By Sachithanandam Sathananthan –

Debt sustainability

The Interim Budget outlined a two-step approach that aims first, to achieve macro-economic stability with the assistance of IMF and other international agencies (clause 4.2); and second, it offered a glimpse of a framework for a longer term National Economic Policy (not a Plan) for the next quarter of a century, to launch the country’s recovery and reach the status of a developed economy by 2048 (clause 34.3).

Successive governments sought IMF’s assistance, 16 times by one estimate over some six decades, for debt sustainability; shorn of macro-economy and international finance jargon, and risking oversimplification, raising IMF loans is hardly more than borrowing from Peter to pay Paul. Unsurprisingly the IMF’s successive interventions failed to arrest the deepening and multifaceted social and economic crises because money lenders – IMF is one – despite their confidence-building rhetoric do not promote debtors’ self-reliance. 

Common sense would suggest a forensic audit to ascertain why IMF’s interventions largely failed to ramp up the economy. Instead policy makers take the easy way out: they often parrot vague speculations about corruption, mis-governance, inefficiency and on. 

One reason for the IMF’s unimpressive record is the institution’s one-size-fits-all approach that requires recipient governments to impose a two-pronged austerity measure: extracting more taxes and cutting down government spending. The objective apparently is to reduce the budget deficit and sustain the servicing of debts, including the Fund’s own, which highlights its role as a debt collector for transnational capital. However, raising taxes – usually more indirect and less direct – eats into the disposable income of consumers; reducing public expenditure on essentials, such as health, education, infrastructure and so on, further impoverishes the working population. Together these changes potentially undermine aggregate demand and discourage investments by the domestic private sector. 

The appalling outcomes of the Fund’s interventions in economies exporting agricultural products – Jamaica and Argentina, the latter with oil reserves – and copper-rich Zambia are well known and the blemished record of the previous 16 attempts in Sri Lanka does not inspire confidence. So, it is unclear how the outcome of the ongoing 17^th IMF intervention would be substantially different.

The second string to the Fund’s bow is to insist that the governments privatise “loss making” State-Owned-Enterprises instead of guiding them to turn the SOEs into profit making State enterprises; the latter, is a long-term reform crucial for economic development but seemingly of little interest to the Fund and allied international money lenders. 

The third, monetary “adjustment” floats or devalues the currency to its supposed “market” value so that exports are said to become more price competitive (cheaper) in the immediate term (1^st Quarter) to carve out larger markets. However, devaluation aggravates price inflation that swiftly pushes up domestic costs in the 2^nd and subsequent Quarters to all but neutralise the transient competitiveness in the export market and often ruin many domestic producers.

Nothing is gained by blaming the IMF. The Fund’s nature and interests are well known; its financial and technical assistance are steeped in Washington’s commitment to promote the private sector, preferably the Anglo-US variety; and its approach to Sri Lanka’s economic crisis is not an exception. Governments compelled, by their own corruption and mis-governance, to repeatedly seek IMF’s assistance to rescue the economy have little option but to implement the Fund’s “structural adjustments”, which are invariably responsible for shrinking the purchasing power of the vast majority and thinning the prospects for investment and growth by domestic entrepreneurs in the medium and long term. 

Inevitably the Fund’s advisors seek to convince Colombo’s policy makers to invite export-oriented Foreign Direct Investment (FDI) to take up the slack to enhance mostly agricultural exports. Apparently, the foreign investors’ participation is to be a stop-gap measure till domestic entrepreneurs mysteriously “help” themselves to their feet by competing in a sluggish domestic market against the bigger, stronger and more ruthless transnational corporations with easier access to global markets.

Economic revival

It is instructive to recollect that FDI in agricultural commodities for export in the island dates to the Portuguese traders, backed by their mercenary armed force, establishing control over cinnamon (and other spice) cultivation and monopolising exports. To ease the Kotte King’s economic misery, the Portuguese Crown handed out a thousand cruzadors in 1584 (Peiris, P.E., Ceylon: The Portuguese Era, 1914. p.59.) The paltry amount was no doubt a fraction of the wealth extracted by Portuguese FDI from Kotte and barely sufficient to keep afloat the Royal Court. It is, arguably, the first instance of “foreign aid” under European colonialism. 

The Portuguese trade monopolies led to greater financial losses for Kotte; the economic dislocation worsened when large sections of competing traders, including many Muslims, were expelled from the Kotte Kingdom 1626. The Portuguese colonial State magnanimously doled out a “subvention” of 30,000 xerafims in 1634 as the maximum grant per year from Goa (de Silva, C.R, The Portuguese in Ceylon 1617-1638. p.142) to mollify the King of Kotte.  “Foreign aid” thus became a recurring annual occurrence on which the Kingdom came to depend.

