The Economic Crisis in Sri Lanka
i received an email the other day asking me to do a video on the economic crisis happening right now in sri lanka and shamefully the first thing i thought was wait there's a crisis current events have sucked the air out of other things going on around the world as it turns out this is one of them sri lanka's economic development has been closely studied for decades these recent events are adding a bitter new page to its history in this video we're going to look at the roots and causes of the ongoing economic crisis in sri lanka but first the asian army patreon i'll make it quick early access members get to see new videos and selected references for them before their release in the public i get a lot of requests for future videos but occasionally i've already done those topics they're just waiting to be released it's not a lot of money and i appreciate the support thanks and on with the show sri lanka once known as salon had been a british colony for over 150 years when the country received its independence in 1948 it had a lot going for it the island held a strategic trading port location and it had suffered no infrastructure damage from world war ii in terms of education and population health the country ranked very well too and in terms of political governance sri lanka was a democracy with the universal suffrage one that others pointed to as a model to follow the former british colony also inherited a highly productive export economy sri lankan plantations specialized in tea rubber and coconuts in 1950 sri lanka's gnp adjusted for purchasing power parity was higher than that of india pakistan thailand and even south korea by 1960 the country's per capita gross income of 141 dollars was still much higher than thailand's 96 dollars in indonesia's 50 and on par with south korea's 156. an adviser to the sri lankan government in the late 1950s wrote that the country's single greatest challenge would be maintaining its current high living standards across a growing population the development plan at the time focused on furthering the country's colonial-era successes and expanding its agricultural exports mostly through infrastructure to improve the growing conditions in sri lanka's less populated dry zones but this rosy picture hid a dangerous mix of flammable ingredients and a number of fateful policy choices and uncontrollable events would ignite them ending this early optimism sri lanka has long been a multi-ethnic nation dominated by two groups the sinhalese and the tamils the sinhalese are majority buddhists and speak sinhala the tamils practice hinduism and speak tamil these two ethnic groups are concentrated in separate parts of the nation the sinhalese about 75 percent of the population live in the south west and north central provinces the tamils constituting about 13 percent of the country's population live in the northern and eastern provinces their relations have historically been tense with devastating consequences but at the start of the 20th century the two groups largely set aside their differences to struggle for independence from the british the reality of the sri lankan constitution in 1948 was that it was not based on broad-based consensus between the various ethnicities but rather through discussions between the sinhalese elites and the colonial administrators as a result the sri lankan constitution failed to take into account the concerns of the ethnic minorities the tamil's objections were treated as obstructions in quote unquote ceylon's march to freedom half of the tamil legislative council did not agree to the constitution and the other half were voted out the next year the first sri lankan general election brought a conservative party the unp to power they faced challenges from a trotskyite left-wing party the lanka sama samaja party inequalities between the people and the rise of communism led to the rising popularity of leftist ideologies to contain them the unp implemented expensive food subsidies and passed legislation to disenfranchise indian tamils these popular food subsidies were paid for by booming commodity prices from world war ii and the korean war but when the korean war ended i guess in 1953 commodity export revenues crashed and the government found itself having to raise rice prices and other public services the country's people rose up in protests a traumatic event referred to as the heartl it forced the resignation of the prime minister and led to the unp losing the general election three years later in 1956. this new government signaled a turn for the worse in relations between the sinhalese and tamil communities ethnic harmony was not a priority a fateful decision various political parties abandoned their multi-ethnic stance sinhalese was instituted as the country's only official language on the economic front the government imposed import restrictions on consumer goods to conserve its limited foreign currency the state then decided to establish monopolies to fulfill those import demands domestically in other words import substitution there is a place for such policies the east asian giants taiwan south korea and japan implemented them to help industrialize their economy for example in the 1970s taiwan and south korea launched import substitution policies targeting the heavy and specialty chemical industries these laid the groundwork for the two economies future domestic success but they have to be done in the right context and as part of a larger economic strategy whole textbooks have been written about such policies failing in south america taiwan and south korea themselves tried import substitution 20 years earlier in the 1950s targeting textiles and fertilizers to conserve foreign exchange and protect domestic industry and in both cases the policies failed to achieve the targeted growth