If the Government’s maiden Budget is anything to go by, the NPP/JVP’s version of ‘production economy’ is likely to turn

Sri Lanka into a hub for dirty industries

“…in all things, there are trade-offs.”

– Joseph Stiglitz (The Road to Freedom: Economics and the Good Society)

By Tisaranee Gunasekara

On 12 April 2022, Sri Lanka declared bankruptcy. Two days later, SriLankan, the national carrier, unveiled a plan to lease up to 21 new aircrafts.

The plan failed, as it was bound to. The fact that it was made during a time of terminal economic crisis symbolises the disconnect between policymaker perceptions and the antipodal reality on the ground.

The existence of SriLankan is not essential to the national economy, national security or popular wellbeing. Yet, successive Governments have pumped billions of rupees into this financial black hole, as if keeping Sri Lanka going is contingent on keeping SriLankan afloat.

The NPP/JVP too has failed to escape this attitudinal straitjacket. The new Government, in its first Budget, has allocated Rs. 20 billion to the serially loss-making national carrier.

Between 2010 and 2014, President Mahinda Rajapaksa spent Rs. 3,572 million on foreign trips, according to a presentation made to Parliament by Prime Minister Harini Amarasuriya. The momentous trip he made to the UK to attend the passing-out parade of his second son Yoshitha from a British naval academy is not included in that figure, for it happened in December 2007.

The story is simple, sordid, and quintessentially Rajapaksa. President Mahinda wanted SriLankan to clear 35 seats for his entourage on an overbooked flight from London to Colombo via Male. The carrier, then under Emirates management, refused to comply offering to accommodate the president and some members of his entourage. An angry president chartered a Mihin Lanka flight for the trip and ordered the immediate cancellation of SriLankan CEO Peter Hill’s visa. “The decision was taken in public interest because the airline failed to look after the interests of the majority shareholder,” as per Dhammika Perera who had been appointed in April of that year as BOI chairman (https://www.flightglobal.com/political-molehill-threatens-to-topple-srilankans-ceo/77969.article).

The Rajapaksa vengeance didn’t end with the petty and the personal; the Government terminated ongoing negotiations with Emirates to extend the agreement for five years and repossessed SriLankan. The airline, which had been making substantial profit under Emirates management, entered a loss-making spiral. Since 2008, it has never made a profit. Never.

The Rajapaksas used the facades of economic nationalism and patriotism to justify the repossession of the national carrier. Their henchmen hailed the repossession as a great victory for the nation. Thus was created the attitudinal trap which equates even the partial privatisation of SriLankan with treachery. Even supposedly anti-Rajapaksa politicians/governments have been unable to transcend this false equation. President Anura Kumara Dissanayake’s first Budget is an excellent case for this fatal inability.

The Budget, in outline, is an exercise in sobriety for its makers have understood the need to stay within the IMF framework. The criticisms by the Opposition that it is an IMF budget are sheer humbug. Given where Sri Lanka is, no sane government can afford to make a non/anti-IMF budget. Had Sajith Premadasa won the presidency, the first budget of his government too would have been made within the same IMF constraints. Only a pure Rajapaksa government, led by a president Namal, might have flouted IMF limits, thereby losing the fourth tranche and pushing Sri Lanka down the precipice again.

The real problem is not the IMF parameters but what the Government has done within those parameters. The list of expenditure is topped by 110 billion for public sector salary increases. By comparison, rehabilitating key irrigation schemes gets 2 billion and promotion of export agricultural crops just 250 million. Youth entrepreneurs engaging in agriculture and industries are allocated 500 million while 10 billion is allocated to provide state-sector jobs to unemployed graduates. SriLankan gets 20 billion while books (including educational texts) remain taxed. The imbalance between indirect and direct taxes has increased to 75:25 (compared to 72:28 in 2024 and 35:65 in 2023 under ‘neo-liberal’ Ranil Wickremesinghe).

