44th Open Forum: Rethinking Poverty

7/31/2019 44th Open Forum: Rethinking Poverty

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OPENFORUMONPOVERTY

RethinkingPovertyFeaturedguestspeechorganised

incollaborationwiththeFacultyofGraduateStudies,UniversityofColombo

Presentedby

ProfessorJomoKwameSundaramAssistantSecretaryGeneralforEconomicDevelopment,UNDESA

Chairedby

DrIndrajitCoomaraswamyCEPABoardMemberandformerDirectorofEconomicAffairs,Commonwealth

Secretariat

Documentationofadiscussionheldon21stNovember2011

attheCentreforPovertyAnalysis(CEPA)

29,Gregorys

Road,

Colombo

7,

SriLanka


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2

Contents

Introduction.......................................................................................................... 3

SpeechbyProfessorJomoKwameSundaram......................................................5

Discussion............................................................................................................ 19

Annex01:ListofAttendees................................................................................ 26


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IntroductionCEPAs objective in hosting the Open Forum on Poverty every quarter is to provide a

platformforgroupsofprofessionalstodiscusstheirresearchand/orexperienceonpoverty

andrelatedissues.TheOpenForumalsofunctionsasamediumthroughwhichknowledge

canbe

disseminated

to

awider

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 44thOpen ForumonRethinking Povertywas chairedbyDr IndrajitCoomaraswamy,

CEPA Board Member andformerDirector of Economic Affairs of the Commonwealth

Secretariat.

The Executive Director of CEPA, Priyanthi Fernando, explained CEPAs objective in

conductingOpenForums,beforeDrCoomaraswamyintroducedtheguestspeakerProfessor

JomoKwame

Sundaram,

Assistant

Secretary

General

for

Economic

Development,

UN

DESA.

Prof JomothenmadehispresentationonRethinkingPoverty.Thetranscribedspeechand

thediscussionthatensuedaredocumentedbelow.

PriyanthiFernandoExecutiveDirector,CEPAGoodafternoon,everybody,Ithankyouforbravingtheweathertocomehere.Weresorry

wehave tobring theOpenForum inside rather thanhaving itoutsidebutwe thought it

wouldbesaferintermsofgettingwet.

I thinkmanyofyouhavebeen toCEPAOpenForumsbefore.This isaplatform,a space,

whereyoucandiscussdifferentissueswhichcanbeeitherresearchissuesorcurrentissues.

Sometimes,liketodaywehaveguestspeakersandweareverypleasedandproudtohave

withustoday,Professor JomoKwameSundaram,who Ihaveknown foravery longtime,

thepresentAssistantSecretaryGeneralofEconomicDevelopmentintheUnitedNations.He

hasavery interestinghistoryofthinkinganddoing thingsthatarequitedifferent,outof

theboxandwhichchallengemainstreamthoughts.Wearelookingforwardtohislecture

or presentation on rethinking poverty; however youwant to refer to it. So, thank you

Jomo,forbeinghereatthissession,despitetheverytightscheduleyouarerunningon.

Tochair thissession,wehavewithushere,Dr IndrajitCoomaraswamy,who Idontthink

needsmuch introduction.He is aCEPABoardMember, served in theCentralBank from

19741989andhasalsobeentheformerDirectorofEconomicAffairsattheCommonwealth

Secretariat.Sowithoutfurtherado,IwillhandthechairovertoIndrajitandthentoJomoto

makehispresentation.


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DrIndrajitCoomaraswamyThankyouverymuch. It isgoodtobehereatCEPA.To introduce Jomo, I thinkwe really

should startwith his name,which is very unusual. Jomo Kwame Sundaram, if I am not

mistaken, is a combinationofAfrican firstnames and a SouthAsian surname; and this I

believereflects

Jomos

thinking.

He

has

many

talents,

numerous

achievements

and

is

atop

class academic;hehasbeen an activist and isnow in the international civil service.One

thingIcansayaboutJomoisthathehasbeenabletobringthestrengthsofanactivistinto

theUN; in that,hehasbeen able to influence the system from inside in a verypositive

direction.His initiative in introducing aUN systemwide supplementarymacroeconomic

advisorycapacityprovidesanalternativeperspectiveontheresponsesthatarebeingcalled

upon fromcountrieswhicharebeingconfrontedwitha rapidlychangingglobaleconomy.

Todaysworldischaracterisedbyagreatdealofriskanduncertainty.Andthisnewfacilityis

givingcountriesanopportunitytolookatthingsinadifferentway.

Jomowill

be

introducing

atraining

programme

tomorrow

for

our

own

Central

Bank,

on

the

subjectof financialsystemstabilitywithin thisnewuncertainglobalenvironment. I really

think Jomo brings a tremendous wealth of experience and expertise across the whole

spectrumof thedevelopmentagenda andwe are very fortunate tohavehimhere. I am

goingtobeveryquickasyouwouldratherbelisteningtohim.

With regard to the theme for today,wehavealwaysbeen thinkingabouthow to reduce

poverty;toimprovethequalityandconditionofhumankind.Ifonelooksattheperiodsince

decolonisationbegan the lastsixdecadesorso therehavebeenconsiderablegains; in

terms of social development, in terms of the reduction in absolute poverty and income

poverty.And

even

ifone

looks

at

the

ten

years

since

the

Millennium

Summit,

the

aggregate

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

increasedglobal

integration.

