29 September, 2022

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Sri Lanka Is A Neoliberal Failed State

By Pitasanna Shanmugathas –

Pitasanna Shanmugathas

While the immediate cause of the current public protests are due to the Rajapaksa government’s corruption and mismanagement, exacerbated by the COVID-19 pandemic, it is important to acknowledge that the root cause of the current economic crisis is because of Sri Lanka’s decades long neoliberal programs. And that is what a majority of the Western media won’t cover.

As noted by political economist Mick Moore, from the 1940s to the mid 1970s, Sri Lanka was actually fairly committed to large-scale spending on social welfare schemes. For instance, initially necessitated by the hardships of World War II, and continuing throughout the post-independence period until the mid 1970s, Sri Lankan governments instituted a very popular rice ration scheme whereby every family was given a weekly quota of rice (or flour) for free or at a very low cost. The program became very popular among the Sri Lankan people so much so that any attempt to repeal it by the government, such as in 1953, was met with quick opposition by the public. During this period, the Sri Lankan government also provided services such as free education and preventative/curative healthcare programs.

The government was compelled to institute such programs due to the high rates of voter turnout from a largely politically conscientious citizenry, thanks in part to the early introduction of universal franchise within the nation, and the government was also compelled to institute such programs due to pressure from organized trade unions and Marxist-leaning parties of the 1930s and 40s. In the 1947 election, the leftist and Marxist allied movements obtained a quarter of all the votes cast. In Sri Lanka, as elsewhere, there were fears of a Marxist revolution so perhaps one reason these social welfare programs were instituted by Sri Lankan governments was an attempt to prevent such a revolution from taking place by addressing the demands of a politically conscious citizenry.  Political economist Ronald Herring, who has written extensively for decades on South Asia, noted that in the mid-1970s Sri Lanka was designating around 20 to 25 percent of its budget towards social security and welfare expenditures in contrast India and Pakistan designated around 2 to 3 percent.  As a result of such welfare programs, Herring pointed out that in the mid 1970s Sri Lanka had a life expectancy near that of some European nations and far greater than any of its neighbors within the subcontinent.

It is worth mentioning against the backdrop of such decades long spending on social welfare schemes, after Sri Lanka’s independence from the British in 1948; successive majoritarian Sinhalese-Buddhist governments began implementing a series of discriminatory policies against the minority ethnic Tamil community on the basis of language, higher education, access to government employment etc.  The consequences of Sri Lanka’s discriminatory policies against the minority ethnic Tamil community would later provide the basis for a thirty year civil war.  The rationale on the part of Sinhala Buddhist nationalists to implement discriminatory policies against the minority Tamils had a lot to do with the grievances they had as a result of Britain’s colonization of the nation—something this author has written about previously.  Furthermore, a significant portion of the Indian plantation workers in Sri Lanka—initially brought over to Sri Lanka as indentured laborers under British colonial rule—were made stateless by the Sri Lankan government after independence in 1948 and therefore the Indian plantation workers were not entitled to benefit from the social welfare schemes provided by the Sri Lankan government.

Development aid from Western nations to the Global South often come with a condition that the country accepting the aid must engage in deregulation, privatization, cutting government- run social programs, and other neoliberal policies. During the Cold War, Sri Lanka was a member of the Non-Aligned Movement and engaged in import substitution policies, often refusing to take development aid from so-called First-World nations.

Successive Sri Lankan governments’ investment into social welfare schemes took a drastic turn in 1977 when JR Jayewardene, the leader of the United National Party hereafter referred to as UNP (one of the two main parties in Sri Lanka) came into power in a landslide victory, with a two-thirds majority in the legislature. JR Jayewardene and his party acolytes felt disillusioned with the welfare-led economic policies of the previous governments which they believed failed to find sources of economic growth to support the nation. Between 1970 to 1977 Sri Lanka experienced a steep decline in trade, with foreign exchange and imports being “unusually scarce”; all of which made it easier for JR Jayewardene to transition Sri Lanka towards adopting market oriented policies.

