Import Substitution Industrialization (ISI) development strategy which was popular in 1950-1970s.)

Particularly, the Western economic institutions such as the IMF and the WB have had a major influence in shaping the economic policies of Sri Lanka. However, when Sri Lanka’s economic policies are compared with the successful NEACs, there are evidently some salient differences in the latter that led to their economic successes.

Stable Political Environments and Leadership

For NEACs, most of the rapid development took place under stable political environments. For some, the stability was achieved only at the price of heavy noteworthy that the political stability which is much needed for economic success was achieved under a more authoritarian rule than under an ideal democratic system in these as well as other East Asian countries.

Looking at the NEACs experience, it is evident that a stable political environment is necessary to carry out correct economic policies for prolonged periods. Under a democratic system, when political parties with different economic ideologies alternate in governance in quick succession, the much-needed policy continuity breaks down. Moreover, to be in power, political parties also form coalitions which ultimately results in satisfying different agendas of coalition partners rather than concentrating on the country’s economic development. Sri Lanka’s political past shows both these attributes and as a result political stability has been absent to carry-out correct economic policies.

The other important ingredient that the NEACs possessed was the leadership to carry on the correct economic policies. Although Sri Lanka had notable leaders on the political front, none were successful on the economic front as Park Chung Hee of South Korea, Li-Kwoh-ting of Taiwan, Lee Kuan Yew of Singapore or Deng Xiaoping of China. These leaders were pragmatic, decisive and willing to unlearn and learn when providing leadership to their countries. They were the architects who transformed their countries to miracle economies by providing direction and stable political environments for policy continuity. repression of the opposition (South Korea & Taiwan until the 1980’s). An exception is Japan which operated under a fully democratic system, however it had only one party in power throughout its high growth period. It is

Economic Policies that have worked

The recipe for success of the NEACs was a three-pronged economic strategy. Initially, in each of these countries, the State intervened in agriculture and land reform. Then the State supported manufacturing and export-led growth. Finally, each of them also had a repressive financial policy that supported both agriculture and manufacturing sectors. China too has followed similar economic policies to attain high economic growth. It is important to realize that following this three-pronged strategy is not sufficient, but there has to be pragmatism built into it, so that what works needs to be continued whilst the failures culled at the right times. The NEACs were very good at this because they had the leadership and a very competent and disciplined public sector to carry out this strategy.

Land Reform and Agriculture

The dispossession of landlords in the NEACs as well as in China was the primary policy change that started their rapid economic development. The land reform made possible more equitable initial distribution of land and the fullest possible use of labour in rural economies to maximize agricultural output. The state also aided farmers in numerous other ways. For instance, to limit farmer risks, there were guaranteed minimum prices for exports of agricultural products. The state also provided the know-how for value-added crops, processing and marketing for export oriented agricultural products. With these interventionist policies as well as with the emphasis on small family owned farms, these countries were able to increase agricultural yields per hectare much greater than in large-scale farming. (The evidence world over is that small-scale farming is more productive. There are no scale economies in cultivation since it is labour intensive whilst for processing and marketing there are economies of scale.)

This increased agricultural surplus and per capita farm incomes led to higher rural purchasing power that primed proto industrialisation. Proto industrialisation is the initial phase of the industrial revolution, a necessary transition from an agrarian society to a mass production economy. In this stage, with increased farm incomes and savings, agriculture labour was able to move into the production of the most basic industrial goods. This bottom-up approach was a necessary step for the initial success of the NEACs. For whatever the reasons, in Sri Lanka proto industrialisation never occurred despite many Governments having used similar policies to that of the NEAC’s. To hazard a guess, inadequacy in land reforms that did not bring equitable initial distribution of land among the rural agricultural population and the continued pressures for market liberalization at the wrong times may have contributed to Sri Lanka’s inability to proto industrialise. (To be continued)

The author is currently a lecturer in Economics and Finance at both Charles Sturt University and La Trobe University in Australia. He is also a tutor for the Department of Financial & Management Studies (DeFiMS) in the School of Oriental & African Studies (SOAS) at the University of London. He obtained his PhD from Temple University, Philadelphia, Pennsylvania, USA.


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