I am not surprised by the current economic crisis in Sri Lanka, but I am very sad about it. It could have been avoided. I’m sad about that, because we had enough time to make corrections and change direction to avoid it; but we didn’t, because our priorities were different.
Learning from crises
There is something I have learned about economic crises: “Crises build up slowly, but collapse is instantaneous”. I started learning about crises since the time of the US financial crisis in 2008. Amazingly, I learned that “it happens” even before it happened! As it inspired me to learn more about economic crises, I also collected information on countries in crisis – in particular Greece, Venezuela and Lebanon – countries that faced severe economic crises over the past 10 years.
Greece’s fate, however, was reversed with tough economic policies and with the support of its saviors – the countries of the European Union, the European Central Bank and the International Monetary Fund; they showed up to inject funds preventing it from collapsing and defaulting on its debt. But even after 10 years, Greece has still not returned to normal although it now appears to be bankruptcy free.
Venezuela and Lebanon continue to sink into their economic crises. It’s quite strange for Venezuela which is a rich country and a country with significant proven oil deposits in the world. It is an economic mistake to think that owning resources such as oil fields is the path to prosperity; it is because resources can be a curse rather than a blessing for a nation!
From Venezuela, it was clear that economic crises can trigger political crises, social crises and humanitarian crises. In the early stages of crises, there will be supply shortages of basic necessities, rapid price increases and rapid depreciation of exchange rates. Then it develops into other forms of crises; political and social unrest; large-scale crime, theft and looting linked to poverty; millions of people are leaving the country. Venezuela has been through all of this.
Interestingly, Lebanon is a country that has many parallels with Sri Lanka. Historically, while Sri Lanka was known to be one of the most prosperous countries in Asia, Lebanon was also among the most prosperous countries in its region, which even earned it a nickname of “Switzerland in the Middle”. East”. Then Sri Lanka was caught in a 30-year conflict, as was Lebanon, which also faced a 30-year conflict. Once the conflict was over, tourism and workers’ remittances brought foreign currencies to both countries, which were caught in heavy borrowing; then the crisis!
By the way, in 2020 Lebanon experienced a massive explosion for which political authorities and high-ranking bureaucrats were accused of negligence. The Sri Lankan analog was that here too there was a terrorist attack which led to similar protests blaming the authorities and demanding justice.
After all, Sri Lanka has also been caught in an unprecedented economic crisis, being the first country in Asia to collapse amid the COVID-19 problem. We isolate problems according to our own preferences, as the “cause of the crisis”. Some would try to interpret it as a result of the pandemic, while others would see it as the result of tax cuts in 2019 or the ban on fertilizers in 2020.
It is quite common to see the problem as the result of bribery and corruption as well as theft of public money by politicians. Educated young people whose aspirations have been demolished and futures lost in the crisis would like to see more of it as a result of these issues. Some would like to place a strong emphasis on borrowing as well as non-economic ways of using borrowed money, including corrupt practices related to borrowed money.
At the same time, some analysts would like to see the problem linked to seven decades of economic journey after independence in 1948. According to another analysis, the current economic crisis is a post-1977 free market problem or a neo-liberal problem, thinking that the Sri Lankan political system after 1977 was a market economy or a neo-liberal economy.
I do not, however, deny the importance of all sensible and relevant explanations; they all played a role here. While we can attribute the crisis to one or more of the above factors, we can still recognize one important thing missing from these analyzes – the role of the public organized under various political groups, pressure groups and interest groups. In this sense, we may appear as guardian angels in the midst of the crisis, but if we look back on our behavior, we also played the role of Satan in contributing to the crisis!
Let me explain it, even if it sounds like a controversial statement. Before that, however, I must explain what explains the ultimate cause of the crisis. If we go deeper into the analysis of the source of the crisis, we end up with the problem of “spending beyond our capacity” as a nation.
The problem of “spending beyond capacity” has two sides, while it can be seen through two accounts. The two sides are the expenditure side and the capacity side; this means that increased expenditure or reduced capacity or both would be a cause of the problem. The two accounts are internal finance (state budget) and external finance (balance of payments). In either account, when there is overspending beyond capacity, it translates directly into borrowing – both domestic borrowing and foreign borrowing, resulting in debt accumulation. .
I’ve said it before, crises build slowly and fall instantly. Crises develop slowly when a nation continues to spend too much beyond its capacity, whether it is internal financing or external financing. Have we, as members of the public, already contributed to building this crisis over the years, influencing either increased spending or reduced capacity?
This is a valid question for all of us. We are not individuals in society; we are part of influential groups in society – political parties, trade unions, student associations, professional associations, business associations or any interest group linked to formal or informal professional activity.
Our role in the crisis
There is no doubt that all of us have played a major role in shaping our spending beyond our capabilities. Let me elaborate on a few things that I remember. We wanted the government to spend on us beyond its capacity; some of us, of course, have stolen public money in the form of misusing public services and resources for our own gain. At the same time, we like to hide our wealth and income to avoid taxes, which has led to a decrease in ability.
In the case of external financing, we were the barrier to investment and businesses that would otherwise generate capacity-enhancing foreign exchange; we even got governments to shut down some of the businesses that would have become currency-earning businesses and tax-paying businesses. We have never protested against foreign borrowing, but we have protested against foreign investment and foreign investors.
While politicians and governments have spoken about the crisis, they have also done so with the public. Once the crisis has built up over the years, there needs to be a trigger for the collapse – an external shock. In our case, that trigger was the pandemic, followed by chaotic global markets.
The way out of the crisis also involves entering; we need to tackle its fundamental problem of spending beyond its capacity. It is a painful journey as we need to reduce expenditures and improve internal financing and external financing capacities.
(The author is a professor of economics at the University of Colombo and can be reached at [email protected] and follow @SirimalAshoka on Twitter).
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