By Kumar David –

Prof Kumar David

Lanka and the demise of neo-liberalism

People are not usually concerned about the more arcane aspects of theory, but of recent there has been discussion of whether the Lankan regime’s economic strategy can be termed neo-liberal and whether finance-capital has become a crucial element in this process. This is argued by some left party leaders and Marxist intellectuals. Ad hominem remarks will not help my case; therefore I will deal with concepts, not name protagonists. I argue in this essay that neo-liberal economics, in its known (and much hated) embodiment is dead and the agenda of Twenty-first Century global capitalism is no longer the same. My second point is that visions of Lanka as a financial centre are hallucinations. Leftist who see ‘financialisation’ looming and blooming are plain Quixotic. The regime’s economic agenda is a disaster, but let’s identify the real disorder, not tilt at windmills.

Neo-liberalism is a term identified with the phase of global capitalism commencing circa mid-1970s (Regan-Thatcher era) and in the West it signalled the end of the welfare state and an attack on unions and the working class. Its central tenants were curbing welfare and social outlay (education, health), privatisation of state assets including public goods (railways, water supply, electricity, post-office), and labour market reforms (pseudonym for wage cuts, slashed employment security, reduced health and retirement benefits). That awful Thatcher woman’s slash and burn crusade is remembered with a shudder; that is neo-liberalism in practice, Hayek its prophet.

Neo-liberalism also inherited from traditional liberalism, a deep faith in free trade. This resonated with the character of the post WW2 age; global expansion of production, trade, investment and finance. Globalisation battered down barriers to goods and services trade and obstacles to the free movement of capital. Protection of nascent industries in developing countries was anathema, subsidies were eliminated. Remember the ‘Structural Adjustment Programmes’? The IMF and World Bank constituted the task force leading the charge to conqueror the developing world; the Washington Consensus provided the programmatic muscle, the charter.

Neo-liberal economics now lies defeated; the retreat occurred in the 2000s. Globalisation, is an objective process of world economic evolution, it cannot be reversed. Of course it need not be on a capitalist basis, indeed the concept has been promoted in left circles under the name internationalism. Neo-liberalism was routed by two factors; the determined resistance of third world peoples that the local state, despite international support, could not vanquish. Second the crumbling of capitalism, as it then existed (neo-liberalism included), starting with the dot-com bubble bust, the 2001 recession, and cataclysmically the 2008 systemic crash. (Actually neo-liberalism had been pretty much abandoned by 2008). The stepwise picture is that it died in the developing world and was buried in the West.

If neo-liberalism, in its classic form, is dead, what survives; and in particular what agenda, that is what IMF agenda, influences Lanka’s economic policy? Globally, what is the nature of the capitalist economic order post-2008? The second question is gigantic but something must be said before addressing the Lankan dimension. I have the temerity to attempt a broad-brush summary in a few hundred words.

Exertions of a drowning man

The World Bank and IMF have retreated from aggressive privatisation and harsh structural adjustment to a softer approach. They have not abandoned commitment to capitalism but retreated strategically in response to realities. For example, a cautious note was sounded in 2000 in Fiscal and Macroeconomic Impact of Privatisation – IMF Occasional Paper. What forced change were defeats at the hands of protesters, and electoral setbacks. The Water Wars in Bolivia in 2000 that ended attempts to privatise water was particularly dramatic. Political setbacks came in an electoral setback (1996) for Congress where Manmohan Singh was Finance Minister, the Chavez presidency (1999), the Lula presidency (2003) and others. Robust neo-liberalism was watered down and measures liable to provoke confrontation were abandoned. In Lanka privatisation of CEB and Petroleum Corporation has been postponed by the government as politically infeasible, with IMF blessing.

The demise of neo-liberalism in the Metrolpolis is crucial because if it is dead at the Centre it is not viable to market the carcass in the periphery. I cannot find space here to discuss why global capitalism suffered one of its periodic cataclysms in the first decade of this century; a flood of literature, some trite some good is available. What I will spend a few paragraphs on is the remedies being implemented because this demolishes any doubt that even a whiff of neo-liberalism survives.

The tools that governments and central banks are using in the US, Britain (till recently), Japan with a vengeance since Abe’s election, France and even Germany to a degree, are Keynesian. Real interest rates are negative, zero or near zero; trillions of dollars-equivalent – these countries together – has been injected into the economy in the last five years in the name of quantitative easing, purchase of government bonds, and support for tottering banks. This is all printing and injecting of money into the demand side and into government coffers on a scale that will surely mortify the ghost of even old John Maynard. This is direct, unswerving, steadfast and resolute rejection of neo-liberalism, of small government, withdrawal of the state from the economy, and reliance on the efficacy of market forces. The ideology and economics of the neo-liberal project is deader than a dodo in the West.

