Page 1
密 繆
 

Page 2
ATA GLANCE
Malaysia. Singapore P.N. Guinea
Philippines Thailand "Australia
China Afghanistan Nepal Sri Lanka Bangladesh Pakistari“ . Burma South Korea နုံ fig:88;်’’ ‘‘‘‘‘‘ “ ’်စဲ #1g77 `် ့်
قصےسےخC
Source: International Monetary FundyAsiAw
LIVING COSTS The United Nations keeps track of the cost of living around the world by monitoring its officials' spending. In June 1987 it cost 48% more to live in Tokyo than in New York. Since June 1983, Tokyo's cost of living has risen by 27% in dollar terms, while New York's living costs have increased sy 9%. Keeping officials in Western Europe is also expensive-Geneva's living costs are 28% higher than New York's, Paris's 6%, ln Buenos Aires, On the Other nand, officials need only 88% as much as they would in New York; in Rio de Janeiro 57%. Warsaw is an even better deal, costing about half as much as New York; in dollar terms, its living costs have fallen by 18% during the past four years. On the same basis, Rome has seen the fastest rise53% since June 1983.
UN officials" living costs, New Yorks 100
Source: UN Ahe Economist
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Economic growth in the
7O
6O
50
40
3O
20
O
1976-80 81 82 83 84 85' 86"
Approximately one third of the developing work's people live in
tries which have experi zero or regati
* Preliminary
*** UN Secretariat forcasts
*** Mgrkෂී මුලද්‍යර්‍ෆූර්‍
Sourceట్టNeters Deperiment othematone Econome and Sంce
Decline in net transfer of resources to the capital-importing developing countries, 1980-1985
industrialized to Developing to developing industrialized countries countries
Nie interest
Net derding payments
Niet flow of investffeft Netflow of return
On investfnant
Officia aik
O
1980 81 828384 85 1980 81 828384 85
ender based on subsidised housing costs

Page 3
Diary of Events
Commodities
Development
Andre Gunder F
Melvyn Westlak
W.D. Lakshman P.Athukorae
H. Ranasinghe and J. Diandas
C.K.Jha
H. L. Hemachand
NEXT ISSUE
* The C * Thep * Techni
COVER
Sepalika F
 
 

Number 9 December 1987
ܒ
COLUMNS
2 Nov - Dec 1987
15 Coconut. Sharp drop in exports
16 The Mahaweli - a look back and into
the future
SPECIAL REPORT
3 THE GLOBAL ECONOMIC SYSTEM
暑- . ¬ 扈
rank 9 Crash Course
12 A time of travail
FEATURES
and 18 Export development in Sri Lanka:
Problems and Constraints. 25 The durability of private bus Owners
' in Srí Lanka
30 Do outward oriented policies really
favour growth?
3. 32 BOOK REVIEW: Pricing Policy in the Social
Sector by Emmanel Jimenez
langing global economic system: the Soviet Union and Perestroika stroelum situation-Critical issues and the future ! logical changes in agriculture - a discussion
brnando

Page 4

ECONOMIC REVIEW DECEMBER 1987

Page 5
The rise and fall of thes
Sagainst the Deutschemark
$ against the yen
3 DM/S Yen/s
2.5-
THE GLOBAL ECONOMIC SY's
The global economic system experienced significant changes over the first seven years of the 1980's. The Stock Market Crash begun in New York on October 19, 1987 brought into sharp focus the problems that had assailed this system in recent years. It appeared that the world was heading towards deep economic crisis.
On October 19, 1987 when the New York Dow Jones index declined a record 508 points or 22.6 percent, in a single day; (some $ 500 billion in paper value, a sum equal to the entire GNP of France, disappeared into thin air) followed by equally severe drops on the London Stock Exchange, as well as in all other main financial centres of the world, it was believed that the collapse was imminent.
ECONOMIC REVIEW DECEMBER 1987
.
The immed 'crash was exa mentators. One point stated en Wall Street ma the tenor of the Same. What cras| the market. It W the idea that th Quildup and tax that the country means indefinite ning after, and prosperity has economy that V nufacturing mig began pursuing gers and takeove new 'financial i were conjured O
 
 
 
 
 

SEOUL
Asian Stock Market - Rises and Falls
TOKYO
TAPE
麟A鼠_J J 凰S0N
HONGKONG
BANGKOK
KUALA LUMPUR
A S O N.
end month
TEM
iate impact of the mined by many comtypical American viewnphatically 'Although y eventually stablize, times will never be the ned was more than just as the Reagan illusion: are could be a defense cuts without a price, could live beyond its lly..... Now its the morthe dream of painless been punctured.....An Vas onCe based On mant and inventive genius Wealth through merrs and the Creation of instruments'. Fortunes ut of thin air....Just as
the crash of the space shuttle Challelger was a blow to America's sense of technological grace, so the crash of the market shattered its sense of fianancial security...... If y
Both the reasons for the October crash and the upheavals in the global economy in recent decades need to be examined in their historical perspective for a proper understanding of the situation. Few would doubt that there has been a growing crisis in the international economy from the 1970's, which intensified in the 1980's. The question is what the essential nature and characteristics of this crisis a re. The 1950's and 1960's were what some economists have termed the 'Golden Age' for the advanced capitalist countries. It appeared that they had found the recipe for constant growth and full employment. They appeared to be reaping the fruits of Centuries of capital accumulation and they even advocated that poor coun

Page 6
tries by adopting a similar system would also be able to share in the benefits of the system.
But the 'system' had within it the seeds of its own deterioration. By the end of the 19th century Britain had relinquished its leadership of the international economic system to the United States. The two World Wars fur
ther secured this position for the US
whose dominance was assured by the end of World War 11. The 'system provided the conditions for the international and transnational mobolity of capital. This was clearly seen in the progressive global spread of US corporations, followed later by West EuroIpean and Japanese firms. But, this growing economic and political strength of Western Europe and Japan was also a factor in the gradual erosion of the dominance of the United States, which was further weakened by the political changes since the 1950's in the developing World.
Leadership of this global system had shifted functionally from one nation to another at different times-from Venice and the Hanseatic League and the Iberian Peninsula upto the 16th century, to Holland in the 17th century, to Britian in the 18th and 19th centuries and there after to the US in the 20th century. There were thus a series of thegemonies, by a particular nation, during these centuries. The hegemonic leader naturally found itself obliged to maintain the system which made its leadership possible, and it has traditionally accepted the responsibility.
The United States emerged from two world Wars as the global economic leader richer and technologically more advanced than any other single nation. its leadership had to be sustained and extended and it is argued that the Cold War was used to achieve this.
World War 11 had helped to estab|lish the political and military dominance of the US. By raising and maintaining fears of another war in Europe and by sometimes identifying the local Left with the Soviet block, it became possible to use a threat of totalitaria
nism to ensure around American
ginary global War
ped market econ dependent on Am way of upholding
and leadership of
tuation Created ti
for the extensive
has been termed duction techniqu 1930's, with a pro
biles, aircraft, m
consumer durable tensive use of oil.
it became poss philosoply and s Cold War and ens the advanced in
post War reconst Europe in the fo Plan was a signif enabled the Unite international ecc such as IMF, IBRI that were establish were based on the of the other advar
tries; with the soc
drawing or refusi them. Through th established what as a 'free' trade the 'free' movem capital. The free sharply constraine those who held ec power. Often ecor litical power was 'free flow becam This 'free trade ted the acceleratic 'economic interde veloped market ec to contribute to ra th. Trade grew m put as a whole. 1973, trade amon countries quardru tries share of Worl percent to 62 pe Foreign investmer
with the global spr
corporations and i most important f

WWestern Cohesion leadership. The imain which the develoDmy countries were erican support was a America's credibility the system. This sile climate in the US levelopment of what "Fordist" mass prois originating in the duct mix of automolitary supplies and s, including the in
ible to promote this ystem through the iure the cohesion of ustrial world. The 'uction assistance to | rm of the Marsha | | icant factor. It also d States to shape the nomic institutions D, GATT, OECD etc, led after the war and support and Consent ced industrial Counialist Countries withng to participate in lese institutions was has been described regime guaranteeing ent of goods and of dom, however, was *d by the wishes of onomic and political nomic and global pointertwined, and the e a rigged exercise. framework promoin of what is termed pendence among deonomies, and helped apid economic growuch faster than outBetween 1963 and advanced capitalist led and these Coun
di trade rose from 48
rcent of the total. t also rose rapidly, ead of multinational stitutions being the orm of capital and
technology transfer.
The Cold War would not have been possible without a parallel process in the East. It sustained the Soviet political and military hegemony in Eastern Europe established during the Second World War. The conflict of the two economic systems turned outs to be a struggle between capitalism and socialism; and although the Cold War was the outcome of the political struggles that occurred from the late 1940's between the twò systems, organised economic interests no doubt contributed to it.
A more concrete way in which the Cold War helped to uphold the system was in the various military alliances that tied up many parts of the globe. Particularly in the Western world and among allied third world states, was witnessed a build up in the infrastructure required for military purposes which included the establishment of military bases arms supplies and the various military and consumption requirements of troops, which in turn promoted the spread of these modern mass production technologies and also the build up of Western capital whose security was ensured.
Although the US maintained its leadership position and relative prosperity in the 1950's and 60's, its economic growth had lagged behind that of other advanced market economy industrial countries, namely some other OECD countries. During the years 1950-73, US annual productivity
ECONOMIC REVIEW DECEMBER 1987

Page 7
Manutaetusing change
growth averaged 2.6 percent, which was very high by historical standards,
but it compared with an average of 4 to 6 percent annual productivity
growth for OECD countries as a whole.
and a starting 8 percent for Japan.
This relatively slow rate of productivity growth was reflected in the declining competitiveness of US manufacturers. During the 1950s and 1960s, it
neered in the -
major in reads in
nents market anc nics, while the E teading role in in of information tec
the business gian
(which generally h;
to government) st bite companies, th the aerospace com
ding it increasingly Some of the roots nomic ills in the be traced to this t in the face of the gies. Many indust ding the US, have this change over bile era and sm to what is known rochip and biotech
A distinct fea 1950-1970 was th nomies of Europe
tive to that of the
was believed that the US could afford
an overseas network of military bases
and large amounts of military and economic assistance because outflows of
dollars returned to the United States in the ferm of purchases of US goods. As the competitiveness of American
manufacturers declined, overseas dol
lars were increasingly spent on West
European and Japanese goods. Thus,
in the 1950s US foreign exchange reserves amounted to $ 24.3 billion, while the combined reserves of Germay, Italy and Japan were $ 1.4 billion. By 1970, US reserves had faifen to $ 14.5 billion, while the reserves of Germany, Italy and Japan had risen to $ 23.8 billion, and the United States experienced its first trade deficit since 1936.
What was more significant is that
from the 1960's US productivity began to decline. The production techniques and technologies of the US, adopted in the 1950's and 60's, were
being left behind by newer develop
ments and markets for its products were not growing as before. The Japanese exploiting techniques pio
ECOMOMC REV EA pECAER
*○8学
a major significanc that the relative among Europe's expanded much fa
all ratie) of Wor!
COU1 rntries the — sha Within Europe OS half to nearly two ports between 19 percentage share c United States was there Was a simila centage share fro market economies of output in the n Europe was associ tegration through tion was at least p of trade with bot veloping countries
While there wa
ternational trade a
dustrialised econd sharp decline in t developing countri (with the exceptic due to a deterior unit prices of dev ports, particularly
 
 
 
 

S itself had made to both the compot consumer electroEuropeans paved a dustrial applications hnologies. In the US
ts of an earlier era
ad priviledged access }ch as the automoe oif mulțtinationais, panies, eté Were findifficult to survive. of the present ecoglobal system could
bid for their survival
advancing technolorial countries, inclubeen caught up in from the 'automoto estac industries
today as the 'mic
跨季
8ef 3, ...
ture of the period hat the market ecogrew rapidły, rela2 United States, and te of this growth was proportion of trade
market economies ister than their overdi trade. For these re of imports from e from less than one D-thirds of tota im55-1970; while their
of imports from the
; nearly halved, and
r decline in the per
m other developed ... While rapid growth market economies of
lated with closer in
trade, such integraartly at the expense h developed and deoutside Europe.
s an expansion in inìmong developed inpmies there was a the relative share of ies in world exports on of oil). This was ation in the relative eloping country exagricultural raw ma
a more direct bearing on
terials and the growing constraints placed on their exports by the developed countries. it was only after the
middle of the 1960's that manufac
tures began to assume importance in the exports of develeping countries, though it was mainly the newly indus
trialising developing countries that I shared this market. -
Another aspect of the structural changes that took place în the world economy over the last 25 years was in that of capital movements and economic integration among the advanced
industrial countries. It may be obser
ved that the changes in the pattern of trade balances and capital movements during the last three decades have had
the present global crisis. In the 1950's and early
1960's trade defieits were maintained within modest limits through export and import controis and drawings on
available foreign exchange reserves, inter governmental loans, and official loans from multilateral institutions. There were in the 1950's and 1960's transfers of capital between the industrialised countries through, for instance direct investment in Europe by American Corporations and in turn portfolio investment by West Europeans in the shares and bonds of American corporations. The rapid expansion of international banking, encouraged by the emergence of the Euro currency market, together with the
high rate of growth of output in Eu
rope and Japan during this period speeded up the process of capital movements and economic integration. The new financial institutional structure and practices helped to provide the necessary funding when international liquidity was proving to be inadequate. As one commentator stated 'the Euro-currency system provided the necessary mobolity of money and credit, unrestricted by national bar
riers or controls'.
These channels of capital flow and
credit expansion, opened up during the 1960's had major repurcussions on the functioning of the world economy, particularly in the 1970's when trade imbalances between countries

Page 8
began to Widen and reserve Currentes were being used on a much larger scale to settle current and capital aՇCOԱրt transactions. The increase in oil prices during the 1970's gave the banking System a surfeit of funds which contributed to the phenomenal growth of the international banking network and its scale of operations and resulted in a massive movement of capital across countries. This international mobility meant that foreign exchange markets came to be dominated more by capital transactions than by trade ransactions. Trade which had been perceived as a 'vehicle for growth' in the 1950's and 1960's in particular in the second half of the 1960's when' nearly every country discovered the virtues of exporting' came increasingly to be viewed after 1973 by the western industrialised countries as a major source of instability and imbalance, with detrimental effects on their domestic economies. This change in outlook was particularly pronounced in developed market-economy countries and thus affected the overall 'trade environment' since these Countries continued to be the leading actors in international economic relations.
Other measures that challenged the post-war global economic interstate system and slowed down international trade included the cuts in economic assistance that consequently increased the growing dependence of Third World countries on commercial bank loans; the shift from military assis
tance to commercial purchases of mili
tary equipment; the end of food aid and the dismanting of US grain reser-- ves which led to a rapid rise in food prices; and the oil price hikes of 1973 and 1979
The fluctuations in productivity trends in the advanced industrialised Countries had also contributed tC. structural changes in the system. The changes that took place could also be is lated to the developments in technogy, changes in the pattern of consuiner spending associated with rising in
come levels, and other factors which,
as already noted, contributed to a
slowing down i productivity in tries, particula productivity als the rate of inves US economy sh
share of deprec
account of a wa 'a general shift long-lived assets wards assets wi rates of obsole past investment energy costs at higher ratio of wered further ment, and as
growing twice against that of
dramatic declin of net capital st
When sizeab emerge in the US in the early capital further of payments a was to delink th later to let if fo
in August
announced the bility into gold charge on dutia ked the beginn Bretton Woods of protectionist
the major curr
fixed exchange
of the dollar in tional currencie tiveness of An industry. The v chandise expor ceeded 4 pel throughout the
percent of its ( also helped to
companies profi over the 1970's sionary moveme rise in prices a confidence in reversal in this li licy was to col sure by using h also revive cor
 

the rate of increase in some developed counby the US, its lowe o resulted in a drop in tment. A report on the owed that a rise in the ation in the 1970's (on riety of factors such as in net investment from such as structures to: h shorter lives', higher scence of a variety of s following the rise in ld, more generally, 'a capital to GNP'') lothe rate of net investthe labour force was is fast in the 1970's as the 1950's there was a 2 in the rate of growth ock per worker. .
ble deficits began to balance of trade in the 1970's and outflows of aggravated its balance
significant step taken
he dollar from gold and at freely. 1971 President Nixon end of dollar Convertiand a 10 percent surble goods, which maring of the end of the system and a new form in. By March 1973 all encies had abandoned rates. The devaluation terms of other internaas helped the competi. merican manufacturing alue of American merÈs which had not exrcent of its G.N.P. 1960's rose to nearly 8 GNP by the 1970's. It more than double US its from manufacturing ... But, when this expan2nt led to a cumulative nd to a sharp loss of the dollar there was a policy. The new US po
Inter inflationary pres
tigh interest rates, and fidence in the dollar,
both through these high interestrates
and by permitting capital inflows on a scale large enough to more than off
set its deficits on current accounts in the balance of payments. But, although these inflows of capital helped the US to raise its government spending substantially and stimulate internal recovery during this period with funds from outside; there - Were negative effects on the world economy from this policy.
The high interest rates, encouraged
massive inflows of capital to the US
though at the same times the industrial economies of Western Europe, as well as a number of developing coun
tries, were deprived of investible
funds. There were signs of a crisis emerging in the global economy in the 1970's and this had been aggravated by the two oil price hikes of 1973 and 1979. From a long period of unprecedented growth and prosperity in the 1950's and 60's the world economy began to move into a state of price ins
tability, uncertainity and stagnation.
This situation also resulted in a fundamental change in attitude towards economic growth, particularly in econo
mic and trade policies, of the develo
ped market economy countries. As observed above, in the period when trade was thought to be the 'handmaiden' of growth these governments tried to facilitate its development at both the national and international leves. But when the destabilising influence of trade came to be perceived their policies began to change. Many of them moved towards protectionism, abandoning their ʻʼʻfree tradeʼ policies.
The impact on the developing countries drawn into the global network of trade and exchange relations, Was par ticularly harsh. Especially for the low income developing economies the situation was critical though it is mainly the middle-income economies who
have received the most attention be:
cause of their heavy debt servicing obligations.
AS one development economist sta ted 'Never before in the history of the capitalist mode of production has the
Economic Review DeceMBER 1987

