AN AMF TO DRIVE OUT IMF FROM ASIA? LIKELY A GOAL TOO FAR

The idea of establishing an Asian Monetary Fund or AMF as an alternative to the International Monetary Fund or IMF was first mooted by Japan in 1997 at the height of the Asian Financial Crisis of 1997-98. But, the proposal got killed at its birth even before it could get a chance of being seriously studied by the concerned parties due to the obvious opposition by the US and the IMF itself. According to the Stanford University academic, Phillip Lipscy, who published an article titled ‘Japan’s Asian Monetary Fund Proposal’ in Stanford Journal of East Asian Affairs in 2000, a fair amount of arm – twisting has been exercised by the US authorities on their Japanese counterparts to have the proposal shelved before it could have been taken up at a forum consisting of battered Asian leaders. However, a number of adverse developments in the global financial and economic landscape since then have prompted many outside the Washington circle, the symbol of global economic and political power, to pull out such proposals from their resting places and review their merit seriously. Accordingly, AMF is not alone today as a regional monetary fund challenging IMF. It has now been joined by at least two other regional monetary fund proposals: European Monetary Fund or EMF and Latin American Monetary Fund or LAMF.
Historical Setting
IMF, together with its sister organisation the World Bank, was created by the international community after the end of the World War II by an agreement signed in Bretton Woods in USA in 1944. The principal actors were the victors of the war, USA, the UK and France, while the Soviet Union kept itself away from this particular exercise. The original mandate of IMF was to provide member countries with financial assistance to overcome persistent balance of payments problems and take preventive measures on a continuous basis to avoid the onset of such problems. This role played by IMF was expected to create the ground conditions conducive for smooth exchange among nations and thereby help world nations to attain economic prosperity unabated and without disruption. To do its job properly, IMF was required to keep the exchange rates pertaining to currencies under continuous surveillance and ensure stability in the financial

systems by advising member countries whenever it felt that there were threats of instability to local as well as global financial systems.
Since USA played the key role in the formation of both IMF and the World Bank, stood to provide funding whenever they were faced with funding issues and undertook to function as the world’s central banker nation by agreeing to allow the free convertibility of the US Dollar to gold, the US Administration had a decisive voice in the management of both these institutions. Hence, the professional staff of IMF could not exercise an effective discipline on their benevolent master, though they were successful in doing so, to a great extent, in the case of other members. This facilitated the US Administration to make a free use of its newly acquired economic and financial power callously and irresponsibly leading to a breakdown of the international reserve currency system in early 1970s. I have discussed the details of this unfortunate episode in a previous article titled ‘The Gold Rush: are we seeing the end of paper money?’ in this series (available at: http://www.ft.lk/2011/04/25/the-gold-rush-are-we-seeing-the-end-of-paper-money/ ).
IMF is subject to attack by many
During its 67 year existence as a global watchdog and fund provider, IMF has been subject to attack by many on many counts.
One particular attack was levelled against it on the substantial powers wielded on its affairs by the world’s leading economies which were previously known as the Group of Seven or G-7. The countries that made up G-7 were USA, the UK, France, Germany, Japan, Canada and Italy. The governance structure in IMF (and also in the World Bank) was such that these countries had the first and the last say about IMF’s affairs. This was understandable because if IMF fell into trouble because of the profligacy or irresponsibility of other nations, it was this group of countries which had to come to its rescue and ensure a smooth exchange system in the global economy. Hence, they were the masters of the global economy and like in any good college, had powers to discipline the errant students. Though Japan was a member of G-7, its rising prominence in the world economy and especially in Asia was not matched by an equivalent ‘say’ in IMF’s governance structure. Hence, Japan was a dissatisfied sideliner waiting for an opportunity to fight back for its rights.
But, the criticism was that the masters themselves did not behave properly and became the source of many a financial crisis which the world has witnessed in the last six decades. But, financial crises, like forest fires, spread quickly from one country to another engulfing the whole world and leaving scarred skeletons behind.
Another criticism against IMF was on its knowledge base and its ability to predict impending crises and take appropriate curative measures. One scathing critic of IMF (and also of the World Bank) was the Nobel Laureate Joseph E Stiglitz who charged that both these institutions have been infested with economic fundamentalists who acted as if being oblivious to emerging ground realities. There is an element of truth in this charge because, IMF, being a conservative institution when it comes to choosing appropriate fiscal, monetary and exchange rate policies, has acted in the past upholding fervently ‘one size fits all’ type of a dogma.
The third criticism against IMF has been on its harsh conditionality imposed on borrowers, especially the borrowers from the developing world. This is an area which has been most misunderstood by its member countries. IMF is a lender and like any wise lender, it is interested in protecting itself from default by its borrowers. IMF assistance is

provided to its members to enable them to come out of chronic and persistent balance of payments crises. To do so, they are required to follow a coherent and holistic macroeconomic policy package. These policy packages are painful to borrowers because they require them to cut budget deficits through austerity programmes, undertake economic reforms, adjust exchange rates to reflect the country’s market conditions and desist from resorting to foreign commercial borrowings at high interest rates. These are good macroeconomic policy measures which a country should pursue voluntarily. Singapore which was not a member of IMF till late 1990s did so on its own. But the member countries which are fearful of violent backlashes by people think that IMF conditionality is an unwarranted interference in their internal matters.
The fourth criticism against IMF has been levelled on the ground that it is not flexible and cannot provide assistance to a member country swiftly and expeditiously. IMF is a bureaucratic organisation with its own systems, practices and procedures. They have been introduced in order to ensure free discussion of its financial plans, make informed decisions after perusing all the necessary information and adopt a consensual approach toward lending. They may be good in a peace time, but not in a crisis situation that threatens to spread across nations, like forest fires.
Alternative: establish regional monetary funds
The growing dissatisfaction about the performance of IMF has led member countries acting as regional groups to come up with proposals to establish their own regional monetary funds.
AMF has been one such instance. Phillip Lipscy has argued in his previously quoted article that the original AMF proposal was presented by Japan out of its dissatisfaction about how both US Administration and IMF approached the East Asian Financial Crisis of 1997-98. According to Lipscy, there were several points of contention that prompted Japan to be a rebel in the family.
First, Japan was closely linked to East Asia and preferred a quick resolution of the crisis by an adequate infusion of liquidity to the affected countries. But both IMF and US Administration preferred a small programme to ensure the long term sustainability of the remedy implemented. A quick liquidity infusion did not worry much about the underlying ‘moral hazard’ problem – a situation which does not encourage the affected countries to set up adequate mechanisms to avoid the recurrence of crises and get out of dependence on the liquidity support being afforded to them. But the support programme proposed by IMF and the US Administration tried to keep the moral hazard issue at the minimum level if it cannot be eliminated altogether.
Second, there was an ideological difference too, according to Lipscy. Both IMF and US Administration preferred free market economy liberalisation that required the countries receiving assistance to undertake long term economic reforms like making the central banks independent, trimming budgets of excess expenditures, reforming loss making public enterprises and liberalising exchange rates and balance of payments. They were integral parts of the proposed assistance programme. But, Japan preferred introducing greater regulatory measures such as controlling capital accounts and stricter oversight of the financial systems.
Third, Japan was unhappy about the US domination of the IMF. This did not matter much in 1944 when IMF was established because the US was the victor and Japan was a battered loser. But, Japan emerging as a powerful economic power by 1990s, did

wish to have its position recognised well in international forums. The remedy was the establishment of Asia’s own monetary fund of which Japan would be the uncontested leader.
Accordingly, Japan came up with a proposal for the establishment of an AMF which had to be aborted faster than it had been presented.
The Rebirth of AMF Proposal
Though arm – twisting and vehement on the spot opposition forced the shelving of the original AMF proposal, it could not be kept in suppressed form for long.
During the last four year period, the idea of establishing an AMF was taken up again by ASEAN + 3, that is, permanent ASEAN member countries plus China, Japan and South Korea.
Pradumna B Rana, an academic at Singapore’s Nanyang Technological University has argued in an article titled ‘Asian Monetary Fund: Getting Nearer – Analysis’ that two important steps taken recently have paved the way for the eventual establishment of an AMF for the ASEAN region (available at: http://www.eurasiareview.com/asian-monetary-fund-getting-nearer-analysis-18052011/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+eurasiareview%2FVsnE+%28Eurasia+Review%29 ).The first is the formation of the ASEAN Macroeconomic Reform Office or AMRO. The second is an initiative taken by ASEAN + 3 at a meeting at Chiang Mai in Thailand which is now known as Chiang Mai Initiative Multilateralisation or CMIM.
Obviously, AMRO being a research body belonging to ASEAN+3, could undertake the ground – breaking research on the formation of AMF and come up with a blueprint of its governance structure and procedures, including its market sustainability. CMIM, on the other hand, is a practical initiative and has elevated the previous bilateral foreign reserve support mechanism among ASEAN members to a multilateral one. In the previous one, members could approach each other individually for support in case of a grave need of foreign reserves and the success depended on the consent of the two parties. This was further upgraded in the new mechanism by establishing a crisis fund of substantial size so that the member countries could draw funds on a multilateral basis simultaneously in case of a shortage of foreign reserves.
ASEAN Crisis Fund
The crisis fund was set up in March 2010 with a total size of US $ 120 billion subscribed by ASEAN+3 members according to the size of their economies. So, Japan and China have contributed $ 38.4 billion each and South Korea, $ 19.2 billion. The rest of the ASEAN countries contributed the balance $ 24 billion with Singapore, Malaysia, Indonesia and Thailand contributing a bigger proportion of $ 4.77 billion each.
The beauty of the fund is its flexibility and swiftness of support. While the three large contributors could draw up to what they have contributed, the other ASEAN

