00:04 [Music] 00:08 00:08 banning something is okay i suppose for 00:10 00:10 some reason but if you do it in a grand 00:12 00:12 scheme you are going to fail in a grand 00:15 00:15 scale 00:20 00:20 we know where it's going to end we have 00:22 00:22 to address the problem domestically 00:26 00:26 if you don't increase productivity you 00:28 00:28 can't sustain 00:32 00:32 bite the bullet and make the changes 00:35 00:35 that need to be changed 00:38 00:38 [Music] 00:52 00:52 i'll say it in simple english 00:55 00:55 and that is it it's a transaction 00:57 00:57 between two people or two groups of 00:60 00:60 people 01:02 01:02 which has some value 01:04 01:04 because it is not a giveaway it's a 01:05 01:05 trade or you can have for example uh 01:10 01:10 barter trade 01:12 01:12 for your shoes i give a hat 01:14 01:14 but we have come we have civilized so we 01:16 01:16 now can pay here with currency notes and 01:19 01:19 coins 01:20 01:20 so that is any transaction between two 01:23 01:23 people that involves a payment is a 01:25 01:25 trade so i will say in economic term 01:30 01:30 what is trade and how do you define it 01:34 01:34 i start with plain english 01:36 01:36 is a 01:37 01:37 transaction between two parties which 01:39 01:39 involves some payment 01:41 01:41 that is the economic meaning of 01:43 01:43 of trade of a trade 01:51 01:51 you have barter trade where there's no 01:53 01:53 money involved 01:54 01:54 people give 01:56 01:56 i give a pair of shoes in exchange for 01:58 01:58 your head unfortunately barter rates are 02:02 02:02 limited i have to find the person who 02:05 02:05 wants a pair of shoes 02:07 02:07 who is when to sell in the shoes 02:09 02:09 and want to buy a hat but this is called 02:12 02:12 double coincidence of want 02:14 02:14 that is why people 02:15 02:15 adopted money and currency notes and 02:17 02:17 coins because you don't have to go 02:19 02:19 looking around the neighborhood to find 02:22 02:22 out who wants to buy 02:25 02:25 your shoes and prepare to 02:27 02:27 sell his hat or her hat 02:37 02:37 the tradition is a sort of arrangement 02:39 02:39 for goods and services being 02:41 02:41 sold between us and the rest of the 02:43 02:43 world 02:44 02:44 so that's the regimen defined by 02:47 02:47 the tariffs that people that say sri 02:49 02:49 lanka 02:51 02:51 charges for goods to be imported 02:55 02:55 and 02:56 02:56 what we pay to others 02:58 02:58 what we are talking about one is 02:60 02:60 internal 03:01 03:01 the tariffs and other 03:03 03:03 types of restrictions also are a trade 03:05 03:05 regime 03:06 03:06 so typically when we want to describe a 03:09 03:09 trade regime we begin by saying yes 03:12 03:12 this trade regime has average tariff 03:14 03:14 rate of say 03:16 03:16 15 percent 03:17 03:17 and then we can also say 03:20 03:20 this the 03:21 03:21 across the board 03:23 03:23 the tariff state the highest is 15 the 03:25 03:25 lowest is say 5 03:28 03:28 so that describes 03:30 03:30 a lot about the trade regime if you give 03:32 03:32 the type of restrictions that are on it 03:35 03:35 now you can have what i call 03:37 03:37 quantitative restrictions too so you can 03:39 03:39 see only you can import so many thousand 03:42 03:42 pairs of shoes so you can import only so 03:45 03:45 many yards of clothes 03:47 03:47 uh 03:48 03:48 and 03:49 03:49 that there will be a tariff or no tariff 03:52 03:52 in some cases 03:53 03:53 so that is a regime that is 03:56 03:56 that defines the transaction between us 03:58 03:58 and the rest of the world 04:03 04:03 [Music] 04:06 04:06 so 04:07 04:07 how does the economy become more 04:09 04:09 productive and efficient through trade 04:12 04:12 reforms 04:13 04:13 well first of all it gives you a state 04:16 04:16 of competition 04:17 04:17 so now you cannot be monopolizing 04:21 04:21 this market you will have to accommodate 04:26 04:26 goods and services that are entering 04:28 04:28 here through as imports 04:30 04:30 so that means we have to we are forced 04:32 04:32 to become competitive if you want to 04:34 04:34 operate in that market 04:36 04:36 so a comparative com 04:38 04:38 it is competition that makes it 04:40 04:40 efficient 04:41 04:41 so if we were producing some good say 04:44 04:44 at x 04:46 04:46 x rupees per yard of per pound 04:49 04:49 now we will try to produce it 04:52 04:52 for x minus 04:55 04:55 say 10 percent x minus five percent to 04:57 04:57 be able to compare to the import so it 04:59 04:59 uh sort of uh 05:02 05:02 i don't know the word forces it compels 05:04 05:04 you to become efficient or lose the 05:06 05:06 market 05:08 05:08 so in a way 05:09 05:09 trade you see that all the countries 05:11 05:11 that became efficient in the world and 05:13 05:13 were very successful 05:15 05:15 when they started 05:17 05:17 trading with the rest of the world 05:19 05:19 otherwise they have very limited 05:20 05:20 competition 05:21 05:21 somebody can monopolize in small country 05:23 05:23 like ours we have no chance to be 05:26 05:26 competitive and 05:27 05:27 to be efficient if we are if we are not 05:29 05:29 competitive because we can't have the 05:31 05:31 scale to generate that type of 05:33 05:33 competition 05:34 05:34 so it's a very important thing it is no 05:37 05:37 accident that the countries that are 05:39 05:39 doing very well in the world are mostly 05:41 05:41 open trade system and we can talk about 05:44 05:44 soviet union 05:46 05:46 which 05:46 05:46 limited trade for all these satellites 05:49 05:49 also nobody within the satellite or the 05:52 05:52 soviet union could trade with the rest 05:54 05:54 of the world without permission from 05:55 05:55 moscow we don't have such a system and 05:58 05:58 they realized that's why they fell after 06:00 06:00 70 years the economy could not stand the 06:03 06:03 type of rules that they had introduced 06:05 06:05 and so trade is a very good thing and 06:08 06:08 with something free trade is a very good 06:10 06:10 thing now there are instances we will 06:13 06:13 not allow drugs to come in we will not 06:15 06:15 allow harmful 06:17 06:17 things to be imported we won't allow our 06:19 06:19 months to come in subject to those 06:21 06:21 limitations 06:22 06:22 it increases the choice for us 06:25 06:25 so if you want to if you go to vietnam 06:27 06:27 today you want to buy a shirt five 06:29 06:29 people will come after you and say so 06:30 06:30 buy mine is really cotton through the 06:32 06:32 color you know it's very so the customer 06:36 06:36 gets the best deal 06:37 06:37 and same thing for the uh 06:40 06:40 for the producer also he can see when he 06:42 06:42 compete 06:44 06:44 what should he do to improve his 06:46 06:46 production in terms of quality 06:48 06:48 in order to be able to compete with a 06:51 06:51 foreign import 06:53 06:53 and vietnam country that i know quite 06:56 06:56 well went from 06:57 06:57 that type of a trade 06:60 06:60 control to a free very free this i used 07:03 07:03 to tell them teach there and i had to 07:05 07:05 say you are a capitalist country you are 07:07 07:07 very free 07:08 07:08 then some 07:09 07:09 countries that i know 07:11 07:11 and so they are doing very well they are 07:12 07:12 growing at eight nine percent that is no 07:15 07:15 accident that this happened at the same 07:17 07:17 time 07:18 07:18 you want me to give a little historical 07:20 07:20 account of other people who 07:22 07:22 uh 07:23 07:23 introduce these ideas or trade that we 07:25 07:25 are now using today 07:27 07:27 actually what we are using today 07:30 07:30 is called 07:31 07:31 the law of comparative advantage 07:34 07:34 it simply says 07:36 07:36 that if if a country has what is called 07:38 07:38 absolute advantage produce every good 07:40 07:40 cheaper than everybody else else in the 07:42 07:42 world it will still do better 07:44 07:44 by trading with somebody it's a very 07:47 07:47 interesting 07:48 07:48 non-initiative understanding 07:51 07:51 so the famous nobel prize winner 07:54 07:54 the best economies of this our 07:55 07:55 generation not our maybe three 07:58 07:58 generations is paul samuelson he was a 08:01 08:01 professor at mit um with the leading 08:04 08:04 science uh university in the world 08:07 08:07 one of the physicists want to work him 08:08 08:08 