By Arjuna Mahendran –
Several Asian countries have, from time to time, turned to leaders with a military background to restore their economic fortunes at times when civilian administrations were found not upto the task. In the aftermath of the Korean war, the so-called East Asian ‘flying geese’ countries’ economic transformation under the stabilising influence of military leaders commenced the East Asian recovery. Their example was subsequently emulated in Thailand, the Philippines and Indonesia. A defining feature of these periods was a focus on maximising investment and moderating excessive growth in consumption. This experience bears some lessons for Sri Lanka as it emerges from the double shock of the Easter bombings and Covid-19.
After the second world war, Japan (under General MacArthur), Taiwan, and South Korea witnessed the emergence of leaders with military backgrounds who set in motion development programmes for their respective countries, which emphasized investment over consumption. They benefitted from generous flows of aid under the Marshall Plan and the presence of large US military bases, prompted by the desire to keep communism at bay. Crucially, these countries prudently opted to funnel the aid flows into investment rather than adopting populist measures to facilitate excessive consumption.
In stark contrast Pakistan and Burma, which also had military governments, could not hope to secure funding from the fading British empire which had lost its financial might after world war 2 and was rapidly disengaging itself from the subcontinent. In fact the entire subcontinent which had favourable sterling reserves after world war 2 and the ensuing Korean war, proceeded to squander those hard currency reserves in the 1950s and 1960s on populist vote-buying consumption-oriented economic policies. This ‘tale of two Asias’ explains why East Asia and ASEAN nations pulled rapidly ahead in the development stakes, leaving the subcontinent trailing. However, the inclusion of Pakistan and Myanmar on the China Belt and Road project has reversed the under-performance of both countries in recent decades.
Singapore’s Lee Kwan Yew once remarked, ‘imagine what it would be like if Suharto let Indonesia became another Burma’. Mr Lee’s comparison of Mr Suharto and Mr Ne Win of Burma in the early 1960s was stark but drove home his point. Had Mr Suharto followed Mr Ne Win’s road to socialism, Indonesia would have sustained slower economic growth, ASEAN would not have come into existence, and the Southeast Asian export-led economic miracle might not have happened. Indonesia’s economy grew rapidly under Suharto’s group of Berkeley-educated technocrats and has prospered thereafter as a thriving decentralised democracy. A key element of Suharto’s success was his policy of ‘dwifungsi’ or “dual function”. This was used to justify the military permanently increasing its influence in the Indonesian government, including reserved military-only seats in the parliament, and top positions in the nation’s public service. Key appointments of persons with military backgrounds were made in all levels of government in Indonesia, including city mayor, provincial government, ambassadorships, state-owned corporations, the judiciary, and Suharto’s cabinet.
The region has moved on from such extensive involvement of the military in the day-to-day running of countries’ affairs. But successive regimes led by General Prem in Thailand, (1980-88), General Ramos in the Philippines (1992-98) and General Yudhoyono in Indonesia (2004-14) provide useful illustrations on how leaders with a military background can build consensus when internecine disputes among factions of political elites result in their inability to agree on how to resolve burning national issues related to internal security and economic policy. All these countries witnessed for brief periods, increasing policy paralysis as elites bickered and the bureaucracy remained rudderless on the sidelines, until the soldiers entered the political fray and restored a sense of direction. I believe Sri Lanka encountered just such a situation in 2019 when it elected retired Col. Gotabaya Rajapaksa as President.
