Back in 2014, out of the blue, I got the chance to travel to Sri Lanka thrice in the space of two months for work. It was my first visit to the country, and I haven’t been back since. I spent time in Galle, Colombo and a place called Puttalam. As with most other people who have been to the country, I found it to be a beautiful place with fabulous food. Oh, the food. What food it was.
And the deep irony, of course, is that the current tragedy revolves so much around the same word: food. Only now, there simply isn’t enough of it.
But what happened, exactly? How did Sri Lanka get to where it is today?
The answer to that question must necessarily be another one: how far back do you wish to go? To borrow an analogy from another field, where should you begin if you want to explain the 2008 Great Financial Crisis? Should you begin with Bear Sterns going belly up in March 2008? Or should you begin with low interest rates in the early 2000’s? Maybe 9/11 and the lowering of interest rates immediately after? The S&L crisis of 1984? How about tulips in the 16th century?
In Sri Lanka’s case, thanks to the excellent Amol Agarwal, let’s begin with a book written by the son of the guy who founded Bata shoes:
At that time, the only oasis of peace in the area was Sri Lanka, or Ceylon as it was called before decolonization. When I first went there in the late 1940s, it was a Shangri- la full of smiling people, ambling elephants and king coconuts with delicious milk to quench one’s thirst. Almost in defiance of the horrors that were raging all around it, Ceylon was an island of tranquility and racial tolerance. Forty years later the Indian subcontinent, along with Singapore, Malaysia, Thailand and Indonesia all enjoy peace and varying degrees of prosperity, and our enterprises in these countries are among the strongest pillars of the Bata organization.
https://www.amazon.com/Bata-Shoemaker-World-Thomas-J/dp/0773724168
But then things started to go wrong in 1948, and who better than Samanth Subramanian to make a complicated history simple to understand? Read the entire book, but the introduction is a good way to come to grips with how things started tear apart at the seams:
It is curious to locate the proximate cause of a war in something as noble as a desire for education. When Sri Lanka broke free of British rule in 1948, the seats in its universities were occupied to disproportionately high levels by the minority Tamils, who through quirks of colonial history spoke better English and were better educated than the majority Sinhalese. The Tamils then went on, after university, to fill the civil service, the country’s most reliable provider of employment at the time. To the country’s Sinhalese who suddenly found themselves empowered with a vote, and therefore to the government, this state
Introduction, This Divided Island (Life, Death and The Sri Lankan War) by Samanth Subramanian
of affairs appeared too lopsided and unfair to continue. When laws and quotas were enacted to protect the interests of the Sinhalese, the Tamils felt they were being discriminated against. The frictions between the two communities erupted repeatedly into ghastly riots; in the worst of them, the Black July riot in 1983, roughly 3,000 people were killed, many of them burned alive. Tamil houses and shops were looted and burned, and 150,000 Tamils were rendered homeless.
When a clutch of Tamil militant groups had begun to emerge in the 1970s, to agitate for a free Tamil state, they found only a trickle of willing recruits; after Black July, though, they were flooded by young
men and women wanting to fight, and none more so than the Tigers. Starting as a ragtag outfit carrying out the odd guerrilla attack, the Tigers grew into a fearsome terrorist organization. They ran arms and drugs, pulled in funds from a Tamil diaspora scattered across the planet, killed thousands of civilians, assassinated presidents and prime ministers, and perfected the art of the suicide bomber. They kept their own people, the Tamils, in line by intimidation and murder. In their full pomp, the Tigers controlled vast wedges of territory in the north and east of Sri Lanka, where flat, hot, sandy coasts meld gradually into jungle. Here they ran their own country in all but name, collecting taxes and policing the streets and adjudicating disputes. But the Sri Lankan state was always just outside the door, impatient to snatch back its land, working itself up into a state of angry nationalism.
Buddhism, the religion of most Sinhalese, developed a vocal right wing; its monks entered politics, pressed for a more merciless war, and dreamed of a purely Buddhist island.
