Sri Lanka’s development dilemmas

A shorter version of this article appeared in Global South Development Magazine.

On May 18, the grace period for a USD 78 million coupon payment expired in Sri Lanka. For the first time in its post-independence history, the island nation defaulted on its foreign debt. The Governor of the Central Bank, Dr Nandalal Weerasinghe, then announced that it would take six months for it to start repaying its creditors. An agreement with the IMF is in the pipeline now, but such an agreement will take another month or two.

From a global perspective, of course, there is nothing unique about Sri Lanka’s crisis. For the country’s 22 million plus population, however, its scale has been unprecedented. While horror stories of Sri Lanka turning into another Lebanon or Zimbabwe have been recycled relentlessly in the press since 2020, in recent months such comparisons have been made more frequently. Inflation, which began peaking last year, hit 30 percent in April and 40 percent in May. While nowhere near Lebanon or Zimbabwe, estimates by certain analysts put Sri Lanka at the top of global inflation indices.

All this has given rise to certain perceptions about the country’s problems. Western and Indian media, in particular, ascribe the crisis to the convulsions of domestic politics. Very few commentators have noted that these problems have been decades in the making, that the government’s ineptitude is more a symptom than a cause, and that external factors have had a say in such issues. The president’s bungling has contributed to these problems, to be sure, but that only shows how complex they are in the first place.

Neoliberal prescriptions

Just how complex, though? To answer that, it is necessary to address the structural causes that neoliberal economists and commentators note as having led to the crisis. These groups underline four factors: the government’s indulgence of unorthodox economic theories, its drive towards organic agriculture, its refusal to go to the IMF, and its insistence on diverting foreign reserves to defending the currency and repaying bondholders.

It must be noted that all these problems are linked to the structural weaknesses of the economy. While there is a consensus on those weaknesses, though, economists and political analysts are divided over what, or who, is to blame for them.

Sri Lanka’s economy has typically been paraded as “export-dependent.” Yet it has been running trade deficits for the last 50 years. Its exports include primary commodities like tea, textiles, and tourism. It also earns remittances from migrant workers, many of whom work at menial jobs in West Asia and effectively subsidise oil-rich economies.

These sectors took a hit from the COVID-19 pandemic. While tourism was on its way up in February, most arrivals were from countries like Russia and Ukraine. Russia’s invasion of Ukraine thus, effectively, dealt a blow to hopes of a long-term revival.

Neoliberal economists, especially those linked to Colombo’s well-funded and well-oiled think-tanks, attribute the country’s problems to excessive money printing and government spending. They see the country’s public sector as bloated, politicised.

To an extent, the latter view is correct. Sri Lanka’s bureaucracy has long been a preferred destination for unemployed graduates and the politically connected. While Gotabaya Rajapaksa came to power implying he would end such a culture, he reversed course two years later and hired 65,000 graduates to the state sector. Ironically enough, it is their peers who are occupying the frontlines of anti-government protests today.

The heterodox view: Industrialisation and local production

Heterodox economists see things differently. According to them, Sri Lanka’s problems have had to do with its failure to industrialise and shift to manufacture.

One of Gotabaya Rajapaksa’s first decisions after coming to power in 2019 was to appoint Dr W. D. Lakshman, a proponent of industrialisation, as the Governor of the Central Bank. Economic analyst Shiran Illanperuma describes Lakshman’s appointment as having been “poorly received by comprador capitalists and economists.” Lakshman earned the wrath of this crowd heavily after he began enacting policies aimed, ostensibly, at stimulating growth, including a series of tax cuts which have now been reversed.

Another of the country’s biggest advocates of industrialisation is Dr Howard Nicholas. A Senior Lecturer in Economics at the International Institute of Social Studies at the Erasmus University of Rotterdam, the Netherlands, Dr Nicholas helped set up the Institute of Policy Studies (IPS), a think-tank that advocated industrialisation, in the late 1980s.

In its first few years, the IPS promoted alternative development strategies. Its advocacy of these strategies was received positively by then president, Ranasinghe Premadasa; based on its recommendations, he spearheaded an ambitious Garment Factory Programme which provided jobs to the rural sector while stimulating growth. This was around the same time Vietnam embarked on export-led industrialisation via its apparel sector.

According to Dr Nicholas, Sri Lanka’s prospects were bright in the 1990s. It even had the potential to surpass Vietnam. Yet with the assassination of Premadasa and the election in 1994 of a regime that modelled itself on Clintonian Third Way Centrist lines, industrialisation was abandoned in favour of privatisation and deregulation.

The new strategy filled the government coffers — for a while. But with the escalation of the civil war and, paradoxically, the elevation of the country to middle-income status in the 2000s, Sri Lanka found it hard to access traditional aid programmes. It was at that juncture that it started moving into international bond markets.

