21 October, 2020

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A More Troubling (And Probably More Likely) Scenario: Whither Sri Lanka If It’s A Depression?

By Kumar David

Prof. Kumar David

There has been a flurry of articles, some excellent, others good in the domestic and global Lanka-oriented electronic media regarding the predicament, outlook and recipes for the future of the economy. Names that readily spring to mind are Nimal Sanderatne, W. A. Wijewardena, Sirimal Abeyratne and Ranga Jayasuriya who write regularly, and one-off pieces including Bilesha Weeraratne, Vagisha Gunasekera, Himan Punchihewa, Andrew Sheng and Asif M. Zaman. Most important by far was an interview with Central Bank Governor W. D. Lakshman in the Daily Mirror on 14 May. There are other contributions, too many to mention, about the way forward, economic restructuring, paradigm shifts and reorganisation.  

Local writers focus, naturally, on the economic fallout from the lockdown, curfew and disruption and briefly or only in passing mention that the global economic environment will be grim for the next 6, 12, 18, or god knows how many months.  Solutions offered in these early days, understandably, are generalities: aggressive, transformational, new-normal, the E-way, systemic change, digital, work-from-home, the gig-economy, prioritise foreign exchange, solve the insoluble (sic!) debt stranglehold etc. Always the external or global economic environment is given only light mention – except Bilesha Weeraratne’s focus on foreign worker remittances which is not quite what I want to touch on in today’s column.

My proposition, at least for arguments sake today, is that a global depression, not a mere recession lasting two or three quarters, is looming. It’s not going to be a tsunami or a hurricane, not even Category 5; it’s going to shake the world to its foundations over the next 3-year to 5+ year, if not longer time span. George Friedman has described the difference between the two, better than I can, and here is what he says. I have padded it quite a bit and “improved” it by inserting specific relations to capitalist political-economy.

George Friedman: Recessions and Depressions; The key differences

* Recessions are a painful but necessary part of the capitalist business cycle. They cull weaker businesses and shift capital and labour to better uses. Usually they last for two to four quarters.

* Depressions are nurtured by capitalism’s endogenous, that is natural progression and long-waves of evolution, but triggered (catalysed) by exogenous forces such as wars or disease.

* Depressions are always multi-national; recessions not necessarily so.

* The measure of the pain of a depression is the extent to which it destroys society, creates refugees and engenders migration within or between countries. It extinguishes hopes and dreams. 

* The last US depression in the 1930s arose from war and was resolved by war. 

* Depressions create desperate people hungry for everything, especially hope for a future.

* The coronavirus has similarities to war, such as the state mobilising people and diverting them from work. WW2 diverted the people of Europe and America into the military.

* The world doesn’t go back to what it was after a depression. A mild one will change people’s dreams, but they will at least have some. World wars, however, kill tens of millions

How do the odds look that in the next three to five years global capitalism will suffer a devastating shock; something for worse than what it is passing through right now in Q2 2020? If you are the type that keeps in touch with the Financial Times (UK), the Economist magazine, NY Times and such like, what I call apex journals of the class enemy, then you could not have failed to notice that the consensus is that the future will be very troubling. Quantitative Easing (QE) driven by MMT (Modern Monetary Theory) says “Print, print, print” flood the world with money; this is the approach governments and central banks have chosen. This is the only way they can save banks, corporations and capitalism itself from going to the wall. And save some jobs and stave off social rebellion. Are they mad to plan the creation of $18 trillion of global debt? Don’t they see that down this road lie the great avalanches and deep canyons? Of course they see; but there is no other way to bail-out the prevailing global order. Society and the state must save the system; socialise costs, having all these decades privatised gains. 