Page 9
1986
actual
APAN 2.4%,馨17200 HONG KONG 11.0% $880 SINGAPORE , $8.600 AWAN 11.6% ఫీ4,000 SOUTH KOREA 12.5% 等2.300 ÀWALAYSIA 1.2% 81,600 THAILAND 5.5% PHLPPNES
INDONESIA*
తిరి
Co trast between the en Off Gius un met
hopes of the vast bulk of humanity, li
wing in poverty, and an enormous un: used productive capacity unused be: cause its use is not profitable - been so glaring as in the developing countries in the periphery today'.
The situation over the 1980's, in the Western world, also continued to grow more acute. In 1985 the OECD
estiamited that 31 million people were
unemployed in advanced capitalist countries; in Western Europe alone, nearly one person in five was unemployed, many over a period exceeding their unemployment insurance cover. Centrally planned economies also experienced a slow-down in the rate of growth imports of Western technology resulted in a growing indebtedness. East Europeans began to experience rising prices, especially rising food prices, for the first time since the end of the Second World War, combined with stagnant standards of living. Over the 1980's the US was transformed into the world's largest debtor nation.
It was also becoming clear that there was no way for the US to maintain both a stable domestic economy and a stable exchange rate. The twin budget and trade deficits of the US were being blamed and there was pre
issure for a reduction of the deficits.
With the high interest on loans and the high exchange rate of the dollar, foreign investment and goods had flowed into the United States. Tax privileges for corporations and income tax reductions had helped to augment the
ECONOMIC RE vyjewi DECEM ER ER
profits of industri mand of more ai This policy also hel my somewhat to ing inflation of the ficant, however, wa of financial marke
the liberalisation
tions. This helped market boom and s cious capital. By th a growth of deamin to the expenditure sections, including stock holders and r perity was built up Their interest incor were reported to ru jon in 1987. Furth
standards of these
had been rising on a cent an year, or C rate of the US econd
The Strains on were intensifying b US industry was fin compete. The mas American markets tion and shifting a the industries that h the foundation of economy and a ma paid jobs for Amer anticipated and stri of the good jobs w cans; and their go other countries wh producing advance American market. Japan, Taiwan and
箕98ア
 
 
 
 
 

1987 * 19ვ8
estimate forecast
3.5% $22,100 3.5% Ꮥ24,600* 售2.0% $8,000 5.5% $8,870*
6.5%、 $7,550 5.5% $8,000 售售。29é三 $5,275 亨.5% $6,200 12.7% $2,800 8.5% $3,000
2.5%** $1,690 40% ** $1,700
7.0% S860 6.0% S940
5.0%、 S630 6.0% S670.
4.0% ** S390 4.5% * * $430
alists and the deFfluent Americans. ped the US econoVercome its grow1970's. More signiis the de-regulation ts which included of current operato spur the stock peculation in fictihe 1980's there was d mainly attributed of those better off over 40 miljon entiers Whose proson these policies. nes from securities n to over $ 500 bilermore, the living better off sections in average of 6 perouble the growth omy as a whole. the US economy y the mid 1980's. ding it difficult to sive take over of oy foreign producbroad of many of ad in the past been the United States jor source of well icans led to an unong decline. Many Pere lost by Ameriod jobs moved to ich had gained by d goods for the in countries like | the Republic of
Servicos Branch, Hongkong வே säsäs Chie E. Economic Planning Board; Ministry of Finance, Malaysia, Bank of
Asia week Chart
Korea, people were fino v Ing up to good jobs, firms were expanding rapidly and investment was increasing while in the United States the situation was reversed. As a result of the enourmous trade deficit, averaging in recent years around $ 150 billion annually the United States was fast going into debt; while the Japanese loaded with dollars were taking over assets in the United States by buying up banks, businesses, farm and and real estate. From 1981 through to 1985 US current account balance (including both goods and services) declined from a positive $ 6 billion to a negative $ 118 billion. The 1987 deficit on merchandise (visible) trade is reported to be $ 17.1 billion. The result is that the United States has in well less than a decade gone from being the largest creditor nation in the world to being its largest net debtor natirin. If these trends continued net external indebtedness in the United States was expected to increase to $ 500 billion before the turn of the decade.
A fundamental problem facing the United States was that it was consuming more than it produced and borrowing more than it saved and such a condition was not sustainable. As the London based 'Economist commented 'Ali in all, it is sheer profligacy which poses the biggest threat to Americans' hopes of smoothly putting their trading house in order. The threat is intensified by some politicians' beZarr reaction to their own ability to cut the federal budget deficit. In total,

Page 10
Americans and their governments vyji i spend about S 150 billion more in 1988 than they produce. All of that will have to be financed by foreigners, either by borrowing or by the sale of American assets. But, rather than cut the deficit, some are perversely beginning to clamour for restraints on foreigners' ability to finance it".
Furthermore, the US dolar which for nearly 40 years was the world's leading currency and had stood at a high of 260 yen to the dollar in 1985 began to slide in value against the leading currencies. Between 1985 and 1987 the US dollar had dropped nearly 50 percent in value against the Japanese Yen and the West German Mark. The falling value of the dollar also cheapened the value of the hundreads of boj ions of dolars’ Worth of U.S. securities held by investors abroad, notably in West Germany and Japan, and made them correspondingly less eager to invest in US stocks, bonds and Treasury bills. With the U.S. also now heavily depedent on foreign trade deficits, a loss of confidence in the currency seemed inevitable.
There existed a paradoxical and britte situation. Americans Were Consuming far more than what they produced, and borrowing from abroad and selling off assets for even cheaper dollars, although in the first half of 1987 rapid economic expansion was recorded. Most of all the Stock market was soaring; but there had to be a limit to the optimism, which was finally manifest in the market Crash of October 19. Looking back on the situation a leading US business journal summed up the situation as follows: 'A soaring stock market, yes....but it has spawned a class of baby magnates who are sometimes shameless in their business prac* tices and their self-cherishing materialism. With so many misgivings lurking behind the optimism, it hardly needed program trading to bring about a 508point drop in the Dow. Above all, the laws of financial physics explain the crash: the market had reached altitudes where atmosphere was too thin to support in. No single event, but a
SWarm of con them Treasury
percent yield b Cretary James E beat down the raised interest
nic. Now, howe lying economy tor confidence 'yes' to 'but fundamentals o
As its peak stocks were wal lion. Eight week the value plung in those rough Tuesday, Augus tober 19, almo 'lost on paper' the net worth holds, either sa inherited from may be more th underlying asset used as collater what analysts c of the 1987 c. 'wealth effect'
Wye | Off Ameri
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Street asto apoeare own and by the confidence Ajas se US with corporati injecting new mon don and Hongkong
 

حمیر
Verging causes among bonds breaking the 10
arrier and Treasury Se
Baker threatening to be dollar if the Germans rates-provoked the paver, resifient the underthat shattered inves, that change from had become one of the f the new bear market
in August 1987 US
ued about USS 4 triçS ater, after the Crash ed roughly 30 per cent... y two months between st 25 and Monday Ocst one-third of it was measured in terms of of all American houseyed in their lifetime or
generations past. (It an a paper loss, if the is had been pledged or a to borrow). This is a the 'wealth effect' rash. This loss of the , as the influence of
cans has been describ
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peared to be heating up.
was well on its way to es since October 19; Wall 2d poised for a rally of its 3eginning of 1988 a new tting into business in the Ons buying up rivais and ley into the market. Londisployed similar trends.
bed, could be painful for the US economy, and its real impact could deter. mine and dictate the future course of the American economy.
in Western Europe too prospecİS are getting gloomy with a drop in both industrial production and exports. According to OECD estimates, the slump is partly a reflection of a global downturn and Europe is feeling it severely. Fears are being expressed that the situation may worsen in 1988, with an increase of protectionism and a new 'mercantitism' in the West, which could result in further turmoil for both the developed and developing worlds. This would no doubt depend on how effectively the global capitalist system could correct its errors and
eXCeSSeS.
In Japan they ask, whether there was really a major long term stockmarket Crash initiated in October 1987. By the end of January 1988 the Nikkei 225 - share indicator had recovered over the 23,000 leve for the first time since last October, and even foreigners were net buyers on the Tokyo Stock Exchange during January. London and New York although partially recovering were still more than 25 percent off their record highs and not moving steadily,Tokyo's rise had left it hardly 10 percent away from its peak and looking ahead strongly, a clear indicator that, unlike in the case of the US, Japan's economy was now booming after two years of relatively slower growth.
In Europe too markets were 'sput
tering back to life' by February 1988,
as one analyst noted. On the Paris Bourse the Comeback had restored more than half the ground lost after the October 19 crash. in Brussels too there was recovery and the stock exchange ended February up 30 percent from its post crash low; while markets in Frankfurt, Milan and Amsterdam had also registered strong gains. The question being asked was how long the rally would last.
Our next issue discusses the changes in the Socialist World, focussing on the USSR).
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Page 11
CRASH COURSE
Andre Gunder Frank
sustainable.
in this excerpted version of an article in the 'Economic and Politic 14, 1987 one of the foreraost dependency theorists, Gunder Frank stock market crash of Monday Oct. 18 was the alarm not the fire, ar posed whether the events in the financial sector could be prevented the real economy of jobs, income and production. He finally raises th post-war system of international finance and world trade as we know
In October 1987 under the helicopter blade of Damocles, an irrelevant emperor, without clothes, living an economic fantasy in a looking glass world that he was unable to comprehend or control, was yelling befuddied Hooverisms (to make a collage of cornmentary from Time magazine and the International Herald Tribune or Trib for short, which also publishes editorial and other material from the New York Times and The Washington Post). In the meantime money talked as Carl Gewirtz noted in the Trib, citing the Morgan Guaranty Trust Bank’s Rimmer de Vries, who observed that the markets were imposing what politicians are unable to do (or even to comprehend?). As a result, Ronald Reagan's favourite magic of the market itself was writing what John Kenneth Galbraith called the last chapter of Reaganomics. This was, in other words (of New York Times colmunist Anthony Lewis), the turning point to the end of the Age of Reagan. Some months before already, reviewing The Wall Street Journal columnist Alfred Malabre's book 'Beyond Our Means: How America's Long Years of Debt, Deficits and Reckless Borrowing Now Threaten to Overwhelm Us', 'Adam Smith had already foreseen in The New York Review of Books that president Reagan
“will be seen like Hoover, a nice fellow
who blew our patrimony and who presided over a great fall. Yuppie young urban upward mobile professionals are transformed into poor urban professional Puppies instead.
On Black Monday, October 19, 1987, the Trib published The Washington Post editorial commenting on the previous Friday's 108 point decline of the Dow Jones index on the New
York Stock Excha but Act now. Com are inevitable. But be another crash then the America. has been substantia That day apparer others had suddenl The Post batting 100: It was double first score, since Dow Jones crashed ble its October 19 line. Unfortunately only .001 on the 90 stocks had stc gether for lack of Big Board's Chai himself nearly shu entirely for fear from which it was temporary Shutdo futures exchange i nic-proof confiden rican Roulette bei Russian counterpar Confused Compari Confusion WOTS parisons between before and after Many are willing t to find suppose October 30, the Washington Post ed that the difference now are night-andaned world economi recession before th now in contrast t panding rapidly. ( Trib had informed had fallen before times unfortunate ted to read the T which cited the
the central banker
ECONOMIC REVIEW deceive ER 1987
 

all Weekly of Nov. observes that the d the duestion was from spreading to e issue whether the it may become un
nge: “Don't Panic, parisons with 1929 a as se a a there will not a la 1929....Since n financial systern lly panic-proofed”. tly, Yuppies and y become illiterate. average was about y right (200) on the that very day the 508 points, or dou29 percentage decy, the Post batted second score: After opped trading altobuyers at noon, the man John Phelan, t down the market of a 'melt-down, only saved by the wn of the stock ni Chicago. Not pace, but chaos. Amecame more like its
律。
WO፻ጌያ e confounded comand with the years 1929 now abound. o go to any lengths i differences. On Trib printed the itorial to the effect S between then and
day because the US,
hy were already in e 1929 crash, while he economy is exin October 23, the that in 1929 stocks
the recession. Both
y they had neglecrib of October 20, general manager of 's Bank for Interna
tional Settlement to the effect that the 1929 crash followed a period of excessive economic boom that is nowhere apparent today. So there is no reason to feaf any resultant decline of business investments, he said, because there are hardly any to begin with From the Financial Times, and elsewhere we learn triat stocks recovered significantly in 1930, but economic growth turned increasingly negative in the depression until 1933; and by then stock prices had declined to a small fraction of the level to which they had fallen in the 1929 crash.
Other supposed saving grace differences between then and now are that the banking System has been shatterproofed by FDIC (Federal Deposit Insurance Corporation) and the GlassSteagall Act in the US, which bars US banks from the security business. Moreover, monetary and fiscal policy has supposedly become much more sophisticated and effective. While then the US Federal Reserve (Central). Bank squeezed credit and liquidity, on October 20, 1987 its new chairman an nounced himslef 'ready to serve as a source of liquidity to support the economic and financial system'(thereby comfirming, contray to Milton Friedman's monetary gospel, that central bank’s monetary policy really accommodates to economic events rather than determining them). Finally, world economic integration and co-ordination is much greater and facilitated by round-the-clock computer communication. Indeed, the truth, albeit not necessarily the virtual protection or protective virtue, of this last proposition was demostrated by the roundthe-world do-mino-like chain reaction to the October 19, 1987 Wall Street crash.
After Black Monday, the New York Times correctly observed that tne market crash was the alarm, not the fire; and the Washington Post and others posed the crucial question whether events in the financial sector can be confined there without spreading through the fire walls to the real economy of jobs, income and production. All these metaphors, however, reflect a serious lack of depth, vision and historical perspective. Beyond the chicken-and-egg debate over crash and recession, reflected in the Trib, the interactions between the financial and real