in us is there anything in economics 08:11 08:11 that is non-native and very powerful to 08:13 08:13 explain the world he didn't take a 08:15 08:15 batten eileen these ideas it's called 08:17 08:17 comparative advantage and said just what 08:19 08:19 i said you can produce everything at low 08:22 08:22 cost still you do better by trading with 08:25 08:25 somebody at least one of the goods i 08:27 08:27 mean that applies outside the norm 08:29 08:29 normal you said your trade supposing you 08:32 08:32 are a lawyer 08:35 08:35 you are making 500 rupees 08:38 08:38 an hour 08:40 08:40 and if you have to type your own briefs 08:43 08:43 you won't be as efficient as secretary 08:45 08:45 so you can 08:46 08:46 hire a secretary pay at 150 half your 08:49 08:49 thing 08:51 08:51 instead of trying to do everything by 08:53 08:53 yourself that is exactly what countries 08:54 08:54 are doing 08:56 08:56 they are following the competitive 08:57 08:57 advantage 08:59 08:59 so that's the reason yeah can i give you 09:01 09:01 some names and i produce i want to 09:03 09:03 mention the how the idea came 09:07 09:07 also very amazing interesting 09:09 09:09 the idea of absolute advance advantage 09:12 09:12 was developed by 09:14 09:14 uh 09:15 09:15 scottish economics most of them turned 09:17 09:17 out to be scottish 09:19 09:19 uh 09:20 09:20 quite an absolute advantage adam smith 09:23 09:23 actually the father of economics in a 09:25 09:25 way adam smith 09:27 09:27 he wrote a book called wealth or nation 09:28 09:28 this is a wrong title but i give 09:30 09:30 everything 09:31 09:31 around 1776 09:34 09:34 and then the 09:37 09:37 the theory we are now using computer 09:39 09:39 advantage 09:40 09:40 was invented by 09:43 09:43 an a person who was not an economist he 09:45 09:45 is a 09:46 09:46 stock market trader 09:48 09:48 uh 09:49 09:49 called david ricardo 18 18 17 i believe 09:53 09:53 yeah 09:55 09:55 what happened was he was going on 09:56 09:56 holiday to brighton 09:59 09:59 and he is 10:01 10:01 a scholar learning want to want to 10:03 10:03 understand this thing ran into a 10:05 10:05 bookstore 10:06 10:06 in london and found this book by 10:10 10:10 adam smith called welter nation bought 10:13 10:13 it took it to the beach and read it 10:16 10:16 and was so convinced 10:18 10:18 about about the book and what it said 10:21 10:21 uh he came back and resigned his job 10:24 10:24 and became an economist 10:26 10:26 and the world has never been the same 10:27 10:27 after what he discovered 10:30 10:30 law of comparative advantage 10:39 10:39 what is meant by impose substitution 10:42 10:42 actually we cannot straight away say 10:44 10:44 it's a good thing or bad thing it 10:45 10:45 depends upon what type of things being 10:48 10:48 substituted but as the 10:50 10:50 term 10:52 10:52 means 10:53 10:53 implies 10:54 10:54 you insert you are replacing what is 10:56 10:56 being imported you are trying to produce 10:58 10:58 at home 10:59 10:59 now if you are as competitive as before 11:02 11:02 as the other 11:04 11:04 the country form which you are importing 11:06 11:06 then i have no problem with it but the 11:08 11:08 trouble is that most of the time 11:13 11:13 when you substitute imports you are 11:16 11:16 actually 11:17 11:17 limiting competition in that area 11:20 11:20 so you are for as 11:22 11:22 immediately prices go up because 11:24 11:24 the you might not be as efficient as the 11:27 11:27 good that you are consuming 11:30 11:30 from imports 11:32 11:32 so immediately prices go up 11:36 11:36 then the the 11:38 11:38 power to compete in the system is 11:40 11:40 reduced so the people who are now got a 11:43 11:43 uh they assume they are only one 11:46 11:46 monopolist is now making a lot of money 11:49 11:49 because 11:51 11:51 he or she 11:52 11:52 has no competition to face he can fix a 11:54 11:54 price depending upon how the market is 11:58 11:58 so it's a bad thing if the it goes 12:01 12:01 if prices go up and costs go up 12:04 12:04 then welfare or the consumer goes down 12:07 12:07 and the incentive for the producer 12:10 12:10 to become more efficient is also removed 12:13 12:13 from the scene so therefore import 12:15 12:15 competitive 12:16 12:16 substitution 12:18 12:18 when it is done this particular way time 12:20 12:20 to just replace impose 12:24 12:24 it's not a good thing because some 12:26 12:26 people 12:27 12:27 we have done that ourselves or in the 12:29 12:29 1970s 77 we thought we could produce it 12:33 12:33 was at that time 12:35 12:35 the 12:36 12:36 not only our problem many economists who 12:38 12:38 were not in the mainstream were arguing 12:41 12:41 that you can do what is called 12:43 12:43 imports substitution based 12:45 12:45 industrialization isi 12:48 12:48 it was not a great success to put it 12:51 12:51 mildly so countries like 12:55 12:55 uh 12:56 12:56 tanzania 12:58 12:58 wanted to produce you say why are we 13:01 13:01 importing we can only do it by ourselves 13:03 13:03 started producing imports 13:06 13:06 actually nobody want to buy those shoes 13:08 13:08 because so low quality so the world bank 13:10 13:10 gave a loan 13:12 13:12 and they couldn't recover it because 13:15 13:15 they they 13:16 13:16 set up a 13:21 13:21 to produce they thought was at least 13:23 13:23 equal to the increase in population 13:25 13:25 every year and had failed it went 13:27 13:27 bankrupt so 13:29 13:29 but it won't go bankrupt if the 13:31 13:31 government intervene and say no don't 13:32 13:32 worry you make losses but i we will make 13:35 13:35 good luck that we have done in our 13:37 13:37 country with the state-owned enterprises 13:40 13:40 we started 13:41 13:41 producing things that we had no business 13:43 13:43 to in terms of competitive advantage in 13:46 13:46 other words 13:47 13:47 be our competitive advantage not in that 13:49 13:49 for example i'm talking about steel 13:51 13:51 cooperation 13:52 13:52 now you don't have to produce good to be 13:55 13:55 that good to be efficient you know 13:57 13:57 israel produces tires for the biggest 14:00 14:00 planes in the world it doesn't produce 14:02 14:02 rubber it doesn't produce teeth it only 14:04 14:04 has technology and know how and they 14:07 14:07 produce shoes for the sorry the tires 14:09 14:09 for the biggest planes in the world 14:11 14:11 today and very successful so they have a 14:14 14:14 competitive advantage in thai production 14:16 14:16 because of the know how they have in 14:18 14:18 order to be able to do it 14:26 14:26 in the 1970s starting with 14:29 14:29 to a seven year period 14:32 14:32 we tried uh imposed substitution in a 14:35 14:35 very serious way 14:37 14:37 and it therefore had very 14:39 14:39 serious consequences for us 14:42 14:42 first of all it was the 14:45 14:45 notion at that time 14:47 14:47 that we could develop 14:49 14:49 industrialize this country 14:52 14:52 with what is called import substitution 14:54 14:54 based industrialization 14:56 14:56 so we picked up a lot of the goods that 14:59 14:59 we were importing 15:01 15:01 banned them 15:02 15:02 and said you have to produce it at home 15:05 15:05 and so there are a lot of difficulties 15:07 15:07 the moment you 15:09 15:09 anytime when you ban then immediately 15:11 15:11 prices go up 15:14 15:14 and so 15:15 15:15 when prices go up 15:17 15:17 consumers 15:19 15:19 make a lot of noise and say what is this 15:20 15:20 why can't we get this at the price we 15:23 15:23 were 15:24 15:24 buying before 15:25 15:25 so the government had to convince the 15:27 15:27 people they had to introduce a lot of 15:29 15:29 russian system 15:31 15:31 because the government has now 15:33 15:33 having 15:34 15:34 imposed these controls make sure those 15:36 15:36 goods have been produced 15:39 15:39 it is very profitable for a local 15:41 15:41 producer 15:42 15:42 where the ability to produce is to sell 15:44 15:44 it at much higher prices than out of 15:46 15:46 prevailing it's like creating a 15:48 15:48 monopolistic or you oligaristic 15:50 15:50 situation i mean one person or many few 15:54 15:54 people producing that good good 15:57 15:57 so we had a very difficult experience at 15:59 15:59 that time i can personally say my 16:02 16:02 personal experience at that time 16:04 16:04 we had three little children you know 