Transcript 33rd National Conference of the Institute of

Winning Economy
Premachandra Athukorala
Arndt-Corden Department of Economics
College of Asia and the Pacific
Australian National University
19 October, 2012
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Sri Lanka’s Post-conflict
Development Challenge
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‘The ideas of economists and political philosophers, both when
they are right and when they are wrong, are more powerful
than is commonly understood. Indeed the world is ruled by
little else. Practical men, who believe themselves to be quite
exempt from any intellectual influences, are usually the slaves
of some defunct economists. … soon or later it is ideas, not
vested interests, which are dangerous for good or evil’.
John Maynard Keynes, The General Theory of
Employment, Interest and Money, 1936, pp.383-4.
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Purpose/scope
To inform the policy debate on the post conflict development
strategy:
• What are the achievements of liberalization reforms initiated in
1977?
• What are the implications of recent policy shifts for the
sustainability of these achievements in the context of global
economic slowdown?
• Is there a case for reverting to the past paradigm of inward
oriented, state-centered development strategy?
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Structure
1.
2.
3.
4.
Historical context
Recent policy shifts
Economic performance
Concluding remarks
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1.
Historical context
(‘Past is the prelude to the future’)
• Sri Lankan economy at independence:
one of Asia’s most promising new nations.
‘The best bet in Asia’
‘An oasis of piece and stability’
See Table 2
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Table 1: PPP GNP Relative to USA
Sri Lanka
India
Pakistan
Indonesia
Malaysia
Philippines
Singapore
South Korea
Thailand
1950
11.4
7.1
9.0
--14.6
10.3
--7.6
9.6
1960
12.5
7.4
6.8
5.8
15.1
11.5
16.6
8.7
9.6
1970
9.3
6.0
8.1
4.8
15.6
10.8
24.2
12.8
11.9
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• Era of state-led, import substitution, late 1950s- 1977
By 1970s Sri Lankan economy was one of the most inward
oriented and regulated outside the communist block
- Poor relative growth performance
- Diminished connectivity in the global economy (Figures 1)
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9
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Figure 2: Trade Orientation of the Sri Lankan
Economy, 1959-2010 (%)
80.0
60.0
50.0
40.0
30.0
20.0
10.0
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
0.0
1959
Trade/GDP (%)
70.0
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Liberalisation reforms
• First wave: started in 1977
• Second wave: started in 1989/90
• By the mid-1990s, Sri Lanka had become one of the
most open economies in the developing work.
• Reforms received bipartisan support: further reforms in
the second half of 1990s
• Reform process lost momentum from about the late
1990s, because of the escalation of the separatist war.
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Reform outcome
A dramatic transformation of the economy despite continuing
civil war and the resultant macroeconomic instability
• Emergence of the private sector as the engine of economic
growth.
• An annual average growth rate of over 5%
• Increase in manufacturing share in GDP from 10% in the
mid 1970s to over 20% by 2000
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• Export diversification: ending of heavy primarycommodity dependence, reversing the prolonged
(1955-1975) deterioration in the terms of trade
(Figure 3)
• Emergence of export-oriented manufacturing as the
major generator of domestic employment.
13
500
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
BTT and ITT (1990 = 100)
Figure 3: Sri Lanka: Barter Terms of Trade (BTT) and
Income Terms of Trade (ITT), 1948-2000 (1990 = 100)
600
BTT
ITT
400
300
200
100
0
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Notes to Figure 3
• BTT = PX/PM , where PX is the export price index and
PM import price index (This is what we normally call
‘the terms of trade.
• ITT = [PX/PM]*QX, where QX is the export volume
index. ITT measures import purchasing power of total;
export earnings.