Page 12
economies are much mere coraplex and longer lasting. Last time, real economic crisis conditions already prevailed during the 1920s, particularly in the previously leading economy of Britain and the upcoming one of Germany. Indeed, some students of long economic cycles date the downturn from 1913. -
By that reckoning, 1929 was 16 (or 9) years into the development of the economic crisis. As in previous economic crisis developments (including that observed after 1762 by the real Adam Smith, who published his “Wealth of Nations’ in 1776), the rundown of profits and growth rates in the real economy, as well as its increasing sectoral and regional imbalances, generated the flight into financial speculation characteristic of the 1920s. By the late 1920s, real growth rates were down, and commodities and agriculture were depressed. Germany was obliged to make war reparations payments of 2 to 3.5 percent of GNP, which in his “The Economic Consequences of the Peace John Maynard Keynes had already pronounced unsustainable for Germany and counterproductive for the world. The political agreements of the Young and Daws plans were unable to reduce Germmany’s payments sufficiently. They were financed by the inflow of Ameri
can capital while it lasted: but in 1929
the market stopped the flow, the in
creased hardships in Germany helped
bring on Hitler in 1933, and he stopped the unsustainable reparations. In - the meantime, all other international economic cooperation had broken down, and depression had engulfed the world. Origin in Real Economy.
The present world economic crisis also began in the real economy with the decline in the rate of profit in the mid-1960s and the recessions of 1967 and 1969-70. In the United States, President Johnson's Great Society and Vietnam War were financed with inflation and foreign capital. Growing real and financial competitive imbalances and refusal of Europeans to sustain them obliged President Nixon to unpeg the dollar from gold and devalue it in 1971 and led to the breakdown of the post-war Bretton Woods Agreement (and the failure to replace
... O
it). Exchange ri to allow float act as shock ab balances and C instead they
which have tra economic shoc sion, which tu world trade ne employment, attributing it shocks, instead further develo economic Crisi
ever, responde
normal solutio debt financed In 1974, Busin special issue tc and in 1978 to my, which it fo doubled in th 1985, the same another specia alarm bells abo Tight monetar ding, Robert world financia over tenfold in again that mol accommodate fi needs if even much of the me Eurocurrency 1. trol of any moni In the 1970 the 1973-75 re of the 1975-79 financial specu the debt financi in the Third W. lly Industrialisi1 surplus countI
growth in the
financed impo1 tained Western bank earnings, inadequate inv profitability in the still growir as had to be, ti 'solution to r york in the St the 1979-82 r.
recovery had less solidly bas
ding the 1973.
1979-32 reces
severe (doubli ment once agai

te pegs were sacrificed
ng exchange rates to orbers of economic imther disturbances; but icted as coil springs, smitted and magnified is. The 1973-75 recesned growth rates and gative and doubled un
hocked analysts into
o an exogenous” oid of analysing it as the pment of the world . The markets, how| with the historically l to the real problem; financial speculation. ess Week dedicated a "The Debt Economy The New Debt Econopund to have more than 2 four years past. By Bisiness Week devoted t issue to ringing the ut the “Casino Society”. y policy notwithstanTriffin observed that 1 reserves had grown ten years (confirming netary authorities only nancial liquidity to real that, since in this case oney was created by the market beyond the conletary authority). 's, in direct response to cession and in support recovery much of the lation was directed at 2 of 'export led growth prld South (in the Newg Countries and OPEC ies) and “import ... ledo Socialist East. The debt t demand of both, susindustrial exports and which replaced the estment demand and the West itself during g crisis. Unfortunately is apparent speculative all problems ceased to luth and the East after :cession. The 1975-79. een even weaker and d than the one prece75 recession. Now the ion was much more ng Western unemplo) compared to the pre
ceding one, third world and socialist countries experienced an acute liquidity crisis as first the recession drove down raw material commodity prices and there with their export earnings. Then the US monetary authority responded by raising the dollar and the rate of interest, and suddenly western banks dried up their voluntary flow of loan capital to the South and East,
which brought on their debt crisis in
1981-82.
To prevent illiquidity from turning into insolvency, the third world had to generate much more foreign exchange just to service the interest on their debts. This obliged these countries to start slashing imports (thereby reducing Western industrial and agri
cultural exports), produce more for
export (thereby driving commodities prices even further down), and become capital exporters on a massive scale. Compared to Germany's annual capital exports for war reparations of 2 spercent of GNP in the 1920s and a maximum of 3.5 percent of GNP between 1929 and 1931, some third world countries today ware being drained of 5 to 6 percent of their GNP just to service their foreign debts. Since the debt crisis erupted in 1981 in Poland and in 1982 in Argentina, Mexico and Birazil, the poor third world has been bled dry of over $ 500 billions of dollars of capital exports to the richer West (s 200 bin in debt service, over $ 100 bin in capital flight, $ 100 bin in terms of trade loss, and $ 100 bin in normal profit and royalty remittances). ‘Growth rates were negative for several years; investment shrivelled into disinvestment, especially in productive infrastructure and social services; unemployment multiplied; real wages and earnings tumbled, especially for the poorest; and GNP per capita declined by over 10 percent in Latin America and Africa on the average, and in some countries including Poland and Bolivia by over 25 percent. In other words, the fire wall between financial speculation and the real economy became the flood gates through which rushed onto Latin America and Africa (and parts of Eastern Europe and Asia), a depression that for them is already more severe than that of the 1930s. US Voodoo Economics
Under these circumstances, which
ECONOMIC REVIEW DECEMBER 1987

Page 13
also compromised recovery of export dependent western industry, of course.
speculation and cyclical recovery since 1983 had to seek greener pastures.
They were found in the United States.
There, in Vice President George Bush's terminology, Voodoo Economics
reigned supreme in the form of Reganomics. With an unstable amalgam of Laffer's laughable supply side and Friedman's frivolous monetarism, Ronald Reagan innocently tried to square the circle even more than his predecessor Lyndon Johnson: Reagan sought to increase defence spending, cut taxes, and eliminate the budget de
- ficit simultaneously (when only a com
bination of any two of these was mathematically possible) and he wanted thereby to make America Number One. Again to boot. Of course, the whole enterprise was doomed to failure, and the preliminary results are well known. The budget deficit became a gaping
hole and the trade deficit became a
spawning gap. The United States became the world's largest foreign debtor (soon to match that of all Latin America and then of the third world), and domestic debt of all kinds -federal, state and local public debt, corporate debt, and private consumer debt, not to mention the stock market and junk bonds - rose 15 to 20 percent faster than GNP. However, Reagan's Military Keynesianism in the American Casino Society permitted Europe, Japan, and the East Asian NICs (but not the rest of the third world, which was forced to place its losing bets) to play American Roulette. Their cyclical recovery and growth since 1983 was sustained by exports to the American market. In turn American Living Beyond Our Means’ consumption, investment, defence expenditures, budget deficit, trade deficit, US treasury bonds, junk bonds, Wall Street, and the dollar itself were all sustained only by the in flow of specualtive European and Ja panese, and debt-bondage-forced third world, capital. The Supply side turned
out to be the Supply of foreign capital.
Moreover, American Reaganomics, but also Thatcherism in Britain, Socialism and then cohabitation in France, COinServative-Liberal Alliance in Germany, NakaSone in Japan, and other Western governments have had to exhaust virtually all their readily availa
ble accommodatic ficitary fiscal pol to sustain their sp mestic cyclical rec budget deficits lar ready, what econ ments remain fo next recession, le when anti-cyclical policy will really more, if the maj failed in their fee dinate these moni cies on the easy st based recovery, they hold out wh tive bubbles, cap. nary or depressior tionist threats, de flicts make polit
| economic coordin
cessary and diffic to come?
A collage of preSS commentary and its aftermath i ket is One of the tors (Trib) (previo have preceded those of 1967, 19 People voted with ballots (Journal) i tening long-term Ohnist) of which US economic poli Wer Vacum aS the a result, all previc of date (Econo
many growth rat
mediately revised to a half (Fina. there is no return (Financial Times), never be the Sam is the new watchw market recovers 60 percent of A pressed unconce Corporationtreasu ain't seen nothing its pension fund nearly half Financ Oif millionaire RO sound in 1929, h cessor Perot find 1987
Global impasse
Indeed already day many observe nosed the serious
ECONOMIC REVIEW DECEMBER 1987

in monetary and decy instruments just sculatively based dooveries. - With gaping di sky high debts alomic policy instru
them to face the
t alone depression,
monetary and fiscal be needed? Further}r economic powers ble efforts to co-ortary and fiscal poli
reet of speculatively
what prospect can en bursting speculatal flights, recessioary dangers, protecence and other conical agreement and ation even more neit in the hard times
some more serious on Black Monday s that the stock marbest leading indicaus post-war declines ecessions, including 69, 1973 and 1979). n dollars instead of in response to threafundamentals (Econ
Europeans see adrift.
icy and political po. root cause (Trib). As DuS forecastS aire Out mist), and indeed è forecasts Were imdownward by a third ncial Times). Thus, to business as usual because things will e again and caution ord even if the Stock (Economist). While mericans polled exrn, the Chrysler er warned that 'you g yet as it reduced equity exposure by
ial Times). While the
ckefeller declared all is oil billionaire suc
is nothing sound in
before Black Mons had long since diag
illness of the Ameri
tam economy, an expeosed finnancia
system, inept monetary and fiscal po
licy, deficitary foreign trade even in
high tech, uncompetitive industry,
oversubsidised agriculture yet bankrupt farmers, and general down fall from highway bridges to space Challenger.
The United States and its partners are also trying to square the circle around the world. They seek simultaneous balance in (especially American) domestic budgets and foreign trade, European and Japanese export surpluses ( as well as third world ones to fi- : nance their debts), stable interest and exchange rates, and economic growth
without inflation or recession to boot.
Such Globonomics would require even more political economic alchemy than Reaganomics. This is all the more the case since Black Monday condemned the contribution of the latter's magical
now-you-see-it-now-you-don't hat
trick to its last chapter, and pious
76fSe.
The financial market and its political interpreters had pronounced that the United States now must inevitably reduce its twin budget and trade deficits. If policy makers would not do it voluntarily, the market would do it ruthlessly. But how, and with what consequences? Now Iower budget deficits would be recessionary, and the Economist argues that at least double the S 23 billion schedule by GrammRudman are a necessary minimum. Either government tax increases or spending cuts, let alone both together, to reduce the US federal budget deficit would be receśsionary per se, and they could contribute to a deeper depression in an already market generated recession. Even Herbert Hoover offered tax deductions and new public works spending and Franklin Delano Roosevelt’s New Deal carreid them even further. Unlike Ronald Reagan, they had not already wasted these anticyclical munitions before the real battle began. -
Indeed, 11 America were ever to pay even the interest, let alone the principal, of its still growing foreign debt, it would have not only to eliminate its trade deficit. The United States, like the third world debtors before it, would have to convert its present massive import surplus into an export sur

Page 14
plus instead. This would meanan enormolts turn around in US and world trade. Either US imports would have to dwindle to less than exports, or US exports would have to increase enormously, or some of both. Who would absorb such US exports in an economic crisis, which would itself be aggrawated by them? Certainly not the poor and still debt-overburdened third world, as long as it is obliged to run an export surplus itself. Only Western Europe, Japan, and the socialist countries remain, but not likely as potential importers of such American export surpluses. Alternatively, Americans could reduce their debt service by reducing or devaluing their foreign debts. One mechanism is through deflationary write downs and bankrupt. cies or renuiciation of part of the debt, presaged by the Wall Street crash. Another way to devalue dollar denominated debts is to devalue the dollar itself, as in the recent past and the foreseeable future. A third way, would be through domestic inflation, which would reduce the real value of the debts directly, as well as indirectly by contributing to further devaluation of the dollar itself. Of course, each of these or any combination of these possible American responses to its foreign debt also has important deflationary effects on America's European and Japanese creditors. Thus, any attempt to square the international financial and economic circle of interest and exchange rates, and budget and trade deficits at this juncture must fail in something and entail serious costs in terms of economic growth and wellfare. What is to replace the United States as the global borrower and spender of last resort, especially when it is most needed? Total irresponsibility during the Reagan Recovery since
A TVE O
Meivyn Westla
m = this artici a leading eco lefmas of the . 4 gest industrial p
ln-—
W
ring from the of a revival i can President Her declare on 1 May passed the worst could not have be on the eve of the crises that contrib Severest economi tury.
Reassurances f industrialised cou of the next few mc the damage of the But, as in the int. cial upheavals are more fundamental economy. Unless degree of skill ar proved beyond go severe recession i At the heart irreconcilable nat three biggest in capitalist NorthGermany. The te lapse of US econc emergence of Ja although still rel responsibility that The parallels w are striking. The mony that was struggled against petitiveness and culties. It was th US that had strt trade and refused tional responsibili mic power deman
1983 has created a Catch 22 situation, whtaever you do. Damned if you do and demand if you don't.
The post-war system of interna. tional finance and world trade as we know it may therefore become unsustainable as American hegemony over it declines in the still deepening present world economic crisis. Yet no other power is ready to replace the United States, and international – let alone supernational-coordination appears beyond immediate reach.
Therefore in a author has examin native developme the possible resur tilism and the reer
ZOnes Or even eCO losses at Americ present troubles casino now make the more likely.
Courtesy:Econon.

FTRAVAL
ke
Trom the omic analyst maintains world economy are the
wers of the capitalist, world.
ith share prices recover
great crash and signs a production, Republibert Hoover was able to r 1930, that "we have ". As a prediction, it 2n more wrong, coming first of three banking uted significantly to the c depression this cen
rom leaders of the big ntries will be a feature inths as they try to limit latest financial collapse. er-war years, the finana manifestation of far | problems in the world these are tackled with a ld cooperation that has vernments in the past, a s inevitable. of the matter are the Eional interests of the lustrial powers of the the US, Japan and West ensions reflect the colimic hegemony, and the pan as a rival power, luctant to take up the t entails. rith the inter-war years in it was British hegewaning, as the country a loss of industrial commounting financial diffihe largely self-sufficient actural surpluses on its i to accept the internaties that its new econoded.
-—ജ്ഞിര
previous article, this ed some of the alternts and in particular gence of neo-mercanmergence of financial nOmic bolOCS. Recent an roulette and the in the globonomic
these posibilities all
ic and Political Weekly”
London based SOUTH journal,
Adelveyn Westlake that at heart of the fundamental probconflicting national interests of the big
At that time, too, the tangle of war debts and German reparations forced countries into fierce export competition and restrained imports, sending deflationary impulses through the world economy. Today, the Third World's trillion-dollar debt burden is no less a millstone round the neck of international trade.
A sudden sharp reduction in the supply of new capital has also been a feature of both periods. After 1927, the capital outflow from New York and London - at the time, the two biggest lenders - to the rest of the world began to dry up. This helped to trigger a debt crisis that resulted in almost 80 per cent of all outstanding loans to Latin America being in default by the mid-1930s. The debt problems of developing countries in the 1980s have similarly been magnified by a collapse in the flow of new commercial loans. Investment capital has instead been going to finance the US trade deficit.
Deregulation in the 1920s also set in motion a financial whirligig that, as in recent years, bore little relationship to the real world of production and employment. In our time, the explosive growth in financial transactions, again stimulated by deregulation, has reduced standards and spawned junk bonds, corporate raiders, leveraged buy-outs and a raft of other dubious instruments and practices that produce profits for financial manipulators but have little connection with the value underlying productive assets. The daily movement of funds across the foreign exchanges is more than US$200-billion, about 20 times the daily value of world trade in goods and services.
Financial institutions have been badly weakened by the fall in the quality of their assets. In 1974 about 16 US banks enjoyed a triple-A rating; by early 1987, this was down to one.
Meanwhile, as in the 1920s, many sectors have not shared the rise in prosperity. Agriculture is depressed, as in the earlier period. Tax cuts for the richest have caused an increasing concentration of income and wealth in the US as they did in the 1920s. And, as living standards
drop in Africa and Latin America, the
increasing concentration of income is evident on a global scale, intensifying deflationary forces.
Eco NoMac REVIEVW Eo EcEMBER 1987

Page 15
Poor countries and poor people within
rich countries tend to spend all their income. This creates demand for goods and keeps ethers employed. Rich people save more of their incomes. If these savings are not used for investment in productive enterprises like factories, they will fuel speculation in financial assets instead. This is why there was so much liquidity driving up share prices.
But in the meantime, the drop in the international buying power of developing eountries has probably reduced output, cumulatively, in the North - through loss of exports - by up to one percentage point. This is quite significant when its growth is only 2 to 3 per cent a year.
All these financial and trade pressures
point to an increasingly destructive rival
ry to sustain or expand the production of
goods at a time when there is less money
to buy them.
Only the US, last of
the big spenders, has prevented glo-bal demand collapsing, by settling its bills with other people's money. By nor
mal standards, the men from the IMF
should have moved into the US treasury a long time ago. But even the US must eventually face the reckoning. The trouble is that its US$35-trillion economy accounts for such a large slice of world trade that when it curbs spending, everybody is affected.
This is the dilemma. If the US administration slashes its budget spending enough to reduce the trade deficit significantly - lowering demand for imported goods and freeing resources for exports - the result will be recession. And if it does
not, the dollar will fall, interest rates will
rise, and there will be recession anyway.
In all probability, any successful effort to bring the trade accounts into closer
balance would involve both a dollar de
valuation and an austerity programme of
government and private spending cuts -
the usual IMF combination for developing countries in this type of situation. There is no certainty that either measure alone would bring about the necessary shift in resources. The connection between the two US deficits is nothing like as direct as sometimes suggested.
If all this makes a recession unavoidable, the only questions are when and how severe. A modest 1.5 to 2 per cent growth is forecast for the industrialised countries in 1988 by many economists. In all probability, we will see a further progressive weakening of business activity later in 1988, although short-term policy adjustments in Washington, Tokyo or Bonn
world trades
for Chandise trade
- سسسسسسس Other deve countries
Plevelopi fig
l
2O
10 West Germa
っ
っ
62یت جیتی- 57۴ - جت 1952
56 61
might ward offir Its severity w. conjuneture ofev rate in the North necessary to ena to go on servici experience mode This will be the which the indus falleri below th increasing margi This can only i. recession will countries into di loss provisions
Trade imbal
BOP basis, sease
annual rates
క్టో 婷 - అతి తీశీతి
^Aい
1980 82
Newly industrialising c.
Singapore and Taiwan First-half 1987
EconoMC REVIEW DECEMBER 1987

hares
: five yearly average
countries
United States
77
81
مسـ 72.
7 76
Trade shares in 1986
4C、
O - sources. UN/UNCTAD, Handbook of international trade and
development statistics : ... It is: UN, Yearbooks o international trade statistics
ecession until 1989.
ill depend on the precise ents. A minimum growth of 3 per cent is said to be ble developing countries ng their debts and still est growth of their own. third consecutive year in strialised countries have at target - and by an
. ntensify the debt crisis. A Force large numbers of efault. Despite the loanmade by commercial
ances: great divide Onally adjusted
*“*, too W. Germany $br
鑫 తి
50
| محصہ "عی W stres / O عي Asian NiCS* ses
United States 50
100
150
200
84 86 87t untries: }} Kong, South Korea. province of China
Source:Morgan Guasrity
banks, many will be at risk. If a series of financial crises coincided with falling output and real incomes, and a breakdown in cooperation between governments, the result could be depression rather than recession. . -
In the US a recession is defined as two consecutive quarters of falling output. A depression is characterised by several years of falling or stagnant output, with unemployment up to 25 per cent. In developing countries, with their rising populations and rapidly expanding labour forces, even national income growth of 2 or 3 per cent could mean falling living
standards and an explosive increase in the
number of jobless.
The one hope government officials in some capitals have of avoiding a recession is to browbeat the West Germans and the Japanese into fuelling their economies to take over the role of locomotives, pulling along the rest of the world. But this underestimates the extent of structural problems. In the first place the scope for the two "surplus" countries to expand is quite limited. The West German popula
tion is falling by 3,000 a week, and its
market is saturated. The West German people appear to want further improvements in their living standards to take the form of better environmental care rather than more goods. They produce more than they consume, which is why they have a large trade surplus.
Japan's workforce will have to support an increasingly disproportionate number of elderly people, for whom it must make provision now. If either country stimulates its economy further, it will have to increase its own budget deficit. At best, these bigger deficits can be no more than temporary, and there is the risk that