The web, the media, the Financial Times, the Economist, the IMF, the EU, Goldman, Fund Managers and pundits have assailed us with analysis and forecasts. The consensus is that 2020 will be annus horribilis. A few stick out their necks with predictions of a V-shaped recovery after two bad quarters, but most have their feet parked firmly on terra-firma. We will be lucky to stave off a prolonged and socially disruptive global economic downturn, a depression – US and Western economies will not stabilise in 2021. The reason for pessimism is precisely the actions taken by governments and central banks as a ‘rescue’ measure – printing money like tabloid newspapers, QE that is multiplying sovereign and corporate debt by trillions of dollars and helicopter money. Print-all-you-can MMT! Global finance capital is on a trajectory foredoomed to become an astronomical debt-trap from which it has no escape. 

Harsha Sirisena says: “Apologists for QE point to the absence of goods price inflation to date (ignoring massive asset price inflation) but this is due to the one-off effect of hundreds of millions of rural Chinese flooding the cities to make China the workshop of the world.  This effect has played out and with ongoing de-globalisation, it is only a matter of time before inflation reappears. I have no doubt we will see a repeat of the great inflation (1965-1982) over the next decade”.

Staying with my premise that we are likely to see an immense global economic crisis in the coming years, that is a depression, how will the analyses of local commentators that I adverted to in my opening para be affected or altered? I envisage three big differences if my assumption of a deep global crisis holds true. The first, we are likely to see a massive increase in unemployment in several sectors, especially those manufacturing apparel for Western markets and hotels & tourism. Tourism cannot recover unless and until the global economy recovers. Chronic unemployment will be the most socially disruptive of all the effects that a sustained global slump will have on Sri Lanka. The second negative effect that we will suffer is that if oil prices stay depressed, then our Middle East dependent remittance economy will suffer a setback. Thirdly and sadly the many constructive suggestions offered by local commentators that I very briefly enumerated in my second paragraph will mostly end up pie in the sky. All this makes for a scary scenario. Don’t blame me, I am only the messenger reading what is written in the leaves; I did not invent global capitalism or its endemic crisis, nor I am the bat that brought corona. 

Does this mean that we remain frozen in passivity with hands folded? Of course not! The way to go however is somewhat different from the enthusiasm of those who want the reorganise, use high tech for fancy products and turn to digital as a magic bullet. Yes, I do believe that all this, that modern technology, has a crucial role to play. I am certainly not a Luddite. But I also accept that a consumerism driven life style that seeks and perceives god in the goods market, sees “little in nature that is ours” and rips apart the environment for greed and profit cannot constitute the value basis of a post-corona shattered, depression traumatised domestic and world order. I am not an introspective nationalist and do not accept that we need to turn inwards and backwards to our long-perished roots. Indeed, we must be global, to be citizens of the world, but of a different world. This is bordering on the lyrical; I’d better stop and get back to hard reality.

There is much reference by local writers to new product lines and the need to explore new overseas market opportunities; that is turn our feet in other directions. But if we are considering a context of collapse and destruction of known economics on the scale of a depression, we will have to do more than look at our feet, we will have to ‘lift up our eyes unto the hills’ and adapt to wholly different international order. There will more to impending global changes than the passing of the American hegemon’s pole-position in the pecking order, and more than the rise of China who knows how high. There is all be other skirmishes, wars and rearrangements, both material and military. (I regard a real Sino-American war as impossible). Unlike our South-East and East Asian neighbours Sri Lanka has been pretty neglectful in strengthening its economic ties with regional trade and development blocks. That’s something that will have to be put right straightaway. 

I will wind up by restating the cardinal premise of this essay. We are on the cusp of an economic catastrophe such as not seen in our lifetime, it will have corresponding deleterious social consequences, and because the world is far more interconnected than it was in the 1930s, its global impact (Asia, Africa, South America and the Middle East) will be correspondingly more profound than the effects of the Great Depression of the 1930s. The time frame to keep in mind is three to five years. I am sorry, I apologise; but I only bear bad tidings; I didn’t actually manufacture the world order.

