Sri Lanka and the crisis of the 2020s: Rethinking the development model

Moreover, as economic depressions go, the problem is not inflation per se. Rather, it is the underlying causes and mechanisms of contraction that result in enduring setbacks for people’s livelihoods. In this regard, if other indicators such as the rate of child malnutrition and cuts in household consumption are anything to go by, Sri Lanka’s depression rages on. As the IMF report itself puts it, the decline in inflation can be attributed to “base effects,” among other factors. Meaning, the permanent hike in the cost of living over the past several years has yet to be resolved through a concrete program of recovery focused on jobs and incomes

"The true objective of planning is not stabilisation at any static level, but regularised growth. It is the full utilisation of our powers of production, which are continually growing, in order that our consumption may grow correspondingly. To this end the purchasing power of the masses must be maintained and must expand." – John Maurice Clark (quoted in “From New Era to New Deal: Herbert Hoover, the Economists, and American Economic Policy, 1921-1933” by William J Barber, p.123)

The establishment narrative in Sri Lanka is that the country has overcome the worst of its economic crisis, evidenced by a dramatic decline in headline inflation. But the most recent IMF report issued in December 2023 makes it clear that Sri Lanka is far from the road to recovery. Moreover, as economic depressions go, the problem is not inflation per se. Rather, it is the underlying causes and mechanisms of contraction that result in enduring setbacks for people’s livelihoods. In this regard, if other indicators such as the rate of child malnutrition and cuts in household consumption are anything to go by, Sri Lanka’s depression rages on. As the IMF report itself puts it, the decline in inflation can be attributed to “base effects,” among other factors. Meaning, the permanent hike in the cost of living over the past several years has yet to be resolved through a concrete program of recovery focused on jobs and incomes.

Meanwhile, according to it its own projections, the IMF acknowledges that Sri Lanka will only regain its pre-pandemic Gross Domestic Product by about 2028 (p.3; author’s calculations). That itself amounts to nearly a decade of lost growth. At the same time, the report anticipates revenues would nearly double in the meantime, almost entirely through increases in indirect and direct taxes. Instead of funding social spending, that was estimated to be a miserly .7% of GDP in 2023, fiscal consolidation will be for the benefit of powerful external creditors. Up to now, the Wickremesinghe-Rajapaksa Government has “negotiated” only a measly reduction in value, or haircut, for the debt they owe. Accordingly, stringent restrictions on public spending along with the absence of far more debt relief, if not outright cancellation, would only deepen inequality in Sri Lanka. The working class will continue to experience a rising cost of living burden through tax increases and price hikes, while opportunities for growth recede further.

The IMF report does, of course, include a subsection titled “Raising Potential Growth” under its policy discussion. But in addition to the standard imperative to promote trade and direct foreign investment, the IMF prioritises increasing labour productivity through the dismantling of “rigid” labour laws, along with enabling greater private sector access to land and digital services. Meanwhile, the unavoidable assumption is that tourism and remittances from migrant workers would continue to sustain the economy, while Sri Lanka embarks on a fire sale of public assets. The late heterodox economist, Lance Taylor explored the dubious effects of this strategy long ago in his article, “The Rocky Road to Reform: Trade, Industrial, Financial, and Agricultural Strategies.” He argued that given the nature of private equity’s interest in public assets, such moves are unlikely to facilitate the capital formation needed to secure long-term growth (p.586). Accordingly, Sri Lanka’s neoliberal development model remains broken, without an alternative in sight.

The parameters of an alternative within the global order

Nevertheless, establishment commentators have managed to turn the question of “what is the alternative” into a blunt rhetorical weapon. In fact, they imply that resistance is futile. The hidden assumption is that given the extreme pressure of powerful global actors and the absence of a social movement grounded in the working people, no realistic alternative to the IMF program appears in sight. Therefore, the only true path forward is through austerity. But the reality is that in the past, the global order has undergone tremendous changes in response to major crises. They engender the social and class forces necessary for major transformation, even if the progressive or reactionary character of the bloc that can achieve such changes today is yet to be determined. The more productive questions we ought to ask, then, include: How is today’s crisis in Sri Lanka distinct from those in the past? What other possibilities could it entail, given a solution will result in a new order inspired by, yet different from previous historical models? 

