Whither Sri Lanka if it’s a Depression? A more troubling (and probably more likely) scenario

Kumar David-May 16, 2020, 1:01 pm


There has been a flurry of articles, some excellent, others good in the domestic and global Lanka-oriented electronic media regarding the predicament, outlook and recipes for the future of the economy. Names that readily spring to mind are Nimal Sanderatne, W A Wijewardena, Sirimal Abeyratne and Ranga Jayasuriya who write regularly, and one-off pieces including Bilesha Weeraratne, Vagisha Gunasekera, Himan Punchihewa, Andrew Sheng and Asif M. Zaman. Most important by far was an interview with Central Bank Governor W.D. Lakshman in the Daily Mirror on 14 May. There are other contributions, too many to mention, about the way forward, economic restructuring, paradigm shifts and reorganisation.

Local writers focus, naturally, on the economic fallout from the lockdown, curfew and disruption and briefly or only in passing mention that the global economic environment will be grim for the next 06, 12, or 18, or god knows how many months. Solutions offered in these early days, understandably, are generalities: aggressive, transformational, new-normal, the E-way, systemic change, digital, work-from-home, the gig-economy, prioritise foreign exchange, solve the insoluble (sic!) debt stranglehold etc. Always the external or global economic environment is given only light mention - except Bilesha Weeraratne’s focus on foreign worker remittances which is not quite what I want to touch on in today’s column.

My proposition, at least for arguments sake today, is that a global depression, not a mere recession lasting two or three quarters, is looming. It’s not going to be a tsunami or a hurricane, not even Category 5; it’s going to shake the world to its foundations over the next three to five+ years, if not longer time span. George Friedman has described the difference between the two, better than I can, and here is what he says. I have padded it quite a bit and "improved" it by inserting specific relations to capitalist political-economy.

George Friedman: Recessions and Depressions; The key differences

Recessions are a painful but necessary part of the capitalist business cycle. They cull weaker businesses and shift capital and labour to better uses. Usually they last for two to four quarters.

Depressions are nurtured by capitalism’s endogenous, that is natural progression and long-waves of evolution, but triggered (catalysed) by exogenous forces such as wars or disease.

Depressions are always multi-national; recessions not necessarily so.

The measure of the pain of a depression is the extent to which it destroys society, creates refugees and engenders migration within or between countries. It extinguishes hopes and dreams.

The last US depression in the 1930s arose from war and was resolved by war.

Depressions create desperate people hungry for everything, especially hope for a future.

The coronavirus has similarities to war, such as the state mobilising people and diverting them from work. WW2 diverted the people of Europe and America into the military.

The world doesn’t go back to what it was after a depression. A mild one will change people’s dreams, but they will at least have some. World wars, however, kill tens of millions.

How do the odds look that in the next three to five years global capitalism will suffer a devastating shock; something for worse than what it is passing through right now in Q2 2020? If you are the type that keeps in touch with the Financial Times (UK), the Economist magazine, NY Times and such like, what I call apex journals of the class enemy, then you could not have failed to notice that the consensus is that the future will be very troubling. Quantitative Easing (QE) driven by MMT (Modern Monetary Theory) says "Print, print, print" flood the world with money; this is the approach governments and central banks have chosen. This is the only way they can save banks, corporations and capitalism itself from going to the wall. And save some jobs and stave off social rebellion. Are they mad to plan the creation of $18 trillion of global debt? Don’t they see that down this road lie the great avalanches and deep canyons? Of course they see; but there is no other way to bail-out the prevailing global order. Society and the state must save the system; socialise costs, having all these decades privatised gains.

The web, the media, the Financial Times, the Economist, the IMF, the EU, Goldman, Fund Managers and pundits have assailed us with analysis and forecasts. The consensus is that 2020 will be annus horribilis. A few stick out their necks with predictions of a V-shaped recovery after two bad quarters, but most have their feet parked firmly on terra-firma. We will be lucky to stave off a prolonged and socially disruptive global economic downturn, a depression - US and Western economies will not stabilise in 2021. The reason for pessimism is precisely the actions taken by governments and central banks as a ‘rescue’ measure – printing money like tabloid newspapers, QE that is multiplying sovereign and corporate debt by trillions of dollars and helicopter money. Print-all-you-can MMT! Global finance capital is on a trajectory foredoomed to become an astronomical debt-trap from which it has no escape.

Harsha Sirisena says: "Apologists for QE point to the absence of goods price inflation to date (ignoring massive asset price inflation) but this is due to the one-off effect of hundreds of millions of rural Chinese flooding the cities to make China the workshop of the world. This effect has played out and with ongoing de-globalisation, it is only a matter of time before inflation reappears. I have no doubt we will see a repeat of the great inflation (1965-1982) over the next decade".

If it turns into a Global Depression

employment will be devastated in Sri Lanka

Staying with my premise that we are likely to see an immense global economic crisis in the coming years, that is a depression, how will the analyses of local commentators that I adverted to in my opening para be affected or altered? I envisage three big differences if my assumption of a deep global crisis holds true. The first, we are likely to see a massive increase in unemployment in several sectors, especially those manufacturing apparel for Western markets and hotels & tourism. Tourism cannot recover unless and until the global economy recovers. Chronic unemployment will be the most socially disruptive of all the effects that a sustained global slump will have on Sri Lanka. The second negative effect that we will suffer is that if oil prices stay depressed, then our Middle East dependent remittance economy will suffer a setback. Thirdly and sadly the many constructive suggestions offered by local commentators that I very briefly enumerated in my second paragraph will mostly end up pie in the sky. All this makes for a scary scenario. Don’t blame me, I am only the messenger reading what is written in the leaves; I did not invent global capitalism or its endemic crisis, nor am I the bat that brought corona.

Does this mean that we remain frozen in passivity with hands folded? Of course not! The way to go however is somewhat different from the enthusiasm of those who want the reorganise, use high tech for fancy products and turn to digital as a magic bullet. Yes, I do believe that all this, that modern technology, has a crucial role to play. I am certainly not a Luddite. But I also accept that a consumerism driven life style that seeks and perceives god in the goods market, sees "little in nature that is ours" and rips apart the environment for greed and profit cannot constitute the value basis of a post-corona shattered, depression traumatised domestic and world order. I am not an introspective nationalist and do not accept that we need to turn inwards and backwards to our long-perished roots. Indeed, we must be global, to be citizens of the world, but of a different world. This is bordering on the lyrical; I’d better stop and get back to hard reality.

There is much reference by local writers to new product lines and the need to explore new overseas market opportunities; that is turn our feet in other directions. But if we are considering a context of collapse and destruction of known economics on the scale of a depression, we will have to do more than look at our feet, we will have to ‘lift up our eyes unto the hills’ and adapt to wholly different international order. There will more to impending global changes than the passing of the American hegemon’s pole-position in the pecking order, and more than the rise of China who knows how high. There is all be other skirmishes, wars and rearrangements, both material and military. (I regard a real Sino-American war as impossible). Unlike our South-East and East Asian neighbours Sri Lanka has been pretty neglectful in strengthening its economic ties with regional trade and development blocs. That’s something that will have to be put right straightaway.

I will wind up by restating the cardinal premise of this essay. We are on the cusp of an economic catastrophe such as not seen in our lifetime, it will have corresponding deleterious social consequences, and because the world is far more interconnected than it was in the 1930s, its global impact (Asia, Africa, South America and the Middle East) will be correspondingly more profound than the effects of the Great Depression of the 1930s. The timeframe to keep in mind is three to five years. I am sorry, I apologise; but I only bear bad tidings; I didn’t actually manufacture the world order.