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Latest comments

  • 9
    1

    In civilised countries, they give a condemned man a tasty meal before he is executed.
    .
    Professor Kumar David has at least written an interesting article informing us of the awaiting doom.
    .
    Is it true that in China they ask the criminal to smile for the camera before he is shot in the back of the head? Should we keep smiling in Sri Lanka to please the Rajapaksas who have made things even worse for us than was necessary?

    • 4
      0

      “Unlike our South-East and East Asian neighbours Sri Lanka has been pretty neglectful in strengthening its economic ties with regional trade and development blocks”
      Yes, there is the crux of the matter with regard to Sri Lanka. We have since independence been overly snooty and cut our ties with India, ties both economic and political which had existed since the time of the Sinhala kings. We have suffered from a misplaced sense of being superior to those toilet-less starving Indians. Even a month ago, the Forces were put on alert to stop an anticipated flood of refugees.
      Right now, shortages of everything from onions to laptops are emerging. There is no foreign exchange for imports. As KD says, it will get much worse, and all this govt. can offer is sunshine stories about self-reliance a la 1970’s.
      Imagine the situation if we had signed the CEPA agreement 10 years ago instead of being misled by ignorant nationalists and self-interested oligarchs. We would have been linked to a solid economy, with access to whatever we want, paid for in Rupees.
      We would have lost local “industries” but more efficient ones would have appeared, with a much wider market.

      • 1
        0

        OC
        Resistance to CEPA (later ECTA) was based on past experience with the Indo-Sri Lanka of 20 years ago.
        If you know what Nepal and Bhutan have been going through, you will read the small print in any agreement with India with an electron microscope.
        It was India’s desire to dominate the SAARC that stunted a project which could have benefitted the region.

        • 0
          0

          SJ,
          I think most of the opposition was orchestrated by local industrialists afraid of drowning in cheap imports. As usual, short-sighted . They were unaware of the huge export market, which people like Damro have discovered.
          In any case, none of these “industrialists” could produce a decent tyre , even with local raw material, until CEAT came in.

    • 1
      0

      Dear Sinhala Man,
      .
      Very good morning to you from Berlin.
      :
      You will understand it clearly if you would please check the video below

      https://www.youtube.com/watch?v=ARij1muv3Xg

      – WHOLE lot of people in our country are brainwashed for their political survival. This nature was then seen in tribal africa, but today, even Ethiopians have improved their thinking patterns.. They thgouh surrendered to CHINESE INVESTMENT INJECTION as many others got caught, but they got developed their country as no others. Now in Adisabeba, you can see, european style trams as their public transport… can you imagine ?

      Blind believers are so naive, if anyone would stand up and recite “SADU SADU” with a louder voice, even a buddhagama monk who is clearly seen as a criminal hidden behind RED ROBE wrapping, people would get caught by what they just heard, no matter, the content of it. That is how many among the BUDDAGAMA followers ( not necessarily they are real buddhists to be honest), become part of abusive politics. Thinking patterns should be improved in order them to see it right. For some reasons, that has been stopped in my home country. People even if they are basic degree holders, get easily caught by the tricks being played by political crooks.

      • 0
        0

        Leela,
        Did you know that Colombo had electric trams till about 1960, and trolley buses too? What happened to them is another story….
        Also, you shouldn’t run down Ethiopians as “tribal”. They were civilized before the Germans.

        • 1
          0

          As a resident of Borella, I have traveled in Trams which ran between Fort and Borella and Grandpass. Lines from Borella to Fort and Armour Street were removed in 1953, but the section from Grandpass to Khan Clock Tower ran till 1960. In 1954 Trolley Bus was introduced in three routes – Borella- Fort, Borella- Kotahena and Kotahena – Fort. Later Madampitiya to Fort via main street was introduced. In 1965 there was a strike by the leftists who during the strike put sugar into the fuel tanks of trolley buses, damaging them. Though trolley buses operated on electricity, they were diesel-electric. As repairing damaged buses was costly, service was scrapped.