There are considerable positives too, such as allocations for improving roads in the North, renovating rural roads and bridges nationally, constructing Vadduvakal bridge in Mullativu, upgrading Jaffna library and all rural libraries, establishing day-care centres for autistic children, and setting up an identification system for differently-abled people. But, in general, the Budget is low on innovativeness. Its limitations are caused not by IMF parameters but by the NPP/JVP’s cleaving to beloved shibboleths.

Dirigisme, still?

The Budget is an IMF budget, fortunately. Without the IMF, the budget deficit would have been much higher, and we might have ended closer to Gotabaya territory. President Dissanayake and his Government should be praised and not damned for working within IMF parameters, thereby avoiding a rerun of 2022.

Two key steps by the newly-minted president Gotabaya Rajapaksa foretold the coming economic disaster. One was the tax cut. The other was the decision to employ 50,000 unemployed graduates and 100,000 OL-level failed Samurdhi family members in the State sector. Some of the unemployed graduates were over 40 years of age; regulations had to be changed to enable their recruitment.

Even in times of change some things remain the same. Like the killing of two suspects in police custody while on that all-too-familiar journey to uncover hidden arms. Like the NPP/JVP Government deciding to employ 30,000 more unemployed graduates at an annual cost of Rs. 10 billion.

Lankan state sector has 101,192 development officials (this is apart from Samurdhi officials, etc.) and only 38,000 nurses. What are these development officials doing? Can’t they be used to fill at least some of the existing vacancies? Aren’t we making an already unproductive and lossmaking state sector even more so, rendering inevitable more burdens on ordinary

Lankans in the form of greater indirect taxation?

Economic nationalism, like economic liberalism, is a two-way weapon. How it works depends on how it is used. Common-sense regulations and targeted and time-limited subsidies and protection can help lift countries out of dire poverty as the South Korean and Taiwanese examples show. But Sri Lanka has a history of opting for the dirigisme version, Government control rather than regulation. Since nation is equated with Sinhala and Buddhism, economic nationalism becomes blood-and-faith economic nationalism. Instead of protecting manufacturing or agricultural industries, we protect state-owned institutions, like SriLankan. We do not use subsidies as a time-bound method to improve competitiveness and provide a better product to consumers at a more affordable price. We use them to keep hugely overstaffed state institutions going, year after loss-making year. (Incidentally, the costly salary increase bypasses those who bear most of the weight of our economy, like the severely underpaid workers in plantation and garment sectors.)

Over the decades, a complex web of interdependent vested interests has been created against which very few politicians dare to speak let alone act. Take the CEB, for example, overstaffed and wasteful (its meter-readers were given an allowance for reading meters correctly!), a main reason for Sri Lanka having highest energy prices in the region. The CEB has also become a major roadblock for replacing costly (and commission-generating) fossil fuel energy with renewable energy.

The Budget, like its predecessors, has ignored the potential of making solar power affordable to the poor and the lower-middle class, the segment of the populace most burdened by electricity rate hikes and most in need of relief (currently it’s the preserve of the wealthier segment who regard it as an investment, like mini-hydro power stations). An example from our own past is illustrative of how this could be done. As career civil servant W.D. Ailapperuma pointed out, during Sirisena Cooray’s tenure as housing minister, a solar village was established as a pilot project in Pansiyagama in Kurunegala with Australian assistance. This provided “a simple photovoltaic solar home lighting system to 500 families… – 4-6 lamps, a radio and a small television.”

Using that experience, a solar power project was set up in the poverty-stricken lower Uva region in 1991. “Solar power was provided to rural hospitals and maternity clinics, doctors’ quarters in rural hospitals, rural schools and school laboratories, teachers’ quarters, vocational training centres and most importantly for community water pumping. In addition, midwives were provided with portable solar lanterns to help in their night rounds and deliveries…” (https://ceylontoday.lk/2022/04/29/b-sirisena-cooray-a-tribute/). Unfortunately, this early experiment solar power was abandoned after 1994. Had it continued, we might have joined the ranks of 100% renewable energy countries such as Iceland, Nepal, and Bhutan.

