Staying alive in the long run

 

 2021/04/11

A lot can happen in April. This April hasn’t been good for the government: coming in weeks after its Geneva defeat, it now faces a major issue with the pandemic, with India reportedly suspending exports of AstraZeneca. The dilemma, as it stands, reminds us of the dangers of relying on one vaccine, and on one source of procurement.

April hasn’t been good for the economy either. This is import season. Workers’ remittances are down. Tourism may be on its way up, but it is hardly enough. Trade will in all likelihood be greater than this time last year, and yet, with disposable incomes coming down, the New Year won’t look like it used to. The merchants are optimistic: “It’s important that people are preparing to celebrate the Sinhala and Hindu New Year enthusiastically,” one of them tells a reporter. But then celebration isn’t everything, nor is there much to celebrate.

Not even with the import restrictions currently in place have we been able to narrow the trade deficit by as much as we should. This is natural: a lot of economic activity takes place in the informal sector. Indeed, given the unreliability of statistics and the state of the informal sector even in normal times, it’s likely the numbers aren’t telling us the whole story.

The government has taken some steps to “go local”, ranging from shoes to cinnamon cigarettes (though promoting it didn’t do much good to Minister Weerawansa). Going local are endeavours to be welcomed. However, the question can be raised whether this entails the establishment of local industry, which is what it will take to stem the tide of widening trade deficits and depleting foreign reserves.

To state the painfully obvious, a global pandemic has failed to keep us from continuing to be a nation of merchants, financiers, and importers. It is a little unfair to blame the government over a problem built into the economy and hardly attributable to one party. Yet in all fairness to those running the show now, they just don’t seem to have recognised the need to make the transition from going local to local manufacture.

Of course, there are silver linings. Regardless of what critics may say, those at the top are taking vaccination seriously. Close to a million have already got the jab, and while doubts do exist as to whether the second jab will come, no one’s complaining too much. Though it has been riddled with shortcomings you usually expect, and get, from government programmes – a lack of planning, a failure to communicate, and rumours of “vaccination lists” – these pale once you consider that the country is, somehow, getting inoculated.

Thus, as far as vaccination is concerned, the government is doing what it can. I only wish one could say the same of what it’s doing with, for, and to the economy.

Looking at it in retrospect now, the November 2019 election brought to power the largest and possibly most diverse political grouping in recent history. Going by the election results, it even paled the 2018 local government polls. The sheer size of the SLPP-led coalition, not to mention its handling of the first wave ?????, contributed to a bigger electoral landslide nine months later. The latter cannot be marginalised: it was the first two-thirds majority an administration achieved, without enticing crossovers, in a post-war setting.

The problem with large majorities, of course, is that they’re easy to lose, even without a virus around. This one was no exception: slowly at first, then picking up speed little by little, one half of the coalition has found itself battling the other.

If the ECT deal was what brought up these dissensions, their origins can be traced to the 20th Amendment, which transferred what little power one of the most popular prime ministers of the country held to the most no holds barred president this country has seen since 1977. The Amendment signified more than just a consolidation of presidential power: it symbolised a transition from the left-populist faction of the SLPP, milling around Mahinda, to the Viyath Maga Eliya (VYE) politico-military-corporate faction, centring on Gotabaya.

The Sinhala nationalist vote – the main vote that counts, for both sides – has traditionally been limited to the heartland of the south: Rajapaksa territory. Yet as the elections of 2019 and 2020 showed clearly, the SLPP, thanks to the VYE coterie, managed to woo and win over the Kelani Valley middle-class while cutting into the UNP-SJB’s traditional base: the Catholic belt. In other words, a party that canvassed votes outside Colombo found itself winning by massive, even unexpected, margins from electorates along the suburbs of the capital.

