By Jayasri Priyalal –
The unrestrained neo-liberal policies that catalyzed the globalization process finally applied breaks with the 2007 financial crisis that emerged in Europe and North America. Deregulations and liberalization in interconnected economies and markets assumed that; maximum consumption across global markets generates total well-being in the communities, thus improving their quality of life. The result was a completely different outcome. Benefits of the neo-liberal policies favoured only the 1% privileged group of the population across the globe at the expense of 99% of the sandwiched middle class and marginalized groups in every economy. The myth of fake prosperity linked with ambiguous economic growth ended up as private debt turning into public debt, finally accumulating as sovereign debt, as Sri Lanka experienced. Many failed to realize; that people live in societies and not in abstract markets. Policymakers rallied with the illusion of putting profits before people and the planet.
This trend is not unique to Sri Lanka. It was common in many other countries as well. However, in many other countries, policymakers foresaw the dangers of unrestrained finance and took firm actions to mitigate the impending risks. Unfortunately, in Sri Lanka, the corrupt politicians, public officials – regulators- and the greedy private sector people in business who were close to the politicians influenced the policy-making to their advantage, pushing the entire economy into peril. Revelation by the concerned officials at the recent COPE hearings proves this assertion well.
The neo-liberal policies work on market fundamentals. And they often discouraged subsidies to the vulnerable groups such as farmers and fishers who were engaged in economic activities and produced the basic needs for the community. However, once the 2007 financial crisis hit North America and Europe, the non-conventional monetary policy tools were introduced as a quantitative easing, bringing interest rates to be negative or near-zero rates. A contradicting the principled position -subsidies distort market- functioning. The public-private partnership enabled those who had the means to speculate in the capital markets Casino Capitalism. This action further distorts the market conditions as the rich had access to funds at zero interest rates.
In contrast, the small and medium-term micro enterprises had to borrow at excessive interest rates from the banks. The COVID-19 pandemic further aggravated the conditions with social distancing and travel bans restricting the inward remittances depleting foreign exchange to the developing economies such as Sri Lanka. However, the pre-pandemic conditions favoured the communities with access to cheap funds to speculate in capital markets, increasing their wealth and widening income inequalities worsening the lives of the working poor leading to jobless growth.
Consequences are unravelling now with higher inflation, making the cost of living unbearable for those in developed economies and adding misery to those in the developing countries. Double digit inflation hikes in the USA and Europe creating havock.
Shadow Finance & Casino Capitalism
Shadow finance industries thrived in the near-zero interest rate conditions paving the way toward speculative casino capitalism. Furthermore, the tax concessions the big businesses and multi-nationals enjoyed continued unrestrained. Tax heavens flourished as many shadow finance industries enabled the super-profits engineered by conglomerates to get transferred into offshore centres. The result was the government’s lost tax revenues to finance public expenditure, sinking into debt. Those with access to shadow finance worked hard to elect popular nationalistic politicians merely to continue the status quo, withering necessary funds to stimulate the real economy and provide gainful jobs. Their main aim was to capture the state with the power of shadow finance. Far-right ideology and popularism dominated the elections in democracies. Politicians were heroes, as the anti-establishment sentiments forced the frustrated electorate to challenge the system. Those who were economically powerful with the access to shadow finances got what they expected through state capture. The electoral gains of the 45th President of the United States, Donald Trump, and the election of President Gotabaya Rajapaksa in Sri Lanka resemble similar trends. True facets of the Viyathmaga pundits who backed President Rajapaksa’s election are surfacing now. Some of them in the parliament switch allegiance.
The revelations at the parliamentary committee on public enterprises (COPE) at the recent hearings certainly opened many issues that brought Sri Lanka into the current situation. We are now on the brink of becoming a failed state very soon unless we learn from the past lessons and rally as a nation to take corrective steps. No business sense exists for anyone to put good money behind bad money in a shrinking, rudderless economy such as Sri Lanka. Young Sri Lankans have realized the danger and rallying for a system change as they are very well aware of the causal factors of corruption and greed of those in power, be it in politics or business.
Corruption and Greed two lethal Viruses in Finance Sector
The Finance sector is the operating system in our economy, linking all the producers and consumers together to facilitate the real economy’s growth. Unfortunately, the facts and evidence prove otherwise. Monetary policy tools were introduced purely to get the finance working for speculation instead of stimulating the economy. The most glaring fact was Central Bank of Sri Lanka wasted nearly US$ 5.00 billion to defend the LKR at an artificially low exchange rate with meagre interest rates. Today, the country is short of minimum reserves to meet the import of basics, fuel, cooking gas, medicine, agricultural inputs, and food. The pain is on the people suffering from untold hardships. And who made the gains out of this policy divergence? This write-up aims to highlight how the ill advice of think tanks results in dire economic situations for camouflage policymakers to prescribe shock doctrines.