More recently, British trading capital established the systematic cultivation for export on a permanent footing within the dualist plantation system in the 19^th Century. The plantation system, to summarise, consists broadly of (a) the planation economy, based on commercial production of mainly tea, rubber and coconut by FDI primarily for export with the participation of residual domestic capital and (b) the peasant economy in which producers cultivate wage goods and cash crops essentially for domestic consumption. The bulk of export earnings was funnelled abroad while remainder procured imports, barely sufficient for the miniscule elite’s consumption. The lesson is obvious: for every dollar of unregulated FDI at least two, if not more, flow out.

The entry of FDIs in selected economic sectors may be of advantage in the short-term if they are strictly regulated to limit the extraction of super profits and ensure domestic reinvestment. Unregulated FDIs invariably hold back domestic capital accumulation; and opening the door to more such FDIs to compensate for the lack of domestic capital surely perpetuates the downward spiral of poverty and intensifies economic crises. Moreover, the technological spinoffs of FDI are both outdated and more ephemeral than substantial, as well documented by the Dependency School.

Development “thinking”?

Colonial administrator C.V. Brayne fine-tuned the plantation system with his 1920’s peasant proprietor settlements mainly to raise paddy output. The State Council’s Minister of Agriculture and lands D.S. Senanayake mimicked and expanded them under his Land Development Ordinance (LDO), fleshed out with tank irrigation projects, from 1935; the iconic Gal Oya Scheme is perhaps the prime example. 

However, Senanayake’s UNP government did not formulate a simultaneous long-term program to build an industrial base. Perhaps the UNP’s landed gentry with roots in the lucrative plantation economy – “the goose that laid the golden egg” – saw little need for industrial development; perhaps they believed the vicious circle “theory” of the scarcity of capital perpetuating poverty. 

More likely, the British-tutored feudalist elite rejected industrialisation in 1938 (Debates of the State Council, p.1342) because the urban/industrial workers fortify the fledgling Left-wing parties; and the 1952 World Bank reinforced the elite’s stance: “cottage industries cease to be cottage industries,” claimed the Bank’s report, “when their handwork methods are brought to centralised plants offering full employment; they…become nothing more than inefficient factories incurring industrial overhead, and…are uneconomical.” It “urged” the colonial regime to “resist” industrialisation (UN, Economic Development of Ceylon, Part I, p.27). 

The World Bank’s recommendations were no doubt music to the feudalist elite’s ears and emboldened them to hobble the logical development of family-based handicraft production into high value-adding manufacturing industries employing wage labourers. They challenged the Left’s repeated promotion the idea of industrialisation, as recorded in the Parliamentary Hansard numerous times in the 1950s. Industrialisation would expand the working class, which the anti-Communist elite led by Sir John Kotelawala feared would strengthen the “communists” who could then contest them for political power. For good reasons. In the 1947 parliamentary elections, the combined Left made impressive gains backed by large sections of plantation labour, capturing 19 seats (LSSP – 10, BSP-BLP – 5, CP – 3, CLP – 1) against UNP’s 42; and the Left was expected to grow stronger. 

In public the landed elite justified the reactionary policy on grounds of promoting the welfare of the majority agricultural population. They increased the population of conservative peasant proprietors, promoted their embourgeoisement through land distribution under the LDO to resist Marxist ideology and supplemented the settlement schemes with Rural Development Programs. The UNP’s elite teamed up with their rural counterparts through Rural Development Societies; they together sugar-coated Rural Development Programs as “rural upliftment”, which continued under President R. Premadasa’s the Gam Udawa (Village Emancipation). 

The Societies of course accomplished a modicum of improvement in rural life: they constructed roads and culverts, and clock towers; conducted food-for-work programs; organised community centres and the like. 

The Programs’ main “development” aim and unstated policy objective, however, was to bottle up landless and underemployed peasant populations in rural areas and prevent them migrating to urban areas in search of employment, joining Left-wing labour unions and often becoming politically radicalised. The strategy succeeded fairly well in the short and medium terms, evidenced by lower rural to urban migration in Ceylon compared to industrialising countries in South and South-East Asia. In many ways the JVP’s 1971 and 1987-89 armed Insurrections confirm the tragic failure of this “pressure-cooker” containment policy in the long term.