members could draw two and a half times of their contribution in case of a shortage of foreign reserves for undertaking smooth foreign transactions. This would, while ensuring availability of reserves, avoid the necessity for undertaking costly economic reforms that are needed to bring about a long term sustainability of the respective economies. This is in fact, in my view, the worst feature of the new arrangement.
Short term expedience in place of long term soundness
The ASEAN crisis fund will help member countries to overcome short term shortages of foreign reserves without going for IMF type bail outs. Hence, the fund is like the availability of a temporary overdraft limit to a business to tide over a temporary gap in its cash flow. It will certainly help the business to carry the day without a major problem, but if its problems are chronic and structurally deep rooted, it will not help the business to sustain itself in the long run. This has been the experience with many countries like ones in the recent debt crises in Europe involving Greece, Portugal, Spain and Ireland. They had allowed the problems to compound without taking early preventive measures. The final outcome has been most painful, bitter and unpalatable. Knowing this indigestible reality, David Cameron’s minority government in the UK has taken a bold step of pruning its luxurious extravagance in the past which in my view is a choice of the reverse order, that is, ‘choosing long term soundness in place of short term political expedience’.
The countries in ASEAN cannot be expected to be as long sighted as the present UK government. Hence, the current move, despite its good intentions will corrupt the regional governments by permitting moral hazard issues to creep in. When situations go out of control and no quick solutions in sight, the adjustments needed may be massive requiring IMF type bail outs.
Hence, AMF, though it may bolster the rising Asian ego, is not an alternative to IMF. In my view, it is likely a goal too far in sight of ASEAN+3 nations.
(W.A. Wijewardena can be reached at waw1949@gmail.com )

ASIA’S RETURN TO WORLD LEADERSHIP: NOT A CAKE WALK AT ALL

Asian writers, thinkers and leaders have been jubilant over a single development that had taken the world by surprise in the recent few years. That single development has been the unprecedented high economic growth recorded by both China and India, when the developed world had gone into an equally unprecedented recession year after year.
The “Chindia Factor”
This “Chindia Factor”, if one borrows a term from the Indian politician Jairam Ramesh, it appears, has been responsible for re – igniting a nostalgic feeling about Asia’s return to world supremacy after a forced hibernation of about three centuries.
The most recent event that fuelled this expectation was China’s ascendancy to the number two position as the world’s largest economy, according to the 2010 second quarter GDP data, overtaking another Asian giant, Japan. Though China’s lead over Japan was just a few billion dollars, (China producing an output worth of US$ 1337 billion as against Japan’s US $ 1288 billion), it did not stop Asians outside China to rejoice themselves over the event. While Chinese leaders very quickly downplayed it, people in Japan were not particularly worried about the inevitable slipping of their country, by one notch, down the world’s economic giants’ list.
The Asians’ Jubilation over Chindia’s Success
Now, let us look at how the Asian writers, thinkers and leaders reacted to the news on Chindia’s faster economic growth.
Sri Lanka’s opposition leader, Ranil Wickremesinghe chose “The Return of the Asians” as the apt title for the lecture he delivered before the Rotary International South Asia Conference in Bangkok in November 2010. Before him, the Dean of Singapore’s Lee Kuan Yew School of Public Policy, Kishore Mahbubani, wrote triumphantly on the re-emergence of Asia in three successively published books, the latest being aptly titled “The New Asian Hemisphere”. Jairam Ramesh, IIT – Bombay and MIT – USA trained Indian politician, thought it appropriate to talk about, as far back as 2005, both China and India as a single economic and political power and coined the term “Chindia” to represent

this power in a book titled “Making Sense of Chindia: Reflections on China and India”. Two editors, Frank-Jürgen Richter and Pamela C M Mar of the World Economic Forum assembled a number of writers from all around the globe, but mostly from Asia, and published in 2002 a collection of contributions titled “Recreating Asia: Visions for New Century” with sponsorship from Malaysia’s Mahathir Mohamad and Singapore’s Lee Kuan Yew. As the title denoted, the contributors had written on the policies and strategies to be followed for recreating Asia, implying that Asia had already been created and lost earlier and now it need be recreated. Even the American investor Jim Rogers could not suppress his awe for Asia when he remarked that if one were smart, he moved to London in 1800, to New York in 1900 and to Asia in 2000.
So, the collective wish of everyone appears to be the return of Asia to world power, displacing the West which occupies that position today. Asia had in fact been the world power for more than three millennia and West’s ascendancy to that position had been only during the last three centuries.
Asia’s Glorious History
The list of Asia’s supremacy in history is too long. It was the seat of philosophy, science and technology and spiritual developments. It is noteworthy that all the major religions in the world today had originated in Asia. As the archaeological surveys have revealed, it had marvellous architectural designs, artefacts and man made lakes. Its ancient universities, like Taxila and Nalanda in India, were unparalleled seats of learning. Even Alexander, the Great, who invaded India in the fourth century BCE, was impressed by the intellectual supremacy of sages like Dandamis of Taxila, according to the historian Plutarch. For more than 2000 years, Europe was supplied with wine, grains, silk, porcelain and other fancy products by Asians through the overland Silk Road that connected China at the far East end and Rome at the far West end. A Silk Road on the sea connected China and the Middle East via Lanka making all nations along the route active and vibrant trading nations. According to estimates by the British economist Angus Maddison, even as recently as 1820, China was the world’s largest economy accounting for roughly a third of the world’s output. When India is also added, the output of Chindia amounted to nearly a half. In comparison, the West produced only a little more than a third of the output at that time.
Hence, there are enough reasons for Asians to be rejoiced about Asia’s regaining of its old glory.
Past Disappointments
However, Asians have been disappointed on this count thrice in the past. The first occasion was in 1960s when Japan became an economic powerhouse and a leading exporter nation. Asians expected Japan to overtake the West and become the world’s leader, but it did not happen. The second was in late 1970s when the four Asian tigers, South Korea, Hong Kong, Taiwan and Singapore, recorded high economic growth rates year after year and elevated themselves to the club of developed nations within the life time of a single generation. Many chose to categorise the future world as the world of “yellow people” as against a world of “white people”. The third was when the new tigers like Malaysia, Indonesia, Thailand and the Philippines too recorded faster economic growth rates and were on their march to become modern developed nations. This new Asian success attracted so much of attention from world nations that the World Bank issued a special volume in 1993 highlighting its success story under the title “The East

Asian Miracle”. But with the Asian Crisis of 1997, “the conventional view that the 21st century would be an Asian century” was “written off”, according to Lee Kuan Yew who wrote a preface to Recreating Asia: Visions for a New Century.
Now the rise of brown people in India and yellow people in China has ignited a new hope in Asians for the fourth time. Will they be able to realise their dream or will that be another disappointment for them?
China’s Rise will Beat USA Down
They would realise their dream, according to some analysts who have projected the future course of world development. For instance, as reported by Bloomberg News, Goldman Sach’s Chief Economist Jim O’Neill has predicted that China will overtake USA by 2027. An optimistic projection by PriceWaterhouseCoopers has advanced the time line to 2020. Many other conservative projections have put a time line of China’s overtaking USA between 2030 and 2040. Whatever the differences in timing, according to the popular version, China is set to overtake USA within the lifetime of another generation.
China’s favourable growth rate
All these projections are based on the vast difference in the growth rates which one finds between USA and China today. USA grows at around 2 to 3 percent per annum, while China grows at around 10 to 11 percent per annum. Mathematically, the compound growth will double China’s GDP in every seven year period raising its GDP to US$ 10 trillion by 2018 and further to US$ 20 trillion by 2025. In comparison, at the current average growth rate of 2.5 percent, USA’s current GDP of US$ 14 trillion will rise a little over to US$ 20 trillion. Hence, according to these analysts, there is no doubt about China’s overtaking USA in the foreseeable future. When India is also added, “Chindia” will definitely be the future leader of the world. So, Asians have reasons to rejoice themselves.
In my view, this logic suffers from a number of weaknesses.
The World is Non - Linear
In the first place, it assumes that the world will change over time in a linear fashion. For instance, if it rains today, it will rain tomorrow, day after tomorrow, two days after tomorrow, three days after tomorrow and so on into an indefinite future. Thus, someone who observes today’s raining will predict that after four days, the whole world will be filled with water because of the continuous raining at a given rate. It ignores many other happenings that might be activated as an effect of the initial rain and carve many different paths for the world to move along. Just one example is that the rain may keep the sun covered and thereby prevent evaporation and condensation of water and eventual formation of clouds. In the absence of a continuous supply of rain making clouds, the rain may automatically come to an end after some time. Hence the prediction of the world getting filled with water would simply be a false alarm. This means that the changes in the world take place in a non – linear fashion. Chindia may have a high growth rate today. But it is inadvisable to assume that the same growth rate will prevail over an indefinite period. The non – linear fashion of the world will cause the initial high growth to fizzle out and after sometime, like the rain which automatically ceased, the growth momentum will also lose its steam.
Designed in USA and produced in China