In doing so, it achieved what Chandrika Kumaratunga did in 1994: a defection of Colombo’s corporate class – a class now involved in the SLPP’s economic programme – from a dying UNP to a more Bonapartist outfit. As with Bonaparte, the upper bourgeoisie opted for the younger Rajapaksa; they chose to see him as their salvation, discarding the old compradore class now split between the UNP and a section of the SJB. Comparisons with Napoleonic France don’t end there, incidentally: Rajapaksa’s November 2019 win happened almost exactly 170 years after Louis-Napoleon dismissed the Royalist Ministry, and 220 after his uncle took power as the country’s First Consul. Who says history has to occur only twice?

Once you see in the coalition an unwieldy mix of corporate heavyweights and trade unions, of estate owners and estate workers, it’s easy to understand the contradictions that make up the government’s economic policies, both in the short run and the long.

What are these policies? In a recent interview with the Daily Mirror, Mr Kenneth de Zilwa (a capital markets expert, business cycle economist, and member of the Monetary Policy Consultative Committee of the Central Bank) makes a convincing case against conventional economic theory: that money printing leads to inflation, that trade must be based on comparative advantage, that neoclassical economics promote growth, and that we must look up to the IMF. In other words, the choice is between letting consumer imports flood the economy, and gearing the economy towards local production; no two guesses for which of these alternatives Mr De Zilwa, and I, prefer.

If this is the underlying philosophy of the regime’s economic programme, then all I can say is, it’s about time. As the history of monetarist theory, comparative advantage, neoclassical economics, and Bretton Woods financing – IMF and World Bank – shows well, there is and has always been a rift between precept and practice with regard to conventional development paradigms: what you read in theory isn’t what comes out in implementation. De Zilwa is therefore correct: we need a new macroeconomic framework, home-grown and free of import rent-seekers. (I can safely say this is the first time I have read an economist refer to “import industry rent-seekers” critically.) That is the reset we should opt for.

And yet, however laudable such a reset may be, one thing keeps it from seeing the light of day: the class contradictions within the SLPP. In a context where policymakers allied with the current government want it to deviate from conventional paradigms and affirm policies that are geared towards domestic industries and markets, how practical would “home-grown” solutions be when the government has wooed, and won over, the same import rent-seeking conglomerate class – the same class that overwhelmingly voted the yahapalanists to power years ago – opposed to such policies? To invoke a metaphor of my own, how can you fight the lion when the lion’s in the den with you, and the meat’s in your hands?

If must, of course, be noted that the pandemic has, for a moment at least, brought all these contending classes together. This is nothing to be surprised at: in times of major recessions, corporations do not necessarily oppose state intervention. They didn’t oppose it in the US in 2008, and they haven’t done so in other countries implementing tough measures to ward off the fallout of the virus. The fact that the country’s corporate upper class has gone quiet over policymakers invoking local industry, despite its dependence on import-driven consumer-led growth, should hence point at how depressions tend, in the short term, to dampen corporate opposition to state intervention.

The time bomb will start to tick once recovery kicks in. For obvious reasons, we will not be seeing that for some time – two years in the least, if not four – but when we do, I won’t be the first to wager that despite the government’s laudable position on local industry, it will start to see its most fervent advocates from the corporate sector turn to the other side if it continues to indulge in anti-rentier rhetoric. In other words, in the short run we’ll see an alliance between the interventionists and the importers, and in the long, we’ll see a rupture.

As far as the regime’s policy of “localising” and “domesticating” the economy is concerned, then, the solution would be to go full speed ahead, setting up factories, shifting from light consumer goods to heavy capital goods, establishing an industrial ecosystem linking different parts of the economy, and orienting ourselves to production, and not just trade.

The sooner it does this, the better it will handle the clash of interests between the advocates of going local and the opponents of going local. That is not going to be easy, for in co-opting a corporate class, the regime co-opted the biggest obstacle it has in seeing through what may be the most ambitious set of reforms since 1970-1977. The government should hence ensure that not even its most powerful backers prevent it from enforcing them. Put simply, it can’t afford to appease those backers. Not in the short run, and certainly not in the long.

The writer can be reached at udakdev1@gmail.com