In

the

process,

income

disparities

within

and

across

countries

have increaseddramatically.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

perspectivebecauseglobalisationhasnumerousoutcomeswhichdonotensure inclusivity


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andstability.Sowiththat,letmehandthemicrophoneovertoJomowhowillbringawhole

rangeofinsightstowhatIhavejustsaid.

SpeechbyProfessorJomoKwameSundaramThankyouverymuchDr.Indrajit,andthankyouPriyanthiforinvitingmehere.Iowebothof

them and all of you an apology for rescheduling the event from tomorrow to today as

certain recentdevelopmentsdidnot allowme to stick to the earlier schedule. So I very

muchappreciateyouallcominghere,especiallysinceitisthedayofthebudgetspeech.

Letmeverybrieflyrunthroughthepresentation Ihavepreparedandtrytomaximisethe

time we have for discussion. Basically, what I would like to do is to give you a global

perspectiveonpovertybecause,oftentimes,wethinkofpoverty inournationalcontexts.

Thatis,ofcourse,veryimportantformanydifferentreasonswhichweallknowabout.

But global inequalities are very significant. There is a tendency to overlook global

inequalities. Ifyou lookat thisgraph,basedon theworkof the lateeconomicstatistician

AngusMaddison,whatemerges is thatoverhalfamillenniumago,sometimearound the

eraofVascodaGama andColumbus, inequalitybegan to rise compared to theprevious

inter

regional

inequalities

that

existed.


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ThisincreasebeginstogrowfurtherfromthetimeoftheIndustrialRevolution,whenthere

wasasignificantgrowthspurtamongmostofthenowindustrialisedeconomies.Now,this

wasnotasteady increase; inequalitiesdidgodown intheearlypostWW2periodpartly

because of the devastation of thewar and partly because decolonisation empowered

manydevelopingcountries todocertainthingstheywerepreviouslynotabletodo.Very

often, this included increasing agricultural production, the green revolution in food

production, importsubstituting industrialisation,allofwhichdidreduce inequality.So it is

important to recognise that there was some decline in inequality after the end of the

SecondWorldWaruntilapproximately1971,whentheBrettonWoodssystemcametoan

end.


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Thebigdivergenceintherecentperiod,ofcourse,camewiththeriseofEastAsia.China,of

course, isthe bigkidontheblock,butJapansrisewasverysignificant,as isKoreasand

therestoftheregion.SotheriseofEastAsiahasmadeahugedifference.Now,therehave

beensignificantgrowthspurtsinSouthAsia,includingIndia.ButIwouldsuggesttoyouthat

overall,SouthAsianeconomicperformancehasbeen less impressive.Today,mostof the

poorpeopleintheworldaretobefoundinSouthAsia,andnotinSubSaharanAfrica,asis

commonlyassumed.

Besidesdifferent ratesofgrowth indifferentpartsof theworld, improvements inhuman

welfarehavealsobeenunequal.Thisispartlybecauseofdifferentdemographictransitions

withdevelopedeconomiesexperiencingmuchslowerpopulationgrowth.Nonetheless,only

inEastAsiahastherehasbeensignificantoverallimprovementorcatchingupcomparedto

developedcountries.


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Therehas

been

alot

of

rhetoric

and

media

interest

in

the

rise

of

the

BRICS.

In

fact,

the

economicperformancesof thecountries involvedhavebeenquitediverse. In thecaseof

Russia, there was a major collapse in human welfare, especially during the first Yeltsin

periodwhenlifeexpectancyofRussiansinparticular,malesfellbysixyears!Thisisquite

unprecedentedinthelast10,000years,andhasneverhappenedbefore,exceptinwartime.

Yeltsins shock therapyor shorttermpaindidnot contribute to longterm gainwith the

Russian economy still smaller than in the late 1980s despite its richmineralwealth 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


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recognised, ratherbelatedly, that there isnoway to reducepovertywithout significantly

increasingjobopportunities.

So, productive employment is really central to poverty reduction. You can talk about all

sortsofostensible povertyprogrammes,butultimately, the rapid growth ofdecentjobs

matters

most.

Not

surprisingly,

unemployment

and

under

employment

have

been

growing

sincethefinancialcrisis.Buttheperiodimmediatelyprecedingthecrisiswasaperiodofjob

poor growth. Various factors have contributed to suchjobpoor growth, including some

dimensionsofglobalisationandrelatedeconomicintegration.

The last decade before the ongoing crisis was reasonably good in terms of developing

countrygrowth,notunlikethetwodecadesfromthe1960stothe1980s. Incontrast,the

last twodecades of the twentieth centurywere pretty dismal. Themain reason in both

periodshasbeencommoditypriceincreases.Commoditypriceimprovements,especiallyfor

agricultural products, generally improve thewelfare of the rural poor, but this has also

meantthatagrowingproportionoftheurbanpopulationareworseoffduetosuchprice

increases,especiallyforessentialfooditems.