It can be queried whether the lessons from the south-east Asian experience of neo-liberal trade and investment-driven policies are suitable for the post-covid world where trade protectionist barriers are rising globally. That issue will take time to be resolved, as the epidemic shows no signs of abating and the outcome of the November Presidential election in the US will have a strong bearing on the outlook for global trade protectionism. But closer home, there is a need to boost domestic savings which lag regional peers. Sri Lanka’s national savings ratio is around 25 percent which is much lower than Thailand (34%), Indonesia (33%), Myanmar (30%). This matters because the 27% of national income that Sri Lanka spends on investment is clearly insufficient to propel economic growth to above 5% annually, a rate of growth which necessarily must exceed the average rate of interest which the country pays on its external debt. Hence the government’s push to raise investment activity is a step in the right direction. It has to be accompanied by a corresponding rise in domestic savings. It is quite likely that domestic savings will rise in Sri Lanka in line with global trends, as people consume less in the face of greater uncertainty about the future. Already there are signs that local investors are channelling their savings into the domestic bourse as foreign investors exit. Funnelling these savings into viable investment projects will be key to successful economic recovery in the medium-term. The stabilisation of the value of the Rupee against the US Dollar suggests that flight capital leaving the country has now abated. This is an important development when considering that the steep fall in the Rupee against the US Dollar between July 2018 and June 2019 resulted in the consequent reduction of Sri Lanka’s per capita dollar income and a consequent relegation of the country to lower middle income status.
Significantly, the Sri Lanka government has already implemented measures to encourage the banking system to keep up the pace of lending and skew bank lending flows away from consumption and towards investment. This would not have happened under the laissez-faire approach adopted by bank regulators in the past which resulted in banks ramping up their lending activity towards funding consumer activity which gave banks high short-term returns under a high interest-rate regime. An example of this was the reorientation of the NDB and DFCC away from their deliberate focus on project lending by broadening their scope to encompass retail consumer banking which arguably diluted the national effort to stimulate greater flows of direct investment. The recent imposition of import controls has likely dampened the prospect of another consumerist lending binge after the forthcoming general election. What is called for now is a higher degree of coordination of investment planning and promotion activity between the relevant ministries, banks, the BOI, EDB, SLTDA, IDB etc. which will give banks a degree of confidence in their lending plans. Refinance schemes are already in place to funnel bank credit into priority sectors. These measures should further strengthen the domestic agricultural, construction, tourism and SME sectors which will foster reasonable growth of the economy. Keeping the supply side of the domestic economy strong is key to ensuring no resurgence of domestic inflationary pressure, in the face of greater monetary outlays.
The decision to continue to expand coal-power capacity is timely in anticipation of the rapid growth of the Port City and East container terminal in the medium-term. In the longer-term there is the potential to capitalise on Sri Lanka’s existing concessional access to the EU markets by ramping up manufacturing and agro-industries. Efforts to develop a manufacturing zone in the Hambantota port vicinity were abruptly halted by the previous regime in the face of public protests. The post-general election period may bring about more clarity on the new government’s intention to resume the development of the Magampura master plan extending the urban infrastructure around the new port and airport in the south. The completion of the extended southern highway opens up new possibilities for locating logistics and manufacturing spaces over a larger hinterland which may face less public opprobrium, than before, when implemented. Sri Lanka has not developed a new export processing zone since the late 1990s but an opportunity now presents itself in the post-covid period, to invite investors to build new zones. Given the land-scarcity in Sri Lanka with its dense population, building new zones are desirable since they make it easier for investors to rapidly secure space with clear title. Historically the BOI has always been able to easily fill new zones with industries and warehousing once built and I have no doubt that this will work once more.
The strategy outlined above of raising investment flows through clear and credible guidance to the banking sector, combined with the facilitation of economic zones is precisely what successful south-east Asian nations did when they grew their economies rapidly from the 1980s onwards. Sri Lanka missed out on that momentum because of the civil conflict. But the election in 2019 of a President with a military background who favours working with technocrats hints at a bright future for the country as it puts behind it the fratricidal politics of divided elites who were demonstrably incapable of maintaining domestic peace and harmony nor credibly articulating the economic way forward. History tends to rhyme. Leaders with military backgrounds were mostly responsible for the emergence of Asian miracle economies over the last 70 years. Now it is Sri Lanka’s turn.