You are on page 1of 12

Some useful insights from visiting Japanese economists

March 31, 2012, 5:42 pm by R.M.B Senanayake

Last week two eminent Japanese economists, Prof. Hirohisa Kohama and Prof Shinji Asanuma, held a public seminar to mark the 60th Anniversary of Japan- Sri Lanka diplomatic relations. They made very thought provoking comments based on the fundamentals of development economics. Such fundamentals do not receive adequate attention among our own economists and policy makers.

Prof. Kohama spoke on Japan’s Development Experience and its Lessons for Sri Lanka. He pointed out that 60 years ago Japan was comparatively poor. She was not blessed with natural resources. But the Japanese people built up the economy to rank as the second largest in the world in this short period. How they did that should provide lessons for us.

Natural resources are more a curse than a blessing and he illustrated the contrasting developments of countries world with and without natural resources comparing Nigeria with its oil and Botswana without any resources. Nigeria’s per capita oil revenues increased from US$ 33 in 1965 to US$ 325 in 2000 but per capita income in PPP terms has stagnated at US$ 1,100 and is among the poorest 15 countries in the world. But Botswana which was one of the poorest countries at Independence is today an upper middle income country comparable to Chile or Argentina. So it is the capacity and productivity of the people and the right policies for development that matter most in economic development.

He referred to the Kuznets hypothesis that as a country develops, there is a natural cycle of economic inequality driven by market forces which at first increases inequality, and then decreases it after a certain average income is attained. An example of why this happens is that early in development investment opportunities for those who have money multiply while wages are held down by an influx of cheap rural labor to the cities. At a later stage of economic development, the increase in prosperity spreads to lower income groups. So economists say there is a tradeoff between growth and equity in the early stage of development.

Prof Koyoma stressed that economic development must come through the efforts of the private sector and that the government has primarily a supporting role.1 million in the public sector which is very high for a small country of 20 million. If those employed in the public sector and the armed forces can be released to the private sector there will be an increase in productivity which means a higher GDP and also higher living standards. Of course there must be employment opportunities in the private sector to absorb them and those released from the public sector or the armed forces must have the required knowledge. . The USA copied the technologies from Europe as did Japan and later South Korea and now China. There are over 1. France and Germany copied from UK. Economic development needs social stability and this youth unemployment is a de-stabilizing factor for development. less than 5% over-all. He pointed out that economic development refers to the improvement of living standards of ordinary people and not of only a section or group of people.Kohama pointed out that the Japanese Government was always committed to growth with equity. The productivity of these workers is very low as most people who visit a government office or work site will see this. the first in the Industrial Revolution. Professor Kohoma stressed the need for a developing economy to utilize technology to promote development. Our labor force is not expanding and there is now a constant complaint of lack of labor by businessmen in the private sector. Further a large part of our labor force is employed in the public sector and the armed forces. He pointed out that the institutional setting must be provided to reap the benefit of the late-comers advantage. If we compare our own situation we find low unemployment today. capacities and skills to fit them to these employment opportunities. This wouldn’t matter if like the Chinese army we had high productivity and efficiency. Late-comers can benefit from the latest technology which is superior and more productive. So what is necessary is the re-training of these persons in the required knowledge and skills. but high unemployment among the youth including educated youth. Every country adopted the technology of the previous pioneer in development. But equity was not to be achieved through the introduction of subsidies as we have done through the last 60 years. But we know that they don’t have such skills and capacities. Despite the end of the war the armed forces still carry the large number recruited during the war. Instead the government gave preference to employment creation in its development programs. He pointed out what is called the late-comers advantage. Increase in employment is the key to achieve equity with growth. Japan emphasized employment generation as its way to promote equity with growth. But it is doubtful there is such productivity and efficiency since there is no incentive to control cost.

