Sri Lanka seems set to return to policies of import substituting production. I started reading Dr Eamonn Butler's primer on Adam Smith this morning and the opening paragraphs describe perfectly the current thinking in Sri Lanka:
"The old view of economics
So much did Smith change our ideas, indeed, that it is hard even to describe the economic system that prevailed in his time. Called mercantilism, it measured national wealth in terms of a country’s stock of gold and silver. Importing goods from abroad was seen as damaging because it meant that this supposed wealth must be given up to pay for them; exporting goods was seen as good because these precious metals came back. Trade benefited only the seller, not the buyer; and one nation could get richer only if others got poorer.
On the basis of this view, a vast edifice of controls was erected in order to prevent the nation’s wealth draining away – taxes on imports, subsidies to exporters and protection for domestic industries. Even Britain’s own American colonies were penalised under this system, with disastrous results. Indeed, all commerce was looked upon with suspicion and the culture of protectionism pervaded the domestic economy too. Cities prevented artisans from other towns moving in to ply their trade; manufacturers and merchants petitioned the king for protective monopolies; labour saving devices such as the new stocking-frame were banned as a threat to existing producers."
What Smith set out to do was to show that the:
"mercantilist edifice was based on a mistake, and was counterproductive. He argued that in a free exchange both sides became better off. Quite simply, nobody would enter an exchange if they expected to lose from it. The buyer profits, just as the seller does. Imports are just as valuable to us as our exports are to others. We do not need to impoverish others to enrich ourselves: indeed, we have more to gain if our customers are wealthy.
Given the essential truth that free exchange benefits both sides, Smith maintained that trade and exchange increase our prosperity just as surely as do agriculture or manufacture. The wealth of a nation is not the quantity of gold and silver in its vaults, but the total of its production and commerce."
To be fair, Sri Lanka is not alone in turning its back on free trade, Smith's insights are important because they are counter intuitive. We don't need to look back to Adam Smith however, we can learn from our own experience. Sri Lanka tried similar policies between 1956-77 that did not succeed but that took place over two generations ago. We may end up repeating the mistakes of the past, but given weak economic conditions and fractured society I don't know if we can afford to make any more mistakes.
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