  • 5
    1

    Prof, I agree with the essence which is the situation we face will be something new and strange to all of us it provides a new opportunity for a new world order . In this battle who will make it and who will perish will depend greatly on individual countries their leaders and most importantly farsightedness and not the shortsightedness, which is what Lanka and the ilk had and suffered since their origin. It will take new leaders, new thinking, a team of people and the public who can understand and accept those changes for the sake of future. Yes the playing field has been some what level , and there is great opportunity for a new but better (understanding and cooperation) world order. It has to start from individual countries just like in past. Given our history I see scant if not none , for us , Sorry Lanka..

  • 3
    0

    This economic problem that we would be facing is not a start off, of the advent of COVID 19. We started it immediately after ending the thirty-year civil war in the year 2009. From 2009, we embarked on a “Luxury Life Style” of high magnitude, that we could ill afford to bear with. No doubt, our economy was in disarray; but how did we plan and worked towards recovery. We completely forgot our “Food Supply” and connected irrigational infrastructure. Once renowned “SAHAL NELIYA” located in the pristine agricultural landscape in the Northern Province and adjacent areas were nowhere in the planning boards of the Government. Instead, all efforts were made to build additional ports, airports, sports complexes, recreational facilities, superhighways, import a heavy load of luxury and unessential vehicles and so many other nonessential economic projects. All that needed capital and with an empty treasury, we were compelled to “Borrow” a colossal sum of loans, without even considering the capacity to repay or generate an equal proportion of income. It is no secret that a fair proportion of such loans were, wasted, robbed, and mismanaged. The worst was, loans had to be raised to repay the instalments and interests on loans that we have already taken

  • 1
    2

    Yes, we are in the midst of a global depression. President Rajapaksa is moving in the correct direction with focus on BOOT, BOT and BOO projects. Unfortunately, parliamentarians who are interested in making money and appointing their kith and kin to these projects, are bent on making them joint ventures. They will only increase corruption, debt which we cannot afford and inefficiency.

  • 3
    0

    Great imagination there, Kumar. Quite divorced from traditional economics, the planet’s keepers need to rethink their priorities. Work on the natural environment, develop green technologies, pay attention to nature’s warnings, show compassion to all animals and plants, develop a symbiotic relationship with the world’s bountiful soil and water. Discard the money markets, paper currencies, the stock exchanges and capitalist-driven economic models and fossil-oil indicators or gold etc.. Go back to community and co-operative existence. Things will look much better, far sooner than you think, Kumar (or want us to think). Remember our humanity. Everyone wants to eat, have sex, bring up kids, sleep well, stay healthy and look out for each other. No other method will deliver us our salvation. However, I will not hold my breath, waiting for the keepers to take notice.

  • 0
    0

    We know some birds laid the eggs for us in crow’s nest. But we don’t know we have to sound like Kaa Kaa or Coo Coo. Was it Crow laid the egg or Cuckoo laid the egg for us? Still it is only dark. Will the crow caw or, is it going to be cuckoo’s call. No light to see any direction. We don’t know whether the tunnel’s end is coming or if it is leading to center of the earth where everything, including birds and animals are going to be infected by mutating Covid-19 and perish. It is not about optimism or pessimism. It is about a sudden callowness or incognizance. Possibly the medical doctors may analysis this recession/depressing better than economics PhDs, because their vision to see the tunnel’s end is better than that of the economists’ vision, in this recession. The million dollar question here is, is there a pharmaceutical item to fight Covid-19 is about to come and if so, when? The answer to that question has the capability to drive any well versioned forecasts into unknown directions. That is why we don’t the new fledgling that is about to come out of the nest is going to caw or coo-coo.

  • 0
    0

    We don’t know if there will be another covid-19’s conflagration, lockdown, confinement, curfew in the next winter or the landfall of the eye of the hurricane is past. There is hope of a medicine or vaccine is could be released before the end of the year. But, before the fight against the Covid-19 is over, talking about who will win the race in rebuilding the economies is like before cutting the goat fighting for the thigh.
    Many countries, about 210, got infected by this pandemic. Lankawe Appe Aanduwa started Covid -19 locally, only to win election. It miserably failed on that project, pressed by opposition, Election Commission, WHO, NGOs & INGOs, other economies…………This made Lankawe to totally lie about any aspect related to Covid-19. Though Aanduwa’s numbers are always wrong, but about Corona death, it is outright lies.

