18 May, 2024

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How Lanka Can Benefit From A Global Recession

By Kumar David

Prof. Kumar David

It is perverse to extract benefits for ourselves from the misery of others – the advanced (rich) economies; but actually, the suggestions I make in today’s column do no harm to anyone. They are passive benefits. The first question though is, will there be a global recession? The World Bank in a recent (15 Sept) press release entitled “Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes” says: 

START ABEVIATED QUOTE: “As central banks across the world simultaneously hike interest rates in response to inflation, the world is edging toward a global recession in 2023 and a string of financial crises in emerging and developing economies that will do lasting harm. Central banks are raising interest rates with a synchronicity not seen for five decades—a trend that will continue next year. But this and other policy actions are insufficient to bring global inflation down. Investors expect 4% interest rate increases; 2% over 2021. Unless supply disruptions and labour-market pressures subside, this leaves global core inflation (excluding energy) at 5% in 2023— double the five-year average before the pandemic. To cut global inflation to a rate consistent with their targets, central banks need to raise interest rates by an additional 2%. If this is accompanied by financial-market stress, global GDP growth will slow to 0.5% in 2023 — a 0.4% contraction per capita which meets the technical definition of a global recession.

“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. These trends will persist, with long-lasting consequences that are devastating for developing economies. To achieve low inflation, currency stability and faster growth, policymakers should shift their focus from reducing consumption to boosting production. Policies should generate more investment, improve productivity and raise capital allocation, which are all critical for growth and poverty reduction.

“The United States, China, and the Euro Area have been slowing sharply. Even a moderate hit could tip the global economy into recession. Experience of the 1970s, responses to the 1975 recession, subsequent stagflation, and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated. Fiscal authorities need to calibrate the withdrawal of fiscal support measures while ensuring consistency with monetary-policy, but policymakers should put in place medium-term fiscal plans to provide targeted relief to vulnerable households”. END ABREVIATED QUOTE. 

These extracts from the World Bank (WB) press-release are heavily abbreviated. 

Many other studies and reports too suggest that a recession is likely in 2023-24. Since I cannot quote a large number, I have limited myself to this WB source that carries credibility. For the purposes of this essay take it that interest rates and inflation will remain high, stock markets depressed, bond yields high and growth retarded for say five years. After that? Hard to say; the options are many.

What I have said so far is not new to those who track economic trends. It is background data for today’s column. A significant point however is that the strategy that is being adopted across the rich world to handle the problems that it creates are contradictory; it is a Janus-Faced strategy of loose fiscal policy side by side with tight monetary policy. A mutually contradictory problematic but unavoidable in the present global political, financial-economic, strategic and paradoxical energy related circumstances. Let me elaborate in a few words. 

It’s easiest to use the US as a focal point. The Biden Administration finds it a matter of existential necessity to take stand against extremism (a lurch to racism, “election deniers”, reinvigorated Trumpism, electoral gerrymandering, a fundamentalist abortion surge in Republican controlled states and feminist outrage elsewhere, and a primitivist majority in the Supreme Court). Biden is seeking to survive by enhancing feelgood among the population. So the Administration is pumping money into pockets; fiscal stimulation a $1.9 trillion “American Rescue Plan” and  $370 billion “The Inflation Reduction Act” including tax credits and rebates for energy-efficient appliances, plug-in vehicles and renewable electricity. (Another part of this measure for Climate Change initiatives is bogged down for now by reactionary Democrats in Congress). 

These Biden initiatives are inflationary and blatant fiscal stimulus. Fiscal stimulus is starkly in conflict with the tight monetary policy (high interest rates) that the FED is bent on in its attempt to bring US inflation down from a feared 8% to nearer the target rate of 2% per annum. The US dollar is rising across the world because of high FED rates and for other reasons such as the Ukraine war and political uncertainties, e.g. victory of neo-fascists in the Italian elections and strengthening of the far-right in France, Poland Hungary, Denmark and elsewhere in Europe. Both the FED’s actions and the said political factors should motivate tighter financial discipline. Instead we observe a crucial conflict between the fiscal and the monetary, further aggravated by West Germany’s imperative to pour money into consumer pockets to cope with energy bills during winter 2022 and 2023. Other EU countries will have to follow suit.

