11th August 1996

'The Malaysian miracle'

Tun Daim's contribution to Malaysia is perhaps best captured in the tribute paid to him in a recent biography by Singapore's former Prime Minister Mr. Lee Kuan Yew.

'Tun Daim's most significant contribution to Malaysia's economy was to shift its policy away from state-owned and state-supported ventures to private enterprise. He had drawn the lessons from the experience of countries in Britain and Europe where because the CEO of a state-owned corporation is answerable to the Government Minister, the company invariably sinks into the red. Tun Daim pushed the privatization program and made the CEOs answerable to private share-holders who will concentrate on and want profits.

His achievement was to turn around the Malaysian economy. Malaysia's finances were in a poor state when he took over as Finance Minister. It's 1984 budget deficit was a high 8.9 percent of GDP. He brought it down in 1988 to 3.6 percent and when he stepped down in 1991 it was 2.0 percent of GDP. This has changed the economic prospects for Malaysia. He is the man who put Malaysia on a high growth path.

He had a powerful asset in the unqualified support of the Prime Minister Dr. Mahathir that enabled him to overcome all problems."

By Malaysian and Singaporean standards of macro economic management Sri Lanka's record during the past decade has been dismal and one of extraordinary fiscal profligacy. Budget deficits which averaged 13 percent of GDP during the decade of the 80s peaked in 1980 to 26 percent of GDP, financed to the tune of 10 percent of GDP by printing money. Having inherited an already high budget deficit of 10 percent of GDP in 1994, President Kumaratunga embarked on a deficit reduction task for the year 2000, which is considerably less ambitious than that achieved by Tun Daim over a comparable period - 4 percent of GDP as compared with 2 percent. It is never enough, as any economic policy maker must appreciate, to will the end without willing the means to achieve that end. Tun Daim needed no prodding by either the IMF or the World Bank to devise the measures needed to reduce Malaysia's budget deficit over a seven year period to 2 percent of GDP from the nearly 9 percent he inherited. He simply imposed the necessary budgetary disciplines on Malaysia at an early stage, so that there was never any need to go, cap in hand, to the Bretton Woods Institutions on their terms in a crisis situation, as happens so often to many developing countries lacking determined leadership.

President Kumaratunga planned an identical strategy when she assumed office and inherited, as mentioned, a deficit of 10 percent of GDP. A joint Sri Lanka-World Bank staff study, which I was privileged to lead at the Sri Lankan end, surfaced at the technical level for political consideration the measures needed for achieving a 4% of GDP budget deficit target by the year 2000. The available options are never easy and always controversial.

The harsh fact is that there is no such thing as a free lunch when it comes to correcting the cumulative policy errors of number of years before it is too late, and this was the essential truth Tun Daim grasped when he slashed budgetary expenditures by 30% in his first budget.

Among the cost cutting measures he eventually introduced were steps to control the size of public sector employment, and reduce the burden of pension and gratuity payments. Unless similarly hard choices are made in Sri Lanka's case the Government will be absorbing a large slice of national savings - between one third and one fourth in recent years - to finance the budget deficit - savings which the private sector desperately needs for raising investment to the levels required for rapid growth. Borrowing on this scale not only raises interest rates to levels destructive of private investment; it also threatens an explosive increase in the interest cost to the budget of domestic debt, reducing still further the room for maneuver in budget making.

There is another intriguing parallel between Sri Lanka and Malaysia. When Tun Daim assumed office as Finance Minister, Malaysia was in the depths of a recession, and the private sector in a thoroughly despondent mood. In 1986, however, Tun Daim produced a budget which galvanized the private sector into action by announcing an intention to promote a dialogue with the Government, accompanied by tax incentives designed to stimulate growth and activity in the private sector. Among these measures, for example, was the introduction of double deduction for approved training by the manufacturing sector to upgrade skills. This was followed in 1988 by an increased reinvestment allowance for capital expenditure from 25% to 40%. The stimulus to private sector growth thus generated expanded budgetary revenues substantially and contributed materially to the reduction of the overall budget deficit. We hope during his visit to learn from his Malaysian experience as to what might be appropriate in today's Sri Lankan context to lift our private sector out of a similar state of despondency. In particular, we need to be enlightened about the dialogue between Government and the business community that he did so much to promote.

