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Can we have good economics and bad politics?

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Edited by Amaya Vershuur

On Sunday, July 3, a week prior to President Gotabaya Rajapaksa’s resignation, I wrote an article called ‘’ in which I reflected on the proposed economic reform programme, the role of the International Monetary Fund (IMF) and argued for a broad coalition of activists, political leaders and professionals to come together to provide a more just and decent economic reform plan for all Sri Lankans.

I received a response the very next day from Shanta Devarajan, former Chief Economist of the World Bank, familiar with Sri Lanka and knowledgeable about the workings of the IMF. While much has changed since President Gotabaya Rajapaksa’s resignation, much remains the same – in particular Sri Lanka’s need for an IMF bailout. Below is our frank discussion of the impact of an IMF bailout on Sri Lanka’s economic situation.

Shanta D:Thanks for sharing the article. Since you asked for reactions, I will share mine with you. While your proposed “Next Steps” are perfectly sensible, I think your characterization of the economic reform program and the role of the IMF and other IFIs is incorrect (and perpetuates some myths from the 1970s). Furthermore, a closer look at the current situation in Sri Lanka provides an opportunity for the economic and political agendas to come together.

Is the government strong enough to implement the necessary reforms?

Shanta D: In your article you state that, “Even if this government (the previous government headed by Gotabaya Rajapaksas with Ranil Wickremesinghe as Prime Minister) lasts it would be too weak to carry out the stringent economic reforms that the IMF is likely to impose on Sri Lanka.” However, the government has already undertaken most of the reforms proposed in the programme. So it’s hard to see how the government is too weak to carry out the reforms. Furthermore you mention “Caught between the economic pressure of IFIs and lenders…” The only pressure is coming from the Sri Lankan government, which took the decision to call for a debt standstill and embark on a debt restructuring program and an IMF program. In order to achieve a debt restructuring (i.e. get the creditors to agree to take a haircut on their bonds and debts), the Sri Lankan government has to show that it has a credible fiscal policy that will ensure that it can pay back the (reduced) level of debt. So all of the economic reforms in the IMF program are reforms needed to restore stability to Sri Lanka’s fiscal policy so that it can reduce its debt. The pressure is self-imposed because without a debt restructuring, the economy would simply collapse and be unable to recover for a long time (just look at Lebanon).

Ram M:In terms of government weakness/strength, I do think the government may be strong enough to carry out some of the reforms – such as flexible exchange rates and some tax increases. Getting rid of subsidies though maybe trickier. And I am not convinced they can reduce expenditure on State Owned Enterprises (SOEs) in the face of strong public sector unions. Even a vanity project like Sri Lankan Airlines is still to be privatized, leave alone the Petroleum Corporation and the Ceylon Electricity Board. For this to happen, you need a strong government with the support of the people willing to take on entrenched interests.

Shanta D:Currently, the government is working on schemes to provide alternative employment options for the laid-off workers in the privatized SOEs. One of them is to use the government-owned land to give these workers shares in the land, which they could then farm themselves or lease to other farmers. In any event, there is a lot of experience around the world in managing worker resistance to privatization. Programs such as voluntary retirement schemes and even cash transfers (as in Brazil’s Bolsa Familia) have overcome the much-feared resistance from workers. I don’t think having a strong government is either necessary or sufficient. It takes a creative plan and excellent public communication. The current situation in Sri Lanka helps because of the widespread antipathy to the status quo.

Ram M:I take your general point that worker resistance can be reduced by creative schemes. But I just do not see how a government that lacks support can be effective at coming up with creative ideas or good public communication. At a minimum there should be a plan and the government should communicate it. And preferably, the plan should be viewed as fair and that the money saved as not wasted – for example on SUVs for ministers. I do not see the current conditions reflecting that. Very few people – other than SLPP politicians – will see whatever the government does as legitimate.

My point is that a politically weak government is more likely to agree to external measures and lender/IMF pressure that leads to an agreement that is not as good, as one that could be achieved with a government that is strong. I do not really buy your point that this restructuring is self-imposed by the government. Yes we chose an orderly default instead of a disorderly default, as is the case in Lebanon. But we still have to agree on a debt restructuring programme. And I do not think there is only one type of debt restructuring programme that is given simply by our level of debt and ability to pay it off. In theory, yes. In practice, the programme will depend a lot on how effective the government is at coming up with options, negotiating its position and winning over friends and convincing detractors.

Shanta D:What is this “better agreement” that a strong government would agree to? The economic policies that are being agreed to in the Sri Lanka program are not that different from those agreed to by Korea during the Asian financial crisis of 1997, Argentina during its many crises, and Chad and Republic of Congo in the recent oil price decline of 2014. So extremely weak and extremely strong governments negotiate more or less the same policy package. This tells me that the policy package has to do with the economics of the situation rather than the politics (as it should be).

