20 highlights
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What people do when they storm palaces is broadly instructive about what comes next.
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Gotabayaâs military plane didnât possibly have space for two more passengers. Blood is thinner than aviation fuel.
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There are two lenses to apply. The first is the structural weakness in the Sri Lankan economy that has persisted for a long time. Then there is the proximate cause of the recent past that led to sovereign debt default and bankruptcy.
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In 1948, the British left Sri Lanka (then Ceylon) with an economy that was quite similar to the many similar resource rich nations of the time. Manufacturing was non-existent, banking services were limited to a couple of cities and the mainstay of the economy was the exports of tea and rubber which were vulnerable to commodity cycles. However, it started with a good base of foreign reserve surplus that could cover imports for over a year.
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With this starting point, the obvious policy measures should have came into play. One, develop a manufacturing sector (public and private) that stimulates growth in the economy and reduces the dependency on imports of intermediates and finished products. Two, to develop the banking sector and create development finance institutions that could provide credit for this transition in the economy. Neither happened.
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By the mid-60s, Sri Lanka was contending with both a fiscal deficit and a current account deficit. The classic twin deficit pincer that low-income economies get caught in. Over the last six decades, it has struggled to come out of it.
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Things didnât go badly for Sri Lanka only in the last few years. Its economy was always fragile, as the seventeen different IMF bailout packages that started in 1965 indicate.
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The comparison with India during the same period is useful. India chose the more inefficient state-led industrialisation and capital creation model and overdid it by the 70s with the nationalisation of the banks. But it led to the creation of a manufacturing sector and the availability of credit. India also created relatively strong institutions for a developing economy during that time. That meant we avoided a sovereign debt default scenario till 1991.
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In the early 80s it âopenedâ its economy on the behest of the IMF that made these conditions collateral for further bailouts. The dismantling of duties and exchange controls made Sri Lanka even more dependent on imports as its nascent industries couldnât compete with the foreign goods flooding in. The twin deficit continued to worsen and further de-industrialisation set in.
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There are things Sri Lanka is commended for during this time. It has the best HDI metrics in the region, with good quality healthcare and education available to its citizens. These should lead to better economic outcomes, provided the structural issues are addressed. That these metrics themselves were built on foreign debt makes their sustainability suspect.
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Why did things go from bad to worse in the past few years? Two things happened. One, the composition of Sri Lankan debt changed for the worse. Sri Lanka issued international sovereign bonds (ISBs) at attractive coupons that got in global fund houses into the mix with more dollar-denominated debt.
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The market borrowings now contributing to 47 per cent shot up in the last decade. This fresh source of funds further lulled the policymakers. The government continued to spend and feed domestic consumption without a plan to control the fiscal deficit while borrowing to build infrastructure and pay for imports.
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The pandemic hit tourism, a significant contributor to the economy and a source of precious foreign exchange. The widening current account deficit had to be controlled, leading to another bold idea. The government announced an overnight transition to organic farming and banned the import of synthetic fertilisers and pesticides. There was no real conviction to organic farming here. It was just a means to reduce the import burden and bring the current account deficit under control.
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Then the Ukraine war sent oil beyond US$ 100 a barrel, which was the last straw. The central bank supplied over US$ 2 billion in the past 12 months to import essential items. But eventually, they all ran out of runway. And we got here.
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When our level of understanding of another country is poor, we resort to cognitive shortcuts to make sense of the news coming from there. We interpret happenings in a way that reaffirms our current fears, hopes, and anxieties. While parsing information about a stronger adversary, we start with a sense of awe. When a weaker adversary makes it to the headlines, we start from a position of derision.
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Excessive reliance on these cognitive blinkers indicates that we donât know enough about another country. And since we donât know enough, we cannot differentiate between trash takes and informed opinions, rumours and facts, and between motivated actions and serendipity. It is easy to see these blinkers in action on social media discussions on Indian foreign policy issues.
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Of course, these cognitive shortcuts are the easiest to find in Indian discussions on China. Because we understand so little about its culture, language, and politics, we almost always solely rely on our preconceived notions. So, we are absolutely confident that the Sri Lankan economy faltered only because of Chinaâs debt-trap diplomacy, that Chinaâs already deployed AI for advanced decision-making in military systems, or that Chinaâs social credit system is a real-life incarnation of the Black Mirror episode, Nosedive.
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A typology of government actions can be extremely helpful. Faced with a policy problem, such a typology can serve as a menu of actions that governments can respond with.
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OâHareâs 1989 paper A Typology of Government Action says: all legitimate government behaviour can be classified in eight classes.
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Eugene Bardachâs typology in A Practical Guide for Policy Analysis is the second one I came across.