While Western media and think-tanks propagate Chinese debt trap narratives, it has been Sri Lanka’s reliance on bond markets, which constitute a greater proportion of its external debt than does China, that finally brought its economy to its knees.

To be sure, over the years several groups have highlighted these concerns. Yet, they differ as to the strategies and tactics needed to chart a way out of the crisis.

Neoliberal commentators argue that the private sector should take the lead. But Sri Lanka’s private sector is dominated by rentiers. Moreover, the country’s exports are limited to commodities and tourism, along with sectors such as IT. These themselves are dependent heavily on imported raw materials and intermediate capital goods.

According to Harvard University’s Atlas of Economic Complexity, Sri Lanka’s largest exports are in “moderate and low complexity products”, like textiles. This contrasts with Vietnam, where textiles are more highly complex. Sri Lanka is also seeing “a static pattern of export growth.” In other words, while in 1990 it could boast of much potential in garments, by the early 2000s the sector’s prospects had considerably reduced.

To resolve the economic crisis, heterodox economists and analysts thus contend that the government must oversee a radical, socialist strategy, centring on import-substitution and local production: a dreary, dismal prospect for Colombo’s neoliberal coterie.

Leaderless protests and lack of alternatives

Sadly, the protests themselves seem little concerned by these imperatives. As has been pointed out by a leading Sri Lankan journalist in The Diplomat, they remain leaderless. This has exposed them considerably to the risk of manipulation.

Thus, while the protesters have called for Rajapaksa’s resignation and coupled it with demands for the resignation of all parliamentarians, they have also claimed that the latter demand, which delegitimises the country’s legislature and empowers the Executive, was incorporated into the protests by government supporters. Moreover, many of them fault the government for not going to the IMF earlier, failing to realise that the IMF’s track record in the Global South, during the COVID-19 pandemic, has been questionable.

More seriously, none of the protesters seem aware of the causes that led to the crisis in the first place. To quote a leading Sri Lankan commentator on global political economy, they “have not been able to put forward an alternative leadership or a viable road map for the future” and seem “unaware of the global dynamics” of the crisis.

Gotagogama, the site of the protests at Galle Face Green, has played host to several radical activists and artists, many of them linked to Marxist, anarchist, and other anti-government parties and alliances. Yet even these groups have failed to call attention to the wider issues. Those that have, like workers’ collectives and leftist commentators, have been marginalised by neoliberal discourses and populist demands for resignations.

The failures of governance and the road ahead

On the other hand, unfortunately for advocates of industrialisation and alternative development, the government has failed to appreciate the importance of their strategies and recommendations. A combination of corruption, ineptitude, and an eagerness to capitulate has thus put alternative development on the backburner.

The country’s Milk Board is a case in point. A loss-making entity for a long period, the Milk Board finally recorded profits last year. Yet a year or so after this milestone in the island’s public sector, the regime replaced its chairman with a person named as one of the main suspects of an assault on anti-government protesters on May 9. Such actions, multiplied many times over, have only distanced capable individuals from the State.

At one level, all this fits in with South Asia’s legacy of dynastic politics. From India to Bangladesh, the subcontinent is hardly a stranger to family rule. The Rajapaksas are no exception there: despite the recent spurt in anti-government protests, members of the family continue to hold important positions in the country.

However, at another level, the Rajapaksa family has gone well beyond the regional model. As Sri Lanka’s leading political analyst Dr Dayan Jayatilleka has observed, “[t]his is not the Asian phenomenon of familial succession in politics, which is serial and sequential. The contemporary Sri Lankan phenomenon and process is both sequential and simultaneous, vertical and horizontal.” In other words, while family rule in the rest of Asia has served to sustain the political system, in Sri Lanka it has led to its very dismantlement. This includes the Rajapaksas’ deployment of the military, and allegations of militarisation in the north and east of the country: regions which bore the brunt of a 30-year civil war.

Nevertheless, despite all this, it goes without saying that what protesters consider as the government’s failures have been symptoms, rather than causes, of the structural faults underpinning the economy. The government must share the blame for this: in particular, the Rajapaksas’ tendency to surround themselves with yes-men.

Yet beyond this narrative, there is a far more compelling problem: a failure to resolve pressing issues like the island’s dependence on imports and sovereign debt. That in itself is linked to the sprawling global debt crisis, which has extended to other countries. But while not all protesters are oblivious to these issues, many of them are yet to address them fully. So long as debates over the crisis remain dominated by narratives of corruption and political personalities, such problems will go unnoticed and unresolved.

The writer is an international relations analyst, researcher, and columnist based in Sri Lanka who can be reached at udakdev1@gmail.com.

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