OPENFORUMONPOVERTY

RethinkingPoverty
Featuredguestspeechorganised incollaborationwiththeFacultyofGraduateStudies,UniversityofColombo Presentedby ProfessorJomoKwameSundaram AssistantSecretaryGeneralforEconomicDevelopment,UNDESA Chairedby DrIndrajitCoomaraswamy CEPABoardMemberandformerDirectorofEconomicAffairs,Commonwealth Secretariat Documentationofadiscussionheldon21stNovember2011 attheCentreforPovertyAnalysis(CEPA) 29,GregorysRoad,Colombo7, SriLanka

Contents

Introduction..........................................................................................................3 SpeechbyProfessorJomoKwameSundaram .....................................................5 . Discussion............................................................................................................19 Annex01:ListofAttendees................................................................................26

Introduction
CEPAs objective in hosting the Open Forum on Poverty every quarter is to provide a platformforgroupsofprofessionalstodiscusstheirresearchand/orexperienceonpoverty andrelatedissues.TheOpenForumalsofunctionsasamediumthroughwhichknowledge can be disseminated to a wider audience. This Open Forum is hosted by CEPA as part of CEPAs Poverty Portal activities. The CEPA Poverty Portal is a free information resource portalonpovertyinSriLanka(www.povertyportal.lk) The 44th Open Forum on Rethinking Poverty was chaired by Dr Indrajit Coomaraswamy, CEPA Board Member andformerDirector of Economic Affairs of the Commonwealth Secretariat. The Executive Director of CEPA, Priyanthi Fernando, explained CEPAs objective in conductingOpenForums,beforeDrCoomaraswamyintroducedtheguestspeakerProfessor JomoKwameSundaram,AssistantSecretaryGeneralforEconomicDevelopment,UNDESA. ProfJomo thenmadehispresentationon RethinkingPoverty.Thetranscribedspeechand thediscussionthatensuedaredocumentedbelow.

PriyanthiFernandoExecutiveDirector,CEPA
Goodafternoon,everybody,Ithankyouforbravingtheweathertocomehere.Weresorry we have to bring the Open Forum inside rather than having it outside but we thought it wouldbesaferintermsofgettingwet. I think many of you have been to CEPA Open Forums before. This is a platform, a space, whereyoucandiscussdifferentissueswhichcanbeeitherresearchissuesorcurrentissues. Sometimes,liketodaywehaveguestspeakersandweareverypleasedandproudtohave withustoday,ProfessorJomoKwame Sundaram, whoIhaveknown foravery longtime, thepresentAssistantSecretaryGeneralofEconomicDevelopmentintheUnitedNations.He has a very interesting history of thinking and doing thingsthat are quite different, outof theboxandwhichchallengemainstreamthoughts.Wearelookingforwardtohislecture or presentation on rethinking poverty; however you want to refer to it. So, thank you Jomo,forbeinghereatthissession,despitetheverytightscheduleyouarerunningon. To chair this session, we have with us here, Dr Indrajit Coomaraswamy, who I dont think needs much introduction. He is a CEPA Board Member, served in the Central Bank from 19741989andhasalsobeentheformerDirectorofEconomicAffairsattheCommonwealth Secretariat.Sowithoutfurtherado,IwillhandthechairovertoIndrajitandthentoJomoto makehispresentation.

DrIndrajitCoomaraswamy
Thank you very much. It is good to be here at CEPA. To introduce Jomo, I think we really should start with his name, which is very unusual. Jomo Kwame Sundaram, if I am not mistaken, is a combination of African first names and a SouthAsian surname; and this I believereflectsJomosthinking.Hehasmanytalents,numerousachievementsandisatop class academic; he has been an activist and is now in the international civil service. One thingIcansayaboutJomoisthathehasbeenabletobringthestrengthsofanactivistinto the UN; in that, he has been able to influence the system from inside in a very positive direction. His initiative in introducing a UN systemwide supplementary macroeconomic advisorycapacityprovidesanalternativeperspectiveontheresponsesthatarebeingcalled upon from countries which are being confronted with a rapidly changing global economy. Todaysworldischaracterisedbyagreatdealofriskanduncertainty.Andthisnewfacilityis givingcountriesanopportunitytolookatthingsinadifferentway. JomowillbeintroducingatrainingprogrammetomorrowforourownCentralBank,onthe subject of financial system stability within this new uncertain global environment. I really think Jomo brings a tremendous wealth of experience and expertise across the whole spectrum of the development agenda and we are very fortunate to have him here. I am goingtobeveryquickasyouwouldratherbelisteningtohim. With regard to the theme for today, we have always been thinking about how to reduce poverty;toimprovethequalityandconditionofhumankind.Ifonelooksattheperiodsince decolonisationbeganthelastsixdecadesorsotherehavebeenconsiderablegains;in terms of social development, in terms of the reduction in absolute poverty and income poverty.AndevenifonelooksatthetenyearssincetheMillenniumSummit,theaggregate picture reveals positive outcomes. The successes of China and India speak to these outcomesverywell. But there are weaker countries which are well behind in terms of achieving social developmentandreducingabsolutepoverty.Furthermore,thetrendsinrelativepovertyor inequality,particularlyinthelast20years,areofgreatconcern.Whenreferringtotheonset ofglobalisation,onetalksabouttheendoftheColdWar,intheearly90s,whentheprocess accelerated. The trade liberalisation; the integration of global capital markets following capitalaccountliberalisation;andthetechnologicalrevolutionthathastakenplacehaveall increasedglobalintegration.Intheprocess,incomedisparitieswithinandacrosscountries have increased dramatically. And if one looks at the top 10%, they have increased their shareofincomeandwealthsignificantly;ifonelooksatthetoponepercent,theirsharehas increasedevenmoredramatically.ThishasledtoalltheprotestmovementsintheUSand elsewhere. In my view, the whole thinking in the area of poverty requires a fresh perspectivebecauseglobalisationhasnumerousoutcomeswhichdonotensureinclusivity

andstability.Sowiththat,letmehandthemicrophoneovertoJomowhowillbringawhole rangeofinsightstowhatIhavejustsaid.

