By Ahilan Kadirgamar –
The resignation last week of Securities and Exchange Commission (SEC) Chairperson Tilak Karunaratne, after he blamed “a mafia of high net worth investors and their crony stockbrokers” for mobilising political pressure, has further exposed the crisis in the stock market. Over the last year, there has been much discussion of two aspects of this crisis. First, the collapse of the Colombo Stock Exchange (CSE) from one of the best performing markets in the world two years ago – when the market value of the CSE quadrupled from the end of the war to its peak within two years – to one of the worst performing markets this year. Second, reports of increasing political interference, market manipulation with the resignations of SEC Chairperson Indrani Sugathadasa late last year and now Karunaratne. The first aspect of the crisis relates to the returns from financial investments and the second to the regulations that are in place to ensure the so-called smooth functioning of the stock market.
A crisis reveals contradictions. A crisis also invites for good or bad interventions by various actors attempting to consolidate their interests, including those claiming to resolve the crisis. The difficult question is how such crisis relate to the unravelling and consolidation of regimes.
Boom and Bust
The CSE boom of late 2009 and 2010 was propelled by euphoria among global and local financiers around the post-war potential of the Sri Lankan economy. The CSE also benefited from the flow of global finance capital from the West after the 2008 financial crisis to the “emerging markets”, the so-called fast growing developing economies. This boom saw the market value of CSE referred to by economists as market capitalisation increasing to levels equalling 40% of the GDP. The Sunday Times on January 16, 2011 reported that SEC chief Sugathadasa claimed: “market capitalisation will increase to Rs 3 trillion by 2011 from the current Rs 2 trillion and that the capitalisation increase will be at 20% per annum … the stock market should further venture into rural areas in order to achieve the SEC’s objective of widening and broad basing the investor base.” Such euphoric projections did not hold even for months, as capital flew from the “emerging markets” triggered by the Eurozone crisis leading to major declines in the CSE. In the face of political interference – including pressure to change some of the rules of trading in the CSE – to prop up the market, Sugathadasa resigned in late 2011.
Such booms and busts in the stock market are not unique to Sri Lanka. Rather, it has been common place throughout modern history. In fact, the capitalist system itself is prone to crisis with business cycles and periodic depressions. However, the extent of the crisis may be dependent on the particular characteristics of capitalism in a country, including the level of financialisation. Capitalism emerged with the monetisation of economies, where the use of money became extensive in economic relations. Consequently, certain trajectories of capitalist development led to the intense financialisation of economies, where banking and financing took a dominant position over production. Historically, the late 19th century saw decades of intense financialisation in the West. Similarly, the last few decades of neoliberal policies have also led to intense financialisation globally. Such periods of financialisation lead to booms, followed by repeated and deepening economic crisis. Such crises over the last few decades have been numerous with severe consequences in Latin America in the 1980s and 1990s, East Asia in the late 1990s and more recently in the West.
Typically, questions about the causes of financial crises are only raised after the fact. The explanations are often the same; that there was widespread corruption or lack of regulation. One may recall how the Western media charged the East Asian economies of “crony capitalism” after they crashed in 1997. Reflecting media bias, there have been no similar insinuations of “crony capitalism” in the West. Instead, the crisis there has been attributed to the lack of regulation. What is deficient in such analyses of corruption and deregulation are the insights of one of the most perceptive recent theorists of financialisation, Hyman P. Minsky, who claimed financialisation increases the tendency towards repeated economic crisis.
Interests of the Regime
Returning to Sri Lanka, how does one account for the Rajapaksa Regime’s keen interest in the capital markets. By capital markets, I refer not just to the stock market, but also to the bond market. Indeed, over the last five years there have been repeated sovereign bond offerings by the Government on the order of US$ 500 million to US$ 1 billion each, and they have been an important source of foreign capital in addition to multilateral aid. The bond market and the stock market are central to accumulation by local and global financiers. However, investments in the stock market in particular, rarely translate into investment in production. Rather, much of it is channelled into speculation and even ponzi schemes, where investors are lured into unsustainable pyramid schemes which pay high returns for a short period by using the funds of new investors. Furthermore, in Sri Lanka now, as is the case in many other countries, financialisation is spilling over into a real-estate bubble, where rising real-estate prices linked to the tourism industry provide fickle but high returns on financial investments. Nevertheless, when it comes to short-term balance of payments problems, the global capital flowing into the financial markets do buttress the country’s external finances and help pay for imports. One reason for the Rajapaksa Regime’s affinity to financialisation could be in part to strengthen the country’s foreign exchange reserves.
A more difficult question to assess is the interests of the Regime, consisting of the group of political and financial elite controlling the State and the economy. In other words, is it their commitment to neoliberal policies and foreign reserves dependent on the flow of global finance capital that have motivated their commitment to the stock market or is it the Regime’s own investments in the stock market itself that have led to political interference? What were the interests behind channelling public retirement funds, specifically EPF and ETF funds controlled by the Central Bank, into risky investments in the stock market? Were they part of a strategy of propping up a sagging stock market? Indeed, over the last year, there have been a number of meetings between the President, the Finance Secretary and the stockbrokers, which have now culminated in the resignation of successive SEC chiefs.