16:06 16:06 and 16:07 16:07 each one had to 16:09 16:09 we had to get infant milk for them 16:11 16:11 it was only one 16:12 16:12 [Music] 16:14 16:14 thing was 16:16 16:16 sold 16:17 16:17 for 16:18 16:18 one family 16:21 16:21 so that i had to go with my staff from 16:24 16:24 the central bank 16:25 16:25 my good friends 16:27 16:27 to buy 16:28 16:28 three 16:30 16:30 tins of infamil i ran the name also they 16:33 16:33 changed the thing name also for the the 16:36 16:36 person who's ordering it which is very 16:38 16:38 bad for children stomach you can't go 16:41 16:41 from one by supposed people importing i 16:44 16:44 think cw probably uh i probably i'm not 16:47 16:47 very sure about that 16:49 16:49 so not only that so when you get the tin 16:52 16:52 they take the tin in 16:54 16:54 smash is on the ground 16:56 16:56 so they won't be able to sell it 16:58 16:58 they are assuming that i am 17:00 17:00 i am taking the milk not to feed my 17:03 17:03 children but to sell it in the market i 17:05 17:05 mean this is really this is the 17:07 17:07 assumption 17:08 17:08 now there's another one for example 17:10 17:10 worse 17:11 17:11 is that if you had a some problem with 17:13 17:13 yokai you need to replace a clutch plate 17:16 17:16 which i had to add all 17:19 17:19 pojo 203 which i like very much 17:23 17:23 they had to send somebody from the 17:26 17:26 the corporation in charge of it to see 17:28 17:28 what i actually need it 17:30 17:30 so you have to dismantle the car and 17:32 17:32 keep it for the inspector to come and 17:34 17:34 see you do you really need it now for 17:36 17:36 the i didn't understand for the 17:39 17:39 what are the reason why would i pay for 17:42 17:42 it if i didn't need it 17:45 17:45 i don't know the reason behind it so 17:47 17:47 everything was held up that way 17:50 17:50 if you want to get married 17:52 17:52 you have to get a license 17:54 17:54 to get the clothes that are required 17:56 17:56 sorry for the lady a suit for the man 18:00 18:00 and they they imported only one type of 18:03 18:03 uh 18:07 18:07 textile for men's suits it all said 18:10 18:10 awful i'm told 18:11 18:11 awful petroleum smell we had to buy it 18:14 18:14 you have no choice right 18:16 18:16 and then 18:17 18:17 so that you have to get saris you have 18:19 18:19 to see when they are available so people 18:22 18:22 will have to wait for all these and we 18:24 18:24 had this system then the 18:26 18:26 the 18:30 18:30 minister of finance not an emperor very 18:33 18:33 well educated honest to goodness people 18:37 18:37 what had to sign everybody's 18:40 18:40 okay everybody import license for a car 18:43 18:43 so a guy one of my colleagues from the 18:45 18:45 central bank used to trudge to the 18:46 18:46 ministry of finance carrying a file how 18:49 18:49 many people applied for a car whether 18:51 18:51 you should be given or not given and you 18:54 18:54 have to produce 18:56 18:56 your 18:57 18:57 bank accounts 18:59 18:59 for the 19:00 19:00 see whether you actually deposit this 19:03 19:03 money whether it's your money so you 19:05 19:05 have to have the account in your name 19:07 19:07 they are looking at your 19:09 19:09 debates and credit to their account and 19:11 19:11 big regular role 19:13 19:13 so i know somebody who 19:16 19:16 put up 56 pages 19:19 19:19 of evidence to get a 19:23 19:23 copper meat 19:24 19:24 so it was like this 19:26 19:26 and so we realized 19:28 19:28 the people are really very tired of this 19:31 19:31 because people are having very tough 19:32 19:32 time 19:34 19:34 non-availability of goods rice could not 19:36 19:36 be paddy could not be transported from 19:39 19:39 one place to another which is really 19:42 19:42 uh 19:45 19:45 didn't 19:46 19:46 sit well with common sense so the what 19:48 19:48 happens in a market is that when prices 19:50 19:50 are high 19:52 19:52 people go to their place 19:53 19:53 sell and price hello people 19:56 19:56 consumers go and buy from there now if 19:58 19:58 you ban 19:59 19:59 the surplus and area from transacting 20:02 20:02 then you're keeping prices high and not 20:04 20:04 helping anybody and so they have a lot 20:06 20:06 of things like that so people got very 20:08 20:08 tired 20:10 20:10 so when the the 20:12 20:12 the 1970 cabinet had very good people 20:16 20:16 you know famous people dr emperor highly 20:19 20:19 educated 20:21 20:21 you know double doctorate in uh 20:23 20:23 political science 20:25 20:25 dr colnardi civil a great lawyer 20:27 20:27 historian 20:28 20:28 uh mr peter kinnaman man who led the 20:31 20:31 claim cambridge uh 20:35 20:35 debating team to 20:38 20:38 to go and debate 20:40 20:40 at harvard united states 20:42 20:42 and people like that top-notch people 20:44 20:44 who are involved in this 20:46 20:46 and they they realize only 20:49 20:49 that the 20:51 20:51 dr emperor resigned in 1975. 20:54 20:54 uh so the system dragged until 1977 with 20:58 20:58 a lot of shortages prices going up 21:01 21:01 people feel feeling very unhappy 21:04 21:04 with the government and they were voted 21:06 21:06 out 21:07 21:07 the slp that led the coalition at that 21:10 21:10 time 21:12 21:12 got only eight seats 21:14 21:14 out some 225 if i remember correctly i 21:17 21:17 know the number seats are correct but i 21:19 21:19 i'm not sure about the 21:21 21:21 the number of how uh seats in parliament 21:24 21:24 at that time total number of seats so it 21:27 21:27 was 21:28 21:28 by all measure 21:29 21:29 a failure 21:31 21:31 now why would we think that it will work 21:32 21:32 now i mean we have had that we have seen 21:35 21:35 that movie 21:36 21:36 why are we doing it again 21:38 21:38 if we are going to do it 21:41 21:41 banning something is okay i suppose for 21:43 21:43 some reason but if you do it in a grand 21:45 21:45 scale you are going to fail in a grand 21:47 21:47 scale 21:55 21:55 yeah it is actually very interesting 21:57 21:57 work done by uh 21:59 21:59 prohibited 22:01 22:01 surya they did something for a project 22:03 22:03 that we were running 22:06 22:06 sri lanka's growth experience during 22:09 22:09 that for that period 22:11 22:11 it turned out that we didn't have to put 22:13 22:13 those restrictions 22:16 22:16 we had 22:17 22:17 enough reserves 22:19 22:19 so when 22:21 22:21 dr emperor finished his 22:23 22:23 term many resigned there were enough 22:25 22:25 reserves 22:27 22:27 so we were necessarily 22:29 22:29 restricting economic activity to build 22:32 22:32 up 22:34 22:34 reserve cover for what purpose 22:38 22:38 so the 22:40 22:40 you don't see the 22:42 22:42 success of a program 22:44 22:44 by saying we have increased accumulated 22:47 22:47 resources that we use for the benefit of 22:49 22:49 the people 22:51 22:51 so 22:52 22:52 in this family in the books that i 22:54 22:54 attended one of the best books written 22:55 22:55 on sri lanka 22:57 22:57 on macro economics they pointed out 22:59 22:59 there was another crunching of the 23:01 23:01 economy and people paid for it 23:04 23:04 in terms of low salaries low income 23:07 23:07 there were also uh 23:10 23:10 income feeling 23:13 23:13 your income could not 23:16 23:16 be over 23:17 23:17 2000 rupees a month 23:19 23:19 okay 23:22 23:22 over two thousand rupees it was tax 23:23 23:23 hundred percent 23:25 23:25 so if you had two thousand one the one 23:26 23:26 rupee was taken right 23:28 23:28 so what happened then 23:30 23:30 what happened then all the people who 23:32 23:32 are earning 23:34 23:34 uh money in the private sector public 23:37 23:37 sector would not pay that amount of 23:38 23:38 money maybe only for the ministers 23:42 23:42 uh they got a lot of concessions 23:45 23:45 saying you can get a 23:47 23:47 a 23:49 23:49 house in aurelia 23:51 23:51 and pay one rupee for the whole month 23:54 23:54 so they rewarded their people 23:57 23:57 this is since the income ceiling they 23:59 23:59 they reward their paper by giving their 24:01 24:01 thing or they'll say oh we buy you 24:03 24:03 petrol for them for the month 24:06 24:06 so they 24:07 24:07 they knew they couldn't keep 24:09 24:09 good managers 24:11 24:11 working at the of those 24:13 24:13 at those rates so it was in that say 24:16 24:16 also it was a 24:18 24:18 trying to control those things was also 24:20 24:20 