Second, an economy is like a human body, subject to growth, saturation and decay. A dying body has to be given a new lease of life if it has to operate at the same level or higher. Economists call this “quantum leaps” in natural phenomena, because it causes a natural phenomenon to move from the current saturated point to a new beginning at a higher level. In the case of an economy, after the decay has set in, a quantum leap will take place if there is new technology, new efficient production methods or simply an improvement in the human skills and competency base. Hence, a continuous growth at the same high rate will be assured only if there is continuous investment in science and technology, human capital development and improvement in human skills and competency base. As it is, Chindia lags significantly behind USA and other Western nations on this count. When one uses any Chinese or Indian product, what one misses is the tag “designed and created in such and such country and manufactured in China or India”. One recent example is that Apple’s iPad was designed and created in USA, but is going to be manufactured in a Chinese high tech firm called Foxconn. So, the benefits of iPad will be drawn by both USA and China. Similarly, many Business Process Outsourcing or BPO outfits in India are simply a part of the long production processes in numerous Western firms. Hence, if there is a successful BPO story in India, it unmistakably means that there are several successful stories of firms all over the West.
Cheap Labour? Not for long
Third, both China and India have become successful growth examples, not because of any inherent growth promoting fundamentals like investments, research and development, but because of the abundantly available cheap labour in both countries. Remember their combined population is some 2.5 billion people with a total work force of a little over 1 billion people. Hence, the current wage levels in both countries are very much lower than those in Western countries. A recent documentary telecast over China’s Central China Television or CCTV reported that the current manufacturing wage rate in China is about US $ 2 per hour. The Indian manufacturing wage rate too stands at about the same level. This compares very favourably with a manufacturing wage rate of US $ 10 to 12 per hour in the West. As it is, it is cheaper for the West to design in their own countries and produce in China or India. But, with closer to double digit economic growth that raises people’s income levels, internal inflation running at around 5 – 8 percent per annum, gradual appreciation of respective currencies and successful reduction in poverty levels and unemployment, both countries are to lose this labour advantage pretty soon.
Automation to Relocate industry in the West
Fourth, China is the global mass producer, but it does so in routine assembly line type of production systems. A manufacturing worker interviewed in the above mentioned CCTV programme revealed that her job was just soldering a tiny part 5200 times a day to a mobile phone being manufactured in her assembly line! This job does not challenge anyone to use his or her intellectual capacity and will become monotonous and boring soon. The corollary is the fast decline in productivity as the workers grow older. Having realised this inevitable fate, the worker under reference reveals her desire to return to her village soon with some savings and start a family there. A similar fate has befallen BPOs in India too. The labour turnover has been very high at about 25 percent and recruiting skilled workers continuously has become a formidable challenge there. In my view, when Asia loses this labour advantage, the West will automate mass production processes and,

then, it will not matter whether the industries are located in Asia or the West. When industries are relocated in the West, the current high growth rates recorded by both China and India will suffer.
Global Prosperity is a Mutual Affair
Fifth, for both China and India to continue to produce, there should be consumers in the Western countries who have the capacity to buy their products. The success of any economic enterprise is based on both the supply side and the demand side. This universal law is valid for countries as well. Accordingly, the world will prosper together and not in isolation in Asia or in the West. Hence, Asia’s return to supremacy should necessarily mean the supremacy of the West as well.
The Pragmatic Chinese Leaders
The Chinese leaders, therefore, chose to downplay the country’s ascendancy to the number two position in world’s output. The spokesperson from the Ministry of Commerce who announced the good news categorically repeated that the occasion did not warrant jubilation, because in terms of per capita income, China was behind 100 other nations! So, China was producing more because it had more people. But, the productivity level of the Chinese was far lower than those of other nations. As reported by Bloomberg News, Ma Jiantang, Head of China’s Statistical Bureau, has summarised this position aptly as follows: “While we take note of our expanding size of economy and enhancing strength, we should also have a sober understanding that China remains a developing nation” This comment is valid for India and the majority of other nations in Asia too.
Who are Asians?
Asians are diverse (made up of different religious beliefs and ethnicity), chauvinistic (thinking each one is the best and destined to produce wonders), inward looking (not open to new ideas), despotic (no respect for human rights and rule of law), uncommunicative (lacks a common language), past – living (nostalgic about past glory) and uncooperative (difficult to agree on common trade relations). Except Japan, South Korea and Taiwan, all others in Asia are developing countries. It is difficult for such a group to put up a common front against another well established group of countries. Kishore Mahbubani of Singapore’s Lee Kuan Yew School of Public Policy has identified seven pillars of western wisdom that would help Asia to acquire world supremacy: free markets; science and technology; meritocracy; pragmatism; culture of peace; rule of law and education. In my view, Asia is yet to build these seven pillars to become a formidable force against the West.
So, the hope of the return of the Asians is a hope of a group of diverse developing countries for acquiring the world’s economic power which would not be a cake walk at all.
(W.A. Wijewardena practiced economics, taught economics and wrote on economics
for more than three decades. He is presently a free lance writer and a consultant on economic matters. He can be reached on waw1949@gmail.com)

THE GOLD RUSH: ARE WE SEEING THE END OF PAPER MONEY?

MY VIEW 17 – ECONOMICS MATTERS
By W.A. Wijewardena
THE GOLD RUSH: ARE WE SEEING THE END OF PAPER MONEY?
A Gold Rush of a different type
The headlines of wire services cried last week: “Gold is at its historical peak”. The event was that gold prices in the international markets had crossed the seemingly impossible peak of US $ 1500 per fine ounce of the metal.
However, a similar cry-out was made when its price crossed $ 1400 level, $ 1300 level and $ 1200 level too in the recent few months. It was a story of gold rising to a historical peak day in and day out. That appeared to be a journey which gold started mildly in 1999 and sharply about 3 years ago with the intention of never going back. In all probability, it seemed that it would be a one way journey for the precious metal which had sparked so many wars among and within nations and caused so much of anguish and pain to humans throughout history.
A similar increase in gold prices took place in early 1980s just before and during the Mexican financial crisis. The US dollar which was the uncontested reserve asset at that time came under pressure and the global interest rates started to rise in the presence of the rising inflationary trends. The London Inter-Bank Offered Rate or LIBOR, the standard interest rate indicator in the global markets, rose to its peak level of 20 percent during this period.
A War between the US Dollar and Gold
The current gold rush is similar to the experience which the world had during that period in some respects and dissimilar to it in some other respects. In the current period, the world has just managed to avert a global financial crisis, but there is a prolonged economic stagnation in the major industrial nations. In the midst of a high global excess liquidity, interest rates are at their historical lows with the six month LIBOR falling to a level of even less than one percent. Inflation rates in major industrial nations as well as the developing world have been historically low, but have started to move up again along with economic recovery. The sudden political turmoil in the Middle East and North Africa and the tsunami disaster and ensuing nuclear crisis in Japan have pushed the confidence about the global economy to its lowest levels. The US dollar has started to fall against all major currencies, recording an eighteen percent fall against its major rival, Euro, since June, 2010.
It, therefore, appears to be a war between the US dollar and gold and in this war, gold appears to have gained the upper hand.
Historical Set up: the Gold Standard Era
Before the advent of paper money and even during the first phase of paper money‟s ascendancy to the status of the main medium of exchange, gold played a key role in adding value to paper money and enforcing discipline in its production. This was done under a system known as the Gold Standard.
Under this system, a country expresses the value of its paper currency in terms of gold and has to keep a gold stock equivalent to the value of paper money issued. Gold is acquired either through mining or through international trade where the country would have exported more of goods than it would have imported from other countries. When the

gold stock goes up, it permits the country to issue more paper money notes to its people. If, however, the gold stock declines, then the country has to withdraw an equivalent value of paper money from circulation. Thus, the gold standard prevented the countries from issuing paper money excessively at its own discretion. Ironically, this was the main reason for world nations to abandon the gold standard in late 1920s because it was perceived as a fetter in their eagerness to issue paper money in large volumes and boost economic growth.
Accordingly, with this discipline no more, the world nations began to over produce paper money through their central banks thereby causing inflation and reducing the real value of paper money they had issued to their public.
The Gold Exchange Standard of the Breton Woods Era
When the IMF and the World Bank were set up under the Breton Woods agreement in 1944, an attempt was made to introduce gold again to protect the value of currencies issued by independent nations. Since there was no gold standard any more to back the value of currencies, the world nations had the problem of accepting each other‟s currencies in settlement of international transactions. To overcome this problem, it was suggested that one country should be designated the world‟s central banker nation and that country should allow free convertibility of its currency to gold.
Given the supremacy which the US had acquired over the world‟s economic and political affairs at the end of the World War II, it was naturally the uncontested candidate to become the world‟s central banker nation. Accordingly, the US government agreed to convert the US dollar to gold at the rate of $ 35 per fine ounce of gold at any time. Thus, if a world nation has $ 35 US dollars, it could buy one fine ounce of gold from the US Treasury; similarly, if a world nation has one fine ounce of gold, it could sell that gold for $ 35 to the US Treasury. Since the US dollar was freely convertible to gold, the world nations did not have any problem of accumulating dollar balances.
According to this system, dollar was convertible to gold and through dollars, other currencies too were convertible to gold. This system was known as Gold Exchange Standard.
US’s free ride on dollars
When a country becomes a central banker nation, like a national central bank, it stands to profit from issuing currency which the economists call earning „seigniorage‟. Suppose, for example the US government issues a one dollar note. It does not cost the US government one dollar to issue that note, but only a fraction of it. But the US government, by using that dollar bill, is able to buy a basket of goods worth of one dollar from another country. Its promise to the country which agrees to accept that one dollar bill in exchange of a good from that country is that one day, should that country choose to buy goods from the US, a dollar‟s worth of an output is available from the US.
Thus, the US immediately enjoys a better life and the other country accumulates dollars backed by a promise. Since there are other nations in the world which are willing to accept dollars from that country for selling their goods, that dollar never returns to the US and it does not have to honour its promise.
This has led to bad behaviour and indiscipline in the issue of dollars by the US in accord with its promise to function as the world‟s central banker nation.
According to US statistics published by the website www.seekingalpha.com , the US has never been serious about its role as the world‟s central banker nation. In 1944

