“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” – Henry Hazlitt
It is not hard to see that Sri Lanka is where it is today as a result of all the short sighted decisions we have made and policies we have implemented focusing only about the benefits of one group or even an individual throughout the history.
The identity of such individuals or groups who benefitted at different times may have looked different on the physical plane while being the same on the conceptual plane. Even a beggar on the streets knows that the life would be easier if he didn’t spend more than he earns. Therefore, one can safely assume that lack of knowledge is not a reason for our problems.
Well, to be specific, lack of knowledge about income and expenditure is not a reason for the problems. Lack of knowledge about the people who were entrusted to make such decisions by a majority of the voters at different times certainly cannot be ruled out as a reason for the problems we are facing today.
International creditors
We are at the mercy of the international creditors since we do not see how we can improve our income, especially improving our foreign currency reserves, since our agriculture sector was also destroyed by the ignorance of the decision makers. It is extremely important to understand the mistakes we have been making along the way so that we will not repeat the same, at least, from now on.
Anyone who has been involved in any type of lending or borrowing would know that a clear understanding of each other’s strengths, weaknesses, intentions and expectations and their histories as lenders and borrowers are important factors to consider before the two parties come to an agreement on the transaction.
The West immediately started playing their ’Chinese debt-trap’ drums and painted a picture implying that China is the main cause for Sri Lanka’s problems. Only 10 percent of Sri Lanka’s foreign borrowing is from China while about 47 percent is from Western countries.
Sri Lanka was essentially left with two options, whether to borrow from the West (IMF), or from the East (China). The fear was created, justifiably so perhaps, about ‘Chinese debt-trap’ especially highlighting the Port City project, Hambantota Port and other white elephants previous Governments have created with some of that Chinese money.
Sri Lanka and the IMF have done this type of economic revivals sixteen times in the past and are in the process of negotiating currently for the seventeenth time and we have to get ready to dance to the IMF tune again.
This may be a good time to find a bit more about these two economic giants, the Unites States and China. The United States (US), because the IMF essentially is following the mandates given by the US since it is the topmost contributor to the IMF. Though they seem to be enemies, or at least economic rivalries, they cannot survive as the number one and two economies in the world without the support of each other.
Ratio
The United States has the second largest national debt (second only to Japan) of US$ 27 trillion with a Debt/GDP ratio of about 107 percent while that ratio for China is only a 50 percent. Simply put, the US national debt is more than its GDP while that of China is just a half of its GDP.
Forty years ago, Deng Xiaoping initiated the economic reform in China by opening it up to the global trade. He said, “Emancipate the mind, seek truth from fact, and unite as one to face the future”. China sustained an average annual growth rate of almost 10 percent for over 3 decades from 1979. Per capita income rose from US$ 220 to US$ 16,000 and became the world’s second largest economy after the US. If looked at on a purchasing power parity basis, then China is the largest economy in the world.
Both countries depend heavily on each other for trading their goods and of course US companies do so by manufacturing in China taking advantage of cheap labour and relaxed environmental restrictions in that country too.
Neither would do anything to topple the cart, though they take a shot at each other time to time just to remind the importance of one to the other so that neither can dominate the next negotiation.
The World Bank (WB) described the growth of the Chinese economy as “the fastest sustained expansion by a major economy in the history of the world”. The GDP doubled every eight-year period and the growth helped raise an 800 million out of poverty.
This is called “the miracle of China’s poverty alleviation.”China’s development miracle was not achieved under the existing theories of development economics, which cannot explain unique aspects of the relationship between the Chinese Government and the market industrial policies, which is described by some as a “socialist market economy”.
Therefore, not only the Chinese but also the world economic community’s major missions are to study the factors influencing such a growth and finding out ways to introduce similar models to other countries.
Real GDP growth of China has slowed down significantly from 14.2 percent in 2007 to 6.6 percent in 2018. IMF predicts that Chinese growth rate will fall further down to about 5.5 percent by 2024.
Crossroad
This puts China at a crossroad where declining returns to public investment, a rapidly aging population, and a less favorable international environment urging the country to find new drivers of economic development. China’s Ministry of Finance (MOF), Development Research Centre (DRC) and the World Bank Group (WBG) initiated a joint research program and analysed all the factors involved in such a transition for over a period of two years.
Joint teams were established to analyse economic growth and productivity, technology and innovation, human capital development and the labour market, entrepreneurship and competition, and governance and institutions. They were looking for ways to develop a policy framework that could be implemented within China’s specific institutional context.
China is among the global leaders in technologies such as e-commerce, artificial intelligence, high-speed trains, renewable energy, and electric cars. China’s growing human capital is supporting such innovation capabilities. Having one of the largest education systems in the world, China graduates more than 7 million students from its universities annually.
More than 40 percent of those graduates are in science, technology, engineering, and mathematics. China’s labour force is expected to decline in the coming years and also to age considerably. Therefore, innovation and productivity were recognised as important sources of growth at the 20th National Congress of the Chinese Communist Party held in October of this year.
They agreed that the markets should play a decisive role in allocating resources and that the Government’s role should be to support the markets.
China will place a high priority on strengthening domestic capacity for innovation, science and technology, and R&D, and on promoting the transformation and upgrading of its manufacturing industry particularly by improving the application of internet-related technologies and developing smart manufacturing.
China is the largest foreign holder of the US Treasury securities. To be specific, China topped the list of foreign creditors holding over US$ 1trillion worth of US treasury securities until the beginning of this year when Japan took over the top position making China the second highest foreign creditor to the US.
Interestingly enough, it was at the 7th National Congress of the Chinese Communist Party, which was held in April of 1945, Mao Tse-tung said “We need to unite all political parties and establish a provisional democratic coalition Government for the purpose of instituting democratic reforms unifying all the anti-Japanese aggressors. We must take the line of unity and democracy, defeat the aggressors, and build a new China.”
The writer has served in the higher education sector as an academic for over twenty years in the USA and fifteen years in Sri Lanka and he can be contacted at [email protected])