25 September, 2020

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Fantasy & Reality: “New Abnormal”, Debt Relief, Food Security, Exports: No Easy Road To Economic Survival

By Kumar David

Prof. Kumar David

Hope springs eternal in the human breast; otherwise everyone has to throw in the towel and give up. However, we must have realism to deal with reality, by which I mean that we must look global reality in the eye and take its measure, or else we will be planning in the void and writing on water. Simply put, what transpires in the global economy will be the most important factor influencing what becomes of Sri Lanka and millions around the world. Covid-19 will go, maybe within a year (there are a few breakthroughs in perfecting a vaccine) but instability in the global order will not. World output and employment are in deep decline hence both supply and demand are diving simultaneously. Supply chains have been disrupted, nay fragmented. Led by none other than mighty America the world is not on the edge but right inside a debt abyss. In a word, the universe of finance capital is declining and falling. I could back these statements with reams of statistics, copious references and colourful charts but I am charged with writing synoptic essays in about 1500 words, not proving chapter and verse.

Let me now state the hypothesis I advance today. Most who write on how to get Lanka out of an economic chasm do not place it adequately within its inescapable global context. Reference to the deep global decline is cursory. “When the tourists come back”; “Let’s set up a sovereign equity fund” – for virus-stricken visitors and global capital-markets neck deep in debt, respectively! Of course commentators know that the global economy is in bad shape, but take the briefest measure of the depth of its impact on the well laid plans of mice and men in mother Lanka. 

A lot of stuff local economists and columnists put out is good. The weekly columns offered by Nimal Sandaratne, Sirimal Abeyratne, W.A. Wijewardena and writers in the Financial Times (SL) are fine; no naysaying that. Don Manu is enjoyable and though not an economist often overlaps the dismal science. Jayanath Colombage in the Daily Mirror 24 March had a well written and content-wise good quality piece. Then there were the two big inputs, comprehensive submissions made to Basil’s Task Force by Pathfinder and the Chamber of Commerce. Disagreeable sod that I am, I would like to make critical comments about every one of these pieces, but life is of limited duration so I give that a pass to focus on my objective which is to grumble that nobody is locating the discourse adequately within the worrisome global scenario.

As it is impossible to deal with all I will pick on the Chamber of Commerce’ multisectoral post CV-19 revival proposals. This is not a critique of the proposals as a whole which though written from the standpoint of the private sector is good in parts. What I question is if the underlying global perspectives are adequate; for example, in the sections on Capital Markets, Apparel, Tourism, Trade & Manufacturing and International Logistics. One comment on tourism is enough to put my concerns in perspective. Major airlines have started selling off portions of their fleet and have cancelled large orders for new aircraft. That’s their judgement of the global travel scene in the next period!

The Chamber is truly whistling in the dark on capital markets. It enjoys visions of a Sovereign Equity Fund (Beggar’s Treasure Chest) where deposits are made by global private investors to be doled out to flagging local companies. Dream on! Sovereign funds like Singapore’s Tamasek are overseas investment arms for the city state’s huge reserves. The opposite of the Chamber’s vision of begging at a time when global private funds will not go anywhere except at high interest rates; 10-year SL government bonds are trading at 9 to 10% yield! On what initial research are the Chamber’s expectations grounded?

Regarding Apparel the Chamber’s concern is subsidies to meet wage bills. Its external perspectives are to find regional supply chains instead of China dependence, cosying up to SAARC and seeking duty free export markets. The only realistic proposal is that, at least at this late stage, an attempt should be made to mend the long-neglected relationship with SAARC. Apparel exports are facing a hard time if there is a prolonged recession – see (vi) below about “reshoring” in the US. The impact of reshoring in the West on employment in Lanka will be devastating. Sri Lanka’s improving manufacturing base faces the same threat. Regional agreements going beyond trade but incorporating manufacturing and trade – Free Trade Zones will have to be integrated – are one way to deal with a recessionary environment in the advanced economies. The suggestions for improving the capability of Colombo Port, Hambantota Industrial Zone and the Digital Economy are useful

My intention is not to find fault with the Chamber’s Proposals, though it is the only one I have had space to examine here. My intention is to suggest that with these proposals as with all the reports and documents that I have had the opportunity to examine in respect of reviving the nation’s economy after the hard knock of recent months, it would have been beneficial had the Chamber examined global trends and positioned its proposals in this context.

