GAYANTHA DEHIWATTE/ 02 February 2024 / Money Capital / Political Economy
Executive Summery
Our country, Sri Lanka, our economy, society and the environment is being trapped by the
economic parasites since 1978. They are using free market ideology, if not neoliberalism as
their propaganda machine. As at today, most sectors have been captured or in the process of
being captured by them, namely finance, health, education, energy, media, agriculture and
land to name a few. By now it is clearly visible that the entire state is in their back pocket. As
a result, very few individuals are making decisions to make excessive profit for themselves,
disregarding the entire country, economy, environment and the society. Rest of the
population are gradually being enslaved by this super-rich class.
They work as parasites, getting in to the host animal (economy) and extracting unearned
income in various forms such as interest, rent, charges, fees, commission and paralyzing the
economy. The rules and regulations are being made thick and fast, helping the rich to siphon
out money, wealth, land and other economic centers of the economy. They are looting not
only public wealth but also the private wealth of the people. This grand theft has been
legalized and even applauded as in achievement.
As a result, the state is on debt bondage to foreign bond holders. Locally, majority of the
private sector is on debt bondage to local bond holders. Inequality has risen sharply, number
of beggars are sky rocketing, over 60% of the population are indebted and middle class is
disappearing by the day.
Table of Contents
Executive Summery
1.0 Introduction
2.0 History
3.0 Income Inequality Trend in Sri Lanka
4.0 Consequence of Washington Consensus
5.0 Neo Liberal Policies and Foreign Debt Conundrum
6.0 Recommendations
7.0 Conclusion
8.0 References
1.0 Introduction
Not so long-ago, Sri Lanka was praised by the World Bank for its progress in reducing
poverty and inequality, and also in sharing prosperity among less well off (financially
disadvantaged). World Bank went on to claim that Sri Lanka has almost eliminated extreme
poverty in their report which was published in 2021. But the Household Income and
Expenditure survey in 2019 which was released recently paint a complete opposite picture,
indicating a dramatic increment in poverty headcount. Similarly, it indicates the income and
inequality gap continues to get widen to a historical high level. Even though poverty rates
seem to be going down between 2006 and 2016, it was short lived. Poverty levels in Sri
Lanka have seen a significant increment from 2016. Poverty headcount ratio was 14.3% in
2019 compared to 4.1% in 2016. This is only the tip of the ice berg, before the collapse of the
exchange rate. Rupee was approximately 180 per USD at the time, currently rupee is trading
below 370 per USD. It is ironic for the World Bank to claim Sri Lankan economy is
progressing just before the country declared bankruptcy (in 2021). That itself shows the
catastrophic failure of neo classical theorizing.
2.0 History
Until 1978, Sri Lanka was predominantly an agriculture based economy. During the 1970’s
industrialization started picking up due to government led investments and bilateral
investments. Despite of government investments, the Sri Lankan economy was going through
high inflection, product scarcity due to the supply side of shock caused by the oil embargo
imposed by the OPEC countries. Sri Lanka was not alone, countries around the world were
going through rapid hikes in commodity prices as well due to the oil crisis. In the early
1970’s the world could witness a paradigm shift in global monitory history, where United
States terminating convertibility of US dollar to gold, bringing the Bretton Woods system to
an end unilaterally and effectively making the US dollar a fiat currency. Subsequently, USA
raised interest to encourage dollar inflow back to United States to strengthen the value of the
fiat dollar.
High interest and high inflation gave an ideal breeding ground to the monetarism philosophy
by Milton Friedman, later got popularized as free-market capitalism. Prime Minister
Margaret Thatcher of the United Kingdom and President Ronald Reagan of the United States
were great ambassadors of the free market ideology in late 1970’s and early 1980’s.
Institutions such as IMF, World Bank and the World Trade Organization were instrumental in
influencing most countries to adapt laissez-faire ideology which later coined as Washington
Consensus.
Prior to 1978, Sri Lanka was not indebted to foreign countries due to the strict trade controls,
capital controls and policies geared towards a production economy. However, in 1978 the
victorious president of United National Party embraced the free market ideology, opening the
economy overnight. Sri Lankan rupee was depreciated 100% within 24 hours, opening a new
chapter in Sri Lankan history. Liberalization of trade polices caused fast deindustrialization in
the economy which was only in the infant stage to begin with. Subsequent liberalization of the financial sector has powered consumerism, asset price inflation and a foreign debt pile
more than the size of the economy, an indebted local population and income and wealth
inequality.