JR Jayewardene and his government, upon assuming power in 1977, quickly took an authoritarian turn. JR Jayewardene established himself as the nation’s first Executive President under the nation’s new constitution which he ushered in 1978. Equipped with unconstrained executive rule, JR engaged in policies to suppress oppositional trade unions (imposing legislation in 1979 that would allow the government to prohibit trade union activities in the state sector). JR Jayewardene also weakened the nation’s main rival political party, the Sri Lanka Freedom Party (SLFP). Foreign aid organizations began supporting JR who was increasingly engaging in export oriented industrialization and thus was in good graces with Western-led international financial institutions. Balasingham Skanthakumar, who has done extensive research on poverty in Sri Lanka, noted that “Economic liberalization drove many import-substituting industries into closure with loss of employment among older male workers…. The reduction of protective tariff walls led to the influx of cheaper substitutes or alternatives…the liberalization of textile imports post-1977, caused the collapse of the domestic handloom sector, in which women predominated, comprising cottage industries and state-owned mills. By 1986 it is estimated that over 120,000 jobs had been lost as a result…..certainly already poor sections of the population were made more vulnerable to poverty through the direct impacts of policy reforms and structural adjustment programmes. During the first decade of the neo-liberal reforms, it is estimated one in four of the population were living in conditions of poverty; and as late as 1995 (almost two decades later), some 46 percent of the population (that is 7.8 million people) were recipients of food stamps…..Economic liberalization did not translate into larger domestic mobilization of resources for state expenditure. Therefore, the government became more reliant on indirect taxation as a source of income. Taxes were increased on consumer staples that dominate the basket of goods consumed by the poor such as sugar, rice, tobacco, alcohol etc. Between 1978/79 and 1986/7 alone, the burden of indirect taxes on the poor grew in excess of 100 percent.”

JR’s economic liberalization policies, as articulated by York University Professor Jennifer Hyndman, “put  an end to many of the concessions and patronage relations that had kept the peace between otherwise disparate class and ethnic factions; the glue holding ethnic and class alliances together was effectively removed. While foreign dollars began to pour into Sri Lanka, specific Tamil and Sinhala areas remained largely excluded from investment.”

With the assistance of the World Bank, under the guise of improving the program, JR severely weakened the nation’s popular rice ration program. In 1953, JR Jayewardene actually played a role in the failed attempt to eliminate the food subsidy program. An ineffective food stamp program was instituted as a replacement. The groups of the 1930s and 40s which had historically rallied around universalistic social welfare programs were severely weakened under JR’s rule.  Export processing zones were created in Sri Lanka in 1978 whereby national and multinational corporations were exempt from paying taxes and had access to cheap labor. Unions were banned within the export processing zones. A decline in government spending on healthcare and education ensued.

By the late 1980s, as noted by Indra Tudawe of the Institute for Policy Studies in Colombo, social spending had been cut in half from its high point in the early to mid 1970s—mostly, however, it was the elimination of the food subsidy and its replacement with ineffective food stamps that comprised the drastic social spending cuts. However, as argued by David Dunham and Sisira Jayasuriya of the Institute of Social Studies, JR Jayewardene’s cuts to welfare expenditure “had no pressing economic rationale…no rigorous study had (or has) ever demonstrated that Sri Lanka’s poor pre-1977 growth performance was due in any significant measure to its food subsidies.” For JR Jaywardene the rationale for cutting food subsidies was purely ideological. To JR Jayewardene, Dunham and Jayasuriya argued, the food subsidies “symbolized the unwarranted political power of the left and the unions. He saw a political opportunity that eluded him for a quarter of a century—not just to cut consumer subsidies, but, perhaps more importantly, to confront and crush the trade unions.” The impact of the drastic policy change to cut food subsidies can clearly be reflected in a 1995 nutritional assessment of Sri Lanka cited by Tudawe which asserted that “the number of preschool child population suffering from stunting is about 300,000; 210,000 are wasted; and 540,000 are underweight. Furthermore 660,000 children suffer from Vitamin A deficiency whilst 720,000 preschool children are anemic. Nearly one third of adult population in Sri Lanka has been classified as undernourished.”

Since 1977, up to the present-day, practically every Sri Lankan government elected into office has promoted neoliberal policies. The SLFP and the UNP have become parties that adopt policies of neoliberalism. For instance, in 1994, when the UNP finally lost its 17-year hold on political power after it was defeated in national elections, the Sri Lankan people voted in a government led by Chandrika Kumaratunga, the daughter of a former prime minister, who ran an enormously successful campaign under a People’s Alliance political coalition consisting of the SLFP and other center-left leaning parties. Her election campaign was quite appealing; she presented herself as someone who would be a champion of the Sri Lankan working class and the downtrodden.  Kumaratunga, however, assured the international business community that she would not deviate from the neoliberal economic policies of the UNP. In fact, as noted by Skanthakumar, during Kumaratunga’s government, “the process of privatization, within a framework of deepening neo-liberal reforms, was accelerated for example through divestment of the national carrier (Air Lanka) and long-term leases on tea and rubber estates. The financial sector was liberalized further with greater penetration of foreign and local banks as well as expansion of finance companies. Therefore, by the early 1990s, there was a convergence across the political spectrum – between the two main parties of the Right and the Left that have alternated state power in post-colonial Sri Lanka – on the irresistibility of internal deregulation, external liberalization, and privatization for economic development. Or more precisely, the SLFP shifted to and adopted with fervor the economic policies of the UNP.”