Next, I need to concisely elaborate my expectations for the world economy as it heads into a tough decade. Instead of the usual declining GDP and falling employment, burgeoning global debt, disruption of investment, trade and supply chains and potential trade wars, for a change I offer you a different approach. Today money-supply will be my statistic – obviously in America. MZM (hereafter just M) the broadest money-supply measure had increased to $ 20 trillion by April 2020 in the US. The velocity of money (V) however declined substantially. What the two taken together mean is that while the Fed is pumping oceans of cash into capital markets (a policy called QE or MMT), investors are shirking and economic activity is slowing down. In theory M x V = prices (p) x output (O); but because of the contrarian movements of M and V their product has not changed much. Hence, we have the strange result that though big money is pumped in, neither output(O) nor inflation (proxy for p) are moving significantly. Economic stagnation already! Inflation not yet! This is the rut the US and the capitalist world is unable to climb out of.

Nouriel Roubini, better known as Doctor Gloom acidly remarked on 28 April “CV-19 has arrived at a bad moment for the global economy. The world has been drifting to financial, political, socioeconomic, and environmental risks, all of which are now growing acute”; (Project Syndicate). Structural imbalances in the global economy were exacerbated by policy mistakes creating downside risks that made another crisis inevitable. Now that it has arrived risks have become acute. Recession may be followed by a lack-lustre recovery in 2021, but a depression will follow later in the decade. Roubini enumerates several risks but some of his theorising is incorrect. I have rectified them, and a reliable enumeration is as follows. 

(i) Deficits, debts and defaults. Response to the CV-19 entails a massive increase in fiscal deficits at a time when public debt levels are already high. Loss of income for households and firms means private-sector debt levels will rise leading to defaults and bankruptcies. 

(ii) The demographic time bomb (aging population) in the West means that public spending on health care and welfare must increase.

(iii) Large scale unemployment leads to personal insolvency. A slack in production will increase the risk of corporate bankruptcy. The US labour force is 165 million, 40 million unemployed means 20% of the labour force is now unemployed. These numbers are huge and make economists shudder. The worrying dimension for us is (iv), (v) and (vi).

(iv)) When millions lose their jobs income and wealth gaps widen further. Advanced economies will re-shore production from low-cost regions; tough luck China, Vietnam, Bangladesh and Sri Lanka.

(v) De-globalisation and renewed protectionism will undermine trade and undercut the potential benefits of comparative advantage. Not good for countries with copious supplies of cheap labour.

(vi) Automation will hasten, the less educated will suffer fanning flames of populism and nationalism, a backlash against democracy will reinforce this. Economic insecurity will drive civil disorder.

(vii) Monetary policies have become skewed. Governments, desperate to avoid public wrath, corporate bankruptcy and deal with fiscal deficits have resorted to the printing press in style. At some point this will result in inflation and in the context of what has been said the result is stagflation.

In respect of (vii) here is a debate about whether capitalism is heading for inflation or deflation. This is odd. Some economists expect that disruption of employment and of society in general, leading to decline in demand, will end in deflation. Supply side shocks (fall in production) and mass unemployment they argue will drive a fall in commodity and oil prices, causing deflation and cutting the ground under central bank efforts to deflate debts by inflation. Paradoxically, the new normal, money supply expansion, should have led to inflation. 