Page 16
boosting deficits and then cutting them again will have a destabilising effect.
On some calculations, Japan's budget deficit is already proportionately bigger than the one in the US that is causing so much trouble. The only difference is that the Japanese save enough to finance it and US savers do not.
It is far from clear, anyway, how much an increase in Japanese and West German consumption would help the US. According to some calculations, even if they doubled their growth, it would not cut more than a few billion dollars from the US$160-billion US trade deficit. The main beneficiaries could be the newly industrialising countries of East Asia, which are anxious to increase exports to Europe and reduce dependence on the US market. The extent of the loss of US internationall competitiveness is not fully appreciated. The high dollar had a severe impact on US manufacturing industry and forced companies to move overseas. Many export markets lost as the US de-industrialised will never be regained. Its lead in many hi-tech sectors has diminished or disappeared: semiconductors, computer hardware and software, fibre optics, robotics, airframes. In 1986, for the first time, it ran a deficit - of more than US$2-billion - in hi-tech manufactured goods.
In the early 1950s, its share of world merchandise trade was around 18 per cent. By 1986, this had fallen to 10 per cent, and Japan, which had a share of between one and 2 per cent 35 years ago, was on the point of surpassing the US. The decline in the US share took place, moreover, in a period when world trade expanded 22-fold.
The great difficulty in correcting theUS trade deficit is compoun ded by the adverse impact it will have on everybody else when it happens. US economist Lester Thurow reckons it takes 4-million full-time workers to produce US$160-billion of US manufactured goods a year. As a consequence, when the US dollar falls to a point where the trade accounts are balanced, the rest of the world will have lost at least that many jobs (partly offset by Germany's falling population).
This is why, when the US trade deficit starts to shrink - as eventually it must - other countries will battle fiercely to hang on to markets. The trade war will hot up. And countries will jockey to hold down the value of their currencies to maintain international trade competitiveness.
trade deficit has led many economists to question whetherit is worth it. But there is no choice. How long will the world go on providing the US with US$10-billion to US$15-billion a month to finance its trade gap, when it already has a foreign debt which at US$400-billion is bigger than that owed by all of Latin America? The
14
The 器 involved in correcting the US
alternative is for the US with dollars, creating se
The reality is that a se or something worse - is p way of eliminating the gli The books will be squared of output, income and tra the outlook formany deve is grim. The largest will Those that depend on cor will see prices and earni Those that export man will experience a drop in overseas. Because the ( tries have learnt to live w levels of private financial beginning of the decade, that their output losses for the industrial countri
In the early 1980s, change in the North’s ou have an almost equal eff
Third World livings
Real absorption per capita
Developing Europe'sses" Western Hemi
1979 80 82
* Real GDP less the real foreign balance
 
 

o flood the world cious inflation.
vere recession — robably the only obal imbalances. at a lower level de. In that case, sloping countries be least effected. mmodity exports ngs fall further. ufactured goods the volume sold leveloping counith much smaller flows than at the the IMF thinks will be less than es in a recession. a one per cent tput appeared to ect on the South.
tandards
110
100
ܔ؟
soleoso" "ܓܠ
అeతో
sphere
34 86
est. Source: MF
This time, the link might be a little weaker. Even so, after years of only weak output growth, it will be a body blow. Export losses are likely to be concentrated among developing countries with the biggest debts. This, warned the IMF last September, would "seriously threaten the fabric of the debt strategy".
The impact of a recession in the North would also be especially marked among the low-income primary product exporters, it said, because they have few alternative uses in the short run for the resources employed in the export sector.
For middle-income countries much will depend on the policy responses of their governments. Some may have scope for switching output into the domestic market and promoting import-substitution. Alternatively, a recession in the North could give a fillip to trade between developing countries. During the recession of the early 1980s, such trade fell more sharply than the South's exports to the North.
But since then widespread policy reforms, currency devaluations and more efficient use of resources have created the potential for an expansion in South-South trade. It would be a considerable irony if the effect of IMF medicine had been to create the conditions for such an expansion. This however, will be made harder to achieve as long as debtor countries have to pile up trade surpluses to pay debt interest to the North.
Coming at a time when these countries will already be struggling to meet their debt bills, it will provide one more compelling reason to cease paying. The IMF, which has consistently been overoptimistic in its prediction about the Third World's future burden of debt relative to export earnings, was expecting some improvement in 1988 and beyond. It saw repayments and interest charges absorbing less than 20 per cent of the export earnings of capital-importing developing countries by 1991, compared with more than 27 per cent in 1986.
But this was before the global economy took its sharp turn for the worse last October. The worst combination for debtors would be lower export earnings and rising interest rates. In those circumstances the number of countries that stopped paying would multiply dramatically.
As it is, there is every likelihood that an increasing number of debtors will unilaterally impose limits on the proportion of earnings earmarked for debt payments. The idea of a 25 per cent upper limit is rapidly gaining respectability, while many countries in Africa and Latin America currently pay 40 per cent or more. Confidential calculations about African debt undertaken within the World Bank already routinely assume a 25 per cent limit. This limit will be adopted much more widely
in 1988.
Courtesy. South
ECONOMIC REVIEW DECEM EBER, '1987

Page 17
coMMODITIES
COCONUT sharp drop in exports
The volume of coconut kernel products exports dropped sharply in 1987. According to Coconut Development Authority records the nut equivalent of kernel products exports which reached 1,162.2mn in 1986 declined by 51 percent tGô 561.0 mln in 1987. The impact of the severe drought conditions around the beginning of 1987, caused a strongly adverse impact on the supply situation resulting in a heavy shortage of nuts for both domestic consumption and exports. A redeeming feature for the industry, however, was that prices were less adverse during 1987 and therefore the overal drop in earnings during the year from kernel products was relatively less, being 14 percent below 1986 earnings. (See table).
Earnings from kernel products have declined steadily since 1985 and in value terms came down from Rs 2,444.6 mn in 1985 to Rs 1,816.6 mn in 1986 and Rs 1,556.8 mn in
1987. Overall ea exports, includi shell products, Come down from to Rs 2,839 mn mn in 1987.
in terms of u million nut equ kernel export pr ly 75 percent. unit price of coc Rs 8,311 in 1 1987; while the cated Coconut V in 1986 to Rs 2C
The export p up from Rs 3.0 in 1987. A com product, growir
Coconut Cream,
price was up frc to Rs 26,462 more favoured international m
EXPORT OF COCONUT
VOLUME
- VOLUME (MT) Product Jan/Dec. Jan/Dec.
1986 1987
Coconut Oil 85347 17 Desiccated Coconut . . . . . 60,819 53,236
Copra- - - 1), M.S. 9,561 8.96S 2) Edible 192 17 Fresh Nuts & Seed Nuts 17794,047 16,328,326 Coconut Poonac . . . 40,080 5,55 Coconut Cream 主,128 45 Sub Total : 1162.17 560.96 Kernel Products (in Mil, Nut Eqvint) Sub Total ... " Fibre Products 85,656 76,72 Sib Totali - Shell Products . . . . 34,884 39,33 Sub-Total (Other Products) * , ,
OTAL VALUE OF ALL PRODUCTS. * Pes.
* Poonac and Coconut Cream not taken into account for ca
ECONOMIC REVIEW DECEMBER 1987
 
 

Irnings of all coconut ng kernel, fibre and have continued to Rs.3,255 mn in 1985 in 1986 and Rs 2,741
nit prices, however (in i Valent terms) overal|| ices increased by nearFor instance, the per onut oil went up from 286 to Rs 14,593 in percent price of Desicwas up from Rs 13,731 1,736 in 1987.
rice per fresh nut was 0 in 1986 to Rs 4,30 paratively small kernal ng in significance, Was where the per unit om Rs 21.484 in 1986 in 1987. Despite the per unit prices in the arket, exporters from
S150 -
Sri Lanka were unable to take advantage of the situation; the end result was that earnings from kernal products which fel by 25 percent in 1986 over that of 1985. fell by a further 14 percent in 1987
what it's Worth Now
Prices of Primary Commodities Value of $100 worth bought in 1975
Palm Oil-Cotton-...-Jute - Rubber
$300 -
S250 -
S200 -
O T T T
I = 75-76 7778 79 80 81 82 83 84 8586 _)
ܓ source: "Asia a EEK'
PRODUCTS - JAN/DEC 1986/1987
MT) & VALUE (SLRs.)
VOLUME (SL.R.S.Mil.) % - Jan/Dec. Jan/Dec. % Change 1986 987 Change
- 30 70932 262.41 - 65 - 13 853.11 252.41 十29...
- 06 85.83. 111.74 + 3O. - 91. 2.33 .33 - 86 - 08 . 54.13 69.90 + 29 ) - 86 109.12 16.39 -85
+257 2.75 12.12 + 330 - 51 , : 1816.64 - 2 ، 1566.84 - 14
10 565.49 51.91 6
D -- 12 26339 34707· +32
1 n22 Ors 1174.34, +。15、、、 2.83869 2,741 Ꭹ18 , ; -3
lculation of nut Equivalent.
5

Page 18
The Mahaweli Project - a look back and into the future
Shortly after the Government assumed office in 1977 it outlined three major public investments
- the Free Trade Zone, the Accelerated Mahaweli project, and the Housing and Urban Development Programme - aimed at reducing chronic unemployment, increasing agricultural and industrial productivity, and creating the right conditions for an export oriented and foreign investment supported expansion of the economy. The Mahaweli project was regarded the most ambitious of the lead projects being undertaken and was the keystone of the entire development programme. From 1978 massive capital expenditures were carried out, largely with foreign assistance as there was an eagerness on the part of many foreign donors to support the Government's new economic policies and these lead projects seemed a natural choice into which this aid could be channeled.
Reviewing the economic benefits of these large investments a multilateral
donor agency has raised the issue whether such massive capital expenditures
could have contributed to the balance of payments problems the country is experiencing, since they have increased Sri Lanka's debt without increasing its capacity to service these loans. The question is how far could this criticism be applied to the investment in the Accelerated Mahaweli Programme. The -Mahaweli Authorities have accepted that over 60 percent of the total costs of the programme were met from foreign aid; but ' a substantial part of foreign aid received was in the form of outright grants, while the balance was obtained as extremely concessionary loans. Hence the burden on the domestic economy for financing the project was significantly low, 'according to the Mahawei authorities.
The annual review of the Mahawei Projects and Programme, released re
cently, reveals th ture incurred on
lopment Program
1986 amounted at current price that costs incurre Programme alone amounted to Rs RS 25 bin has be works projects three main head male Victoria a penditure is esti with the larg Rs 10,240 milii the Kotrynałe pro Rs 5.487 milio the form of ou interest loans frc cost of the W Rs 8,897 milior right grant of f 1 from Hannover which amounts
total cost. The the Randenigala the largest of th about Rs 6.00 Rs 5,500 milion the end of Octob of these costs a concessionary lo West Germany. Á cern has been til which according nistry review, we as inflation and exchange rate rency. This sam over 60 percent the programme aid
international however – indicat expenditure wer cientiy”. Drawin that between 19 haweli Project '': a capital exper
 

at the total expendithe Mahawei DeveIme upto the end of to Rs 38 bilion (bn) ;. The review states d on the Accelerated between 1979-1986 30 bin of which over. en on the four head completed. On the pwrks projects - Kotnd Randenigala - exmated a Rs 24.3 bn; jest sum, namely on being incurred on ject. Of this amount a will be received in right grants and low Im Sweden. 1he total 'ictoria project was 1, comprising an out| 13 milion and a loan Trust of £ 20 milion; to less than half the total expenditure on project, (the last and he reservoirs built) is O milion of wàyhich had been spent upto er 1987. A major part re being met from a an of DM 40G from A major cause of conhe escalation in costs to the Mahawawej Nijre due to factors such deterioration of the of the Sri Lanka curhe source noted that of the total costs of vere met from foreign
funding agencies, ed that public capital 2 'not being used effigattention to the fact 74 and 1978, the Ma. absorbed about half of hditures' this agency
ECGNOMIC REVEW DECEMBER
states in this context that "both because it was carried out on a crash basis and because cost escalation was high in large projects, by 1985 the 1977 estimate of Rs 1 - .2 billion for a full Mahaweli Programme had become Rs 40 billion for a reduced programme irrigating 120 000 hà. of land that were originally planned. Rapid inflation explains a third of this increase in costs, while the other two-thirds refers to real cost increases above the initial estimates that took place inspite of the reduction in the scope of the programme'. This same agency goes on to state that the Accelerated Programme was ''a risky propostion'', and voices fears that 'a large volume of resources has been allocated to a scheme that may now have limited economic returns'
Other significant points made in the annual Mahaweli Ministry review are
that: (a) By the end of 1986 more
than 20 percent of the total expendi
ture in the development of the downstream areas for the Accelerated Mahaweli Programme had been spent on social infrastructure such as darge regional development activities.(b) Upto the end of September 1987 a total of nearly 56,000 families had moved in and settled in the newly developed Mahaweli Settlement areas.
Other achievements listed for the project in a note by the Secretary of the Mahaweli Ministry are that the 'project area is producing 20 percent of total paddy production; 53 percent of total dried chillies; and about 20 percent of subsidiary foods in the country. The average paddy yield in the area has exceeded 5 tons per hectare".
The Director General of Mahaweli Authority notes, however, 'by the end of 1986 that 5.9 percent of the total and area under paddy in Sri Lanka fef within the Mahaweli Project. This area contributed 8.4 percent of the total national paddy production during that year'.
It is also noted that although the gross income of the Mahaweli farmer
7- 8يحك i"