itself, in which the Breton Woods agreement came into force, the US had issued $ 39 per fine ounce of gold it had held in its reserves, though it promised to convert dollars at the rate of $ 35 per fine ounce of gold. Thus, if all the people holding dollars wanted to have their dollars converted to gold simultaneously, the US Treasury did not have enough gold to satisfy them all.
The situation became more alarming since then. By 1961, it was $ 64.97 per fine ounce, by 1963, $ 81.42 and by 1968, $ 135.01 and by 1971, $ 198.82. This was like creating multiple deposits and credit by a commercial bank based on a given amount of bank reserves.
Consequently, by 1971, had all those dollars demanded immediate convertibility to gold, the US Treasury could have met only one fifth of such demand. When the open market price of gold went up to $ 70 per fine ounce of gold and arbitrageurs started to raid on the US gold reserves and the US Treasury could no longer meet the demand, in August, 1971, the US abandoned the Gold Exchange Standard unilaterally.
This possibility had been long warned by John Exter, founding Governor of the Central Bank of Sri Lanka, on account of the profligate money printing by the US Federal Reserve System. In a private discussion in 1962 with Paul Samuelson, Nobel Laureate in economics, Exter is reported to have remarked “Paul, it is very simple. The Fed is printing too many dollars and they flow out of the country into foreign central banks who demand gold”. Two other Nobel Laureates, Friedrich A Hayek and Milton Friedman, too made unkind statements about the US Federal Reserve System‟s irresponsible money printing policy. Hayek advocated that the money supply monopoly should be taken away from governments and handed over to the private sector in a path breaking publication titled „Denationalisation of Money Supply‟ in 1975. Friedman was much more militant in his approach: he declared that if he were given a choice that he would ‘padlock the Federal Reserve Bank and take a helicopter ride to the Atlantic Ocean to drop the keys to the Ocean’ meaning that the world would be better off if the Federal Reserve System is permanently closed.
The US Profligacy continues since 1971
Even after the end of the Gold Exchange Standard, the US dollar continued to function as the world‟s major reserve currency not by agreement but by popular demand. Though there was no official obligation on the part of the US authorities, for the well and smooth functioning of the global economy, the US administration was expected to produce dollars within limits and maintain its value over time. But this was the least which the US did since then.
From 1971 to 2009, the total of dollar reserve money created by the Federal Reserve System went up from around les than $ 100 billion to $ 800 billion. It is pertinent to note that commercial banks are able to create multiple deposits and credit by using this reserve money and therefore its stock growth is highly inflationary. This is witnessed by the sharp increase in the US Consumer Price Index by 435 percent during this period.
Naturally, the dollar holders should get alarmed and nervous because the value of a dollar in 1971 has fallen even less than one US cent in 2009.
With the financial crisis of 2007-9 and the ensuing economic recession that forced the US Administration to throw generous economic stimulus packages, the US dollar printing was much faster than what John Exter witnessed in 1960s. Between end 2009 and March 2011, the reserve money base in the US increased sharply from $ 800 billion

to $ 2200 billion, another historical record by the US. Consequently, the US has now issued $ 3813 per fine ounce of gold it is holding in its reserves. As a result, the dollar has now lost completely its free convertibility to gold.
This has so far not contributed to the US inflation in a big way. Its CPI has increased only by 4.6 percent between end 2009 and March, 2011. But, inflation is yet to come and the world nations have correctly felt the heat of the oncoming US inflation.
The results are obvious. World‟s central banks are now increasingly converting their dollar balances to gold, thereby raising the price of gold on one hand and reducing the market value of the dollar on the other.
This is why the gold prices exceeded the $ 1500 mark in April and dollar fell by 18 percent against Euro during the last ten months.
The Way out
It, therefore, appears that a massive restructuring programme has to be undertaken by the US in order to give confidence to markets and the world nations which have relied on the dollar in the past.
Since the current gold prices are at $ 1500 level, the US has issued dollars more than two and a half times the value of gold in the market. To maintain parity, either the US has to cut down its money supply by two and a half times so that its issued dollars would be equal to $ 1500 per fine ounce of gold it is holding in its reserves or the free market price of gold should rise to $ 3800 level per fine ounce.
The first option is a near impossibility given the long time frame of 12 years which President Barack Obama has given to cut his budget deficit by $ 4 trillion and the disagreement with the Republicans about the appropriate course of action which the US has to take in achieving that goal. Obama wants the wealthy Americans to bear the full burden so that the deficit will be trimmed by raising tax revenue rather than expenditure cuts. The Republicans want him to go for deeper expenditure cuts rather than imposing additional tax burdens on the citizens.
Both appear to be insincere in their approaches and eyeing for the Presidential election that is scheduled for November 2012. To win the election, Obama seem to be placating low income Americans who are more numerous in terms of votes. Republicans, on the other hand, seem to be wooing the rich Americans for raising funds for the election campaign. While there is logic behind the strategies of both parties, it does not do well for the US dollar or the nations that have relied on the dollar to keep their excess foreign exchange reserves. A country like China which has put in more than a one third of its $ 3 trillion foreign exchange reserves in to Dollar assets stands to lose the most.
Hence, the world nations have become anxious, nervous and alarmed. They naturally tend to over-react because it is they who have already lost and who stand to lose in the future. Gold is, therefore, being increasingly used as a hedge against the dollar with the outcome which the world has already witnessed: dollar falling and gold rising in the world markets.
Return to Gold Standard?
Many have now suggested that the world should return to the gold standard once again.
Even the President of the World Bank, Robert B Zoellick, a former US Treasury Official, in an article published in the London‟s Financial Times in November 2010, declared, calling for a more cooperative monetary system to increase confidence and

boost economic growth, that world leaders should reconsider reintroducing a gold standard to protect the emerging leading currencies, namely, dollar, euro, sterling pound, yen and the Chinese Yuan (available at: http://www.guardian.co.uk/business/2010/nov/08/world-bank-new-gold-standard) His attempt has been to protect the use of paper money because its production involves less cost and it is more convenient to handle.
Gold prices may rise, but gold is not an alternative to paper money. The use of gold as money involves a series of cumbersome and costly economic activities, namely, mining, refining, appraising, transporting, storing, safekeeping and handling. These are all costly activities. Paper money does not involve such high costs. Hence, as suggested by Zoellick, the world may be better off by imposing discipline on abusers of paper money production through a system of returning to the gold standard and developing a cluster of reserve currencies so that the world does not have to rely on one currency.
Hence, at least for the next decade, we do not see the end of paper money in the world.
(W.A Wijewardena can be contacted on waw1949@gmail.com)

