Economic pundits lose their bearings

By Janaka Perera

Former Head of United Nations Economic Affairs Division Dr. G. Uswattearatchi said on Monday (April 27) that the current global financial crisis had forced many economic and business pundits to re-examine their pet theories and rewrite what they have taught so far. He was speaking on the Global Economic crisis at a meeting organised by the Royal Asiatic Society of Sri Lanka (RASSL) at the Mahaweli Centre, Colombo 7.

"All main stream economics teaching had been against government intervention and regulation was providing opportunities for rent seeking. The burgeoning markets for derivatives valued at $51 trillion at mid 2007 had been unregulated. That was accepted wisdom in economics. Less government was good economic policy. It was determined by these ideologies and techniques that young economists learnt at university. That is what IMF and World Bank wrote as ‘conditionalities’ when they gave loans. They will not write them any more because no one is sure now what constitutes good economic policy. Business Schools had taught all what created the disaster that hit the financial world. Young MBAs and mathematics graduates with ‘single factor Gauss’s cupola’ became whiz-kids in Wall Street. Both economics and business schools would have to re-write what they teach."

Dr. Uswattearatchi referred to the unprecedented high rates of economic growth the world saw in 1998 to 2008. These, he pointed out, gave the first clue that those high rates were unsustainable.

"Then how did those rates takes place? The high rates of growth were the outcome of some unusual eventualities. A group of countries including China, India, Japan, Malaysia
Singapore, Taiwan and most petroleum exporting countries in West Asia accumulated savings, which they lent to the United States of America and Western Europe. That kept the interest rates low.

"Those savings were borrowed by consumers in US and Europe. With these loans people in the US and Europe bought what was produced in China, India, Japan and elsewhere. Thus international trade soared during that time. The savings lent appeared as foreign assets of lending countries and as foreign debt of borrowing countries. China became to hold the largest foreign exchange reserves (two trillion dollars two months back) and US became the world’s most indebted country."

According to Uswattearatchi low interest rates and the product of high savings in China, Japan, India and many OPEC countries, made it feasible for people to borrow heavily. For a variety of reasons, mostly political, US government made it possible and indeed necessary that financial institutions lend to sub-prime borrowers. But there is a limit to which households can borrow and that limit is determined by the capacity of borrowers to pay. In the seven years ending 2008, housing prices more than doubled, far faster than incomes grew. Low income earners found that they could not service their debts. House prices started dropping in 2006. By December 2008, 10.5million households had negative equity. The same thing happened to car loans and soon credit card debt will become toxic. The percentage of loans more than 120 days overdue rose from close to 1 percent in January 2008 to 2.6 percent in March 2009. The ratio of household debt to disposable income in US rose from its long term range of 70 percent to 80 percent to 140 percent in 2008. These levels of debt were unsustainable and the crash first came in the financial sector and then in output, profits and employment. Between September 2007 and March 2009, US lost 5.4 million jobs.

He forecasts that the two large population-economies India and China are showing early signs of life compared to economies in developed countries.

Coming to Sri Lanka’s Northern and Eastern provinces, Uswattearatchi said that both the State and private sectors should give these two devastated regions the very best in technology, so that they might be well in advance of the rest of the country for quite sometime as Germany and Japan did after the end of World War II in 1945.

“That is one of the advantages of the opportunity to rebuild completely what had been destroyed piecemeal. We will need to make the past destruction truly creative. That is why we will need so many resources. Can the government raise them from tax revenue? More important, can the government execute these programmes efficiently? I will not worry about corruption. No matter who implements these programmes, our politicians are wily and depraved enough to collect their bribes and commissions. There is great room for private sector enterprises to undertake this work. Perhaps, under the right circumstances individuals in the Diaspora may find this an opportunity to better living conditions of people in the East and the North for which they have been struggling so long and to bring down which they contributed so very substantially.”

C. Hewapattini, representing the Institute of Personnel Management, speaking on
"Human resources and the crisis" warned that the global financial crisis was already taking a heavy takes it toll on Sri Lanka’s domestic industries, where over 16,500 workers involved in the industrial sector have lost their jobs.

He said that 32 companies in Sri Lanka have applied to the Labour Commissioner seeking its approval to terminate the services of their employees temporarily or offer voluntary retirement schemes. According to him of the 350 garment factories that were operating in 2007, only around 265 to 275 factories were operational presently.

The crisis has led to the (1) stoppage of increments (2) sending staff on leave (3) stopping overtime, all allowances and bonus payments (4) voluntary pay cuts and (5) lay offs. The sectors worst affected are Apparel, Plywood, Food Processing, Garment accessories (gloves etc.), Leather Products, Ceramic ware and Cement.

Hewapattini revealed that certain local companies who were not concerned about market forces/practices were the first to lay off staff. They had earlier paid huge salaries and benefits to executives well above the market.

“The prospect of a ‘Dooms Day’ never occurred to them.”

He ridiculed the argument of some politicians that although some factories had closed down more new factories were being opened. He likened this absurd logic to saying “although some couples got divorced others got married and therefore no problem.”

He asked, "What about the trauma caused to those who lost their jobs? What about their dependants?"

President of the Inter-Company Employees Union Wasantha Samarasinghe speaking on ‘Impact on Employees’ said that the impact of the global financial crisis on Sri Lanka’s hotel industry affected not only those who were directly employed by the tourism sector but also those who provided services to the industry – such as taxi owners and food suppliers. He estimates that around 9000 people in the hotel sector were likely to lose their jobs due to the economic crunch.

Economist Dr Harsha de Silva and Senior Lecturer, Colombo University Dr. Sirimal Abeyratne also spoke.

RASSL President Dr. Susantha Goonatilake was the convener.

- Asian Tribune -