{"id":229624,"date":"2022-10-23T02:08:19","date_gmt":"2022-10-22T20:38:19","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=229624"},"modified":"2022-10-31T01:35:40","modified_gmt":"2022-10-30T20:05:40","slug":"how-lanka-can-benefit-from-a-global-recession","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/how-lanka-can-benefit-from-a-global-recession\/","title":{"rendered":"How Lanka Can Benefit From A Global Recession"},"content":{"rendered":"

By Kumar David<\/a> –<\/strong><\/span><\/p>\n

\"\"<\/a>

Prof. Kumar David<\/p><\/div>\n

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\u2019s 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 \u201cRisk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes\u201d says:\u00a0<\/span><\/p>\n

START ABEVIATED QUOTE: \u201cAs 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\u2014a 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\u2014 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 \u2014 a 0.4% contraction per capita which meets the technical definition of a global recession.<\/p>\n

\u201cGlobal 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.<\/p>\n

\u201cThe 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\u201d. END ABREVIATED QUOTE.\u00a0<\/span><\/p>\n

These extracts from the World Bank (WB) press-release are heavily abbreviated.\u00a0<\/span><\/p>\n

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.<\/p>\n

What I have said so far is not new to those who track economic trends. It is background data for today\u2019s 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.\u00a0<\/span><\/p>\n

It\u2019s 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, \u201celection deniers\u201d, 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 \u201cAmerican Rescue Plan<\/a><\/span>\u201d\u00a0and\u00a0 <\/span>$370 billion \u201cThe Inflation Reduction Act\u201d 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).\u00a0<\/span><\/p>\n

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\u2019s 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\u2019s 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.<\/p>\n

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\u2019s old left, broad left, Maoist and Fidel-loyalist left is to pour scorn on Ranil\u2019s 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\u2019s 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.<\/p>\n

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.\u00a0 <\/span>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.\u00a0<\/span><\/p>\n

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\u2019s 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.<\/p>\n

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!\u00a0<\/span><\/p>\n

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.<\/p>\n

One last point before I signoff is a Briefing in the Economist<\/i> of October 15 entitled \u2018Mothering Invention\u2019 about the role of the state in directing long-term economic policy. Dirigisme<\/i> 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<\/i> article provides considerable insight.<\/p>\n","protected":false},"excerpt":{"rendered":"

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