NOW THAT BRICS FORMALISED, THE THIRD WORLD WILL RE- EMERGE

When Barack Obama was struggling to trim his horrendous budget deficit by $ 4 trillion over the next 12 year period and the North Atlantic Treaty Organisation or NATO was embroiled in a costly military intervention in Libya, the leaders of five nations calling themselves BRICS (Brazil, Russia, India, China and South Africa) met in summit in Sanya in Hainan Province of Southern China last week. The Sanya Summit ended on April 14, 2011 with a joint statement issued by the five leaders which is now known as Sanya Declaration.
In a previous My View titled ‘If Chindia cannot oust the West, why not use BRIC Plus?’ (available at: http://www.ft.lk/2011/01/17/if-%E2%80%98chindia%E2%80%99-cannot-oust-the-west-why-not-use-bric-plus/), I argued that BRICS is a diverse group with China as the most important country in the group in terms of rising economic and political power and all others are yet to gain economic supremacy in the world. Hence, the logical inference is that the combination of the five countries does not make common bed fellows and cannot have a long term economic relationship in which each party will get equal economic benefits. But this is true if they confine themselves only to economic matters.
The Sanya Declaration
The Sanya Declaration cleared the doubts by making BRICS, as announced by the South African President, Jacob Zuma in the subsequent press conference, a multi – centric diplomatic force. To give credence to this, BRICS leaders took immense pride in noting that all of them are permanent members of UN Security Council and they have a right to make themselves known in world issues, not in quantitative terms but in qualitative terms. The Russian President, Dimitri Medvedev, expressed this view in a different setting, saying that they all should work together to strengthen the UN System meaning that its current leaning toward US and EU interests should be corrected. The declaration too, while highlighting the financial cooperation among BRICS, touched upon extant global political issues such as the Libyan crisis and the need for resolving it peacefully in a manner satisfying the wishes of the Libyan people. They also talked about

the need for developing renewable energy and taking strictest safety measures when harnessing nuclear power for energy purposes.
The Sanya Declaration has not proposed a road map for implementing its key points. Hence, all in all, it is nothing but a wish list of five emerging global leaders for recognition and active participation in global matters as equal partners.
BRICS as a growing global political force
BRICS still has no recognition as a formal body set up by an international agreement subscribed to by all the five nations. Yet, its annual summit meetings have now been formalised with India hosting the next summit in 2012. Hence, it is apparent that it is expanding its original informal mandate of functioning as an economic cooperation group into a powerful global political force.
This has in fact brought a new dimension to the extant global political and diplomatic landscape.
The Death of the Third World
After the World War II and with the emergence of the cold war between the West and the Soviet Union, the world was divided into three groups based on military and political affiliations.
The first world comprising the developed western countries in North America, Western Europe, Oceania and Japan came into being with the signing of NATO and the South East Asian Treaty Organisation or SEATO. Then, the Soviet Union and its East European Bloc joined together by signing the Warsaw Pact and came to be known as the Second World. The countries which did not belong to both these power groups calling themselves Non – aligned Nations became the third world. While in the old terminology the first world and the second worlds were considered as developed countries, the third world was synonymous with ‘poor’, ‘undeveloped’, ‘underdeveloped’ or ‘developing’ countries. The majority of the countries in Asia, Africa and South America belonged to this third world category.
Third-worldism
The rampant poverty and underdevelopment in the third world category also gave rise to a new type of third world economics, an ideology known as ‘Third-Worldism’. There is no single document or a book that highlights this ideology, but it consists of loose and separate writings by many. The third world writers like Samir Amin, Amin Mazrui and Carlos Ramirez-Faria and political leaders like Egypt’s Gamal Abdel Nasser, Ghana’s K. Nkrumah and Tanzania’s Julius Nyerere were in the forefront of propagating this ideology in 1960s and 1970s. When one examines the basic tenets of third-worldism, one may find many close kin of this ideology in all the countries, including Sri Lanka.
The Venezuelan journalist, Carlos Rangel, in a book titled ‘Third World Ideology and Western Reality’ and published in 1985 (translated into English as Third-Worldism and hence, credited for coining the term) has listed the main features of third world ideology as follows:
 first, the development of the western world and the underdevelopment of the third world are mainly attributed to the old colonial rule exercised by the developed West over the third world countries;
 second, there is no way of achieving wealth and prosperity by one country without harming another country;

 third, the developed world exploits the developing countries by selling their industrial products at inflated prices and buying the primary products of the developing world at suppressed prices;
 fourth, the external debt is a way for both the Western World and the multilateral lending organisations to exercise new colonialism on the third world countries;
 fifth, there is a cultural colonialism on the third world countries through downgrading the local and indigenous practices and values and superimposing the values of Western culture on them, and
 sixth, the brain drain from the third world countries to the West is another way of robbing the intellectual wisdom of the former by the latter thereby denying the developing world the opportunity to attain its true growth potential.
While these are debatable and are not substantiated by real world economic data and facts, the fall of the Berlin Wall in 1989 and the simultaneous dissolution of the Soviet Bloc removed the Second World from the scene. Since the third-worldists drew much of their ideology from the Second World, the collapse of the Second World saw the collapse of the Third-Worldism too. However, in some parts of the world, the ideology continued to prevail with some national leaders of selected countries in the Middle East, Africa and Asia continuing to propagate the third worldism to protect their power base till recently. But, according to economist Fabio Rafael Fiallo who wrote an article to The Wall Street Journal on March 22, 2011, the last remnants of the ideology has seen its eventual demise with the recent revolutions in Egypt and Tunisia and the continuing unrest in Libya (available at: http://online.wsj.com/article/SB10001424052748703818204576206391411710346.html).
Now the Second World is no more and, therefore, the world is divided into two groups: developed countries and developing countries. Ironically, the former Second World is now categorised in the latter as emerging economies together with several other countries including China and India.
BRICS is an off-shoot of the emerging countries to make a separate political and economic grouping among the developing countries. Thus, with the entry of BRICS to the scene, Fiallo may prove to be wrong.
BRICS divides the world into three groupings once again
With BRICS coming forward as a separate grouping at its Summit Meeting last week, the world is now divided into three groupings once again: the developed world consisting of the Organisation for Economic Cooperation and Development or OECD, BRICS as an independent separate grouping and other emerging and developing nations.
BRICS is made up of the leading nations in four continents, namely, Asia (China and India), Africa (South Africa), South America (Brazil) and Europe (Russia). Hence, except Australia and North America, BRICS has influence in four other continents. It boasts of 40 percent of the world population, 80% of the world’s recent economic growth, 18 percent of the world’s output and 24 percent of the world trade. At present, there are no other candidates vying for its membership and, hence, it will continue to function as an exclusive group with the current five members for sometime.
Implications of BRICS’s emergence

However, trade and economic cooperation among BRICS countries is still at a very low level and all these countries depend heavily on the rich West for continued economic growth and sustenance. Hence, unlike in the old division between the first world and the second world, BRICS cannot completely shed the rich West and emerge as an independent economic force. As it is, if the West grows, so will the BRICS. If, on the other hand, the West falls, so will the BRICS.
Hence, the BRICS arrangement today may be aiming at two goals in the long run. The first is to benefit from the perceived high growth of BRICS countries by developing a common market for each other’s goods and services and develop a common currency for trade and other transactions. Since BRICS keeps a substantial part of their excess foreign exchange reserves in USA and the balance in EU, it stands to lose if the respective asset values fall due to the profligate policies adopted by both USA and EU. Hence, if BRICS can park its excess reserves among their own member countries, it can reduce the risk too. By way of a preliminary arrangement for this, prior to the Summit just concluded, an agreement was signed by the BRICS countries to enable the state development banks in respective countries to lend to each other.
The second is to promote trade among BRICS countries and thereby develop a fall back mechanism when the West, on which these countries still depend pretty much, could not buy their products due to periodic economic recessions. Such a mechanism is necessary, because relying on a single group of countries for selling one’s products is a risk in the current volatile global economic scenario. BRICS, on the other hand, is fast growing and has the capacity to buy each other’s products in the event of a general global recession.
This leaves the developed West, BRICS and other developing nations in three separate economic and political groups. However, unlike in the past, there is no economic hostility among these countries, though there are some political hostilities among a few selected countries.
Impact on the developing world
The rest of the developing countries today are in a precarious situation. They all have recognised that trade in goods and services are the prime contributor to economic growth, prosperity and wealth creation. Yet, the world trade is increasingly becoming skewed, leaning toward the rich West and BRICS which account for about 80 percent of the world’s total exports. It is like the rest of the developing world is faced with a glass ceiling above them. They can see the prosperity and prospects above, but cannot reach it because they cannot break the ceiling. Hence, however much they try to build a viable export base, it is difficult for them to break the ceiling and move upward.
This is truly disappointing because they have to remain passive spectators of world’s wealth being enjoyed by the developed world and the BRICS countries.
The frustration that may arise from these disappointments will make the developing world militant and rebellious as it had done during the cold war period. When a group of countries is unable to realise their goals, it inevitably leads them to believe in various conspiracy theories on others trying to exploit them. This provides a fertile ground for the third world to re-emerge and the third-worldism to flourish in a new form.
It is true that the rich West is going through a difficult phase today. Yet, they as a group are growing at about 2 to 3 percent annually. Since they are growing, there is no an erosion of the well-being of the people of those countries. BRICS, on the other hand, is

growing closer to double digit numbers making their citizens richer by every year. The rest of the developing world, it appears has to lag behind both the rich West and BRICS. This would inevitably widen the gap between the developing world and the rest of the world.
The Danger of the Rise of Economic Nationalism
Throughout history, mankind has been susceptible to the claims of conspiracies perpetrated against them by many unseen enemies. One important conspiracy is that foreigners are always bent on destroying their culture, economy and civilisations. In the past, the enemy was the rich West. Now, in addition to the rich West, BRICS too will be considered enemies. The popular sentiments growing against the Indians and the Chinese in contemporary Sri Lanka are a case in point.
This is again the fertile ground for breeding economic nationalism by crafty national leaders in developing countries.
Economic nationalism rejects the market and preaches the virtues of self sufficiency in everything. At household levels, irrespective of the nature of occupation in which one is engaged for a living, self sufficiency in food is promoted as a way to beat the rising cost of living and perceived irregularities of the market. But, the old adage is that ‘Jack of all trades is Master of none’ and therefore, when one devotes his time for an activity for which he has no speciality, he loses on every count because his outcome becomes inefficient. For instance, if a manufacturer of brass fixtures is asked to grow his own vegetables, he will not do well in both his traditional occupation and the new engagement.
At a national level, economic nationalism rejects international trade. Buying goods manufactured by other nations is considered an activity promoting incomes of peoples in those countries. Hence, imports are considered a taboo. But, on the other hand, selling one’s goods to foreigners is considered virtuous. But, what matters is that one cannot sell unless he is prepared to buy from others too. If all nations try to become sellers as upheld by economic nationalism, no nation would be able to sell; the solution is for all nations to do both buying and selling simultaneously.
BRICS has understood this well and tries to build a diversified trading partnership with all the countries in the world.
Should the rich West get scared of the emergence of the BRICS grouping as a separate economic and political force? Not at least for the moment. All the BRICS country leaders were driven to the Summit Venue in shining black Mercedes Benzes piloted by equally shining black Audis, both manufactured in Germany. Hence, for the moment, BRICS does not pose a threat to the rich West.
But the developing world, unless it learns to shed third-worldism and economic nationalism, will find the emergence of BRICS as a second force a threat as well as a denial of opportunities.
(W.A. Wijewardena can be reached on waw1949@gmail.com)