The difficulty in answering this question stems from the fluid character of investments in the stock market, where funds flow in and out and change hands at a rapid pace, making it difficult to trace the players in the market. Historically, when regimes invested and controlled cartels, it was easier to trace it back to the regimes. For example, where regimes in other countries have controlled oil companies and trading conglomerates, the colluding interests of the regimes could be traced to the ownership of these cartels. However, with the rapid turnover in stock markets, even drug money and other forms of black money can be funnelled into speculation in stocks. While mainstream economists will claim that the financial markets create a level playing field, the reality is that periods of extensive financialisation and privatisation with the large transfer of financial resources, provide great opportunities for political manipulation and the consolidation of the power of financiers. Thus recent proclamations by the two past SEC chiefs that a “mafia” is controlling the stock market should not be a surprise.
Capital-State Nexus of Regulation
Now if capitalism is prone to crisis, and certain sections of the capitalist class, particularly financiers, rely on volatility in the markets and the loop holes that enhance their capacity to manipulate markets and accumulate capital, where does the apparent need for regulation arise from? In the history of capitalism, all forms of regulation have been promoted by the state with the support of sections of the capitalist class. Such regulations, ranging from addressing working conditions in factories, to laws that legitimise and regulate property and markets, have been important for sustained accumulation of capital. Yet, accumulation of capital, the severe competition that it creates between capitalists, the fall in profits and the exploitation of labour where low wages cannot sustain consumption, are some factors that lead to business downturns and capitalist crisis, regardless of the presence of regulations.
The chorus of voices in support of Karunaratne are in fact a call for regulation by the State. They believe regulation will provide confidence to international and local finaciers to invest in the stock market. On the other hand, those stockbrokers who have been pushing for the resignation of the SEC Chairperson, see regulatory measures and investigations carried out by the SEC into market manipulation as personally dangerous and dampening market sentiments.
The stock market crisis has now become more than an issue of national interest as the IMF has also raised concerns. The logic of international regulation is best articulated by a quote from IMF Resident Representative, Koshy Mathai, in a recent interview with Reuters:
“It is sad to see the SEC lose yet another strong chairperson, and in such a short period too… From all credible accounts, Karunaratne and his team were taking exactly the right steps to ensure that stock market participants obey the rules. … In any country, it is only with a firm set of regulations and an active regulator to enforce them that foreign and domestic investors will have confidence that the stock market is indeed a level playing field for all and not just designed for the benefit of a select few… This is an important issue for Sri Lanka, as development of the capital markets is a key priority in ensuring the country’s continued rapid growth.”
These words are reflective of the neoliberal faith in financialisation and capital markets as the road to prosperity rather than ruin. Of course, if and when there is a complete collapse of the capital markets as in the East Asian crisis, the IMF will step in to bail out global finance capital by pushing for measures impacting the local population including cuts to welfare, in order to compensate foreign institutional investors. Similarly, the World Bank may well fund projects for financial governance and regulation as they are now doing in Sri Lanka. But in the process they also push for further financialisation through the introduction of new financial instruments such as derivatives. A similar logic prevailed with the Finance Business Act of 2011 meant to empower the Central Bank in the regulation of financial institutions, which also required finance companies and non-state banks to get listed in the CSE, leading to further financialisation. The larger point here is that the regulatory approach of the capital-state nexus does not recognize the crisis prone nature of capitalism and particularly the financial system. What is ignored in reducing the economic crisis to corruption and deregulation is the systemic character of capitalist crisis.
Regime Consolidation and Reckless Destruction
The above analysis may lead one to conclude that political interference, market manipulation, stock market fluctuations and even financial crisis are only business as usual within the capitalist system. Furthermore, that the ruling regimes are free of responsibility for the financial and economic mess. I would argue otherwise. Given that these regimes make major financial gains in this destructive process of financialisation, the regimes should be held responsible. Furthermore, every regime is different, and they fall on a spectrum from liberal bourgeois democracy to militarised authoritarianism and even fascism.
This is where the recent and blatant interventions by the Rajapaksa Regime into the workings of the stock market and the economy more broadly seem to signal a qualitative shift. The financial interests of the Regime are now beginning to trump the larger interests of national and global capital. Furthermore, the political manipulation of a range of institutions from the SEC, the Central Bank and the Treasury are likely to severely damage the institutions responsible for capitalist regulation in Sri Lanka.
Now critics of capitalism may find satisfaction in such reckless moves undermining the capitalist system, but that would be a dangerously short-sighted view. The concentration of financial power benefiting the consolidation of regimes may well put regimes on the course of confrontation with the capitalist logic of accumulation. It may even lead to the collapse of regimes as they dig their own graves. But this process of parasitic accumulation by regimes can lead to the reckless destruction of public institutions and social welfare. Even if authoritarian regimes collapse, there is nothing that assures the emergence of a bourgeois democratic regime or a progressive social welfare regime. The future scenarios include the oligarchic consolidation of the Regime or the emergence of an all together new fascist regime after the collapse of all bourgeois democratic norms. The capitalist system in its diversity is the foundation on which regimes of differing politics are consolidated and those of us with aspirations for more radical forms of democracy should be alert to the consequences of economic crisis.