The joint policies of neoliberalism by the political parties in Sri Lanka after 1977 has resulted in the rich continuing to get richer and the poor continuing to get poorer as income inequality has widened in contrast to decades preceding 1977. Based on 2012 statistics from the Central Bank of Colombo, “the richest 20 percent of households account for 54.1 percent of income share; whereas the poorest 20 percent have only 4.5 percent and the middle 60 percent have a lower combined income than the richest 20 percent.” While the rich continue to get richer, the government spends less on programs to help working class Sri Lankans. According to  2011 World Bank statistics, the Sri Lankan government spent less on education  than any other government in the South Asian region—a stark contrast to the situation decades prior.

In 2019, Gotabaya Rajapaksa came into office—having previously been Secretary to the Ministry of  Defense when his brother (Mahinda) was President from 2005 to 2015. Gotabaya, as Secretary to the Ministry of Defense, engaged in especially horrendous atrocities against Tamil civilians during the final stages of the civil war in 2009 which he oversaw.

Since the civil war began in 1983, both major parties in Sri Lanka—the UNP and SLFP—increasingly began investing greater amounts of money into expanding its military while welfare spending for its population continued to be neglected. Even after the civil war ended, Sri Lanka continued to expand its military budget. Everybody wanted to know for what purpose is Sri Lanka’s military budget continuing to expand even though the country is no longer at war? The military continued to occupy the Tamil dominated North and East of the country even after the war ended. Meanwhile the welfare needs of a war affected population continued to be inadequately addressed. Even now, according to 2021 statistics, Sri Lanka allocates a greater percentage of its GDP to the military than Germany, Japan, Sweden, Bangladesh, and China.

President Mahinda Rajapaksa, after the end of the three decade civil war in 2009, began massive infrastructure projects for which he sought commercial loans which came with high interest rates. These loans were taken with the belief that the infrastructure projects will help modernize Sri Lanka and generate revenue. The projects were a failure. The Sri Lankan government was already plagued with declining tax revenue and this was worsened when the recently resigned President Gotabaya Rajapaksa pursued the neoliberal policy in 2019 of instituting tax cuts for corporations and thereby bringing in less revenue for the government. Due to tax policy changes instituted by the government, tax revenue declined from 11.8% of GDP in 2019 to 8.1% of GDP in 2020. Mick Moore, a political economist who has been a specialist on Sri Lanka for nearly fifty years, said that the current economic crisis in Sri Lanka is “the most man-made crisis that I know of.” In an interview Moore gave in May 2022, he stated, “following the 2019 tax cuts, creditors became worried about whether they would get repaid. The rates at which the Sri Lankan government could borrow money naturally increased. Instead of just reducing its investment and borrowing less, the government insisted on continuing to borrow heavily and repaying at higher and higher rates of interest. When the situation became so dire about a year ago, the government should have just gone to its creditors and said ‘Sorry, we can’t repay; let us reschedule the debts. Instead, they insisted in a macho fashion that they could repay in full. They went along this way until about six weeks ago when they had basically given away virtually all the foreign exchange they had.”

Moore has previously attributed the “institutionalized pressure for tax exemptions” as contributing to the “hollowing out of Sri Lanka’s revenue base” which he noted played a role in creating a fiscal crisis within the nation—and this practice has clearly contributed to the economic crisis Sri Lanka is facing presently.

Since 1977, the Sri Lankan government has been inept in effectively collecting direct taxes from its citizenry and this is because that is what is in the best interests of the wealthy class of Sri Lanka. The wealthy class of Sri Lankans, Moore asserts, comprise of “those who pay little or no direct tax on their (fast-growing) income, property values and other wealth, and are not directly impacted by the degeneration of under-funded public education, health and social protection systems.”