Page 19
has already been raised to aras unporecedented level of over Rs 20,000 per annum on the average, 'this is considered inadequate to raise the farmers level much above subsistence level'.
Meanwhile, a study of settlers in
the Left Bank area of system 'H' based
on an in-depth farm record book suryey, showed that the farm incomes of the settlers were nearly two and a half times of the incomes of the pre-project inhabitants of the area. According to
I this study, more than 60 percent of
the settlers had incomes exceeding those earned by 98 percent of the ruFal population in Sri Lanka'.
The most significant achievement of the project, accòrding to the Mahawedi i Ministry is that the electricity supply in the country has benefitted by a hundred percent increase over what was available before the Mahaweli Programme... An additional 469 megwatts of installed hydropower capacity to the island's grid of electricity has already generated 2,300 kilowatt hours of energy, resulting in a saving of valuable foreign exchange to the equivalent of nearly Rs 3,250 million, which was the cost of imported fuel for the generation of thermal back-up energy up to the middle of 1987. In 1986 the Mahaweli Programme had supplied more than 40 percent of the total amount of power available in the
Country.
Judging in strictly monetary terms the international agency has commensted that returns ora massive capital expenditure had been 'modest' and has raised the issues whether such expenditure has contributed to the balance of payments problems: of the country by increasing Sri Lanka's debt without increasing the country's capacity to service it; and also whether this programme would have provided the economic benefits commersurate with resources they have absorbed. Over the period 1987 - 1991, according to the Public investment Programme, a further Rs 19.4 billion is to be incurred as expenditure on the Mahaweli project. Of this about Rs 10.9 billion will
be on downstr Systems 'B' and
Although th gramme is in feasibility studi pursued on oth available in the
Resource con led rephasing o grammes under ment. Havestrnen reached a peak ( total capital exp 1983 and 1984 gressively declin percent in 1987.
Rłoragahakanda
For instance, th vvas one of the f
in the Accelerat been taken up multi-purpose pr Ambanganga jus Eahera diversior
Bowatenna Reser
national Co-ope started feasibilit 1987 to update study done by {i} formulate a development pla basin and its ad mise the use of l. ces (ii) increase the existing irr (iii) prepare a pl programme of th
An earfer UN sal is being rev should be a total composed partly
of 223 ft. high
partly rock-fill C mឃ្លាm height and the left Bank lance earth fil 7
and 2,060 ft. long
on the extreme way will be prov dam, equipped w discharge a maxi
CԱՏՅCS
ECONOMIC REVIEW DECEMBER 1987

eam development in Cf 籌
e Accederated ProtS concluding stages is are being actively Xir projects which are få hawe! Master Plan.
straints have compelthe settlernent prodownstream developts on Mahavveli Which if about 40 percent of 2nditure allocations in have since been proing and Stood at 16
ough Moragahakanda ive headworks shelved ed Programme it has วnce again. This is a oject situated on the t above the existing Wyer and below the voir. The Japan inter
ration Agency (JICA) y studies in October an earlier feasibility Ji CA in 1979 and to in overall agricultural n in the Ambanganga jacent areas to maxiand and water resourthe cropo intensity ipa igation systems and roper implementation ese projects.
DP and JCA propo. iewed that the dam length of 5,050 feet, of concrete gravity and 1660 ft. long, iam of 167 ft. maxi1,350 ft. long across deep saddle, and ba) ft. maximum height across the depresion Left Bank. The spilided in the concerete rith 3 radiall gates to num flood of 87,000
The reservoir wil have a Capacity of 692,000 a.c.ft. with an active storage of 470 thousand ac. ft. and an annual regulated flow of 1,396 thousand ac, ft. (augmented by Kotmale through Poligolia diversion). Bydropower generation will be with an installed capacity of 40 MW.
The geology of the dam site is of a complex nature which requires careful
investigation. This reservoir will initially provide additional irrigation supplies to about 73,000 acres of existing lands in System Di, G and D2 and be: nefit about 37,000 acresa of new lands in existing systems under Minneriya, Parakrama Samudra, Kaudiula and Kantale.
in the final phase of development water from Moragahakanda will be taken to the North Central parts through a NCP Canal to augment Systems J. K. L., & M.
System 'A' - Downstream Develop
get -
Another project being persted is
tne downstream development of System. 'A' which has now received pledges of Soviet assistance. This System is situated in the deltaic region of the Mahaweli Ganga consisting of a gross area of about 45,300 ha. of which
22,600 ha. is the commandable irri
gable extent, including 6,300 ha. of already existing area irrigated under Allai scheme. A project formulation report was prepared in June 1980 by international Consultants ”Joint VentU fe Randenigala” (Saltzgitter Consułt GMBH, Agrar Hydrotechnik & Electrowatt Engineering Services) with financial asistance from the World Bank. The same - consultants stübimitted a Final Feasibility Report in 7 Volumes an Atlas of maps in March 1982.
The final feasibility report is based on a decision that the project area should ~be confined to the MahaWedi Right Bank lands, which are divided into three units. Flood protection
bunds will be provided to protect the
right bank from flooding.
7

Page 20
FEATURES
Export Development in Sri Lanka Problems and Constrain W.D. Lakshman and P.Athukorale
Having been a country exporting a handful of primary commodities in the 1950's, Sri Lanka had gradually developed into a country whose basket of export Commodities is quite varied. No doubt, commodity concentration of exports is still rather high, with 4 to 5 agricultural and industrial commodities bringing in about 75 per cent of total merchandise exports. Yet in terms of the variety of product categories exported, the country can be con: sidered to have gone a long way forward towards diversification since the early post-independence period.
Being a small country, sustained
growth and development in Sri Lanka .
requires, as an unavoidable condition, further growth and diversification of exports. This continues to be hampered by a variety of problems and constraints which are discussed in this chapter. These problems and constraints are clearly chaning their character over time. Even at a point of time, different export activities are faced with different sets of problems and constraints. Though the focus is on currently important problems the discussion has to be conducted largely in
general terms. Some attempt however,
is made to touch on specific problem
areas affecting certain important categories of commodity exports. . " 2 م : : -
Merchandise exports and their
18
growth clearly invo two distinct activiti duction activity an Problems affecting growth can thus be affecting both these
inadequate Producti One of the mo affecting Sri Lanka ment efforts * is reli quacy of the produ duce for "domestic
kets. Economically
this is basically a q racter of the dome.
class, complicated factors hampering p Development of
pitalist class during tish Colonial rule :
numerous ways W economy and relate finance activities.
tings about the St
class, reference has
being made to its This implies that th dequate accumula capital by Sri Lank except in plantatic ted production act was still worse in
tion of industrial C
the period of im
 
 
 

lve a process with es : domestic prod export activity. 2xports and export
seen as problems types of activities.
ion Base st basic problems in export developated to the inadection base to proor for export marand sociologically uestion of the chastic entrepreneurial further by other roduction activity. the Sri Lankan cathe period of Briwas connected in ith the plantation d foreign trade and Within various wriLankan capitalist been måde and is herchant character. ere has been an inaion of production an business classes, n, mining and relarities. The situation aspect of accumulapital. It was during ort and exchange
controls from the late 1950's that some development of industrial capital took place. Open economic policies since 1977 had an adverse impact on the less efficient of the industrialists so developed during the period of control regime while also helping through easy availability of imported inputs, the more efficient ones among the existing industrialists. The opening up of the economy in 1977 and various other policies adopted simultaneously seem to have more favourably affected the entrepreneurs in non-tradeable sectors of the economy-trade, transport, finance, construction and so on. The
fact that almost half of the GDP of the
country is generated in service sectors is a clear indication of this problem of inadequate development of entrepreneurship in those sectors of the economy producing tradeable goods.
The development of the production base, whether for domestic or for foreign markets, thus requires a gradual diversion of private capital from nontradeable to tradeable goods sectors. The provision of various investment incentives,infrastructural facilities, credit facilities and so on by the government to promote capital accumulation in general is thus quite understandable. In addition, various schemes of entrepreneurship development are in operation to gradually develop from small beginnings usually, a viable entrepreneur class of people. ー ー ー
Due to various historical developments during the post-independence
period in Sri Lanka, a substantial pro
portion of production capital has
come to be concentrated in public enterprises. State ventures in agriculture,
mining and manufacturing still control a large proportion of the production of tradeable goods. They contribute a large share of the country's exports too. It is quite understandable that State capital would come to playa significant role in a society characterised by inadequate development of private production capital. The problem here,
ECONOMIC REVIEW DECEMBER 1987

Page 21
however, is concerned with how efficiently and productively these public enterprises are managed.
It has been necessary to promote
direct foreign investments, among other things, to fill in the gaps Created by lack of domestic private and State capital. Such investments have been promoted sometimes to start up production of tradeable goods on their own and sometimes in collaboration with domestic private or State Capital. The progress achieved in direct investment flows from e abroad has been quite satisfactory since 1977, but the contribution these foreign firms can
make to export growth, GNP growth
and progress in other macro variables like employment can be furthered by having a capable and widespread domestic entrepreneurial class. Often it is easier to attract foreign investments in the presence of collaborative domestic capital than in its absence. In addition, benefits to the national economy emanting from such direct foreign investments are also likely to be graeater under collaborative arrangements than under arrangements of 100 per cent foreign ownership.
The problem created by inadequate development of an entrepreneurial class in more severely felt in the field of production for export than in the field of production for the domestic market, as the competition in the former usually is enormously more stiff than in the latter To the problems due to inadequacy of the domestic entrepreneurial class should be added the problems emanating from the lack of a well-developed managerial class. This is a problem faced by both private and public sectors more so by the latter. All this renders, the effort required to build up a production base for a vigorous expansion of exports an enormously difficult one.
The problems referred to above,
namely the inadequacy in the development of the country's entrepreneurial and managerial class are, as already noted, the result of Sri Lankan historical development. The factors which historically led to this situation are
considerably weak through the natura economic developm tervention. Yet the temporary factors sluggishness in the classes of people. T OW include Some C rary Constraints on a sufficiently broad for a Vigorous expar of tradeable goods. the following top with special referer lopment.
Finance and Work According to ti National Export Di achievements of th port development plan required a t Rs 10,280 million ( of 1983-87. This sources as given in tal envisaged inves ded into the five as to require abo per year from a gether.
Figures of acta
the 1983-1985 pe classification syste TWO SetS Of numb very roughly com ning to NEDP en and actual investm of numbers are 6.2 and 6.3 the envisaged investm and coconut (NED ments in planting, development (C latter dealing wi ments in textiles and jewellery and (NEDP) and apprc vestments in proje laboration - (GCE
Comparison of investment figures ted an extremely tual from the pla investment Volun
prices, the above * These are not in rubber and coconut a
ECONOMIC REVIEW DECEMBER 1987
 
 
 

ened Over time process of socioent and policy inre are certain concontributing to a growth of these Opics discussed beIf these contempohe development of production base of sion of production This discussion of ics is undertaken ce to export deve
ing Capital Needs
ne estimates of the
avelopment Plan the e rather modest ex
targets set by the Ota in Westment of over the plan period was expected from
Table 6.1. This totment nas been diviyears in Such a way ut Rs.2000 million four sources to
ual investment over riod in a comparable m is not available. ers are available in a parable form pertaivisaged investments ents. These two sets presented in tables former dealing with ents in tea, rubber P) and actual investreplanting and land 2ntral Bank) and the h envisaged investand garments, gems other manufacturing oved or contraced incts with foreign col
and FAC). envisaged and actual in table 6.2 indicahigh shortfall of acnned. Since planned les are in Constant
hortfall can be seen oto necessarily in tea, lofne.
to be દેven higher than indicated by the numbers in table 6.2. Actua figures given, moreover, are predominantly related to the three traditional export crops but they cover also inVestments : un related to them. This Would make the shortfall referred to still bigger.
if approved or contracted in Vestments in GCEC and FAC firms, as shown in table 6.3, can be asssumed to have been actually carried out, even subject to a 75 per cent shortfall, and even leaving room for an adjustment for inflation, the NEDP investment targets in the Sectors concerned can be assumed to have been reached during 1983 - 1985. This investment target achievement was perhaps particularly impressive in respect of the garments industry and this is quite well substantiated by the rapid growth achieved by garment exports over this period.
if the NEDP investment targets were adequate to achieve their export growth targets, the question of invest
ment finance which may have pre
Vailed thus seems to have been more a sectoral problem than an overal general problem. In sectors like garments, gems and jewellery and similar export industries which were able to attract foreign investments, capital scarcity was probably not a severe problem. n other sectors like tea, rubber, coconut, minor export crops, fisheries and other industries which did not have much to offer for foreign private capital, raising the required investment capital was probably a serious problem.
In some of these sectors, the problem of the scarcity of investment capital was also a structural problem. In activities like minor export crops, coconut, fisheries and so on, the bulk of the production base consists of small producers scattered over a wide geographical area. The export of the products from these activities, however, is in the hands of perhaps a few large firms. Development of exports in such sectors basically requires the development of their production base. The small-scale producers, however, do not
19

Page 22
usually have their own capital for in- reiatively poor per vestment in production growth and are of these sectors in not always in a position to gaine from could largely be a concessionary investment finance faci- problems of investin lities available from government sup- by their peculiar str ported credit schemes. Moreover, it is tiCS.
not always clears whether the benefits -
of various export incentives provided investment Finance trickle down to these producers. The There have been
TABLE 6 1 NEDP Estimates of Required investment Activities and Their Sources, 1983-198
F5 AM fion
Government Sector - 4302.35 Private Sector - 305Ꮕ.42 EO B 125.18 Aid Donor Agencies 27.972
1 O275 16
Source EDB
TABLE 62 Planned investment in Tea, Rubber and Actual investment in Planting, Replanting and land
1983-85
Rs. AM1/lio - 1983 1984
Planned (NEDP)-Cogastant Prices :
Tea 788 826 Rubber 378 536 Coconut 442 397
Aetua— (Centrat Bank)
Gross Domestic Fixed Capitat Forma. tion on Planting. Replanting and Land Development s (at current prices) 451 - 492
Note : a Not only in tea, rubber and coconut.
Source · EO8 Central Bank
TABLE 6.3 Planned investments in Textiles ar
Gems and Jewellery and other Manufacturing it Approved / Contracted GCEC and FAC investm
RS. AMillic
1983 1984 Paramed (NEDP) : Textiles and Garments - 297 71 Gems and Jewellery - 30 6 Other Manufacturing 325 21 A Approved or contracted Total
WestmentS : GCEC Firms (contracted) 177 597 FAC Firms-(approved) 1031 1283
Source : EDB and Central Bank
20

formance of some
terms of exports reflection of these ment finance caused 'uctural characteris
various schemes of
in Export 7
% of fota/
41 87 2968
1 2 3 27.22
100.00
Coconut and Development
1985
7.59 64O 429
650
di Gaffnerts, dustries and ents 1983-85
摩
1985
64 17 1 12
2OO 476
investment finance operated by the government with the assistance of the Central Bank and various financial institutions to provide investment credit under concessionary terms. Two major ones among these Schems are the EDB/ Centra Bank Medium and Long-term Credit Scheme and the Small and Medium Scale loan Scheme jointİy operated by the National Development Bank and a number of commercial and other banks under a Central Bank re
finance coverage. There is a large and
varied institutional structure deveoped to provide the needed investment credit to prospective investors. A critical examination of the progress of available investment Credit schemes and the operation of long and medium term credit institutions makes one feel that the existing problem of investment finance is something more than limited availability of funds for the purpose. It seems to be a problem caused parti y by the inadequate develepment of an industrial entrepreneurial class in the society as noted in the foregoing section - a class of people who are willing to take risks in venturing into new production areas and in expanding available production facilities, capable of preparing saleable project proposals to security conscious banks and other financial institutions and also having some financial strength to back up credit funds that are available. It is also partly a problem caused
by the overall incentive structure in
the system.
Entrepreneurial activity, whether it is from private or public sources, depends on relative profitability conditions in the system. As the NEDP itself argues, there are elements in the market and the incentive structure which favour business activity in import and domestic trade, transport, construction and other contract work and simifar non-tradeable Sectors. These Conditions are caused by a variety of policy and non-policy variables including exchange rate manipulations, tariff structure, cost of infrastructural facilities, interest rates, collateral based lending practices of security cons
ECONOMIC REVIEW DECEMBER 1987

Page 23
斐
苇A鹦彗、苓毒
sa o RT - TERM (PACK NG) CRED CT REQUIRE
For EXPORTS 1983,
雷984。鲁苇98
1983 1984
RS AMillion Ros Milh
Value of Exports
ill-Working Capital Required to
29.096 3734,
Finance Exports, per Quarter a 5,400 6.90
-Funds Available with Exporters b
TV-Packing Credit Disbursed
(outstanding at the end of the quarter) under the Central Bank Short-Term Refinancing Scheme
W-Average Packing Credit Dis
bursed under the Refinance Scheme (iv), as a Percentage of Working Capital Requirements-(i)
Vi.—Shortfalil in — - FRefinancing
(ili — (ii 1 —4- IV) )
O8O 箕38、
1,200 1,500
22% 22%
3, 20 4.02O
Fotes: a Method of Computation =Total Value of Exp. Exports -- Petroleum Products 10% Profit Marg b. 20% of Working Cpital required. The figures are
Source : Basic Data from the Central Bank Annual Repc
Buletins,
cious commercial banks favouring trade credits and so on. These factors, operating within a system dominated by private capital looking for quick profits, have in fact, created a market environment going against the deveopment of export-oriented business ventures.
In addition to the above problems
related to long and medium term investment finance, there are also prob
ems related to short-term finance for working capital requirements hampering export growth. Growth of exports creates an increasing need for such short-term finance and higher the cost
of such availal will be the porc During the rec on short-term banks ranged b cent according The COn CeSSiO facilities a Vilab schemes like Refinancing SC Bank do not even 30 per C the very app aboje – 6.4 indi The probler acutely by expc
Eco NoMVC REVIEW DECEMBER 1987
 

:MENTS 5
1985 on Rs. Million
36.2O7
O 6.40s)
) 1 280
) 300
20%
3.820
forts less (GCEC in) ounded off.
rts and Monthly
Dle finance, the jower fitability of exporting. ent past, interest rates redit from commercial etWeen 1 1 and 30 per to Central Bank data. tary short-term credit e to exporters under he short-term Credit hennes of the Centra
eem to have Covered .
nt of requirements as Dximate estimates in
ate.
here is faced more ters of non-traditional
products. Historical development of the banking habit in Sri Lanka is known to have favoured certain traditional exports. Exporters of new product lines, particularly if they are relatively new and small, are faced with more short-term financing problemas than those of old and more stabilised exporters of traditional products. High market interest rates on pre-shipment credit in Sri Lanka are a particular constraint to export growth because exporters in competing countries like Korea, Indonesia, Malaysia and Singapore do enjoy very low interest rates on pre-shipment credit.
There are similar problems also in short-term credit facilities available to exporters. The automatic and speedy availability of unlimited amounts of pre-shipment credit for working capital at internationally competitive interest rates is a necessary Central feature of any complete export-incentive system. A Sri Lankan exporter who has to pay up 19 per cent (in mid-1985 up to 27 per cent) in interest on an overdraft for working capital is at a clear disadvantage vis-a-vis his competitors from Countries like Korea. Singapore, Malaysia, indonesia and the Philippines where exporters are provis ded short-term credit facilities at Very low interest rates. There are various reasons for this state of affairs - restrictions on the total quantum of refinancing that is available, inability to provide collateral required by banks, inability to wait until the request for credit is processed, misinterpretation of the scheme by commercial banks and so on. Whatever the reasons are the existing situation in respect of shortterm export credit requires corrective action if the country's export drive is to succeed. There is a grave need to find ways and means of enhancing commercial banks willingness to lend more for export and of simplifying and streamlining the procedures and data requirements involved in the preparation of export credit applications.
The export credit schemes, operated by various financial institutions in Sri Lanka are said to be subject to va

