Sri Lanka: Global Finance, Authoritarianism and the Second Wave of Neo-liberalism

I am posting below my article in the Sunday issue of the Island, a popular daily in Sri Lanka, based on a talk I gave in July, to the Socialist Study Circle which meets at the N. M. Perera  Centre, Colombo. I would appreciate your feedback, including your reactions to the notion of a “second wave of neoliberalism”.

Global Finance, Authoritarianism and the Second Wave of Neo-liberalism

September 4, 2011

By Ahilan Kadirgamar

Over the last two years, even as the Rajapaksa regime has been consolidating its political position through a series of landslide election victories, there has been increasing criticism of its illiberal tendencies. Such criticism has focused on the continuation of war-time militarisation and emergency rule, and the further centralisation of power in the executive presidency as with the year-old 18th Amendment. An emergent authoritarianism mobilising Sinhala Buddhist nationalist forces has constrained domestic opposition through the intimidation of dissent and the strategic control of media and its ownership. The regime’s approach towards the national question has been one of rejecting minorities’ grievances and aspirations, including any serious movement towards a political settlement, and manipulating those minority representatives succumbing to patronage politics. Unfortunately, without democratic mobilisation and other forms of struggles, such illiberal tendencies are not the exception, but characteristic of liberal democracies.

Even as the Rajapaksa regime’s illiberal politics is facing mounting international disapproval, criticism on the economic front has been limited to corruption, the lack of transparency and the centralisation of economic policy, including reconstruction of war-torn regions. This subdued criticism of economic matters is related to the weakness of a liberal political and economic outlook. Indeed, the regime’s economic vision is largely appreciated by global powers. Bilateral development aid from China, India and Japan has seen considerable increases over the last few years. Furthermore, there has been an overwhelming flow of finance capital from the West. Indeed, the regime’s economic pundits are boasting about the building of massive infrastructures whether it be roads, ports or power plants, high economic growth rate of eight percent, per capita GDP exceeding two thousand dollars, foreign exchange reserves of eight billion dollars and for that matter even the sale of three billion dollars in sovereign bonds. The latter despite the regime’s so called uncompromising stand on sovereignty!

Any careful analyses of the recent historical developments and the conjuncture leading to the emergence of the Rajapaksa regime have to account for these shifts and contradictions in the political and economic realms. The political economy of Sri Lanka has historically been constituted by global developments and this continues to be so in the current era. And the Rajapaksa regime has to be understood as a bloc of forces from the hardened nationalists to the neoliberal right. Here, the first term of the Rajapaksa Presidency, from 2005 to 2009, capitalised on the global “war on terror”, and with the support of many international actors, ended the civil war and radically changed the political landscape of the country. The second term of the Rajapaksa Presidency, beginning in 2010, is now radically transforming the economic landscape, through a second wave of neoliberal reforms with considerable accumulation of wealth for few actors in the short run and the possibility of a serious economic crisis looming ahead.

The Class Project of Neoliberalism

Neoliberalism, as Marxist theorists have argued, is a class project leading to the dominance of finance capital, constituted by the nexus of state power and finance capital. This class project which emerged out of the economic shifts in the1970s, has been prone to numerous and repeated financial crises. Such crises, along with widespread dispossession and rising inequalities, have required authoritarian states to crush peoples’ struggles and continue the neoliberal onslaught.

Neoliberalism is both an ideology and constitutes varied practices specific to different situations. As an ideology, it emphasizes the free flow of goods and capital across nation state borders. In the realm of practice, it takes various shapes from pushing privatisation and private property, to the monetisation of the economy, to liberalisation of goods and capital markets, to imposing fiscal austerity and a fully convertible currency regime.

The sustenance of such an ideology and the implementation of policies requires certain institutions including the IMF, World Bank, WTO, stock markets, global and local financial firms and, of course, the state. The Washington Consensus of the mid-1980s, which came to prevail on developing countries, was the coming together of neoliberal ideology and practices in the form of structural adjustment policies towards the global free flow of goods and capital. The Washington Consensus was spearheaded by the IMF and World Bank with the active backing of the US Treasury.

