Current General Studies Magazine (January 2016)

General Studies - III "Security Based Article" (Time to look within, not westwards)

Sri Lanka has just stepped into what could be a make-or-break year for the country. How it crafts its political and economic vision now will profoundly impact its future

Exactly a year after his election, President Maithripala Sirisena has initiated a welcome process to rewrite the country’s Constitution. The government is also moving ahead on transitional justice processes to 0address the UN Human Rights Council resolution unanimously adopted in September last year. However, progress on both the constitutional and transitional justice fronts, which seem to have the consensus of both the President and Prime Minister Ranil Wickremesinghe coming from historically opposing parties, depends to a large extent on the country’s economic future. Given the President’s affinity to the rural economy and the Prime Minister’s championing of economic liberalisation, the new economic reform agenda is likely to shape the path of regime consolidation and influence the stability of the government.

The prevailing economic conditions characterised by the rising cost of living, lack of job opportunities and income inequalities were central to the electorate voting out the previous regime. And it is to address this troubling economic situation that global financier and philanthropist George Soros was invited to host the Sri Lanka Economic Forum during the first week of January. The economic forum, a brainchild of the Prime Minister, aims at an economic transformation by bringing in global finance capital and putting Sri Lanka on the global financial map. The event was framed by Harvard University’s Center for International Development which brought its network of international experts.

The new economic reform agenda is not very different from the financialised urban development policies of the Rajapaksa regime. Increased borrowings in the global financial markets, beautified urbanisation of Colombo and tremendous infrastructure buildout over the post-war years leading to high growth are the foundations on which the new economic policy package is being constructed. However, the new policies are far more aggressive in attempting to transform land, labour and capital in line with dictates of the International Monetary Fund (IMF) and World Bank.

Disappointing show

The Harvard show in Sri Lanka was disappointing to say the least. With little understanding of the country’s political-economic challenges and outright ignorance of its history, a team of experts led by Ricardo Hausmann of Harvard along with economic reformers such as Montek Singh Ahluwalia, among a number of international panellists, did little more than provide ideas from comparative situations; mere ideas found in textbooks of economics and popular economic magazines with little relevance for the path of development in Sri Lanka. The global economic situation and the challenges for a developing post-war country after the global economic crisis of 2008 and the continuing challenges were hardly discussed. Instead, the aspirations of becoming a Singapore, which is the tea party talk of the reminiscing elite in Colombo while structural problems mount, was this time peddled by the experts from Harvard.

Here, it is the interventions of Dr. Soros and veteran economist Joseph Stiglitz alone that stood out in their warnings about the global economic conditions and the tremendous challenges facing the Sri Lankan economy. They raised concerns of the economic downturn in China, the reversal of flows of capital with the U.S. Federal Reserve increasing interest rates and the macroeconomic policy challenges in the context of the short-term inflow and flight of capital. Dr. Stiglitz in particular suggested the need to consider a progressive land tax, a luxury consumption tax and the importance of the role of the development state.

The macroeconomic challenge facing Sri Lanka is no secret. It is an issue of extremely low government revenues amounting to 12 per cent of GDP and that too with a regressive tax regime with over 80 per cent of revenues coming from indirect taxes. It is also about the low level of exports — limited to garments, tea and rubber — which are only compensated by the remittances of cheap labour working in West Asia. Moreover, the lack of jobs and decent employment are aggravated by rising inequalities and uneven development centred on Colombo. It does not take a rocket scientist from Harvard to understand these problems.

It is the solutions repeatedly prescribed, including by many international agencies and think tanks, to these problems that are the subject of debates and struggles in Sri Lanka. The government’s strategy is one of increasing external financial flows and financialisation of the economy, including through the promotion of a market in land and real estate. The government is proposing further trade liberalisation despite imports amounting to double of Sri Lanka’s exports, perhaps to please the IMF and other international actors. Indeed, a possible IMF Stand-By Arrangement and a new trade agreement with India are both expected in the months ahead, and are likely to accelerate integration with the global markets in capital and goods.

While the Sri Lanka Economic Forum agenda claimed to address a policy of creating one million jobs, there was not one concrete statement on how that was to be achieved. However, there was much discussion of the government’s flagship Megapolis project; the urban expansion of Colombo to cover much of the Western Province, crucial to absorb the inflow of capital that it desires. The doubling and in some places tripling of land prices in parts of Colombo is seen to be conducive in contributing towards building the massive urban infrastructure. The possibility of a land bubble that may in the short term lead to speculative investment in real estate, including through the proposed introduction of Real Estate Investment Trusts, but eventually leading to crisis and dispossession — characteristic of the many financial crises from East Asia in the late 1990s to the global downturn a decade later — was conveniently not discussed.

Dangers ahead

Sri Lanka’s problematic high-growth economic vision, even as its economy is falling apart with indebtedness at all levels from its national finances down to its rural households, requires the involvement and engagement of a variety of actors both within the country and outside. Given the dearth of development economists in the country, the support of progressive economists in the region might also be necessary. Revitalising its agricultural and fisheries rural economy, creating viable manufacturing and industrial jobs, and revamping the coffers of the state require critical political economic thinking particularly given the fragile political moment in Sri Lanka. To draw from a historical lesson, one of the most extensive progressive visions to reform taxation in Sri Lanka came from the efforts of economist Nicholas Kaldor of Cambridge, who spent months researching the problems of taxation in India and Sri Lanka in the 1950s. The failure of the Kaldor scheme, in part due to the lack of understanding of the political economy of Sri Lanka, should be a grim reminder about the engagement of Harvard and its economist Prof. Hausmann.

The Colombo elite gravitate at all costs towards the West. Fourteen years ago, during the previous stint of Mr. Wickremesinghe, Norwegian expertise and funds — backed by American power — were invited to mediate the ethnic conflict. That Norwegian peace effort coupled with neo-liberal economic reforms ended in a disaster: internationalisation while disregarding the political and economic realities on the ground contributed to the hardening of both armed actors, a catastrophic end to the war, the consolidation of an authoritarian militarised regime and further ethnic polarisation. The writing is on the wall as far as the current round of international engagement with the sorrows of the Lankan economy goes. It is not just the credibility of economic policies and legitimacy of the government that are at stake. The constitutional political solution and addressing the political and social legacy of the war are also at risk with the crisis-prone new economic policy package in the making.

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