Page 24
rious constraints which limit their efficacy. It is said that there is some reluctance on the part of bankers to file applications with the Central Bank for refinance under the Medium and Longterm Credit Scheme in operation due to: insufficient margins of profits allowed to them for operating the scheme, security conscious traditional lending practices of commercial bankers and similar factors. Furthermore,
exporters are heard as complaining of
Cumbersome administrative procedures when it comes to obtaining subsidised credit under available official export credit schemes. It is said that in carrying out lending activities under the Medium and Long-term Credit Scheme, the EDB, commercial banks and the Central Bank request information independently at three different times with regard to projects submitted by prospective investors. This clearly acts as an effective barrier to dissuade prospective export businesses from undertaking the investments for the purpose, due to unnecessary duplication, Confusion frustration and delays this system creates.
The Exchange Rate
The exchange rate is a powerful instrument for stimulating export growth. The use of this as a policy instrument has been briefly discussed in chapter two above. However when Sri Lanka's experience during the few years 1982-1984 is considered the movements in the exchange rate seem to have acted as a constraint on rather than as a stimulant of exports. The overValued exchange rate has been widely cited as one of the major constraints on Sri Lanka's export drive.
An overvalued exchange rate has two main adverse implications of which one is domestic and the other international. Domestically as a result
of such overvaluation of the domestic.
currency every dollar earned from exports yields less rupees to the exporter than under a realistic exchange rate. This would naturally act as a disincentive to expand export activities. Internationally, currency overvaluation re
duces the competitiven exports as the export. whose currency is ove relatively more expen buyers. -
in nominal terms.th preciated from Rs.15.6 in 1977 to Rs.26.29 p. the end of 1984 and end of 1985. Howevel tion has been offset by
relative domestic infa
period, particularly up the years domestic in
sure has increased the
tion while the rupee e. ports have not increa
high as the rate of inf
all effect of this real the rupee has not bee exports. In 1984, the widely heard that ex Come significantly les unattractive to the
Lanka due to overv
rupee. Recent studies
investors do not favou the return on investm ly high in view of the g risks and higher cost mentation and proced exporting as against ( oriented activities. In of exporters indicatec exporting at a loss in to their markets in the times to Come. In ad the export, activities local investors, the change rate has mad ports uncompetitive tional market.
Problems created
the real appreciation tional value of the rl 1984 have been reso tent in 1985. As a higher rate of depre pee in nominal term and partly the substa the domestic inflatio change value of the in 1985 vis-avis curre jor competitiors anc of the country. Yet
 

ess of domestic of a country valued becone sive to foreign
e rupee had de1 per US dolar er US dolar at Rs.27.41 at the , this depreciahigher rates of tion during this | to 1984. Over flationary prescost of producarnings from exsed at a rate as ation. The overappreciation of n favourable for complaint was porting has bes profitable and investors in Sri aluation of the have shown that ir exports unless 2nt is significantgreater economic s (e.g. in docuures) involved in domestic market 1984, a number i that they were order to hold on hope of better dition to making unprofitable to overvalued exe Sri Lanka eXin the interna
for exporters by
of the internapee in 1983 and ved to SOrne eXesult of partly a :iation of the ruduring this year ntial reduction in rate, the real exrupee depreciated ncies of most matrading partners the conditions of
the existing world exchange rate scene impose serious difficulties in respect of export development of a country like Sri Lanka with a weak and insignifieant currency. It is usually very difficult to orchestrate the behaviour of the real value of a currency like the Sri Lankan rupee in line with the volatility found in major foreign exchange markets.
Exporters desirous of receiving increasing amounts of rupees for a dollar they earn would naturally like to see some continuous depreciation of the rupee in foreign exchange markets. Orthodox economic opinion, represented at a global level by international institutions like the International Moneas tary Fund and the World Bank, would also argue for currency depreciation: with a view to attaining a realistic value for the rupee, as a very effective export promotion measure. It must be mentioned however that there is no consensus of opinion on this issue. Neither is there any consensus, as far as Sri Lanka is concerned even among the major policy institutions involved in the management of the behaviour of the exchange rate.
What ultimately matters is the real rather than the nominal exchange rate. Depreciation of the rupee in nominal terms may lead to its depreciation in real terms too, but not at the same rate as nominal depreciation, since the latter invariably leads to some rise in the rate of domestic inflation. Furthermore, official institutions looking after
policy from a very broad national pers
pective, like the Central Bank and the Planning Ministry might consider also the cost of living implications of exchange rate variations. Empirical researchers might also argue that the connection between currency depreciation and export growth, at least as far as Sri Lankan historical data are concerned, is not - firmly established one way or the other.
None of the above points, however, changes the fact that when there is an appreciation of the currency in real terms, the exporters find themselves receiving less real (purchasing power)
ECONOMIC REVIEW DECEM EIER 1987

Page 25
rupees from the dollars they earn. They would also realise that here they would be coming up against more stiff competition from their competitors in world markets. Thus from their own sectoral interest an overvalued real exchange rate would be a significant constraint on export growth. It is the task of the official institutions, which operate with an eye on broader Social and economic issues than the exporters do to strike a balance between what is beneficial to the latter and what would be tolerated by the rest of
the society. The 1985 developments,
combining nominal rupee depreciation with a low rate of inflation would be the best possible compromise authorities would wish to see being achieved
on this rrunt although it is clearly too optimistic to see such a harmonious
combination of events on this front
every year.
Tariffs and Tariff Structure
import duties on imported raw materials and intermediate products used in the production of exports, particuJarly the industrial exports, push up production costs and therefore reduce the competitiveness of such exports in foreign markets. Two schemes, discussed in chapter two are in operation namely the import Duty Rebate Scheme and the Manufacture-in-Bond System, to enable exporters to have access to imported inputs at World prices. There are hoWever, Certain practical problems preventing these schemes from achieving their objectives emanating from various difficulties Connected with the administration of the sche mes. An in-depth study of the subject has shown that during 1977-1982 less than 50 per cent of the eligible exporters availed themselves of the benefits of the duty rebate scheme. The study revealed that some exporters were under the impression that the -duty rebate is given only on directly imported raw-materials, whereas it could be
claimed on the import content of lo
cały purchased inputS too. There is, in addition, the possibility that the exporters consider the procedures in Voli
LLLSLLLaLLLLSS SLLLLL LSLLLSYLLLLLLLS S HH LLLSLSe YYYLLLLLLSZYiS
*€ा>
ved in claiming t bersome and cer rebate payments cost and time ir sing of claims.
Export dutie. export products are made lead g fitability and sta raging growth of expOft duties t their traditional and the overali tive is quite well my with a substa would be gener free that sector, entirely since quring revenue responsibilities i the export secto of revenue. But a price-taker for in foreign mark are usually paic their revenues (ar by producers of the prices they receive). This mai in profitability tives in respect { port. The proble
acute when the compete in inter exporters from C change export d dise exports.
A tariff stru affects relative a ting has been wi ly, namely the h tive protection substitution acti activities. When puts used in the particular produ dutjes On the im duct the domesti tutes for that im
are said to be en of 'effective'
"nomina!' duty product implies.
mestic producers are still known to
"iՅՑ7 要

he rebate as too cumplicated of that Smał
are not worth the volved in the proces
levied on whatever on which such ievies enerally to lower prond as a factor discouexports. In respect of he conflict between revenue iaising role export growth objecknown. In an econoantial export sector, it ally very difficult to from Customs tariff the government res to carry out its S bound to consider
r a Convenient source in a country which is the bulk of its exports ats the export duties i by exporters from ld through duty shifts export products from ought to otherwise rurally leads to a drop and creates disincenpf production for exm be Comes e Ven more se exporters have to national markets with ountries which do not uties or in fact subsi
Cture problem which ttractiveness of expordely discussed recent
higher degree of effec
afforded to import vities vis-a-vis export import duties on inlocal production of a Ct are lower than the port of that final proc producers of substinported final product joying a higher degree protection than the on the imported finał in effective terms doof import substitutes o be substantially pro
tected in certain product areas. This distorts the incentive structure and makes import subsitution production continue to be more attractive than production for export.
constraints on Ability to Penetrate Foreign Markets
Lack of an effective organisation for marketing and the lack of marketing know-how is one of the constraints in the long-term development of exports. Poor market information and lack of Continued and regular contacts with markets abroad is a severe drawback here. Sri Lanka has no private sector organization in the rmajor markets for any kind of promotion and feed back to producers. At present certain governmental entities, like the Department of Commerce and the country's Diplomatic Missions abroad are expected to perform the task of such market promotion but they are unlikely to be as effective as a private sector organization developed solely for the purpose.
Outside the traditional exports of tea, rubber and coconut Sri Lanka has had hardly any tradition of exporting and has not developed an export organizational capacity. There is nothing of the nature of the trading houSes of Japan or South Korea or even the more rigid organization systems that India had developed in the major markets. Thus, knowledge of markets and constant market contact and informatiori are rather scarce. Even where markets are known, the organization of a regular supply from a large number of small producers in sufficient quantity and quality has often failed.
Poor market information and know-how along with lack of capital and technical know-how has been a constraint on Sri Lanka's ability to - develop new products and gain access
to new markets. The present system of government officials performing the
trade promotion activities through foreign embassies (except in the case of tea), with very little links with the private sector producers and exporters,
23

Page 26
gent need incentives
is most unsatisfactory. There is an urfor government to extend to the private sectors to organisational capabilities lines of the Japanese and
build up along the
South Korean trading houses.
Marketing difficulties are particularly harsh, as should be expected in respect of non-traditional, refatively new
exports. The increasing promotion of direct foreign investors into new ex
port activities was partly motivated by these market problems. While official agencies can do a lot in promoting Sri Lankan products abroad, they cannot
be a substitute to an efficient set of
private organizations dealing with the
task of promoting the 'Made in Sri Lanka' label abroad.
Some other Problem Areas and an
Optimistic Note
This discussion of export development constraints may be concluded by referring to two other frequently cited export growth constraints. One of these refers to numerous shortcomings in infrastructure facilities required for successful export performances, particularly those in communications, shipping and air freight facilities. Good conditions in these infrastructural facilities are indispensable for success in export business. Afer the recent improvements in overseas telecommuraications, harbour and airport facilities the conditions in this respect are very much better today than a decade ago. Yet one comes across numerous Complaints about continuing inadequacies.
Another area in which complaints are heard involves various procedural delays exporters have to undergo at
various institutional points a subject
already referred to.
It is perhaps unfair to conclude this chapter by only emphasizing difficulties and constraints. The Sri Lankan exporter has gone a long way forward since about the early 1970's in promoting non-traditional exports. As noted in the NEDP the potential Sri Lanka has for growth of exports of certain types of products is quite large and is yet to eliminate many constraints on what
24
could be achieve environment is quite base from which expo be accelerated to set th export-led growth pat bfe basis. The enviri and the production bi the recent past largely forts of the EDB she tained growth of expo biotic partnership bet and the private secto my. When the expor up the existing const dually cease to operat
tacles, some in a natur
velopment and some rate policy action
brought about throug
ters lobbies. In fact n. so far encountered ar up in the way and ou out while the process is in its gear. No Cour which attained rapid port growth in the p that success by waitir elimination of the co hand Exports and Balance C Some of the issues
: discussed under this
have already been ad
We could be brief here. Since the up of the economy 1977 the country con critical balance of pa The “Open Economy payments to extremel though there was so subsequently resulting tion of the pent-up existed, foreign paym a high level throug from 1978. By 1985 amortization paymen account of external the immediately preci come to add their S level of external paym
These remittances 'transfers' indicating 'earnings' through proc unlike other foreign rect abroad, these remittance country without any si obligation
 

d. The existing adequate as a it growth could e Country on an in on a sustainaonment created ase developed in due to the ef)tuld ensture sus*ts within a symween the public 'S of the econot growth speeds raints may grae as serious obsa process of dethrough delibewhich may be n growing exporaw problems not e bound to crop ight to be sorted of export gorwth try in the world and sustained exast had achieved ng for a compelte instraints before
of Payments
that have to be Section heading dressed. therefore rather relative opening of Sri Lanka in tinued to have a yments position. raised foreign y high levels. Alme levelling off from the saturademand which
ents remained at hout the period arge interest and is falling due on Oans obtained in ding period have nare to the high enf:S,
are described as hat they are not uctive activity. But ipts like borrowing are received in the nificant repaymént
Over this period as a whole, the trade balance, the balance on goods and services and the current account balance all remained in deficit. There was a large and continuing external resource gap, financed largely with external borrowing. The government depended on three main items to obtain the necessary foreign earnings to bridge these growing external payments gaps: export of goods, tourism, and remittances from Sri Lankan workers abroad. Tourism was seriously and adversely affected by the violence in the country after 1982. As most job opportunities abroad for Sri Lankans came from the Middle East Countries, where the bucyancy in foreign exchange earnings which existed after 1973 is threatened by the post-1983 drop in world oil prices the degree of
dependence the country could place
on these emigrant remittances as a balance of payments corrective is also becoming more and more fragile, to say the least. In these circumstances, the urgent need for growth of merchandise exportscannot be overemphasised. The urgency of the need for export growth is enhanced further by the country's current security which has its direct impact both on the government budget and the balance of payments.
The drive towards growth of merchandise exports has to be thus relentlessly pursued by those engaged in such activities. Following from what was discussed in the foregoing section, there is one more point worth stressing here-namely the need to promote export lines dependent more and more
on domestic inputs. The greater the
import intensity of production for export the less will be the benefit of any growth of exports to the country's balance of payments. The basic balance of payments problem Sri Lanka is faced with is the faster growth of imports over exports if the atypical year of 1984 is excluded from the more recent data. A not unimportant part of the required solution of this problem is to encourage greater use of locally available materials in export production. There are incentives provided by the State to promote such an increasing use of local raw materials by exporting firms. The progress achieved in this direction ought to be constantly monitored.
ECONOMIC REVIEW DECEMBER 1987

Page 27
t
-
The durability of private bus owners in Sri Lanka tuse of sparse data to arrive at plausible findings Hi Ranasinghe & J Diandas
A survey of private buses in middle of 1985 indicated th turnover of bus owners such that drivers reported an avera wate buses blat only just Over One year driving for the prese conductors reported average service of just over one year well as with the present employer. Responses of bus owned in business indicated that 33 percent had one year, 23 per and 21 percent three years in business, leaving only 23 than 3 years. This picture did not match the growth in pr permits which had risen from 68 percent in 1982 to 100 pe survey figures (382 owners' responses) and the total permit were both converted to an index based on 100 in 1985. indexes were compared and, subject to several qualificat average picture emerged:
: 16 percent any years's permits are not renewed in
drop-out rate of 1 in 6. Surveyed owners had been in business for an average Business-survival of drop-outs was 3.3 years. 71 percent of 1981 owners, 66 percent of 1982 owi
of 1983 owners had quit by 1985. The survey by its design covered only surviving owner: not detect all the owners who held permits for only one ye
the average survivability of owners is expected to be the drop-out rate is understated and the durability ra The emerging conclusions are:
private bus business is not very stable. sparse data can be used to arrive at plausible findings The work is part of a much larger study sponsored by Stiftung. The complete study is undergoing final editing lished in due course as a book on the role and reward of m buses and aspects of the productivity of man and bus. Fr ted at SLAAS Sessions December 87.
1. introduction enumerators and
of obtaining any f
1.1 Department of Private Omnibus that 17 owners Transport (DPOT) data reveal that 94. claimed to have b
percent or registered owners in 1986
own only one bus and that their buses TABLE 1 Dani represent 87 percent of the private :
Tot
buses registered for route permits. A 1985 survey of 400 bus owners in Source Colombo. Kandy and Matara showed ܡ that 89 percent of them owned only one bus and that their buses represen- Colombo 6 ted 77 percent of the buses owned by Kandy 8 the responding owners. These results latara
3. 1
3.
match reasonably and tend to give Sub-tote] 4, confidence to the survey as a whole. Other 135.3 The relevant figures are set out in Total 10. 1
Table 1: Fடிe 95.
1.2 During a pilot survey of 20 Colombo 2 buses and their owners and crews (un- Kandy dertaken as a trial run for training the Matara 1. Total | 4
YLLLSLLLLLLaLSLLScJS LOuLLL LcLG SLS S S H L SSJ0SLG0YYD S000000HS

at there was a high se of 4 years in print employer, while in private buses as S as to their period pent had two years percent with more vate bus operating rcent in 1985. The S (10,292 in 1985) The growth in both ons, the following
the next, giving a
of 2.1 years.
hers and 53 percent
s. The method canar. Therefore: at least 3 years. te OverStated. --
the Friedrich Ebert 2 and will be pubtanpower in private Om a paper presen
ള്ളജി'
not for the purpose
indings) it was noted (i.e. 85 percent) een in business for 3
years or less. This seemed to be a very high percentage. Indeed DPOT figures
showed that private bus route permits
had increased by only 33 percent in the last 3 years. Therefore, although the primary purpose of the survey was to develop knowledge about the terms and conditions of employment of priwate bus emplồyees and about their output as a contribution to the transport needs of the Country, measured as bus-km per crew per day, it was decided to investigate, as a marginal issue, the survival period of the
OWe S.
1.3 The hypothesis based on the pilot survey was that the duration for which an owner continued to ply his bus was short and that this could be correlated in some way to the high percentage of owners who owned only one bus. This later aspect was abandoned, but it was decided to try and find out how long owners did remain in business. owners remain in business and the drop-out rate was not easy because of the limitation of the survey which neCessarily interviewed only owners stili|| in business. To interview those who had already dropped out would have been extremely difficult. Therefore to reach any sort of conclusion, even a tentative One, it was necessary to Compare the survey answers of owners on their periods in business with DPOT data of permit growth.
nance of One-Bus fleets
O J N E R S B U S E S A n : * Only owned g bus. alone Total as single of i per
bus louners units bus es? Ou in CT !
* : 143,386 94 3,954; 3,386 86 မှီငှါ၊ ဒွါမှီ၊ ဒိဋ္ဌိ | ဒွါ ဒွါမှီ၊ ့် ဗွီ:  ́ `့် ဒါ့ 914,511, 94 5,212, 4,511 i 86
17; 914 9.616 94-11:0001- 9.615 --87.
Do 89 89 14 G3 73 1.14, ー。 봄- -------홍-
s - ". o ○○○ 7 1
25