3.0 Income Inequality Trend in Sri Lanka
The Department of Census and Statistics reports income inequality utilizing the following
measurements;
- The Gini index (Gini coefficient)
- The shares of aggregate household income by quintiles and deciles
- The quintile dispersion Ratio
The Gini index is the main statistical measure of income inequality ranging from 0.0 to 1.0,
where 0 indicates perfect equality and 1 indicates maximum inequality. Gini index measures
the amount that any two income values differ, on average relative to mean Income.
The national value of the Gini coefficient of household income is 0.46 in 2019 which shows
an increase from 0.45 reported in 2016. In 2019 at the sector level Gini coefficients are 0.49,
0.44 and 0.36 in the Urban, Rural and Estate sectors respectively.
Figure 02 shows the share of household income by decile in 2019. A decile is one of ten
equal groups ranked by income from lowest to highest so that ten per cent of all households
are in each group. The lowest decile received 1.5 per cent of aggregate household income
while the households in the top ten per cent that is in the highest decile received 36.2 per cent
of aggregate household income.
Table 06 shows the share of household income by quintile and the quintile dispersion ratio of
household income based on HIES 2019 and 2016. A quintile is one of five equal groups
ranked by the income of households from lowest to highest. In each quintile has 20 per cent
of all households.
The quintile dispersion ratio means household income of 5th quintile/ 1st quintile takes the
ratio of the top rank 20 per cent to the bottom 20 per cent households in household income
distribution. In 2019, The quintile dispersion ratio is 11.2, meaning that households at the top
20 had incomes about eleven times in the incomes of households at the bottom 20 per cent.
The ratio increased by 0.6 points from 2016 to 2019.
The red line indicates the share of income in the top 1% and the blue line indicates the share
of income in the bottom 50%. These two lines are almost mirror images of one another since 1995. The pattern goes on to indicate the long-term trend in income inequality and income
extraction from the bottom 50% to the top 1%. The above pattern also gives clear evidence
against neoclassical theory of law, diminishing marginal utility. There is no slowing down the
collection or extraction of income by the top 1% from the bottom 50%, hence it is clear these
theories are built on fake assumptions and have no whatsoever representation of the real
world.
4.0 Consequence of Washington Consensus
The introduction of the neo-liberal policies from the late 70’s imports have increased
dramatically and today we import more than twice the amount collected from exports,
workers remittance and tourism. What this means is that it continues to build a trade deficit
and we owe foreigners in foreign currency. Mainly, these twin factors have led the rupee to
depreciate drastically. At the same time rupee has collapsed from approximately Rs.8/- in
1975 to Rs.370/- in 2022 per us dollar.
Some of the industries of that time have disappeared from Sri Lanka, and we currently see
that agriculture is on its knees. People have got used to trading instead as it allows people to
make quick money with minimum risk. Trading for over 40 years has put the economy in life
support and has resulted in the rupee depreciation and a dramatic rise in cost of living. Two
thirds of Sri Lanka’s population earn less than Rs. 500/- ($1.35) a day, denying them of
essentials for surviving.
Sri Lanka is a country which goes through a massive essential product scarcity caused by the
balance of payment crisis. The general public has to wait in lengthy queues to purchase
essential items and in many cases the queues could last few days.
Scarcity of essential items, specially gas and oil has brought the country to its knees. Sadly, it
brings back the memories of covid-19 lockdown periods.
Most small businesses are forced to close down their operations. Unemployment is
skyrocketing. The passport office cannot meet the demand of people who are trying to flee the
country.
Government is barely managing to provide electricity even with several daily power cuts.
Government functionality has been paralyzed and limited to operate only few days a week.
Most people find it difficult to consume three meals daily and levels of malnourishment in kids
are rapidly rising.
When our country is in this dire state, our central bank has increased their interest rates over
30%. It is imposing this heavy burden on people who had to go through severe economic
hardship due to Easter attacks and covid-19 lockdowns. These people have barely come out of
moratoriums with increased level of indebtedness. Effectively, Sri Lankan people have to pay
sky-high interest for the used-up capital and extraordinary high rates for the unpaid interest
during the moratorium period.