  • 0
    0

    The Ministers who loaded the Sinhala Buddhists on the flight of Election, with marketing pitch of life long vacationing in the paradise of King’s dream land, are now pulling back their feet. They are saying they don’t have money even to pay government employees’ salary. All their boasting and bragging are grounded after they realized that the election could not be conducted as expected and the 2/3 they desperately needed to crystallize their authoritarian rule in vain. Their plan is not abandoned by them; still waiting for the next auspicious time. Having said that, it has to stressed that there is nothing within that the so called rebuilding the country after the Covid-19 endemic. They are saying that this is a worldwide disaster; it is the world that has to start the projects to rebuild and they only can follow it. At least this time, if they honestly mean that word, but it is not another election intended talk, then Ceylon economy can be started to rebuild to where the Britons left. Sadly all doubt their sincerity even now. As the Covid-19 numbers they releasing are absolutely fake, we still have to wait and see when the epidemic can be cleaned from Lankawe.

  • 0
    0

    In the past Ceylon was referred as granary of East. Tea or Rubber or Coffee was never their products. At the end of the foreign occupation Ceylon had a high favorable balance of payment but only with the export of Estate products, which was unknown in the kings’ time. Remember, the Arabians, Europeans came here only for spices, not for tea, nor even for rice. The imported Telugu Nayakka Sinhala Kallathonis, who were blaming the Britons for their estate’s losses, tore it off and shared it within them, but never brought the locals crops (rice and spices) to the status of monarchic times. So the neighborhood trading of rice & spices were, completely wiped off. For another 100 years, same like the past history, garments will be a world’s major employer, right after farming. Lankawe could not foot in that even after US & EU gave the GSP+. The White Van & White Flag murderers only created White elephants projects, but did not invest in viable industries. They brought rice from Moon and lifted Ceylon as Miracle of Asia. Further to that, the new Economic Maha Viyath Cabals are still not thinking to advance the economy by developing the traditional industries with less expenses but causing the people to hallucinate for 4th Industrial Revolution, with IT automation. Remember Ranil and Swamynathan wanted merge North East under loans by smelting iron cages instead of offering jobs for locals with traditional homes, loan free?

  • 0
    0

    In 1798 Thomas Robert Malthus famously predicted that short-term gains in living standards would inevitably be undermined as human population growth outstripped food production, and thereby drive living standards back toward subsistence. We were, he argued, condemned by the tendency of population to grow geometrically while food production would increase only arithmetically. This never happened because the human spirit is innovative and borne with the will to OVERCOME.

    Professor Kumar David whom I admire, alas in this instance over-run the airstrip. What he discarded (or under estimated) is the human will. Sometime back I read a book by Professor Charles Handy “The Age of Unreason”. The synopsis is that things do not happen always that can be explained by past experiences. When man is confronted with an apparent insurmountable challenge, always there would be a paradigm change in the way people react, do and recuperate. The learned Professor is banking heavily on past experiences in the world. The accumulated knowledge of past experiences paints a very disastrous picture for the next 5 years. But I believe there will response to this crisis quite different to what the Professor predicted. A response so different to the past accumulated knowledge. The human spirit and will is and will be the saviour.

  • 0
    0

    Prof. K.D

    “The time frame to keep in mind is three to five years.”

    Obviously, there will be a lot of Suffering and the worst hit will be the poorest of the poor. And the Most Disappointed will be the Winners in the coming Elections who will have Far Less Opportunities to do what they are good at – Lining their Pockets. They will be so Disappointed that, may be, most of them will choose to Retire when the term of the Coming Parliament ends. That, is certainly a Silver Lining for us, Sri Lankans.

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