SpeechbyProfessorJomoKwameSundaram

ThankyouverymuchDr.Indrajit,andthankyouPriyanthiforinvitingmehere.Iowebothof them and all of you an apology for rescheduling the event from tomorrow to today as certain recent developments did not allow me to stick to the earlier schedule. So I very muchappreciateyouallcominghere,especiallysinceitisthedayofthebudgetspeech. LetmeverybrieflyrunthroughthepresentationIhavepreparedandtrytomaximisethe time we have for discussion. Basically, what I would like to do is to give you a global perspectiveonpovertybecause,oftentimes,wethinkofpovertyinournationalcontexts. Thatis,ofcourse,veryimportantformanydifferentreasonswhichweallknowabout.

But global inequalities are very significant. There is a tendency to overlook global inequalities. If you look at this graph, based on the work of the late economic statistician Angus Maddison, what emerges is that over half a millennium ago, sometime around the era of Vasco da Gama and Columbus, inequality began to rise compared to the previous interregionalinequalitiesthatexisted.

ThisincreasebeginstogrowfurtherfromthetimeoftheIndustrialRevolution,whenthere wasasignificantgrowthspurtamongmostofthenowindustrialisedeconomies.Now,this wasnotasteadyincrease;inequalitiesdidgodownintheearlypostWW2periodpartly because of the devastation of the war and partly because decolonisation empowered many developing countries to do certain things they were previously not able to do. Very often, this included increasing agricultural production, the green revolution in food production,importsubstitutingindustrialisation,allofwhichdidreduceinequality.Soitis important to recognise that there was some decline in inequality after the end of the SecondWorldWaruntilapproximately1971,whentheBrettonWoodssystemcametoan end.

 Thebigdivergenceintherecentperiod,ofcourse,camewiththeriseofEastAsia.China,of course,isthebigkidontheblock,butJapansrisewasverysignificant,asisKoreasand therestoftheregion.SotheriseofEastAsiahasmadeahugedifference.Now,therehave beensignificantgrowthspurtsinSouthAsia,includingIndia.ButIwouldsuggesttoyouthat overall, South Asian economic performance has been less impressive. Today, most of the poorpeopleintheworldaretobefoundinSouthAsia,andnotinSubSaharanAfrica,asis commonlyassumed. Besides different rates of growth in different parts of the world, improvements in human welfarehavealsobeenunequal.Thisispartlybecauseofdifferentdemographictransitions withdevelopedeconomiesexperiencingmuchslowerpopulationgrowth.Nonetheless,only inEastAsiahastherehasbeensignificantoverallimprovementorcatchingupcomparedto developedcountries.

 There has been a lot of rhetoric and media interest in the rise of the BRICS. In fact, the economic performances of the countries involved have been quite diverse. In the case of Russia, there was a major collapse in human welfare, especially during the first Yeltsin periodwhenlifeexpectancyofRussiansinparticular,malesfellbysixyears!Thisisquite unprecedentedinthelast10,000years,andhasneverhappenedbefore,exceptinwartime. Yeltsins shock therapy or shortterm pain did not contribute to longterm gain with the Russian economy still smaller than in the late 1980s despite its rich mineral wealth and humanresourceendowments.

Untilthemiddleofthepastdecade,growthwasgenerallyspeakingmuchslower,more modestanduneven,formostoftheworldsincetheearly1980scomparedtothepostwar Golden Age (1950s1960s). Not surprisingly, poverty reduction has been much slower during the recent period, with slower growth and growing inequality. It has been

recognised, rather belatedly, that there is no way to reduce poverty without significantly increasingjobopportunities. So, productive employment is really central to poverty reduction. You can talk about all sorts of ostensible poverty programmes, but ultimately, the rapid growth of decent jobs mattersmost.Notsurprisingly,unemploymentandunderemploymenthavebeengrowing sincethefinancialcrisis.Buttheperiodimmediatelyprecedingthecrisiswasaperiodofjob poor growth. Various factors have contributed to such jobpoor growth, including some dimensionsofglobalisationandrelatedeconomicintegration. The last decade before the ongoing crisis was reasonably good in terms of developing countrygrowth,notunlikethetwodecadesfromthe1960stothe1980s.Incontrast,the last two decades of the twentieth century were pretty dismal. The main reason in both periodshasbeencommoditypriceincreases.Commoditypriceimprovements,especiallyfor agricultural products, generally improve the welfare of the rural poor, but this has also meantthatagrowingproportionoftheurbanpopulationareworseoffduetosuchprice increases,especiallyforessentialfooditems. The enormous increase in the number of billionaires in the world suggests that although muchhasbeenmadeoftheriseofthemiddleclassindevelopingcountries,thesuperrich haveaccumulatedwealthincomemuchmorerapidlyinrecentdecades.Inotherwords, totrytounderstandthepersistenceofpoverty,wealsoneedtounderstandgrowingwealth concentrationasdifferentsidesofthesamecoin.

