Sri Lanka’s unprecedented economic crisis in 2022 was not a sudden occurrence. It was in the making for decades and exploded when the contradictions could not be sustained any longer. The Governor of the Central Bank expects the economy to reach 2018/19 levels next year, meaning that we are sliding back by almost a decade.

The inability to have seen this earlier is a heavy indictment on the economists at the Central Bank and officials of the Ministry of Finance. Those same officials are now the main advisors to the government. They are not trained in development economics and most of them rely on econometrics and mathematics, which makes them vulnerable to neoliberal ‘mythematics’.

Sri Lanka’s true potential was not understood by local leaders and officials. Many outsiders did express the ‘great potential’ that the country possessed, particularly with regard to its strategic location. The major task the governments, past and present, face is to reduce the gap between the country’s real potential and its performance. To do so one has to know what the real potential is, which requires an expanded thinking process. Another way would be to observe others in the region and how they exceeded their own expectations in development.

Insanity of Repeating Neoliberal Mantras

The thinking of officials over the years has been to borrow now and expect the situation to improve later. After the 1950s in Sri Lanka, there were no more ‘Korean booms’ – only busts which led to seeking IMF support as well as other forms of borrowing for consumption rather than developing industry.

What is amazing is that many officials expect the same thinking that got Sri Lanka into its worst mess will help us get out of it. If the IMF programme were focused on export development and the balance of payments rather than the budget, perhaps the thinking would have shifted. Instead, the IMF is pushing the country towards more ‘debt financing’ to meet debt servicing obligations by 2028 – the cause of the crisis in the first place! Together with austerity, this model has pushed the majority of the population below the poverty line.

In the present situation, with the ongoing IMF programme, the maximum that the government can do is tinker a little bit here and there. Without a major development drive, which is desperately needed, not much change can be expected. The smallness of thinking, which has been the trend over the past four and a half decades, leads to low and unambitious targets. Few realise how far Sri Lanka’s economy has lagged behind.

The Scale of Sri Lanka’s Lag

The only way to indicate the scale of Sri Lanka’s economic lag is by drawing comparison with other countries in our region, some of them well below Sri Lanka at independence in 1948. Except for three countries – Myanmar, Cambodia and Laos – all the others have a GDP of close to or above $500 billion, while Sri Lanka is struggling to reach $100 billion. Therefore, one could see that our lag is around $400 billion, with many missed opportunities over the period.

What has to be understood is that reaching that level of GDP was not an impossible task, if handled wisely. What Sri Lanka lacks is a proper plan and thought process.

One of Sri Lanka’s biggest missed opportunities was the failure to make Trincomalee the ‘oil hub of Asia’ long before Singapore. This alone could have sustained our economy for a hundred years or more. Making best use of Trincomalee would have included the establishment of an integrated steel mill for export and opening the door for a shipbuilding industry.

At independence, there were funds available for both these due to the Sterling Balances Agreement of 1948. However, what was not available was the innovative thinking. By contrast, South Korea established the state-owned POSCO (formerly Pohang Iron and Steel Company) steel mill with the reparations it received from Japan – this brought in billions in export revenue and laid the foundation for industrial development.

One of our biggest mistakes was to depend on economists for development ideas. Development strategy should come from people with common sense and their feet on the ground. For example, throughout Asia it was engineers more than economists who led the development process.

Despite half the population living below the poverty line, preventing them from participating in productive economic activity, few to no rural production programmes were thought of except perhaps the 200-garment factory programme in the early 1990s. While vast sums have been spent on developing domestic agriculture, the farmer who was poor in 1948 remains poor seventy years later.

These are some of the mistakes that have contributed to Sri Lanka’s huge lag and failure to achieve and what many saw as the country’s great potential at independence. Though many opportunities have been missed, there are still many things that can be achievable with a proper programme.

The Problem of Industrial Development

Any developing country that hopes to advance would look towards industrial development. Countries that place great faith in orthodox economic theory wait for market forces to direct investment into industry. However, others who realise that the market is not developed enough to play this role would use the state to directly intervene in the economy to set up strategic industries.

In the state-led process, the first industries that are set up are import-substitution industries. These are also called ‘infant industries’ as they are new and have to be developed in stages. After establishing these industries, the developmental state has to perform many functions, including bringing more participants into the manufacturing process. The logical end would be the export stage which brings in export revenue and exposes companies to competition – this is seen in the East Asian experience.

In Sri Lanka, the industries that were established hardly moved beyond the first stage. Ministers were happy with merely creating some employment and did not push beyond to develop technology, production capacity, and export potential. On the other hand, orthodox thinkers called for a jump into export-oriented industries without realising the staged process required to ensure domestic value-addition.

Some economists used distinctions phrases such as ‘inward’ and ‘outward’ looking orientations. However, this misses the fact that these are two tactics of the same strategy. You can’t have one without the other except in a few special areas. When policy becomes focused on only one tactic, without considering the overarching strategic goal, it damages the idea of industrial development.

Both Hands Tied Behind the Back

No country has developed along neoliberal lines. Even the industrialised countries of the West used very different methods from what they preach now. The only countries to have successfully developed their economies, within our lifetime, did so by the very opposite of the neoliberal ideas. The government should keep an open mind to alternatives. It should seriously consider joining Global South initiatives towards more just and effective international development organisations.

The Central Bank should be fully be involved in the development effort. In the United States, when the economy was down, it was the ‘New Economics’ of the Kennedy administration that got the economy up and going, with monetary and fiscal policy working together towards a common objective. Manipulated by the West, Sri Lanka has tied both its hands behind its back with the new Central Bank Act. The door to development has now been shut for Sri Lanka. Therefore, one wonders how the government hopes to bring about development on the required scale.

The power and purpose of ‘money’ should be understood. If money is the fuel that runs the economic engine, is it not important to consider who creates that money, for what purpose, and in whose interests? Neoliberalism does not permit Central Banks to assume the role of money creation, preferring to delegate that power to the private sector.

The economic history since independence should teach us to be careful with advice given by the IMF and World Bank. We need to develop our own confidence and broaden our thinking to craft a path forward. Ultimately, the objective should be to reach the country’s full potential. That requires a very different thinking from what has been used up to the present.

(Sunil Abhayawardhana was CEO of Sri Lanka’s largest heavy construction company. He has a master’s degree from the University of Wales and is working on a PhD in economics. He is a member of the Asia Progress Forum, which can be contacted at asiaprogressforum@gmail.com)

by Sunil Abhayawardhana