Sri Lanka’s Neoliberal Reforms

Sri Lanka propelled by both global and national economic crises in the 1970s, was one of earliest neoliberal economies. This transformation came with the far reaching open economy policies of the Jayawardene regime in 1977. Furthermore, the Premadasa and Kumaratunga governments, while responding to the urgencies of war, continued such neoliberal reforms including privatisation.

However, it was the Wickramasinghe government of 2002 that attempted an acceleration of neoliberal reforms in the form of a second wave. Here, the failure of its peace initiatives with the LTTE, its weak position of cohabitation with an antagonistic President and the rising discontent in the South, led to the government’s collapse in 2004 and the failure of its economic project.

In this context, it is the end of the war and the promise of a post-war economic boom that has created the conditions for the second wave of neoliberal reforms. But such a second wave requires a stable national regime firmly in power and global economic conditions conducive for the inflow of capital. This moment arrived with the consolidation of the Rajapaksa regime after the war in 2009 and the global economic crisis of 2008 resulting in global finance capital flowing into the “emerging markets”.

The Sri Lankan economy over the last few decades has been sustained for the most part by the exploitative sectors of tea, the garment industry and migrant workers responsible for considerable foreign remittances. While the Government advocated an industrial policy focused on Special Economic Zones for the production of intermediate goods a few years ago, this initiative has for the most part failed as reflective of the limited amount of Foreign Direct Investment, averaging just 400 million dollars over the last two years.

Characteristics of the Second Wave

In this context, the second wave of neoliberalism is characterised by bilateral aid from China, Japan and India, multilateral development aid from the World Bank and the Asian Development Bank, and most importantly the leveraging of global finance capital through the liberalisation of capital markets. Global finance capital, central to creating the booming stock market and the sale of sovereign bonds, is subject to the business confidence of international investors, which in turn requires the endorsement of the IMF achieved through the Standby Arrangement with the Government in 2009.

Thus the IMF is effectively the watchdog of the government’s economic policies in the interests of global finance capital. Hence the shift in domestic policies including the tightening of the budget with respect to education, health and other subsidies, far reaching tax reform and liberalisation of the banking sector. Furthermore, financial investment and speculation requires real or perceived returns on capital, including justification for the major infrastructure projects in roads and ports, and the expanding service sector in banking and telecommunications.

Here, the exuberant rational for high growth and return on capital is the rosy expectation of 2.5 million tourist arrivals by 2016, compared to 600,000 tourist arrivals in 2010. This appalling emphasis on the fickle tourism industry is encouraging investment in real estate related to hotels, malls and other infrastructures. Indeed, real estate bubbles are linked to asset bubbles in general in absorbing speculative finance capital. Over the last few years, 3 billion dollars in sovereign bonds were sold, albeit at relatively high interest rates. And since the end of the war, the market capitalisation of the stock market has quadrupled to a value equivalent to 40% of Sri Lanka’s 50 billion dollar GDP. Such inflows of global capital continue to reinforce the bubble economy.

Austerity, Crisis and Dispossession

Such a financial and land bubble sustaining this second wave of neoliberalism, when punctured by a national or international economic problem can lead to capital flight, a sudden devaluation of assets, a balance of payment crisis and a domestic banking crisis. A severe economic crisis, much like previous crises in developing countries around the world, would further deepen Sri Lanka’s debt already borrowed at relatively high interest rates. This could lead to another IMF intervention to bail out global investors coupled with further calls for budget cuts, resulting in widespread dispossession. Indeed, Marxist theorist David Harvey has shown how accumulation through dispossession is very much a characteristic of contemporary economies.