Putting People and Planet before Profits: Should become the priority
Many lessons from history show how the powerful emperors and conquerors lost their empires due to losing track with the commoners and neglecting the well-being of the marginalized and vulnerable communities that were the more significant segment of their subjects. Genghis Khan was a ruthless conqueror who globalized the world on horseback in the twelfth century. Genghis Khan, a Mongolian worrier who united the various Chinese clans and linked trade between east and west on the famous Silk Road, became an emperor. The nobility’s wealth was close to the emperor’s court, measured in horses, sheep and cattle. (Livestock) Peasant farmers and surfs were significant obstacles for the wealthy nomads as they occupied the land for agriculture, taking away the grazing land for animals. Powerful noble groups persuaded emperor Genghis Khan to acquire the land from peasants to raise cattle, sheep and horses to increase their wealth. When Genghis Khan’s reign ended in (1162-1227) the livestock population exceeded the peasants and subjects. He even could not manage to find a successor to rule after his death. Kublai Khan, the grandson of Genghis Khan, took over the empire and modernized the administration, uniting China as the Great Yuan dynasty (1260-1294). Kublai Khan adopted a novel approach to looking after the interest of the people under his rule. Allowing the subjects to continue with their chosen livelihoods, provide them with the resources, and practice their own religious and cultural beliefs as there were different ethnic groups in the empire. Kublai Khan introduced an efficient administration for tax collection from the subjects, better regulatory systems, and selection of administrative officials based on merits under a governing secretariat. He deviated from his grandfather’s style of rule, thus putting people before profits. There are many such case studies to learn from the history if one follows the Chinese civilization, relevant to apply in the current context. Emperor Kublai Khan was the first emperor who introduced demonetization. The birth of the Yuan, the current Chinese currency, originates from his era, as he demonetized the previous Song dynasty paper currency. Equally, Emperor Kublai Khan ruthlessly punished corrupt state officials, including his loyal minister in charge of tax collection, Ahmad Fanakati.
Virus guards and Firewalls
The two lethal viruses which often attack the finance-led operating system are corruption in the public sector and greed in the private sector. This analogy helps the readers to connect with the digital era, knowing the dangers of viruses impacting their operating systems in the computers and SMART devices. It is not a secret both viruses have acted in tandem in the pre and post-election of President Gotabaya Rajapaksa. In other words, as things unravel as the COPE Committee exposes, how few influential businessmen manage the misinformation campaign well to bring an inexperienced Mr Gotabaya Rajapaksa into power, purely with an aim for complete state capture. A grand convergence, corruption in the public sector, greed in the private sector with the connivance of the corrupt politicians in the country.
The system change that all Sri Lankans aspire to needs to address this unhealthy trend at the outset, essentially inventing effective virus guards and firewalls to insulate the finance industry from the two lethal viruses, Greed and Corruption. The young Sri Lankans who are agitating on the streets rallying under the #GotaGoHome campaign has to design a framework with the help of Sri Lankan intellect who are willing to take the lead to bring an order to steer the economy forward. Those who engineered the strengthening of the shadow finance industry have not given up hopes, and their efforts to re-capture the state through shock doctrines in troubled waters are a warning signal to note. Read my column on 17th Jan 2020]
Global Minimum Tax Agreement to arrest tax base erosion and profit shifting
Developing countries rely heavily on corporate income tax revenue. Given the economic toll of the ongoing COVID-19 pandemic over the past two years, these governments need to find additional resources to finance better physical and digital infrastructure. Yet, Sri Lankan policymakers were generous to the private sector and offered substantial tax concessions for an income over LKR 500 billion. Notwithstanding the ill-advised fiscal policy debacle, Sri Lanka stood with the position of opting out of agreeing on the global minimum tax rate of 15%, targeting the Multi-National Enterprises (MNE), whose annual turnover exceeds Euro 750 million.
The western world that championed the neo-liberal policies realized the dilemma. The unrestrained globalization, privatization and liberalization process has financially weakened the governments and only strengthened the multi-national corporations. There was a massive deficit between government revenues and expenditure, as many Multi-National enterprises (MNE) do not pay taxes in the countries where they operate. Instead, the giant corporation has set up shell companies in tax havens and parked all their profits, avoiding paying taxes to the respective governments.
After concluding years of negotiations Organization for Economic Co-operation and Development (OECD)/G20 inclusive framework on tax base erosion and profit shifting (BEPS) finalized a global agreement in October 2021. The international deal prescribes multi-national enterprises (MNEs) to be subjected to a minimum 15% tax rate in every country of operation from 2023, thus preventing situations where these MNEs take advantage of differing tax regimes between jurisdictions and effectively avoid paying tax. Of 141 countries, 137 signed up for the agreement except four countries, including Sri Lanka.
The global minimum tax agreement is essential, given that corporate income taxes can provide governments with crucial revenue for achieving public policy objectives. Corporate income tax rates have been declining for decades because of tax competition.
Brains behind Sri Lanka’s abstention from the Global Minimum Tax agreement
Sri Lanka is a signatory to the UN Sustainable Development Goals (SDG) campaign. Target 17.1 of SDG, for example, calls upon governments to “strengthen domestic resource mobilization, including through international support to developing countries to improve domestic capacity for tax and other revenue collection.” One more instance of policy divergence. Such policy debacles make things difficult for Sri Lanka to present a favourable case to seek urgently needed financial assistance from the International Financial Institutions, such as IMF.
Why did Sri Lanka abstain from joining the global minimum tax agreement? The public needs an explanation from concerned officials. Were they overconfident in attracting MNEs who generate revenues of Euro 20 billion, such as the big digital giants to Sri Lanka? The policy direction indicates the connivance between the public institutions and the influential private sector dominating the shadow finance industries purely for state capture to protect their interest manipulating income tax rates at the expense of the national development damaging the country’s reputation.
Although there is no functioning government in Sri Lanka at present, concerned ministry officials advice the President appropriately follow the best practices and join the Global Tax agreement as agreed by over 137 countries. That will at least convey to the international community the country is serious about restoring its economy and finances. Failing to act promptly may signal that the shadow financiers are still meddling with policy formulation aiming to re-capture the state by hook or crook.
*The writer is the Regional Director responsible for Finance Sector; working with UNI Global Union Asia and Pacific Regional Organization in Singapore and can be reached at email@example.com.