The governments’ approach over the past seven decades, since 1948, has faithfully maintained the plantation system in its essentials. The recent additional sources of foreign revenue are the Tourism service sector with a high import content, garment assembling (not manufacturing) using mostly imported components, gems and inward remittances of overseas Sri Lankans. They provide some reprieve but do not fundamentally alter the colonialists’ extractive model. In comparison to other rapidly industrialising Asian economies, Sri Lanka’s has remained little more than a toy economy. 

In our view FDI in export-oriented production of agricultural commodities would likely walk that beaten path to merely extend and entrench the plantation system with the addition of, say, pineapples and perhaps bananas, reminiscent of United States multinationals’ FDI in soybeans, coffee and sugar in Latin America. The inevitable consequences in Sri Lanka will be similar economic crises and social disruption. 

Policy makers clamouring to further open the economy to those the former President J.R.Jayawardene eulogised as “Robber Barons” are either enamoured by the “foreign touch” or convinced there is no alternative. Either way, they may find John Perkins’ New Confessions of an Economic Hitman (Ebury Press, 2016) rather illuminating.

Industrialisation

One cannot disagree with the government’s intention to trade its way out of the present economic crisis. What is at issue is whether the country trades primarily in agricultural commodities, as during the past seven decades of general economic decline, OR diversifies into the production and export of industrial manufactures in the future. 

Industrialisation is not setting up import substitution industries in selected economic sectors. Rather industrialisation involves a broad-based structural transformation based on long-term economic planning over at least 25 years; it has to be led by a mercantile elite and demands, but is not limited to, public investment in basic industries (steel, energy, transport) combined with protection for private investment in infant industries, supplemented by expanding essential services (education, health) to ensure a skilled, healthy and efficient workforce.

Industrialisation and technological innovations swiftly raise the productivity of labour – the crucial determinant of economic well-being – and facilitate the manufacture of high value-added commodities. The final Budget for 2023 proposed “agriculture-based value-added industries” (Clause 34). But industrial manufactures command more advantageous terms of trade than agricultural commodities and earn larger export revenues over shorter timespans

The obstacles to industrial development in Sri Lanka are many. First, the lack of planning for industrialisation, which is due in part to an ideological obstacle rooted in the feudalist elite’s compulsion to defend its landed economic interests by discouraging the growth of the industrial workers as a class. 

Second, an unanticipated fallout is the virtual absence of skilled and experienced planners that possibly led Dr. Nishan de Mel, Verité Research Executive Director to  assert that

“[w]e do not have the capability to design our own plans for economic recovery”. He does not offer explanations; but we suggest it is the direct consequence of the “Sinhala Only” policy that groomed an intelligentsia largely not functionally literate in English and cannot either effectively come to grips with policies and practices of global economic and financial institutions or formulate a vision for a developed industrial society.

Third, the relatively few who could have tackled the task mostly emigrated to saner environs, driven out by the consistent mis-governance by the political class. 

In conclusion, the experience with industrialisation among our South Asian neighbours is worth noting.   

In Nehruvian India the government invested in basic industries – fuel, steel, transport, etc. – under successive Five Year Plans, protected emerging private sector industries, firmly regulated FDI and mandating they transfer technology and indigenise production (typically within five years), boosted technological development by establishing state-of-the-art Indian Institutes of Technologies and thereby laid the foundation for the country’s evolution into an industrial giant and atomic power, with an enviable space program. A current thrust is to fully indigenise arms manufacture.

Similar changes underpin the recent success of the war-ravaged so-called “Basket Case” Bangladesh, though admittedly it’s premature to reach firm conclusions. 

In sharp contrast, and fearing the potential power of organised industrial labour, Pakistan’s feudalist “wadera” elite dodged broad-based industrialisation as did their Sri Lankan counterparts. A minority invested in sugar and textile mills but in general the Pakistani elite aligned with the Islamic clergy to all but crush the political Left; they together brought the economy to its knees and have placed the country at the mercy of the IMF. The unfolding consequences of a similar alliance between the feudalist “walawa” elite and Buddhist clergy in Sri Lanka requires no elaboration.

The message to Sri Lanka is loud and clear: either industrialise and develop a sustainable manufacturing base or remain primarily a rentier economy bled by rent-seekers but masked by agrarian activities varnished with a patriotic veneer but at best condemned to stagnate and in reality fall behind. 

[Next: Part II: Political Devolution]

*Dr Sachithanandam Sathananthan is an independent researcher who read Political Economy for the Ph.D. degree at the University of Cambridge. He was Assistant Director, International Studies, Marga Institute, Visiting Research Scholar at the Jawaharlal Nehru University School of International Studies and has taught World History at Karachi University’s Institute of Business Administration. He is an award-winning filmmaker and may be reached at: commentaries.ss@gmail.com