Wrong policies which departed from the use of market prices. engineers. The over-protective labor laws also act as a disincentive to the employment of workers by the private sector. The attempt to maintain an over-valued exchange rate without depreciation did not provide the right environment for the import of new machinery and the latest technology. . Incentives matter and the failure to maintain market determined prices for key factors and resources undermined the policy of import substitution which worked in South Korea in its early development strategy. Even the Railway and the Government Factory employed apprentices those days. architects and accountants. This he said did not refer to formal education but included the legal and social set-up.I remember the import substitution policy adopted by the SLFP government in the early 1960s. It was the over-valued exchange rate that provided the incentive for such practice. electricians and artisans. fitters. This task is entrusted to the government but like most activities of the government they are a failure." Prof Kohoma drew attention also to the need for social capability. Our structure of differential wages provides the wrong incentives. But the private businessmen who set up such industries imported second-hand machinery and obsolete technology at over-valued prices to benefit from the foreign exchange rate in the black market. mechanics. The government gave tax benefits and duty concessions for the import of machinery to set up local industries which could produce import substitutes. They protest vociferously when the supply of doctors is to be increased by setting up private medical schools. They also oppose the liberalization of Services through CEPA. There must be a market economy where prices are determined by supply and demand. The entire system of market prices was distorted and instead of promoting long term investments such policies promoted short term capital gains and speculative ventures. The government should increase facilities for trade schools and vocational schools by providing incentives to the private sector to enter this field. I remember whilst in school how some boys left school after the 5th Standard and joined as apprentices in firms. There are inadequate facilities to train such skilled workers and middle level technicians. The professionals are able to earn high because they do not face sufficient competition. A host of brokers were bred by the system who earned economic rents which in common parlance are "commission kakkas. particularly doctors. We need to have an apprenticeship system as in Germany but our laws prohibit the employment of persons who are below 18 years of age. At this stage of our economic development (there are stages of development as first identified by Walt Rostow) we need more engineers. the adoption of artificial exchange rate and interest rate policies and allowing money supply to grow excessively created relatively high inflation and gave wrong incentives to the private sector. Brain workers and professionals earnings are too high relative to skilled workers who work with their hands.

.another stimulating and thought provoking lecture. they will see how progress is being made to achieve such targets. Industrial policy has several elements such as government subsidies. But Prof Kohoma pointed out that it was the result of willing co-operation between the government and business due to constant communication between the bureaucrats at every level with their counterparts in the private sector. The government should win the confidence and support of the people for its development policies and targets. But he pointed out that this did not pre-empt competition. Next week I will deal with the lecture given by Professor Shinji Asanuma on "Asia’s Growth experiences and their implications for Sri Lanka’’ . favorable tax treatment. On such occasions economic growth has to be sacrificed to tide over balance of payments problems. The government should present realistic targets not aspirations. directed credit and protection. One of the problems that arise when there is economic growth is the inability to avoid balance of payments crises.Importance of getting people’s confidence. Japan is often cited as practicing an ‘industrial policy". Professor Kohoma said that when the government solves critical issues it gives confidence to the people. Despite the protected and oligopolistic market structure in Japan’s business sector there still was incentives to compete and this aspect is often ignored by critics. When realistic targets based on sound economics are presented to the people.

The World Bank analyzed the growth experience of the East Asian NICs in "The East Asian Miracle in 1993.B Senanayake Professor Shinji Asasuma of Hitotsubashi University recently spoke about Asia’s growth experiences and its lessons for Sri Lanka. Malaysia too became a success story among 13 success stories. a method that enables considerable illumination of economic processes. Both countries are multi-ethnic and have gone through ethnic conflicts. Asasuma referred to the method of analysis through paired comparisons.M. 4:23 pm by R. In 1960 our per capita income was US$961 (in IPC/Kravis dollars) and Malaysia’s was US$ 888. Both countries are engaged in the production of primary commodities and mineral resources. . He paired Sri Lanka with Malaysia The two countries have many similarities. but not Sri Lanka. The bank also published the Growth Commission Report of 2008. Both countries also have undergone a colonial experience and built up some democratic traditions after Independence. Prof Deepak Lal has compared such pairing exercises to the psychologists comparing the medical histories of twins. Both countries were largely agricultural and rice cultivation was an important economic activity.Asia’s growth experience and its lessons for Sri Lanka April 7. Some sort of comparative analysis is indispensable for a greater understanding of economic development. 2012.