Page 28
TABLE 2 : Employees periodis of employ Enent in private bu
and for - prosent ouner by %
IN PRIVATE C O N D U C T O R S Ο R I USES ! Colombo . Kandy Matara Total Colom 5oo Kan 8 - با less than 1 year 47 43 50 | 47 16 7
1 - 2 years 26 31 19 25 3. 1 ! 2 - 3 y Garg 18 16 13 12 11
tess than 3 yrs | 84 92 B5 85 41 29 | More than 3 yrs - 16 8 15 15 59 71 Total I 100 100 100 100 եւ 100 | 100 FOR PRESENT OUNER
Less than 1 year 55 : 57 68 58 - 55 : 52 1 - 2 years 20 23 19 20 23 23 2 - 3 years * Less than 3 yrs : 91 90 93 91 91 90 I Morg than 3 yrs 9 : 10 7 g g : 10 「千ota1 }t 100 100 100 100 1 Ծց 100
2. Drivers & Conductors periods of work in private buses and for present
OWIle
2.1 The hypothesis received some confirmation from more than 1,200 employees who were asked seperately how long they had been employed in private buses and how long for the present pwner. Their answers are shown in percentage form in Table 2 :
2.2 The answers are remarkable Both conductors and drivers ha vi. worked for present owner for like pe riods, predominantly less than 3 years. Drivers have worked much longer in the sector than for the present owner. But allowing for a slight difference in the form of the question, conductors have worked for the same period in the sector and for the present owners. And as will be seen in Table 3, the owners' indications of period in business tally closely with the conductors' period in employment.
3. Owners length of time in the business
3.1 The responses of 382 owners who replied this question are set out in Table 3:
3.2 This table shows that out of 382 responding owners 15 percent had been in business for less than 6 months, and 18 percent for a period of
26
6 - 12 months giving a cent having one year ness. A further 23 perc the business within it giving 56 percent in years or less. Another
TABLE 3 DURATI
DURAT ION IN
BUSINESS
ത്തെ
Up to 2 Years O - 6 months 6 - 1 2 finonths
up to one year 1 - 2 years tOtal
Over 2 Years
LLLLSSMSMSSGLSLkLkiTTqSqSqSMSMMSMkqTkTkqSqS
6 + years
5 - 6 years 5 + years
4 - 5 years 4 + years 3 - 4 years 3 + years 2 - 3 years tot el TOT A
Less than 1 year 1 - 2 years 2-3 years Less than 3 yrs Over 3 years
Total
 
 

S8393
J E R S.
بطےحمستعصمستحصیحتسمس مضموقعے
dy Matarat Totali
5 13 10 12 і 8 ; 11 23 36 77 64
* * 100 m hog
69 57 18 22 --- 7 12 94 91 ... 6 9 1 Օ0 1 ՕO
total of 33 peror less in busi
ent had entered he last 2 years
business for 2 20 percent were
carrying on the business for between 2 and 3 years. Thus 76 percent of the operators who responded had entered the business only during the last 3 years. About 7 percent of the owners had been in business for 5 years or
Ore.
3.3 The high incidence of recent thew entry into the business cannot be explained by recent growth in permits
ted private buses on the road. 4. Growth in Private Bus Route Per
mits.
4.1 Table 4 sets out the growth in route permits according to DPOT, with annual permits and annual net increases shown as a percentage of the total permits issued in 1985.
4.2 This table shows the growth in the number of buses allowed to operate private bus services. According to this, only 3 percent of the permits
issued in 1985 represented a net in
crease in permits during that year, and only a further 4 percent represented a net increase in 1984.
ON OF OUNERSHIP OF 1985 SURVEYED BUS OWNERS
Col. Osimbo エア
s
Kandy Matara Total
Ounors ; Outners ; Ouners ; Ougners ż, ,
16 1713 1558 15 | 35 118 ქ. 13 - 14 წ. 20_iლმ H ნმ - 18 64 34 29 31 33 35 126 33. --56-29-ի-15- 15 || 16 - 17 | 67 - 23 120 63 44 45 49 52 213 56
, 4 2 : 2 2 4 10 3. 3 2 . g . g : 7 : 7 : 19 5 7 4 11 11 11 11 29 7 3 E. 13 14 5 5 25 14 07 24, 25 ; 16 16 54 年在 16 8 9. 9 : 11 12 36 9; | 30 16 | ತ್ವ.: 34 : 27 , 28 : 90 : 23 42 20 211g 20 79 21 70 37 5355 46 48 169 44. 190 100 g7 100 ցS 1 Օ0 38շ 100
SUMMARY OF PERCENTAG
Colombo Kandy Matara Total 34 30 35 33 29 15 17 23 21 21 2O 21 84 66 72 77 16 34 28 23
100 1 OO 1 00 1 ՕO
EconoMic REVIEW DECEMBER 19 a 7

Page 29
TRENDS NDICATING HIGHowNERSHIP TURNovER
£ණිජ්ඩ්‍රජ 1985 تھی؟--بے
20
ፕ 1ù
荡
O
ஆ ஒroth in total number of privat
淫 operating under route persits, taken frost route perfei
issued per Ministry data.
300 is route persits. issued in 1985
జైతా తణజాజోజాతికి జ్ఞh populatiškofa o ế
surviving og naars in 1985 es par Survey
Co segners suryayed in 985
N porat holdsrs teho prasusably N quit before the survey in
}డ్లెత్తి
3 porcentags of paraithoiders ຊື່ຫຼິ ರ್ಥ್ರಿ ಚಿÅd net
§ಿ?
quit before the survey
1978 7 1980 982
魏穩 -
* : additional perfaits
| 4ෂිෂී (Jෂිප් මනඃch yêඝr
壹
碧7擎 980 է 981 1982
Econo Mic Review DECEMBER 1987 ,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

EGRE
'69.
47g
385 198 185 196
,saias faset en magal entry ofte سر محصے
ouainess of offers surveyed in 1983
8s 98.3 ፱985 1986 #9ಿ?
27

Page 30
霉A巽4
PRIVATE BUS ROUTE PERMITS
军 - 2- 1979-1987 - 2 of YEAR PERMITS 1985
1979 − 809 ج8 ۔ - - - - - ۔ - }
3 294 ܦܬܐ. 1980 - 1,103 麦臀
+ 3,972 38... 1981 5,075 49 1,913 19 1982 6,988 68 卡 2,614 2 25 1983 9,602 93
416 4. 1984 10,018 97 卡 325 3 1985 10,343 1 OO
士 1,162 - . . . . 1986 靠售鲁 七、 ܚ 密79、 - 9 1987 12,384 120
Source : Affitis Ejono of Prira71 eo Ć) } } fliiblty Fransport: ÉpeFSOlaf Coihnutilication) -
5. Net Drop-Out Rate
5.1 Tables 4 and 3 indicate that 1983 per mit S \Arere 93 Per Cen (f th;
in 1985 as against eo owners being in bus number of buses ( , finits) of the 382 res not readily as cértain bus per ovver rate
onły 1.15, this is ni
the ensuing discussio
5.2 Table 5 is an endurance of owne
i (sample survey of ov
issued permits) by us each based on the
1985 date.
5.3 Table 5 assum
is typical of the who
year afe assumed to
...the increase allows
aCCOUnit nevAV entran dex. The increase in permits is first set-o vey index and then the increase in tota less than the new er indeX, the defi cif iş C, t | tt, for that y sea F.-
TABLE 5 : INDEXED PRIVATE BUS OUNER SERVIVORS & QUITTERS 19
less net drop-outs (Note3):
1979 1980; 1981, 1962, 19.
a total permits (Note it)
from prior year 4. 8 售个 49 5 increase 4. Ց 3 58 || 49 || 2: tota 4. 8 诽 维维、津意9 68 9.
2- survivors in 1985 (Nota 2:
ren gujalls3 3. 3. 8 雷4,2, nesu arntrants 3. 3 5. 6 9 2 total 3 3 8 A 23 4 3. permit sequence -
prior year permits 8 . 1 49 6
NOTES
directly from Table 4.
directly from Table 3.
total permits
reneujals assums d 合 作管 49 61 net neu entrants (Note 4) 8 5 38 19 2. totali percraits శ్రీ.శ 4- 8 11 49 68 g; 4, drop-out 5 : : het drops outs. 25% -
Index figures for total permits (a proxy. for total buse,
2. Index figures for survivors in 1985 (i.e. responding oud
3. In 1980, 1984 and 1985, increase in survivors is more til
he excess is taken as net drop-outs total permits of the previous year
4. In 1981, 1982 and 1983, increas e in total permite repre entresnits (i. Go total neu Britirants li G s s drop-outs a from not identified by the survivor analysis).
5. In any year the increase in permits represents neul Gntr;
(i.e. permits of previous year not reneued). only of drop-outs indicated by the excess of survivor. ouer the perffait findex increase
6, 1985 responding ourners who may not reneuf their permits
drop-outs) are not knoun since the survey was done in
his ef,

mily 44 ef surveyed
iness in 1983. The
and therefore perponding owners is able, but since the
in the survey is
ot fi kefy to effect
靛。
assemblage of the rs from Tables 3 wners) and 4 (total sing an index from percentage of the
es that the sample
»le. Permi{S Of One : be renewed where
after taking into t:S per Survey inthe index of total ff againSt the sur
a located. Where
I permit index is
trants per Survey treated as drop
drop-outs and survivors
5.4 The result of this excercise is to show that 20 percent of 1983 permitholders dropped out. in 1984 and that 31 percent of 1984 permit-holders
dropped out in 1985, the overal ave
rage dropout rate is 12 percent, but,
because the survey gives no indication
of how many surveyed owners would renew their permits in 1986, the year 1985's should be excluded. The average dropout rate then increases to 16 percent. 6. Duration in Business (i.e. Survival) 6.1 Based on the same indexed figures as Table 5, an attempt at age analysis of owners' duration in business is shown in Table 6:
6.2. A first-in first-out assumption is made as to the year in which drop-outs first entered. The index numbers are
weighted for years of duration. This
exercise is shown for total permits, | (i.e. renewals) separately. The result of the exercise is to show an average duration in business:
SurvivOrS. 2.0 years drop-outs 3.3 years 6.3. Since it was not known how
many survivors in 1985 will drop out in 1986, or when they will drop out, the survivors' average of 2 years is not
very meaningful. Moreover the like
79-1985 83 1984-1985 Total
B 93 97菲326 5 | 4 # 3 }է 160 3 - 97 100-11 426 3 | 44 | 67 | 159 հ է 23 Ւ 3.3 է 180 4 L67 100 259
8? - 93 - 97 i 326 =
(19) (30) ( 51) B 74 67 - 275 5 23 33 151 3 97 100科、426
20% 31%. 16%
S) are takon
riers) are thken
ħafn increases in arti dedit jct ad for off
se3ntis finet o njeg tuj
previous year
ante less drop-out 8*
hoc d is that stable operators survive. Hence even the drop-out average of 3.3 years may understate the typical survival period of private bus owners.
6.4 Nonetheless í would appear that a significant number of the respondents entered the business by taking over from a retiring owner. And if the sample is representative, it would seem that there is unstability in the business which causes relatively high turnover in ownership, reflecting com
paratively short average periods in
business.
6.5 Figure 1 attempts to visualise
the business duration pattern of pri
Vate bus owners.
6.6 Assuming that the Survey is ty
alysis takes account pical of all private bus permits, this
se index incretase
in 1986. (i.e. 1985
1985 •
figure illustrates quitting rates vide
Table 7: ---.
ECONOMC REWEW DECEMBER *193ア

Page 31
6.7 The percentage declines not because of increasing stability, but because of the lesser time lapse before the survey.
6.8 The result of this exercise must be treated with caution because of Several factors, including the estimation
of regulated rot minish the scop the road. Wheth,
a worthwhile fe
of this discussior
7. Conclusions
inherent in the owners' responses, the 7.1 Subject approximation of all figures into tions, the follo whole years, the assumption that the emerged: sample is typical, and the bringing together of total and survey figures into O 16 a common denomination based on an per index Depite the caution, however, it 1 를 seems reasonable to conclude that the O Out S business is not one of great stability. bee This in fact tallies with reported ex- ye perience in other countries, where 0 bu: stability develops only in a condition out
TABLE = 6 : AGE ANALYSIS OF ONER & per NOEXES
1979 1 1980 - 1981 1982 - 1983 - 1984
LL LL tStLS L S LL SLLL SSSS LLJ LS S L LLLL SJS LLLSJLLS ۔ ۔ ...............................! total pernits 7 years 6 3 18 5 鞑 6 30 5 25 4 } Յ 24 || 5 20 22 — 88 3 " 6 18 5 1538 114 19 57 2 翡 , 6 12 || 5 10 138 76 119 38 25 50 1 year 8 8 5 5鹊8_苇8事雀乌_奎9壬25_25茎23三23 bote: a B 11 174g. 6668 134 g3 227 g7 261 average yrs 1 , .. 5 13 2.. O 2, 4 27 net drop-outs 7 years 6 5 3 15 莓三型 16. 64 3 it 宦5三4B甘雪母三30 2 -н 事_墅 2 2 total 2 2 19 6330 102average yrs 1 33 34 Sgrif W. O'r 3 7 years 6 3 18 5 璽 3 15 S 25 4 鬣 6 24 5 20 6 24 3. 鞑 6 18 5 1522 66 g 27 2 鞑 6 12! 5 ﷽ 10፤ 38 = 761 19 381 21 ﷽42 1 year 6 6 5 5 38 38 || 19 1ց է 25 251 23 23 reneujas 6 6, 11 17 49 6668 13474 16467. 1591 average y FS 1: 15 1.3 2 - Յ: 22 2.4
ECONOMIC REVIEW DECEMBER 1987
 

Jte licences which dibe for competition on er stability is or is not ature is not the subject
to several qualificaowing average picture
5 percent of any year's
mits are not renewed
the next, giving a drop
; rate of 1 in 6.
surveyed owners had 'n in business for 2, 1
arS On a Verage.
siness survival of drop
is was 3.3 years
Total. 1985 Total luithout
1985 nr lift onir uJt ; finir uyt
3 21 3 21 5 30 8 48 3 18 6 30 ; 17 85 11 55 9 36 || 42168 || 33 132 21 63 89 267 68 204 23 45 16 232 93 186 33 33菲5重一拿5霄鲁8 118擂 ዐዐ 259 ሀጏ26 972 ፪326 713 2.6 2, 3 22
3 153 15 16 64 16 64 26 78. 26 78 孪三8薰 4 8 2 2, 2 2 51 16751 16
: 33 3.3
3 2 5 2. 5三3G彗3萱8惧三3 18 6 — 30 * 14 7OH 8 4C 9 36 26 104 | 17 βε 21 6363 189: 42 12d 23 46112224: 89 17s 33 33149 149. 116 11
TABLE 7
PERCENTAGE OF ROUTE PERMIT HOLDERS OF PAST YEARS WHO QUIT BEFORE 1985
YEAR OF % QUIT PERMIT BEFORE
1985
1979 63 1980 27 1981 71 1982 66 1983 53 1984 31
O 71 percent of 1981 owners, 66 percent of 1982 owners and 53 percent of 1983 owners
had quit by 1985.
7.2 The survey by its design covered only surviving owners. The method cannot detect all the owners who held permits for only one year. Therefore:
O the average survivability owners is expected to be at least 3 years 0 the drop-out rate is understated and the durability rate overstated. 7.3 The emerging conclusions are:
O private bus business is
not very stable. O sparse data can be used to arrive at plausible findings.
8. Acknowledgement
8.1 The work is part of a much larger study sponsored by the Friedrich Ebert Stiftung. The complete study is undergoing final editing and will be published in due course as a book on the role and reward of manpower in private buses and aspects of the productivity of man and bus.
8.2 The authors acknowledge with thanks the sponsorship and encouragement given by the Friedrich Ebert Stiftung, and the assistance given by Trade Union representa
i tives who attended workshop discussions;
Secretary, Ministry of Private Omnibus Transport and Secretary, Labour.
8.3 However all opinions and findings are those of the authors alone.
29