a failure i had to say 24:27 24:27 the outward oriented trade policies are 24:32 24:32 trade policies that treat pr 24:35 24:35 treat production for domestic market or 24:37 24:37 for export 24:39 24:39 on equal basis so i give example right 24:42 24:42 to explain 24:43 24:43 that is that if if you have to use say 24:46 24:46 x number of resources 24:49 24:49 to produce a export 24:53 24:53 and 24:54 24:54 if you 24:57 24:57 use the same amount of views of the 24:59 24:59 producer import then you are in outward 25:01 25:01 oriented 25:05 25:05 policy framework 25:07 25:07 you discriminate don't discriminate 25:09 25:09 between producing the domestic market or 25:11 25:11 body for the export market so how things 25:14 25:14 get allocated well is that when that 25:17 25:17 this balance is there in the system 25:19 25:19 so let's assume this way so supposing we 25:23 25:23 want to produce 25:25 25:25 some good and earn say ten dollars with 25:28 25:28 it using domestic resources like lay 25:30 25:30 buying capital 25:32 25:32 and 25:34 25:34 on the other side other hand 25:36 25:36 if there is a we are going we are we are 25:39 25:39 therefore earning 25:40 25:40 ten dollars by using this amount of 25:43 25:43 resources 25:44 25:44 for ourselves for our country 25:47 25:47 now we can save 25:49 25:49 uh also by import substitution 25:54 25:54 similar to that amount so we are neutral 25:57 25:57 between the two 25:58 25:58 so when we say outer donated originally 26:01 26:01 people mis understood it 26:04 26:04 or misrepresented calling you promote 26:06 26:06 exports there you promote imports no it 26:09 26:09 giving equal status to both now we know 26:12 26:12 as economists that in order for 26:14 26:14 something to be increasing production 26:17 26:17 the output you have to give them 26:18 26:18 incentives prices that they can say make 26:21 26:21 a profit 26:22 26:22 so also so when you have a neutral 26:25 26:25 policy 26:26 26:26 then people 26:28 26:28 your entrepreneurs 26:29 26:29 invest in those areas that give them the 26:31 26:31 best return so it could be an export 26:34 26:34 then they are 26:35 26:35 near neutral it could be in exports 26:38 26:38 production of impose substitution so you 26:41 26:41 that way you can have 26:43 26:43 both efficient import products import 26:45 26:45 substitution efficie efficient export 26:47 26:47 production that worked so when we look 26:49 26:49 at the in the 26:51 26:51 1970s when we look at the countries that 26:54 26:54 were east asian countries 26:56 26:56 they said that is because the 26:57 26:57 government's elected no that is wrong 26:59 26:59 that's not the case 27:01 27:01 when we found when you look at the 27:02 27:02 numbers the paper that deepak lal and i 27:04 27:04 wrote we showed that um 27:07 27:07 when you look at the cost that was you 27:09 27:09 see they were very close to being equal 27:12 27:12 not necessarily equal but very close to 27:14 27:14 being equal 27:16 27:16 so outward oriented policy is that where 27:18 27:18 the incentives of production the 27:20 27:20 domestic market and foreign markets are 27:22 27:22 equal or nearly equal 27:24 27:24 okay number one 27:26 27:26 so inward-oriented policies are where 27:28 27:28 you bias it for the domestic market 27:31 27:31 it has no idea of the balance here now 27:34 27:34 so for example you can say you ban 27:37 27:37 you come to our favorite example of 27:39 27:39 shoes you banjos 27:42 27:42 and 27:44 27:44 immediately prices 27:45 27:45 rise 27:46 27:46 so people put resources into that area 27:51 27:51 so people who have capital c oh this is 27:53 27:53 good let's go and produce this because 27:55 27:55 you get more sri lankan rupees 27:58 27:58 for 28:00 28:00 for for uh producing a shoe that is 28:04 28:04 consumed used in this consumer silicon 28:06 28:06 market 28:08 28:08 but it doesn't end there so where do 28:10 28:10 these increase resources come from 28:13 28:13 come from what they have been going for 28:15 28:15 exports and but have gone for 28:17 28:17 non-credible goods so that you cannot 28:19 28:19 isolate that's the point you cannot 28:21 28:21 isolate one fact and say we are going to 28:24 28:24 produce for this sector well you are 28:26 28:26 immediately neglecting 28:27 28:27 so the 28:29 28:29 capital and labor that needed to produce 28:31 28:31 more goods for the for imports of for in 28:35 28:35 substituting imports 28:37 28:37 come from exports 28:39 28:39 and come from non-terrible goods mostly 28:41 28:41 from exports 28:42 28:42 so therefore when people say we are 28:44 28:44 doing import substitution i immediately 28:46 28:46 say if that is the type you are going to 28:48 28:48 do you are going to make it very 28:50 28:50 difficult for the exports now there is a 28:51 28:51 very expensive respectable 28:54 28:54 uh argument for import substitution 28:56 28:56 called infant industry argument infant 28:59 28:59 industry argument says 29:00 29:00 if i can produce something more 29:03 29:03 efficiently in the future but i don't 29:05 29:05 have the resources to do that the 29:07 29:07 government like 29:08 29:08 government can help me 29:11 29:11 saying i can give you for three years 29:14 29:14 a license to produce this but in 29:16 29:16 three years if you cannot meet 29:19 29:19 the competition from abroad then you 29:21 29:21 have to close down 29:23 29:23 our case is that we have not we have 29:25 29:25 continued to 29:27 29:27 continue to give subsidies 29:29 29:29 for import substitution or 29:32 29:32 import substitution type of production 29:35 29:35 and in the meantime 29:38 29:38 taxing exports 29:41 29:41 taxing export in in the process for 29:43 29:43 example there is what is called a 29:45 29:45 learner symmetry theorem not a big 29:47 29:47 theorem 29:48 29:48 it says what i said 29:50 29:50 in one 29:51 29:51 either if you 29:53 29:53 give incentives to one sector 29:56 29:56 you are doing at the cost of another 29:57 29:57 sector the opportunity cost of doing 29:59 29:59 export 30:01 30:01 so it is no accident 30:03 30:03 that the taiwans of the world 30:06 30:06 singapores of the world south korea so 30:08 30:08 the world 30:10 30:10 hong kongs of the world did so well by 30:14 30:14 discovering following 30:16 30:16 equal incentives for domestic market as 30:19 30:19 far as the foreign markets 30:27 30:27 i think that trade reform have a very 30:29 30:29 important place in that it is no 30:32 30:32 accident most of the countries that have 30:33 30:33 grown very fast and become more 30:35 30:35 efficient started with the trade reform 30:38 30:38 because they in a way relatively easy to 30:40 30:40 do 30:41 30:41 compared to other reforms and also more 30:47 30:47 able to bring out research results 30:50 30:50 better 30:51 30:51 than doing it 30:52 30:52 uh in a different way by taxing and 30:55 30:55 subsidizing 30:57 30:57 sector bisector these across the board 31:00 31:00 right so what we want to do basically is 31:03 31:03 to go from a inward oriented trade 31:06 31:06 regime to an outward oriented trade 31:08 31:08 regime 31:09 31:09 it's another way of saying we short time 31:11 31:11 we say we won't liberalize this economy 31:14 31:14 now when i use the word liberalized 31:16 31:16 people sometimes get may wonder what is 31:19 31:19 this i'm going to import everything that 31:21 31:21 is there i mean what is this you can't 31:23 31:23 run a country like that no 31:25 31:25 the word liberalization here has a very 31:27 31:27 specific meaning the meaning is that 31:29 31:29 allowing prices to allocate 31:33 31:33 resources 31:34 31:34 not some czar or somebody sitting in the 31:37 31:37 tenth floor of some building 31:39 31:39 and telling what you should be importing 31:41 31:41 what you'll be exporting that has failed 31:44 31:44 i mean if anybody is having dreams about 31:47 31:47 that they you can look at 31:49 31:49 what has happened to vietnam's of the 31:51 31:51 world 31:53 31:53 mainland china 31:54 31:54 soviet union let us fail 31:57 31:57 so now we have to allow 31:60 31:60 the market to have some 32:02 32:02 some say 32:03 32:03 not everything should be done in the 32:04 32:04 market but most of it turns out there 32:07 32:07 are certain things like what are called 32:09 32:09 public goods had to be produced by the 32:11 