NOW THAT GSP PLUS IS CLOSED, TIME TO OPEN TRADE EVERYWHERE

The announcement which the country had been expecting for long was made by a European Union Parliamentarian herself last week. At a press briefing at the conclusion of a visit to Sri Lanka, the Green Party Member for London in the European Union Parliament, Jean Lambert, said that “GSP Plus concessions to Sri Lanka is now a closed book” because Sri Lanka Government has no intention of applying for it. (available at:
http://www.newsfirst.lk/index.php?option=com_content&view=article&id=16478:gsp-plus-to-lanka-a-closed-book-says-jean-lambert&catid=97:news-items-2&Itemid=294)
There was neither confirmation nor denial of her announcement by the Sri Lankan authorities.
The opinion of Sri Lankans on the GSP Plus issue is a mixed one. Some support, some oppose and some are apathetic.
The Supporters demand “GSP Plus”
The industry magnates who have been the beneficiaries of GSP Plus, particularly those involved in garments, porcelain – ware, and fish products, had been clamouring for long for the extension of the concessions for a further period. Their main argument has been that Sri Lanka‟s entry to European Union or EU as a major export destination was very much facilitated by the GSP Plus concessions. Hence, any abrupt cancellation of the concessions will impede the country‟s move toward diversifying its export destinations.
This claim is borne out by Sri Lanka‟s export performance in the last few years.
For instance, in 2005, Sri Lanka‟s exports to EU amounted to $ 1961 million or 31 percent of total exports, slightly less than its exports to USA which stood at $ 1988 million. By 2008, EU had overtaken USA by a significant margin. In that year, EU‟s absorption of Sri Lanka‟s exports amounted to $ 3034 million or 37 percent of Sri Lanka‟s total exports. In comparison, Sri Lanka‟s exports to USA had risen only to $ 1869 million in 2008 accounting for 23 percent of its exports.
Thus, EU is Sri Lanka‟s Number one export destination today.
The Opponents view GSP Plus as Sacrifice of Sovereignty
Holding a contrary view, Sri Lanka‟s leaders, top policy makers and a section of the community have opined that, while the country welcomed GSP Plus, that would not

be at the expense of the country‟s sovereignty. As reported by asiantribune.com, the Minister of Export Development and International Trade in 2008, G.L. Peris, has said in an interview with the website, that Sri Lanka was not happy about EU‟s insistence of investigation of certain matters relating to the country (available at:
http://www.asiantribune.com/?q=node/13725).
Accordingly, GSP Plus has not been viewed as an economic or trade issue, but an issue involving the country‟s pride and sovereignty. Many Sri Lankans too holding the same view have hailed this stand in comments posted to blog sites that carried this news.
However, the majority of Sri Lankans, who are totally apathetic to the issue, carry on their daily chores without knowing even what GSP Plus is.
What is GSP Plus?
GSP or the Generalised System of Preferences is a special trade concession offered by EU to world‟s poor countries with no obligation on the part of the poor countries to offer similar concessions to EU. So, the concessions are one way from EU to the poor countries and not from the poor to EU.
It is being implemented by EU at two levels: the ordinary GSP and GSP Plus. The first one is a trade arrangement which EU provides to 176 developing countries and territories to sell their products in the EU market at reduced tariff rates. GSP Plus is an enhancement of this facility to vulnerable developing countries offering additional tariff reductions to enable them to attain sustainable development and maintain good governance in their affairs. For this purpose, they are required to ratify and implement a number of international conventions which the global community has prescribed for all its members. There are 27 such conventions which EU has stipulated for the eligibility for GSP Plus concessions and they cover a wide range of aspects applicable to human freedom.
The Concerns of Human Freedom: Now a Global Concept
Human freedom is now recognised by economists and policy makers as the ultimate goal of development. This is because the development means the development of a perfect individual and without freedom, whatever the material well – being attained by individuals in a society will become meaningless. The concept of freedom encompasses from political to economic to social to spiritual. Since the state, through the use of force, can arrogate to itself the power to deprive people of freedom, in olden times it was the merciful monarch and today the ruling executive who was expected to guarantee all kinds of freedoms to the people.
This has been well – elaborated in the current policy document of the Government, The Mahinda Chinthana, with reference to the use of the executive powers of the Presidency. While denouncing the misuse of the executive powers in violation of the moral and ethical code in the past, The Mahinda Chinthana says that “…an open discussion on the Executive Presidency will be held with all parties. The Executive Presidency will be converted into a Trusteeship which honours the mandate given to Parliament by being accountable to parliament, establishes equality before the law, is accountable to the judiciary and enacts laws that are accountable to the judiciary, and is not in conflict with the judiciary” (p 56)
The implementation of this programme, enshrined in The Mahinda Chinthana, will certainly ensure human freedoms.

The Nobel Laureate, Amartya Sen, has been a vociferous advocate of human freedoms for development of mankind. He argued the importance of freedom in two previous books titled “Development as Freedom” and “Rationality and Freedom”. Further developing and codifying his ideas on freedom, he, in his latest book, The Idea of Justice, has emphasised two requirements that are essential for ensuring justice in a society: the freedom to choose and the freedom to think with reasoning as the guide. According to Sen, “…the freedom to choose our lives can make a significant contribution to our well – being, but going beyond the perspective of well – being, the freedom itself may be seen as important. Being able to reason and choose is a significant aspect of human life”.
Since it is widely alleged that many poor countries lack both these requirements, the donor community has taken upon itself the responsibility for ensuring a just society in aid recipient countries by tying aid to a multitude of behaviour traits. These traits cover such subjects as democracy, law and order, rule of law, good governance, transparency and proper disclosure, human rights, environmental preservation and labour conditions. In addition, EU has the right to introduce any other requirement to address other deficiencies which the donors would have observed as prevailing in the recipients of aid programmes.
Enforced Good Behaviour through Aid Packages
It seems that the West has interested itself in seeing a show of enforced-good behaviour by poor countries which are desirous of receiving foreign aid. However, this has been subject to much criticism and protest by aid recipients. Yet, there is an element of justification, from the point of donors, in their tying aid with good behaviour traits.
First, there has been mounting evidence of gross abuse of aid flows by the power groups in poor countries, namely, politicians and bureaucrats. The absence of anti – corruption laws, or when such laws prevail, their weak application, has been found to be the main cause of the proliferation of alleged misuse of aid flows in poor countries.
Second, with faster and more advanced communication systems, information on abuse of power or money by poor country rulers is now readily available to the citizens of donor countries. Since donor countries use tax payers‟ money for granting aid to poor countries, they have to listen to the collective wish of their citizens: that the aid givers should ensure that the tax money they sacrifice is put to proper use by the recipients.
Tariff Concessions are also a form of aid
One may wonder how GSP Plus which is a special tariff concession could become an aid flow.
The aid flows to poor countries could be classified into two categories.
One is the direct aid in the form of grants, concessionary loans and assistance in physical form like technical support and food supplies. The other is the indirect aid given in the form of preferential tariff concessions extended to developing countries through bilateral trade agreements to have larger market access in developed countries. Both have added to poor country woes, because they are linked to political affiliations, loyalty shown in international fora and in recent times, the commitment to good behaviour by aid recipient countries. The last string encompasses a wide spectrum of national behaviour traits as explained above.
Sri Lanka has always upheld the Principles underlying the Conventions
4
The conventions under reference are those ensuring all types of rights of the citizens (civil, political, social, economic, cultural, children‟s, women‟s, collective bargaining, freedom of organisation and freedom of association), prevention of discrimination against race, gender, employment and occupation, protection of citizens against torture, cruel, inhuman or degrading treatment or punishment, ensuring the prevention and punishment of the crime of genocide, abolition of child labour and many conventions involving the protection of environment and preservation of biodiversity.
These are all prerequisites for creating a just society as pronounced by Sen in The Idea of Justice and therefore, it behoves a country to do so voluntarily rather than under compulsion. A plus point for Sri Lanka in this context has been that it has always upheld the principles underlying these international conventions and has raised its voice in international fora many a time for proper adherence to them by all nations without exception. Hence, there should not be any reason for Sri Lanka to have objections to ratifying and implementing them as required under the GSP Plus rules.
Adoption of Conventions is no interference in Sovereignty
Sri Lanka had agreed to ratify these conventions at the time it sought the concessions under GSP Plus. But by mid 2009, it was found that no action had been taken by the country to fulfil its obligations.
Under EU rules, a beneficiary country is given a three year period to satisfy the requirement of ratifying and implementing all the 27 conventions involved. Since all these conventions are already designed by the global community and readily available for quick ratification and implementation, a period of three years cannot be claimed to be a too short a period for a country to do so. In view of Sri Lanka‟s long commitment to these principles, the failure of the country to do so as revealed in mid 2009 would have been due to a breakdown of its management systems which should have advised the government to do the needful at the appropriate time. Hence, it is most unfortunate that a set of international conventions meant for ensuring justice, freedom and well being of its citizens is portrayed as unnecessary interference in the sovereignty of the country by outside forces.
EU is Significant for Sri Lanka‟s Exports
Whatever the reason, now GSP Plus is not available to Sri Lanka. Hence, it has to compete in the EU market with those countries which have the advantage of preferential treatment. The annual export flow to EU from Sri Lanka has remained around $ 3 billion or some 38 percent of total exports during the three years from 2007 to 2009. This is a significant volume and with Sri Lanka‟s renewed growth potentials, it represents a market that provides immense opportunities to Sri Lanka‟s exporters. Hence, EU cannot be written off by Sri Lanka quite conveniently as some, including top policy makers, have casually chosen to do in the run-up to the withdrawal of GSP Plus. While the non availability of GSP Plus will not bring the country‟s exports to EU to a zero level as feared by some, it will definitely retard or stunt their growth which the country now plans to promote vigorously. Hence, all systems have to be directed by Sri Lanka in the short to medium term to overcome the obstacle created by its own failures and become competitive in the long run so that it could acquire a bigger market share in EU.
With a trade deficit exceeding $ 5 billion in 2010 and bound to grow phenomenally in 2011 due to the unexpected rise in the oil prices, exports are Sri Lanka‟s life – saving elixir.