Theenormous increase in thenumberofbillionaires in theworld suggests thatalthough

muchhasbeenmadeoftheriseofthemiddleclassindevelopingcountries,thesuperrich

haveaccumulatedwealthincomemuchmorerapidlyinrecentdecades.Inotherwords,

totrytounderstandthepersistenceofpoverty,wealsoneedtounderstandgrowingwealth

concentrationasdifferentsidesofthesamecoin.

Income inequality has been increasing inmost countries in theworld 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


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10

coefficient about 0.8, or 80%. Brazilian inequality was also rather high, but has seen

significantchangesinthelastdecade.

Afteralmostaquartercenturyofslowgrowth,muchofSubSaharanAfricadidprettywellin

themiddleof the lastdecade.More importantly, in recentyears,some richcountriesare

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 arenowbeing told to forget aboutexporting;what youneed todonow 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.Slowergrowth inrichcountries is

goingtoadverselyaffectgrowthindevelopingcountries.

Weneed

to

pay

much

more

attention

to

global

level

economic

inequality

and

not

just

nationallevelinequality.Therichestonepercentgetsabout14%ofworldincomecompared

tothepoorest20%whogetslightlyover1%.BrankoMilanovicoftheWorldBankhasshown

thatalthoughnationallevelsofinequalityofincomeandwealth canbeveryhigh,most

global inequality isaccountedforby international,notnational level inequalities.Although

high,intranationalinequalitiesareactuallyrelativelysmallcomparedtoglobalinequalities.


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Whileabout twothirdsofglobal inequality isaccounted forby international inequalities,

onlyathirdisduetointranationalinequalities.

A late 2011Al Jazeeradocumentary claimed that 15,000people inGreecehave avoided

taxesof57billioneuros,averagingabout4millioneurosperperson.Thetaxauthoritiesin

Greece

are

not

grossly

incompetent,

but

were

grossly

under

resourced,

not

least

in

terms

of

personnel.Perhapsmost importantly, thepolitical settlementmade toget themilitary to

returntothebarracksinthe1970senabledsuchtaxevasion.

Attheglobal level,allthishasbeenfacilitatedbycapitalaccount liberalisation,withmany

developingcountriestrippingoverthemselvestomarkettheirnationsastaxhavens.Weare

nownolongerjusttalkingabouttheCaribbeanIslands;intheIndianOceanandelsewhere,

there are governments offering similar facilities. So, not surprisingly, the largest foreign

investorinIndiaisMauritius.Ofcourse,MauritiansarenotgreatlyinvestinginIndiainabig

way.Rather, thisphenomenon of round tripping isquitewidespread elsewhere, e.g. In

China,HongKongandSingapore.

This chart attempts to provide a threedimensional graphical representation of income

inequalitywithinandamongcountries.TheXaxisisacontinuumfromrichtopoorwhilethe

diagonalshows richcountriesat thebackandpoorcountries in front.So,poorpeople in

poorcountriesareinthefrontright,whiletherichinrichcountriesarelikeaskyscraperin

thefarcorner.


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Intercountryinequalitydoesnotseemtobeclearlygoingupordowninthesecondhalfof

the twentiethcentury.ButonceChina isoutof thepicture, it rapidlychanges,and inter

country grows from slightlyover 0.5 to about1.7.Although there arehuge and growing

inequalitieswithinChina,itsrisehasmitigatedmajorchangesinglobalinequality.

Thenext twobar charts give a senseofhow some inequalitieshave changedover time.

Comparing the early 1960swith the early part of the last decade, the intervening four

decades sawoutput increasebyabout30% in thepoorest countries,while in the richest

countries,itincreasedbyalmost3/4.Thetrendsinglobalconsumptionhavebeensimilar.


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Now letme turn topartsof theglobalisationstory Indrajit referredto.Weareoften told

thatweareallbetteroff throughtrade integrationas this issupposed tobeaxiomatic in

internationaleconomics.Manyofyouespeciallyof theoldergenerationwho studied

economics longagomay rememberHansSingerandRaulPrebisch.Theypointedoutthat

forthefirsthalfofthe20thcentury,therewasadecline inthetermsoftradeforprimary

commoditiescompared

to

manufactures.

Their

thesis

appears

to

hold

for

the

second

half

of

the20thcenturyaswell.Inthefirstdecadeofthe21stcentury,commoditypriceswentup

againbutseemtobegoingdownagainnow.

Another economistW 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 thirdargument is thatdeveloping countrymanufactured goods seem todo lesswell

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. Inmostdeveloping countries, thewage ratedoesnot really goup

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 theydrop.AfterWorldWar1, therewasahugedrop,and in the1980s, therewas

another huge drop in commodity prices. The relative prices of manufactures from

developingcountriesalsodeclinedinthelasttwodecadesofthe20thcentury.

Letmeturnfromtradetofinance.ThereasonIwanttoemphasisefinancenowisbecause

wealwaysthinkofglobalisationasinvolvingtrade.Butinfact,asthechartshows,financial

integrationor financialglobalisation isevenmore significant than tradeglobalisation.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

thishasenhanced real investments.What is the story?The chart shows increased cross

borderflows,butrealinvestments,orgrossfixedcapitalformation,haveactuallydeclined.