32:11 government with support from the 32:12 32:12 government because it will be 32:14 32:14 underproduced and it will be 32:16 32:16 worse off 32:17 32:17 without those public goods like you know 32:19 32:19 fresh air 32:20 32:20 uh 32:22 32:22 security uh 32:24 32:24 just justice they they have to these had 32:26 32:26 to be provided by the government you 32:28 32:28 can't privatize 32:30 32:30 security 32:32 32:32 so you have to do it to public policy so 32:35 32:35 what is remaining 32:37 32:37 in in terms of 32:38 32:38 goods and services 32:40 32:40 that people consume every day 32:43 32:43 could be liberalized meaning allowing 32:45 32:45 them to be produced 32:47 32:47 as the markets detected 32:50 32:50 based on prices in other words the 32:52 32:52 prices are very important things are 32:54 32:54 conveying that information that somebody 32:56 32:56 prepared to pay so much for such such as 32:59 32:59 such a thing 32:60 32:60 is is important knowledge very important 33:02 33:02 information that we need there 33:05 33:05 so if you go then you will begin by 33:08 33:08 reducing the tariff rate 33:10 33:10 out every freight 33:11 33:11 when in 1977 we put it down the 11 33:14 33:14 percent it had remained there but we 33:16 33:16 have put tariffs on top of that various 33:18 33:18 types mainly 33:21 33:21 during the war in order to finance the 33:23 33:23 war we have to understand that but now 33:25 33:25 the boy been over for 33:28 33:28 what 33:29 33:29 11 years right 33:31 33:31 we are still having the tariffs that we 33:33 33:33 used 33:34 33:34 in order to finance the war for peace 33:36 33:36 time 33:38 33:38 that's number one 33:39 33:39 number two 33:41 33:41 and i we didn't talk about the little 33:43 33:43 bit but very equally important reduce 33:45 33:45 the variance 33:47 33:47 the highest tariffs and lowest tariffs 33:49 33:49 they should be 33:51 33:51 close together 33:53 33:53 rather than having very wide variant we 33:55 33:55 are close to bend the white variants 33:57 33:57 there are opportunities for 33:58 33:58 misallocation of goods so what is being 34:00 34:00 produced is not but is now comparative 34:03 34:03 advantage what the what the prices are 34:05 34:05 indicating artificially created prices 34:07 34:07 to tariffs 34:09 34:09 so therefore 34:11 34:11 so 34:12 34:12 so we by doing 34:14 34:14 this by 34:16 34:16 liberalizing allowing prices to allocate 34:18 34:18 resources we are promoting competition 34:20 34:20 like that 34:22 34:22 so second the firms 34:25 34:25 that are 34:26 34:26 good at 34:28 34:28 innovating good at uh 34:30 34:30 raising quality do well in that system 34:33 34:33 if if 34:35 34:35 certain industries cannot do it they are 34:37 34:37 free to go to another other area or 34:40 34:40 abandon that thing 34:41 34:41 all together and do something else 34:44 34:44 so it turns out that 34:46 34:46 this type of liberalization allowing 34:48 34:48 prices to allocate resources is 34:51 34:51 superior 34:52 34:52 to having a command economy where few 34:55 34:55 people are 34:57 34:57 manipulating and selling you could 34:59 34:59 produce this you could not produce this 35:01 35:01 that type of 35:03 35:03 direction 35:04 35:04 so i think it's not very difficult 35:07 35:07 to i have watched many countries doing 35:09 35:09 it 35:10 35:10 we did it in 1977 there are many 35:13 35:13 countries followed actually the world 35:16 35:16 went much more liberal towards 35:19 35:19 uh 35:20 35:20 getting rid of controls in the 35:23 35:23 70s 80s and 90s actually most of the 35:26 35:26 countries like china had a tremendously 35:28 35:28 controlled system now it's very china 35:31 35:31 has a more move free economy than us 35:34 35:34 india 35:35 35:35 in 1991 india got into tremendous 35:38 35:38 difficulties with its balance of 35:40 35:40 payments i think so india went and grew 35:43 35:43 by seven and eight percent nobody would 35:45 35:45 have believed they were done it then 35:47 35:47 there are the vietnam they are going by 35:49 35:49 10 11 percent they are the cambodias 35:52 35:52 there all these countries are doing very 35:53 35:53 well 35:54 35:54 and so 35:57 35:57 it is becoming neutral towards 35:60 35:60 uh 36:00 36:00 export promotion and impossible i also 36:04 36:04 want to say by creating institutions we 36:06 36:06 are not doing it 36:07 36:07 we have to have the incentives 36:10 36:10 to 36:11 36:11 get people to 36:13 36:13 establish those industries or expand 36:15 36:15 what are already there 36:17 36:17 just because we have an institution 36:20 36:20 won't do it 36:21 36:21 it must be able to argue for liberal i 36:24 36:24 think this is already doing it as i 36:25 36:25 heard for relaxing someone to control 36:29 36:29 for example 36:30 36:30 i 19 36:32 36:32 2010 i was the advisor to the 36:36 36:36 center for international trade did the 36:37 36:37 survey of sri lanka 36:40 36:40 all 500 house 36:43 36:43 firms 36:44 36:44 various sizes 36:46 36:46 like medium type firms and the answers 36:49 36:49 were 70 percent of the respondents said 36:52 36:52 their problems are not not outside not 36:55 36:55 at the board or outside but inside the 36:58 36:58 country getting licenses 36:60 36:60 when they use something in wood 37:02 37:02 getting from archaeological 37:03 37:03 commissioners various so many licenses 37:06 37:06 that can be put in one place 37:08 37:08 so they have to go from one place to 37:10 37:10 another 37:11 37:11 and you know if 37:14 37:14 export 37:15 37:15 ventures are very have to be very 37:17 37:17 competitive the rest of the world is 37:19 37:19 moving very fast 37:21 37:21 and we have great opportunities now 37:22 37:22 because of the what i call 37:24 37:24 fragmentization of production that 37:27 37:27 project 37:28 37:28 is the world authority on it now uh 37:30 37:30 talking about 37:32 37:32 global 37:34 37:34 production networks we can participate 37:37 37:37 in it now which we didn't have the 37:39 37:39 opportunities earlier for that we have 37:41 37:41 to have efficient ports we'll have to 37:44 37:44 reduce the so-called 37:46 37:46 illegal payments 37:47 37:47 we have to 37:49 37:49 have water and all the things that are 37:52 37:52 now monopolized in our country 37:55 37:55 given them the chance to in order to 37:59 37:59 provide these 38:02 38:02 facilities which are already happening 38:05 38:05 in the sort of free trade area we can do 38:07 38:07 with more freighted areas also 38:10 38:10 to get those regions going 38:19 38:19 now if you want to compete with the rest 38:20 38:20 of the world that is what you do 38:22 38:22 you have to now compete 38:24 38:24 you cannot just 38:27 38:27 be selling your stuff just because you 38:29 38:29 have a barrier at good prices no now you 38:31 38:31 have to earn your keep 38:33 38:33 by 38:34 38:34 improving your product 38:37 38:37 production 38:39 38:39 where you use 38:40 38:40 10 people to produce something try to do 38:43 38:43 it with five people 38:45 38:45 try to educate your workforce 38:47 38:47 uh try to 38:50 38:50 learn new technologies fdi is very 38:52 38:52 important here all the countries that 38:54 38:54 they liberalize 38:56 38:56 have 38:57 38:57 benefited from foreign direct investment 38:59 38:59 so foreign investment is a good deal we 39:01 39:01 are going to earn only two one to two 39:04 39:04 percent of our gdp foreign investment 39:06 39:06 where countries like vietnam is 39:08 39:08 contained twelve percent and the biggest 39:10 39:10 foreign investment country in the world 39:12 39:12 is china believe it or not everybody is 39:15 39:15 producing everything there 39:17 39:17 and that is because they have very good 39:20 39:20 workforce 39:21 39:21 uh 39:22 39:22 very well-educated 39:24 39:24 well-disciplined 39:27 39:27 and so and they are producing all the 39:29 39:29 american most of the firms that are 39:31 39:31 there are owned by americans most of 39:33 39:33 them 39:34 39:34 and under license 39:36 39:36 and you can produce a guy like jack ma 39:39 39:39 who is a world leader who can give a run 39:42 39:42 for the mine to amazon i mean i think 39:44 39:44 already 39:45 39:45 so the opportunity are there it all 39:47 39:47 became after they 39:48 39:48 liberalized china not before 39:58 39:58 not very much 39:60 39:60 for the