Now go for Trade and wean away from Aid
Raúl Prebisch, the reputed Argentinean economist who headed the United Nations Conference on Tariff and Trade in 1950s, is credited to have coined a very popular slogan emphasising the wishes of poor countries. That slogan was that poor countries expected “trade, not aid” from rich countries. This is because trade makes them equal partners, while aid makes them complaisant slaves.
Since Sri Lanka is not interested in GSP Plus any more, Raúl Prebisch‟s slogan, „trade, not aid‟ comes handy to Sri Lanka at this point of time. The development economists of Prebisch‟s generation believed that free trade among nations will improve the welfare of all. But what they meant by free trade is the trade conducted without preferential treatment so that it would enable a country to improve its own productivity and comparative advantage. Hence, it is a golden opportunity for Sri Lanka to restructure its export industries to win the long run war, though it may lose the short run battles. This essentially requires exporters to cut costs, improve labour productivity, introduce cutting edge technologies, raise management competencies, use new production techniques and adopt new marketing strategies. As Peter Peterson, a former US Trade Secretary and CEO of Lehman Brothers, has mentioned in his autobiography, The Education of an American Dreamer, „every problem has to be viewed as an opportunity‟ by innovative people. Such an approach will help to wean the exporters away from the long afflicted aid syndrome associated with GSP Plus.
Support Export Sector through Prudent Macroeconomic Policies
The restructuring of the export industry should be a joint exercise by both the government and the exporters. All export firms which adopt the innovative methods outlined above should be supported by the government. Since many industries that export to EU live on thin margins, cost cuttings and productivity improvements are essential in order to survive in a fiercely competitive market. For instance, in the case of garment and apparel firms, unbundling of different procurement, logistical and production steps to outsiders, even to foreigners, must be positively considered and the government should extend the necessary exchange control liberalisation to them. The adherence to a macroeconomic framework that aims at long term price stability in the economy will help the exporters to keep the overall wage bill under control. The reduction of the budget deficit and government‟s borrowing requirements will make available a larger volume of funds to the private entrepreneurs. The long term price stability will also help the country to maintain stable exchange rates thereby helping the exporters to keep import costs under control and avoid agitations for higher wages that lead to increases in costs.
Sri Lanka should open free trade globally
In a previous column of My View – Economics Matters on the Comprehensive Economic Partnership Agreement or CEPA with India, I expressed the view that Sri Lanka should look in all directions, north, north east, west, east and south east in improving its trade relations. This is because free trade is essential for Sri Lanka to become a nation of worth through improved prosperity and wealth (available at:
http://www.ft.lk/2011/02/21/reviving-cepa-%E2%80%93-act-swiftly-and-decisively/).
Hence, I am of the view that Sri Lanka should now open trade everywhere to compensate for the stunted export market in EU due to the non - continuation of GSP Plus.

