A Sense of Progress: The Sri Lankan Square Deal

This present crisis provides a multitude of options for reform on the governance side, but the State and conveniently, the media and commentary have focused almost exclusively on the economic reforms

Both major parties contributed to the deterioration of real CBSL independence and perceptions of the credibility of Sri Lanka’s financial system through political appointments; from Mahendran to Cabraal

I would suggest that by the time the Sri Lankan government approached the IMF for relief in the aftermath of what is aptly termed a disorderly default (an understatement), alternative options had all but dissipated under a spate of Gotanomic policy

Fresh in the minds of bilateral partners will be any number of recent foreign policy missteps: Japanese projects cancelled, Chinese long-term leases of strategic assets; their political and financial entrenchment in a country on the border of India, in whose sphere of influence we exist

The poorest people in Sri Lanka, those who are furthest from the seats of power, will inevitably bear the brunt of Sri Lanka’s policy failures because the reforms are necessary given the current economic context and lack of cashflows

“The Principles for which we stand are the principles of fair play and a square deal for every man and every woman...a square deal politically, a square deal in matters social and industrial... I stand for the square deal... not merely for fair play under the present rules of the game, but... for having those rules changed so as to work for a more substantial equality of opportunity and of reward for equally good service”  - U.S. President Theodore Roosevelt (1910)

 The Covid-19 pandemic was transformative for humanity, reminding us that we are social creatures that seek the bonds created by in-person interaction and that these bonds of community are essential to the human condition. There was also a paradigm shift in how we view productivity within an economy, reconfiguring the value we place on different types of work with the realization that ‘blue collar’ jobs were actually part of the ‘essential’ work in an economy. Workers themselves had a collective epiphany; the 2021 ‘great resignation’ was a phenomenon observed in markets as diverse as the US and India.

 Another paradigm shift occurred in economic policy: the UK launched the Covid-19 Wage Subsidy Scheme and various other furlough schemes to subsidies business payroll; in the US, President Donald Trump led the Republicans in approving the Coronavirus Aid, Relief and Economic Security Act (CARES) which included historic stimulus cheques of $1,200 to over 160 million Americans, from the same group that spawned the Tea Party libertarians who focused entirely on the fiscal deficit. Stimulus packages are part of what Indian Economist Dr. Jayati Ghosh notes have been the standard response in Western markets to the severe economic downturn; the introduction of counter-cyclical fiscal policies to increase demand in the economy and stimulate growth during a recession. At the time of writing, the March 15th industrial action saw major sectors combined for mass protests; workers from the health, postal, transportation, education, ports and utilities joined together to bring further pressure on the government to alter course.

 An Elusive Alternative
 You may reasonably ask, what is this alternative course, is there a solution besides the IMF programme, its package of reforms and the ensuing tranches of greenbacks from the famous Washington Consensus seal of approval? I would suggest that by the time the Sri Lankan government approached the IMF for relief in the aftermath of what is aptly termed a disorderly default (an understatement), alternative options had all but dissipated under a spate of Gotanomic policy. The time for turning to bi-laterals is long past, we lost the trust of our regional and international partners through the breakdown of systems and institutions. Both major parties contributed to the deterioration of real CBSL independence and perceptions of the credibility of Sri Lanka’s financial system through political appointments; from Mahendran to Cabraal.

 Fresh in the minds of bilateral partners will be any number of recent foreign policy missteps: Japanese projects cancelled, Chinese long-term leases of strategic assets; their political and financial entrenchment in a country on the border of India, in whose sphere of influence we exist. We witnessed public setbacks for Indian interests in Sri Lanka due to the GOSL pivot to China. To give you an idea of how some Indian commentators view Sri Lanka, here is an Indian author and foreign policy specialist Shiva Shankar Menon writing in his 2016 book ‘Choices’: Sri Lanka is “essentially an unsinkable aircraft carrier 14 miles off your coast”. We politicized the American MCC Grant; US Secretary of State Pompeo openly warned Sri Lanka against its trajectory towards becoming a Chinese satellite. Sri Lanka could not even count on the oil-rich nations of the Gulf for emergency oil shipments on credit due to the burial rights issue created by the previous administration (still in administration).

 While accepting the need for engagement with the IMF, it is also possible to be skeptical of the rationale for the cocktail of economic contraction and high-interest rates to control inflation. Leaving aside the complex and nuanced conversations surrounding the source of inflation, we have to assert a few aspects of the IMF programme before we answer the question of what can be done differently: (1) Contracting the economy (2) Free-float of exchange rates (3) Interest Rate hikes (4) Energy Pricing (5) Increases in taxes across all segments. Each of these actions necessitates the next action and sets off a domino effect.

