by Analyst
To Gunnar Myrdal there was nothing automatic about economic growth or development. Growth is not a result of blind historical forces but of deliberate choices and decisions, particularly on the part of governments. Myrdal used to stress the importance of attitudes, values institutions and policies in bringing about economic growth.

Backwash effects

He also spoke of backwash effects. Centers of economic activity attract people and resources from depressed or poorer areas. The more enterprising villagers leave the village and are attracted to the cities and towns, leaving the villages trapped in a vicious circle of low aspirations, low expectations and with an undue burden of dependents too. So we find people from the village drawn to the cities where they live in slums to earn a living, which is above that they can obtain in the village.

The city lights and the desire to escape from the stifling atmosphere of the village with its status system and values which are an obstacle to improvement of economic status also draw them. Similarly we find people leaving the poor countries like our own to go to the richer countries in search of better paying employment. Our women have left in large numbers to the Middle East to work as housemaids. Our professionals have migrated to the developed countries ranging from UK, USA to Australia and Canada etc. to be employed as doctors, engineers, IT specialists etc.

To redress the disparities between the richer countries and the depressed peripheries requires much public expenditure. One thing about democracy is that since the peasants and unemployed workers have the vote, the governments are willing to spend the money although they do not know how to solve their economic problems. The people are not sophisticated enough to understand how their problems are to be solved. The governments spend moneys on roads, bridges, schools, hospitals, rural electrification etc. But most of the time they give subsidies like the Samurdhi benefits doled out by the present government.

Backwash through international trade

The government does not know how to create productive job opportunities through new economic activities and modification and improvement of existing economic activities. So they give jobs to the unemployed in the state sector even where there is no work to keep them occupied. Unemployed graduates are absorbed as teachers to government schools, never mind if there is already a surplus of teachers in the school system. Others are employed as clerks in government departments although the public service is heavily bloated already and really requires slimming.

International trade also has backwash effects. Traditional handicrafts like our handloom industry like the Indian textile industry and metal industries perished under colonial rule since the colonial power safeguarded its own industry back home. Colonial rule of course did bring many economic benefits by way of roads, ports, political security (important for economic growth), law and order, a public service for the first time in the history of many colonies, sanitation, health and education. But colonial rule had adverse effects on the growth of local industries as in the case of the Indian textile industry.

India had a well-developed textile industry and Indian textiles were exported to both the east and west, finding their way to Europe as well as the present-day Indonesia and even China (cottons) in the 16th and 17th centuries. But the British imposed taxes and passed laws which had the effect of protecting their own textile industry back home. The industry in India then suffered.

The colonial powers imposed a kind of international division of labour, which benefited them. The colonies were expected to provide the raw materials to the metropolitan industries back home. Economists argued that primary product supply would not lead to development because the prices of such products did not increase although the demand for such continued to increase. Most of the processing, packaging and marketing of the products of the colonies was done in the metropolitan areas and this pattern continued even after the colonies got their independence.

Policy makers

So the policy of adding value to the primary products before exporting came to be adopted as policy in these countries. Although the consumers of the primary products like tea or coffee paid increasing prices to purchase them, most of this increase in prices accrued to packers in London or Frankfurt or Paris. Clearly the remedy was to do more of the value addition by way of processing, packaging in the exporting country itself before export. But how was this to be achieved without the machinery which had to be imported from the metropolitan countries?

So the developing countries had to depend even more on primary product exports at least in the short and medium term to get the foreign exchange for investment in value addition and industrialization. So there was actually increased production of primary products although we acted differently with our rhetoric of nationalization of the foreign owned plantations. Malaysia for example expanded its rubber plantations and opened up palm oil plantations as well during this period. With the increased production of primary commodities their prices came to fluctuate with each glut depressing prices.

So policy makers and economists argued that it would be best to invite foreign capital to set up industries in the country and even gave tax exemptions and tax concessions and even built up free trade zones where such foreign capitalists could set up with the minimum of delay. Singapore made a special effort to welcome the multi-national corporations in the 1960s and 1970s. But this strategy too had its drawbacks although it might bring about some development since the subsidiaries set up in the country were isolated enterprises with little interaction with the rest of the economy.

The multinational corporations created only enclaves of prosperity with limited spread effects. We were able to attract the apparel manufacturers because of the quota system which prevailed in the importing countries in the developed world. Much of the profits generated by the Direct Foreign Investment were repatriated abroad and important decisions were taken out of the hands of the local entrepreneurs. The importers established their own buying offices here and knew exactly the costs of production and how they could squeeze the surplus.

Such direct foreign investment could also lead to diplomatic pressure from foreign governments of the investors on domestic economic policies. Even foreign aid was realized to be at times a tool of leverage for foreign governments. Even aid from international institutions like the IMF or the World Bank were not without strings since such institutions were looked upon as reflecting the views of the dominant powers like the USA. So it was argued by some that whatever the poor country did to break out of the poverty trap and promote its own version of development, it would be thwarted.

