By W A Wijewardena –
Aseni, whiz kid interested in all issues relating to economics, and her grandfather, Sarath Mahatthaya, an ex-official of the Ministry of Finance, are in conversation on the current acuteeconomic crisis in Sri Lanka and the challenges faced by President Ranil Wickremesinghe when making a turnaround in the economy. Aseni has watched Ranil’s statement to Parliament, his interim budget speech, and various interviews given to Western media from time to time. She has been intrigued by some bold statements made by him. Therefore, she sought the assistance of her grandfather for elaboration of same.
The following is the exchange of views between them:
Aseni: Grandpa, there is no secret that Sri Lanka is going through the worst economic crisis in its post-independence history. The country is bankrupt, the Government is a lame duck when it comes to economic management, and the Central Bank is charged with the impossible task of stabilising the exchange rate, the rupee’s external value, and taming inflation, the rupee’s domestic value. President Ranil Wickremesinghe has assumed presidency amidst these multiple crises. In your view, what is his biggest challenge today?
Sarath: You are correct. With respect to the economy, Sri Lanka is falling through an abyss of which the bottom cannot be seen. That is why Ranil is warning the people every time he talks about the economy that tomorrow will be worse than today. This is a disappointment to those Parliamentarians who have voted him to presidency in the belief that he possessed a magic wand to make a quick turnaround in the economy and put it back on a solid growth path. This is now becoming an elusive goal day by day.
It seems that he is trying to cage in a raging tiger by catching it by the tail. According to a Buddhist story that you can find here, the correct way to tame a ferocious tiger is to meet its immediate needs and gradually coach it to a state of being subdued. The use of force in this connection is unproductive because it will make the tiger more ferocious. The danger of attempting to tame the tiger by force is that if it turns back and attacks the tamer, it will be fatal for both the tamer and those around him.
Ranil is a person with a different economic policy strategy. That strategy we can call ‘Ranilnomics’. Since it is different from the ideology of those who have voted him to power and those who are backing him now in Parliament, his biggest challenge is to win the ideological war as quickly as possible.
Aseni: What is his economic ideology?
Sarath: As pronounced by him in his address to Parliament in early August, and in the interim budget speech, it is called ‘social market economy policy’. It is not a new ideology because it is the same social market economy policy which he advocated when he sought power in 2015 after the MaithripalaSirisena administration was set up in January that year. He put this as his Government’s guiding principle in his election manifesto. However, at that time, it was just a notion borrowed from the post-war Germany and no detailed blueprint had been prepared for action. It was therefore new to his Parliamentary group as well as to his top policy advisors. There had been several independent policy analysts who had presented a detailed analysis of how this new economic strategy should be framed and how it should be implemented.
The post-war Germany went for social market economy in an attempt at finding a middle path between pure capitalism and extreme socialism. Pure capitalism advocated an open society based on the private sector and no intervention by the government known as laissez faire policies. The extreme socialism took the opposite side with the government making all the choices for the people. The first was not acceptable because it canvassed the market efficiency to exclusion of the social justice. The latter was not hailed because it created an inefficient economic system. Hence, the move to adopt the middle path in which the government also intervened in the economy, while allowing the private sector to play the major role.
So, this is the policy ideology behind Ranilnomics.
Aseni: I understand. But how does it differ from what is being believed by his partners in the Government?
Sarath: The Parliamentarians who back Ranil are famous for holding a different worldview which has certain basic features but appeared in different names. At first, it was called neo-colonialism, a term used to describe the world after many former colonies gained their independence. In his interim budget speech, Ranil castigated those who harbour the neocolonialism views as those who have derailed effective economic reforms in the country. He said that it was a slogan-led politics which they had practiced in different forms in different times for their own benefit. He concluded that, I quote, “this was the main reason for the collapse of our Sri Lanka’s economy” and end quote. He blamed the citizens for accepting these rhetoric and politicised economic policies without criticism.
The proponents of this ideology argued that the West which was made up of former colonial masters continued their colonial subjugation of the newly independent countries through trade and unnecessary political interventions. But this campaign lost its steam in early 1960s and was represented in form of a new ideology called the ‘thirdworldism’. This was the term coined by the Venezuelan writer Carlos Rangel in a book published in Spanish in 1982 under the title ‘El tercermundismo’ to describe the body of arguments earlier presented under neocolonialism.
This third world ideology believed in a worldview in which the West was portrayed as being bent on exploiting the developing world through schemes favourable to them. A remarkable feature of the thirdworldism was that a similar view was not held about the second world made up of the Soviet Union and its allies. But after the collapse of the second world in early 1990s, there was no vogue in going behind the thirdworldism. Hence, it was represented again in the form of a new ideology which became popular as anti-neoliberalism.
Neoliberalism was earlier known as Washington Consensus. That was because it was the economic ideology of three Washington DC based institutions, IMF, the World Bank, and the US Treasury. In 1990s, these three institutions had advocated, inter alia, for reducing the size of the government, supremacy of the private sector, and movement toward free international trade. The critics portrayed it as an attempt by the West to allow their companies to penetrate the markets of developing countries and exploit their natural resources. However, the vogue of the Washington consensus waned after its chief proponents admitted that it was not successful in reforming the global economy. But these arguments were represented as anti-neoliberalism.