reason they are not really free 40:02 40:02 trade agreements in the sense that 40:04 40:04 people cannot buy and sell what they 40:06 40:06 want to do is the best way to describe 40:09 40:09 it is a preferential trade agreement 40:11 40:11 so that we for example we have three 40:13 40:13 agreements with china pakistan and 40:16 40:16 singapore still inactive 40:19 40:19 um 40:20 40:20 as i understand it 40:21 40:21 the oldest one that we have is 40:24 40:24 with india 40:26 40:26 i want to say three things about it so 40:28 40:28 first of all they are not fleeted in the 40:30 40:30 sense there is a just a tariff we have 40:32 40:32 to pay lower tariff than the rest of the 40:34 40:34 world who are going to say sell in sell 40:39 40:39 in 40:39 40:39 india 40:40 40:40 so because of that they have to impose 40:42 40:42 what are called rules of origin 40:45 40:45 so far for sri lankan export to india 40:48 40:48 with the exception of some goods like 40:50 40:50 tea and 40:51 40:51 others 40:53 40:53 we can get as the concessional rate 40:57 40:57 but 40:58 40:58 the thing that we produce here 41:01 41:01 35 percent 41:05 41:05 up to 35 must be produced in sri lanka 41:08 41:08 domestic value added 41:11 41:11 so 41:12 41:12 a country like vietnam 41:14 41:14 for example cannot export to sri lanka 41:17 41:17 and get it re-exported 41:20 41:20 because 41:20 41:20 then they know that it is 41:23 41:23 uh value addition is not 41:25 41:25 is less than 35 percent 41:28 41:28 so they won't allow it 41:32 41:32 so 41:33 41:33 third point is that 41:35 41:35 there are a lot of procedures to follow 41:37 41:37 in order to qualify for it 41:39 41:39 more licenses 41:41 41:41 in other countries also it doesn't work 41:43 41:43 very well because 41:45 41:45 for example the famous one nafta 41:48 41:48 not 41:49 41:49 american retail area between mexico 41:52 41:52 united states and canada people are not 41:54 41:54 using 41:55 41:55 the 41:56 41:56 [Music] 41:57 41:57 they are not using nafta they are going 41:59 41:59 outside because they have to spend about 42:01 42:01 20 percent of the value of their goods 42:04 42:04 it turns out by 42:06 42:06 to get that pressure concession so we 42:08 42:08 are in a similar situation 42:10 42:10 but on the other hand 42:12 42:12 we have to keep our neighbors 42:15 42:15 very friendly with us so there is a very 42:17 42:17 good reason for us to be 42:19 42:19 in agreement with the indians 42:22 42:22 you know after all we owe a lot of 42:23 42:23 things with 42:25 42:25 our basically we have a landmark of 42:27 42:27 religion 42:28 42:28 and they are very different important 42:30 42:30 power in the world we have to have 42:33 42:33 have also not only political not only 42:35 42:35 kind of political meaning motive also to 42:38 42:38 be with them 42:40 42:40 but 42:42 42:42 we we can liberalize that further by 42:45 42:45 reducing the 42:47 42:47 the 42:50 42:50 rules of origin going to a lower 42:52 42:52 percentage 42:54 42:54 by 42:56 42:56 providing special entry in sometimes in 42:59 42:59 the southern 43:00 43:00 ports in india we have difficulty 43:03 43:03 particularly when we have 43:06 43:06 exported things like strawberries that 43:08 43:08 are very time sensitive 43:10 43:10 we can do those things and we can look 43:12 43:12 at the dispute settlement mechanism 43:15 43:15 and the indians want to do even more but 43:18 43:18 they could not get the agreement from 43:21 43:21 from us 43:22 43:22 for services and 43:24 43:24 professionals to move back and forth our 43:27 43:27 people are worried about opening up 43:30 43:30 sometimes justified sometimes not 43:32 43:32 justified for example singapore 43:34 43:34 agreement was opposed by people 43:37 43:37 the doctors 43:39 43:39 thinking that a 43:41 43:41 singaporean doctor will come and 43:42 43:42 practice here we have to pay him five 43:44 43:44 times 43:46 43:46 what we for domestic doctor if we get a 43:49 43:49 singaporean doctor to come back here 43:51 43:51 instead our ministers go there to get a 43:55 43:55 better attention from the singaporean 43:57 43:57 hospitals so 43:59 43:59 so 44:00 44:00 i i think that if you can explain 44:04 44:04 if you can expand so there's a very 44:05 44:05 successful treated agreement not a 44:07 44:07 freedom agreement in the world that that 44:10 44:10 is in the asean 44:13 44:13 asean 44:14 44:14 is successful because they're very light 44:17 44:17 their rates are like five percent three 44:19 44:19 percent they are very light they follow 44:22 44:22 the rules and there there are also every 44:25 44:25 country that are going very fast 44:27 44:27 indonesia thailand you know those 44:29 44:29 countries there once we try to get in 44:33 44:33 during president um 44:35 44:35 premada says time you want to get in 44:38 44:38 actually it are not well prepared you 44:40 44:40 can't just go and ask everybody has to 44:42 44:42 agree thailand has to agree the five 44:44 44:44 countries also have had to agree 44:46 44:46 and so that didn't go through 44:49 44:49 um 44:50 44:50 i would not put all my eggs in that 44:51 44:51 basket i would say you know let us do a 44:54 44:54 unilateral 44:57 44:57 liberalization as we did in 1977 45:01 45:01 we learned from that lesson we didn't 45:03 45:03 allow it to work through now now papi 45:05 45:05 will say some people say it didn't work 45:07 45:07 through here this is true but after a 45:09 45:09 while 45:10 45:10 from 1977 to about 45:13 45:13 1995 45:15 45:15 we did very well high growth rate 45:17 45:17 increase in efficiency 45:19 45:19 all those things we had because of the 45:20 45:20 thing what happened was that 45:23 45:23 while we were 45:25 45:25 doing this we didn't look after our 45:27 45:27 macroeconomics very well 45:28 45:28 so the exchange got appreciated our 45:31 45:31 goods became more expensive 45:33 45:33 imports become less expensive in sri 45:36 45:36 lanka and so we have to abandon it 45:39 45:39 the liberalization and of course then 45:42 45:42 ideologies change 45:43 45:43 the new ideology came in 95. 45:46 45:46 i have seen some people equating the 45:48 45:48 liberalization is worse than the war 45:51 45:51 against ltte i mean i have seen that i 45:54 45:54 can quote from 2017 budget speech that 45:57 45:57 was said 45:58 45:58 i suppose even now they are saying that 46:01 46:01 but it is nothing like that 46:04 46:04 we can have a good team of people 46:06 46:06 looking at it 46:07 46:07 we can get assistance to do this from 46:09 46:09 other countries our good trading 46:11 46:11 partners 46:12 46:12 and so we can increase efficient 46:15 46:15 actually we have no choice 46:18 46:18 for a country like us 46:19 46:19 we cannot go forward if we don't 46:22 46:22 increase our productivity that's the 46:24 46:24 biggest secret of our not doing well our 46:27 46:27 productivity has remained stuck in one 46:30 46:30 place for nearly 30 years 46:33 46:33 so we have to increase productivity and 46:34 46:34 that you did by liberalizing your trade 46:37 46:37 regime making it easy for people to 46:39 46:39 invest in mighting 46:42 46:42 investment and doing those things 46:51 46:51 no it depends upon now 46:52 46:52 how many people i like to ask the 46:54 46:54 economist in sri lanka how many our 46:56 46:56 people are prepared to get to free 46:58 46:58 exceed the agreement with china 47:02 47:02 not very many people say yes because 47:04 47:04 they are very worried 47:06 47:06 the chinese can 47:07 47:07 compete 47:09 47:09 you know drastically with us 47:11 47:11 produce a lot of things but on the other 47:13 47:13 hand their real wages are going up 47:15 47:15 so chinese are losing their business to 47:17 47:17 vietnamese 47:19 47:19 now some people argued and wrongly i 47:21 47:21 must say 47:25 47:25 they look at if you the more trade 47:27 47:27 agreement you sign the better no not at 47:28 47:28 all it depends on your suit suits us 47:31 47:31 do we have a new opportunity to sell 47:33 47:33 goods and services that we can't sell 47:35 47:35 outside go there and enter the thing you 47:38 47:38 know we we there 47:41 47:41 there are some advocates among us who 47:43 47:43 make that argument i am not one of them 47:52 47:52 so macroeconomic policies meaning 47:55 47:55 policies 47:57 47:57 conducted by the central