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Global economic warfare and Sri Lankan elections

03 Aug 2015 - {{hitsCtrl.values.hits}}

The Nobel laureate economist, Sir Arthur Lewis argued that developing countries should orient more of their trade toward one another and move in the direction of economic integration. Many countries are focusing on the challenges as well as benefits of interdependence. The United States wants energy independence, China wants to stimulate domestic consumption, Germany wants to protect itself from the economic decisions of its European Union (EU) neighbours and Russia is trying to hedge against US-led dominated financial system. Unfortunately, the South Asian countries such as Sri Lanka, Bangladesh, India and others have not yet gone in that direction. As for Sri Lanka, sadly none of the election manifestos put up by the political parties has touched on the need to have “economic integration” as a strategy to improve the economic welfare of the people of this country.

Economic integration and election manifestos
In the absence of economic integration, Sri Lanka may not have sufficiently large domestic markets. This means, the local industries could not lower their production costs through economies of scale. The end result is the establishment of inefficient and high-cost local industries under the guise of import substitution. Not only does such duplication result in wasted scarce resources, but it also means that consumers are forced to pay a higher price for the product than if the markets were large enough for high-volume. The same industry (e.g., textiles or shoes) may be set up in two or more adjoining small countries. Our politicians are still talking about old slogans such as an export-led growth strategy, import substitution, socially-oriented market economy, etc., thinking that the average voters would swallow these slogans.

Economic integration occurs whenever a group of nations in the same region join together to form a regional trading bloc by raising a common tariff wall against the products of non-member countries while freeing internal trade among members. The opportunities and benefits from economic integration across developing countries have now increased. The leading developing countries have never had so much power in the councils of global economic policymaking, including G20, World Trade Organisation (WTO) and in the World Bank and International Monetary Fund (IMF). They have more to offer one another—from better technology transfer to means to pay higher prices for primary products.

Let us examine few regional economic and trading blocs. The North American Free Trade Agreement (NAFTA) represents a unique arrangement in that a large developing country, Mexico, has joined a developed-country trading bloc, Canada and the United States. (Chile, an NIC, is also seeking membership.) Many EU members use a single currency, the euro, requiring close monetary coordination and in effect creating the largest economic entity in the world. In Africa, moves are underway to promote regional economic integration, including the South African Development Community (SADC). Thanks to well-developed railroad and air links, the 10 members of SADC—Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland, Zambia and Zimbabwe—anticipate new and much greater trading opportunities. Two major trading blocs now exist in Latin America. In 1994, Argentina, Brazil, Paraguay and Uruguay finalized arrangements for a free-trade area called the Southern Cone Common Market, also known as Mercosur. The other Latin American bloc, the Andean Group (consisting of Bolivia, Colombia, Ecuador, Peru and Venezuela), established a full-fledged common market in 1995.

Hit by economic warfare
According to the World Economic Forum (WEF), 2015 publication, the United States and Europe and few other developed economies are now faced with challenging fiscal deficits and weak political support from their own people. They, without resorting to use of military force, seek to project power through their influence over the global economy and multinational corporations (MNCs). Sri Lanka is unfortunately getting caught in the economic warfare between the West and the East. Recent Western sanctions against Russia are the beginning of the first great power conflict since the end of the Cold War. We have also witnessed the emergence of Western trade controls in recent years aimed at Iran, Myanmar and Venezuela. In Sri Lanka, the tea prices have plummeted to very low levels during the last seven to eight months. This is due to low demand from Russia and Middle-East tea buyers. This is mainly due to sanctions imposed by the West on Russia and Iran and political and social unrest in Syria.

After three years of unusual stability around US $ 100 a barrel, oil prices fell steeply in the second half of 2014, dropping from US $ 115 a barrel in June to around US $ 60 by December. With oil critical to national economies, international security and climate change, what does this mean? Rubber prices have dropped below production costs in Sri Lanka and smallholders have resorted to cutting rubber trees for firewood needs, as they do not see light at the end of the tunnel. On the other hand, when oil prices are falling, the biggest benefits accrue to major oil importers- the Chinese and Indians and few European economies- will reap bigger dividends.

Economic sanctions are usually a double-edged sword. Washington policymakers see sanctions as the highly targeted weapons (drones). However, the country applying sanctions hurts its own businesses that trade with or invest in the target country. US companies have had to stay away from Iran, German machine-builders have had to reduce their exports to Russia and French shipyards have suffered through the freezing and potential cancellation of the sale of ships to Russia. Sanctions can also provoke counter-sanctions. In 2014, Russia retaliated against Western measures by banning food imports from the countries that had joined sanctions against Moscow.