This is also the logic of the current austerity program. With the fear of capital flight hanging over its head, the Rajapaksa regime is financially constrained to address protests linked to cost of living and repressed wages harking back to the decades of war. The regime is unwilling to address issues of redistribution or for that matter drastically cut military expenditure, which in any event, is also responsible for considerable employment. Rather, it is committed to maintain the confidence of finance capital from which sections of the Sri Lankan elite also continue to gain.

As such, protests are likely to mount as evident from recent university teachers’ trade union action, protests in the Free Trade Zones, resentment against slum demolitions and rising discontent in the tea plantations. This is where the repressive arm of this authoritarian regime is likely to come down rather than make concessions. Furthermore, over the long run, this second wave of neoliberal transformation is likely to impact class formation; not only the dispossession of the urban and rural poor, but also the economic marginalisation of the lower and middle classes relying on the state sector for employment.

While progressives are acutely aware of the authoritarianism of the Rajapaksa regime, there is little critical analysis of the nexus of global finance and authoritarian state power which is transforming state and society in Sri Lanka. Historically, this economy was susceptible to the winds of global economic forces because of its size and its dependence on the external sector, particularly of exports and imports. At one level then, Sri Lanka cannot avoid integration into the global economy, but the question is on what terms and in whose interests? Is it for global capital and the local elite or the broader citizenry of Lanka?

The second wave of neoliberalism engendered by global finance capital and an authoritarian regime is likely to devastate broad sections of Lankan society. Hence the urgency in demystifying the ideological claims of high rates of economic growth, high per capita GDP and massive capital flows. Furthermore, the importance of raising political economic questions about forms of dispossession, increasing inequalities, uneven development, cuts in social welfare and the dangers of a deepening dependent economy. An alternative economic program for Sri Lanka should be linked to both a progressive economic vision for the developing world in general and a regionally integrated economy on mutually beneficial terms. It should be an economic vision coming out of local struggles that empower the marginalised and dispossessed, and informed by global political economy in our turbulent times.

This article is based on a talk given at the Socialist Study Circle at the N.M. Perera Centre on 28th July 2011.

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4 Responses to Sri Lanka: Global Finance, Authoritarianism and the Second Wave of Neo-liberalism

  1. neil says:

    Great article Ahilan, thanks for sharing. Your analysis of neoliberalism in Sri Lanka works well at the level of both the particular and the general. Many of the trends you mention as part of the second wave—austerity and neoliberal reform of social services, immense infrastructure development for tourist and service industries, large-scale floating of sovereign bonds—have also been occurring in, for example, U.S. municipalities.

    I would be interested to hear more about how you view the relationship between neoliberal reforms and the war in Sri Lanka. As you say, a “second wave of neoliberalism” requires both a stable, post-war regime, and availability of international financial capital (based on global economic conditions). To what extent do you think the one feeds back into the other? Were there, for example, “external” factors involved in the collapse of the Wickramasinghe government, such as a failure to attract international capital (perhaps not available in the early 2000s?) to help shore up its legitimacy? Related to this, I’m wondering what the balance of power is in the current ruling bloc of nationalists and neoliberals? How does this change over time, based on the ebb and flow of international finance capital? I’m always fascinated by the fact that international finance capital is able to work through local authoritarian regimes that are ostensibly based on principles quite different from it.

    One last thing, related to the West/non-West question… do you see any benefit to distinguishing between regional powers, bilateral aid, international institutions, and global (Western) finance capital? Or, rather, at what level of abstraction do you think these distinctions should be made?

  2. Neil, thanks for the engaging questions.

    Yes, while need for a post-war stability is specific to Sri Lanka, I do believe the acceleration of neoliberal reforms and the inflow of global finance capital do need stability. I don’t think it is any coincidence that the emphasis on security over the last two decades emerged after neoliberalism’s take off. While the language of international peace and security has existed for a while it has merged with development, much more in the post-Cold War era, when global hegemony worked against the very proxy wars that were encouraged by the US during the Cold War.