I have expended a few paragraphs on the trends circumscribing the global economy as it is essential background. The recent fashion in the writings of Lanka’s old left, broad left, Maoist and Fidel-loyalist left is to pour scorn on Ranil’s inadequacies which are legion. But Ranil is small change; what is needed is to understand the processes maturing in the innards of global capitalism and flesh it with analytical and empirical content. For example, the likelihood or otherwise of a decade of global capitalist durability, or alternatively, recession, deep-depression or depression. My few paragraphs are intended to alert readers to important issues in fiscal, monetary, financial and equity markets. (I have not even touched on one important issue, Lanka’s indebtedness to international capital markets). It is inattention to empirical data and detail among leftists that is undesirable. If empirical detail is disregarded and objectivity lost, all is lost. I will come back to these concerns again and again in future columns.

What is directly relevant to my topic today is how Sri Lanka can find spaces, crevices and loop-holes that it can to exploit to its benefit in midst of these stresses force upon the rich world.  Since there will be money in the pockets of rich country middle, upper class and older consumers (a few hundred billion dollars) an obvious beneficiary can be our tourism sector. Ecotourism, cultural tourism and climate change related tourists are the sectors to watch for. The downside of reckless tourism – drugs and harmful sex tourism -are dangers to be alert to. We are familiar with employment generated remittances but SL expatriates too are (were) keen to inject funds into families to upgrade homes and open small businesses. A rush was visible in Jaffna soon after 2009 but chocked on unbridled political corruption and rampant government racism. 

These earnings have to be supplemented with a drive to expand the use of English in education. One has to be careful to encourage only UK English, not the American dialect to avoid snarl ups and to exploit the benefits of Lanka’s membership of the Commonwealth, one of the largest, and a still expanding association of nations. Other options such as permitting small property purchases by non-citizen individuals and non-resident expatriate families has also got to be examined.

Let me now comment on the big-capital picture. The world is awash with excess capital and now is a crucial opportunity to exploit access to large investment. It would be wise to channel investment into avenues that will be amenable to compliance with the role of the state in long term economic directions. This is tricky and a separate topic best left to another day. The point is that rising interest rates in the rich countries encourages money to move out of stocks, and there is some reluctance in the rich-world to invest in sovereign bonds and private equity, so there is a pool of big capital searching for investment openings overseas. To attract some of this as FDI requires tinkering with the exchange control mechanism and the exchange rate. Both the SL Central Bank and the government are well aware of the opportunities and perils; I mention it here only to slake the curiosity of my laymen readers. Everybody, government and CBSL are very cagey about flexibility in the exchange rate or reducing foreign currency restrictions! 

Turning to the corruption theme, to attract large manufacturing investors and moderate sized investment in commercial farming (orchards for example) the biggest single disincentive is state protected corruption. Now allow me a politically incorrect remark: Retroactive capital punishment for the biggest crooks, the billion-dollar types, will be salutary. But sigh! It will never happen; who will touch the Rajapaksas or rogue Ministers and MPs? A minimum that can be done is to cultivate Lee Kuan Yew type morality in the public service – ruthless punishment of corrupt officials – and to install a Hong Kong style Independent Commission Against Corruption (ICAC) which in its best days prosecuted and imprisoned a Chief Executive the moment he stepped out of office and lost immunity.

One last point before I signoff is a Briefing in the Economist of October 15 entitled ‘Mothering Invention’ about the role of the state in directing long-term economic policy. Dirigisme is a doctrine where the state plays a key policy role in setting long term economic policy. It is canvassed by the left internationally and in Sri Lanka. This Economist article provides considerable insight.

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Latest comments

  • 2
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    KD: Sri Lanka needs a Graphite and other Rare Earth Mineral mining corporation in the Eastern Province to value add to its valuable rare earth minerals that are sent out of the country as Mineral Sands. Minerals do not contribute anything to the foreing exchange earnings at this time due to high levels of corruption at GSMB.
    Also, Lanka needs a Fisheries Resources Industrialization Policy and to stop corruption in the fisheries sectors and up-scale and industrialize the fisheries sector. Currently Japanese, French, EU, Korean and Taiwan Republic of China trawlers companies are looting Lanka’s fisheries having signed corrupt contract deals with Fisheries Ministers and officials.
    Tourism is a waste of time in the current global downturn and given the Exogenous Shocks applied to SL. Minerals and Fisheries resources belong to Sri Lanka and only need to be properly harvested and new non-Western markets identified for these products.

