ESCAP Survey of 2011: A road map for the region

The United Nation’s Economic and Social Commission for Asia and the Pacific, popularly known as ESCAP, released its Survey on the ESCAP Region for 2011 on last Thursday in Colombo. According to ESCAP sources, this is the 61st of such surveys issued by this UN Agency highlighting the challenges faced by the region and the remedial measures to be taken.

Six decades ago when ESCAP released its maiden survey, Australia and New Zealand were the only two countries from the region that had made their mark on the league of the developed world and Japan had just been struggling to make a comeback after the massive destruction it had suffered during World War II.

Over the last 60 year period, in addition to Japan, only four countries known as the original tigers of Asia, namely, Singapore, Hong Kong, Taiwan and South Korea, have managed to join the league. The rest of the countries in the region numbering 46 are in various stages of development ranging from the least developed at the lowest level to higher middle income at the highest level.

In the next decade, another three or four countries are poised to become developed nations if they continue with correct type of economic policies. Compared to Europe and North America, where all nations have moved upward together, demonstrating an ‘inclusive development’ among nations, Asia and the Pacific or AP region is yet to make a name as an economically and socially important group in the world.

Of course, ESCAP is not responsible for this sad state of affairs. It has, as it had always done, brought the main issues of economic and social development relating to the countries in the region to limelight and made prescriptive recommendations.

It would have been the responsibility of the countries in the region to take these recommendations seriously and push their nations forward. It just appears that the countries concerned have treated ESCAP Surveys as yet another UN publication and not paid the attention they deserve as good policy guidance documents.

The ESCAP Survey for 2011, being a wonderful compilation of all the issues and the remedies needed from a point of emerging global developments, should not be condemned to a similar fate. It is specifically important for Sri Lanka because it is an objective analysis done by outside experts who are free from biases or prejudices relating to the current stage or the policy package relating to its economic development.

Such impassioned views on economic issues merit serious attention of the country’s policymakers. Further, it would also help Sri Lankans to see beyond their coastal borders and look at the country’s position from a regional point of view.

The theme: Sustaining dynamism and inclusive development

The current survey has noted that the AP region has shown a remarkable capability in maintaining its dynamism in the midst of a prolonged global economic gloom, destabilising financial crises and devastating natural disasters. When the rest of the world has grown by less than three per cent over the last few years, most of the countries in the AP region have managed to record growth rates of over five per cent.

However, in my view, as laws of nature would tell us, dynamism is not something that will continue to prevail unabated over a long period and sooner or later, it would naturally fizzle out requiring greater and greater efforts at each subsequent stage to maintain its original momentum.

Except the four original tigers in the 1980s and China and India recently, no country in the AP region has been successful in maintaining its dynamism of development over a sufficiently long period.

Sri Lanka had a growth rate of over eight per cent in 1978, but it fizzled out soon. Similarly, the moderately high growth rates achieved by the country in 1993 (6.9 per cent), 2000 (6.0 per cent) and 2006 (7.7 per cent) had suffered from the same fate. These singular attempts at breaking away from economic stagnation by Sri Lanka are shown as disappointing spikes on a graph recording its growth rates over the last 33 year period.

Hence, the first theme of ESCAP Survey 2011 drawing attention to the need for sustaining dynamism by all AP region countries is an apt proposition.

The second theme is, in my view, more important than the first one. Economic development in the whole AP region over the last six decades has shown a high degree of exclusiveness. Only four countries out of 53 (including Taiwan) have become developed nations.

Within countries, there are vast regional differences in economic development. With regard to equity in economic development, there have been growing income gaps between the rich and the poor. Such differences have led to inter-nation conflicts and within nations inter-regional and inter-community conflicts, causing a baneful effect on the region’s continued economic prosperity.

In contrast, Europe and North America were able to prosper for more than six decades without being hit by major conflicts since World War II. As economic journalist Dan Gardener has implied in his latest book, ‘Future Babble,’ published in 2010, the simultaneous prosperity gained by countries in that part of the world contributed to this relative peace in Europe and North America, which in turn contributed to continuous prosperity in that region. So, prosperity together and peace go hand in hand, reinforcing each other.

Hence, as ESCAP Survey of 2011 has proposed, the countries in the AP region should incorporate these two thematic aspects in their future development strategies.

The policy agenda: Follow a holistic path

The ESCAP Survey of 2011 has highlighted the need for undertaking a complementary policy package to address the above two challenges. According to the survey, given the current challenges faced by the region, the policy objectives of the nations involved should target the following:

nProtect macroeconomic fundamentals (that is, inflation, balance of payments, exchange rate and levels of output, employment and income) from global instability;

nCreate new sources of internal and regional growth in the medium term (since the region cannot depend on the developed West for continuous prosperity in the short to medium run because the latter has been hit by a sluggish economic performance for a prolonged period);

nImprove the quality of growth to ensure the high economic growth attained is translated into improving the livelihood of the poor and the vulnerable groups, while maintaining environmental sustainability (so that development becomes inclusive benefiting all rather than some exclusive segments).

These are three separate objectives and, therefore, when one is achieved, it could lead to the frustration of another. Thus, the ESCAP Survey of 2011 has emphasised the need for achieving these objectives in a holistic manner so that the countries could avoid one policy objective from damaging another and make them supportive of each other.

