Crisis choices: Economic fundamentalism or economic realism?

By DR. DAYAN JAYATILLEKA

Economics is not a hard science. There are no scientific axioms in economics that can be universally accepted. It all depends upon the economic paradigm or episteme one operates with and within.

Economic policy is a matter of choices. There is no one, single, correct answer that is self-evident. It all depends on where you are coming from and want to get to.

Unlike in the case of hard science, where the correct methodology applied to the data points you in a certain direction, in the case of economic policy the choices you make can take you into the minefield of civil war.

UNP-NOMICS, POHOTTU-NOMICS, JVP-NOMICS

In economics, the dogmatic rightwing liberal school of economic thought has never figured out what happened to the periods of Ceylonese/Sri Lankan history they applaud and approved of:

1. The UNP of the 1950s, which ended with the hartal of August 1953 and Sinhala Only 1956

2. The UNP of 1965-1970 which ended with the rise of the armed JVP and a two-thirds majority for the SLFP-led coalition;

3. The UNP of 1977-1988 which led to a massive Southern insurrection and the near-decapitation of the UNP (and had to be rescued by Premadasa through a shift to a very different economic paradigm);

4. The UNP of 2001-4 which ended with the Presidential ouster of the PM and the electoral victory for Mahinda Rajapaksa;

5. The UNP of 2015-2020, which ended with the electoral extinction of the UNP.

This is why I do not trust for a moment, the prescriptions of those who belong to that same school of economic thought and have made no public criticism of and rupture with the policies of those times.

When these successive experiments have ended in sociopolitical backlashes, it would be suicidal to approach the same doctors for the same diagnoses and prescriptions.

Sri Lanka has experienced twin disasters:

(A) Statist closed economy/low growth (SLFP 1970-1977, SLPP 2019-) and

(B) Open economy/rapid growth/trickle-down/free-market fundamentalism (UNP)

The JVP-NPP’s discourse and printed proposals so far, take as a starting point the denunciation and rejection of the Open Economy of 1977. That alone tells us that they cannot offer a solution to the present crisis or a better future for Sri Lanka. the JVP’s rejection of the Open economy instead of a progressive reform OF the Open Economy will lead us to the kind of abyss that has given socialism a bad name as an economic system.

Thus, three options we are offered, namely the current regime’s policy which is a throwback to that of Sirimavo Bandaranaike -NM Perera, the Ranilist UNP’s economic policy –summed up in the ‘IMF First!’ approach—and the JVP’s rejection of the Open economy, are all disastrous.

PROGRESSIVE PRAGMATISM

Based upon empirical evidence, it is only the paradigm of President Premadasa that gave us high growth including rapid industrialization, high inflows of foreign investment, a lively stock market and zero-socioeconomic polarization/backlash, because it also witnessed rapid decline in inequality. I do not trust anyone who fails to recognize that fact.

That is also why I insist that any discussion of ‘exits’ from the crisis and an economic strategy for Sri Lanka’s future, takes as a start-line, the economic paradigm and policies of President Premadasa.

It is only that combination of ‘growth with equity’; of state-led social and economic intervention and an Open Economy, that can avoid social instability and ensure a better future. That is what Sri Lankan Social Democracy looks like.

Thanks to the Rajapaksa regime’s policies we are poised on a volcano. The wrong policy prescription will make the coming explosion far worse than it needs to be. The problem is not the IMF as such. The problem is the austerity programme that will be presented as a solution either by the IMF or this Government or its successor.

This country has seen far too much turmoil and bloodshed, and I have been in and around too much of it, that I tend to fight against anything that would cause more of it.

In the context of a grave and deepening economic crisis, if we are to avoid further social and political polarization, the political leaders and policy-makers, current and aspirant, must look for the Middle Path or Golden Mean, because this provides and has almost always provided the best solution.

The economic paradigm of John Maynard Keynes is an excellent example of a middle path between free-market capitalism and state-controlled communism. Keynesianism was the animating spirit of the Beveridge plan and the welfare state erected by the Labour government of postwar Britain.

If we move into the realm of economic reform at times of grave crises we have President Roosevelt’s New Deal, which was a middle path between unreconstructed capitalism and Marxist socialism. While many countries were succumbing to the lures of either Fascism or Communism, the Rooseveltian New Deal saved US democracy from being rent by civil conflict and class struggle during the great depression.

If anyone thinks that these are old-fashioned ideas, I would suggest he/she reads the writings of Nobel prize winner Joseph Stiglitz and Paul Krugman, not to mention Jeffrey Sachs and Robert Reich. In the USA today, the economics of President Joe Biden represents, in his own words, a return to the philosophy of Roosevelt’s New Deal.