Even by my usual standards, this is a bit of a whopper, this extract, but I hope it nudges you into reading the entire book. (Actually, given that it is Samanth Subramanian we’re talking about, pick up anything written by him. It’s guaranteed value for money.)
The war ended, finally, in the year 2009, but it ended with a very high cost. The Wikipedia article serves as an introduction to the war, and Samanth’s book is a deep, thought-provoking reflection on the aftermath.
That’s a ridiculously brief background, and now let’s get down to the economy. The Sri Lankan economy, much like the Indian economy, is mostly a service based economy. Around sixty percent of their GDP comprises of services today, but that’s where the similarity with the Indian economy ends. A large chunk of this sixty percent, as you might imagine, is down to the tourism sector. And the pandemic has devastated this segment – not just in Sri Lanka, of course, but the effects are felt with much more severity in a nation that is so very dependent on it.
But it gets worse!
The economy is highly-dependent on imports for essential items such as food, and oil. The economy finances these imports mainly via agricultural exports (tea, rubber, and coconut), industrial products (textiles), and remittances from abroad. The revenues from exports, and remittances have not covered the cost of imports, and Sri Lanka has always been in a current account deficit (CAD). The average CAD in 2010-19 was around 1.2 percent of GDP.
https://www.moneycontrol.com/news/opinion/how-sri-lanka-reached-this-economic-precipice-8314151.html
The CAD has been met mainly by the government borrowing from abroad. As the government borrowing from abroad has been larger than the CAD, the balance has been pegged to the foreign exchange reserves. What can one make of an economy where the forex reserves consist of mainly borrowings from abroad!
So an economy that was, at best, precariously placed during the Covid-19 pandemic. And then, of course, going 100% organic.
Here’s a part of the conclusion from Seeing Like a State, by James C. Scott:
Take small steps: In an experimental approach to social change, presume that we cannot know the consequences of our interventions in advance. Given this postulate of ignorance, prefer wherever possible to take a small step, stand back, observe, and then plan the next small move. As the biologist J. B. S. Haldane metaphorically described the advantages of smallness: “You can drop a mouse down a thousand-yard mineshaft; and on arriving at the bottom, it gets a slight shock and walks away. A rat is killed, a man broken, a horse splashes.”
Seeing Like a State: How Certain Schemes to Improve The Human Condition Have Failed, by James C Scott
Or, if you prefer pithier statements, Deng Xiaoping’s famous dictum about crossing the river by feeling the stones comes to mind (although the quote isn’t originally by him). But Sri Lanka, of course, went straight to 100% organic farming, and well, if you’ve read even a single newspaper in the last two months or so, you know how that turned out.
The rest of the story is predictably depressing, and depressingly predictable. Rapidly depleting forex reserves, a drying up of foreign investment, stratospheric inflation, a weakened currency and all the rest of it.
And the knock-on effects of each of these on the ordinary person on the street are equally horrible. We’ve all heard about postponement of exams because of a lack of ink, long lines at petrol pumps, rising protests, people fleeing the country and so on.
And most tragic of all perhaps, is the ostrich-like approach of the government, which insists on coming up with ridiculous (there really is no other word) responses in terms of policy making. Long story short, this is a problem that is going to get much, much worse before it gets better.
I’ve tried to keep the story as simple as possible, but if you’re looking for a good in-depth read about this, here are some recommendations:
- Via Splainer.in (which you really should subscribe to!), an excellent in-depth macro analysis of the crisis, but in English (with jargon explained at the end, imagine!)
- The political fallout, which is rapidly evolving, and may well be out of date by the time you read this.
- Best of all, try and play around with the data if you happen to be a student of macroeconomics. What charts and tables would you create using this data, for example, and why? Best of all, pick an article such as the first one here, and try and see how many of these charts you can recreate in Excel. Trust me, ’tis the best way to learn.
EconForEverybody 