In my view, this is wise counsel. A common mistake made by many nations in following growth objectives is that one policy objective adopted by them may completely ignore the impact it would make on the other policy objectives and, as a result, at the end, it would create a serious imbalance in the whole system.

China in the last two decades has followed a vigorous high growth objective without regard for the damage done to the quality of life or the environment or the macroeconomic stability. Today, it has gained an enviable prominence as a fast grower in the world. But, the quality of life of its people is at present seriously at stake.

As revealed by its population authorities recently, in every half a minute, out of eight children born, one child is born defective. This is an unbelievably high rate of 12.5 per cent of the total live births. And today, China has to use more resources to reverse this trend.

The relocation of industries in less populous regions, imposing high environmental and pollution standards on all industries, moving into so-called ‘green energy sources’ and making the whole country aware of the environmental concerns have been some of the measures taken.

The holistic path, therefore, helps a country to minimise damages right from the beginning, thereby avoiding having to go for a damage control measures at the end.

The holistic approach: How to implement it?

Since economies are diverse and spread over a wide landscape, implementing a holistic approach may be more challenging than pursuing simple growth objectives by a nation. In the absence of a ‘multi-eyed spectator’ who could see cases of violating the principles of holistic approach and alert authorities to intervene in time, this becomes just another prescription on paper without value in the ground.

Even a small country like Sri Lanka will find it difficult to follow it without placing unnecessary fetters in its endeavours to attain a rapid economic growth. The more numerous are the requirements of the holistic approach, the greater the difficulties which a nation would face in implementing them.

Given these difficulties, it becomes necessary for a country to decide on a simple set of holistic principles for ensuring that all policy objectives are supportive of each other and do not cause a general imbalance in the system at the end.

In my view the following approach may be useful:

nPrepare a checklist of principles that have to be observed when adopting a policy strategy at the national level. It is necessary to keep this checklist to a minimum.

nAll national level policy making authorities should be advised to look into the checklist when they consider any new policy strategy for adoption.

nThe checklist should be in public domain thereby giving an opportunity to concerned public to raise issues or make comments on the same. This is the job to be performed in a participatory democracy by think-tanks and groups of concerned citizens. It promotes good governance at the national level.

nThe periodical review of the compliance with the principles should be made by the authorities concerned so as to ascertain that no violation has been made in implementing new strategies.

nThe policy making authorities should be prepared to self-review their own performance and listen to the concerned public on these matters, however critical such views are. The reversal of a policy strategy when it is later found to be causing damage to the other policy objectives should not be viewed as a loss of dignity or honour.

A typical case would be a decision to make foreign commercial borrowings for undertaking needed investment projects. There is nothing wrong in going for foreign commercial borrowings by a country when the domestic resources are found to be inadequate to meet the investment requirements. In fact, this was the strategy adopted by Singapore when it planned its development strategies in the initial phase of its development.

However, foreign commercial borrowings are costly, have low maturity and need in many cases to be repaid in a single shot known as a bullet repayment. Hence, foreign commercial borrowings would impose a serious risk to a country’s macroeconomic stability and its future growth prospects.

A checklist to ensure holistic approach

Accordingly, a typical checklist on a proposed foreign commercial borrowing may include the following:

How the foreign borrowing would affect the country’s money supply and inflationary pressures and how such inflationary pressures are minimised by authorities? This is important because inflation affects everyone adversely: ordinary public will experience a reduction in their real living, entrepreneurs will have to face an increase in the cost of their inputs, exporters will lose competitiveness and exchange rates will come under pressure for depreciation.

Whether the investments made out of foreign borrowings would generate sufficient revenue to pay interest and repay the loan? If this does not happen, the foreign commercial borrowing under question has to be paid by general tax payers who will have to sacrifice some other benefit they are currently enjoying.

How would the foreign borrowing affect the country’s overall foreign indebtedness and how could the country minimise or avoid adverse repercussions? Many countries have fallen into debt traps by going for uncontrolled foreign commercial borrowings because moneys were available in plenty in international markets due to excess liquidity.

A good example is Mexico which had to default its foreign debt in 1980 because the investments it made in building ports in 1970s out of foreign commercial loans did not yield sufficient foreign exchange earnings to repay such loans.

How would the proposed investment affect environment? This is also important because many such investments are later found to be causing irreversible damage to environment reducing their real usefulness to the nation.

How would the proposed investments improve the living conditions and the quality of life of people? Since the ultimate yardstick of any economic activity is to ameliorate the quality of life and wellbeing of people, a close look at this aspect is important.

It is necessary that this checklist is made available to the concerned public. This is because, in their haste to implement the proposed investments, the authorities who are responsible for ensuring the compliance of the checklist may miss some points or make wrongful evaluations. A simultaneous public review will eliminate the possibility of this pitfall.

This type of strict review for foreign commercial borrowings is not a new phenomenon at all. As revealed by Indrani Munasinghe, the Colombo University History Don, in her ‘The Colonial Economy on Track,’ the Secretary of State in the colonial government did not approve of raising one million Sterling Pounds in early 1860s by issuing debentures at six per cent interest in the London capital market until he was satisfied that the proposed Colombo-Kandy Railway Line had the capacity to earn enough to repay the loan in full within the stipulated period. This review delayed the construction of the railway line, but it did not drive the country to default the loan or pass it on to the tax payers in general.

In the next My View, I will look at the other aspects of the recommendations of the ESCAP Survey of 2011.

(W.A. Wijewardena can be reached on [email protected])