The theme of Tun Daim's talk today goes to the heart of the problem of reducing our budget deficit rapidly - namely public service reform. When the private sector fails to grow fast enough to reduce unemployment, the government inevitably becomes the employer of 'first resort' and the public service expands beyond the limits compatible both with efficiency and fiscal prudence. In Sri Lanka's case some 70,000 new jobs were created in the Civil Service cadre since 1993, and the total number of authorized Civil Service positions reached approximately 570,000 in l995.

Malaysia's experience provides valuable lessons on slimming down the public service without pain through generating alternative opportunities for entrepreneurship and self employment in creative ways. This, in turn, requires sharply expanded private investment "Kick-started" by appropriate incentives, and financed by releasing savings through reducing budget deficits to the vanishingly low levels characteristic of Malaysia under Tun Daim's stewardship as Finance Minister. As a result Malaysia's investment stands today at 39 percent of GDP financed almost entirely by domestic savings, while Sri Lanka's much lower investment rate of 27 percent of GDP is financed substantially by foreign savings.

Malaysian economic growth, propelled by Tun Daim's strong fiscal adjustment and incentive framework averaged 8.4 percent during 1990-1994, while Sri Lanka's averaged 5.6 percent. Malaysia is, as a result, short of labor and has no unemployment to speak of, while Sri Lanka's unemployment has stagnated at between 12 to 16 percent of the labor force for 3 decades, fueling periodic insurgencies.

The fiscal space created by the Malaysian miracle has permitted the emergence of a small, dedicated, professional, public service that is remunerated well enough to be able to look company chairmen in the eye. This has been the unfailing recipe in East Asia generally for providing the administrative underpinning for rapid development with a human face, and I have much pleasure in inviting Tun Daim to tell us the Malaysian story like it is.

Russia's Vietnam or Chechen Jihad?

When President Boris Yeltsin returned to the Kremlin last week after a well-earned post-election rest, he was promptly reminded that winning the presidential contests, two rounds, and a second term was not necessarily the toughest tasks which confront Lenin's heirs in post-Soviet Russia.

He still had a war on his hands, and too many analysts are calling it Russia's Vietnam. Not in the worst days of the Vietnam war however did bombs explode in Washington (Or in Atlanta). However Yeltsin's army chief, General Pavel Grachev did speak like many a swaggering American general, who threatened to wipe out Vietnam's half-starved yellow bellies in black pajamas and wrap it all up in a few months. General Grachev promised to wrap it all up in 48 hours. It would be a "small, swift and popular war" and the boys, no doubt could come home the next weekend. After all, Dzhokhar Dudayev, the Chechen leader was only a "bandit".

During the June election campaign, however, President Yeltsin was clever enough to spend a day in Grozny, the secessionist rebel capital, which has been the target of bombardment every hour a more severe assault than Sarajevo per week, wrote British correspondent Chrystia Freeland after a visit to Grozny. For the strategists in Moscow, this was neither Afghanistan nor a Vietnam. Dzhokhar Dudayev was no more than "a bandit whose criminal gang would be ousted by a police operation" (Even McNamara did not dismiss the "V.C., the "Vietcong" so arrogantly). The Chechen Ho Chi Minh was even smarter than the legendary Uncle Ho. The Russian-controlled Chechen "police force" simply vanishes when Russian army units enter an area to wipe out rebels. The truth is that the local police force are Dudayev loyalists who are policemen by day only because they "need the income of a government job". So the Russian treasury pays the separatist Chechen rebels, a trick that even the Vietnamese didn't pull on a US-backed Saigon regime.

Alexander Iskandarian, the Director of the Center for North Caucasian Studies in Moscow, is right when he argues that "the top brass completely fails to understand what sort of war is being fought in Chechnya". While "the classic guerrilla war" goes on to prove him right, Mr. Iskandarian may not have anticipated the new turn - the systematic use of air power.

It may not help Moscow win the war but it certainly makes life for the ordinary Chechen family very, very hard. Reuter reported on Thursday that Russian helicopters firing rockets attacked Chechen fighters in the capital.

The main target of the attack was the central square in Grozny, Minulka Square. Russian troops took control of the square last year when the railway station was also taken. But earlier last week, rebel forces succeeded in ousting the soldiers from part of the station.

