Sri Lanka, Abandoned By the West

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If there’s one thing both the left and right agree on in Western media — Sri Lanka has a bad government and needs a new one. Perhaps that’s overstating it. The West doesn’t care about Sri Lanka in the first place.

Western journalism can’t conceive of a world where Sri Lanka becomes a problem no one can ignore. Worse, it doesn’t recognize that in wearing the apparel from Sri Lanka, and drinking its tea, the West is a de facto business partner, if not friend to Sri Lanka.

Is it good to abandon a friend in need? How can the West supply Ukraine with $40 billion in weapons and economic assistance but not $0.4 billion for a few tankers worth of cooking oil and gasoline?

I believe the United States passed up a great opportunity with India to keep Sri Lanka in the liberal democratic camp. As it is, we can be less certain who will be running Sri Lanka in the future.

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How did Sri Lanka get here?

Sri Lanka’s main industries are tourism, tea, apparel, textiles, agriculture, information technology and mining. I assume that a few families own most of the wealth and the government is heavily represented by their interests (like everywhere else).

Foreign investment (debt) helps all businesses in Sri Lanka, both the owners and the workers. It’s the efficient way to build new roads, schools, power plants, etc.

Improving local economies from external debt is replicated almost everywhere you find civilization, from my small city of Cambridge to the nation of Sri Lanka.

Another way to look at it is this: Sri Lanka can sell more tea to the United States if it has better highways. So if the United States provides the equipment and materials to build those highways, the U.S. will end up with better tea and Sri Lanka will end up with highways they can use for all aspects of their economy. This has indeed happened.

In our current global economy, this type of investment is done with dollar debt (or credit). What the media leaves out is that dollars don’t travel a one-way street from the U.S. to Sri Lanka. Everyone does what they wish with their dollars. Indians use dollars to invest in Sri Lanka. Wealthy IT business owners in Sri Lanka use dollars to invest in Silicon Valley startups.

If you have a dollar you own that dollar, wherever you come from. (Sanctions don’t change that. I’ll skip that rabbit hole).

Yes, the U.S. influences the use and value of dollars (just like a casino which can change the exchange fee or who can play), but that has little to do with Sri Lanka’s problem in getting gas for its gas stations.

If someone wants to blame Sri Lanka’s problems on the United States then there is a basis for those complaints; but they wither under scrutiny. It’s like if your friend goes to Las Vegas and blames the casino because it wouldn’t comp him a few extra chips when he had a good hand, but few chips left. Yes, the casino took advantage of its customer, but it was far from the root of the problem.

There’s no mystery here. Sri Lanka has gotten crushed from the negative economic effects of the pandemic. It doesn’t have the revenues to pay off the dollar debt on the foreign investment. If Sri Lanka had sold the amount of tea it expected to sell, or even somewhat less, it would have been able to keep up with debt payments.

Hindsight is 20/20. Should the government have borrowed as much? We don’t know. What if the pandemic never hit. What if Sri Lanka never borrowed but other countries did, allowing their tea industry to replace Sri Lankan tea on global markets because, with better highways, they could sell faster and cheaper?

In short, all global businesses need to keep up with current technology. Seldom does any investment go completely to plan. Nonetheless, liberal democracies allow the populations of each country to work things out.

Sri Lanka grew its per capita income from $408 in 1990 to roughly $4,000 in 2018 — a 10x factor of growth. It could not have done so without foreign investment. (The U.S. went from roughly $24,000 to $63,000, or less than a factor of three).

One of the reasons the U.S. is wealthier than Sri Lanka is that it can mine and refine its own oil. Unlike Sri Lanka, the U.S. doesn’t need to trade anything for gasoline. Sri Lanka has this problem: the more middle-men (trades) between products the more expensive they become.

Or, I, in the United States, only need to pay the oil man’s profits for my gas. Sri Lankans must pay the tea man’s profits AND the oil man’s profits for his gas. Many governments that must import oil provide subsidies to hide that fact. Those subsidies are generally rolled up into the government debt, compounding the country’s problems when their economy goes south.