Economists have been referring to the long term decline in the terms of trade between primary producer countries and industrialized countries. there was a spillover effect to Korea. But identity politics and ideological struggles re-emerged in the 1980s. In Korea it was the coming into power of the Park Chong Hee government. The present regime believes in public sector investment and state driven rather than private sector driven development. There are defining moments in every country where there has been a shift to economic development strategies from identity politics or ideological politics. In China it was Deng Chiao Ping’s Reforms to allow market prices and market forces to operate. But the development we have seen so far in all these countries including China is private sector driven development.rubber and oil palms. But . When Japan became protectionist and its costs rose. Only Rohana Wijeweera even bothered to raise the issue here. The present regime believes in state driven rather than private sector driven development although of late it has tended to shift gear. The defining moment for Malaysia was the launching of the First Malaysia Plan 1970. They were more committed to State power. What are the reasons for the differences? Are they due to the civil conflict? The professor though that is not the full explanation. He also thought it was due to different economic strategies followed in Malaysia and Sri Lanka. He referred to the spillover effect in Korea from Japan’s growth. In Vietnam it was the launching of the "Doi Moi" Policy and in India it was the liberal reforms by Dr Manmohan Singh after the balance of payments crisis of the early 1990s.R Jayewardene’s open economy of 1977.But consider the following development indicators over time in the table. Malaysia also gave up identity politics and ideological struggles while Sri Lanka continued to debate about Socialism and went for State Capitalism rather than free market driven capitalism. Malaysia considered the issue of what to do with its plantations . Sri Lanka produced President J. In Indonesia it was the New Regime of 1970 under President Suharto and his development cabinet. The full explanation for the differences in indicators arises not only from the conflict but also from wrong economic policies and bad economic management in the case of Sri Lanka. She built up a first class research institute to study ways and means of raising productivity. But Malaysia continued with its rubber plantations and sought to improve their productivity. The momentum petered out and the reforms to expand the market economy and de-regulate lost momentum during the regimes of his successors.

The company has shareholders and other stakeholders like the employees and the suppliers. The Government has however not pre-empted resources available to the private sector and instead is resorting to foreign borrowing for its investment programs. But this doesn’t mean that the shareholders should be the mangers or even select the managers.even then it is to a form of crony capitalism where businessmen who have the favor and support of the rulers alone are favored. The State driven development has not generated the stimulus for the private sector. The economic opportunities arising from the infrastructure investment has not flowed to the private sector. . But unpalatable changes and reforms have to be carried through if there is to be faster growth. The professor also referred to the need for technocrats and professional managers in government. In the process they water down the reforms or counteract it and the anticipated advantages do not take place. But they don’t realize that there are trade-offs which are indeed painful. But this has exposed the economy to the pressures arising from the world financial and capital movements. He compared the governance of a country to the management of a business by a company. Whenever they introduce reforms they want to protect the losers and this has a cost financially. Our political leaders are not willing to go through with the trade-off. Imagine what would happen if the managers are appointed by popular vote of the shareholders. The losers will complain and even protest on the streets. Crony capitalism is unlikely to produce development. They benefit if the company is managed well. The liberalization of trade by the reduction of tariffs and other bureaucratic controls in an environment where there is excess money supply and continuous budget deficit has brought what looks like a balance of payments crisis. All political leaders pay lip service to economic growth and they all want it. Our leaders are inclined to follow short term populist strategies rather than long term reforms. Strategies for growth There has not been a serious debate on the sort of growth strategies suitable for the country. A modern state cannot be managed except by technocrats and a system of governance where the politicians decide is a recipe for a failed state. There are always winners and losers in the process of growth. Chinese contractors do not subcontract and they use largely Chinese labor.

electrical and electronic industries where there are limits to expansion in the world markets? Should we move up the value chain and if so what sort of knowledge and skills do we have to promote? What about creating a suitable environment for domestic investors? What about the overly protective Labor Regulations? Can we continue with them if we want business to develop? . There must be a commitment to the strategy and given the scarcity of resources it is foolish to attempt to do too much even of a good thing. The professor next dealt with the implications of his analysis for Sri Lanka by raising the questions but leaving the answers to the audience. unless it is based on a strategy where there is a direct relationship between the target and the strategy. Do we have a long term economic strategy? Have we studied the natural resource availability in the country? What about the productivity of our agriculture? Should we go for expanding the tea or rubber plantations? Have we completed the applications of the Green Revolution? Have we fully utilized the high yielding seeds? How efficient and productive are our irrigation systems? Should we not economize on the use of water and if so how do we do it and what legal measures have to be taken to penalize those who use too much water? What about our agricultural extension service? Do they provide an efficient service? Should we expand our paddy cultivation when we know that we can’t export our rice? Should we produce rice for export and if so what investments will be necessary to make our rice conform to international standards? Industrialization What type of industrialization should we promote? Should it be export driven or intended for import substitution? If we opt for export driven industrialization should we set up special export processing zones? Do our present export promotion zones meet the requirements of the investors already located in these EPZs? Should we promote labor intensive industries such as textiles. Doubling per capita incomes by 2015 is an aspiration not a realistic target.The professor also stressed the need for realistic targets rather than aspirations. Do our political leaders have a commitment to economic growth or are they still concerned more with identity politics and ideological stances of socialism versus capitalism? Are they for short term populist measures to become popular? .