bank monetary 47:59 47:59 policy 48:00 48:00 policies conducted by the 48:03 48:03 minister finance fiscal side has a lot 48:06 48:06 to say 48:07 48:07 because 48:09 48:09 they determine 48:10 48:10 the 48:12 48:12 nominal prices in the country right 48:15 48:15 as well as the real prices 48:18 48:18 but also the exchange rate therefore 48:22 48:22 so if you have a application of the 48:24 48:24 exchange rate 48:27 48:27 that's 48:28 48:28 it's overvalued then exporters get fewer 48:31 48:31 amount of rupees for the dollar 48:33 48:33 on the other hand if it is undervalued 48:35 48:35 it goes the other way 48:37 48:37 so they have to keep you know on an even 48:39 48:39 keel 48:40 48:40 so while we are liberalizing the economy 48:43 48:43 we particularly have to have 48:47 48:47 prices not going up 48:51 48:51 quick fast 48:53 48:53 we need to have current account 48:56 48:56 deficit that is sustainable 48:58 48:58 if you don't have them then it will 49:00 49:00 undercut 49:02 49:02 the 49:02 49:02 liberalization that you are trying 49:05 49:05 now in the 1977 49:08 49:08 liberalization which we did was a great 49:10 49:10 success 49:11 49:11 we did it second country in the world 49:13 49:13 therapy country the world to do it after 49:15 49:15 chile chili did in 1974 video 1977. 49:19 49:19 pretty soon 49:20 49:20 we also at the same time undertook a 49:23 49:23 huge 49:24 49:24 public investment program associated 49:26 49:26 with mahaviri and housing 49:28 49:28 so it built up demand in the economy 49:34 49:34 and 49:35 49:35 created problems for the liberalization 49:39 49:39 so while you are done a good job of 49:42 49:42 liberalizing economy you are not done a 49:43 49:43 good job of the macro economics of the 49:46 49:46 country 49:47 49:47 so inflation started going if i remember 49:49 49:49 right went to 26 percent inflation 49:53 49:53 so the last sentence of a book that 49:55 49:55 deepak lalla and i wrote says when our 49:59 49:59 liberalization exhibition fails 50:02 50:02 it didn't fail because of the trade but 50:05 50:05 bad macroeconomics 50:07 50:07 so what type of macroeconomic 50:10 50:10 went haywire with the huge public 50:13 50:13 expenditures associated with mahavali 50:16 50:16 now what is relationship to 50:18 50:18 regulation 50:20 50:20 actually so trade only 50:24 50:24 directly affects tradable goods 50:27 50:27 exports 50:29 50:29 and exportables imports and importables 50:33 50:33 uh when i say exports are necessary is 50:35 50:35 the export but 50:37 50:37 possible import exportables and similar 50:40 50:40 parallel 50:41 50:41 for the 50:42 50:42 importables 50:46 50:46 so 50:47 50:47 trade and the prices affect our tradable 50:51 50:51 goods 50:53 50:53 goods that we buy and sell with the rest 50:54 50:54 of the world but there's another class 50:56 50:56 across the goods that are non-tradable 50:59 50:59 that are monthly services electricity 51:02 51:02 that those if those prices 51:05 51:05 go out of control similarly we have a 51:07 51:07 problem like that 51:10 51:10 so we have to be while we are 51:12 51:12 liberalizing the economy or reforming 51:14 51:14 the economy to go to price oriented 51:17 51:17 system then we must take care 51:20 51:20 of that we don't allow inflation to go 51:22 51:22 up 51:22 51:22 we allow we don't allow our current 51:25 51:25 account deficit to go anywhere and today 51:28 51:28 we have even more difficult problem 51:30 51:30 because we have huge debt to be repaid 51:32 51:32 now we didn't have that probably in 51:34 51:34 1977. 51:36 51:36 so what is the story that we have to be 51:37 51:37 extra careful 51:40 51:40 about uh 51:41 51:41 how to manage the economy during this 51:44 51:44 time while we are undertaking this 51:47 51:47 incentive reforms 51:56 51:56 it will complement each other but you 51:59 51:59 have a little faith in before you get to 52:01 52:01 there 52:02 52:02 so because actually what happens is that 52:05 52:05 there's a lag between 52:07 52:07 initiating policy and getting the result 52:10 52:10 for example it's worked out in the case 52:12 52:12 of sri lanka if the central bank 52:15 52:15 increases 52:16 52:16 uh 52:17 52:17 the 52:19 52:19 monetary base by 10 percent its effects 52:22 52:22 are going to be failed over 18 months 52:25 52:25 so there's a built-in 52:27 52:27 uh time lag 52:29 52:29 so you have to manage in the short 52:31 52:31 period that while you are you you you 52:34 52:34 now getting people to 52:37 52:37 respond to the new price signal that you 52:39 52:39 have created 52:40 52:40 but at the same time there are a lot of 52:42 52:42 noise coming from macroeconomics the 52:44 52:44 prices are going here by 26 percent in 52:46 52:46 the case of sri lanka 1981 if i remember 52:50 52:50 the inflation rate we had never had that 52:52 52:52 before so while the government were 52:54 52:54 liberalizing 52:55 52:55 one side the other side was playing a it 52:58 52:58 was not a coalition ump government the 53:01 53:01 assad was making huge investments 53:04 53:04 and non-tradable prices go up therefore 53:06 53:06 the exchange rate got so valued so while 53:10 53:10 we are creating the incentive to produce 53:12 53:12 more exportable importable 53:15 53:15 input affordable also 53:17 53:17 then we are creating other side 53:19 53:19 instability of prices 53:21 53:21 so with instability prices we can't 53:23 53:23 invest if we don't know what is the 53:25 53:25 likely price of a you know 53:29 53:29 brick 53:31 53:31 18 months from now 53:34 53:34 people won't get into that business 53:37 53:37 so that is why it is important 53:45 53:45 i'll say what the australian 53:47 53:47 priority commission does 53:49 53:49 it was earlier called the 53:51 53:51 australian industrial commission 53:54 53:54 but the 53:55 53:55 australian being very smart people 53:57 53:57 realize they should not confine their 53:58 53:58 industry australia is one of the most 54:00 54:00 successful agricultural countries in the 54:02 54:02 world right 54:04 54:04 so they call it the productivity 54:05 54:05 commission which is a nice word 54:07 54:07 so what these what the production 54:09 54:09 commission does very productive with the 54:11 54:11 commission stands in judgement 54:13 54:13 between people who want to 54:17 54:17 increase tariffs 54:19 54:19 and people are going to be adversely 54:20 54:20 affected by it it's try to balance the 54:23 54:23 the argument for 54:25 54:25 for a tariff 54:27 54:27 increase for example 54:29 54:29 consumers have to pay higher prices so 54:31 54:31 they should be represented 54:33 54:33 so the australian commission does say 54:35 54:35 that it has very well sent people staff 54:38 54:38 and they invite the leading economies of 54:40 54:40 australia that time 54:43 54:43 you know two 54:45 54:45 recently about three years ago 54:49 54:49 mr banks came 54:50 54:50 he was one of the chairman of the 54:54 54:54 the productivity commission and before 54:56 54:56 that 54:57 54:57 even 54:58 54:58 even his one of his teachers was the uh 55:02 55:02 professor richard's name 55:04 55:04 was the chairman so they look at the 55:06 55:06 proposition so if somebody wants to get 55:08 55:08 help from the government by supporting a 55:11 55:11 new terrorist to help them they have to 55:13 55:13 go public 55:14 55:14 the decision made in front of everybody 55:17 55:17 and he reported in newspaper next day or 55:19 55:19 a couple of days later this request was 55:22 55:22 made and actually they had to put 55:23 55:23 advertisement saying we are asking to 55:25 55:25 increase the price of 55:26 55:26 bricks by 20 55:28 55:28 starting 55:29 55:29 [Music] 55:31 55:31 six months from now 55:33 55:33 so we have a debate then in in that cucu 55:36 55:36 publicly is using it's what i call 55:39 55:39 subject to sunlight 55:41 55:41 the both sides make arguments 55:44 55:44 and then the commission staff says yeah 55:46 55:46 this argument is wrong you can't we are 55:49 55:49 not prepared to give you anything or 55:51 55:51 somebody will say no you can get the 55:52 55:52 same thing done go through that another 55:54 55:54 way 55:56 55:56 so it's more like a 55:58 55:58 you know we were going to 55:60 55:60 the last government and i shouldn't say 56:01 56:01 we have a public officer 56:04 56:04 was going to