Other economists however take the conventional view that excess money, fiscal deficits and supply-side shortages due to de-globalisation will make inflation and in its wake stagflation inevitable. The reason this did not happen post 2009 was for special reasons. Goods price inflation was kept in check by China which deployed hundreds of millions from rural areas into modern industry. Goods produced by cheap labour poured into Western markets. Furthermore, though Fed indulged in QE it did so in the form of expanding bank reserves which do not enter the real economy like cash but stay in the interbank market. By remaining within the financial, and not the production and supply economy, QE post 2009 led to asset price, not goods price inflation. Stock, commercial property and other asset prices inflated which suited financial vested interests.

It is reasonable to keep an open mind about how the global economic pendulum will swing; inflation or deflation, inflationary or deflationary stagflation. We are in completely uncharted territory this time and the responses of central banks is unpredictable and utterly unconventional since bank overlords themselves are muddled and jinxed. [For a recent primer on conventional inflation targeting read W.A. Wijewardena.

My grumble in this piece is that not enough thought is being given to the impact of impending global economic disorder in the next year and the next decade on the design of domestic economic strategies. In truth I am not aware of any discussion forums or the usual circuit of seminars where the future of the global economy has been targeted. Better, broader understanding in the public domain will be very beneficial.

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Latest comments

  • 6
    3

    “No Easy Road To Economic Survival”
    Gota will obviously disagree
    He has set up a task force to dig up archaeological are effects in the East of Sri Lanka
    This is a brainwave form the Rajapakse clan.
    They have sold most of Sri Lanka to China , India and USA
    He is now hoping he can unearth some art effects and auction themat Sotheby’s of London
    Smart Guys!

    • 0
      4

      Rajash,
      Digging to look for archaeological artifacts to sell at Sotheby is not the responsibility of the task force. Their job is to protect Sinhala Buddhist heritage sites from ‘Para’ Demalu and ‘Para’ Muslims who are all out to destroy them because these ‘Para’ imbeciles do not understand the value of these sites.

      • 3
        0

        EE “Their job is to protect Sinhala Buddhist heritage sites “
        There isn’t any in the East to protect.
        so their first job is to create bogus sites
        and then suddenly discover them
        by accident ofcourse

  • 2
    0

    Prof. Kum! You have given second thoughts to proposals given out by various parties, in fields which you have had no basic training but self learnt with time. Good! If so many can submit proposals and you have all the time dissect them, then will you accept the invitation to educate the “masses” (a leftist term) on the importance of telecommuting, a field that close to your specialization, which would ensure “social distancing” and contribute immensely towards revving up the economy? Let your answer be a one big YES.

  • 3
    1

    I foresee a new phenomena in this recession. Earlier ones mainly hit the production because people didn’t wanted to buy for lack of money. Most of them shed off more men. This one is hitting mainly sales organization. Amazon, Alibaba, Walmart keep going. So the girls employment going to be affected permanently. When the economy start to ease, (I have no idea where is it going start with) a new initiation will be need to keep single moms and college leaving girls employed. They are normally cash scant community. They get employed temporarily at shopping mall jobs. People are demanding faster delivery from on line orders. Like grocery retailers and super markets, many other merchants are offering same day delivery, immediate deliveries. The pressure for faster will pay way for man-less deliveries. Robots and UAV going to be common scene. This recession will create new way of living, new culture. I expect in all western world some amount of ghost villages to appear by the shirking trading and shopping centers. Other than Home Depot and Loews like home improvement centers, all other will shrink their spaces. Many restaurant will turn into take out only or drive through.

    • 1
      0

      “The only realistic proposal is that, at least at this late stage, an attempt should be made to mend the long-neglected relationship with SAARC.”
      In other words, India. That’s where we go every time we screw up. 1971, 1987, 2009. Now they’ve given us a currency swap of a billion dollars.We should have signed the CEPA long ago instead of listening to local oligarchs. By this time we would have grown competitive industries linked to the Indian market. But we never learn. The word of an ignorant cleric or “doctor” always counts more than sane reasoning.