Income inequality has been increasing in most countries in the world except perhaps in northernEurope,northeastAsiaandSouthAmericainthepastdecade;LatinAmericaand Southern Africa have been characterised by the highest inequalities in the world. For example, the highest income inequality today is to be found in Namibia with the Gini

coefficient about 0.8, or 80%. Brazilian inequality was also rather high, but has seen significantchangesinthelastdecade. Afteralmostaquartercenturyofslowgrowth,muchofSubSaharanAfricadidprettywellin the middle of the last decade. More importantly, in recent years, some rich countries are almost resigned to a period of indefinite slow growth. Over the past three decades, developingcountriesbecameincreasinglyintegratedintotheglobalsystem,andmuchmore oriented towards producing for export, whether commodities or manufactures. These countries are now being told to forget about exporting; what you need to do now is to produceforthedomesticmarket. Thegrowthwhichtheyhaveachievedprincipallyonthebasisofexportcompetitiveness hasbeenbasedonkeepingdownthewages,incomesandwelfareoftheirownpopulations. Butnow,theyaretoldtostartproducingfordomesticconsumption.Itisrelativelyeasierfor large countries like China, India or Brazil to make that kind of switch. But for smaller economies,itismuchmoredifficult.Whatisbeingproducedforexportisoftennotwhatis neededordesiredbymostofthedomesticpopulations.Slowergrowthinrichcountriesis goingtoadverselyaffectgrowthindevelopingcountries.

We need to pay much more attention to global level economic inequality and not just nationallevelinequality.Therichestonepercentgetsabout14%ofworldincomecompared tothepoorest20%whogetslightlyover1%.BrankoMilanovicoftheWorldBankhasshown thatalthoughnationallevelsofinequalityofincomeandwealthcanbeveryhigh,most globalinequalityisaccountedforbyinternational,notnationallevelinequalities.Although high,intranationalinequalitiesareactuallyrelativelysmallcomparedtoglobalinequalities.

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While about twothirds of global inequality is accounted for by international inequalities, onlyathirdisduetointranationalinequalities. A late 2011 Al Jazeera documentary claimed that 15,000 people in Greece have avoided taxesof57billioneuros,averagingabout4millioneurosperperson.Thetaxauthoritiesin Greecearenotgrosslyincompetent,butweregrosslyunderresourced,notleastintermsof personnel. Perhaps most importantly, the political settlement made to get the military to returntothebarracksinthe1970senabledsuchtaxevasion. Atthegloballevel,allthishasbeenfacilitatedbycapitalaccountliberalisation,withmany developingcountriestrippingoverthemselvestomarkettheirnationsastaxhavens.Weare nownolongerjusttalkingabouttheCaribbeanIslands;intheIndianOceanandelsewhere, there are governments offering similar facilities. So, not surprisingly, the largest foreign investorinIndiaisMauritius.Ofcourse,MauritiansarenotgreatlyinvestinginIndiainabig way. Rather, this phenomenon of round tripping is quite widespread elsewhere, e.g. In China,HongKongandSingapore.

This chart attempts to provide a threedimensional graphical representation of income inequalitywithinandamongcountries.TheXaxisisacontinuumfromrichtopoorwhilethe diagonal shows rich countries at the back and poor countries in front. So, poor people in poorcountriesareinthefrontright,whiletherichinrichcountriesarelikeaskyscraperin thefarcorner.

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 Intercountryinequalitydoesnotseemtobeclearlygoingupordowninthesecondhalfof the twentieth century. But once China is out of the picture, it rapidly changes, and inter country grows from slightly over 0.5 to about 1.7. Although there are huge and growing inequalitieswithinChina,itsrisehasmitigatedmajorchangesinglobalinequality.

The next two bar charts give a sense of how some inequalities have changed over time. Comparing the early 1960s with the early part of the last decade, the intervening four decades saw output increase by about 30% in the poorest countries, while in the richest countries,itincreasedbyalmost3/4.Thetrendsinglobalconsumptionhavebeensimilar.

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Now let me turn to parts of the globalisation story Indrajit referred to. We are often told that we are all better off through trade integration as this is supposed to be axiomatic in international economics. Many of you especially of the older generation who studied economicslongagomay remember HansSingerandRaul Prebisch.Theypointed outthat forthefirsthalfofthe20thcentury,therewasadeclineinthetermsoftradeforprimary commoditiescomparedtomanufactures.Theirthesisappearstoholdforthesecondhalfof the20thcenturyaswell.Inthefirstdecadeofthe21stcentury,commoditypriceswentup againbutseemtobegoingdownagainnow. Another economist W Arthur Lewis of the Caribbean argued differently. He argued that tropical agricultural products seemed to do worse than agricultural commodities from temperate countries. If you look at agricultural commodities from the tropics and the temperatezone,thetermsoftradefortropicalcountrieshavedeclinedforaboutacentury aswell.

The third argument is that developing country manufactured goods seem to do less well than developed country manufactured goods. The international division of labour has changed over the last few decades, with much more manufacturing taking place in developing countries. In most developing countries, the wage rate does not really go up because the seemingly unlimited supplies of labour keep wages down even when productivity rises. Thus, for example, wage goods may decline in price. In developed countries, however, thanks to better union organisation, skills, etc., productivity increases translateintohigherwages.

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Insuchcircumstances,youcouldwellhavegrowthwithouttheproducersbecomingbetter off.Thegraphsummarisescommoditypricesoverthe20thcentury;therearetwoinstances when they drop. After World War 1, there was a huge drop, and in the 1980s, there was another huge drop in commodity prices. The relative prices of manufactures from developingcountriesalsodeclinedinthelasttwodecadesofthe20thcentury.

