Why is the economic miracle so elusive and how can we achieve it?

Light industry the springboard for greater economic success

Part 3

In the current stage of its development, Sri Lanka should refrain from solely following neo-liberal development policies espoused by the West. For rapid economic development, it needs to look closely at the successful policies that have worked for the NEACs. When these countries were initially developing, the NEACs followed interventionist policies that nurtured and protected firms as well as got the firms to compete with each other (See “How Asia Works: Success and Failure in the World’s Most Dynamic Region” Joe Studwell. p 66-84, 223.)

The way forward is to first establish political stability. This allows the correct economic policies to be carried out in a disciplined manner for an extended period of time without disruption. Here, having an Executive Presidential system and a powerful President would auger well for Sri Lanka contrary to what some political commentators may believe. Once political stability is established, a bottom up, three-pronged approach like what the NEACs adopted is necessary for rapid economic growth and development.

In the three-pronged approach, first there must be a clear policy intervention to uplift the agriculture sector and prime it for proto industrialization. This policy should address land reform, agricultural best practices and know-how and market creation and distribution channels for the produce so as to increase the productivity and incomes of the agriculture sector workers which constitute around quarter of the present Sri Lankan working population. With increased incomes and savings, these workers should be encouraged to invest in producing basic industrial goods to supplement their incomes. The primary goal of the state here is to increase the purchasing power of the predominantly rural agricultural workers hence the state involvement is an absolute must in this stage. Any involvement of the established private sector in any activity of the rural agricultural sector has to be carefully monitored to prevent the agricultural surplus to be expropriated. If Sri Lanka is to rapidly develop, it is of paramount importance that the agricultural surplus is retained with the agricultural sector workers.

Second, use the surplus labour in the rural areas to create simple industries that produce light consumer and basic industrial goods. These goods should be produced based on obsolete technology mainly imported from abroad. The idea here is that such technology will be cheap and the goods produced will be of a certain quality that will be preferred and affordable to the rural people. China used this policy very successfully. In fact, China was successful in exporting some of these cheap goods manufactured in Township Village Enterprises (TVE’s) to developing countries.

The state should intervene to provide the know-how, help with importing the machinery and create markets domestically. The more promising ventures that have export potential should be subsidized, but assistance should only be based on the export success. If this stage is successful, as discussed earlier, the workers know-how and skill levels will improve to take on the next level of industrial production. Furthermore, substantial markets will be created for consumer goods, machine tools, infrastructure and energy because of the increasing purchasing power due to increase in worker’s incomes (See “The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution” George Fortier and Yi Wen.)

If the earlier stages are successful, the Government should promote mass production of industrial and consumer goods. Ideally, in this stage the country should move into the production of heavy industrial goods. The Government should encourage all types of production to be exported. There should be active government intervention in financial policy, finding export markets, and making sure domestic companies will be competitive in international markets. Assistance to industries should be strictly based on export performance.

At this point, to put everything in perspective, it is pertinent to point out the number of years it would take Sri Lanka to achieve the current per capita Real GDP levels of some of the NEACs and other successful Asian countries. If all policies are successful and everything goes according to plan, it is reasonable to assume that Sri Lanka can achieve a maximum yearly growth rate of only 6-7% in constant US dollar terms for a 10-year period. Here, it is seen that only on very rare occasions that a country can achieve a growth rate of 8-9% yearly for a decade based on constant US$ terms. Only Japan and China have achieved such a feat in recent times.

From the Table below, based on a maximum growth rate of 7% annually, Sri Lanka could reach Malaysia’s real GDP/capita levels (2016) in 10-11 years and that of the NEACs in just less than 20 years. For any annual growth rate below 5%, it will take Sri Lanka at least 30 years to catch-up to the NEACs. That is the best that Sri Lanka can hope for given its past experience.

The Table shows what a herculean task it would be to become a miracle economy in a short period of time. Hence, it underscores the importance of having a stable political environment and getting the correct economic policies in place for the country to achieve what the NEACs have achieved in growth and economic development in a relatively a short period of time. Relying on neoliberal development policies under the auspices of the Western nations would only delay the miracle from happening.

The task at hand is difficult, but nevertheless achievable. With the prevailing world economic order, WTO, WB, and IMF would always push Sri Lanka to adopt neo-liberal policies with the least state intervention. However, it is important to understand that successful development will happen only by “lying.”

Sri Lanka will have to subscribe publicly to the ‘free market’ neo-liberal agendas touted by these institutions while pursuing the interventionist policies that are actually required to become successful.

These are the same policies that NEACs followed 50-60 years ago and the developed West followed 200-250 years ago. On the political front, all parties need to realize that making the economic pie bigger is the most important decision that needs to be made for the country and its citizens. That way, every citizen in the country will benefit.

To achieve this, what is required is a disciplined and responsible political leadership that can harness the efforts of a competent public sector to carry out the three-pronged strategy.

This leadership should be an instrument of necessary change from the status quo – a leader who has the nation’s best interest at heart and who can make the necessary reforms for Sri Lanka like the aforementioned leaders of the miracle economies. They were all great leaders not only in their own countries, but in the eyes of the rest of the world. The opportunity awaits.


(The writer 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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