Rajpal's Column

5th April 1998

Some wild pleasures of economic failure

By Rajpal Abeynayake

Blaming the Premadasa era became almost a cottage industry in this country. The enterprise still goes on. Most of the crimes that have been attributed to the ex-President are not proved. Hearsay has been the operative word.

But, the real "benefit' of the Premadasa era coming to a close may be from reasons that are not commonly cited. Premadasa freed the economy more than JR Jayewardene did, and was planning to liberalize it much more than JR ever dreamed of. It is a given among economy watchers that the Premadasa era saw unprecedented economic liberalization. Bigger plans were to come, because Premadasa was following the example of the successful Asian tigers.

The rule among the Asian tiger economies was that laissez-faire should be taken seriously. Liberalization came to a point where it became absolutely old fashioned to regulate.

This trend sprang from the lessons of economic success, which is why all capitalists were crying for deregulation with a passion. Looking back, this tendency can be seen from some of the writings of former US President Richard Nixon, who in his book "Seize the Moment'' gives a roaring certificate for the kind of economic de regulation that has now got the Asian tigers in big trouble. In hindsight, Nixon couldn't possibly be blamed for his upbeat and sanguine assessment of freeing developing economies from all sorts of controls, based on the Asian Tiger example. There was no hint of the collapse of these economies that were to follow in later times.

Look how Nixon goes into raptures about the tiger economies and the Laissez-faire policies they followed. He says in "Seize the Moment'' that, "the lessons – the key to the success of the Asian tigers – should not be startling. In a contest that pits a strategy based on state control and intervention against one based on free markets private initiative and competition, the latter will always prevail. The collapse of the Soviet economy proved this point dramatically. Many observers explain the success of the Asian tigers as a product of East Asian Confucian heritage, with its emphasis on a strong work ethic. The real secret of their success is the decisions of their leaders to unleash market forces. Not only do their policies have little to do with the philosophies of East Asia, they are also not unique to Asia. If the other countries free the mainsprings of the market, they will enjoy the same success as the Asian tigers.''

Now, contrast this with what Lee Kwan Yew, Singapore's Senior Minister had to say about the collapse of the tiger economies when Newsweek interviewed him some weeks ago. Says Yew, who would have been one of the staunchest defenders of the economies of the Asian tigers :

"I am discouraged, because there was no reason the problems should have aggravated this way. Take Indonesia. Their macro figures were sound; budget not in deficit, no large current account problems, inflation under control. But they had 240 banks as a result of the recent liberalization. Because there was no adequate supervision, many banks were not sound, and their Central Bank did not know that the private sector had borrowed some 70 billion. When the rupiah was attacked, the Central Bank correctly and wisely defend it , but allowed it to float. When it went down, the unhedged corporate debtors rushed to the market to cover themselves, and that caused the rupiah to sink. The rest was all human error.''

Without a doubt it can be argued that Sri Lanka was never in the league of the Asian tigers, which is why the collapse of those economies had no significant fallout or impact on the local economy. True, we had little growth in the first place, for there to be a significant collapse that followed.

But, fact remains that we were at the point of liberalizing the economy to the point where prudent fiscal control was to be done away with, as was done within the Asian tiger economies.

President Premadasa could not have been blamed if he realised his vision of bringing in such controls. He would have been doing what Nixon exhorted, which is to "free the mainsprings of the market, in order to enjoy the same success of the Asian tigers.'' Though Premadasa has been demonised since his death for sins told and untold, it would be definitely unfair to blame him for something that might have happened. But, for academic reasons, it is possible, or rather probable, that the fact that Central Bank controls not taken off entirely in our economy prevented the "rags to riches and back to rags " story that is now true of places like Indonesia.

Call it old fashioned, but sticking to controlled banking systems is something that should, now, in hindsight, be a precursor for all economies which are opening up. Says Lee Kwan Yew ( in Newsweek ) about China: "I think they should think very carefully before they finally opened up ( their capital account ) because they have now seen the risks of inadequate banking systems. This will make their banking systems right.''

It's pleasant to know that there may be positive consequences from not having succeeded. Richard Nixon was a great visionary but it's history now that he loved shortcuts. The economic shortcuts he admired worked for a short time for the Asian tigers, but like the story of his own success, the story of that triumph came to grief.

Postscript: Colonial hangover though it may be, good fiscal control in this country was based on a then pooh-poohed value system which saw prudent regulation as a hurdle in an unbridled upbeat market mood. But, now it seems we old fashioned mandarins may have had the laugh.:

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