So,the

increased

availability

of

financial

resources

from

abroad

does

not

necessarily

mean

thatactualrealinvestmentsgoup,contrarytowhatweareusuallytold.


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Duringthiscrisis,fargreaterattentionhasbeenpaidtothecomplexrelationshipbetween

inequalityandprices.Thereisatendencytomaketoomanygeneralisations;afterall,things

donotremainthesameindifferentcircumstances.IntheUS,forexample,realwageshave

gonedownoverthelastthreedecades,buttheavailabilityofcheapcredithasmeantthat

evenpoorpeoplewereabletomaintainacertainlivingstandardbecausetheycouldeasily

borrowcheaply.

When

interest

rates

went

up,

they

were

badly

affected,

resulting

in

the

housing bubble andwhat happened thereafter.Many approve of subprime lending as a

formoffinancial inclusionwithcreditmoreeasilyaccessibletothosewhocouldnotreally

afford it.Butwith crediteasilyavailable, itwas the inevitableburstingof the assetprice

bubblewhichprecipitatedthecrisis.

Most European countries spend tremendously for public interestpurposes, to save their

banks and so on. The level of indebtedness of governments in Europe was generally

between40%60%before the crisis. Ithasgoneup toabout100% in the last fouryears.

Now,governmentsarebeingtoldtopracticeausterityandcutspending,etc.althoughthis

will contribute tohugejob losses. In theUK, forexample,overhalfamillionjobs in the

publicsectorwillbe lost inthemediumterm.Asaconsequence,theburdenofsavingthe

financialsystemisbeingshiftedinwaysthatareexacerbatingpovertyandinequality.

Initially, particularly in 2009, there was a willingness to consider traditional Keynesian

solutions,

at

least

rhetorically.

But

often,

Keynesianism

was

invoked

as

justification

to

save

thefinancialsystemandtoadopttemporaryexpansionarymeasureswhichdidnotlastvery

long.Europehasanumberofautomaticstabilisers,butthesearenotasstrongintheAnglo

Saxonworld,particularlytheUSandUK.Thisispartofthereasonwhytheseeconomiesare

morelikelytogethitunlessthereareothertypesofinterventions.Europeisbetterableto

ensuregreaterlabourmarketsecurity.


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So, it isquitepossible thatnotonly theshareof incomeof labour,buteven theshareof

incomeofcapitalwilldecline,with financial rentsgrowing.So, the tensionbetweenWall

StreetandMainStreet(orastheBritishputit,betweentheCityandHighStreet)islikelyto

grow. But in the popular imagination, it is much easier to blame the outsider the

immigrantorsomeotheroutsiderandthisislikelytocreateproblemsandsocialtensions

whichwe

will

need

to

deal

with.

The2010Reporton theWorld Social Situation isonRethinkingPoverty.First, itmakes astrong argument against howpoverty is traditionallymeasured. Thewayweunderstand

poverty isdelegitimisedby theways inwhichwemeasurepoverty.Until2008, theglobal

povertyfigureusedwassomewhereintheregionofabillion.Inmid2008,theWorldBank

cameupwithitsnewfiguresfor2005;suddenly,thefigurewentfromabilliontoalmost1.4

billion.Inotherwords,thenumberofpoorpeopleintheworldwentupby40%duetothis

adjustmentinmeasurement.Undoubtedly,therewereproblemswiththeoldmeasures,but

suchahugejump inyourestimates raisesquestions. It raisesmoregeneraldoubtsabout

thereliability

of

the

measures.

There

have

been

important,

if

subtle

changes

with

each

new

ICP (InternationalComparisonofPoverty).There isno robustmethodologicaljustification

foraglobalpoverty lineexpressed indollars.Whyshouldadollaradaysecureonesbasic

human needs in all countries of theworld even if you adjust for PPP. These important

problemsaretrivialisedbytheimpositionofauniversalyardstick.

ThesecondpartofRethinkingPovertycriticallyreviewssomesocalledmagicbullets.Whatarethesemagicbullets?

Atonepoint, therewereexcessiveclaimsas tohowmicrocreditwasgoing toovercome

povertyintheworld.Noonewoulddisputethatmicrocredithasdonealotofgoodthings,

e.g. inBangladeshi society forexample, ithasempoweredwomen.But the claimsmade

about micro credit were grossly exaggerated, and gave rise to a major means for the

banking sector tomakemoremoneywhilepretending todo 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 secondmagic bullet is associatedwith Hernando de Sotowho has been promoting

property rightsas thesolution topoverty.Butnot surprisingly, the resultsexpectedhave

notmaterialisedinCairoandotherpartsoftheworld.Thishascreatedproblemsbecausea

singlemodelof landtitleswas imposedon landfordifferentuses,notjustforagricultural

practices,butalsoforpastoralandothertypesofpractices.

Yet anothermagic bullet is associatedwith the late Professor Prahalad a Professor of

MarketingattheUniversityofMichigan calledBottomofthePyramidmarketing.Hisbasic

ideawasthatachievingeconomiesofscalerequiresbuyinginbulk,butthepoorcannotbuy

inbulk.So,youproduce inbulkforeconomiesofscale inproduction,butmarket insmall


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18

quantitiesforthepoor.Suchmarketingcreatesjobs,andsomehowthis issupposedtobe

addingvalue.Thereisnoevidencethatanyvalueisaddedunlessonedefinesmarketingas

addingvalue.ButthisapproachhasbeenendorsedbytheWorldResourcesInstitute,avery

influentialNGO,andothersaswell.

