Global recession? Impact on Sri lanka

by Kumar David

Whether there will be a global recession within a year or two and what its impact on Sri Lanka may be, are debated among the cognoscenti. On the first question there is little agreement among economists, Central Bankers and investors the world over. If there is a global recession the nature of its impact on Sri Lanka however is better understood. What there is universal agreement about is that inflation is rising the world over and in this country the rate will be high for two more years – in August 2022 it was 106% year on year, seventh highest in the world. In most countries shown on Hanke’s Inflation Dashboard reproduced above inflation is on the rise for the same reason as Sri Lanka. For decades consumption outpaced production and the shortfall was made up by foreign and debt and domestic deficit. Then one day fate caught up and debts fell due. The collapse was sudden and painful; Covid aggravated the pain but was not the root.

In some cases, the reasons are special. Cuba’s financial patron collapsed; Ukraine is caught up in a war; in Zimbabwe it was corruption and mismanagement on an incredible scale; Venezuela, Argentina and Turkey are examples of economic mismanagement on a lesser scale and Burma is a pariah military dictatorship which all the world except China shuns. Inflation is rising across Europe for more complex reasons to do with unexpected energy shortfalls (especially Germany), monetary and tax policy and industrial decline (UK for example) and social and/or political conflict (the Baltic states, Sudan, Hungary, Czechia – that is former Bohemia – Bulgaria and Poland).

The USA

The USA is an interesting special case. The Biden Administration has for reasons to do with domestic politics and to retain the country’s position as a premier global power, pumped a huge amount of money into the economy as employment and consumption support though inflation reached 9% (headline) 6% (core) leaving the FED’s much proclaimed 2% target in tatters. Salespersons, pre-school teachers, tellers and counter staff are in severe short supply because it’s better to work less hours and collect part-employment benefits than to work full time. Right now, there are two vacancies for one every unemployed person.

There is a genuine fear among economists that dreaded stagflation (simultaneous stagnation and high inflation) may be difficult to avoid in the coming years. The last time this occurred in the late 1970s the Regan-Paulson assault on US living standards sparked global neo-liberalism and, in the UK Mrs Thatcher, responded with a ruthless battering of trade unions. This reactionary global trend was not pushed back till the late 1990s by mass anti-privatisation mobilisations in developing countries and progressive political trends in the West such as the rise of Barrack Obama, China’s increased economic heft and the global ideological defeat of neo-liberalism and neo-conservatism.

Inflation has come to stay in the US since it is clear that the FED will allow the core rate to stay above 7% till 2024. The Dow Jones Industrial average is falling and it will be allowed to continue to decline. In order to retain its global position, the Biden Administration is unlikely to shrink consumer demand or slow down monetary expansion. The political scene also appears to be propitious. Donald Trump is being investigated for a slew of illegal activities and it is possible he may be convicted; in which case he will not be eligible to run for the presidency in 2024. That’s a big headache out of the way for Biden. Taking everything into account including even disrupted global supply chains, and assuming that the US economy will set the trend for the world, it seems unlikely that there will be a global economic recession within say two years.

Is Ranil fit to be Head of State?

Frankly the answer has to be in the negative; he has not been above the ugly. The link between his name and the Batalanda torture chambers is a black mark he cannot live down; the minorities will never forgive his participation in JR’s overtly racist government; the same goes for Ranasinghe Premadasa. Without denying that the JVP committed political suicide, these two men lorded it over a string of torture sites that mushroomed across the country in the 1989-93 period. As if this isn’t bad enough, the moment he took over the reins Ranil Wickremesinghe sent his khakied thugs and military goons early in the morning to beat up aragalaya protestors who were still asleep. This man does not stand above petty politics and for that reason is unfit to be Head of State or to replicate the role of QEII, William Gopallawa or Droupadi Murmu. This underlines the importance of finding a suitable Head of State.

The passing of Lilibet (Elizabeth) provides an occasion to reflect on two matters. The Monarch must be (must appear to be) above the grime of day to day politics; that is to say the roles of a Head of State and a Head of Government must be, or at least must appear to be distinct. This allows the Head of State to create public confidence in the institution of state (as opposed to the cut and thrust of politics). The second matter that Lilibet’s reign highlights is the transition from Empire to Commonwealth of Nations which the good lady and her close advisors managed with consummate skill.

There are 54 members of the Commonwealth, four more than at the end of WW2 with a population of 2.4 billion. Only two have left, Ireland in 1949 (unavoidable) and Zimbabwe in 2003 (good riddance!). The most recent four to join – Mozambique (former Portuguese colony), Rwanda, Gabon and Togo (three ex-French territories) – have no historical ties to the Empire. The frustrated sun must have hoped that at last it will have a chance to set on the blithering Empire. No such luck! Work it out, from the Pacific coast of Canada, to the South Sea Islands, NZ, Australia, the Malay Archipelago, then the huge Sub-Continent, Seychelles, Bahrain, East, Central and West Africa and the Caribbean. The odds against the sun setting on Commonwealth are getting longer by the day! Credit goes to Lilibet; Charlie-Boy may not keep it up though he is the beneficiary of “Darling Mama’s” 70-year stewardship.

Does this remark about the Commonwealth have relevance for Sri Lanka; indeed, it does. Membership of the club provides an opportunity for contact and succour from the countries of the Subcontinent, the UK, Malaysia and Australia. The opportunity to participate in gatherings brings significant benefits. Sri Lanka’s Head of State must fit the role uncontroversially.

What’s for Lanka if a global recession is unlikely?

As I have pointed out in this column previously it seems that capitalism will remain stable globally in the short-term; no one in his right mind will venture to make medium or long-term predictions in an unstable world. Given RW’s awkwardness as a prospective Head of State it is possible to kill two birds with one stone. A new constitution will have to be enacted within say a year and obviously the new president will be selected by the constituent assembly or the first parliament. There are a few suitable candidates I can think of, probably there are many more. No names at this stage please! Parliamentary elections will need to be held within say a year and it this time the front runners appear to be a Ranil+ alliance or the JVP. By Ranil+ I mean Ranil-Sajith, or some combination of SJB people with brains (there are a few) with a UNP contingent. The rump of the SLPP, the Dullas clique, the 10-party comedy and the SLFP will be wiped out. Whoever secures a legitimate and constitutional electoral mandate let him/her be PM, be it Sajith, Namal, Ranil, Anura Kumara, Tom, Dick or Harry. If we seek democracy this right is unquestionable.

If capitalism survives globally for say five plus more years (which is the same as saying a global recession is avoided for now) our country’s economy will need to navigate new waters. Few will wager anything in these parlous times except perhaps that WW3 is unlikely. If capitalism is the global option then to my mind the JVP is the natural parliamentary opposition. This is reminiscent of the reds in the Legislative Council and Parliament in the 1930s and 1950-60s. Most of the 1940s they were locked up or in exile. I have spoken of global uncertainties, so will capitalism be shaken globally to its foundations within a decade? Wow, the topic is way beyond the reach of this essay.