Supply-side and the Third World: Sri Lanka's Development Strategy

SUPPLY-SIDE AND THE THIRD WORLD:_ SRI LANKA'S DEVELOPMENT STRATEGY Devinda R. Subasinghe Xhe Reagan administration is in the process of articulating a comprehensive policy on U.S. economic relations with the Third World. A series of speeches given by Secretary of State Haig (to the United Nations General Assembly in September 1981), by Secretary of the Treasury Regan (to the annual meetings of the World Bank and the International Monetary Fund in September 1981), and by President Reagan (at the Bank-Fund annual meetings, the World Affairs Council in Philadelphia, and remarks at the North-South summit meeting at Cancun, Mexico) have all presented the rhetoric for the emerging policy. The policies seem to be analogous to the adrninistration's domestic supply-side economic proposals— "Reaganomics." The resultant economic development advice for the developing countries—"Third World Economics"—is being put forward as the cornerstone of the adrninistration's policy on U.S.-Third World relations. According to President Reagan, the key issue to be addressed is "how we can work together to strengthen the world economy and promote greater economic growth and prosperity for all our peoples."1 The success of Third World Reaganomics hinges on whether such U.S. proposals prove to be viable in the developing countries that implement them. Reaganomics in the United States and in the Third World come at a time of uncertainty in the American economy and in the economies of many developing countries. As presented by its proponents, supply-side Reaganomics represents a significant shift away from Keynesianism in American economic policies. The foundations of such past policies had been that a dynamic and healthy economy would be achieved if demand were sustained through increased government spending and 1 . Remarks of the president to the World Affairs Council of Philadelphia, Pennsylvania. October 15, 1981 , p. 1. Text released by the White House Press Office. Devinda R. Subasinghe is a Ph.D. candidate at The School of Advanced International Studies (SAIS) of The Johns Hopkins University. He is also a research assistant at the Overseas Development Council in Washington, D.C. 149 150 SAIS REVIEW market interventions.* According to supply-siders, Keynesian policies in the United States led to rising inflation, low growth, and increasing unemployment-stagflation. Many developing countries followed an unsuccessful course ofgovernment spending and market controls that led to rampant state capitalism in most of the Third World. Both in the United States and in developing countries, economic growth and production, investments and savings, and incentives for increased productivity were all neglected. The developed countries underwent stagflation. In the Third World a majority of the people faced continued grinding poverty. The economic growth and modernization, so assiduously sought by developing countries, remained unrealized goals. With Reaganomics, American economic policy has broken with Keynesianism. Analysis of Third World economic successes in the 1970s has resulted in an increasing realization in developing countries that the Socialist model of development has, for the most part, failed to yield economic success. In this context, Third World Reaganomics, founded upon relevant elements of domestic economic policies, makes its appearance. If these policies can promote development, they may well help to overcome the instability in many Third World countries, which has resulted so often in the past in a threat to American interests. The following key elements ofThird World Reaganomics can be identified: (a) Laffer Curve-based supply-side economics, in which economic growth is to be achieved through tax rate reductions, tax credits, deregulations, and a diminished role for government that would increase supply, incentives, and government revenues; (b) policies to encourage private enterprise through market forces that encourage savings, investments, productivity, new technologies, and economic efficiency ; and (c) exhortations for developing countries to rely upon international trade and foreign investments and less on foreign aid. Will this package bring about meaningful and real economic development in the Third World and do so more efficiendy than Keynesian policies? There is some evidence available in the Third World. The proponents of Reaganomics have for many years been advocating the application of supply-side advice to Third World economic development.3 Sri Lanka provides a complete test case for an analysis ofthe dynamics ofsupply...