Revenue shortfalls, expenditure overhangs, and unfulfilled pledges are Lankan budgetary norms. When revenues vanish and costs balloon, the Government will have to make some serious trade-offs, deciding which programs to gut and what taxes to increase. Going by the conceptual outlook of this Budget, a large portion of that burden too would fall on those least able to afford it, via more indirect taxes and non-implementation of some social-developmental budgetary programs.

The targets of such measures would be citizens incapable of holding Governments to ransom as the insatiable GMOA is threatening to do, again. This time, the NPP/JVP will be at the receiving end. It will be instructive to see how it handles this latest blackmailing by public sector doctors educated at public expense and playing with the lives of the very public that funded their expensive medical education.

Production economy = dirty industries?

Mossville, a small town in Louisiana, was founded by freed slaves in 1790. “It thrived until the mid-20th century when a coterie of industrial plants was built on its doorstep,” according to Brown University’s School of Public Health. This industrialisation by mostly petro-chemical industries “culminated in major environmental and health crises including a massive chemical spill in 1994 that exposed residents to lethal levels of contamination and resulted in untold number of deaths. Mossville’s residents would go on to suffer a host of ills from the oil refineries, vinyl-chloride manufacturers, and petro-chemical plants emitting millions of pounds of toxins into the air, water, and soil every year” (https://sph.brown.edu/news/2024-02-08/our-storied-health-mossville). Mossville, one of the most polluted and sickest towns in the US, is located in what is known as Cancer Alley, an 85-mile stretch along the Mississippi River with an abnormally high concentration of petro-chemical industries and abnormally high levels of toxic pollution.

If the Government’s maiden Budget is anything to go by, the NPP/JVP’s version of ‘production economy’ is likely to turn Sri Lanka into a hub for dirty industries, a place where countries intent on cleaning up their own environment can dump their high polluting manufacturing plants. For instance, the Budget proposes setting up a manufacturing zone in Paranthan “dedicated to chemical products manufacturing including acids and alkalis.” Such industries are major fossil fuel consumers and polluters. What they would do to the health of neighbouring communities and environment (and by extension tourism promotion) is all too easy to imagine.

The JVP belongs in an era when setting up heavy industries, irrespective of the cost to communities and environment, was considered the only path to development. That era is now over. Many experts, ranging from progressive economists like Dani Rodrik and Joseph Stiglitz to the current World Bank Chief Economist Indermit Gill, have argued that for developing countries the path to prosperity lies in a different direction, via service industries. “Where developing countries are concerned, the future of economic growth will look very different from its past. The climate challenge, new technologies and digitalisation… render the export-oriented industrialisation strategies of the past less viable and effective,” argue Dani Rodrik and Joseph Stiglitz. They propose a two-prong strategy: “investment in the green transition and productivity enhancement in labour-absorbing, mostly non-traded services (https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf)/.

Citing a World Bank study, Indermit Gill advises developing countries to consider relying on ‘4Ts’: “expanding services trade, fostering technology adoption, training workers to upgrade skills, and targeting services that provide benefits to the wider economy for public support (https://blogs.worldbank.org/en/voices/your-service-developing-economies-bet-service-industries-growth#main). He points out that “IT, professional, scientific and technical services accounted for more than half of all exports in Costa Rica, Ghana, India, Pakistan, and The Philippines.”

While there are no one-off solutions to the complex problem of underdevelopment, focusing on service industries makes more sense given Lanka’s comparative advantages than turning the country into a dumping ground for some of the world’s most toxic industries. We have a literate, numerate, and trainable workforce. We have also achieved some global success in service exports. For example, software developed by Lankan company Millennium IT is used by London and Italian stock exchanges, London Metal Exchange, Johannesburg stock exchange among others. Tourism promotion can be integrated into such a strategy, such as by promoting health tourism using indigenous medical knowledge. Such an approach can also go in tandem with President Dissanayake’s pet project of digitalisation.

Economics is more a matter of choice than fate. Gotabaya Rajapaksa chose to cut taxes, hike expenditure, and print money – and here we are. What the NPP/JVP does today would decide how Sri Lanka fares in the years (decades if the Let the dirty industries come plan works) ahead. The potentialities are many, but ignorance, myopia, and habit can lead us astray, again.