 The end goal is a primary account surplus of 2.3% of GDP by 2025. The austerity-driven nature of IMF programmes are notorious for its impact on the poorest in those societies. In Sri Lanka, the deflationary policy seems to have been the only means through which to suppress the demand for Dollars and lower the trade deficit until Sri Lanka is able to unlock foreign currency borrowings from markets and bi-laterals.

 Regarding the time-restricted aspect of the contraction, ‘economic shock therapy’ as it’s called, there are fascinating insights presented during a recent webinar organized by the Research Intelligence Unit. Dr. Jayati Ghosh was baffled by the assertion that the IMF programme was beneficial to Sri Lanka: “seriously? During a recession you want to achieve a primary budget surplus and you want to achieve it... in three years”. Her point is that the time restriction is arbitrary and not conducive to the sustainability of the programme given the pressures exerted on the people and the reactions of organized labour. Dr. Sharmini Coorey, a former Senior Official of the IMF, made the counterpoint that the longer the fiscal adjustment takes, the longer the people will suffer under harsh inflation; the costs of the recession will be higher if the period of contraction is stretched further.

 This is where we must remind ourselves of comments made by the IMF’s Peter Breuer in September 2022: “these economic reforms need to be carried out, there has to be a government that has a mandate to carry out the reforms and there needs to be ‘buy-in’ by society to support reforms”. While there may not be an alternative to the IMF at this stage, there exist alternative paths to achieve the primary account surplus, to reduce Sri Lanka’s debt stock by some reasonable amount and thus regain “debt sustainable” status.

Theodore Roosevelt  and the Three ‘C’s
 In the United States around the turn of the 20th century, between 1890 and 1920, there was a period referred to as the ‘Progressive Era’; defined by a concerted period of political and social change driven by activism focused on corruption, corporate monopolies and inefficiencies in industry, what we may today label as ‘rent-seeking’. The American Library of Congress (LOC) describes the movement as working to “make American society a better and safer place in which to live... to make big business more responsible through regulations... to clean up corrupt city governments, to improve working conditions in factories, and to better living conditions for those who lived in slum areas... Many progressives were also concerned with the environment and conservation of resources.”

 The earliest American progressives, labour activists James Sullivan, Robert La Follette and William U’Ren; are not well known even among modern progressives. Their politics originated from material issues encountered in their everyday lives: rising poverty, expanding slums and the exploitation of the labour force. “The mass migration of people into the cities enriched some people but caused severe problems for others... For the emerging middle class, benefiting from growing incomes and increases in leisure time, the expanding city offered... Department stores...and shopping centres... Parks... stadiums... built to meet aesthetic and recreational needs. Transportation systems improved, as did the general infrastructure, better meeting the increased needs of the middle and upper-class city dwellers.” Yet as the LOC notes: “Thousands of poor people also lived in the cities. Lured by the promise of prosperity, many rural families and immigrants... arrived in the cities to work in the factories... by 1904 one in three people living in the cities was close to starving to death... With few city services to rely upon, the working class lived daily with overcrowding, inadequate water facilities... and disease. Lagging far behind the middle class, working-class wages provided little more than subsistence living...”

 The counter-cyclical fiscal policies discussed earlier; increasing government spending into productive sectors to increase aggregate demand in the economy, stem from the Keynesian branch of economics. The ‘New Deal’ era of government projects, programmes, regulations and reforms in response to the economic crises of that period is regularly referenced by the Leader of the Opposition Sajith Premadasa. Around three decades prior to the New Deal, there was another set of programmes that are not quite as well known in popular culture: President Theodore Roosevelt’s ‘Square Deal’ abbreviated as ‘3 Cs’: Control of corporations, Consumer protection and Conservation of natural resources.

Roosevelt was considered a progressive for his criticisms of oligarchy whilst simultaneously protecting business from the more extreme demands of organized labour. In 1910, Roosevelt laid out plans for a “New Nationalism” for America: “The Principles for which we stand are the principles of fair play and a square deal for every man and every woman in the United States, a square deal politically, a square deal in matters social and industrial... I stand for the square deal... not merely for fair play under the present rules of the game, but... for having those rules changed... I hold that while man exists, it is his duty to improve not only his own condition but to assist in ameliorating mankind”. Roosevelt was ahead of his time in his critique of the effects of capital and its relation to labour:

 “Labour is prior to, and independent of, capital. Capital is only the fruit of labour, and could never have existed if labour had not first existed. Labour is the superior of capital, and deserves much higher consideration. Now, this means that our government, National and State, must be freed from the sinister influence or control of special interests. Exactly as the special interests of cotton and slavery threatened our political integrity before the Civil War, so now the great special business interests too often control and corrupt the men and methods of government for their own profit. We must drive the special interests out of politics.”