Letmeturnfromtradetofinance.ThereasonIwanttoemphasisefinancenowisbecause wealwaysthinkofglobalisationasinvolvingtrade.Butinfact,asthechartshows,financial integration or financial globalisation is even more significant than trade globalisation. The upper line represents financial globalisation and the lower line represents trade globalisation.Althoughtherehasbeenanincreaseintradeintegration,especiallysincethe 1990s,thegrowthinfinancialglobalisationisfarmoresignificant.
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Andwhathasthismeantwiththeopeningofcapitalaccountsandsoon?Contrarytowhat mostofuswhostudiedeconomicsweretaught,capitaldidnotflowfromthecapitalrichto the capitalpoor. Rather, capital flowed uphill, from the capitalpoor to the capitalrich, often huge amounts. We are not just talking of middle income countries; even poor countrieshaveexperiencedmassiveoutflowsofcapital.

Andwheredoesitgo?TheUSreceivesalmosthalfofworldcapitalinflows.Butperhapsall this has enhanced real investments. What is the story? The chart shows increased cross borderflows,butrealinvestments,orgrossfixedcapitalformation,haveactuallydeclined. So,theincreasedavailabilityoffinancialresourcesfromabroaddoesnotnecessarilymean thatactualrealinvestmentsgoup,contrarytowhatweareusuallytold.

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Duringthiscrisis,fargreaterattentionhasbeenpaidtothecomplexrelationshipbetween inequalityandprices.Thereisatendencytomaketoomanygeneralisations;afterall,things donotremainthesameindifferentcircumstances.IntheUS,forexample,realwageshave gonedownoverthelastthreedecades,buttheavailabilityofcheapcredithasmeantthat evenpoorpeoplewereabletomaintainacertainlivingstandardbecausetheycouldeasily borrow cheaply. When interest rates went up, they were badly affected, resulting in the housing bubble and what happened thereafter. Many approve of subprime lending as a formoffinancialinclusionwithcreditmoreeasilyaccessibletothosewhocouldnotreally afford it. But with credit easily available, it was the inevitable bursting of the asset price bubblewhichprecipitatedthecrisis.

Most European countries spend tremendously for public interest purposes, to save their banks and so on. The level of indebtedness of governments in Europe was generally between 40%60% before the crisis. It has gone up to about 100% in the last four years. Now,governmentsarebeingtoldtopracticeausterityandcutspending,etc.althoughthis will contribute to huge job losses. In the UK, for example, over half a million jobs in the publicsectorwillbelostinthemediumterm.Asaconsequence,theburdenofsavingthe financialsystemisbeingshiftedinwaysthatareexacerbatingpovertyandinequality. Initially, particularly in 2009, there was a willingness to consider traditional Keynesian solutions,atleastrhetorically.Butoften,Keynesianismwasinvokedasjustificationtosave thefinancialsystemandtoadopttemporaryexpansionarymeasureswhichdidnotlastvery long.Europehasanumberofautomaticstabilisers,butthesearenotasstrongintheAnglo Saxonworld,particularlytheUSandUK.Thisispartofthereasonwhytheseeconomiesare morelikelytogethitunlessthereareothertypesofinterventions.Europeisbetterableto ensuregreaterlabourmarketsecurity.

