The following article appeared in the Sunday Island, the Sunday edition of the Island, a popular English daily in Sri Lanka, on February 19th, 2012.
“The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.” – John Maynard Keynes
When economists, policymakers and intellectuals refuse to identify economic problems and address them, the people do. That is the meaning of burning tires, mass protests and strike shutdowns. Colombo and many parts of the country were stranded on Monday with private buses on strike. As this article goes to press, Chilaw is in a state of curfew, after militant protests by the fishing community met with police firing killing one protestor and injuring several others on Wednesday. The JVP protests in Colombo met with the heavy hand of the police including tear gas. And major protests are continuing to be mobilised. While the facts are clear – 9% increase in petrol from Rs 137 to Rs 149, 37% increase in diesel from Rs 84 to Rs 115 and 49% increase in kerosene from Rs 71 to Rs 106 – this week’s protest mobilisations are a far better gauge of the economy than what any economist may write.
Few governments would dare to make such large and sudden increases on an essential commodity. Such contempt would readily earn the wrath of the people. However, there have been a few such moments in our history – the most famous being the increase in the price of rice from 25 cents a kilo to 70 cents a kilo and cutting the mid-day meal given to school children in July 1953. The UNP Government at that time felt it should make those cuts with the mounting economic problems following the Korean War boom. Those cuts in subsidies culminated in the Great Hartal of August 1953, crippling the country with the Cabinet of Ministers shaken by protests and holding their meeting on the British war ship, HMS Newfoundland.
The hasty increases in fuel prices by the Rajapaksa Government – in the face of increasing global oil prices, US sanctions against Iranian oil and the balance of payments problems – were met with similar outrage from the population. While the Rajapaksa Government is hastily negotiating subsidies with various constituencies to ensure the protests don’t reach crippling proportions, such economic blunders are etched in the political memory of the masses. Indeed, the Hartal of 1953 was a major political milestone in the eventual defeat of the UNP regime with the emergence of an SLFP regime in 1956.
Fetish of the Long Run
I began this article with the well known quote from Keynes, as a reminder to those economists who will justify the fuel price hike as a necessary correction in the “long run.” For what does the “long run” mean to people lacking decent wages to meet their daily expenses? Equally weak are the arguments in the media including by the UNP, that our current woes are the result of waste and corruption. The situation is much more serious. The problem here is not that policy is being implemented inefficiently, or that corrupt officials are deviating from government prescriptions. The failure lies with the policies themselves, and the larger project of which they are a part.
Many of the economists who are critical of the Government now for the balance of payments problems are in favour of the economic policy trajectory. They in fact believe the Government has not gone far enough with liberalisation; including by completely floating the exchange rate, more cuts in subsidies and further financialisation of the economy. Indeed, this has been the neoliberal prescription of the IMF, World Bank and other institutions, even if the economic experience of many countries around the world should refute such policies. Furthermore, the UNP was committed to such neoliberal policies during its stint in power from 2002 and 2004, and might be in a similar if not worse situation if it were in power now.
The urgent need of the hour is to identify the character of this crisis. Economic crises can not be explained in purely causal terms. They emerge over time and erupt into visibility when triggered by shifting economic forces and political trends. Was it the US sanctions against Iran, the increasing global oil prices, or our balance of payments concerns with increasing imports that finally pressured the Government to suddenly make this drastic move? The answer is a combination of these factors, and they are inter-related; global oil prices will be impacted by US sanctions and our increasing import bill is tied to increasing oil prices.
More importantly, these seemingly immediate factors were influenced and shaped by economic forces and policies over years. Why did the Government depend on Iran for close to 90% of oil and not diversify oil imports? What measures were taken to address the volatility in global oil prices in recent times? How have tax reforms and trade liberalisation impacted the import bill over the last two years? While considering the problems with excessive imports and the cost of oil, one should not forget the looming crisis in flows of capital tied to the Government’s euphoric sale of sovereign bonds and promotion of a fickle stock market. The coming together of various economic and political forces and pressures at a historical moment is called a conjuncture, at times leading to a crisis and occasionally resulting in major political and economic shifts.
The “long run” that Keynes criticized is now the fetish of mainstream neoclassical economists who provide legitimacy to neoliberal policies and ideology. They disregard the economic life of the people, and focus on an abstract economic equilibrium in the “long run” which they claim will be solved by the market. When the crisis deepens or a new crisis emerges, yet another promise of prosperity in the “long run” is made. In the meantime, sections of the national elite and global financiers continue to accumulate wealth during the prolonged crisis, while the larger population is dispossessed and impoverished.