While the onset of the current crisis in Sri Lanka initially drew comparisons to the 1970s, for example, the ongoing contraction of the economy implies that the crisis of the 2020s is on a scale far more like that of the 1930s. The problem, however, is that Sri Lanka inhabits a very different position in the world system from the Western capitalist societies that were shaken to their very foundations during the Great Depression of the 1930s. The underlying assumption of policymakers is that because global capitalism still appears to operate along the lines of business as usual, the crisis in Sri Lanka can be confined to its national boundaries. In other words, it can be resolved with the same broad emphasis on “structural adjustment” that has defined the IMF and the World Bank’s approach to developing countries since the debt crises of the 1980s that were in turn influenced by the shocks of the 1970s.

Redefining progress

Similarly, in today’s context, despite the debt distress many countries in the Southern periphery are experiencing, there appears to be no systemic threat to the capitalist world system. Nevertheless, there are major changes occurring that are changing the fundamental trajectory of the global economy, specifically, the unravelling of the global order that has accelerated in the aftermath of the COVID-19 pandemic. This tendency towards systemic chaos previews the possibility of a far more widespread conflict. A conflagration could occur between hegemonic powers or other states tied to their respective blocs. Meanwhile, the death of the 1990s-era of hyper-globalisation is already apparent. More and more powerful countries such as the US are returning to explicit engagement with industrial policy as a matter of national security. But rather than geopolitical competition, the question of development remains central to understanding the terrain of struggles involving the rest of the world. 

In this regard, recent historical work on crisis in the early part of the twentieth century has done an effective job demonstrating the global dimensions of the domestic settlement in Western countries along with their political implications, from Left to Right. As Tara Zahra points out in her book Against the World: Anti-Globalism and Mass Politics Between the World Wars, for example, the emphasis on security to prevent a dramatic regression in living standards later morphed into an aspirational horizon for the uplift of the newly independent countries after World War II. 

The question of a new development model in Sri Lanka hinges on understanding how the current crisis once again compels us to redefine progress. That requires placing a stronger emphasis on the sectors and industries that can anticipate the outlines of a fairer and more just society. Consequently, buried in the contemporary debate about the IMF bailout program, and the counterargument for more relief, is a longer-term question about the accumulation strategy that could be viable for a small dependent country such as Sri Lanka. This approach is what could enable progressive transformation.

Relative autonomy vis-à-vis competitive geopolitics

The possibility of a new development model is linked to, but distinct from, the major changes occurring in the global political economy. It presupposes the possibility that Sri Lanka, among other countries, may yet be able to identify its own relatively autonomous path insulated to a degree from the pressures of powerful global blocs. That objective was the original inspiration for the Non-Aligned Movement. Consequently, if the problems of Sri Lanka along with other debt distressed countries cannot be reduced to their strategic value for Western policy makers, how else can we understand the major shift in the development paradigm required to overcome the crisis emerging in these places? The horizon of decolonisation has long ago disappeared, replaced by the neoliberal vision of globalisation. That approach promised to raise standards of living through greater incorporation into the global market, although even this claim must be met with a much greater degree of scepticism. 

A policy focused on wage repression to produce exports in cutthroat competition with other poor countries is a non-starter. Instead, prioritising imports such as the intermediate goods required for production would demand that we think in a far more critical way about the nature of Sri Lanka’s trade relationships, specifically from the vantage point of productive consumption

Regardless, with the utter collapse of this pathway, it is now more urgent than ever to revisit the development model. We must consider the possibility that the crisis of the 2020s, in Sri Lanka as elsewhere, can in fact anticipate a renewed critique of global capitalism. Many have argued that the leverage embodied in the Western working class has been transposed to the new working and middle classes of the “middle powers”, most famously China. But the problems and issues represented by a wide cross-section of working people across the Southern periphery in countries such as Sri Lanka, that are witnessing a dramatic regression in living standards, also foreshadow critical trends. These could strengthen our understanding of the relationship between capitalism and imperialism. Their contradictory dynamics have engendered the unravelling of the current global order. While the alternative remains hazy, thinking against the grain requires outlining the tendencies that could nevertheless materialise in a new order.

From recovery to development

To frame the problem in concrete terms, there is a tremendous need for a conscious effort to reorient Sri Lanka’s economy around the renovated principle of self-sufficiency to ensure the basic survival of the country’s working people. That includes investment in the food system, along with implementing a renewed public distribution system along the lines of the historic food subsidy that sustained people from World War II until economic liberalisation in the late 1970s. But there is also the difficult question of the path to accumulation that can facilitate Sri Lanka’s development in the long run, given the reality of constraints on external financing flows. While external debt restructuring remains a contentious process, progressive forces cannot afford to delay a reckoning with the underlying method to transform the economy. If economic growth indeed appears far off, then as the Depression-era economist John Maurice Clark implies in the epigraph above, any policy of stabilisation is inadequate compared to a renewed emphasis on planning to revive growth for the purpose of meeting social needs.