Ranil is viewed as a neoliberal and those who support him now in SLPP had firmly believed it. So, Ranil’s biggest challenge today is to erase that reading of him in their minds and get their support for the economic reform program he is proposing. He seems to be aware of this challenge. That is why he had devoted a significant portion of his address to Parliament to counter these critics. He had specifically mentioned the instances of those who opposed Sri Lanka’s arrangement with India to develop the unused oil tank farm in Trincomalee, introduction of the India supported ambulance scheme, light railway project with India, and those who opposed Sri Lanka’s move to IMF for support.
Hence, Ranil and his Parliamentary supporters are not on the same wavelength. Now he should win them over to his side for otherwise, the entire reform program will be a non-starter.
Aseni: How should he do that? I suppose that it is not an easy task.
Sarath: Yes, it is not an easy task. It requires taking those hard-held views out of their heads – known as de-education – and put new ideas into their heads – a process called re-education. De-education is not easy because there is a sizeable number of followers in the country who also hold the same view. If these Parliamentarians change their stance of the worldview now, they have to abandon those voters who have supported them throughout. That is because as the adage says that you cannot run with the hare and hunt with the hounds. You must take only one stand.
Re-education is the more difficult task because at their current maturity and age, it will be nearly impossible to relearn unless they have developed that skill. It is only those who have an open mind that can do this miracle.
What this means is that he should keep on communicating this new philosophy to his Parliamentary supporters until he is comfortable with their loyalty to the ideology not just by letter but in spirit as well. It is like a wife nagging her husband day and night until he falls in line with her planned action. This is the formidable challenge which Ranil is facing now.
Aseni: I now understand that he should remove this neoliberal tag which they have attached to him and emerge as a social market economy proponent. Other than this, what are his challenges relating to winning this ideological battle?
Sarath: Social market economy is a strategy in which you take the best out of the free-market economy and the governmental intervention. Every policy action has a good wherein you deliver a benefit and a bad in which you produce an undesired byproduct. Taking the good and throwing out the bad require careful planning, analysis, and foresight. The test for this comes when he presents the interim budget for the next three months shortly and the full budget for 2023 later in November.
There, the challenge is how to harmonise the two opposing requirements, submitting a prudent budget on one side, and providing relief to people who have already been hit by the economic crisis. If he tilts toward the prudent budget concept which is a must for him to make Sri Lanka a rich country by 2048, he will continue to be branded as a neoliberal. But if he tilts toward the other side, he will be a social market economist who cares for the wellbeing of the downtrodden.
His options in this connection are very limited. His Treasury is not only empty but also negative since it is run out of borrowed money continuously. His Consolidated Fund was negative to the extent of Rs. 990 billion as at end-2021. Given the debt financed transactions which the Treasury had undertaken during the last seven-month period, this negative balance may now have increased to well over Rs. 1 trillion. At the same time, his Central Bank is having a negative foreign reserve balance of $ 4 billion. The former limits the fiscal ability to provide relief to the affected people. The latter imposes a restriction on the ability of the country to import the necessary essentials – foods, fuel, medicines – to keep the supplies going.
This is an issue which he faces when he presents the interim budget for the next three months of 2022 and the full budget for 2023. Tax revenue domestically and foreign assistance on humanitarian grounds should be increased in the new budgetary strategies. To increase tax revenue, except those measures introduced in May 2022, there have been some marginal changes to the existing tax policies.
Corporate income tax has been increased from 24% to 30%, concessionary corporate income tax from 14% to 15%, and value added tax from 12% to 15%. To expand the personal income tax net, he has proposed that all those who are above 18 years in age should register themselves with the Inland Revenue Department, irrespective of whether they are above or below the threshold income level of Rs. 1.8 million per annum. This is a policy taken in the correct direction.
Aseni: Right now, those in the Government, especially the ministers and leading politicians do not seem to be aware of these limitations. They are acting as if there is no economic crisis in the country. Isn’t it also a constraint for him to implement a rescue package for the country?
Sarath: Yes. It shows that it is more difficult for him to introduce an across-the-board austerity measure than getting the support of the supporting Parliamentarians to the new economic ideology. In the Chinese Canon, there is a discourse of the Buddha titled Avadana Sutta which explains the behaviour of these leaders amply. According to this Sutta, a man walking through a forest was chased by a raging elephant. To escape the wild beast, he hanged on to some roots that had fallen down a well. When he looked down, he saw a python climbing up the roots to swallow him. When he tried to change over to another root, he saw some poisonous snakes trying to attack him. When he looked up, there was this raging elephant trying to dislodge him from the hanging roots. Then, he saw some mice gnawing at the root he was hanging on so that his fall onto the well was imminent. Then, there was a wildfire that was also raging at the well. This destitute man saw a honeycomb hanging from some other root. The Sutta says that the man facing five death threats licked the honeycomb.
So, the behaviour of the politicians and policy leaders in the country is like what that man had done. They are licking honey quite oblivious of the imminent danger to them as well as to the country. Ranil’s biggest challenge will be to put sanity into their heads and take them on board the ship which is sailing to the land of social market economy.
Aseni: Agreed that we are just like the man licking honey while there are several death threats. Hope President Wickremesinghe will be able to overcome this issue.
To be continued….
*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at firstname.lastname@example.org