As

a

consequence,

billions

of

dollars

have

been

pouring

into

such

programmes.

If

you

look

at,forexample,theMillenniumDevelopmentCorporationsetupbyPresidentBush,almost

its entire funding in the early yearswent into strengthening land registration offices in

Madagascar and other countries. Somehow, thiswas supposed to result in SubSaharan

Africa being able to takeoff.Needless to say, itdidntwork. So, the second half of this

volumedealswithbogussilverbulletssuchastheonesIjustdescribed.

The last point Iwant tomake 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 isbasically sound,andallweneed isasafetynet tocatch the fewwho slip

betweenthecracks.

Instead,therehasbeenabigpushrecentlyforwhatistermedasocialprotectionfloor.The

basicideaisthatyouneedafloorforall,andthatisverydifferent.So,ratherthanthinkingofanet fora few,youactuallyhavea floor forall. In2011,a reportwassubmittedbya

group ledbyMichelleBachelet,theformerPresidentofChile,andthechallengenow isto

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

villagera100

days

of

income.

Income

from

work

for

100

days

may

seem

very

modest

but

it

isimportant,alsoprovidingdignity,forthepoorestwhosignupfortheprogram.

Someofthatworkiscareworkwhichisimportantandoftenundervaluedbecauseitisoften

associatedwithwomen. It isalso important for infrastructuremaintenancewhichagain is

undervalued because most people think about new infrastructure construction, not

maintenance.Maintaining irrigation canals, roads and soon is important, so this kindof

efforthasactuallygenerated important results.So in so faraspovertyhasgonedown 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 thatwe can all learn from,which allows us to rethink our understanding of

povertyaswellasourstrategiestoovercomeit.

Thankyou.

DrIndrajitCoomaraswamy


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19

ThankyouverymuchJomo.ImustsaythatIcameinherewithextremelyhighexpectations

and you have certainly not let us down. Thank you for a wonderful presentation, the

information,theanalysis,theinsights alotofcompellingstuff.Wehavegotabouthalfan

hour for discussion, so I dontwant to preempt anymore time. Letmejust throw the

discussionopentoallofyou.There isa lotofmeatand Jomohaspresentedanumberof

differentperspectives

on

topical

issues

and

challenges.

DISCUSSIONQuestion:To someextentyouwerejustifiably criticising theamountof faithweplace in

microcreditasawayofalleviatingpovertyorrelievingthepoverty,butIthinktheproblem

there is not themicro credit aspect but with the fact thatmicro credit supportsmicro

enterpriseandatthisstagemicroenterprisedoesnthavemuchofafutureanywhereinthe

world.Soanyhowwehaveasituationwheretheamountofcreditthatyoureceive isonly

capableofsupportingmicroenterprise.Thereforewearecriticisingthewrongpartofthe

equation.

Question:Jomo,Firstofall,Iwouldliketothankyoufortheveryinterestingpresentation,it

was a very visually interesting presentation as well. My comments revolve around the

economicbullets....OvertheyearstherehasbeenasearchforamagicbulletwhichIthinkis

thewrongthingtobesearchingforwhichisalmostasproblematicasonepovertymeasure

forallasistheideathatalldevelopmentproblemswillbesolvedbyonemagicbullet.Ihave

tosay that theacademiccommunity ispartlytoblame. Inasense, itwouldbenice ifwe

could findamagicbullet.But I think tosomeextentacademics tryto forcethings in that

way and sometimes its facilitatedby certain institutions.On themicro finance side that

wouldalso

point

to

the

issue

that

often

micro

finance

operates

maybe

at

24%

30%

per

annum.InsomecaseswhereyouhavehadmicrofinancesystemsorGramenBanks,interest

rateshavebeenquitehighbutjustifiedasnecessaryduetothediseconomiesofsmallscale

and so on. Politicallymany governments dont want that to continue. Theywant these

banks to subsidise creditwhich can then catapult starvationwithin the rural economy. I

thinkthereisevidencethatovertime,asmorecapitalisdrawnintotheruralareas,wellsee

interestratescomingdown.Itisnecessarytofindthatbalancebetweenattractingcapitalin

andstarvingtheruralsectors.Iwasalsointerestedinthepartoncapitalflows.Yousaidthat

capitalflowsfromthelowerincomedevelopingcountriestodevelopedcountries.Thismay

alsobetrueinpartbecauseChinahasbuiltverylargereservesandtheissueiswheretoput

them.Iguess

they

should

invest

in

their

own

countries,

but

then

China

has

invested

very

substantiallyininfrastructurethoughtheremaybeadifferenceininlandChina.Sothenmy

pointis,thatatsomepoint inthatflow,youcanseethedevelopedcountriestakingitand

thenwhereisthatmoneygoingtogoifitwasntgoingtogotothedevelopedeconomies.

SowherewouldChinahaveinvested?


