By W.A. Wijewardena –

Dr W.A. Wijewardena

Professor Prema-chandra Athukorala: Growth with foreign markets in sight is needed to reduce poverty

Growth with an eye on foreign markets is key to reduce poverty

The Sri Lankan born economist of international repute, Professor Prema-chandra Athukorala of the Australian National University, advised Sri Lanka’s policy makers to accelerate economic growth to reduce poverty but with foreign markets in sight because such ‘outward-oriented economic growth’ is  more friendly to the poor. He did so in delivering the keynote address at the inauguration of the Network of Asia Pacific Schools and Institutes of Public Administration and Governance or NAPSIPAG International Conference, organised jointly by Australia’s Monash University and Sri Lanka’s Institute of Development Administration, better known as SLIDA, in Colombo two weeks ago. NAPSIPAG had “Development Challenges in the Asia-Pacific: Millennium Development Goals and Beyond” as its conference theme and Athukorala’s job was to kick off the conference by bringing the pertinent issues to the attention of the subsequent paper presenters. He further elaborated his message in the keynote at a subsequent roundtable discussion marking the conclusion of the conference.

Open economy versus national economy

Athukorala’s advice on the need for following open economy policies is in fact “rebellious” if not “seditious” in a country that firmly believes in the ability of its home-grown policies to deliver durable and pro-poor economic prosperity, while discarding ‘outward-oriented economic policies’ as disastrous and harmful to both the rich and the poor alike. The advocates of this policy frame often come up with such appealing concepts as “independent national economy” instead of interdependent global economy, “import replacement” instead of export growth, “agriculture based rural economy” instead of manufactured product economy and “home-grown policies” instead of time-tested standard economic policies to drive Sri Lanka to its future destiny. Recently, a very senior public servant now in retirement tried to convince this writer of the many virtues of the economic policy package that had been in practice in Sri Lanka prior to 1978 and the incalculable damage which the subsequent policy package in the style of an open market economy has brought to the country. When asked about how Sri Lanka could acquire advanced technology under the old closed economy system, his explanation was that ancient Lanka had all the needed technology to take the country forward and that technical know-how now lost due to the five hundred year old colonial rule has to be rediscovered by the government and propagated among Sri Lankan entrepreneurs to build up the cherished national economy in the country. These views, held by a significantly large section of the population, are not different from those expressed by the country’s top policy makers from time to time. For instance, the Budget 2012, while taking pride in not pursuing what is known as neoliberal economic policies, had equated them to the destructive terrorist movement which Sri Lanka had defeated resolutely in 2009. Hence, Athukorala was an odd-man out among a gathering that had no sympathy for the type of policy recommendation he made for Sri Lanka.

Athukorala’s prescription

But, was Athukorala wrong in coming up with this particular policy prescription? Not so, if one goes through his keynote address carefully. Athukorala, having taken his audience through the policy evolution during the last 60 years or so, has presented facts, data and examples in support of his argument. It is on the basis of the weight of the evidence he has presented that one has to evaluate Athukorala’s prescription against the popular economic wisdom in the country.

Hence, let’s first look at a summary of Athukorala’s prescription.

Relative poverty versus absolute poverty

Athukorala makes a distinction between relative poverty and absolute poverty. The relative poverty involving income distribution and the gap between the rich and the poor has not been one of the targets in the millennium development goals or MDGs introduced by the United Nations in 2000 for its member countries. Instead, it is the absolute poverty or how many people in a country live below the level of poverty which has been incorporated into MDGs. Absolute poverty for MDG purposes has been measured as the number of people whose daily consumption falls below $ 1.25 when that dollar value is calculated in terms of the buying power of a dollar in an individual economy. Economists call this purchasing power parity or PPP. In my view, since Sri Lanka’s PPP income is just double the nominal income level, to meet this goal, the nominal daily consumption level should be about $ 2.50 or Rs 325 a day. Given the current prices, this is a reasonable threshold for a poor person to maintain his daily sustenance. However, Sri Lanka’s official poverty line at about Rs 107 a day is about a third of this international benchmark for poverty.