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So, it is quite possible that not only the share of income of labour, but even the share of income of capital will decline, with financial rents growing. So, the tension between Wall StreetandMainStreet(orastheBritishputit,betweentheCityandHighStreet)islikelyto grow. But in the popular imagination, it is much easier to blame the outsider the immigrantorsomeotheroutsiderandthisislikelytocreateproblemsandsocialtensions whichwewillneedtodealwith. The 2010 Report on the World Social Situation is on Rethinking Poverty. First, it makes a strong argument against how poverty is traditionally measured. The way we understand poverty is delegitimised by the ways in which we measure poverty. Until 2008, the global povertyfigureusedwassomewhereintheregionofabillion.Inmid2008,theWorldBank cameupwithitsnewfiguresfor2005;suddenly,thefigurewentfromabilliontoalmost1.4 billion.Inotherwords,thenumberofpoorpeopleintheworldwentupby40%duetothis adjustmentinmeasurement.Undoubtedly,therewereproblemswiththeoldmeasures,but such a huge jump in your estimates raises questions. It raises more general doubts about thereliabilityofthemeasures.Therehavebeenimportant,ifsubtlechangeswitheachnew ICP (International Comparison of Poverty). There is no robust methodological justification foraglobalpovertylineexpressedindollars.Whyshouldadollaradaysecureonesbasic human needs in all countries of the world even if you adjust for PPP. These important problemsaretrivialisedbytheimpositionofauniversalyardstick. ThesecondpartofRethinkingPovertycriticallyreviewssomesocalledmagicbullets.What arethesemagicbullets? At one point, there were excessive claims as to how micro credit was going to overcome povertyintheworld.Noonewoulddisputethatmicrocredithasdonealotofgoodthings, e.g. in Bangladeshi society for example, it has empowered women. But the claims made about micro credit were grossly exaggerated, and gave rise to a major means for the banking sector to make more money while pretending to do good. In early 2011, Nobel Laureate Professor Yunus argued that profit oriented small scale lending is sure to be usurious and instead made a case for social business. The debate has changed very significantlyoverthelastfewyears,especiallyoverthelastyear. The second magic bullet is associated with Hernando de Soto who has been promoting property rights as the solution to poverty. But not surprisingly, the results expected have notmaterialisedinCairoandotherpartsoftheworld.Thishascreatedproblemsbecausea singlemodeloflandtitleswasimposedonlandfordifferentuses,notjustforagricultural practices,butalsoforpastoralandothertypesofpractices. Yet another magic bullet is associated with the late Professor Prahalad a Professor of MarketingattheUniversityofMichigancalledBottomofthePyramidmarketing.Hisbasic ideawasthatachievingeconomiesofscalerequiresbuyinginbulk,butthepoorcannotbuy inbulk.So, youproduceinbulkforeconomiesofscaleinproduction,butmarketinsmall
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quantitiesforthepoor.Suchmarketingcreatesjobs,andsomehowthisissupposedtobe addingvalue.Thereisnoevidencethatanyvalueisaddedunlessonedefinesmarketingas addingvalue.ButthisapproachhasbeenendorsedbytheWorldResourcesInstitute,avery influentialNGO,andothersaswell. Asaconsequence,billionsofdollarshavebeenpouringintosuchprogrammes.Ifyoulook at,forexample,theMillenniumDevelopmentCorporationsetupbyPresidentBush,almost its entire funding in the early years went into strengthening land registration offices in Madagascar and other countries. Somehow, this was supposed to result in SubSaharan Africa being able to takeoff. Needless to say, it didnt work. So, the second half of this volumedealswithbogussilverbulletssuchastheonesIjustdescribed. The last point I want to make in this connection is on social safety nets. This term has become very popular in the last two decades and, in and of itself, it does not seem objectionable.Butpolitically,andfromapolicypointofview,itbasicallysuggeststhatthe system itself is basically sound, and all we need is a safety net to catch the few who slip betweenthecracks. Instead,therehasbeenabigpushrecentlyforwhatistermedasocialprotectionfloor.The basicideaisthatyouneedafloorforall,andthatisverydifferent.So,ratherthanthinking of a net for a few, you actually have a floor for all. In 2011, a report was submitted by a groupledbyMichelleBachelet,theformerPresidentofChile,andthechallengenowisto ensurebroadacceptanceandimplementation. This can work in very different ways, for example through what is called NREGA the National Rural Employment Guarantee Act in India, which basically guarantees every villagera100daysofincome.Incomefromworkfor100daysmayseemverymodestbutit isimportant,alsoprovidingdignity,forthepoorestwhosignupfortheprogram. Someofthatworkiscareworkwhichisimportantandoftenundervaluedbecauseitisoften associated with women. It is alsoimportant for infrastructure maintenance which again is undervalued because most people think about new infrastructure construction, not maintenance. Maintaining irrigation canals, roads and so on is important, so this kind of effort has actually generated important results. So in so far as poverty has gone down in India, we need to compare the impact of the headlines about the Bangalores and Cyberabads compared to the full impact of NREGA on social relations in the Indian countryside. There are some very important developments in terms of recent world experience that we can all learn from, which allows us to rethink our understanding of povertyaswellasourstrategiestoovercomeit. Thankyou. DrIndrajitCoomaraswamy

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ThankyouverymuchJomo.ImustsaythatIcameinherewithextremelyhighexpectations and you have certainly not let us down. Thank you for a wonderful presentation, the information,theanalysis,theinsightsalotofcompellingstuff.Wehavegotabouthalfan hour for discussion, so I dont want to preempt any more time. Let me just throw the discussionopentoallofyou.ThereisalotofmeatandJomohaspresentedanumberof differentperspectivesontopicalissuesandchallenges.

DISCUSSION
Question: To some extent you were justifiably criticising the amount of faith we place in microcreditasawayofalleviatingpovertyorrelievingthepoverty,butIthinktheproblem there is not the micro credit aspect but with the fact that micro credit supports micro enterpriseandatthisstagemicroenterprisedoesnthavemuchofafutureanywhereinthe world.Soanyhowwehaveasituationwheretheamountofcreditthatyoureceiveisonly capableofsupportingmicroenterprise.Thereforewe arecriticisingthewrong partofthe equation. Question:Jomo,Firstofall,Iwouldliketothankyoufortheveryinterestingpresentation,it was a very visually interesting presentation as well. My comments revolve around the economicbullets....OvertheyearstherehasbeenasearchforamagicbulletwhichIthinkis thewrongthingtobesearchingforwhichisalmostasproblematicasonepovertymeasure forallasistheideathatalldevelopmentproblemswillbesolvedbyonemagicbullet.Ihave to say that the academic community is partly to blame. In a sense, itwould be nice if we could find a magic bullet. But I think to some extent academics try to force things in that way and sometimes its facilitated by certain institutions. On the micro finance side that would also point to the issue that often micro finance operates maybe at 24%30% per annum.InsomecaseswhereyouhavehadmicrofinancesystemsorGramenBanks,interest rateshavebeenquitehighbutjustifiedasnecessaryduetothediseconomiesofsmallscale and so on. Politically many governments dont want that to continue. They want these banks to subsidise credit which can then catapult starvation within the rural economy. I thinkthereisevidencethatovertime,asmorecapitalisdrawnintotheruralareas,wellsee interestratescomingdown.Itisnecessarytofindthatbalancebetweenattractingcapitalin andstarvingtheruralsectors.Iwasalsointerestedinthepartoncapitalflows.Yousaidthat capitalflowsfromthelowerincomedevelopingcountriestodevelopedcountries.Thismay alsobetrueinpartbecauseChinahasbuiltverylargereservesandtheissueiswheretoput them. I guess they should invest in their own countries, but then China has invested very substantiallyininfrastructurethoughtheremaybeadifferenceininlandChina.Sothenmy pointis,thatatsomepointinthatflow,youcanseethedevelopedcountriestakingitand thenwhereisthatmoneygoingtogoifitwasntgoingtogotothedevelopedeconomies. SowherewouldChinahaveinvested?

