Never ending trade deficits and rise in cost of living
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.
This was possible only due to the change in the monetary system that took place globally during the same time, changing from the Bretten woods (Gold Backed) system to Fiat currencies. Fiat currencies can be created out of thin air which means it continues to increase trade deficits and raises the foreign debt pile.
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.180/- in 2019 per US dollar.
Some of the industries of that time have disappeared from Sri Lanka, and agriculture is currently on its knees. People have got used to trading instead as it allows people to make quick money followed by 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 the cost of living. Two-thirds of Sri Lanka’s population earns less than Rs. 500/- a day, denying them of essentials for surviving.
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. These projects have yet to yield any revenue for the country and neither has it reduced the people’s living cost. A popular neo-liberal policy of taxing wage income earners and consumers further reduce the ability to spend on masses people.
These loans pose a massive risk to our economy and our sovereign rights. We can clearly see foreign bondholders already controlling our government, dictating terms on our national policy making, enforcing austerity programs restricting the government’s spending on health, education, infrastructure and much-needed subsidiaries for the people. These international bondholders pose a greater threat for national security and sovereignty as well, this was clearly evident from our government’s reactions aftermath of the terror attack in Sri Lanka. Further, having an economic model which excessively depends on foreign currency loans can trigger a Venezuela type crisis. It clearly demonstrates the power of foreign bondholder. Even in Sri Lanka, we have given away our ports and airports at distress prices to bondholders inclusive of tax holidays leaving us the massive debt to pay.
Financial parasites and oligopolies kill the real economy
Policymakers today, brag about the economic development of the country. Let’s take a look at the most profitable sector of the economy.
Most profitable companies in Sri Lanka are dominated by financial institutions (banks) and the insurance sector. Second, the most profitable sector is taken up by oligopolies (multinational & national giants).
It is important to understand that the finance sector performances should not get added to Gross Domestic Production (GDP). Simply because it does not add value to products or services, instead it takes out value from products and services in the form of interest.
These private companies decide who should get funded at what cost. In a way, it is strange to think that national economic development is in the hands of private companies who are strictly driven only by profits.
Let’s take a closer look at how funding allocation works. Majority of the funding goes to consumption and providing asset purchasing loans to the private sector. In case if you are unaware both of these funding allocations are considered bad debt since it increases private debt without adding value to the GDP.
The next biggest allocation goes to oligopolies, at a very attractive rate as opposed to the small businesses. Generally, oligopolies use these funding to replace jobs with machinery and annihilate arising competition in order to maximize profits. Further, they also get rewarded for this effort by the government in the form of tax breaks, for ruining the economy.
Finally, the least amount of funding is allocated to small businesses which considered as risky by the financial sector. Therefore very high interests are charged from these clients. In case if you are unaware, small businesses in Sri Lanka create over 60% of employment.
All the above factors work hand in hand in order to extract wealth out of masses of people making them poor while making very few people extremely wealthy, which creates a massive income inequality.
These private financial institutes do not lend out anything special, it lends out government own sovereign currency while making massive profits. It is a simple logic to grasp that the government should be able to lend out its own currency. If that is the case, the profit will become our national income.
Either way, I wonder why the government has not taken the necessary steps when it comes to credit creation and or lending by private financial institutions. In fact, the Central Bank can stop this calamity overnight by regulating the financial sector. Unlike other products, credit creation and or lending can be easily monitored and controlled by the Central Bank since financial institutions cannot function itself without the central bank.
Rising private debt and declining consumption
All these coordinated efforts increase the indebtedness of the people, pushing them further into high debt, in turn charging further high interests. Rising private debt at an alarming rate over the last five years has caused the consumption to decline.
Massive amounts of earnings go to debt servicing leaving the people very little to consume. As a society, somebody’s expense creates another person’s income. In other words, declining consumption creates declining income for the society which leads to a lack of effective demand. Private debt deflation has already started in Sri Lanka that is evident by 3% growth in our GDP last year.
Debt deflation drains out the income of the businesses towards the financial sector making businesses vulnerable. This leads to contraction of the businesses which means low wages and loss of jobs. Overall, the economy suffers from spillover effects in the form of declining income which leads to declining consumption and lack of effective demand.
Declining consumption and lack of effective demand create downward pressure on prices regardless of the cost. In economic terms, this is called price deflation. Price deflation is a common syndrome in business to the business sector.
This is a vicious cycle, with every cycle indebtedness of the society increases, debt servicing cost rises, income levels drop, consumption declines and demand declines.
The government seems to have no clue over the causality of the economic downturn. Because current policies will increase more of the same, enabling massive wealth extraction from one class (the masses) to another (wealthy) creating massive income inequality levels in society.
Class struggle
One does not have to be a genius to work out who benefits at who’s expense due to these 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.
First quarter results of this year further indicate that the trend intact has accelerated. Growth in share market in the first quarter is purely based on the impressive results of the financial sector. Clearly indicates how financial parasites are killing the real economy. Financial parasites are detrimental to society. It destroys the real economy which produces the goods and services extracting money out of it leaving nothing for the economy to survive. We live in an economy, where debt is the key ingredient to operate. Regardless of people like it or not, they have to get into these one-sided contracts with these financial monopolies. Nothing is changeable for the customer without being penalized. In contrast, a monopoly credit supplier can change anything at their will. It will not stop just destroying the economy. It will disable the society ruining families and dehumanizing human beings.
It does not have to be this way. The government can easily step in, putting an end to the extortion and making policies favoring voters not the campaign contributors. This is not the Karma of people. This is a systematic way of extracting the wealth of masses to a few individuals or families while destroying the real economy and society.
Inspired by
Economist Michael Hudson
Economist Steve Keen
Economist Randall Wray
Philosopher Karl Marx
Written by Gayantha Dehiwatte