ECONOMYNEXT – Sajith Premadasa, who is pushing to be the presidential candidate for Sri Lanka’s United National Party said he wanted to employ a mix of Hayekian and Keynesian economic policies.
“On one hand we have the Keynesian aggregate demand management model,” Premadasa said speaking at a think tank in Colombo.
“At the other end we have the Frederich Hayek new model. I believe we need a mixture of these models to have the major attributes of economic growth.”
Premadasa was perhaps the first senior level politician in Sri Lanka to publicly mention Hayek.
Hayek proposed classical liberal policies based on sound money that had earlier laid the foundation for the industrial revolution (gold standard at the time) protecting the incomes of the poorest of the poor, while keeping house prices low and affordable by preventing inflation and asset bubbles .
Housing bubbles and mal-investments generally come when central bank enforce rate cuts with printed money, leading to collapse of currencies and investment bubbles.
Keynes proposed a remedy to boost after a central bank creates a bubble, and causes depression.
Sri Lanka has generally followed Keynesian policies after US ‘New Dealers’ pushed a central bank on Sri Lanka to join the failed Bretton Woods soft-peg after World War II, breaking a classical liberal currency board.
Sri Lanka had been consistently following Keynesian money printing models except for a brief period when Central Bank Governor A S Jayewardene and Nivard Cabraal and with W A Wijewardene as Deputy Governor, analysts have said.
“We have to follow an export based economic model,” Premadasa said. “When it comes to growth I firmly believe the greatest value addition is to be achieved from growth based on manufacturing, this has been proven to be the case in the 80s and 90s.”
Premadasa’s father helped set up over 100 apparel factories using the multi-fibre agreement to push exports.
“If you observe the progress made by the Asian Tigers in the late 90s and early 2000s, manufacturing based industrial development for economic growth has been proven to be the most sustainable economic growth that can be achieved,” he said.
Singapore, which used Hayekian monetary policy, eschewed Keynesian ideas.
Goh Keng Swee, independent Singapore’s first finance minister and head of the currency board said money printing led to balance of payments troubles, inflation and political instability.
“When nearly two-thirds of our citizens’ expenditure is spent on imported goods, a strong Singapore Dollar helps to keep consumer prices down,” explained Goh Ken Swee, Lee Kwan Yew’s first finance minister and the economic architect of the country.
“Third, we wanted to indicated to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore.
“A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.”
Another export powerhouse Japan, saw inflation explode soon after World War II, under General Douglas McAurther due the influence of American New Dealers, who were Keynesian.
“To cope with output collapse and unemployment, the Japanese government printed money to finance subsidies while imposing price controls,” explained Konichi Ohno later in his book, Development of Japan.
“Clearly, this strategy could not be sustained for long. Monetization of fiscal deficits created triple-digit inflation from 1946 to 1949. Black market inflation was even higher, especially in the early period. This was the highest inflation that Japan ever experienced, before or since.”
General McArthur’s staff in Tokyo were also Keynesian New Dealers, who did not want big bang correction, Ohno said.
“But this debate within the US government was ended when Washington sent Joseph Dodge to Tokyo in early 1949. Dodge was the president of Detroit Bank and a strong believer in the free economy,”
Under the Dodge stabilization package the Yen was fixed at 360 to the US dollar. Sri Lanka’s rupee is 180 from around 4.70 after World War II.
Korea was not so lucky. It went to the IMF 18 times until the central bank was fixed in the early 1980s following disasterous real effective exchange rate targeting exercise and wage suppression that led to mass-strikes and protests.
Japan’s 360 to the US dollar was fixed until 1971 when the US dollar collapsed under President Nixon’s Keyensian ‘Great Society’ program when then-Fed Chairman Arthur Burns printed money to close an output gap. The Yen is now 105 to the US dollar.
The collapse of the Bretton Woods led to Sri Lanka’s closed economy of the 1970s. Following the economic and rise of unemployment to around 20 percent, in Sri Lanka Sajith Premadasa’s father became Prime Minister under J R Jayewardene.
Jayewardene, who set up the Central Bank after independence, did not reform it, leading to high inflation, finance companies collapses and political unrest in the 1980s, while Britain and US both stabilized and had low inflation under Thatcher’s Hayekina policies and Volker’s tight monetary policies.
The UK, the birthplace of John Maynard Keynes, where he was a Treasury official, suffered terribly. The UK went to the IMF 11 times suffering with rationing, exchange controls and Sterling crises, until Thatcher came stopped printing and abolished all controls.
In post-war Germany, Hayekian policies were implemented by Wilehm Ropke and Ludwig Earhard to implement the Federal Republic’s Social Market Economy creating the so-called German Economic Miracle overtaking UK which won the war.
“Stability is not everything,” Geman Economic Minister Karl Schiller once said. “But without stability, everything is nothing.”