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Jomo:Withregardtothequestionsonmicrocredit,thereissomeopportunitycosttoany initiative requiring resources, as they could be deployed otherwise. For borrowers, three questionsarewhetherandhowtheemergenceofamicrocreditalternativeaffectsinformal credit markets, encourages indebtedness and actually improves livelihoods beyond smootheningconsumption. Indrajit:Thereseemstobeamisunderstandingamongtheaudienceorsomemembersof the audience, regarding what Jomo said. He indicated that the micro finance space was beinghijackedbytheprivatesectorbythefinancecompanies,andevenbybankswhich operateforprofit.Thishasresultedinextremelyhighinterestrates.Butwhenitcomesto GrameenorAASUM,wheretherearemorethan20millionpeopleborrowing,thesearenot forprofitprogrammesandtheinterestratesareveryreasonable.Sothatswhathe(Jomo) wasreferringto,notaboutmicrofinanceinvolvinghighinterestrates. Jomo: Thank you. You have answered the confusion very clearly. I would go a little bit further.PartofthereasonwhythereislessneedinIndiaanditiscertainlyamuchmore complexstoryisbecausetheynationalisedbanksalmosthalfacenturyago,andrequire directedlendingwithbanksrequiredbythegovernmenttolendforspecificpurposes.The expansionofbankingfacilitiestotheIndiancountrysidewasrequiredafternationalisation. Inothercountries,youhavededicatedmicrolendingfacilities.So,therearemanywaysyou canpromotemicrocredit,notjustbyleavingthingstotheprivatesector.Richard,youwere referringtootherthingsYunushassaid,butIthinkthegentlemanbehindyouwascorrectin elaboratingonwhatIwassayingastohowthedebatehaschangedoverthelastyear. Asfarasmagicbulletsandacademicjustificationsareconcerned,Ithinkwehaveaproblem ofleadership.IfyouthinkabouttheNewDeal,forexample,RooseveltstartedtheNewDeal in1933afterhebecamePresident.HedidnotwaituntilKeyneswrotetheGeneralTheory andthensaynowtheacademicjustificationhascome,Icandoit. Whatdowefindtoday?Wefindmajorworldleadersanxiouslylookingovertheirshoulders tocheckwhatwillbanksthinkifIdothisorthat?Howwillthebondmarketreact?The advisor to two US Presidents, James Carville famously said he wants to be reborn as the bond market, suggesting that is where power resides today. What has happened to the world, where major world leaders are unable to provide leadership, and instead are beholden and held hostage in thisway. We are now held hostage by markets and certain things cannot even be said publicly by leaders because they fear markets might react in certainwaystotheirdetriment.Thisisadismalstateofaffairs.Whateveryousayaboutthe thirties,inwhichadecadelongdepressionwasonlyendedbytheoutbreakofworldwar, youknew,atleast,thattheleaderswerenotheldhostagebytheinvisiblehand.Butthisis thestateoftheworldanditisavery,verysadstateofaffairs. Today,theabilityofenterpriseslarge,mediumandsmalltocreateenoughdecentwork opportunities is modest, and there is a greater expectation of selfemployment, that
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everyone can be an entrepreneur. In many developing countries, micro enterprise developmentoftenmeansphenomenawhereonepersonstartsastalldoingsomethingand everybodywhocanstartscopying.Then,youhavetextbookperfectcompetition,onlyfound nowadaysamongsmallfarmersandsomepettyormicroenterprisessuchashawkerstalls selling similar products. It hardly exists anywhere else in the world except in the imaginationsofeconomicsteachersandtheirstudents.Thatispartoftheproblemofmicro enterprises; you have cutthroat competition among microenterprises which undermines theirviability. Today, employment is a huge challenge and we have to think of ways and means to promoteemployment.Wageemploymentisnottheonlyformofemploymentavailable.We have to begin to think of ways and means by which selfemployment becomes a useful, viableandproductivealternative. Richard,IthinkImissedoneofyourquestions. Richard:ItwasonthecapitalflowswithChinaanditsmassiveservices. Jomo: I would say two things. Its an exorbitant privilege that only the US can afford. At BrettonWoods,Keyneshadadifferentproposal,butwecannotturntheclockback.There areveryinterestingproposalsnowwhicharebeingdiscussed.Soratherthantrytoturnthe clock back, we need to move forward in ways that would develop a different type of internationalmonetarysystemandadifferenttypeofinternationalreservesystem. Thereisabsolutelynoreason why youcannot emitSDRsinsufficientlylargequantitiesto perform the function of accumulated reserves.There aremany other variationswhich we needtothinkabout.ThisisimportantforustoconsiderbecauseODAdeclinedgreatlyinthe 1990saftertheendoftheColdWar.Now,therearemiddleincomecountriesfightingwith each other to persuade the world that they too deserve ODA, and not just the poor countries. But the likelihood of ODA greatly increasing to the long promised levels is not there.Attheendof2011,the4thHighLevelForumonAidEffectivenesswasheldinBusan, Korea.Someobserverscontendthataideffectivenesshasdeclinedovertheyearssincethe forums on aid effectiveness started. Greater micro management of aid, increasingly channelledbilaterally,hasmeantthattheunitsizeperprojecthasdeclinedfromoverUSD3 milliontolessthanUSD1million.Soaccountabilityandauditingmechanismsincreasedover threefold as the total amount of ODA has remained the same. Several years ago, the Tanzaniangovernmentannouncedamoratoriumonvisitsbyalldonors.Theywerejustfed up, after spending more and more time entertaining donors. In the name of insisting on improved accountability, donors with less and less money wanted to be entertained and takenaroundbynolessthantheministerorviceministerandsoon;therewasnotimefor theministriestodoanyrealwork.Andallthiswasdoneinthenameofaccountability,to thecitizensofthedonorcountries.Butthishasmeantthatwholeministrieswerespending