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20

Jomo:Withregardtothequestionsonmicrocredit,there issomeopportunitycosttoany

initiative requiring resources, as they couldbedeployedotherwise. Forborrowers, three

questionsarewhetherandhowtheemergenceofamicrocreditalternativeaffectsinformal

credit markets, encourages indebtedness and actually improves livelihoods beyond

smootheningconsumption.

Indrajit:Thereseemstobeamisunderstandingamongtheaudienceorsomemembersof

the audience, regardingwhat Jomo said.He indicated that themicro finance spacewas

beinghijackedbytheprivatesector bythefinancecompanies,andevenbybankswhich

operateforprofit.Thishasresultedinextremelyhigh interestrates.Butwhen itcomesto

GrameenorAASUM,wheretherearemorethan20millionpeopleborrowing,thesearenot

forprofitprogrammesandtheinterestratesareveryreasonable.Sothatswhathe(Jomo)

wasreferringto,notaboutmicrofinanceinvolvinghighinterestrates.

Jomo: Thank you. You have answered the confusion very clearly. Iwould go a little bit

further.PartofthereasonwhythereislessneedinIndiaanditiscertainlyamuchmore

complexstory isbecausetheynationalisedbanksalmosthalfacenturyago,andrequire

directed lendingwithbanksrequiredbythegovernmentto lendforspecificpurposes.The

expansionofbankingfacilitiestotheIndiancountrysidewasrequiredafternationalisation.

Inothercountries,youhavededicatedmicrolendingfacilities.So,therearemanywaysyou

canpromotemicrocredit,notjustbyleavingthingstotheprivatesector.Richard,youwere

referringtootherthingsYunushassaid,butIthinkthegentlemanbehindyouwascorrectin

elaboratingonwhatIwassayingastohowthedebatehaschangedoverthelastyear.

Asfarasmagicbulletsandacademicjustificationsareconcerned,Ithinkwehaveaproblem

ofleadership.IfyouthinkabouttheNewDeal,forexample,RooseveltstartedtheNewDeal

in1933afterhebecamePresident.HedidnotwaituntilKeyneswrotetheGeneralTheoryandthensaynowtheacademicjustificationhascome,Icandoit.

Whatdowefindtoday?Wefindmajorworldleadersanxiouslylookingovertheirshoulders

tocheckwhatwillbanksthink if Idothisorthat?Howwillthebondmarketreact?The

advisor to twoUSPresidents, JamesCarville famously saidhewants tobe rebornas the

bondmarket, suggesting that iswhere power resides today.Whathas happened to the

world, where major world leaders are unable to provide leadership, and instead are

beholdenandheldhostage in thisway.Wearenowheldhostagebymarketsandcertain

things cannotevenbe saidpubliclyby leadersbecause they fearmarketsmight react in

certainwaystotheirdetriment.Thisisadismalstateofaffairs.Whateveryousayaboutthe

thirties, inwhichadecadelongdepressionwasonlyendedbytheoutbreakofworldwar,

youknew,atleast,thattheleaderswerenotheldhostagebytheinvisiblehand.Butthisis

thestateoftheworldanditisavery,verysadstateofaffairs.

Today,theabilityofenterprises large,mediumandsmall tocreateenoughdecentwork

opportunities is modest, and there is a greater expectation of selfemployment, that


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21

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

imaginationsof

economics

teachers

and

their

students.

That

is

part

of

the

problem

of

micro

enterprises;youhave cutthroat competitionamongmicroenterpriseswhichundermines

theirviability.

Today, employment is a huge challenge and we have to think of ways and means to

promoteemployment.Wageemploymentisnottheonlyformofemploymentavailable.We

have tobegin to think ofways andmeansbywhich selfemploymentbecomes auseful,

viableandproductivealternative.

Richard,IthinkImissedoneofyourquestions.

Richard:It

was

on

the

capital

flows

with

China

and

its

massive

services.

Jomo: Iwould say two things. Itsanexorbitantprivilege thatonly theUS canafford.At

BrettonWoods,Keyneshadadifferentproposal,butwecannotturntheclockback.There

areveryinterestingproposalsnowwhicharebeingdiscussed.Soratherthantrytoturnthe

clock back, we need to move forward in ways that would develop a different type of

internationalmonetarysystemandadifferenttypeofinternationalreservesystem.

There isabsolutelynoreasonwhyyoucannotemitSDRs insufficiently largequantitiesto

performthe functionofaccumulatedreserves.Therearemanyothervariationswhichwe

need

to

think

about.

This

is

important

for

us

to

consider

because

ODA

declined

greatly

in

the

1990saftertheendoftheColdWar.Now,therearemiddleincomecountriesfightingwith

each other to persuade the world that they too deserve ODA, and not just the poor

countries.But the likelihoodofODAgreatly increasing to the longpromised levels isnot

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

Tanzaniangovernment

announced

amoratorium

on

visits

by

all

donors.

They

were

just

fed

up,after spendingmore andmore timeentertainingdonors. In thenameof insistingon

improved accountability,donorswith lessand lessmoneywanted tobeentertained and

takenaroundbynolessthantheministerorviceministerandsoon;therewasnotimefor

theministriestodoanyrealwork.Andallthiswasdoneinthenameofaccountability,to

thecitizensofthedonorcountries.Butthishasmeantthatwholeministrieswerespending


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22

a lot of timejust catering to such visitors with their many different requirements and

expectations.