Once again, we can blame the Sri Lankan government for hiding the true cost of its oil imports. And again, economic growth hindsight is 20/20!

The wealthy business and land owners of Sri Lanka make an easy target for uneducated Sri Lankans.

Foreign investment (debt) is paid off by taxing the wealthy business owners and the public. Politics determines who pays how much and when. Generally, everyone benefits from foreign investment so everyone pays a portion of the debt.

In times like this, it seems a simple solution to ask the wealthy Sri Lankans to pay off the public debt. Unfortunately, it can only work for a limited period of time and when the wealthy run out of money the original problem remains — a shrinking economy unable to buy (import) oil AND service its debt on global markets.

Yes, the wealthy may be selfish and greedy but punishing them doesn’t fix the root problem which is that the Sri Lankan economy can’t earn the money to pay the debt. Keep in mind, the buyers aren’t boycotting tea or textiles; they’d love to be in a condition to buy them!

If the wealthy of Sri Lanka take their dollars and pay the gas tankers directly the gas stations will be able to pump gas and Sri Lankans able to drive around. But what, ultimately, is that local economic activity producing?

Therefore, the Sri Lankan currency will continue to depreciate. Once all the gas is sold and the wealthy families count up those revenues, in the local currency, they will end up having lost wealth through whatever the inflation rate was during that period.

Lately, that would mean that for every $1 of gas wealthy Sri Lankan’s bought for the local economy, they’d end up with $0.75 in local currency value — or much worse. Every time they re-invest their money in gas they will take that percentage loss. Eventually, if inflation continues, they will end up with nothing.

In short, if I have a bushel of tea, whether as a wealthy owner or day laborer, and I need to sell it to feed my family, I must find a buyer or I will starve. No government can change that. No amount of politics can change that. Sri Lanka doesn’t have foreign customers at the moment.

Therefore, it must find a way to keep its local economy running! Of course, the creditors can write off the debt, but why should they write all of it off? Suffice it to say that when there are disagreements about money people become, um, untruthful.

Politicians will point out that the poor are caught in the middle and they are the ones who are suffering. That’s true. However, the wealthy paying for gas out of stored wealth only kicks the can down the road. In the end, both the creditor and debtor will have to negotiate who takes what losses. They can never be made up.

Every time a problem like this occurs the risk arises that the public will burn everything down out of anger and frustration. The goal of both creditor and debtor is to work out an agreement before that happens.

In a healthy global economy, Sri Lanka’s problems would end up solved, or at least fixed enough that the masses would stop protesting and get on with their lives. We do not have a healthy global economy. In my lifetime I do not believe it has ever been sicker and scarier.

Although the U.S. is self sufficient, has a strong economy compared to others, a strong military to threaten those who don’t play according to U.S. rules, it is also facing the same problems that Sri Lanka is facing — angry masses.

Does it matter if riots break out because there is no gas in Sri Lanka or if the price is $10 a gallon in Chicago?

I don’t think so. All liberal democracies should work together to maintain access to basic necessities for everyone, no matter where they live.

The United States, for its own self interest, should make sure all its economic partners do not become failed states. Even from the most selfish point of view, Sri Lanka as a failed state will increase our tea and apparel costs. Again, the whole world is hurting so it’s not easy for apparel industries to find another cheaper needle.

The pandemic has not ended; economies are not growing again. Sri Lanka can become a failed state and failed states are notoriously difficult to revive. Preventative medicine now, which would entail a minimal level of access to energy for every-day Sri Lankans, will cost less than dealing with terrorism and warfare later.

The West has the same problem as Sri Lanka — masses of people who can no longer afford, or access, minimal energy needs. If China ends up putting substantial a military base on Sri Lanka it isn’t going to sit well with the United States or India. That’s just one way Sri Lanka can become a geopolitical nightmare. Lebanon may already come back to bite the West because it is Iran that is supplying a basic gas supply.

I once believed global economic friendships would mean something. Sri Lanka makes me wonder if I was naïve. More gist for my theory that there are decades of world war ahead of us — but I wish it wasn’t.

Further reading:

Indrajit Samarajiva lives in Sri Lanka writes on these issues.