rates foreign exchange reserves did not increase while close relations between businessmen and the government led to corruption so without needed reforms these policies can be damaging in sri lanka wide-ranging import substitution policies led to inefficiencies as the government tried to do everything themselves their domestic products cost more has import demand simply shifted from imported finished goods to imported raw materials price shocks in raw goods like during the oil crises of the 1970s thus filtered down to the finished goods by the 1970s sri lanka had turned from a relatively open market-based economy into one of the most closed non-communist economies in the world economic growth dramatically slowed and the country's development fell behind that of its peers by 1977 sri lankan per capita income was two hundred dollars up just sixty dollars from 1960 17 years earlier to compare south korea per capita income was eight hundred and twenty dollars malaysia nine hundred and thirty dollars thailand four hundred and twenty dollars and indonesia three hundred dollars sri lanka's plantation economy its crown jewel fell into disarray the government had been threatening to nationalize these british owned assets ever since 1958 so the foreign company stopped investing in them and they declined until the actual event occurred in the 1970s the sector continued to decline with operations overseen by six ministries with overlapping powers and conflicting concerns the government became the country's employer of last resort doubling its gdp share from 1961 and providing over 50 percent of the country's manufacturing jobs this was unfortunate because higher education exam policies public sector employment and more favored the sinhalese elites this unequal scenario bred radical ideologies amongst the minority tamil youth the seleucus economic growth finally built up the political will to change this welfare state-like status quo 1977 saw a change in government and an attempt at reform and opening up the new regime wanted to attract foreign investors and establish a labor-intensive export development economy they established free trade zones built in guarantees against nationalization of assets without compensation devalued the currency and attempted to limit state participation into the wider economy the country even managed to reduce the rice subsidy long a taboo subject in sri lankan politics this was a prime window of opportunity sri lanka was trying to open up before china and many other asian nations could the international community praised the country's turn in direction and sent unprecedented amounts of foreign aid growth surged from 2.9 percent a year before 1977 to six percent in a brief five-year period from 1977 to 1983. garment exports surged from 2 to 16 of the economy's total exports tourists more than doubled from 1.9 million in 1978 to 4 million in 1982 nearly tripling the amount of foreign exchange however that same 1977 election had also swept the tamils into power on a platform calling for an independent tamil state and unfortunately the government did not properly calibrate for the initial downside effects of their liberalization drive its effects hit the poorest members of the community hardest with inflation the removal of food subsidies and the lifting of trade protections on certain farmed goods the government failed to properly use the money it got from subsidies and foreign aid money was wastefully funneled to loss-making state-owned zombie companies to keep them alive and mega-infrastructure projects like a brand new capital and a house building program did not quite make sense things had already been precarious but the worsening conditions set off a wildfire the 1977 government had long shown authoritarian tendencies their heavy-handed tactics against tamil protests set off a cycle of violence and retaliation that spiraled out of control the tamil's militant wings consolidated into an organization called the ltte then in july 1983 an event referred to as black july an ltte attack on the security forces led to a brutal anti-tamil program across much of the country thus the country fell into chaos supported by donations from the tamil diaspora around the world the ltte established a de facto state in the north and eastern provinces of the country the brutal war saw several pauses but would not finally end until 2009 despite the civil war the government continued their opening up with an eye towards building a labor-intensive export industry following the standard playbook set down by other asian economies some loss making soes like the textile mills were privatized or closed down certain free trade privileges were expanded beyond the free trade zones interestingly this reform drive continued despite a new center-left government the people's alliance taking power from the unp in 1994 the people's alliance had campaigned on a strongly populist platform threatening a return to the 1960s but moderated their rule and continued the market-based reforms upon actually coming to power manufacturing gained prominence finally ending the country's historical dependence on its plantation agricultural center garments rubber-based products and gems are some of the top manufactured items exported sri lanka's textile and garment industry is especially strong and globally competitive responsible for a majority of its exports the industry has attracted named customers like abercrombie and fitch banana republic victorious secret and more sri lankan apparel firms have since incorporated advanced digital design techniques and begun evolving into multinationals of their own establishing centers in india bangladesh and beyond so despite an ongoing civil war the economy grew at about 5 a year and the number of people living in poverty declined from 29 in 1995 to 15 in 2006.