REVIVING CEPA – ACT SWIFTLY AND DECISIVELY

Last week, the media were abuzz with a news item that the Sri Lankan Government would revive the shelved Comprehensive Economic Partnership Agreement or CEPA with India. It said that an inter – institutional committee comprising representatives of some 10 institutions, including Finance, Exports and Economic Development, will be appointed to redraft the CEPA agreement.
This should surely be good news for those who support CEPA as well as those who oppose it. Those who support can now enjoy the comfort of living in the hope of CEPA at last becoming a reality. Those who oppose can congratulate themselves that they have succeeded in bending the hard stance which the bureaucracy had taken in promoting CEPA a little.
Even the top Sri Lankan Businessman, W.K.H. Wegapitiya of Laugfs fame, who earlier had reservations about CEPA, welcomed the Government‟s move in a telephone interview with ART‟s State of Business. His only concern was that the proposed committee did not have private sector representation which the Government can rectify without any cost at the time of constituting the committee.
This shows that Sri Lanka is now going in the correct direction after losing seven valuable years since 2004, the year in which CEPA would have been sealed by both countries.
What is CEPA?
CEPA is a bilateral arrangement between Sri Lanka and India to make available the markets in the two respective countries to each other under specifically agreed favourable conditions for buying and selling of both visible goods and invisible services. CEPA will, therefore, provide a bigger market access: for Sri Lanka a market of some 1.3 billion people and for India, a market of some 20 million people.
In the present case, CEPA was the logical extension of the Indo – Lanka Free Trade Agreement or ILFTA which both India and Sri Lanka signed in 1998 and became effective from 2000. Under ILFTA, the trade of visible goods between India and Sri Lanka was to be promoted taking advantage of the specialities which each country had in different lines of production. For instance, India has advantage in producing drugs and
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machinery and so Indian producers could sell their products to Sri Lankans at reduced duty rates offered by the Sri Lanka Government. Similarly, Sri Lanka could sell in the Indian market, say, spices and garments in which Sri Lanka had speciality in production again at reduced duty rates offered by the Indian Government.
The objective of ILFTA was, therefore, to promote trade and narrow the trade gap between the two countries. The track record of ILFTA shows that the two countries have indeed made satisfactory progress toward the realisation of both these objectives. In 1999, Sri Lanka‟s total imports from and exports to India amounted to$545 million. This shot up by more than four times to $2401 million in 2005 and even in the gloomy foreign trade scenario that prevailed after 2008, the total trade amounted to $2142 million in 2009. The narrowing of the trade gap between Sri Lanka and India was much more prominent during this period. In 1999, when Sri Lanka exported one unit to India, it had to import 11 units from India. By 2005, this ratio fell to one export to 3.2 imports. Even in the low trade scenario in 2009, the ratio stood at one export to 5.6 imports, much better than what it was in 1999. In 1999, Sri Lanka‟s trade with India was practically negligible. But in 2009, India was Sri Lanka‟s number one importer and number six exporter.
CEPA: The Next Generation Economic Cooperation with India
Two years after ILFTA, in 2002, the leaders of both India and Sri Lanka decided that it was time for both countries to look into economic prospects beyond free trade in visibles. Accordingly, a joint study group consisting of experts from both countries was formed to study and report on the possibility of having a wider economic cooperation in the form of a comprehensive economic partnership between the two countries. This study group made its recommendation in October 2003 that India and Sri Lanka should go for a formal CEPA, emphasising that the required negotiations be concluded within 4 to 6 months. In terms of this time line, the study group expected CEPA to become operative by April, 2004.
However, due to a series of subsequent events that took place in Sri Lanka including a change in the government two times, first from the existing ruling party to a new party and then within the new ruling party from one leader to another, it took more than six years for both countries to come up with a reasonable draft agreement on the format and the content of such a comprehensive economic partnership.
However, the efforts of both Sri Lankan and Indian experts were totally wasted because the draft agreement was shelved after it ran into stormy weather in the form of wide – spread protests by certain sections in Sri Lanka.
The Main Ingredients of CEPA
CEPA, in addition to the trade in goods covered in ILFTA, has three other areas of economic cooperation between the two countries. They include trade in services, promotion of private investment flows and a third category specifically beneficial to Sri Lanka, namely, transfer of technology and facilities from India to Sri Lanka in the areas of transportation, infrastructure, education, tourism and information and communication technology. In this last category of cooperation, it has been proposed to provide Indian support for modernising Sri Lanka‟s railway system and establishing a higher learning institution in the model of Indian Institutes of Technology. Given India‟s growing world
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leadership in these areas, it is not uncommon for the Joint Study Group to come up with this recommendation.
The Objections to CEPA
The objections to CEPA have been made on two premises. The first is the perception that ILFTA is singularly beneficial to India because it has promoted Indian exports to Sri Lanka and not Sri Lankan exports to India.
If one examines the value of exports, this argument appears to be correct. In 1999, Indian exports to Sri Lanka amounted to US $ 500 million. This went up to US $ 1820 million by 2009, when Sri Lanka‟s exports to India increased only from US $ 45 million in 1999 to US $ 322 million in 2009. Surely, these absolute numbers testify to the fact that it is India which has benefited from ILFTA.
But the relative numbers tell a different story. When Indian exports to Sri Lanka increased by nearly four times during this period, Sri Lankan exports to India increased by slightly more than 7 times. Hence, Sri Lanka was making a steady progress in narrowing the trade gap between the two countries.
The larger import volume from India during this period has also been beneficial to Sri Lanka for another reason. Sri Lanka has been importing from India mainly vehicles, machinery, cotton textiles, foods and drugs. If Indian goods are not brought to Sri Lanka, the country would have brought them from the western countries where prices of these products are about two times higher than those from India. Hence, on one side, the cheaper Indian goods have eased the pressure on Sri Lanka‟s external payments. On the other side, they also enabled the country to acquire these intermediate goods at a lower cost and remain competitive in both the domestic and external markets. A good case in point is the price difference between a Suzuki Maruthi or a Bajaj Motorcycle from India and a Nissan March or a Honda Motorcycle from Japan.
This favourable trade diversion to India in the case of motor cars got reversed by the Government‟s recent decision to extend duty free motor car permits to public officials and the reduction of the duty rates on cars in general.
The second objection is that CEPA would open flood gates for Indian professionals like doctors, lawyers, and accountants etc to invade Sri Lanka‟s limited professional services market. Though such a move would increase competition and benefit the clients in the form of reduced fees, the professionals involved in the respective fields made the most vociferous protest against CEPA.
Ancient Lanka: A Champion of Free Trade in both Goods and Services
Contrary to what many contemporary Sri Lankans believe, ancient Lanka had a free trade policy in both visible goods and invisible services.
Having being located on a convenient naval route that linked the East and the West, the ancient Lanka had been a meeting point for traders who came from Europe and the Middle East from the western side and those who came from the Far East from the eastern side. During the reign of Parakramabahu the Great (1153 -86 AD) in the Polonnaruwa period, the country was an entrepot trading centre which stocked goods from all over the world and resold the same to visiting traders. One striking example is the reference by Professor Senarat Paranavitana in the History of Ceylon published by the University of Ceylon (Volume Two) to an Arabian geographer named Idris that the King had bought all the alcohol brought from Irak and Phers and resold to other traders at prices fixed by him. Dr S Arasaratnam, drawing on sources in archives in both Portugal
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and Holland, says in his Dutch Power in Ceylon, that Lanka in the 15th to 17th centuries had exported the country‟s elephants and arecanuts to India and imported the much needed rice and textiles. Both Mahavansa and Chulavansa have numerous references to various artisans coming from foreign lands and providing their services in architecture, sculpture, irrigation and reservoir building and artistic creations such as singing, dancing and composing.
Ancient Lanka had built up enormous amounts of wealth and prosperity by these means. Hence, it was a complete free trade in goods and services without entering into formal CEPAs with other countries.
CEPA is not an unreserved opening of trade in services
Many have feared that CEPA would open up the services sectors of the two countries wholesale in an equal manner, but that is not the case. India has offered to make a deeper and a wider opening of its services sector to Sri Lankan professionals. Sri Lanka has been requested to reciprocate in small measures gradually. Accordingly, India would open up 80 sub sectors upfront, while Sri Lanka would do so only in 20 sub sectors. In this manner, India will allow unlimited number of visas to executives, managers and specialists to work in India; Sri Lanka will do so only in two sectors, namely, IT and maritime services, but thereagain, it is limited to investment projects made by Indians in the country.
Economic Cooperation: Sri Lanka is the Beneficiary
India is emerging as a world economic power and some analysts project that it has the potential of growing even faster than China. The reputed British journal, The Economist, in its issue of 2nd October, 2010, has expressed confidence that India could outpace China due to its still growing work force and strong and versatile private companies. When compared to Sri Lanka, India‟s technological and scientific base is much improved and developed. Hence, by going into an economic cooperation pact with India, Sri Lanka always stands to benefit.
Sri Lanka hibernates, but India acts fast
While Sri Lanka has been sleeping over CEPA for over 7 years since 2003, India has been active in negotiating or signing comprehensive economic cooperation and partnership agreements with a number of countries. First, it was with the Association of South East Asian Nations or ASEAN in terms of India‟s „looking east policy‟ promulgated in early 1990s. Accordingly, a comprehensive economic cooperation agreement or CECA was signed with ASEAN in general in 2003. To make it more comprehensive and tailor - made, individual CECAs are now being negotiated with Thailand, Malaysia, South Korea and Singapore and all these agreements are expected to be completed shortly. Outside ASEAN, a similar agreement is being negotiated with Japan too on the basis of a Joint Study Group Report completed in 2006. India expects to conclude this agreement too in the near future.
Moving further forward from its initial looking east policy, India has now been looking in all directions: looking north (EU, Pakistan and Nepal), looking west (Gulf countries, Mauritius, Americas and Chile) and looking south (South Africa). This pragmatic approach by India is due to the recognition that its future depends on its successful integration to the global economy.
Despite its huge domestic market of which Sri Lanka should be envious, India and Indian companies believe that they should build a viable export base in order to harness
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the economies of scale in the long run. This should be done not by offending or annoying the potential economic partners, but by cooperating with them. This is similar to the „leap-frogging‟ policy pursued by Singapore in its initial phase of economic development. India too is leap – frogging around the globe in search of new markets and opportunities.
Many in Sri Lanka believe that India cannot do without Sri Lanka. India‟s $ 1.3 trillion economy is about 29 times bigger than Sri Lanka‟s $ 45 billion economy. Similarly, India‟s $ 177 billion export industry is 22 times bigger than Sri Lanka‟s $ 8 billion export industry. When India has accumulated $ 76 billion worth of FDIs up to end of 2009, Sri Lanka has done so only up to a woeful amount of $ 3 billion. So, without Sri Lanka, India can exist, sustain and prosper. But for Sri Lanka, Indian support is definitely a booster when it comes to realising its future economic aspirations.
Sri Lanka Should Look North, East and Everywhere
For Sri Lanka, India is an important source of economic energy. In the ancient times, Sri Lanka had immensely benefited not only from material goods that came from India, but also from various scientists, spiritual leaders, philosophers and artisans who crossed the borders without any hindrance. Hence, in the current period, Sri Lanka should first „look north‟ to its mighty big brother for support. But, dependence on a single country is also a risk, as noted by Lee Kuan Yew when he planned Singapore‟s initial development strategies. Hence, Sri Lanka should diversify its economic relationships covering as many countries as possible. In this exercise, Sri Lanka should therefore start „looking east‟ toward, ASEAN, China and Japan. Then, Sri Lanka should look west (EU and Americas) and South East (Australia and New Zealand).
What this means is that Sri Lanka should have CEPAs not only with India but also with all other trading partners.
Sri Lanka should act swiftly and decisively
Sri Lanka has already lost seven valuable years since the release of the first study group report in 2003. The current decision to appoint an inter – institutional study group is a welcome sign, but it should not be a repeat exercise of what the previous study group had accomplished. Further, doing it unilaterally without the participation of Indian experts would simply render it to a document “made in Sri Lanka” without taking into account the concerns and the problems of the other party. Hence, it will be a daunting task for Sri Lanka to sell this made in Sri Lanka document to India. Given the fact that India can do without Sri Lanka, but Sri Lanka cannot do without India, it is in the interest of Sri Lanka now to build its credibility relating to international arrangements and show its commitment to bilateral economic cooperation again.
It requires Sri Lanka to act swiftly and decisively.

Why Husbands Should Remain Silent ... :)

WIFE: "What would you do if I died? Would you get married again?" HUSBAND: "Definitely not !"

WIFE: "Why not ? Don't you like being married ?" 
HUSBAND: "Of course I do."

WIFE: "Then why wouldn't you remarry ?" 
HUSBAND: "Okay, okay, I'd get married again."

WIFE: "You would ?" 
HUSBAND:  ....... ??

WIFE: "Would you live in our house ?" 
HUSBAND: "Sure, it's a great house."

WIFE: "Would you sleep with her in our bed ?" 
HUSBAND: "Where else would we sleep ?"

WIFE: "Would you let her drive my car ?" 
HUSBAND: "Probably, it is almost new."

WIFE: "Would you replace my pictures with hers ?" 
HUSBAND: "That would seem like the proper thing to do."

WIFE: "Would you give her my jewelry ?" 
HUSBAND: "No, I'm sure she'd want her own."

WIFE: "Would she wear my shoes ?" 
HUSBAND: "No, her size is 7."

WIFE: -- silence - 
HUSBAND: "Shit".