On July 20th 2022, the Members of Parliament voted Ranil Wickremesinghe as the President of Sri Lanka thereby willfully ignoring the demands of the overwhelming majority of Sri Lankans they were elected to represent who have consistently called on Ranil to resign, viewing him being in office as a continuation of the Rajapaksa-style politics. Wickremesinghe has been voted to serve out the remainder of Gota’s term which lasts until 2024.

The current President of Sri Lanka, Ranil Wickremesinghe, is the nephew of JR Jayewardene. Ranil Wickremesinghe, like his uncle, is a staunch proponent of neoliberalism. For instance, when Ranil was Prime Minister in the early 2000s, and had control of the Sri Lankan legislature, in 2002 his party introduced a poverty reduction strategy paper. The poverty reduction strategy paper, Skanthakumar noted, fondly reminisced about the late 1970s neoliberal reforms referring to them as having “produced good results” but claiming that since that time “we have lost momentum.” With the stated goal of achieving an annual growth rate of 10 percent, the strategy paper advocated for a wave of privatization schemes such as transferring the state owned Ceylon Electricity Board and the Ceylon Petroleum Corporation from state ownership into private ownership. Furthermore, the strategy paper advocated public services such as healthcare or education be transferred to private ownership or a public-private ownership. The strategy paper advocated for provisions that would allow international companies to monopolize profits as well as ‘labor market flexibility’ that would strip workers of protections. The strategy paper advocated for the creation of additional export processing zones and lowering taxes on corporations. One critic of the strategy paper noted that “the recommended policies appear to be designed to bring the country more into conformity with the IMF and World Bank’s traditional recipes, without offering evidence that this formula will produce better results than the current and past policies of the country.”

If Ranil remains as President, these are the types of neoliberal policies Sri Lankans will likely live with, and of course, it will surely be welcomed by the Western international financial institutions.

Evidently, any meaningful resolution of this crisis is clearly far from over. So long as Colombo politicians continue to undermine the democratic will of the people in exchange for maintaining or consolidating political power in service to the interests of the wealthy, Sri Lanka will continue to be a neoliberal failed state.

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Latest comments

  • 3
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    A very interesting article indeed! The author has indicated the likely scenario to be followed by Ranil in rescuing the country from the present economic crisis.

    However, Ranil is authoritarian and is not a team player. It is doubtful whether he would be able to build up a team of likeminded ministers to implement his brand of neo- liberal policies and also whether the country will be patient enough, not to topple the applecart in the process!

    Any failure of Ranil’s strategy will lead to instability and chaos for a long period

    • 1
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      Yes, Excellent article!
      JRJ, Ranil’s uncle was known as “Yankee Dickie”, Ranil is a US-backed Dictator today in Sri Lanka to deliver the country to the Washington Consensus and enable the IMF to control Sri Lanka’s policy space and autonomy. The Millennium Challenge Corporation (MCC), also targeted the Energy Sectors, Transport and Land in order set up a US military base in the strategic Indian Ocean island after signing the Status of Forces agreement (SOFA) back in 2019 when RW was Prime Minister,,. Ranil is the man to do this now with the IMF in 2022!
      The US has IMF or MCC projects in many South Asian countries – MCC in Nepal and Bangladesh, IMF in Pakistan and Sri Lanka. This is all part of the economic and trade war on China. Euro-American colonialism is alive and well as Cold War 2.0 hots up !

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        Can we ever dare to say “United States Go Home”? I believe the term was “Yankee Go Home” . I do not mean to be rude, however it would be nice if they dismantle their preparations for war against China.

  • 2
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    “The consequences of Sri Lanka’s discriminatory policies against the minority ethnic Tamil community would later provide the basis for a thirty year civil war. “

    First the Tamil leadership wanted separation through political means, when that could not be achieved they took up arms. There was no “discrimination”, since Burghers and Muslims never complained. People point to 1956, it’s not racist to make a language the official one if 90% of the population speak it. In Tamil Nadu, at about the same time, there were anti-Hindi agitations. The 90%+ majority in Tamil wanted only Tamil to be the official language.

    • 0
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      Lester the fairy-tale maker,
      “There was no “discrimination”, since Burghers and Muslims never complained. “
      Wow! Why do you think there are so many Burghers in Australia?
      You must really enjoy making a fool of yourself in public.

  • 2
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    Where were you comrade; long time no see! On a pilgrimage for an Isngnam in Ganges, to wash off the past sins possessed by Siri Ma o association? Next time don’t sleep with the dogs which have ticks. Otherwise, would you have to write a fake pro Protesters and anti-Neo liberal essay? BTW, can you cite some info from the demand protesters published to the evidence that they are anti Neo liberals enthusiastic like you?