If imposing extremely high interest rates isthe right way to tame inflation in an economy which
barely functions with a massive product scarcity, why bother offering moratoriums? This is an
illogical mantra taken out from the neoliberal text book and a failed theoretical attempt
globally.
The governor of central bank claims that he has raised the interest to save poor people from
raising inflation. Would you charge more from the poor to save them from rising costs?
This joker has completely ignored the massive short supply of essential items in the country.
When the products are not available for 21 million people to consume, prices are bound to rise.
That cannot be and will not be tamed by raising interest rates. That will make the situation
worst by paving the way for a complete economic collapse.
Even though government debt grabs all the headlines, private debt is larger and has a greater
impact on the economic outcomes. Simply because the government is able to achieve deficit
spending and private businesses and households are unable to the same. Massive amounts of
earnings goes to debt servicing, leaving the people very little to consume or to invest.
Unfortunately, the current economic crisis struck our country at a time when private debt has
grown disproportionately to private income levels. All these coordinated efforts, especially by
the central bank, isincrease the level of indebtedness of masses of people, pushing them further
in to high debt. Private debt is rising at alarming rates, threatening the very existence of
businesses and households. It is true that the current central bank strategies favour the bankers
by allowing extremely high income at the cost of the general public. In case if you are not
aware, during the past covid-19 period, the banking sector made record profits. Simply because
they were allowed to charge interest on interest on helpless people faced with enforced
lockdowns. I am certain that the central bank will defend their strategies saying that they are
raising the interest rates to save the poor depositors. But we all know that the deposits held by
poor people are negligible when compared to the massive deposit base of the super-rich.
Besides, smaller depositors can be easily protected by giving a deposit guarantee. It is clear,
the government policies are the reason for ongoing income and wealth extraction of masses of
people making them poor, while making very few people extremely wealthy creating massive
income and wealth inequality in the society.
5.0 Neo Liberal Policies and Foreign Debt Conundrum
Foreign Debt is another product of neo liberal economic policies. Regardless of the parties,
all governments after 1978 opted to go for loans denominated by foreign currencies for
infrastructure projects, funding for imports and funding for previous loan repayments. Under
successive governments, massive amounts of foreign loans were taken for unsuccessful
projects by our corrupted governments. These projects have yet to yield any revenue for the
country and neither has it reduced the people’s living cost. These loans pose a massive risk to
our economic and our sovereign rights. We can clearly see foreign bond holders already
controlling our bankrupt puppet government, dictating terms on our national policy making,
enforcing austerity programs restricting government’s spending on health, education,
infrastructure and much needed subsidiaries for the people. IMF austerity measures are
currently being imposed on Sri Lanka namely increasing VAT, increasing interest, increasing
fuel, increasing electricity, increasing water and decreasing income tax threshold of wage
earners to broaden the tax base. AS per their conditions we will have to privatize our public
assets or sell off our state-owned economic monopolies such as public infrastructure and
utilities to creditors. Further opening up the economy will only lead to further outflow of
dollars in the form of revenue repatriation. These austerity measures are being imposed on
people who have been economically suffering since 2019 Easter attack. These measures will
further cripple the economy, creating more and more income and wealth inequality.