there were some notable misses however due to the war motorola and harris corporation came to sri lanka in the early 1980s with the goal of building an assembly plant but departed to malaysia due to political instability considering the bustling electronics assembly industry centered in panang today it was a big loss for sri lanka in 2007 a new administration came to power led by the current prime minister mahinda rajapaksa his government won critical defectors from the ltte gathered massive support from various countries china in particular and then led a massive military campaign that finally defeated the ltte he finally brought peace to a war-weary country this decisive victory allowed the then president the opportunity to cement his power he called for snap elections and amended the constitution to greatly expand his executive powers facing first the turbulence of high energy prices and then the chaos of the global financial crisis the government began emphasizing its role in quote guiding the economy end quote to deal with the negative effects of globalization in 2012 the government reimposed export tariffs on tea and rubber with the goal of once more encouraging domestic processing import substitution this has represented a reversal from 30 years of trade liberalization policy and opening up the reversal is surprising considering rajapaksa was a key member of the people's alliance but despite this turn away from economic liberalization the five years after the end of the civil war saw the sri lankan economy growing very well gdp grew seven percent a year the sri lankan stock market boomed per capita income grew from about a thousand dollars in 2004 to 3 200 in two thousand thirteen inflation fell from a high of twenty two percent in two thousand eight to a low of three point one seven percent in 2014. unemployment halved from eight percent in 2004 to 4 in 2013 and poverty rates declined from 15 percent to 6 on the surface these are great numbers it portrays a country hitting its stride and enjoying its peace dividend by 2019 sri lanka had become an upper middle-income country yet underneath this rosy picture there were signs that this boom wasn't necessarily healthy growth first the main drivers behind this growth did not look sustainable 70 percent of the real gdp increase from 2004 to 2013 came not from labor-intensive manufacturing but rather debt-fueled major public sector construction and infrastructure sri lanka regularly runs fiscal deficits they have repeatedly breached deficit reduction agreements with the imf but their annual debt to gdp ratios have steadily increased since 2012. in 2019 it hit a 10-year high of nearly 87 fueled by a massive tax cut brought in by incoming president gotabaya rajapaksa mahinda's younger brother these mega projects include the massive colombo port city project a city of the future built on top of reclaimed land the project is part of china's belton road initiative and has a budget of over 15 billion dollars now there's nothing inherently wrong with debt especially if it is appropriately used and spent on productive items but the economic viability for these projects are questionable colombo port city for instance is in the south far away from sri lanka's war-torn northern and eastern provinces it is close to the current government's political power base however furthermore these projects show signs of corruption with billions of dollars of no big contracts and rates of increase correlating with those found in other countries known for high corruption however i do want to add that i don't really buy the claims of chinese debt trap diplomacy just about 10 percent of sri lanka's total debt is owed to china the vast majority is owed to the international bond markets there are some concerns of 99-year leases and whatnot but i won't address those here meanwhile sri lanka's traditional economic drivers have been shunted aside manufacturing as a share of gdp reached a peak of nearly 20 in the early 2000s but since then it has trended downwards to 15 in the years thereafter and the manufacturing that has grown has been focused on servicing the domestic sector food beverage and tobacco rather than export-oriented industries like garments or electronics compare this with vietnam which embarked upon its manufacturing push much later but has overtaken sri lanka in terms of market share amongst manufacturing in the developing countries domestic dissatisfaction has increased with employment once more dependent on how good your standing is with the government many sri lankans have gone overseas to find work the u.n estimated that nearly 2 million sri lankans work abroad as migrant workers with 100 to 200 000 more leaving each year it's hard to take a low unemployment rate at face value when so many sri lankans are opting to head for the exits their remittances have become a major economic driver representing 68 of the country's economy it's the second biggest earner of foreign income after exports and a critical crutch in 2019 the 6.7 billion dollars of remittances migrant workers sent back to the home country covered over 85 percent of the country's forex shortfalls the sri lankan economies shift from manufacturing to debt funded infrastructure with supports for remittances reduced its resiliency against external shock a shock that arrived with the pandemic in 2020 the pandemic arrived at sri lanka's shores with big impacts on the country's economic drivers especially those generating the majority of its foreign exchange garment tea and rubber exports to locked down countries in india europe and the united states quickly declined the sri lankan export development board had expected 2020 to deliver some 18.5
billion dollars in export earnings in the end total exports were 11 billion dollars foreign remittances drastically declined pandemic lockdowns in countries like south korea and qatar meant that workers weren't working reductions in international travel have also affected workers ability to travel abroad adding further downward pressure the decline in travel has also hurt tourism sri lanka's tourism industry experienced double-digit growth has chinese tourism boomed after the civil war ended and had become the country's third biggest foreign exchange earner after exports and remittances but the pandemic coming on after a series of suicide bombings in 2019 at various luxury hotels in colombo caused tourism to plummet in 2018 2.5 million tourists visited sri lanka bringing in 5.6 billion dollars in foreign exchange earnings 2020 just half a million tourists came and earnings declined by 80 percent with their second and third largest foreign currency generators now crippled the government sees import substitution of items like fertilizer as key towards preserving the remaining foreign reserves but that in turn leads to domestic shortages power cuts rationing and inflation the sri lankan rupee has seen a substantial drop in value against the us dollar since march 2022 worsened by extensive money printing without access to foreign currency or i guess crypto people's hard-earned savings will vanish and return them to poverty they're not going to take that lying down the economic hardship has been a long time coming kovind might have contributed the final push but the country has been on the brink for a very long time more than a few people have made the connection between what is going on right now in sri lanka with the ongoing financial crisis in the lebanon i echo those thoughts as well and like in the lebanon the way out of the crisis starts with coherent political leadership the government is in a bit of a deadlock having recently lost their two-thirds parliamentary majority but unable to work with the opposition the government needs to restructure its debt bring itself back onto the pathway towards economic reform and improve its relations with the people such an effort starts from the very top all right everyone that's it for tonight thanks for watching subscribe to the channel sign up for the newsletter and i'll see you guys next time
2022-04-16 21:21