The sanctions imposed on Russia in 2014 during the crisis over Ukraine have contributed to a surge in Vladimir Putin’s popularity and the growth of Russian patriotism and nationalism. The Kremlin hopes that a long period of sanctions can guarantee political stability in the country for many years. When Russia faced Western sanctions, it accelerated its rapport with China, the one major power, shared Moscow’s opposition to US global dominance. As for China’s role in geo-economics, China’s infrastructure projects could be as important to the 21st century as America’s protection of sea lanes was in the 20th century.

Infrastructure finance has thus become a tool of foreign policy, particularly for China, which has surpassed traditional multilateral lenders in its loans, grants, joint ventures. China is building the physical transportation and other infrastructure in key markets where it seeks to either access raw materials or make its export flows into those markets more efficient.

China has increased its foreign direct investment and loans to countries where it seeks to enhance access to commodities, particularly by investing in infrastructure, such as roads, railways, pipelines and ports. China has launched new multilateral institutions to expand infrastructure finance activities, such as the BRICS Bank (currently located in China with plans to rotate the chairmanship to India) and the Asian Infrastructure Investment Bank. China stands to benefit from improved infrastructure connectivity to market in Asia and worldwide. Exporting countries will also benefit from higher quality infrastructure.

Geo political realities affecting Sri Lanka
During the last couple of months, Sri Lanka’s foreign reserves have plummeted as the authorities had to defend the external value of the rupee by selling dollars lying to the credit of the gross official reserves. As for deficit financing, Sri Lankan authorities have resorted to raising money through issue of treasury bonds/development bonds. It seems that the government had to rely on the Central Bank via the monetary policy to run the economy as opposed to fiscal measures. This is because the treasury has not been able to raise “increased tax revenue” through much talked about budget proposals presented by Ravi K in Parliament last February 2015. As stated in the World Economic Forum, 2015 publication, central banks are increasingly caught between domestic political pressures and alleged monetary policy and supervisory independence. Through increasingly politicized central banks, they use unconventional tools to advance their government’s policy interests. Central bankers have become owners of enormous swathes of securities, with enormous influence as a result, WEF claims.

As for parliamentary elections on August 17, the UNP/Muslim Congress are contesting together at the forthcoming elections. The SLFP/UPFA was to initially contest under the influence and control of President MY3. However, the UPFA is now contesting and campaigning under former president, MR and all anti-UNP forces are rallying under the banner of the ‘beetle’ symbol. Few SLFP members have joined the UNP (few under the UPFA as well) with the blessings of MY3. The JVP is also a force to be reckoned with. The TNA is contesting separately and its manifesto has been released recently. This includes proposals such as North-East amalgamation, self-determination, police and land powers, federalism, etc. However, there is no “separate state” demand. Through this N/E amalgamation demand, the link between the TNA and Muslim C is well established. In the event the UNP gets a higher number of seats, the game plan is to form a national government between the UNP/Muslim Congress and few SLFP members who would cross over after the elections with the blessings of MY3. The Constitution will be amended to incorporate greater devolution, perhaps without referring to the word “federalism”. Nevertheless, it is argued that the 13th Amendment has gone to the edge of the unitary state concept (vide Supreme Court determination in 1986). There could be an alternative solution as opposed to granting federalism. What is needed is to have a meaningful dialogue between intellectuals/all progressive forces and the political parties with a view to put in place a system to have a true national reconciliation. We also need to be mindful of establishing the link between the communal and religious harmony and maintaining national security. In my view, this is a high priority area.

In the event no party has secured the simple majority cut off level of 113 seats, the only party that can form a government is the party that gets the highest number of seats in Parliament at the election. This is explained in Article 46 (4) and 46(5) of the 19th Amendment to the Constitution coming under the concept of national government. If the UNP obtains at least one seat more than the number of seats obtained by the UPFA, then the UNP will be invited to form the government. Even if the UPFA gets one seat more than the number of seats obtained by the UNP, the UPFA is the party that could form a national government. This means, contrary to popular belief, the President has no authority in inviting the leader of the party to come in at the second place to form the government. In other words, the possible “cross overs” have no effect at all during the first round. If one party gets more than 113 seats, then no need to form a national government.

So who will the winners and losers be?

(Jayampathy Molligoda is a Fellow member of the Institute of Chartered Accountants of Sri Lanka and holds a Master of Business Administration (MBA) from the University of Sri Jayewardenepura. He is currently Director/CEO of a leading Regional Plantation Company in Sri Lanka and can be contacted through [email protected])

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Global economic warfare and Sri Lankan elections

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