The policy makers in Moscow are quite confident that the current offensive will be beginning of the end of the Chechen secessionist war, if not the end itself. High-level spokesman, such as Konstantin Pulikovsky told the press: "By September we will withdraw all remaining units of the Defense Ministry. I guarantee that this plan will be fulfilled." The new confidence is evidently not a posture to impress the foreign media and thus the international community. Both the "Nationalities Minister" Vyacheslav Mikhailov and the Secretary of Russia's "Commission" on solving the conflict", Sergei Stepashin, announced a ceasefire "even before peace negotiations took place".

More interestingly Minister Mikhailov spoke to Mr. Tim Guldiman who heads the special mission of the Organization for Security and Cooperation in Europe. Committed to peace and security in Europe, this organization concentrates on "conflict resolution", the former Yugoslavia and the Balkans became its primary concern in the post-Cold War world.

However it did not (or could not) assign a well-defined role to Moscow, a role that the post-Gorbachev policy-making elite regarded as "proper" to a country that was still a superpower militarily, despite the Soviet implosion. In his first term, President Yeltsin had to fight hard to persuade the US and NATO to recognize Russia's European and global role. But Russia's domestic problems, basically economic, denied Moscow the material resources to sustain such a continental role. Russian sympathies, the Slav connection, rested with the Serbs, the largest nation, but it was the US-led NATO which marginalised the United Nations, and then took charge of "conflict resolution" exercise that certainly did not entirely please some of its NATO allies.

And now NATO will advance eastwards to incorporate some of the former WARSAW pact allies (satellites?) of the USSR., Russia. One of the countries that NATO will embrace is the Communist state that gave the name of its capital to the Moscow-dominated alliance, Warsaw. The Soviet Union lost its "empire". The Soviet Union soon became Soviet dis-union, and eventually Russia. And now Russia is threatened by Chechnya. Moscow's reaction is to draw the line - demarcate the limits of tolerance. Chechnya is an INTERNAL, a separatist threat.

But Moscow has to face the fact that the Chechens are equally committed to the "defense" of its territory. In mid-December 1994 immediately after his division had entered the village of Novo Shurvoi, on its way to Grozny, General Ivan Babichev, addressed a gathering of several hundred Chechen farmers.

He said: "Any order to attack Grozny is a criminal one. This operation contradicts the constitution. It is forbidden to use the army against peaceful civilians. It is forbidden to shoot at the people". Turning to a junior officer, he said: "When I look into the faces of these old women, it is as if I see the face of my own mother..."

Just when the sole superpower has made three Moslem states (and Cuba) its principal targets (Iran, Iraq and Libya) it is interesting to note that President Yeltsin has sent the mighty Russian army to Chechnya where Mayerbeck Bokhacheev, the 28 year old Chechen fighter old Steve LeVine says: "This is a holy war. You can tell Yeltsin the Islamic people of Chechnya will never retreat". On Bokhacheev's vest was inscribed ALLAHU AKBAR.... God is great.

Ashraff: something's terribly wrong in the state of Lanka

Minister M.H.M. Ashraff says he is sensing a lot of problems so he has a duty to bring it to the notice of the Government because he is not an "yes man".

In a candid interview with The Sunday Times the Minister said: "If my feeling of the people's pulse is right, I think a general despondency is setting in the minds of the people." About the coalition government of the P.A., Mr. Ashraff said, "I would expect a higher degree of friendliness, understanding and cooperation among the constituent partners." Excerpts from the interview:

By Roshan Peiris

Q: Why have you, an important constituent member of the Government recently expressed your discontent with the government?

A: First let me tell you I do not consider that we (the SLMC) are an important constituent member of the government.

Q: Why? Aren't you important?

A: (With a smile) It is for others to decide whether we are important or not. Anyway, I have not expressed discontent as you say.

Q: But you have said "something is terribly wrong somewhere."

A: It is like my not feeling well, and sensing the signs of fever. That does not mean that I am angry with myself, nor that I am discontented with myself. So in this coalition government just now, I am sensing a lot of problems. I think I have a duty to bring it to the notice of the Government because I am definitely not a 'yes man'. But get this straight that at the same time this does not mean that the S.L.M.C. has any serious problems with the government.

Q: You have also stated that there seem to be signs of hopelessness among the people.