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2. Recent Policy Shifts
Backsliding from liberalisation reforms from about 2005,
in particular after the ending of the separatist war in 2009
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Trade policy regime
Increased complexity of the import duty (tariff) stature:
a number of import taxes (para-tariffs and other) in addition to
customs duties;
Notable increase in the average levels import duties (tariffs)
(Table 2)
Increased variability of t rates among tariff lines (increased
cascading nature)
New export taxes (promoting resource-based industrialisation)
Greater emphasis on free trade agreement (origin
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complications)
Table 2: Sri Lanka: Unweighted Average Protection
Rates, 2002, 2004, 2009 and 2011
Customs
duties
Para-tariffs
Total
protection rate
November 2002
9.6
2.9
12.5
January 2004
December 2009
11.3
12.4
2.1
15.5
13.4
27.9
January 2011
11.5
12.2
23.7
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FDI policy
• The Strategic Development Project (SDP) Act (2008)
- leaves room for ample discretion in the investment approval
process
• Revival of Underperforming Enterprises and Underutilised Assets
Act (November 2011)
- empowered the government to acquire and manage 37 ‘under
performing enterprises
• A minimum, across-the-board, capital requirement for FDI
projects to become eligible for five-year tax holiday (US$
500,000) (Malaysia 65,000; Thailand 65,000; South Korea
50,000, India 2,100)
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FDI policy (continued)
Heavy emphasis placed on ‘domestic value added’ (or
domestic content) in approving new projects
(discuss inconsistency of this criterion with promoting
FDI in an era of economic globalisation
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State-owned enterprise
Abandoning the privatization program following
change of government in 2005.
Renationalisation of some previously privatised
firms and some fresh nationalisations.
Loss-making SOEs have become a huge drain on
the government budget.
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Macroeconomic policy
‘Stable exchange rate regime’ (2005- February 2012) and real exchange rate
appreciation (Figure 4)
Managed floating since February 2012.
Discuss
• The link between nominal and real exchange rate.
•
The link between budget deficit, current account deficit and the future
course of the nominal exchange rate
(Box 1 and Box 2)
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20
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
Index, 2004 = 100
140
Figure 4: Sri Lanka: Real exchange rate and its
components, 2004Q1 – 2012Q2
120
100
80
60
Nominal effective exchnage rate (NEER)
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Real effective exchnage rate (REER)
Relative price (RP=PW/PD)
0
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Real exchange rate
RER = [NER*PW]/PD
------------Current account balance (CAB) and the budget deficit
CAB = (S - I) + (TX - TR - G)
= (S - I) + (TX - TR - G)
(8)
= private sector balance + public sector balance
(or budget deficit/surplus)
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Sri Lanka in 2011 (% of GDP)
CAB = private sector balance + public sector
balance
-7.8 = -0.9 - 6.9
(Source: Central Bank of Sri Lanka, Annual
Report 2011, Key Economic Indicators)
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3. Economic Performance
In terms of the standard indicators (GDP growth rate, per capita
income, unemployment rate, inflation etc) growth performance
in the immediate post-conflict period looks impressive,
but
these indicators hide a number of concern regarding the
sustainability of growth
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• The main drivers of growth are the non-tradable
sectors (construction, transport, utilities and trade
and other services).
• The doubling of per capita income in current US$
partly reflects domestic inflation and the artificial
stability of the exchange rate during 2005- Feb 2012
(Figure 5).
• The decline in the unemployment rate was largely
dote public sector recruitments and labour
outmigration.
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Figure 5: Sri Lanka, per capital GDP in current and
constant (2000) price (US$), 1970-2010
3000
Per capital GDP, current US$
2500
Percapital GDP, constant 2000
US$
2000
1500
1000
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0
1970
500
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• External payments position remains fragile:
- current account deficit has widened (poor export
performance, faster import growth despite increased
import duties)
- Net foreign reserves are very low (Figure 6)
- The share of non-concessional loans in total external
debt increased from 7.3% to 42.9% in 2011.
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Figure 6: Sri Lanka’s International Reserves
(in Billions of US$)
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• A number of export-oriented foreign firms
seems to have stopped operations (and/or left
the country).
• The budget deficit as a percentage of GDP is
very high (2010: 9.9%; 2001: 6.6%)
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4. Concluding Remarks
The Sri Lankan experience under liberalisation reforms has clearly
demonstrated that an outward-oriented policy regime can yield a
superior development outcome compared to a closed-economy
regime, even under severe strains of a protracted ethnic conflict and
macroeconomic instability.
Viewed against this backdrop, recent developments in the Sri Lankan
policy scene do not seem to augur well for the future of the Sri Lankan
economy.
Policies based on the past paradigm of inward oriented, state centred
development offer no viable long term solution to the huge challenges
facing Sri Lanka in face of a global economy that is in deeper trouble
than at any time since the 1930s.
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Thank you.
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