  • 2
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    Also Dr. KD: Any thought on how we may help the IMF to Restructure the US Government Debt of 31 Trillion??
    Is it not time to talk about Restructuring US EU debt since Sri Lanka’s purported dollar debt of $26 billion is really peanuts..?
    Also there’s all this rubbish about all Creditors being equal and the ‘Moral Hazard’ of Vulture Funds like BlackRock being asked to Cancel Sri Lanka’s Odious and illegitimate Debt benefiting bi-lateral creditors like China and India.. Any thoughts and check out this Talking Head on SL Debt restructuring.. and the Rape of Sri Lanka though Dollar Debt Colonialism:
    https://youtu.be/m_5Kf5HOk3M
    No mention or comparison with Restructuring US Government debt of USD 31 trillion….!

  • 0
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    How Lanka Can Benefit From A Global Recession.

    First the Presdisend be good with the people not showing to Pohottuwa parliamentarian that the he can control the Aragalaya and taking them to jail. and this disturb the people are always coming to the road in protest and these messages are gone globally making an impression that sri lanka is in war as the police crowding and water cannon looks a war zone then tourist are diverted to other countries this the mind drift for distraction of tourist to look for other country to visit.
    Ranil has to make people smile and show the world , He is controling to make speechless, for aragalaya then turns you into a storyteller.

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    “The recent fashion in the writings of Lanka’s old left, broad left, Maoist and Fidel-loyalist left is to pour scorn on Ranil’s inadequacies ….what is needed is to understand the processes maturing in the innards of global capitalism and flesh it with analytical and empirical content”
    *
    Pretty sweet, coming from one who spent much of his breath pouring scorn on Ranil.
    It also indicates how little he knows about the analysis in serious left circles.
    Comments that I have seen in their publications on the Ukraine proxy war and the Sri Lankan crisis are more mature and sensible than what are offered by authors on these pages, but for the rare few like Sachithanandam Sathanandan

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    “One has to be careful to encourage only UK English, not the American dialect”.
    There are now several Englishes with a standing of their own, and none can be dismissed lightly as a dialect.
    Sorry to say that, despite my own preference for the Queen’s English (now the King’s) for purely socio-linguistic considerations, the ‘dialect’ has been the dominant force for decades now.
    Some American spellings (like color) and pronunciation (like ‘router’) have penetrated other Englishes that were more akin to the Queen’s.
    *
    Most business goes on in the dominant ‘dialect’ in countries that we trade with. So sentiment does not get us far.

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      SJ,
      Even I found that interesting. American English and UK Standard English are mutually intelligible, so there should be no problems. But the same cannot be said of Scottish or West Indian or even Singaporean dialects.

  • 1
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    As for the global economy, Europe is well and truly screwed up, thanks to following the US on its sanctions against Russia.
    The US has gained at the expense of Europe’s misery.
    As for China, its problems are much unlike those of the US and Europe, and have always been addressed differently, and resolved smoothly much to the disdain of prophets of doom.

  • 1
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    ”…….Retroactive capital punishment for the biggest crooks, the billion-dollar types, …. A minimum that can be done is to cultivate Lee Kuan Yew type morality in the public service – ruthless punishment of corrupt officials – and to install a Hong Kong style Independent Commission Against Corruption….”

    Mr David, the reality, as you say ”…It will never happen; who will touch the Rajapaksas or rogue Ministers and MPs?” From politicians to cronies & corrupt public officials, we all know they will never face justice, just wishful thinking on our part. Maybe if God exists or karma is real, we can at least expect divine justice. These yobs milked the country dry & continue to do so while the citizens watch helplessly. As long as these 225 or so yobs are in Parliament, we are unable to come out from this spiralling downfall. We need competent people with integrity but are there such people willing to come forward?

  • 3
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    The author in his long analysis of world economies and their predicament also says:

    “…Retroactive capital punishment for the biggest crooks, the billion-dollar types, will be salutary. But sigh! It will never happen; who will touch the Rajapaksas or rogue Ministers and MPs?…”

    A massive uprising, which its proponents expect to be peaceful and decent like the Aragalaya but magnified ten times will also unleash an utterly revengeful population on the parasitic scum that have seen the relatives of the aggrieved die in hospitals from lack of basic medical intervention, severe malnutrition and starvation, at present around 80% of the population going without proper food, hardly exposed in the media.

    In such a scenario, there will not be any patience to try them in wholly corrupt judicial institutions and law enforcement sectors, in which there is no longer any public confidence.