A: If my feeling of the pulse of the people are right, I think a general despondency is setting in, in the minds of the people. There is the war and all that goes with it, the cost of living, unemployment problems, the stock market which is unhealthy and inefficiency in certain public sectors.

Q: Such as?

A: I would rather not specify and create problems for myself.

So I feel that these are some of the problems to which we as a government should turn our minds to.

Q: You have said that besides the Opposition the government is having opponents all over the country. Isn't it a strong indictment?

A: Yes, Yes, I did say that, because in this coalition I expect a higher degree of friendliness, understanding and cooperation among the constituent parties. One of the main causes seems to be that there is no sign of an overall consensus on key issues such as open economy, worker's rights, privatization, executive Presidency and the devolution package. I also see a drastic contradiction between trade and agricultural policy.

Q: Could you elaborate?

A: I would rather not, except to say that there is a close connection between the two sectors.

Q: Recently there has been speculation that the SLMC might agree on demerging the North and East. What is your view?

A: Let me make it quite clear that the SLMC has been consistent in our policy on the ethnic question. We are most certainly not prepared to answer questions to please other people's ears. So let not people put specific questions to us and try to compel us to answer 'yes' or 'no'.

Q: Are you referring to the Tamil political parties?

A: Yes and also to some of the newspapers which do not want to listen to the SLMC's point of view.

Q: Is it correct that the Muslims have also asked for a homeland?

A: I now this concept has been spoken about. Let me assure you that we have never asked for a homeland for the Muslims.

We have never subscribed to the idea of a homeland. This is different from stating that we want to find an acceptable solution to the problem. We believe that at least among reasonable people there is a consensus that power should be devolved to a unit whether it be Provincial or Regional. In such a scenario the larger portion of the cake will inevitably go to the Sinhala majority. There will therefore be seven Sinhala majority units and one Tamil majority Unit. And obviously there will be one Muslim Unit. So there will be seven Sinhala Chief Ministers, one Tamil Chief Minister and therefore is it wrong for me to ask the question from the general public what is wrong in this scenario in suggesting the creation of a Muslim majority Unit?

When the Sinhala Community gets seven units nobody calls it seven Sinhala homelands. So why are people trying to label so unkindly only the Muslim majority region as a Muslim homeland. Isn't this grossly unfair?

Q: Can you in this context spell out the SLMC views on the devolution package? So far there has been no coherent view on it.

A: I am delighted to answer this question. My answer is that the ethnic problem cannot be solved in an unconditional merger of the Northern and Eastern Provinces. Similarly I do not believe that the present Provincial boundaries can form the units of devolution. In other words the separation of the Northern Province from the Eastern Province is no solution at all.

It has therefore to be a solution that is in between. The SLMC has therefore advocated the creation of a Muslim majority Unit consisting of Kalmunai, Sammanturai and Pottuvil electorates.

We have also suggested the excision of the Ampara electorate. It can either join the Moneragala region or stand on its own as a separate unit. At present we are speaking to the TULF. We are insisting that the non contiguous Muslim areas of Batticaloa. Trincomalee and Mannar Districts be administratively attached to the Muslim majority region which we identify presently as the South Eastern region.

If this is not acceptable to the Tamil political parties they should then put forward an alternative solution which will be acceptable to the Sri Lanka Muslim Congress.

Q: One last question. You have had some unpleasantness with the Saudi Arabian government about the Haj visit this year. What was your problem?

A: For the first time I as Minister was leading an official team for the Haj festival. As such I naturally expected certain formalities to be followed. They agreed to give us only protocol recognition whatever that is, and nothing else such a trip by an official delegation entails.

I do not want to go into any details, since I have no grievance as such. But I have asked some questions and clarifications from the Minister of Foreign Affairs.

Q: There is some talk that since you refused to go on this Haj pilgrimage, from the normal allocation of Rs. 500,000 given to our Embassy in Saudi Arabia by the Muslims Affairs Department and the Haj Pilgrimage Committee to assist needy Haj pilgrims 300,000 rupees was withdrawn. What have you to say?

A: I have nothing to do with the Muslims Affairs Department nor the Haj Pilgrimage Committee. I didn't get the connection at all between the funds being reduced and my decision not to go. I am sorry for those pilgrims who were deprived of facilities.