. They also have entrepreneurial ability and run successful businesses abroad. Since there are many Tamil expatriates who can invest in the country. Regional (SAARC) Agreements? These are all questions that should be debated and discussed both within the government circles as well as in business.What about the diaspora? Should we not create a conducive climate for them to come back or at least invest locally? The Diaspora has capital. have we created the right climate for them? Are we leveraging India’s growth and what use are we making of the Bilateral. skilled professional knowledge and skill.

policy not subject to political changes key ingredient for growth Malaysia a success story: Sri Lanka not one of them March 24. 6:07 pm By Steve A. professionals. East Asian Miracle report of 1993. and the Growth Commission report of 2008 He was speaking at a seminar at the Center For Banking Studies. Asanuma and Prof. addressed an audience of academics. last week. School of International and Public Policy. 2012. Subjects that gained exposure were ‘Asia’s Growth Experiences and their Implications for Sri Lanka’. Morrell Malaysia is one of 13 success stories in high growth countries of Asia and the world. quoting the World Bank. . said Professor Shinji Asanuma. University of Zhizuoka. Faculty of International Relations. and university undergraduates from seats of learning in Colombo. Prof. and ‘Japan’s Economic Development and its Lessons for Sri Lanka’.Consistent govt. Hitotsubashi University. Hirohisa Kohama. but Sri Lanka was not one of them. Central Bank of Sri Lanka.

Hirohisa Kohama. Japan was a poor country after the WW II and its economy was not fully developed in the 1950s However. was now appropriate for further assistance from the Japanese Government . D. and development hinged on industriousness and vision for sustained development. He outlined substantial areas for assistance that included hydro power. University of Colombo was introduced by Ambassador Hobo. growth policy did not change. There was already the document called ‘The Mahinda Chinthana’ targeting sustained medium – term growth of 8 % per year. The main ingredient for on-going commercial stability was consistent government policy. consequential to the policy philosophy of 1954. said Japan’s status for industrial growth in its contemporary context stems from its devastation during World War II. the first speaker to be introduced. and positive private sector involvement in development plans. But. Although. H. who introduced both speakers. Asia & Sri Lanka’. said it was now 60 years since Japan and Sri Lanka opened diplomatic relations and a public seminar on ’60 Years and Beyond: Japan’s Development Experience. Sri Lanka too could accelerate growth through increased investment in infrastructure. The moderator for this seminar. He reiterated importance of the private sector and its contribution to realize economic goals. Dean. Similarly. Karunaratne. ‘growth and equity’ Employment was key to equity. It was now time that Sri Lanka too picks up after its long 30 year war. Faculty of Management and Finance. thereby doubling per capita growth by 2016. He also said Japan would look forward to further cement and stabilize business ties through collaborative partnerships with Sri Lankan businesses. . he said the main ingredient for growth was consistent government policy not subject to political changes. Prof. Prof. Japan had frequent changes in government. the turning point was around 1960. This would create job opportunities and other spin off plusses that would benefit Sri Lanka in its sustained development plans. Nobuhito Hobo. wind power and other major areas for assistance.Initiatives of the Ambassador for Japan in Sri Lanka.

China too was a clear example of such economic policy. Results of a pairing exercise was that in 1960. Malaysia too had domestic conflicts in 1948 and 1969. Asanuma said. and 2009. Both countries had common colonial experiences. Sri Lanka’s per capita income was $ 961. Sri Lanka was not one that was included in this list. Indonesia and including Vietnam shed their restrictive socialist policies to one of market economy resulting in growth. Questioned by the media on the downward spiral of the Japanese economy placing it at fourth position in world economies. He also conceded that China and India were ahead. that their East Asian Miracle report of 1993 and the Growth Commission report of 2008 that Malaysia was one of 13 success stories in the region. He did not attribute excuses of this or that. Similarly Korea.Prof. conflicts were recorded in 1971. In Sri Lanka. but acknowledged such to be fact. Sri Lanka’s performance is just over $ 2000. ’83. Japan would again be an economic power. Kohama said it was correct that Japan was in that position. The over boding differences were that ideological struggles did not deter growth politics. Malaysia in that year was $ 888. Since then GDP performance in Malaysia at its current performance levels was approximately $ 8000. quoting the World Bank. . ’79.