      • 0
        0

        OC
        The experience with the Free Trade Agreement signed by CBK was not particularly encouraging.
        *
        In 1987 and ‘2009’ we went to India after India screwed us up.
        I am not sure if the threat was serious enough in 1971 for India to get involved. The thrust of the uprising was quelled in days. The rest was mopping up.
        “The element of surprise was the only advantage the JVP possessed. Once it was lost, the insurgents lost the battle.” (https://roar.media/english/life/reports/revolutionary-strategy-the-jvps-1971-insurrection/)
        *
        Meanwhile, the UNP and FP whipped up fear about North Korea and China in parliament. L:ies about North Korea took some months to be exposed. China had good communication links and the charges collapsed in a matter of days.

        • 1
          0

          S.J,
          The “Roar” writer is a young man who couldn’t have been around in 1971. I was, and I remember seeing Indian ( and Pakistani) helicopters flying around for a few weeks. No idea what they did.We didn’t have any real ones at the time. There were Indian guards at Katunayaka.
          The North Koreans used to take out full page ads in the papers promoting Kim IL Sung.
          As to the FTA, as with the famous bond scam, it’s a matter of interpretation. Most critics point to the trade imbalance. But much of this is from the imports of cars, trucks, buses, etc which are NOT in the FTA. Where else would we get them at those prices? Our exports to India have gone up more than if there wasn’t an FTA.

          • 0
            0

            Indian air force presence was visible in Colombo.
            But there was no combat involvement by the Indians. (It happened 16 years later.) The “Roar” writers comment that “the element of surprise was the only advantage the JVP possessed” I would say is precise. All the battle preparations of the JVP, inculding home-made bombs got them nowhere.
            *
            Full page ads and free copies of the Works of Kim Il Sung (one set of which I collected from a bookshop at Bambalapitiya junction) were all there. North Korea was doing this in many other countries, including the UK. But what had any of that to do with the JVP insurrection?
            The JVP had rejected all Communist governments but Cuba which, however, did not endorse it. The JVP was bitter with China as the CPC recognized only the party led by N Samugathasan. Shan had some clout with CPC which perhaps persuaded Radio Peking to have daily Tamil broadcasts lasting 30 minutes. (None in Sinhala at the time.)
            *
            Analysts agree that trade under the FTA itself has been beneficial for exports. But Sri Lanka has been unable to penetrate the Indian market sufficiently to escape the yawning trade gap. Trade under FTA grew fast until 2005, but stagnated since.

            • 1
              0

              SJ,
              Not imputing any motives to North Korea.
              “Sri Lanka has been unable to penetrate the Indian market sufficiently to escape the yawning trade gap.”
              Much of this gap is due to non-FTA imports. This anyway is an illogical attitude. Our trade gap with the US is the other way around.
              There are a couple of success stories, like Damro and MAS. It all depends on initiative. The fact that imported cheese is cheaper in India than here is an indication that tariff barriers are not as high as some people claim.

      • 1
        0

        In other words, India. That’s where we go every time we screw up. 1971, 1987, 2009. “
        Hey Old Coddie, what are you roaring? You mean The poor girl Siri Mao didn’t know what a FTA means so she took the Katchativu free and charged the Pakistan Military planes to land in Colombo? Anyway Buddharakkitha,’s Girl Friend is not that stupid like Mrs. Gandhi; she kept ASP Shanmugam with her during Turbans were around there. She did know otherwise the Turbans would turn their guns on her too.

        • 0
          0

          Malli,
          Did ASP Shanmugam have poor eyesight? B’s girlfriend Vimal W would have been a bit past her prime by 1971.

          • 0
            0

            Sorry, Vimala

  • 4
    0

    Thank you for the insightful article.

    This is a cynic’s observations with a limited understanding of economics.

    Context
    Nixon removed the dollar peg to gold and cut a deal with Saudi Arabia to use US Dollars for oil sales. (US Dollar to remain the trading/reserve currency).
    Paul Volker successfully fought inflation, although his success led to the infamous stock market crash in October 1987, two months after he left (August 1987).
    The FED under Alan Greenspan, Ben Bernanke and Janet Yellen progressively used Quantitative Easing to (1) support stock markets (2) save the financial system – GFC (3) fight wars until Jerome Powell began raising rates. All bets are off now – it is money printing with no limits.