Gunder Frank, a neo-Marxist in the 1960s, formulated the theory that the ex-colonial countries’ under-development was due to dependence on the rich former imperial countries. The prescription then would be to opt out of the world economic system dominated by the western countries, to sever all links with them and pursue a policy of self-reliant development, using one’s own resources and following a Spartan lifestyle to generate the economic surplus so necessary to create the capital to be invested in development. They also argued for co-operative trade and economic relationships with the Socialist Group of countries.

The JVP is still following this economic strategy and philosophy. The only regime to follow this philosophy was the Pol Potist Khmer Rouge, which ended up in the "killing fields." The break up of the Soviet Union and the collapse of Communism in Russia and Eastern Europe has undermined this theory. Since then China too has gone for market prices and market forces and given up central planning which was characteristic of Socialism.

Another dramatic development is the extraordinary economic growth of the East Asian and South East Asian economies. They were linked to the world economic system and their growth was due to export expansion rather than any inward oriented policies. So it is argued that integration with the world economy is desirable to achieve fast economic growth.

Development not growth only

Myrdal conceived of each South Asian country as a ‘social system’ consisting of inter-related conditions, which he categorized into: Output and incomes; conditions of production; levels of living; attitudes towards life and work; institutions and policies.

Data on output and incomes are useful as an index of growth but not of development. So too much stress should not be placed on the growth rate. It is also not an adequate measure of welfare. It can be inflated by activities which although necessary do not increase the standard of living. Thus the ever-increasing expenditure on the war will increase the GDP. So will the increasing crime rate since it increases the services of lawyers. It will increase the number of prisoners and since it costs money to feed and clothe prisoners, the extra expenditure will add to GDP.

Building a new prison has the same impact on GDP as the building of a new hotel. If the number of civil and criminal cases increases the GDP will increase. But although increasing GDP these increases in activity show that all is not well with the society. The Gross National Product is a related measure, which includes the income earned from abroad, and excludes the payments to other countries from assets that foreigners own in the country.

For practical purposes either measure is alright but the payments outwards have been increasing steadily in our GNP figures. In fact while the GDP growth rate in 1999 was 4.3%, the GNP growth rate was 3.8%.

Economics of corruption

There is also the growth in corruption, which also is included in the figures since the money that passes is either a kickback from the original value of the transaction or represents less than the value added. The economic consequences of corruption have been analyzed. There is what has been called "efficient" corruption which occurs when scarce resources command an illicit price which corresponds to their scarcity value and "inefficient" corruption when the price is lower. In the case of a bribe to get a timber permit. The corruption is efficient since the government under prices timber.

High tax rates, complex regulations combined with "inefficient" corruption leads to widespread evasion of laws and regulations and causes the growth of the black economy. We already have a sizeable black money with increase in smuggling with every increase in indirect taxes like the GST or Defence Levy. Businessmen travel to Singapore and personally carry dutiable goods and clear them by bribing the customs officials. Corruption also diverts the resources of management into fixing rather than producing goods efficiently.

Corruption also tends to lower the standard of service of public officials to the public. Delays are deliberately introduced in government offices by multiplying procedures so that people will pay bribes to circumvent such delays. This has now become widespread at all levels of government. The public have to come to accept such delays as normal thus undermining the efficiency of the whole economy. At higher levels of the government money can buy favourable treatment in matters of tax, tariffs, government contracts, concessions, subsidies etc. In extreme cases large firms like the multi-nationals can buy up the government and run the country to suit their purposes as the United Fruit Co. did in Central America in the past.

A better measure of the income of the people is the national average level of income, that is the level of income enjoyed by the majority of people or the median income in an Income Distribution table. According to the Survey of Consumer Finances published by the Central Bank there has been no change in the median real income over the last ten years. The point is that we cannot go by the per capita GDP only and assume that conditions are improving. The escalating expenditure on the war and the increase in crime show that all is not well. If we did not have to incur such expenditure we would be better off although the GDP then would be lower if such expenditure is excluded.

The soft state

Myrdal referred to the "soft state," by which he meant a state where there is no social discipline, a state where there is poor enforcement of law, where there is disregard of rules and regulations by public officials, where public officials are in cahoots with politicians in misusing the resources of the state or even robbing the state. There were flagrant instances of these during the recent elections. Our state fits Myrdal’s description of a soft state. Galbraith referred to the Indian state as an organized anarchy.

The recent incident in Bindunuwewa shows that the security forces can have their own agenda which may differ from that of the state. The ruler in such a state will have to depend more and more on the Praetorian Guard like the Presidential Security Division to be in power.