    Now in Sri Lanka, when the Wickramasinghe government attempted the second wave of neoliberalism, their push was to merge the peace process with neoliberal reforms. Some of us thought of it then as a neoliberal peace. In fact, the donor community (consisting mainly of Japan, EU, US and the multilateral donors) pledged 4.5 billion dollars in reconstruction and development aid at the Tokyo Donor Conference of June 2003. It was at that conference that Japan, US, EU and Norway appointed themselves the Co-Chairs to the Donor Conference and then transformed themselves into the Co-Chairs to the Peace Process. Norway was the facilitator/mediator of the peace process and was central to internationalizing the peace efforts. I remember at that time a donor conference for Afghanistan around the same time could hardly muster 1 billion dollars, despite the US pushing hard for it. So, the reason there was so much excitement among the donors with respect to Sri Lanka was not just because of the peace process, but probably because of the linkage with future neoliberal reforms. But note that this pledge of 4.5 billion dollars was bilateral and multi-lateral aid, different from global finance capital, which would only have entered after stability had been ensured and neoliberal reforms were on their way.

    The Wickramasinghe experiment failed mainly for internal reasons. The LTTE did not want to move forward with the peace process and the Wickramasinghe government was defeated in the elections, arguably also due to opposition to such neoliberal reforms.

    Now, the distinction I would make between bilateral aid from say China, Japan and India versus global finance capital is that, the latter is much more prone to speculation. Global finance capital also would encourage financial liberalisation in particular, and given its affinity for quick returns, is more likely to feed real estate bubbles like it also did in various cities in the US. However, “the regional powers, bilateral aid, international institutions, and global (Western) finance capital”, as you put them, these various actors/forces/institutions do reinforce each other.

    As for the balance of actors within the ruling bloc between the nationalists and neoliberals, the distinctions are fluid at one level, because, ofcourse nationalists can also be neoliberals and vice versa. But my sense is that during the last years of the war and soon after the war, the bloc was weighted much more with nationalists, but now, more and more actors from the business community and neoliberal policy makers are becoming part of the bloc.

    Interesting, just couple days ago, Milinda Moragoda, a central actor, and a former senior minister, involved in merging the peace process with neoliberal reforms between 2002 and 2004, and who had crossed over to the government few years ago, has now joined the SLFP, the party of President Rajapaksa. Furthermore, with the blessing of the President and the President’s brother the Defence Secretary, Moragoda is contesting for the Mayor of Colombo on October 8th. Significant here is that the Urban Development Authority was brought under the Defence Ministry last year, and slum demolitions and the “beautification” of Colombo are already underway. Not long ago, it would have been a major come down for a former minister and that too someone of Moragoda’s stature to contest for Mayor. This is a major move in this second wave of neoliberalisation; we know from experiences around the world that the neoliberal city attracts global capital. Moragoda is considered to be a politician with strong links to Washington, and in his campaign, he has emphasized getting the support of international actors to transform Colombo. His interview in the State-run Sunday Observer is telling of what is in store, and interestingly very few people in Sri Lanka including those opposed to the government are finding it hard to criticise Moragoda. Here is the link to his interview:

    And if you don’t read the interview but want a sense of his language in the interview:

    “The other aspect is that in the modern context, Local authorities are really run like companies. When we look at major cities in the West and in Asia such as Japan, they are run as companies and administered efficiently. The whole idea is to provide services to the people. It is like a service company. Citizens pay rates to the council and the council provides the service to the citizen. So what happens there is the citizen becomes a consumer. In that context it is not a political institution.”

    So, yes, the bloc is increasingly bringing neoliberal actors under its fold.

  3. Hello, just wanted to mention, I enjoyed this post.
    It was funny. Keep on posting!

  4. An intriguing discussion is worth comment. I do believe that you need to write more on this topic, it might not be a taboo subject but generally people don’t talk about these topics. To the next! Kind regards!!

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