By Uditha Devapriya –
Economists and political analysts tend to extol the virtues of free markets and the evils of state-led growth. They seem to think that Sri Lanka has, for the most, been caving into the latter approach, i.e. widening the state at the expense of the private sector. The solution, according to analysts, is to let the market decide and to limit the government to the role of what Robert Nozick described as a “Night-watchman”, formulating the rules of the economy without playing with them. These analysts then point at societies that prospered under such a state: the US, much of Western Europe, and the Tiger economies of East Asia.
Unfortunately, much of the hype surrounding advocacy of free market principles and small government is built on a tautological premise: economic liberalisation will lead to growth, so it should be implemented in the country. Import tariffs must be reduced or even eliminated, export-orientation must replace import-substitution, let’s not think of local industrialisation or machine-manufacture yet because we’re an island, and let’s reduce the role of the state because in the US, Britain, and East Asia, it played a minimal role.
Countries are not all endowed with the same levels or the same kinds of resources. Nor do they magically transit to free markets and small governments. To say economic liberalisation worked there and that owing to it these principles must be applied here is to assume that all it takes for a country to prosper is the implementation of policies to which those countries which are supposedly implementing them now resorted only after they had passed through certain stages. This assumption, quoting the late S. B. D. de Silva, is “a veritable non-sequitur of bourgeois scholarship.” As always, context is important.
The US got to where it is largely through its leap to industrialisation in the latter part of the 19th century. Much of the industrialisation which transpired at that time was financed, not by private initiative, but by the government: vast tracts of land running into millions of acres were handed over to railway companies. In Britain the state played an important role in promoting local industry, smothering the up-and-coming textile mills of India. Discussions about the success of private sector led growth in these countries leave out or ignore the role played by colonial conquest, which happened to be financed by the government. “Is there any greater example of a rampant state than the English state in the world?” asked a friend at an Advocata Night-Watchman seminar years ago. “When you’re talking laissez-faire, they were basically robbing the seas around the world, installing slavery.” True.
In East Asia three distinct case studies can be identified: Japan, Taiwan and South Korea, and Singapore. The foundation for Japan’s economy was laid down long before the war by the Tokugawa shogunate; it broke the stranglehold of petty traders, privileging industrial capital over merchant finance. Taiwan emerged from the war cut off from mainland China after the Communist takeover in 1949, yet American experts and economists who formulated that country’s transition to liberalisation didn’t embark on free market reforms right away. First they oversaw rent reduction in 1949, the sale of public lands in 1951, and a land-to-the-tiller program in 1953. Land reform limited ownership of paddy land to 4.5 hectares, much lower than the 10-25 hectare limit imposed by the Sirimavo Bandaranaike government in 1972 (a favourite punching bag for free market “Advocatas”). South Korea implemented the same set of reforms. It hardly need be added that in all three countries, democratisation followed, rather than preceded, the transition from agriculture to industrialisation.
Singapore is a different case, not least because unlike other East Asian countries it lacked a rural hinterland in which a transition from agriculture to industry could take place. Yet there too the role of government intervention cannot be denied, economically and also politically. Milton Friedman once referred to Lee Kuan Yew as a “benevolent dictator”, the very same epithet Maithripala Sirisena used on Mahinda Rajapaksa in 2014 after walking out from the then administration. In a 1993 essay William Gibson described the country as “Disneyland with the Death Penalty”, bringing to mind Jagath Manuwarna’s remark about Sri Lanka at a press conference in late 2014: “kalakanni Disneylanthaya.” Unlike Manuwarna’s statement though, Gibson’s essay was banned by the Singaporean government.
Liberals and classical liberals and even left-liberals tend to look up to Singapore and Yew’s reforms without realising that, as Regi Siriwardena observed, their achievements rested on the denial of democratic and human rights. Hence when one columnist, drawing wildly false analogies, argues that Singapore lacked a president, yet accomplished much (implying that Sri Lanka doesn’t need an Executive Presidency to get things done), he fails to acknowledge or chooses to ignore not only that Singapore had just one political party during its transition from third world to first, but also that it curtailed dissent in a way that makes any hounding of dissent in Sri Lanka today look haphazard in comparison; when asked why he refused to tolerate political cartoons, for instance, Yew bluntly told Fergus Bordewich that in Confucian society politicians ought to be seen as deserving of respect.
The absence of a rural hinterland made it all the easier for Singapore’s government to enact capitalist reforms, since it could dispense with the need to abolish the kind of pre-capitalist social relations that existed in Taiwan and South Korea. Despite this, however, government intervention swept across the country; in the words of one economist, Singapore responded to international economic forces “through manipulating the domestic economy.”
Wage adjustments vis-à-vis a National Wages Council, a high savings and investment culture promoted via state enforced and state directed abstinence, the shift towards manufacturing in the latter part of the 1960s, the growth of public enterprises (believed to have accounted for 14% to 16% of manufacturing output), and tight government control of trade unions all played a part in bolstering its prospects. As Hoff (1995) noted, the paradox of Singapore’s economic success was that while investments came from the private sector, savings relied on the public sector. It is true that contributions by foreign investment were significant, yet had Singapore not had a rigidly regulated economy where, for instance, compensation costs for production workers were one-third that of the US equivalent by 1993, it would not have become the third world to first success story it is touted as today.
The specific conditions under which the East Asian economies transformed from developing to developed, from inward-looking to outward-looking, make their emulation in other parts of the world untenable, if not unlikely. At the time the governments of these countries were imposing reforms, Western Europe was struggling to recover from wartime recession and MNCs had not become as active in peripheral countries as they would decades later. Their geopolitical alignment with the US in the Cold War guaranteed the success of the East Asian Tigers. Moreover, these were hardly what one could call classical liberal societies: political authoritarianism cohabited with economic liberalisation. Even that dichotomy comes off as false when we consider that government intervention figured heavily in these economies, something the “Advocatas” of free markets don’t seem to be aware of today.
There was another very significant factor: the absence of a merchant trader class in these countries. The Tokugawa reforms extended to Korea and Taiwan after Japan turned them into granaries for its domestic needs. The US experts hired to oversee reforms in Korea and Taiwan facilitated, rather than reversed, these processes. In Sri Lanka and much of the Third World, by contrast, experimentation with free market classical liberalism has resulted in not just political authoritarianism, but also the defenestration of an industrial sector, leading to lopsided growth subsidised by a Pettah merchant class: rather than manufacturing goods, they are imported and resold. The call for “going local”, then, contrary to what intellectuals, institutions, and Opposition MPs think, say, and write, has to do with more than a hysterical call for a garrison state. This is not economics. This is common sense.
False analogies, assumptions, and tautologies will thus get us nowhere. It is certainly ironic that think-tanks and institutions that privilege reason over guesswork end up indulging in selective scholarship. Even more ironic are statements uttered by academics from countries which passed through several stages before making the transition from a planned order to a free market advising us to bypass those stages when implementing policy reforms here. It takes not only foresight and hindsight, but also courage, to swerve from and dispute these assumptions, dig deep into history, and understand what drives the wealth of nations and the poverty of others. Free markets alone will not do, as even the history of countries where they flourish today tell us. Something else can, and something else must.