Also, there is lessmoney going into national budgetswith donormoney 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 touse capital controls instead toprotect yourself?Why is itdeemed

necessarytoallowfreecapitalmobilitywhenthereisnoevidencethatfreecapitalmobility

enhancesgrowthorstabilitywheninfacttheevidenceindicatestheconverse?

Ifyouhaveahuge tradesurplusandaccumulate reserves from thatsurplus,youneed to

investthosereserves.Thesereservescan insteadbe invested in,say,anAsian Investment

BankoraSouthInfrastructureBankprovidingtripleAcreditratingstobuildinfrastructure.

Comment: The real reasonwhy Bangladeshwaswarned to create a lot of reserveswas

becauseallthecountrywantsistouseitaspower;thesereservesareatremendoussource

ofpowerthattheycanusetoinfluenceforeignpolicyandraiseinterestworldwidewhichin

thepastwasdonewithgunwars.Today thepowercomes from lendinganothercountry

moneyandmakingthemdowhatyouwant.Similarly,itiswhynodonorwillgiveanNGOan

endowmentfundbecausetheywanttheNGOattheendofthestring;theywanttousethat

control.

Comment:Maybeyoucanhelpmewithsomething.Thethingwithmagicbulletsisthatthey

are supposed to explode and then they are supposed to be donewith right? So micro

finance isamagicbullet.Even inSriLankawegetall sortsofaccusationswith regard to

workingwithpoverty,beingacottageindustryandthingslikethat.Nowanonprofitbank,

something for the users of micro finance loans, on the face of it doesnt sound very

sustainable.Iwouldthinkthatbeingmarketorientedwouldbeusedasasteppingstoneto

gettomoreconventionalmarkets inwhichcasemicrofinanceshouldeitherbesomething

that helps the lowestband ofpeople get out of theproblemwhere they cannot access

capital and all the opportunity cost issues or it should be thatwe never neededmicro

financesowegotoaguywiththeknifeinhisbeltroundthecornerandwecomeoutofit

andwedontneed itanymore.So inthatsensewhydoweneedmicrofinanceordowe

needit.

The

whole

thing

about

micro

finance

is

that

we

should

be

graduating

people

out

of

it;sohowcomewearemissingthat?

Indrajit:Letmeaddressacoupleofthosepoints, if Imay,becausewearerunningoutof

time. On the micro enterprises I think the authorities have focused very much on the

productionfunction.Butthemore intractableproblemrelatestomarketingandhow one

fixesthis....


23/26

23

Mytwoquestionstoyou:(1)Youseemtoimplythatlargereconomieshavemoreoptionsin

termsof responding to the effectsof low growth in theUS and Europe in termsof the

greatercapacitytheyhavetorebalancetheireconomiestoagreaterrelianceondomestic

demand.(2) Chinasmassivereservesaresaidtobeamajorpartoftheimbalancesthatare

underminingglobalstability.Thesereservescanberecycledtosupporteconomicrevivalin

advancedcountries

Jomo: I really have nothing against micro finance, but the claimsmade by its Western

proponents were really quite excessive. There are many micro financial needs, notjust

credit needs, but other needs aswell, which need to addressed for awhole variety of

reasons.Butultimately, it isproductiveemploymentthat isthemajorchallenge,andhow

we facilitate such growth of productive employment becomes a challenge. If Indrajit is

correct,andmarketing isthebigbottleneck,thenweneedtoaddressthatandgobackto

Richards challenge earlier. I would go for a more modest approach of identifying and

addressingthesebottlenecks.

Atthesametime, it isvery importantthatcountriesusewhateverpolicyspacetheyhave.

UnderArticle6,section3,oftheIMFsArticlesofAgreement,allmembercountrieshavethe

righttomanagetheircapitalaccounts.Butthevastmajorityofcountriesintheworldhave

denied this right to themselves. In fact, over 140 countries actually have some form of

capitalcontrols,buttheydarenottalkaboutthem.Theyare indenialand ifpressed,they

pledgetogetridofthem,tomovetotheEuropeanideal.

Wearecompeting inaleaguewhichleadstoaculdesac,whichdoesntgetusanywhere.

There is absolutely no evidence that capital account liberalisation enhances growth. For

example,you

have

alot

of

money

coming

in

here

for

whatever

reason,

and

then

something

happens tospook themarkets, themoneywill startmovingoutsuddenly,even if the so

calledeconomic fundamentalshavenotchanged.Nowadays,moneymoves inandout for

all kinds of reasons; you canjust have a rumour without much basis, but that can be

enough.


24/26

24

Considerhow thesedecisionsarebeingmade? In socalledemergingmarketssuchasmy

own,suchdecisionsareofteninfluencedbygossipexchangedintheeveningsinthebarsin

townwhere investment fundmanagersgo from theoffice to relaxandchat.This ishow

informationisgathered.Thefactthattheyarealreadytiredandprobablyintoxicateddoes

notdiminishtheirperceptionofhowreliablesuchinformationis.