It is true that austerity and belt tightening were enforced in basket cases like Ireland, Portugal, Spain, Greece and Cyprus. They were in hopeless state of indebtedness and had in effect defaulted on their international commitments. When extreme unction has to be pronounced it is impossible to avoid blood-letting, but this must not be confused with the survival of neo-liberalism. Even these exercises were accompanied by concerted intervention of the European Central Bank and Euro-zone states. This was an exercise is massive international state-capitalism. The ideology and economics of the neo-liberalism is deader than a dodo even when austerity in imposed!

Neo-liberalism cannot rise from the ashes and impose its will no Lanka or anywhere. The IMF’s recent interventions in Lanka are in line with old fashioned liberal economics. Recommended prescriptions says: ‘Cut the fiscal deficit, get a grip on out-of-control foreign trade deficits, we won’t lend to you any more because you are in a debt spiral which will end in hell, and privately, stop stupid expenditure on self-glorification projects’. This is vanilla liberal economics and common sense.

Prospects for global financial capital

Despite the new depression of capitalism in general which shows no sign of ending the financial sector is carrying on in the old way, speculating, paying itself billions of dollars and preparing the ground for a second crash that some analysts predict will occur within a few years. For example a recent (30 September 2013) quote from Michael Pento a big shot in something called Pento Portfolio Strategies says:

“It’s not just house prices which are in back in a bubble.  Stock prices are also growing at double-digit annual rates. These double-digit gains in stocks are taking place in an environment of little earnings and revenue growth.  Meanwhile, Treasury bonds offer only half of their average yields going back over 40 years.  So, for the first time in our lives we have three bubbles that exist together–equities, bonds and real estate.  But the real catastrophe this time is that these bubbles will become exponentially larger than previous episodes. Therefore, when they burst the devastation will be many times worse”.

The myth of financialisation

Financialisation is not an OED word (at least it’s not in my 2200 page one volume New OED) but I think the meaning is easy to grasp. It means, or should mean, that a city or country is evolving into a financial centre, international finance is sinking roots, global banks are interested, and the currency is trading internationally. If this were happening, Colombo, in time, could become a junior partner if not of Tokyo, Hong Kong and Singapore, at least of emerging financial centres in the Gulf.

What do financial centres, places that are ‘fiancialised’, do? What are their activities? First and most important, investors (consortia of banks and financiers) and borrowers (governments or companies) come together, financing for projects is secured and deals finalised. Another traditional activity is currency dealing and short and long term lending, especially to banks and governments. A third is insurance and reinsurance. In the last decade another game has assumed importance; designing and dealing in fancy speculative financial instruments. These go by names like derivatives, hedges, credit default swaps, contracts for difference and the better known family of options, futures and puts. Is there any sign that this is taking off in Colombo? Search me, I have not heard of it. Even the local stock market is a Mickey Mouse affair. It is quite absurd to suggest that Lanka is ‘financialising’.

There is error, categorical and methodological, in the ‘financialisation’ thesis. Lanka has great difficulty bridging the budget and squaring the fiscal deficit; the foreign trade account is in the red and the current account is bridged only by worker remittances from the Middle East True there is increase in tourism earnings. The net effect is that the government is borrowing on an ever expanding scale not only from agencies that provide low interest loans but from financial markets. The result, the yield (effective interest rate) on the long-term sovereign bond has risen above 8% – which is high and bad.

This is compounded by an unknown factor largely shrouded from public view. What’s going on with China? The government is borrowing from China like a drunked for infrastructure projects (the show piece on which it hopes to survive politically) but terms and conditions are unknown. There is talk of borrowing from China not only for projects but to bridge debt servicing which is becoming unbearable. China fortunately does not lend for such purposes and Lanka’s public must hope that it stands firm and refuses to bail out this incompetent, corrupt and authoritarian government.

I think when some theorists who speak of the ‘financialisation’ of Lanka they have in mind the bottomless hole of debt that we are being sucked into. That is a valid concern; research and discussion of the issue, and how this crisis affects the economy at the national and provincial level is welcome and constructive. Damning the government as neo-liberal, pro-capitalist, hidebound and bent on authoritarianism is fine by me on the propaganda stage. However when we enter the Marxist study class we need to be precise; that’s the left tradition.

At the entrance to science, as at the entrance to hell, the demand must be made: ‘Here must all distrust be left; All cowardice must here be dead’. Marx, quotes Dante.