A Progressive Era?
What would a Sri Lankan progressive era look like? In the United States and to a degree in the UK; healthcare plays a major role in political narratives. The struggle for single-payer healthcare in the United States is an issue that animates the progressive left while expanding or at least protecting private healthcare insurance, which has wide support across the political spectrum.

 I might suggest that education becomes a similarly energizing issue for Sri Lankan progressives, one that can gain significant support from across party lines and across a wide demographic. It is understood, based on multiple reports that Sri Lanka has underinvested in education; the World Bank recently quoted the Human Capital Report 2020: “though the expected years of schooling in Sri Lanka was 13.2 years, the learning adjusted years of schooling was only 8.5 years. This is a learning loss of 4.7 years, the highest in South Asia... Sri Lanka’s public spending on education (1.7 per cent of GDP) is also lower than the South Asian average”.

 Sri Lankan progressives should also be paying close attention to the ongoing calls for reforms of the economy. For example, all progressives must surely recognize the need to reform Sri Lanka’s State-Owned Enterprises (SOEs); but should this not be considered alongside efforts to integrate Sri Lanka into Global Production Networks (GPNs)? There will need to be considerations of strategic industries that may enhance Sri Lanka’s process of integration to GPNs, not just with assembly plants or storage warehouses, but as a fully-fledged manufacturer of high-technology components.

 Once again, high-technology investments require expertise from engineering to mathematics and IT plus entire systems dedicated to research; further revealing the interlinked nature of public policy. What happens to our cost base with reforms to energy pricing, when our products compete in extremely cost-sensitive global markets? Let us acknowledge that it is possible to critique the ‘race- to-the-bottom’ nature of the global free-trade regime while also appreciating the need for Sri Lanka to gain traction in that same system. I have made this point before: the critique of free-trade neoliberalism is misunderstood by commentators; whatever the theoretical arguments that have been made; by myself included, the neoliberal regime did what it was supposed to do, it created masses of wealth. What has been lacking is a critique of the failure of redistribution in the modern system; that means reforming the Internal Revenue Department and enhancing its role with major investments.

 Calling for a New Caucus
 A progressive outlook must consider the long-term impacts of policy and appreciate the negotiation with providing relief in the present. In that regard, the present Sri Lankan Government and those that represent it are behaving in a manner that is the opposite of progressive. This present crisis provides a multitude of options for reform on the governance side, but the State and conveniently, the media and commentary have focused almost exclusively on the economic reforms. This is what I have referred to before as treating the symptoms while ignoring the disease.

The poorest people in Sri Lanka, those who are furthest from the seats of power, will inevitably bear the brunt of Sri Lanka’s policy failures because the reforms are necessary given the current economic context and lack of cashflows. Yet, why has the government completely failed to engage the worker organizations to generate some of Breuer’s “buy-in”? Why not use the power of the trade unions to create a transactional dialogue, negotiate the price of reforms and show that while workers suffer, the political class and bureaucracy that allowed this to happen are also being held accountable; far from being political witch-hunts, this would instil a perception of equitable treatment.

A progressive Republican, President Theodore Roosevelt believed in government action to mitigate social evils, and as president, he in 1908 denounced “the representatives of predatory wealth” as guilty of “all forms of iniquity from the oppression of wage workers to unfair and unwholesome methods of crushing competition, and to defrauding the public by stock-jobbing and the manipulation of securities...” In the wake of the Sri Lankan economic collapse, similar dynamics have arisen: institutional capture by special interests and political elites.

 Is a General Election to reconstitute parliament desirable for the Sri Lankan recovery; should we sympathize with the strike action and protests? It primarily depends on whether we acknowledge the governance deficit and appreciate its contribution to the economic collapse. If we then understand that the continued control of the economy by the SLPP and how it affects the perceptions of workers, voters, market participants, creditors, bi-lateral partners and the IMF, the answer to the question of a General Election becomes much clearer: it might be the first step to a future sense of progress.

(The writer has over a decade of experience in the banking sector after completing a degree in accounting and finance. He has completed a Masters in International Relations and is currently reading for a PhD at the University of Colombo. He is also a freelance presenter, writer and researcher and presents the Daily Mirror Online interview show ‘Insight’ – available on YouTube, Instagram and Facebook.)