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a lot of time just catering to such visitors with their many different requirements and expectations. Also, there is less money going into national budgets with donor money earmarked for donorfavourites.Prioritiesarebasicallysetbydonors,sometimeswiththebestofintents, but very often, it undermines policy freedom, and reduces the policy space of recipient countries.Ifthewholepointofhavingatradesurplusistoaccumulatereservestoprotect yourselfagainstapossibleattackonyourcurrencyorsomeotherreasonlikethat,whynot exercise your right to use capital controls instead to protect yourself? Why is it deemed necessarytoallowfreecapitalmobilitywhenthereisnoevidencethatfreecapitalmobility enhancesgrowthorstabilitywheninfacttheevidenceindicatestheconverse? If you have a huge trade surplus and accumulate reserves from that surplus, you need to investthosereserves.Thesereservescaninsteadbeinvestedin,say,anAsianInvestment BankoraSouthInfrastructureBankprovidingtripleAcreditratingstobuildinfrastructure. Comment: The real reason why Bangladesh was warned to create a lot of reserves was becauseallthecountrywantsistouseitaspower;thesereservesareatremendoussource ofpowerthattheycanusetoinfluenceforeignpolicyandraiseinterestworldwidewhichin the past was done with gun wars. Today the power comes from lending another country moneyandmakingthemdowhatyouwant.Similarly,itiswhynodonorwillgiveanNGOan endowmentfundbecausetheywanttheNGOattheendofthestring;theywanttousethat control. Comment:Maybeyoucanhelpmewithsomething.Thethingwithmagicbulletsisthatthey are supposed to explode and then they are supposed to be done with right? So micro finance is a magic bullet. Even in Sri Lanka we get all sorts of accusations with regard to workingwithpoverty,beingacottageindustryandthingslikethat.Nowanonprofitbank, something for the users of micro finance loans, on the face of it doesnt sound very sustainable.Iwouldthinkthatbeingmarketorientedwouldbeusedasasteppingstoneto gettomoreconventionalmarketsinwhichcasemicrofinanceshouldeitherbesomething that helps the lowest band of people get out of the problem where they cannot access capital and all the opportunity cost issues or it should be that we never needed micro financesowegotoaguywiththeknifeinhisbeltroundthecornerandwecomeoutofit andwedontneeditanymore.Sointhatsensewhydoweneedmicrofinanceordowe needit.Thewholethingaboutmicrofinanceisthatweshouldbegraduatingpeopleoutof it;sohowcomewearemissingthat? Indrajit:Letmeaddressacoupleofthosepoints,ifImay,becausewearerunningoutof time. On the micro enterprises I think the authorities have focused very much on the productionfunction.Butthemoreintractableproblemrelatestomarketingandhowone fixesthis....
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Mytwoquestionstoyou:(1)Youseemtoimplythatlargereconomieshavemoreoptionsin terms of responding to the effects of low growth in the US and Europe in terms of the greatercapacitytheyhavetorebalancetheireconomiestoagreaterrelianceondomestic demand.(2)Chinasmassivereservesaresaidtobeamajorpartoftheimbalancesthatare underminingglobalstability.Thesereservescanberecycledtosupporteconomicrevivalin advancedcountries Jomo: I really have nothing against micro finance, but the claims made by its Western proponents were really quite excessive. There are many micro financial needs, not just credit needs, but other needs as well, which need to addressed for a whole variety of reasons.Butultimately,itisproductiveemploymentthat isthemajorchallenge,andhow we facilitate such growth of productive employment becomes a challenge. If Indrajit is correct,andmarketingisthebigbottleneck,thenweneedtoaddressthatandgobackto Richards challenge earlier. I would go for a more modest approach of identifying and addressingthesebottlenecks. Atthesametime,itisveryimportantthatcountriesusewhateverpolicyspacetheyhave. UnderArticle6,section3,oftheIMFsArticlesofAgreement,allmembercountrieshavethe righttomanagetheircapitalaccounts.Butthevastmajorityofcountriesintheworldhave denied this right to themselves. In fact, over 140 countries actually have some form of capitalcontrols,buttheydarenottalkaboutthem.Theyareindenialandifpressed,they pledgetogetridofthem,tomovetotheEuropeanideal. Wearecompetinginaleaguewhichleadstoaculdesac,whichdoesntgetusanywhere. There is absolutely no evidence that capital account liberalisation enhances growth. For example,youhavealotofmoneycominginhereforwhateverreason,andthensomething happens to spook the markets, the money will start moving out suddenly, even if the so calledeconomicfundamentalshavenotchanged.Nowadays,moneymovesinandoutfor all kinds of reasons; you can just have a rumour without much basis, but that can be enough.