So,on thebasisofallkindsofpartial information,major investmentdecisionsaremade,

often tobeaheadof thecurve,bothon the riseaswellason the fall. Idontknowhow

muchof this you findhere inColombo,but this ishowdecisions aremade in themajor

financialcentresofEastAsia,LondonandNewYork.

So,youhaveveryconsequentialdecisionsbeingmadeonthebasisofinformationofmixed

qualityaswellasinvestmentmodelswhichtendtobeprocyclical,transformingboomsinto

bubblesandadjustmentsintobusts.ConsiderwhathappenedwiththeAsiancrisis.After thePlazaaccordofSeptember1985,

theUSdollardeclined againstothermajor 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 inadecadeofhighgrowth inMalaysia,Thailandand Indonesiauntil

theAsiancrisisof19971998.InJune1995,LarrySummersandSakakibaraEisukegottogether,implicitlyagreeingthatthe

highyenpolicywaskillingtheJapaneseeconomy;79yentotheUSdollarwasstranglingthe

Japaneseeconomyandtheydecidedtoreversetheyenappreciationofthepreviousdecade

after1985.So, thehighyenperiodorendaka lasted from thePlazaAccord inSeptember

1985untilthetwometinJune1995.And the South EastAsian economies,which had pegged their currencies against theUS

dollar, suddenly found themselves with appreciating currencies which were less

competitive.Butmany financial interests in theseeconomieshadborrowedheavily from

abroad,takingadvantageofinterestrateandexchangeratearbitrationopportunities.They

hadavestedinterestinprotectingtheearlierpegstotheUSdollar.So,eventhoughitwas

adversely

affecting

the

real

economy

in

Southeast

Asia,

they

were

defending

these

USD

pegsintheirselfinterest.

Thus, the19971998Asiancrisisstartedoffdue tounsustainableSoutheastAsianpegs to

thedollar,whichhadservedthemwellastheUSdollardeclinedagainsttheJapaneseyen

up to mid1995. After June 1995, the US dollar strengthened, which implied the

appreciationoftheSoutheastAsiancurrencies.Theappreciationofthesecurrenciesmade


25/26

25

theirexportsmuch lesscompetitive,which then sloweddowneconomicgrowth thathad

becomedependentonexportgrowth.

TheclassicUSMainStreetversusWallStreetkindofconflict orHighStreetversustheCity

tensionintheUK hasbeenresolvedoverthelastthreedecadesinfavouroffinance.The

proliferationof

the

business

media

has

greatly

strengthened

the

influence

of

finance

not

onlytheprintmedia,butmoreimportantly,thebroadcastmediaandawholehostofnew

typesofinformationflowsfacilitatedbyICTandsoon.Thisbasicallymakespolicymakingin

thefinancialworldbeholdentomediafedperceptions.

Nevertheless, inmanyofourcountries, it is stillvery important toenhance theextentof

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 verymuch for your interest and I apologiseonce again for rescheduling this

meetingandhopeitwasnottooinconvenient.Thankyouverymuch.

Indrajit:ThankyouverymuchJomo,IthinkIcan,withconfidencesayonbehalfofallofus,

thatithasbeenaverystimulatingcoupleofhours.Thankyouverymuchfortakingthetime

tobewithusandthankyoutoPriyanthiandtheCEPAteamforputtingthison.Ithinkthere

hasbeenanenormouslevelofinsightthathascomethroughonsomeveryimportantissues

at theglobal levelbut thosewhichhaveveryspecificandconcrete implications forpolicy

makinginSriLanka.Sothankyouverymuch.


26/26

Annex01:ListofAttendees

Name Organisation

1. HiranDias ChairmanCEPA2. VinyaAriyaratne ExecutiveDirectorSarvodaya3. DulanDeSilva Director BerandinaDEVELOPMENTSERVICES4. M.Vamadevan Consultant5. MalaLiyanage ExecutiveDirector LawandSocietyTrust6. IsharaJayawardana JournalistLakehouse7. FredrickAbeyratne SeniorProgrammeAnalyst/UNDP8. RazinaBilgrami DeputyCountryDirector9. AzusaKuboth10. RanjithD.Wanigratne InternationalConsultant&11.W.M.Leelasena DirectorDev.Chakra12. J.C.Ratwatte ManagingDirector RuralReturns13.QuintusPerera Journalist14. I.Samarakoon Consultant15. S.H.A.Mohamed FES16. RichardVokes CompanyDirector17. SusruthaGoonasekara SocialProtectionEconomist18. HafizZainudeen PRBMUnit19.W.M.S.A.Samarakoon Student20.

K.K.

Wickramasinghe

Student

21.MangalaWeerasekera22.AmaliBoralugoda VisitinglecturerUniversityofKelaniya23.PriyanthiFernando ExecutiveDirectorCEPA24.K.Romeshun CEPA25.NadhiyaNadjab CEPA26.GeethaMayadunne CEPA27.MohomadMunas CEPA28.GayathriLokuge CEPA29.J.Wickramaratne CEPA30.K.I.H.Sanjeewanie CEPA31.ChaturangaWeerasekera CEPA32.KarinFernando CEPA33.TehaniAriyaratne CEPA34.NilakshiDeSilva CEPA35.GeethaHarshani CEPA

44th Open Forum: Rethinking Poverty

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