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Were the many billions invested in the push for
self-sufficiency in rice worth the cost?

Economic independence in a global economy:
What does it mean?

In the aftermath of political independence there was a cry that the country should achieve economic independence. But what is economic independence? Under the SLFP government of the early 1960s it was interpreted as freedom from dependence on other countries. So the government of the day adopted what came to be called the import substitution model whereas countries like Singapore and South Korea went for export growth.

Economists generally agree that import substitution behind protectionist tariffs is not desirable. It merely leads to the consumers becoming captives of the few industrialists engaged in such import substitution industries. In fact the industrialists merely imported finished goods in knocked down or semi-knocked down condition and there was little if any value addition. In some cases there was actually value subtraction not value addition! The policy merely helped some favored businessmen with licenses to set up industries and fleece the consumers. There was no genuine adoption of modern technology. There was no generation of employment either. Industrialists padded invoices to import second hand machinery as new and spirited away the country’s hard earned foreign exchange. Goods became expensive and there was much corruption in the ‘License Raj".

Import substitution

The situation was no better in agriculture where a stronger case can be made for import substitution on the ground of food security. During the Second World War the country found it difficult to import food and instead, synthetic substitutes for rice like ‘Rycena’ were imported. So there is a case for developing our agriculture. We have poured millions of rupees by way of providing fertilizer subsidies, guaranteed prices for food items which were above the world market prices. We have increased our rice production significantly but at what cost? Some would ask whether it was worth it all. They point to the poor incomes of the paddy farmers despite all the subsidies and the enormous spending on irrigation, agricultural extension etc. We must review such policies.

Economists refer to the Law of Comparative Costs and argue against any subsidies. Can we do without subsides for our agriculture? We cannot if only because of the high inflation that has prevailed over several decades since independence. Unless we can bring down inflation and improve our productivity, we cannot produce any good which is globally competitive. So our local industries cry out for protection. A leading businessman was faulted for opposing protectionist duties. I would go along with him that any changes in protectionist duties should be phased out gradually and not in a sweeping manner as supposedly done by Ranil Wickremesinghe in his previous period in office.

Yes, a time period must be allowed to remove protection while bringing down inflation to comparable levels in our competitor countries.   Economists would say that the people are paying a high cost for protectonist polices by way of higher prices for the protected goods. The real problem is our high inflation caused by fiscal expansion. Point to point Inflation has gone up in December to 6.5%. The Central Bank has all along measured inflation by this change. But the Governor says average inflation has come down. Consumers have to brace themselves for higher food prices and higher inflation in the months ahead. The CB is expecting inflation to fall after April. But this expectation is unlikely to be realized. The main culprit for dearer goods is the cheap money sloshing around in the economy due to excess liquidity not to mention the large amount of black money. This together with a rise in global commodity prices will lead to higher inflation. Higher prices will eat into disposable incomes of the poorer segments of the population and the cost of living in urban areas will go up.

Budget deficits are the cause of all our economic woes

According to economists the problem is the high budget deficit. Some argue that it is necessary to fund the rupee resources for infrastructure investment. Maybe, but the government should bear in mind that there is a cost to any type of policy and budget deficits produce higher inflation and higher current account deficits in the balance of payments. The only way to carry out infrastructure investments from our own resources is to increase our savings and set off public dis-saving by increasing private savings. But we have a very low savings to GDP ratio compared to our level of per capita income. It is below 20% even after adding the remittances received from the migrant workers who work abroad. Why is this so? The reason is clear. For several years the Central Bank held down the nominal interest rates below the rate of inflation. This became acute in 2007 when the government went on a spending spree for infrastructure investment which was funded by borrowing from the banking system which is called money printing by economists although a more refined term is used nowadays called ‘quantitative easing’ in developed countries.

Can we blame the government and the politicians? It is we the public laboring under the free lunch syndrome that keep demanding more and more subsidies and increases in public spending for free education, free health care services and subsidies for the Samurdhi beneficiaries who were said to number at one stage 50% of the population. This when we have reached middle incomes status and poverty measured on the dollar a day criterion has come below 15% from 22% earlier.

The high taxes on commodities are one of the ways to fund such spending. Another is by borrowing for which the government has to raise the rates of interest and then the private sector complains it cannot carry on. Failing both methods the government is forced to borrow from the central bank and the banking system and although this does not increase interest rates, it causes higher inflation. Growth with inflation is hard on the poorer segments of the population and will make any government unpopular.

Wrong economic model

The model of economic growth followed by Sri Lanka and India was based on the socialist economics which was very critical of capitalism. It was argued that engaging in world trade meant being exploited by the richer developed countries of the world. The argument was that the long term trend of prices for commodities was downward and that it was necessary to move to manufacturing industry where cheap labor was a distinct advantage. But the problem was that these countries lacked capital which can be created only by foregoing present consumption. But even increased local capital was not enough to fund industrialization since foreign exchange was required to buy capital goods like machinery and equipment from the developed countries. So a country would need to generate foreign exchange from exports or from foreign aid or foreign investment.

Foreign investment was looked down upon as it would, according to Communist economics, lead to exploitation of the Third World. Andre Gunder Frank made out the case against foreign investment. So some Latin American countries and countries influenced by Communist ideology as Sri Lanka made no attempt to woo foreign investment. But countries like Singapore and Hongkong welcomed multinational corporations with open arms. These countries as well as countries like South Korea and Taiwan emphasized export driven growth while countries like us resorted to import substitution polices behind protectionist barriers.

Our policies failed to produce higher growth rates. Instead we ran out of foreign exchange in the early 1970s with the oil price hike. Soon we got into a balance of payments crisis and had to resort to import controls, quotas and licensing of imports. Our exports themselves require imports of raw materials and intermediate goods apart from the capital equipment for industry. Our exports were then purely agricultural goods. We were required to import fertilizers and pesticides etc. With the nationalization of the tea plantations, our tea industry also wilted and failed. So the attempt to follow import substitution policies apparently under the objective of achieving economic independence failed.

The open economy

After 1977 the economy was once again thrown open to foreign trade and foreign investment. The growth rate went up to 8.2% in 1978, the highest we ever achieved. But we could not sustain it because we failed to control inflation caused by the Accelerated Mahaweli Project. Of course foreign investment was also dampened by the 1983 riots. Multinational Corporations like Motorola were keen to site their investments here but later went to Malaysia.  Several other foreign investors acted likewise and the growth rate fell back to the 5% and later to the 4% range.

Economists tell us that trade and exchange creates wealth and increases incomes. We cannot afford to turn our back on the world economy and retire into isolation in the name of economic independence. Even if we can produce all the goods we need for our consumption, the Law of Comparative Costs says it would be better for us to devote our resources to products we are best at and import the rest. In fact many counties both import and export the same or similar goods. Japan has no natural resources and has to import practically all raw materials but it exports them after adding value.  She is the second largest economy in the world still although China may soon displace her from such ranking.

The old story says we have to depend on ourselves and become self sufficient. . The new story tells us we can earn a livelihood, gain freedom, and build community through cooperation. Call it "globalization," or the "free market," or "capitalism.’’ We have spent enormous amounts of money on paddy farming to achieve self sufficiency or near self sufficiency. Was it worth the cost?

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