    “The strategy paper advocated for provisions that would allow international companies to monopolize profits as well as ‘labor market flexibility’ that would strip workers of protections. The strategy paper advocated for the creation of additional export processing zones and lowering taxes on corporations. “ Ha ha ha…….. Is that you who is appearing in the Middle East, when the girls’ heads are shopped? Unlike this top-notch essay, those representation for the rape & ME court murdered cases didn’t sound like very good representation. Why is that so?

    You are telling me that in the Western companies there is no labor rights protection, but the Aanduwa promoted ME house maid jobs with a lot of protection? Shame man!

    Anyway, how is your Guru Dubious Jeya doing? We invited him here for discussion. That Royal lord doesn’t seem to like our race and face.

  • 1
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    PS, Ranil’s rescue strategy will have to fail as you predict instability and chaos for a long period. We have had chaos from power domination since JRJ added divisive secular religious priority in place to govern when they as priests should be purifying the people from cravings. But priests welcome the luxury cars and DN rides on elephant and even Kelaniya priest in time of SWRD, kept female. Some buddhist nikayas are rejected as a low caste division. Ranil gazetted military power and before aragalaya could vacate, military hammered in and claimed victory as their portion. Nothing called service to the millions of citizens, but the doddering, limping, sick and old 225 at election of president showed their only interest was to rebuild their properties. The queues of lack all over did not matter to the parliament at all. Aragalaya shouting that pain needed to be suppressed. Why not suppress those who robbed our money until a begging bowl.

  • 1
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    Pitsana: good work- keep it up!
    How neo-liberal reforms de-develop countries with poor leadership and elites is well captured in this article: Should Sri Lanka De-Dollarize: Beyond Bananas, Beaches and Bases:
    https://www.ft.lk/columns/Should-Sri-Lanka-de-dollarise-Beyond-bananas-beaches-bases-and-dependent-development/4-734254

  • 2
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    PS, you left out one of the major contributor to our current crisis, “CORRUPTION”, I did not see that mentioned anywhere in your article. Please remember to add the next time. When financial institutes like IMF lend money, their major concern is too get it back. So what ever policy they suggest is to salvage and not further weaken our economy. Countries who do not like austerity should avoid bankruptcy in the first place, instead of finding fault with the lender. If not country like Lanka can Bankrupt IMF in no time.

    • 0
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      The word “corruption” is literally in the first sentence of the article.

      • 2
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        PS, so sorry, you were focusing on failed neoliberal policy and I was looking for corruption in BOLD letters. In my opinion the root causes are many and it’s a surprise it took this long to hit the bottom. 1) INdependence we never had 2) family kleptocracy 3) racism to the core 4) Immoral racist public who sacrificed future for instant pleasure of seeing minority suffer 5) So called neoliberal policies / subsidy politics were more of a vote bank (like racist agenda) than for welfare. 6) Agree that free health and education were productive but soon they took the backseat 7) Even then, education was used for racial profiling, discrimination, health care was filled with people who do not qualify, the same policies instead of improving quality of life, lead to mega “BRAIN DRAIN”.8) corruption was normalized and became a culture 9) religious interference 10) Constitution soon turned into constipation. 11) there is more

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          PS, the reason I call the above as root causes is because they were present either before or soon after independence. The sham pacts govt signed with minority Tamils, annual pogroms, discrimination, nepotism, immoral public, racial divide/hatred were all there from the time of our INdependence. Sorry I left out so called DEMOCRAZY, of ours , which is nothing but a SHAM.

  • 2
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    “Colombo politicians continue to undermine the democratic will of the people in exchange for maintaining or consolidating political power in service to the interests of the wealthy”
    .
    Nicely put. Great article. I don’t see anyone protesting against the “wealthy”, why is that so? It will make one long banner, and too large for a twitter handle. I can see it now :
    .
    “Wealthy people, stop undermining the democratic will of the people in exchange for maintaining or consolidating political power in service of your own interests”

    “Power in the service of the wealthy” – didn’t Prime Minister Sirimavo Bandaranaike try to solve this issue?
    .
    This is what the Encylcopaedia Britannica says about her.
    .
    “While reducing inequalities of wealth, Bandaranaike’s socialist policies had once again caused economic stagnation, and her government’s support of Buddhism and the Sinhalese language had helped alienate the country’s large Tamil minority.”

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