Unpopular opinion: Gota pushed the failing economy down the precipice Perhaps someone had to break it to fix it

Some Parliamentarians are calling for the appointment of a commission of inquiry to hold those responsible for the current economic crisis. The worst-ever economic crisis since independence has already created cascading effects of looming hunger, shortage of lifesaving medicine and crippling public service. Look no further: The primary culprit is none other than President Gotabaya Rajapaksa himself. That would mean that the search for accountability under the current circumstances is elusive. Yet the hard but stubborn fact is that Gotabaya with a series of misguided and ego fuelled decisions turned an otherwise manageable crisis into a national calamity, impoverishing millions of Sri Lankan families and bringing the country’s economy to its breaking point. 

31 May 2022

However, as much as he is the protagonist in the current bout, the genesis of the economic crisis is not his creation.

Sri Lanka throughout its independent history has spent more than it could afford. That practice began soon after the British left the country’s shores. The independent leaders had a knack for short term fixes to postpone serious economic reforms, which anyway have been politically unpalatable.

The much-hyped Sino-Ceylon Rubber-Rice Pact is one of the earliest examples. Faced with declining commodity prices at the end of the Korean War, the then government of Prime Minister Dudley Senanayake was cash strapped to provide two measures of free rice to people, which was a wartime measure that the British introduced.  But the native leaders, driven by electoral considerations continued with the rice subsidy, despite it being a wasteful doll out. So much so, that the government asked for a US$ 50 million loan from the US to finance the rice subsidy. When that request was rejected, the government turned to Communist China which had then been shunned by the US and the West, and inked the trade pact to barter Sri Lankan rubber for the Chinese rice. If anything, that was an early blow for the country’s industrialization as the government shipped raw rubber to feed the population that had been procreating at a rate of modern day Niger. 

The Sri Lankan economy had been rotting for decades. The first three decades since independence, which some Sri Lankans consider good times, were, in fact, the lost decades. Good times ended when Sri Lanka run out of economic fortune that the departed British left behind, and squandered relative advantage vis a vis other countries it enjoyed at the independence.

Mahinda Rajapaksa is blamed for spending Chinese loans on vestige projects, some of which are indeed wasteful investments. But, MR is also the first leader in the independent Sri Lanka, who made a decisive effort to address a long-held infrastructure backlog.  It would have been better if his administration was less corrupt and more transparent. But again, from Suharto to South East Asia’s development dictatorships, the governments that leapfrog their economies were equally corrupt and lacking in transparency. That was however in a different era. MR is also blamed for the declining share of industrial output or exports as a percentage of the GDP. But, again, Sri Lanka’s export basket had been stagnating since 1994, long before he became the president. The current economic crisis is the extreme manifestation of collective follies and indifference by a succession of political leaderships.  Sri Lankan economy had been failing, and underperforming, even though it clocked 6-7% growth in the first half of the last decade. 

It could have gone on that way for some more time, had it not been for the economic shock of Covid, and Gotabaya’s serial follies. With his idiosyncratic ban on chemical fertilizer and emptying the foreign reserves to pay off the sovereign debt and defend the Rupee, Gotabaya pushed the already failing Sri Lankan economy down the precipice. (Rani Jayamaha, a former member of the monetary board says the government spent US$ 5.5 billion of foreign reserves to maintain the Rupee at 200-203 to US$). In a political system where accountability of the holders of political office matters, he would have been held accountable for the destruction he unleashed on the country.

However, there is another point. Unbeknownst to him, probably he might have brought the Sri Lankans to the realization that without economic (and political) reforms, they would perish,
That itself is a rare achievement. No leader had managed to do that, perhaps except for Sirimavo Bandaranaike. Without her disastrous Statist economic experiment in 1970-77, her successor JR Jayawardene would not have been able to introduce the first ever serious economic reforms in Sri Lankan history, leading to a free market economy, without facing any real opposition.

 

Sri Lanka throughout its independent history has spent more than it could afford. That practice began soon after the British left the country’s shores. The independent leaders had a knack for short term fixes to postpone serious economic reforms, which anyway have been politically unpalatable

 Sri Lanka is a difficult country for economic reforms. Sri Lankans have repeatedly protested against their interests. Each free trade agreement and many development projects have been abandoned to appease the protesters. Private-Public Partnerships are considered as selling out of the nation’s wealth and strategic nerve centres. Serious donor-funded projects are labelled as foreign conspiracies. Free trade agreements are condemned as unpatriotic. In the meanwhile, two to three hundred thousand Sri Lankans are leaving the country to eke a living abroad, often doing gruelling menial jobs as the local economy is stagnated by too much protectionism.
Countries rarely change their course on their own. When they do so, they do because of exogenous shocks, which are generally a combination of unexpected outcomes, like Covid and accumulated rot of their previous mismanagement of the economy. India’s economic reforms in 1991, after the country ran through all its foreign reserves and was forced to ship its gold to London to secure a loan is one such instance. Survival of the economy and the state itself compelled the Indian lawmakers to dismantle licence Raj and adopt liberal economic reforms which turbocharged the Indian economy for the next three decades. Until then, teeming masses of Indians lived hand to mouth, while their bureaucrats mouthed the superiority of central planning over Capitalism.
You see a gradual change in Sri Lankan mass opinion as well along these lines. The usual culprits who oppose anything associated with economic reforms are qualifying their stance. IMF has suddenly become the patron saint. Politicians are openly advocating for the restructuring of loss-making SOEs. An IMF deal or any substantial assistance from foreign countries would come with conditions for serious economic reforms. No one wants to pump money into a bottomless pit. 

Sri Lankans perhaps for the first time in history are not asking for free goodies or subsidised fuel. But an end to queues. The public is much less enamoured with the usual naysayers who oppose every attempt at economic reforms. The gruelling hardships of the economic crisis have also dawned on them with a degree of economic realism.

Nonetheless, economic reforms that are needed to place the country on a sound footing for future economic take off would be painful. But Sri Lankans had already been through a good part of the crisis. If it gets worse, it is less due to the reforms, but due to the lack of it.

Alberto Fujimori, the right-leaning former president of Peru described a series of economic reforms under his presidency, taken suddenly and at tremendous social displacement as economic shock therapy. As much as it caused immediate pain, the economy of Peru leapfrogged thanks to pro-market reforms, becoming one of the economic success stories in South America.

Gotabaya Rajapaksa already had unleashed his ‘shock therapy for no reason. However, it could be the opening for meaningful structural reforms, which are long overdue. You can blame Gota for the current economic pain. But, if Sri Lanka misses this opportunity to reform, Sri Lankans can only blame themselves.

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