    The new paradigm
    Central Banks are driven by markets and not the other way around. US refuses to allow poorly performing companies to fail. Central banks will continue to print money and consider helicopter money for consumers. Why bother about debt now when the world can kick the can down the road. The consequences of diverging wealth gap and the mountain of debt are for the future generations to resolve. History teaches us that debasing currency is the easiest way out of debt. UK did it and so will US.

  • 0
    0

    Continuation
    Post COVID
    Two US companies hired 25% more staff (Amazon and Facebook). Google’s cash balance is roughly equal to the combined value of Boeing and Airbus. US companies are greater than many European economies. Facebook considered creating a new crypto currency. TESLA is planning to dominate space travel.
    Reference: https://www.profgalloway.com/bats-and-amazon

    My take is that the world will postpone the day of reckoning.
    I entirely agree with the author that the Sri Lankan economy will be hit very badly – no remittances and no tourism.

    • 3
      0

      Sunil Abeyratne

      Are you saying Amazon, Facebook, TESLA, Paul Volker, Jerome Powell, Alan Greenspan, Ben Bernanke and Janet Yellen should be held responsible for debasing this island?

      Do you think Sundar Pichai (a Tamil from South India) the chief executive officer of Alphabet Inc. and its subsidiary Google LLC should pay reparations to this island in order to settle its outstanding loans to China/Hindia,…… ?

      It sounds fair.

      • 1
        0

        Hello Native Vedda,

        The proposition that my comments implied that the “responsibility for Sri Lanka’s dire economic circumstances resides with the multinational companies and powerful individuals who controlled the levers of the world” is at best inaccurate, if not preposterous.

        With limited and dated knowledge on Sri Lanka, it is best that I avoid making invalid comments.

  • 0
    0

    I just was a webinar on Port City
    doesn’t look promising. another 25years to complete.
    Assumptions and decisions are made based on current local and international scenarios/statistics/data etc
    there seems to be no serious international takers.

    Dubai is building new cities every 5 years
    Singpaore is

    Facebook
    https://www.facebook.com/watch/?v=252880972650382
    Youtube

    https://youtu.be/zMlsbk2W3ww

    • 0
      0

      …Singapore is also building one of the biggest ports in the world from reclaimed land. That will be also fully operational in 25 years but partially operational form 2021 building up to full operational by 2040

      they are hoping expiates will be buying luxury apartments in Colombo city

      in 40 years time all first generation expats will be dead and gone
      second generation Sri Lankans in the west have little or no interest in Sri Lanka

      if China come hard on Hong Kong ….the fund mangers will go to Singapore not Sri Lanka

      by the time Colombo Port city completed….there wont be any takers …another white elephant?

      • 1
        0

        The biggest problem is there d full sovereign land for China within the Colombo pong Cing. No body knows what is Chiana will do with that. It is building Khalifa Tower, so near by properties will go down in value. Is it going to build a Disney world. Traffic will go up in near by roads. Is it going to install a missile launching site. Indian Submarine will frequently hit cargo ships to Colombo Port by accident.

        India and America are/were too late to act in Lankawe. Yanking out China is not viable. So there is a good chance Lankawe to become as a testing ground for new defense technological products.

  • 4
    0

    By Kumar David –

    Kumar

    Hope springs eternal in the human breast; otherwise everyone has to throw in the towel and give up. However, we must have realism to deal with reality, by which I mean that we must look global reality in the eye and take its measure, or else we will be planning in the void and writing on water. Simply put, what transpires in the global economy will be the most important factor influencing what becomes of Sri Lanka and millions around the world. Covid-19 will go, maybe within a year (there are a few breakthroughs in perfecting a vaccine) but instability in the global order will not.

    *** Dont underestimate Gotha . He may have been a failed businessman in his Country USA. But he is a man of Vison and man of many talents. The World is at his feet looking for help from him with technical expertise

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