6.0 Recommendations
- Wealth Tax: Tax reforms, shifting tax burden from consumer, wage income earner to
wealthy. Remove or reduce indirect taxes. Tax holiday for wage earners up to a
genuinely reasonable level. Increase taxes or limit earnings of financial sector and
monopolies. Introduce taxes for technological giants who have oligopolies in the
digital economy. Budget cuts may lead the economy into a trap no matter when cuts
take place or how judiciously they are made. Government should continue to spend
on the economic growth regardless of the tax revenue based on a target rate,
meaning a specific unemployment rate and/or growth rate. Sri Lankan sovereign
currency has no technical constrains for deficit spending. - Automatic Stabilizer: The “fiscal trap” must be further moderated or perhaps,
eliminated. This includes long term fiscal solutions; the government should seek to
use a more comprehensive and rational combination of policy rules and/or
automatic stabilizers to help ensure that spending is increased when needed and used
in positive ways. This is an approach that Minsky (2008 [1986]) and other
Keynesians have supported for many years. These measures would work on the
principle of increasing the deficit when capacity utilization, employment growth,
economic growth or some similar economic indicator was below par, and vice versa
(countercyclical assistance for the state and private sector). - Socialist Policies “Job Guarantee”: We would support increased programmatic
spending aimed at solving key problems, such as, domestic infrastructure and domestic
industries, as well as welfare spending in reference to, free health, free education, transfer
payments to low income earners and a job guarantee program. We would hope that a large
portion of the new spending would be used in ways that increased employment, not
by the invisible hand or perfect markets as prescribed by the neoclassical mythology,
but by public sector hiring. The renewed vigor seen in many heterodox economic
traditions offers a better hope for effective policies that will steer clear of the fiscal trap
and put the economy back on a path to recovery. - Reduce Inequality “Debt Forgiveness”: We propose government spending to deal with the debt crisis by forgiving debts as was done in ancient times to reset the economy. Our basic premise is that debts that cannot be paid won’t be. Widespread foreclosures and evictions would further worsen the distribution of income and wealth, and then further constrain the ability of the economy and the society to sustain. Writing debt down to levels that can be serviced would clear the decks for a real recovery. Income that would be siphoned off in debt service would instead be available for the wellbeing of the society.
- Protectionism: We support protective tariffs to support local industries and to create
an independent national economy using a nationalistic trade strategy. Economic
history suggests, economic powerhouses such as USA, UK, China, Japan and
Germany have built up their economies through protectionism. Protective tariffs cause
to reduce imports, hence reducing indebtedness of the economy. - Monitory Sovereignty: We strictly oppose foreign credits (loans) for domestic
spending. Domestic sovereign currency can be infused to the economy using keyboard
entries. In this context we would not need foreign capital inflows to extract interest,
profits and finally our sovereignty. Sri Lanka should avoid indebting its economy for
foreign creditors as return for electronic “computer key board credit”. - Central Planning/ Guidance: We propose money creation to be nationalized, hence
to nationalize the banking system. Money is not a commodity, money is a debt and a
creature of the state. Money creation should only be for productive purposes for the
wellbeing of the society, economy and the environment. Money creation for importing
consumption goods and asset purchases should be strictly prohibited. - Low cost of Living: We propose to priorities government spending programs on
infrastructure development, skill development and healthcare improvement to reduce
cost of living in Sri Lanka. Low cost of production will attract natural export
opportunities for domestic producers increasing our competitiveness in global
markets. - Green Economy: We propose substantial increment in government spending on
renewable energy, environment protection schemes and reforestation. Incentivize
private sector via tax and other lucrative concession in order to get them to
contributing for a green economy. These measures will help us to overcome the
challenges poses by the climate changes. - Financial Assets: Make available risk-free financial assets such as government bonds,
treasury bills and other saving instruments for EPF/ETF funds and pensioners. Special
saving vehicles with healthy return for categories who deserves and risk-free
investment.
7.0 Conclusion
The rise of neo liberalism has made our country indebted to foreigners. It has destroyed our
industry, agriculture and local entrepreneurship. It has made us dependent on foreign imports.
Rising foreign debt servicing cost and import cost has made our government enslaved to
foreign bondholders.
As a debtor nation, we have started giving away our ports, our sea and many important public
asserts to creditor nations as a country. By now, our sovereignty is at risk at the hands of
these powerful bondholders.
Further, popular neo liberal policy of taxing wage income earners and consumers further
reduce the ability to spend for masses people. It has financialized our economy to a stage
where entire private sector also in debt bondage to financial institutions. Currently our private
sector debt has grown disproportionately to private sector income levels. High proportionate
of private sector income goes to debt servicing leaving very little for masses for consumption.
All the above factors work hand in hand in order to extract wealth out of masses of people
making them poor, while a few are becoming wealthy beyond their wildest dreams creating
massive income and wealth inequality.
One does not have to be a genius to work out who benefits at whose expense from these neo
liberal policies. While masses are oppressed by these austerity programs in the form of high
interest and high turnover taxes, wealth, flows to a few economic parasites who own the
oligopolies and financial Institutions.
Our objective is to come up with a set of economic and public policies suitable for a debtor
nation like Sri Lanka, to stop ongoing wealth extraction from the working class and to reduce
inequality in our society.
8.0 Reference List
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