create that type of a 56:07 56:07 arrangement these very important 56:09 56:09 non-credible goods because terrible 56:11 56:11 goods are taken care of by competition 56:13 56:13 from the rest of the world for 56:15 56:15 non-tradeable good there is no such 56:16 56:16 competition so you need an authority to 56:19 56:19 look into it you the observation must be 56:22 56:22 independent of the government must be 56:24 56:24 well 56:25 56:25 trained people and they should be taken 56:28 56:28 very seriously by the cabinet and others 56:30 56:30 and that is exactly what they have 56:32 56:32 and they have done it very well over the 56:34 56:34 last maybe 30 years 56:37 56:37 productivity commission 56:45 56:45 yeah you know when they passed the anti 56:47 56:47 dumping uh rules in sri lanka 56:50 56:50 many people uh rejoicing ah now we have 56:54 56:54 but anti-dumping can also be a 56:55 56:55 protection device and it had become so 56:58 56:58 when the country liberalized 57:01 57:01 the late 57:02 57:02 reduction in prices they went on 57:04 57:04 anti-dumping 57:06 57:06 so there we have shown that there's a 57:08 57:08 really a sequence you liberate the 57:10 57:10 economy the 57:12 57:12 people get there and uh and in in 57:15 57:15 introduce anti-dumping uh rules with the 57:18 57:18 internet 57:19 57:19 and determining procedures so it is very 57:22 57:22 unfair in this sense that is the 57:24 57:24 anti-dumping estimate is done by the 57:25 57:25 country that are complaining against it 57:27 57:27 it's like saying the accused is coming 57:30 57:30 to come and say 57:33 57:33 argue in that case 57:34 57:34 so i mean the i said genuine case for 57:36 57:36 anti-dumping if it were 57:38 57:38 proved so if a country in a third market 57:42 57:42 is selling at a lower cost than in your 57:43 57:43 market and also inverse their own cost 57:47 57:47 of production is lower than what they 57:49 57:49 are saying you think then they are 57:50 57:50 dumping now why would they do it 57:53 57:53 because by doing it they might eliminate 57:56 57:56 a production facility here and then 57:59 57:59 everybody bankrupt and go on home they 58:01 58:01 come and introduce it catch up with all 58:03 58:03 the 58:04 58:04 the profits they are foregone by doing 58:07 58:07 doing at a lower price 58:08 58:08 they can look at the 58:10 58:10 you know the 58:13 58:13 overtime the time cost of money and make 58:16 58:16 that calculation saying okay we'll be 58:18 58:18 able to sell it ten percent less 58:21 58:21 for the three years while we get these 58:23 58:23 guys bankrupt then we come back and 58:25 58:25 double up by prices you know that can 58:27 58:27 happen 58:28 58:28 uh 58:29 58:29 but governments went 58:31 58:31 out of the way to use anti-dumping as a 58:34 58:34 protective device so i am 58:35 58:35 i'm not for it the second one is a 58:38 58:38 countervailing duty now some people give 58:41 58:41 duty uh 58:44 58:44 imposed duties for our impo from our 58:47 58:47 exports 58:48 58:48 and we can do accountability during duty 58:51 58:51 from they are exposed to us 58:53 58:53 and that is within the law it is called 58:55 58:55 acceptance protection and the third one 58:58 58:58 i don't think we have done it but i 58:60 58:60 think we are now working with 59:01 59:01 anti-dumping i am not very sure about it 59:04 59:04 uh 59:05 59:05 and 59:07 59:07 in the safeguards is that if we have a 59:09 59:09 surge in import that we can't handle 59:11 59:11 then we can inform the w2 and say we are 59:15 59:15 we are 59:16 59:16 asking the people to slow down they say 59:19 59:19 otherwise we'll have to 59:21 59:21 you are invoking safeguards and 59:26 59:26 telling them we can't allow you to be 59:28 59:28 exporting such a volume we can handle it 59:31 59:31 in our system and imports to us 59:34 59:34 so 59:35 59:35 those are good points and bad points 59:37 59:37 depending on how you use it 59:47 59:47 as i said we are showing a good trade 59:49 59:49 policy will give equal incentives to 59:51 59:51 both 59:52 59:52 for import substitution as well as 59:53 59:53 proportion 59:55 59:55 and we have to operate within system 59:57 59:57 rules in the world trade organization we 59:59 59:59 cannot subsidize for example for extra 60:01 60:01 promotion we cannot substitute our 60:03 60:03 export directly but some people have 60:05 60:05 argued in the past and failed that is 60:07 60:07 saying if they can't get credit for 60:09 60:09 something they say we are going to 60:13 60:13 we can give a duty no you can't do it 60:16 60:16 but there are other ways to support it 60:18 60:18 by removing the barriers to exports 60:20 60:20 you know that is one thing now 60:24 60:24 if you 60:25 60:25 if you 60:26 60:26 if you want to reduce the imports 60:28 60:28 there's a cost attached to it 60:31 60:31 if you cannot produce at that price 60:33 60:33 for 60:35 60:35 then 60:41 60:41 you you're asking for help from the 60:43 60:43 government saying but there could be 60:45 60:45 infant in this argument you're saying we 60:47 60:47 can reduce these costs in the future 60:50 60:50 but 60:52 60:52 if they are not able to do it they give 60:53 60:53 them some time then you have to close it 60:55 60:55 down and say sorry sundown clause 60:58 60:58 if for example we have discussed this 61:01 61:01 earlier we now 61:02 61:02 discuss 61:04 61:04 in 61:05 61:05 particular with reproductive commission 61:07 61:07 they consider committee and saying could 61:09 61:09 we give them infant industry gown this 61:11 61:11 is a good grounds are there any prospect 61:13 61:13 that they'll be able to recover this in 61:15 61:15 the future that's an essential thing we 61:17 61:17 have to do they can go through this at 61:20 61:20 my thing and look at the numbers and see 61:22 61:22 it 61:23 61:23 so there's nothing 61:24 61:24 uh 61:26 61:26 nothing wrong in trying to make that 61:28 61:28 argument if you if it's a genuine infant 61:32 61:32 but the trouble is that those infant 61:33 61:33 infants end up within a geriatric ward 61:36 61:36 at the end of the day because the 61:37 61:37 government continue to 61:40 61:40 support them because they'll come and 61:41 61:41 say oh we can't do this because if you 61:44 61:44 lose employment 10 000 people are going 61:46 61:46 to lose their jobs if you withdraw the 61:48 61:48 support that's what they are giving in 61:50 61:50 for example on state-owned enterprises 61:52 61:52 in sri lanka 61:54 61:54 you know 61:55 61:55 so 61:56 61:56 so it is a false argument to say 61:59 61:59 you can 62:00 62:00 save money 62:03 62:03 by importing 62:05 62:05 increasing 62:07 62:07 import substitution 62:08 62:08 at what cost 62:11 62:11 so just because some you have been 62:13 62:13 importing and you suddenly stopped it 62:15 62:15 you 62:17 62:17 your price of domitic prices have to 62:18 62:18 have to go up and then it's first of all 62:22 62:22 there's a 62:22 62:22 uh adverse effect on the consumer 62:25 62:25 consumer have to pay more 62:27 62:27 then there's address on the production 62:30 62:30 side because the competition is not now 62:32 62:32 removed 62:33 62:33 so they can charge you more higher 62:35 62:35 prices so both ways is not going to help 62:38 62:38 macro economically it will be won't help 62:40 62:40 at all 62:42 62:42 so if you have proper exchange rates 62:44 62:44 a competitive exchange rate then you 62:47 62:47 won't come to a situation where 62:49 62:49 uh like the one you said you can stop 62:52 62:52 all imports no it depends upon the 62:54 62:54 exchange rate so exchange management is 62:56 62:56 also very important which is a 62:58 62:58 macroeconomic part of the 63:00 63:00 situation 63:05 63:05 this is a part of the program that 63:07 63:07 adokata is institute is running 63:10 63:10 on what are called master classes 63:13 63:13 this is the second master class that we 63:15 63:15 have done 63:17 63:17 and we expect to do another master class 63:20 63:20 on industry policy in january 63:23 63:23 in the meantime we want to thank you 63:25 63:25 very much for participating in these 63:27 63:27 discussions i 63:29 63:29 i like to to share my little knowledge i 63:33 63:33 have 63:33 63:33 with 63:35 63:35 all of you 63:36 63:36 on issues of important economic issues 63:39 63:39 of the day 63:45 63:45 you