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Consider how these decisions are being made? In socalled emerging markets such as my own,suchdecisionsareofteninfluencedbygossipexchangedintheeveningsinthebarsin town where investment fund managers go from the office to relax and chat. This is how informationisgathered.Thefactthattheyarealreadytiredandprobablyintoxicateddoes notdiminishtheirperceptionofhowreliablesuchinformationis. So, on the basis of all kinds of partial information, major investment decisions are made, often to be ahead of the curve, both on the rise as well as on the fall. I dont know how much of this you find here in Colombo, but this is how decisions are made in the major financialcentresofEastAsia,LondonandNewYork. So,youhaveveryconsequentialdecisionsbeingmadeonthebasisofinformationofmixed qualityaswellasinvestmentmodelswhichtendtobeprocyclical,transformingboomsinto bubblesandadjustmentsintobusts. Consider what happened with the Asian crisis. After the Plaza accord of September 1985, the US dollar declined against other major currencies, especially the Japanese yen. After depreciatingtheirowncurrenciesinthemid1980s,theSoutheastAsianauthoritiespegged theircurrenciesagainsttheUSdollar,whichdeclinedforadecadeagainsttheJapaneseyen. The depreciation of the Southeast Asian currencies effectively reduced their production costs, attracting investments from the first generation East Asian newly industrialised economies, resulting ina decade of high growth in Malaysia, Thailandand Indonesia until theAsiancrisisof19971998. InJune1995,LarrySummersandSakakibaraEisukegottogether,implicitlyagreeingthatthe highyenpolicywaskillingtheJapaneseeconomy;79yentotheUSdollarwasstranglingthe Japaneseeconomyandtheydecidedtoreversetheyenappreciationofthepreviousdecade after 1985. So, the high yen period or endaka lasted from the Plaza Accord in September 1985untilthetwometinJune1995. And the South East Asian economies, which had pegged their currencies against the US dollar, suddenly found themselves with appreciating currencies which were less competitive. But many financial interests in these economies had borrowed heavily from abroad,takingadvantageofinterestrateandexchangeratearbitrationopportunities.They hadavestedinterestinprotectingtheearlierpegstotheUSdollar.So,eventhoughitwas adversely affecting the real economy in Southeast Asia, they were defending these USD pegsintheirselfinterest. Thus, the 19971998 Asian crisis started off due to unsustainable Southeast Asian pegs to thedollar,whichhadservedthemwellastheUSdollardeclinedagainsttheJapaneseyen up to mid1995. After June 1995, the US dollar strengthened, which implied the appreciationoftheSoutheastAsiancurrencies.Theappreciationofthesecurrenciesmade

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their exports much less competitive, which then slowed down economic growth that had becomedependentonexportgrowth. TheclassicUSMainStreetversusWallStreetkindofconflictorHighStreetversustheCity tensionintheUKhasbeenresolvedoverthelastthreedecadesinfavouroffinance.The proliferationofthebusinessmediahasgreatlystrengthenedtheinfluenceoffinancenot onlytheprintmedia,butmoreimportantly,thebroadcastmediaandawholehostofnew typesofinformationflowsfacilitatedbyICTandsoon.Thisbasicallymakespolicymakingin thefinancialworldbeholdentomediafedperceptions. Nevertheless, in many of our countries, it is still very important to enhance the extent of policymakingfreedom.Andifyouarestillinterestedinbeingexportcompetitiveanditis verydifficultnottobedespitewhathashappenedinrecentyearsespeciallyimportantfor relativelysmalleconomies,itiscrucialto,atleast,gettheexchangerateright. As inflation targeting is not very helpful with open economies in a globalised world, exchangeratetargetingactuallymakesmoresenseasapolicypriorityfromadevelopment point of view. I am not really addressing your question on the virtues or problems of integrating with the Indian economy or South Asian regional economic cooperation, becausethatisamuchmorecomplexissuewhichyouallaremuchmorefamiliarwiththanI am. I thank you very much for your interest and I apologise once again for rescheduling this meetingandhopeitwasnottooinconvenient.Thankyouverymuch. Indrajit:ThankyouverymuchJomo,IthinkIcan,withconfidencesayonbehalfofallofus, thatithasbeenaverystimulatingcoupleofhours.Thankyouverymuchfortakingthetime tobewithusandthankyoutoPriyanthiandtheCEPAteamforputtingthison.Ithinkthere hasbeenanenormouslevelofinsightthathascomethroughonsomeveryimportantissues at the global level but those which have very specific and concrete implications for policy makinginSriLanka.Sothankyouverymuch.
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Annex01:ListofAttendees
Name Organisation 1. HiranDias ChairmanCEPA 2. VinyaAriyaratne ExecutiveDirectorSarvodaya 3. DulanDeSilva DirectorBerandinaDEVELOPMENTSERVICES 4. M.Vamadevan Consultant 5. MalaLiyanage ExecutiveDirectorLawandSocietyTrust 6. IsharaJayawardana JournalistLakehouse 7. FredrickAbeyratne SeniorProgrammeAnalyst/UNDP 8. RazinaBilgrami DeputyCountryDirector 9. AzusaKuboth 10. RanjithD.Wanigratne InternationalConsultant& 11. W.M.Leelasena DirectorDev.Chakra 12. J.C.Ratwatte ManagingDirectorRuralReturns 13. QuintusPerera Journalist 14. I.Samarakoon Consultant 15. S.H.A.Mohamed FES 16. RichardVokes CompanyDirector 17. SusruthaGoonasekara SocialProtectionEconomist 18. HafizZainudeen PRBMUnit 19. W.M.S.A.Samarakoon Student 20. K.K.Wickramasinghe Student 21. MangalaWeerasekera 22. AmaliBoralugoda VisitinglecturerUniversityofKelaniya 23. PriyanthiFernando ExecutiveDirectorCEPA 24. K.Romeshun CEPA 25. NadhiyaNadjab CEPA 26. GeethaMayadunne CEPA 27. MohomadMunas CEPA 28. GayathriLokuge CEPA 29. J.Wickramaratne CEPA 30. K.I.H.Sanjeewanie CEPA 31. ChaturangaWeerasekera CEPA 32. KarinFernando CEPA 33. TehaniAriyaratne CEPA 34. NilakshiDeSilva CEPA 35. GeethaHarshani CEPA
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