Page 32
Do Outward - Oriented Policies Really Favour Gro A critical look at the World Development Report 1987
L.K. Jha.
Rajapatirana replies.
The world Development Report 1987 was prepared by a team Sarath Rajapatirana and his paper on “Industrialisation and Fore carried in our November issue, contains much of the substance of leading official figure in India's commerce and planning setup and man of India's Commission on Economic Efficiency, Productivity greed with some of these views and takes a critical look at the Rep
P. unterested un the problems of developing countries look forward to the annual publication of the World Development Report by the World Bank with great expectation. The special feature of the 1987 Report, the tenth in the series, is that it tries in Chapter 5 to argue that the trade orientation of developing countries has been the principal factor influencing their industrial performance. To prove this point, it classifies 4l developing economies according to the orientation of their trade strategy over 1963-73 and over 1973-85. At one extreme are the countries whose policies are said to be strongly outward-oriented, while at the other end are those described as strongly inward-oriented. In between, there are two Other groupings-moderately outward-oriented and moderately inward-oriented. The Report compares the macroeconomic performance of these four groups, focusing attention on their average annual percentage growth in real GDP, both overal and in per capita terms, as well as other yardsticks o. economic performance, such as gross domes tic savings, incremental capital/output ratio, average annual rate of inflation, and the growth of manufactured exports. The broad conclusion drawn from these comparisons is that the more outward-oriented their trade policies, the better was the performance of developing countries.
A careful analysis of the methodology employed in coming to this conclusion gives rise to serious misgivings. Is it seriously contended that a policy which paid large dividends to island economies in whose national income foreign trade made such a large contribution would prove equally useful in continental economies such as Brazil and India? One wonders why some other island economies, such as Fiji, Seychelles, Jamaica, Trinidad, Mauritius, and Bermuda have not been included in the study. Further, is the inclusion of the Republic of Korea among the outward-looking economies fully justified, considering that the country'ss trade policies went through many phases, some more restrictive than others? in any event, the regulatory and developmental role of the State in various fields, particularly technological research, and the kind of political and economic support from the United States, among other things, have also unquestionably helped in the spectacular growth of Korea. Nor has its record of performance been
30
equally satisfactory
the annual rate of i percent. indeed, t factors, differing f which influence the and performance generalization of th by looking at th individual perform tries, carefully sel correlating it with t very misleading.
Of the many fact performance of a table, such as fiatu Some, such as po nable to change ov through sociologic policies. Others inc relations with de cooperation can t providing resource kets for the devel Then again, while e comes into expo island economies market, in a large the size of the don at which it is expa investment. In tur to be assured of a competition, both
Then there are part of the nationa tradition of entre often leaves an oth n a state of pover bolicies which hel corrective to it.
 
 

With?
of economists led by ign Trade', which we the Report. L.K.Jha a i most recently Chair' and Exports has disabort in this note; while
all the time. At one stage, nslation was as high as 40 nere are a wide range of rom Country to Country, e developmental potential of each. Therefore, a e sort made in the Report e average-and not at ance-of different counlected and grouped, and heir trade policies, can be
ors influencing the growth country, some are immuural resource endowment. pulation growth, are ame. Per a long period of time, a rather than economic clude the nature of political veloped countries whose be particularly helpful in es, technology, and marloping country's industry. xternal investment usually rt-oriented industries in with a small domestic continental economy, it is nestic market and the rate inding that attracts foreign n, foreign investors want measure of shelter from 2xternal and internal.
special factors which are | psyche. The absence of a preneurship, for example, erwise promising economy ty. Often restrictive trade minimize risks act as a
An objective study of the impact of Outward- or inward-orientation of an economy On its industrial growth could have been better made by comparing the performance of the same economy at different periods of time, under different trade orientations. The results of such a study might well have led to very different conclusions. For example, in the case of India under British rule, the economy was open. There were no inhibitions about allowing private foreign investment in industry. Import tariffs were low. Yet, the rate of industrial growth in that period was . very low. It was during World War II, when imports were severely curtailed as a result of short supply and shipping difficulties, that there was the first real spurt in the rate of industrial growth. This gained further momentum after independence. The experience of many other colonies, before and after inde* Dendence, would tell a somewhat similar tale.
Yet another way of making an objective evaluation of the impact of trade policies on the pace of industrial development would be to look at the historical experience of developed countries. Was the emergence of the United States as the leading industrial economy the result of outward-oriented trade policies or of other factors? Then, again, what about Japan? A 1972 OECD study, The Industrial Policy of Japan, has a very different story to tell. It says:
"Should Japan have entrusted its future, according to the theory of comparative advantage, to these industries toys or other miscellaneous merchandise and low-quality textile products) characterized by intensive use of labour? That would perhaps be a rational choice for a country with a small population of 5 to 10 million. But Japan has a large population. If the Japanese economy had adopted the simple doctrine of free trade and had chosen to specialize in this kind of industry, it would almost permanently have been unable to break away from the Asian pattern of stagnation and poverty, and would have remained the weakest link in the free world, thereby becoming a problem area in the Far East.
"The Ministry of International Trade and Industry decided to establish in Japan industries which require intensive employment of capital and technology, industries that in consideration of comparative cost of production should be the most inappropriate for Japan, industries such as steel, oil refining, petro-chemicals, automobiles, aircraft, industrial machinery of all sorts, and electronics including electronic computers. From a shortrun, static viewpoint, encouragement of such industries would seem to conflict with economic rationalism. But, from a long-range point of view, these are precisely the industries
s where income elasticity of demand is high,
ECONOMIC REVIEW DECEMBER 1987

Page 33
technological progress is rapid, and labour productivity rises fast. It was clear that without these industries it would be difficult to employ a population of 100 million and raise their standard of living to that of Europe and America with light industries alone; whether right or wrong, Japan had to have these heavy and chemical industries."
Turning once again to the area covered by the 1987 World Development Report, a careful
study of the data presented can lead to very
different conclusions from those drawn in it. Thus, Figure 5.3 on page 86 furnishes information on the performance of individual countries with different trade orientation over 1963-73 and 1973-85. A closer study of the information presented shows that the rate of increase of real GNP per capita for Bangla
desh jumped up from about minus 2 percent
in the first period to above 4 percent in the
second period. Likewise, for India, the rate
went up from a little above zero to just below 4 percent. Against this, the corresponding rate in Singapore and the Republic of Korea registered a fall of 2 percent or more per annum. Considering that the rate of population growth in Bangladesh and India was so much higher-a very important point when assessing per capita growth rates-surely their performance cannot be judged to be too poor, even though they pursued inwardlooking policies. o
Similarly, the average annual percentag growth of "real manufacturing value-added" shot up from near zero to about 10 percent in the case of Bangladesh, and from around 3
percent to around 7 percent in the case of
India. The percentage rate of growth in "employment in manufacturing" between the two periods went up in the case of Bangladesh and India, while it recorded a sharp decline in the case of the Republic of Korea, Singapore, and Hong Kong.
Another point which emerges from a study of the Report's data on the performance of individual countries is that Pakistan's rate of per capita income growth was higher between 1963 and 1973, when it was classified as strongly inward-oriented, than between 1973 and 1985, when it had moved into the category of moderately inward-oriented. In "real manufacturing value added" too, Pakistan did not improve its performance by going in for more liberalized policies. Moreover, "employment in manufacturing" in Pakistan, which showed an average annual growth of around 2 percent over 1963-73, had a growth rate of minus 3 percent over 1973-84.
Thus, the data presented in the WDR could well be used to argue that most of the poorer people of the earth have fared better with inward-looking trade policies. This is not the conclusion reached by the authors of the World Development Report 1987.
- EOO NOMIC REVí EVAf DEOEMEE FR 128 ?
 

3

Page 34
Cost Recovery for Education and Health in Developing Countries. By Emannel Jimenez. Published for the World Bank. The John Hopkins University Press. Baltimore 1987.
Until a few decades back educational and health services were considered essentially welfare with expenditure on these services being regarded as welfare expenditure. Over the past two decades, however, the realisation has grown that expenditure on education and health is a long term investment rather than merely a welfare measure. It has been accepted that since those services increased opportunities for education and health, and improved productivity of human resources, they were a necessary factor in efficient production. Furthermore, the educational levels and health standards of a population have come of ten be considered as direct development indicators of that particular country.
This book attempts a revaluation of pricing policies for these services in developing countries and tries to maintain that the uniformly high subsidised pricing policy in publicly provided educational and health services in developing countries had led to ineffiencies and inequalities in the distribution of these services. According to the country data provided in the tables to
illustrate the low prices for education
and health services, the recovery of costs is low in these countries:“In 28 developing countries the public costs recovered through prices for highel education was 9 percent, secondary education 15 percent and primary education 5 percent. In health, recovered costs was 7 percent”. In relation to current costs in prices, the author Jimenez sees three types of inefficiencies in provision of education and health services namely, relative under. investment in these sectors, misallocation of resources within each sector, and an inability to ration services according to need. ,
Hıs view is that ın developing countries budgetary constraints have serious repurcussions for education and health; while at the same time there is an excess demand for these
32
PRiCING POLICY IN THE SOCIAL SECTOR
services from tho pay for them, bu not flexible enol
mand to generat
these services. Fu ly low prices fo sub-services in the a bigger subsidy cost services with of social return.
data presented i poorest countries rica public exper has been concent catioi at the exp cation. It is argui
to ensure efficier
ces, those who ar served should rec free or highly su Services alone di everyone or those ble to be serviced vice. The author ment with the cas income groups w ford to pay libera cost on tuition materials while st groups cannot col) entry into higher fore these low in verely under-repre cation despite th emphasises more current pricing households have g subsidies in educa vices, than the po Or again......the portion of subsidi more children in at this education dies are highest ...* lin discussing til on health service, sises that Subsidis to unequal distrib ces among various upper income g from the subsidie; pulation do not to the free health urban areas.
The latter part up a case for diffe policies for recove
 
 
 

se who would wish to t current policies are Lugh to use such dee more resources for |rthermore, uniform - ir different types of ese countries result in allocation for high a relatively low level From the empirical in the tables, in the in Sub Saharan Afhditure on education trated in higher eduense of primary edu: ed in this book that lit allocation of Servie most suitable to be seive the service; but bsidised provision of oes not imply that who are most suitaWould enjoy the serillustrates this arguse of the cost of high ho privately can afally to meet the high and extra curricular udents in low income mpete with them for education and there
COme grOupS are Sesented in higher edue Subsidies. Jimenez than once 'under
arrangements, rich
reater ccess to public tional and health seroor households....... rich get a larger proes because they have school particularly all level where subsi
he equity component s the author emphated prices contribute bution of these servigroups and therefore
roups benefit most
s, while the rural po: have the same access services available in
of the book builds :rent types of pricing bring part of the cost
of these social services. The author advocates a move away from acrossthe-board zero pricing for all educational and health services'. He argues that pricing policies across all types of publicly priced items should not be uniform but should differ depending upon the 'public goods' characteristics of social service. He argues that if the 'externalities and 'scale economies are great or if exclusivity of use cannot be enforced, the role for subsidies in financing a public service should be increased. However, he maintains that subsidies should not be at the same level for all sections of society.
He goes a step further in arguing that the pricing policies should also depend on initial market conditions namely “how much of a service is being demanded in relation to supply at
" current prices”. The basic monetarist
analysis of an implicit faith in the market mechanism becomes more apparent at this stage; and the view advocating minimum intervention and free play of market forces to decide on efficient allocation of resources gets more apparent. Jimenez argues that “pricing policies should also depend upon initial market conditions'. His example is that if public budgets have fixed subsidy allocations for a given service and if there is an excess demand for that service, then prices could be raised. This revenue, he says,
could be used to finance expansion of
the service with the highest social return. He adds''......prices could be raised until excess demand for that service is eliminated." In the case of a developing country like Sri Lanka we could raise the question of how practicable such a measure would be? Would it not nullify the principle of price efficiency and equity the author is attempting to make a case for in this
book?
There is also a suggestion that for
services requiring relatively large outlays, such as higher education or prolonged hospital stays, efficiency and equity in pricing policy depend upon development of the related markets. His suggestion is that education fees could be accompanied by credit schemes, and also medical insurance schemes could be introduced. Such a recommendation may not be of much practical value particularly in the case of hospital services, since it is not easy
ECONOMIC REVIEW deceMaser '987

Page 35
to introduce and expand medical insurance schemes among the poorer developing countries. In these countries there are large sections of society living below the poverty line, and such a considerable proportion of the total population of these countries would
not like to or be in a position to sac
rifice their present consumer expenditure to face up to future risks. In fact any reduction in their present welfare levels would eventually lead to lower health status leading to another vicious cycle.
The author also argues that efficiency and equity are improved by differentiating prices not just by types of services but also by types of individuals. In this way subsidies could be targeted towards low income groups rather than distributed indiscriminately. Here the author discusses the cost of administering cost recovery on a selective basis. He argues that maintaining records of the users of these services is easier than that of direct income taxpayers. But a proper identification of people capable of paying fees for these services in terms of their income levels would be difficult or some times impossible. Of course, prices could be differentiated by groups of individuals, such as rural as opposed to urban residents. But in such a broad
Emmanuel Jimenez
4.
categerisation, on Would be the sele come groups With urban sector. Tt gested seem ing when it comes where efficiency have to be given some developing ready implement cing policies to S thor also admits information on larly, information cient administrat: of these services i feasible changes ( the developing CO The thrust of tempt to justify pricing policies health. Jiemenez of applied welfar purpose. The cor supported by sp ple, many of th Bank where the a as an economist discussion the aut ber of World Bal studies. His anal most cases, with Ón a number O' Graphical illustrati to clarify the anal The nine chap supplemented wit
tables.
The first of th
sents the essence
the book under th cy, Equity and CC ming - upʼ. The ne cuss specific issue mines why and h publicly provide health services is
chapter discuss fir under-investments vices. Chapter fou sent pricing pol
inefficiency withi
while the next c qualities in the d dies and reasons f The next four ch six discuss the V possible changes i cluding basic pric cient provision of equitable access t
 

ce again, the problem :ction of different inin the rural sector or ierefore policies Sugpractiblee particularly to implementation 7 and effectiveness recognition. In fact countries have aled some of these priOme extent. The authe need for further the subject, particuon the cost of effiion of cost recovery in order to introduce of pricing policies in untries.
the book is the atchanges in prevailing on education and uses the basic tools e economies for this ceptual discussion is2cific country examem from the World uthor has functioned from 1984, " ! lin this hor has used a numnk and other recent ysis is supported in interesting statistics. f selected countries, Ons have been made ysis. ters of his book are h four appendies and
e nine chapters preof the argument of le heading “Efficienbst Recovery a SumXt four chapters disS. Chapter two exaow cost recovery of :d education and low; while the next lancial problems and
in these Social SerLr explains how preicy contributed to in the social sector napter takes up ine
istribution of subsi
or these inequalities. apters from chapter says and impact of in pricing policy; ining policy for effisocial services and o these services; and
the implications of changing policies in education and health. The last chapter assesses the feasibility of policy
change. In the first appendix alternative pricing policies are reviewed,
assuming that prices elsewhere in the economy are given; and are based on partial equilibrium analysis. In the second appendix pricing policies under budgetary restraints are analysed, both these being presented in a strongly mathematical form. The third appendix presents the algebra of user fees using mathematical models; while the last appendix provides five tables with very informative supporting data on the subject under discussion.
The logic of the author's higher prices argument is that the extra resources generated through increased prices could be devoted to activities with the higher social returns. For instance, in education extra resources collected from the increase in price of higher education could be used to expand primary education, in countries where primary school enrolment is far below the universal level. This could be a useful idea. His concern that those who drop out at the middle levels of education are mainly from the low income groups and that there should be equal access for all is contained in the proposal for selective subsidies and eventually educational credit. Similary in health there appears to be excess demand for curative health services.He suggests that if there was a ten percent increase in charges for curative services, and if this extra revenue were used to finance service expansion it would increase levels of health by about one percent. But tied up with the pacakage is a scheme of medical insurance which may be beyond the capacity of the low income groups, as referred to earlier. A price increase in the health sector can therefore lead to a situation where the user's of this service from the low 'income groups might drop, although evidence shows that the lowest
income groups use the subsidised pub
lic services more frequently than any other. There is a passing reference to political acceptability and administrative feasibility of such policy changes. But these factors, together with the deeper social impact of charging for
public services, have not been treated
sufficiently. H.L. Hemachandra

Page 36
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