Not trickle down but pull up approach          

Normally, there are two approaches to poverty alleviation. One is the indirect approach under which an economy is permitted to grow and along with growth, increase the incomes of the poor who are in absolute poverty. Generally, this is known as ‘the trickle-down approach’ but Athukorala calls it ‘pull-up approach’ because it pulls up the poor to a higher consumption level by giving them extra income through the normal process of economic growth. A trickle-down is a process in which economic benefits come down to the poor after the rich have got income first through economic growth. But economic growth increases the incomes of both the rich and the poor simultaneously and as long as growth is durable and stable, that income too is durable and stable. The other approach is the direct approach under which money is given to poor people to facilitate them to consume more. These are the hand-outs or subsidies which a government extends to groups of people identified as poor by taxing the others more or very often the poor themselves in view of the high percentage of indirect tax burden falling on the low income groups. In addition, there is a third micro level approach which Athukorala has not considered for he has been concerned about only macro level policies. That micro approach is the provision of income generating opportunities to the poor by developing their capacity, empowering them in the economy and helping them to establish self-employment enterprises through microfinance and other market access facilities.

No consistent policy in the past

Athukorala has said that the policy approach in the past has swung between the direct and the indirect approaches from time to time. It was the growth through state led ‘import substitution’, now called ‘import replacement’ that ruled the world in 1950s and 1960s. This was based on the premise that a country’s problem was its having to pay out valuable foreign exchange for imports which was a waste since those imported goods could be produced in the country itself; accordingly, through a combination of ‘omniscient’ or all knowing state leadership, state planning and state enterprises, a country sought after building a self-sufficient national economy generating employment, income and prosperity to its people. It was believed that developing countries could do only marginal improvements by changing the primary commodity export structure which Athukorala has termed ‘pessimism’ about exports.

Attempts to address relative poverty

Then, in 1970s, it was an era of seeking to redistribute income and wealth as a way to alleviate the relative poverty. Income was redistributed to enable the poor to fulfill at least their basic needs like foods, clothing and healthcare. Still the development approach was based on state planning and state enterprises searching after the development of a national economy.

Christening neoclassical model as ‘Washington Consensus’

Athukorala has identified the next phase of evolution as one relying on the free market economy and economic liberalisation based on what economists commonly call the ‘neoclassical economic model’. This was tried out in late 1980s and 1990s after the collapse of the former Soviet Union and its satellite states around that time. The basic policy component of this approach known as ‘neoliberal policies’ was codified into a more palatable economic dogma called ‘Washington Consensus’ meaning that it has the blessings of the three Washington based institutions, namely, IMF, World Bank and the US Treasury. This was the policy package which was adopted by Sri Lanka in late 1990s and the early part of the first decade of 2000s. It is this package which has been explicitly rejected by the current policy makers of the country as more disastrous than the defeated terrorist movement.

Attack on Washington Consensus

The Washington Consensus came under attack in early 2000s because of the mixed results it generated: Some countries like the satellite states of the former Soviet Union succeeded while the countries like Sri Lanka made only a moderate success. Hence, instead of going by the policy package enunciated in the Consensus, attention was paid to attack poverty through a three-pronged approach. That approach emphasised on accelerating economic growth through market mechanism, upgrading the capacity of the poor through investment in education and healthcare services and helping the marginalised groups to enter the mainstream of the economy by providing safety nets. Athukorala says that MDGs were designed by the UN in 2000 in this background.

MDGs either too low or too high

But, according to Athukorala, MDGs have two basic defects. First, they were just goals without a strategy or resources. Second, for some countries like Sri Lanka, it was too low a goal and for some countries in Africa, it was too high a goal. Hence, while MDGs cannot be attained without a strategy or resources, they do not improve the conditions of the world’s poor since many countries had already surpassed their targets. So, a new approach to poverty alleviation and creating prosperity is needed if one looks at the world’s situation today and what should be done after 2015 when the MDG time frame comes to an end. That is where Athukorala’s prescription comes to conflict with the popular wisdom and the policy package being pursued in Sri Lanka.