How has the Middle Path in economics and especially in the context of economic crisis, worked in Sri Lanka? At a time of devastation through civil wars and interventions, Presidential candidate Ranasinghe Premadasa deliberately struck a neo-Rooseveltian chord, entitling his 1988 election manifesto “A New Vision and A New Deal.” In his policy practice he eschewed the twin extremes of, on the one hand, the establishment thinking of rapid growth which awaits ‘trickle-down’, and on the other hand, and on the other, the crassly egalitarian socialism that the JVP stood for.

The Premadasa paradigm was of growth with equity, which succeeded in reviving growth rapidly, attracting foreign investment, rejuvenating the stock market while simultaneously—not sequentially—reducing inequality through a plethora of programmes such as Janasaviya, free school uniforms, free mid-day meal, etc.

In a recent speech on the ongoing economic crisis, Prof Howard Nicholas of the ISS at the Hague, and the University of Rotterdam, emphasized that industrialization was the only solution, and pointed to President Premadasa as the only leader who actually embarked successfully on that path.

Premadasa consistently took a Middle Path and did so creatively. In 1992, he addressed the problem of loss-making plantations neither by maintaining the status-quo nor by selling the plantations to foreign corporates as President CBK did in 1995. Instead, Premadasa granted five-year renewable management contracts to Sri Lankan private companies.

Another example of the Middle Path in economics is that of East Asia, namely Japan, China, South Korea and ASEAN, most notably Vietnam. Theirs was not the path of relying excessively on the free-market to work its magic, as in the West. The role of the state is much greater in the East Asian model than in the neoliberal one. Therefore, the formulae of Lankan neoliberals, to slash state expenditure, has to be looked at more closely and with greater discrimination.

At a moment when the JVP’s Anura Kumara Dissanayake and the FSP’s Pubudu Jagoda and Duminda Nagamuwa have attacked the IMF as a solution, and given that these parties drive a powerful union movement, I renew my call for an Economic Roundtable to arrive through consultation at a broad consensus, based on mutual trade-offs, so as to manage the economic crisis.

The country must go to the IMF only having agreed on the parameters and red-lines as pertains to austerity measures which will impact upon the working people and the poor.

Where should the cutbacks be? Where should they land? Those are choices. Who will make them and for what reasons? To put it bluntly, who should carry the burden of the crisis and the so-called solution? Is it the 99% of the citizenry or the 1%?

There are no axiomatic solutions. Take the issue of State-Owned Enterprises. From the neoliberal right to the regime’s tough Ministers such as Dilum Amunugama, there is an advocacy of privatisation, but is this the only solution? The unions can help identify where the cuts can come.

Any attempt at slashing public expenditure without consultation and the coming storm will turn into a tornado. This in turn could provide the opportunity for the installation of military rule.

Social Democracy is a Middle Path between Right and Left, consisting of a synthesis of ideas of Right and Left.

To sum up, I would use the markers ‘Keynes’, ‘Roosevelt’, ‘Social Democracy’, ‘East Asian model’ and ‘Premadasa’ to demarcate the third space in economics and economic policy; the Middle Path which Sri Lanka should follow.

The Middle Path or Golden Mean is the only approach that will get the citizenry on board the adjustments that are necessary in the context of this crisis. It is a Middle Path between what the minimum that economic policy planners, local or foreign, propose as imperative reforms, and the maximum that the citizens, starting with the working people and the poor, are willing to accept. No economy reforms deemed as fundamental by policy wonks, will be implementable without the consent of the citizens. That consent has to be obtained by the willingness of policy-makers to come halfway.

What the economic fundamentalists utterly fail to realize is that for any policy package or measure to work, the people, starting with those are directly affected, are willing to co-own those reforms. They will do so only if they have been consulted and have participated in the design of policy. Once they feel they co-own the policy they will participate with some degree of voluntary discipline.

A leader with the track record of the most spectacular development success in rapid growth with simultaneous equity, explained the fundamental approach with the following words:

“We as a government cannot claim credit for this. It was and is a people’s effort. We mobilised. We assisted. But it was …the people who participated with unprecedented commitment. Why is that? Why are the people so keen to participate? The answer is very simple. It is because they are consulted. It is because they are involved. It is because they benefit directly.”

(President Premadasa’s, Speech at Gam Udawa 91 exhibition, Kamburupitiya, July 23rd 1991)

Contrary to the approach of neoliberal economic fundamentalists, those are the three practical criteria that any successful economic policy programme must meet: Are the people consulted? Are they involved? Do they benefit directly? These are the criteria that any programme of adjustment and stabilisation, be it by the IMF or the Government – this one or its successor—must meet if a sociopolitical explosion is not to result.