Sri Lankan lesson for India

Sri Lanka has been in the news for so long that its current crisis is the stuff of popular wisdom. One can see the acute shortage faced by the people here due to non-availability of staple food at affordable prices in the market and paucity of petrol at the pumps. Those with even the slightest knowledge of economics can trace it back to dwindling foreign exchange reserves, which are necessary not only to import food but also to pay off external debt. They will also understand the default on this loan which has happened now. But Sri Lanka’s foreign exchange crisis is only a symptom of a greater malaise that needs to be understood. How is it that a country fails to produce enough of even the most basic of food items like rice and milk powder? It is less easy to understand.

Since the end of colonial rule, Sri Lanka’s political system has been a mixture of nationalism in politics and welfareism in economics. Ethno-nationalism was instigated to create a nation state in the context of Sinhalese identity, beginning in the fifties. This is recognizable in the official “Sinhalese Only” language policy introduced at the time. Although this could be reduced later, it strengthened caste superstition and left a large number of Tamil-speaking populations vulnerable.

linguistic suffrage

The linguistic suffrage of Tamils ​​originated partly due to the appeasement of the Buddhist clergy, who is almost exclusively Sinhalese. This not only led to the isolation of the Tamil-speaking population, but also led to the formation of the Tamil Tigers, a terrorist organization, and a civil war. The Tamil Tigers were eventually defeated, but it took the Sri Lankan state two and a half decades to achieve it. Meanwhile, there was an exodus of Tamils, who were marching west and those who could survive were moving towards Tamil Nadu.

With the significant presence of Tamils ​​in the professions, the country experienced a loss of expertise in almost all fields. The impact of the loss of technical expertise to an economy is slow and often imperceptible, but it has adverse effects, which we see happening in India. Investments are also likely to stall due to civil war. While all that uncertainty stifles investment, private investors will be particularly reluctant to lose their money in times of chaos. A state pursuing a civil war can hardly make up for it through public investment, as it is bound to be severely financed by its military operations. Nor would it have had much time to address the stress points that arise from time to time in any market economy, let alone planning for economic development. In various ways, social conflicts can hinder the development of a country’s productive forces and affect its economic growth.

So here we have the first cautionary tale for India from Sri Lanka. Sri Lanka’s woes are economic on the surface, but stem from social conflict exacerbated by state-dominated identity politics. Identity politics between social groups is a recipe for economic disaster. It would not be wrong to suggest that the Modi government’s inability to restore, even increase, the investment rate in India is partly related to the socio-political tensions that have come in its wake. Conflicts between the Center and states and protests between religious communities are sure ways to stifle investment, even if there has been some improvement in ease of doing business. The exit of some high-net-worth Indians from the country and the outflow of foreign direct investment are examples of this. Foreign direct investment inflows into India have been high since 2014, but have been unable to offset the decline in domestic private investment.

political economic lessons

If the first lesson from Lanka is about how politics can affect the economy, the second is about how faulty economic policy can affect the prospects of the economy. The country first came to the world count in the 1950s when its economic policy was praised for its welfare programs that included subsidized rice. But not everyone was impressed at the time. In his autobiography Home and the World, Amartya Sen describes how Cambridge economist Joan Robinson described it as a matter of “having to taste the fruit before it is grown”. Mr. Sen implies that he was not convinced by this point of view but that his supervisors were endowed with some remarkable foresight. Now, the great lady of economics in her time, could hardly be against the idea of ​​welfare per life, as she was in the UK, the pre-eminent welfare state of the world. She was very likely condemning welfareism, which makes the distribution of consumer goods a central focus of economic policy. In any case, she has been proven right.

In Sri Lanka, distributionism seems to have gone beyond what can be guaranteed from domestic sources. This newspaper has previously reported on the slogan “Produce or Destroy” from past political stages in the country. This will serve as smart advice not only for the three Sri Lankan economists who are now tasked with getting their country out of the crisis, but also for India’s political class. As India’s economy has grown, many states have increased their welfare expenditure. Some have distributed cycles for girls and others television sets to families. While any form of welfare need not in principle be excluded, public finance is subject to an accounting constraint. When revenues are limited, free cycles and TVs reduce spending on measures that increase the productive capacity of the economy, including endowment of schools, hospitals and the infrastructure needed for production. There is also an ethical issue to be faced. When welfareism is financed by borrowing instead of taxes, future generations pay for our consumption.

The third lesson from Sri Lanka is that openness should not be taken as a panacea for the world economy. In the 1970s, in a switch from explicitly socialist economic policies, Sri Lanka liberalized trade and capital flows. It is a moot question as to how this policy reconfiguration would have worked if the decades-long civil war had not been intervened, but the reliance on world markets that led to it would not have helped the country. A well-known theorem in economics, the principle of comparative advantage, encourages a country to specialize in its production and rely on foreign trade for goods it does not produce. It assumes that the demand for the country’s product will continue. The case of Sri Lanka shows us why it can be harmful for a country to depend on trade for its essential consumption goods. By comparison, the states of India that face food shortages survive by becoming part of the Indian Union. Unlike Sri Lanka, they do not need to earn foreign exchange to obtain food from the national granary, Kerala being a prime example of this arrangement. Sri Lanka’s first task will be to urgently revive its food production sector. As far as India is concerned, it should learn from the misfortunes of its neighboring countries and increase domestic production in all sectors from oilseeds to renewable energy and defense equipment.

(Pulpre Balakrishnan teaches at Ashoka University, Sonepat)