Global Market Forces
Because of its size and structure, the Sri Lankan economy is particularly susceptible to global market forces. This is as true of the crisis of 1953 and that of 1970s as it is of our own era. The question is what steps the Government takes to reduce the impact of such forces on the economy, and particularly the economic lives of the people. Unfortunately, the Government has been opening the flood gates for such global market forces. Soon after the end of the war and beginning with the second term of the President, neoliberal policies consisting of tax reform, trade liberalisation and financialisation were accelerated, leading to an initial boom in real estate, stock market and sovereign bonds. Such neoliberal policies were encouraged by and earned the support of the IMF and international rating agencies, boosting the business confidence of global financiers and increasing the flow of global finance capital. The problem is that the very same barriers that were brought down to invite finance capital can also ravage our economy when there is capital flight.
In November, the President boasted in his Budget speech: “Despite global uncertainties, our country has been able to sustain an 8 percent growth momentum … our country enjoys a per capita income of US$ 2,800.” But what does the economic report card look like now? The foreign exchange reserves boosted last year by sovereign debt is continuing to fall from US$ 8 billion to around US$ 6 billion. The stock market index has dipped from a peak of 7,800 last year to below 5,000 this week, a fall of 37%. The exchange rate has dropped from Rs110 to close to Rs 120/dollar. And if the Central Bank decides to float more sovereign bonds in these conditions, global financiers will ask for higher interest rates, thereby deepening the cycle of debt. So the terms on which the Government has been assessing the economy is also in a dire situation. The point, however, is that high economic growth and per capita income are the kinds of abstract economic data that have meant little to the people’s economic lives.
In the months ahead, the Government will increasingly be at the mercy of the IMF, who will demand greater cuts in subsidies. In fact, rupee depreciation and oil price increases following IMF pressure have effectively cut subsidies through price inflation. Even the recent pay raises won through strike action over the last many months will be inflated away. These are necessary consequences of neoliberal policies to open the economy, which the accounts of corruption and wastage do not capture. And this is where the economists who are critical of the Government now, but subscribe to neoliberal policies, are in fact part of the problem.
Class Character of the Crisis
This crisis is a necessary outcome of a project that has a strong class character. If we look at the fuel price hikes, the largest increase was for kerosene jumping close to 50%. This has devastated the fishing communities, where 80% of the fishing boats run on kerosene. Reflecting the urgency, Northern fishing communities repressed for years by militarization have also decided to strike in solidarity with Southern fishing communities. According to Census and Statistics data, 16% of the estate population and 14% of the rural population do not have electricity and use kerosene for lamp lighting. Furthermore, 15% of the urban population use kerosene for cooking. The price of kerosene in 2002 was Rs 21, which is over a five fold increase with the recent price hike to Rs 106. Therefore, the most affected are the subaltern classes; those who work in the informal sector, who may not belong to unions and who are excluded from state services and even subsidies due to illiteracy and other social woes. But the crisis this time is also national as evident from the 37% increase in diesel affecting a 20% increase in bus fares. Furthermore, to pour fuel on the outrage of consumers, household electricity charges are to increase by 25% to 40%, but industry and hotels will only see an increase of 15%.
A positive sign this week has been the swift and defiant protests by the masses. In a moment, the Government’s economic program of beautifying cities and expanding the tourist industry have been exposed for what they are, far removed from the daily economic concerns of ordinary people. The widespread anger at the Government expressed from various quarters is symbolic of a people coming together for their social and economic interests. When dissent and consciousness is raised by people protesting in the streets, it eventually finds political expression. But the road ahead for the economy looks arduous, as prices of everything from lunch packets to milk powder to bread will also increase. These are only the early signs of a deeper crisis in the making with the decades of neoliberal policies accelerated over the last three years.
These cost of living increases will affect the elite the least. Some demands the mounting protests should consider are increased taxes on the financial sector, increases in import tariffs, and higher taxes on luxury items. Furthermore, this is the time to increase subsidies to the lower classes and provide higher allocation for welfare including education and health. That is one way to cushion the impact of this economic crisis. Such demands should be tied to reversing the continuing opening of the economy including financialisation. But that would be an ideological break from the neoliberal policies which mainstream economists will oppose and the Government cannot stomach. The protests must mount and confront the inevitable State repression, for that alone can change the disastrous economic trajectory.