In this regard, there are critical examples from elsewhere around the world, including the US’s own break with economic orthodoxy during the Great Depression of the 1930s. But the path forward for Sri Lanka will necessarily be different. It would entail difficult questions about the additional challenges the country faces as a small, dependent province within the global economy. Towards this end, a macro stimulus policy of buttressing incomes in rural areas could generate the domestic savings that would be the collateral to strengthen investment in foreign-exchange-earning industries through a development banking network. These industries themselves could be identified through reciprocal engagement between experts and communities, to identify opportunities for public investment based on key criteria such as: 

1) The degree of strategic risk in obtaining materials outside the country (including product elasticity)

2) Long-term investment possibilities (including the scope for technological innovation) 

3) Social relations, or the degree to which households, cooperatives, or firms are involved in production and the consequent ramifications for developing a wider ethos of solidarity committed to transforming gender, caste, etc. roles, and 

4) Barriers to entry in export markets.

However, these efforts require an approach different from the emphasis on the export-led industrialisation that informed the earlier strategies of developmental states, most famously countries in East Asia such as South Korea and Taiwan.

Towards balanced geographic development

With global trade growth contracting further since the Global Financial Crisis of 2008, the timing of Sri Lanka’s intervention in the global economy further reveals new challenges. A policy focused on wage repression to produce exports in cutthroat competition with other poor countries is a non-starter. Instead, prioritising imports such as the intermediate goods required for production would demand that we think in a far more critical way about the nature of Sri Lanka’s trade relationships, specifically from the vantage point of productive consumption. That would mean identifying the complementarity between industries and sectors in other countries based on a policy oriented towards balanced geographic development. Whether a constellation of new enterprises within Sri Lanka itself are evenly distributed throughout the country to promote a more sustainable relationship between rural and urban areas is also critical. This perspective is crucial if we are to push back against the belief that self-sufficiency in food production, for example, necessarily entails suppressing the aspirations of youth, who are supposedly oriented more to the habits and lifestyles of the city, if not the world.

Nevertheless, the experimental outlines of such a strategy become clearer if we distinguish an immediate relief program grounded in redistribution and funding for a public distribution system from the longer-term question of the linkage between savings and investment. Despite the best efforts of Sri Lanka’s economic establishment, this relationship could no longer be surrendered to the market. The current crisis in fact appears to justify a renewed bout of accumulation by dispossession on a greater scale. That includes wage repression and the fire sale of public assets. In this context, as Samir Amin pointed out, “savings” are in fact absorbed through greater profits abroad and the speculation of rentiers at home, rather than active investment in productive ventures capable of satisfying the urgent needs of Sri Lanka’s working people. But what we end up calling a development model focused on the latter must be made an urgent task of collective debate. Above all, we must not be afraid to identify it in ideological terms along an explicit spectrum of models from Left to Right, that represent alternatives to the unravelling of the global order.

The political spectrum

In this regard, despite the fervent wish of Sri Lanka’s esteemed development planners, from Gamani Corea to Godfrey Gunatilleke, for an apolitical, technocratic approach, the question of planning is inserted into an intense struggle between social and class forces. Sri Lanka needs major collective mobilisation to overcome the challenges of the current crisis. But posing the relationship between planning and mobilisation, including through autonomous forms of civil society such as cooperatives, also mean being able to determine in a self-conscious way the potential scope for an alternative in the face of pressures imposed by capitalist-imperialism. Recent historical studies of the global New Deal era have pointed out both its contradictions and limitations due to the absence of ideological clarity. Learning from this example, it would be up to Sri Lanka instead to carve out a new path that explicitly aligns with the needs and aspirations of countries currently experiencing the worst forms of debt distress, premised on a more egalitarian vision of the global order. 

Whether this attitude is the basis of a new movement on a regional or global level remains to be seen; one that not only challenges financialisation but anticipates a range of alternative development models under a progressive rubric. But whatever else happens because of the unravelling of the global order, at the very least, a strong popular democratic push within Sri Lanka can turn it into a beacon for a more just alternative. Now more than ever, our orientation to this objective must inform the menu of policies that eventually forms the basis for a new consensus. It is clear the old Washington Consensus driven by austerity and knee-jerk privatisation only makes things worse. The economic establishment, that tails the IMF and the World Bank, has answered its own question about what the alternative is. It appears to implicitly recognise that its strategy will lead to an unprecedented social and political explosion. In other words, there is no alternative to an alternative. The old order is impossible to sustain. What will replace it?