    Yes, they will touch the Poxes too, if they can get to them before those helicopters start taking off. (if they are disabled by sabotage in covert operations beforehand)

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    If there is a global recession next year, the US initiated sanctions against Russia could be the real reason. While European countries became the victims of their own sanctions, Mr. Putin used the same to strengthen his connections with Asia, Middle East and Africa. As a result of both, the entire world is now connected with Russia in one way or the other.
    Iran was accused of supplying drones to Russia, which the Iranian authorities have denied. I don’t think Iranians lie. On the funny side, it is amazing that Iran, with all the sanctions, developed a teeny weeny automatic “flying lawnmower” (no offense meant) that caused alarm among the top US officials.
    I wanted to send the following comment to Dr. Kumar David’s previous article on referendas held in DPR, LPR, Kherson and Zaporizhzhya to join Russia.
    The following videos of independent journalist Patrick Lancaster prove that the results of referenda reflect the actual feelings of the citizens in the four oblasts annexed by Russia.
    Referendum To Join Russia.
    1. Mariupol in DPR
    https://m.youtube.com/watch?v=UE2J0leMgdU
    2. Avdiivka in DPR
    https://m.youtube.com/watch?v=_JoVUXFFbXA
    3. After the referendum In Donetsk – September 27, 2022.
    https://m.youtube.com/watch?v=oA0WmCfZlDA

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      The latest in Ukraine.
      The genocide I mentioned in one of my previous comments is about to happen. Residents in Kiev have already been advised to stay in underground shelters which means that the Ukrainian government expects a retaliation in Kiev after Kherson genocide. I hope Russia has enough time to evacuate people from the current battlezone in Kherson. People in Eastern Ukraine have started fleeing to Russia after Ukraine attacked cities in Donbass on February 18, 2022. Therefore, there is nothing new about Khersonians also fleeing to Russia to save their lives.
      Is the Ukraine ‘war’ heading for an uncontrollable escalation? I think it already started after the attacks on Kerch Bridge and Nordstream pipelines. When I first read about the attack on the Kerch Bridge, I thought it was a gift from the US to ‘whining Zelensky’. Later, Russian investigations proved Ukraine’s involvement in the blast (with the knowledge of the US?). It was pretty obvious that the US or Ukraine didn’t expect Russia’s retaliation in “Kiev”. The magnitude and the intensity of Russia’s response (which is still ongoing) shook the world. We can imagine Russia’s response, if Ukraine used a “dirty bomb”.
      Contd’….

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        I don’t have much to say about Kherson other than that Kherson, Crimea, Kharkiv and Odessa are strategically crucial for Russia’s territorial sovereignty, and, therefore, Russian forces will strengthen their position in Kherson. We cannot deny the fact that Kherson was Russia’s first naval base and the shipyard. In 1922, Russian leader Vladimir Lenin gifted today’s entire Eastern Ukraine, from former Kharkiv to Odessa, to Ukraine WITH ITS RUSSIAN POPULATION. That is what makes the Ukraine crisis more complex.
        .
        Why do I believe Russia’s claim that Ukraine has plans to use a “dirty bomb” on its own territory to escalate the war? Well, I have two opposing reasons.
        1) “The dirty bomb provocation” has nothing to do with ‘Ukraine regaining territories’. The reason is political and it is connected with US midterm elections to be held in November. There is a possibility that Democrats will lose both chambers in Congress. Therefore, the US administration desperately needs some kind of victory in Ukraine which can be used in its favour and justify its war investments in Ukraine. Also, the “dirty bomb provocation” discourages all attempts to pursue Russia and Ukraine for a peaceful resolution and boost legal and illegal weapons trade all over the world.
        Contd’…

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          2) Russia, somehow, managed to unearth Ukraine’s plans to detonate a “dirty bomb” and promptly shared the information formally with the US and other countries while stressing the point that it would lead to an uncontrollable escalation in the Ukrraine crisis. Well, I may be wrong in my first assertion that the US was fully aware of Ukraine’s plans to use a “dirty bomb”. Maybe the current US administration actually has no intention to go for a nuclear war with Russia “for the sake of Ukraine”. Russia has already warned all powerful nations the possibility of an uncontrollable escalation in the Ukraine crisis. What will the US do? There are two possibilities:
          a) The US administration will let the Ukraine war escalate, and, if it goes too far, cut a deal with Russia to save the US, leaving NATO on the lurch. (Not long ago, Mr. Biden ordered immediate withdrawal of the US forces from Afghanistan without even informing other NATO countries.)
          b) Initiate a formal dialogue with Russia to find a peaceful solution to the Ukraine crisis and take the ‘credit’ for preventing a nuclear war.
          I have a feeling that everything will be quiet by December.

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