Vindication of Washington Consensus

Athukorala has contrasted the remarkable poverty reduction record of China and some of the East Asian countries like Malaysia, South Korea, Taiwan and Thailand with the dismal failure of Sub-Saharan countries in Africa. Even Sri Lanka managed to reduce its poverty, going by the official poverty line which is below the international benchmark, from around 27 per cent of population to less than 9 per cent within a space of about 10 years. What is the secret of these achievements? It is nothing but faster economic growth. Thus, though rejected in Sri Lanka, the neoclassical economic model or the Washington Consensus, according to Athukorala, has been vindicated.

David Dollar and Aart Kraay: Growth reduces poverty

Athukorala quotes the findings of two World Bank economists, David Dollar and Aart Kraay, to substantiate his argument. In an article they published in The Journal of Economic Growth under the title “Growth is Good for the Poor” in 2004, these economists have reported that the average income of the bottom 20 per cent of society rises or falls proportionately at the same rate as the average per capita income of the country. Their conclusion has been based on the analysis of a large sample of 90 countries for over four decades. This is consistent with Athukorala’s ‘pull-up approach’ and it implies that if the economic growth is high, the pull-up is also high and if the economic growth is low, the pull-up is also low. Hence, economic growth matters.  Then, what about some of the determinants of growth such as democratic institutions, the rule of law and openness of the economy? Dollar and Kraay have found that the presence or absence of these prerequisites has little systemic impact on the distribution of income meaning that they benefit both the rich and the poor equally. This is because they create a good environment for economic activities by protecting private property rights and in that environment, the rich and the poor can work hard and reap the fruits of their enterprise. If there is no rule of law or democratic institutions, then, the private enterprise of both the rich and the poor is stunted and economic growth which is achieved will just be short-lived.

East Asia’s growth not due to authoritarianism

Then, one may question how authoritarian countries like Malaysia (single party rule), South Korea (military rule), Taiwan (single party rule) and China (single party rule) managed to attain lasting economic growth and reduce poverty significantly. Economist Yasheng Huang of Massachusetts Institute of Technology has answered this question in a TED lecture delivered in July 2011 (available here). Yasheng has said that it is true that these countries were dictatorships during most of the period. But their growth was not due to the authoritarian rule because there were many more countries in the world which had authoritarian rules but did not grow. Though they were dictatorships, they had observed the rule of law and through rule of law, protected the private property rights. When private property rights had not been protected in 1960s and 1970s, both China and India had very low economic growth rates, but when they started to open up their economies, China in early 1980s and India in early 1990s, the growth rates quickly jumped up to the world’s highest growth rates. Though China has a single party rule in a static sense (because it does not change over time), Yasheng says that its political dynamism has changed a lot after 1980s instituting an internal democratic system within the Communist Party. In India, economic reforms, an end to arbitrary nationalisation of private property and access to free information which were introduced in 1990s have built investor confidence and promoted higher economic growth. Thus, according to Yasheng, the argument that an authoritarian rule is needed for durable economic growth is misconceived.

Globalisation and free trade help both the rich and the poor

David Dollar and Aart Kraay, in a paper published in 2001 under the title “Trade, Growth and Poverty”, have argued that the wave of globalisation in 1980s and 1990s have helped the emerging economies in East Asia and India to maintain high economic growth rates despite the economic decline in the developed world. They have found that trade has a positive impact on growth and growth has a positive impact on the poor. Thus, these two economists have found that there is no substance in the argument that globalisation is anti-poor and pro-rich. Based on the individual cases and cross-country analysis, Dollar and Kraay have concluded that globalisation leads to faster growth and poverty reduction in poor countries.

No to home grown policy packages

Athukorala was not sympathetic to the idea of having a ‘home-grown policy set’ for accelerating economic growth in a country. When this question was directly posed to him at the concluding roundtable discussion, his answer was more universal than national. He said that every country has to learn from others and that learning will help them to avoid mistakes made by some countries and emulate successes attained by others. Thus, calling for a pure home-grown policy package, however much it is appealing to the local population, is an illusion. In my view, what is important is not whether a policy is home-grown or not, but whether it stands to hard-core economic reasoning which has no national boundaries.

Athukorala did not try to please his audience by saying what they would have loved to hear. Instead, he said the opposite which will have enough economic sense when it comes to making good economic policies.