Ram M:On your comparison between the current Sri Lankan program and those implemented in other contexts, I am sceptical about the argument that short term pain is necessary for medium to long term gain. Most IMF programmes are associated with austerity – at least in the short term. Greece, Spain, not to mention many parts of Latin America. These measures end up punishing the people for the blunders or worse corruption of their leaders. And bilateral and multilateral lenders end up imposing these restrictions, not just because of good economics (balance the budget and reduce wasteful expenditure), but because of politics – a kind of morality play where rich countries (and their public) feel that someone should pay for this. That someone ends up being the poor, or at least the lower middle class and salaried folk – who had nothing to do with the bad decisions of their governments. They gained nothing from it. And indeed suffered from those decisions to begin with.

Shanta D:Let’s separate appearances from reality. Of course, these IMF programs are associated with austerity and when there is austerity, everybody suffers and in some cases, the poor suffer more (incidentally, the recent evidence is that the poor don’t suffer more than the non-poor). And in many cases, the middle class takes a hit. But you have to always compare this outcome to the counterfactual. What would have happened in the absence of the IMF program? In almost all cases, the economy would have collapsed and the poor would have suffered immeasurably. Since (by definition) we don’t observe the counterfactual, most people observe the hardship associated with the IMF program and blame the Fund. But the reality is that the Fund is trying to avoid an even bigger disaster from happening.

Furthermore, for a given austerity program, whether the poor are hurt more than the non-poor depends on the existing policies and institutions in the country. Typically, in these countries, the policies and institutions are captured by the elites. In Egypt, the energy-intensive industries are owned by government cronies who therefore keep energy prices low. Since these are powerful people, they make sure that the burden of an austerity program doesn’t fall on them, which is why they get off Scot free. World Bank programs try to dislodge these entrenched elites (subsidy reform, targeted cash transfers, SOE reforms, etc.) but, as you observed, there are limits given the existing political situation. And a program is needed to avert the bigger collapse. So the Fund and Bank compromise and allow some of the anti-poor distortions in the economy to continue, in order to get the program delivered. But the underlying problem is the policy and institutional framework in the country rather than the IMF program.

Who is to blame?

Ram M:The problem we are in is certainly self-inflicted, in that our corrupt governments borrowed more than we could pay off for non-productive projects. Those who pushed debt on the SL government, or for that matter any other badly run third world government, and lent money for corrupt projects do not pay a price. Sure some of them take a haircut, but many others have already recouped their investments.

Shanta D: Every loan has a risk associated with it. That is why lenders do a cost-benefit analysis of the project before financing. If they made a mistake with their cost-benefit analysis, then they do pay for it in the case of default. Of course, if the borrower doesn’t want to default and continues paying back the loan when it’s gone bad (just like Sri Lanka did paying off the bondholders when the country lost access to capital markets), that’s the borrower’s fault, not the lender’s.

Ram M:But there is “self dealing” or at least backroom dealing going on that leads to a country like Sri Lanka taking on more debt than it can pay back. Consider the Central Bank under Cabraal paying bond holders even after we lost access to capital markets. There is a private complaint in courts alleging that either through corruption or gross negligence he is responsible for the economic crisis in the country. But it is exactly this leap from Cabraal to Sri Lanka that I am pushing back against. Let us – only for the sake of argument – say that senior officials had a deal with bond holders. And promised to pay them back no matter what the consequences for Sri Lanka’s people. That is exactly the kind of “debt pushing” and back room deals by lenders and key officials in debtor countries that I am concerned about here. Why should the Lankan people pay the price for this? OK we elected President Gotabaya, and he appointed these officials. So it is our fault in the end. But isn’t that a bit of a stretch when it comes to accountability. Since we did not really elect President Gotabaya to undermine the economy in this way. Moreover, this lets bond holders off the hook – when they knowingly invest in shaky bonds on the basis of assurances given by “dodgy” officials. So my concern here is about “odious” debt where debt pushers not only fail to pay a price, but actually make a profit.

Shanta D:I’m still not convinced that the creditors did anything wrong. Anyone who buys an ISB is taking a risk. The bond can be paid back at face value or, if the economy gets worse, it could be worth a lot less on the secondary market. In Sri Lanka’s case, the ISBs were trading at a discount in 2021 because everyone saw that the economy was declining and Sri Lanka would probably not be able to pay back. However, the Sri Lankan government took the decision in January 2022 to pay back $500 million ISBs in full (starving the people of much needed imports). The bondholders who bought these ISBs at a discount in 2021 made a killing but that was because of the Sri Lankan government’s decision. Now, you could say that the people who bought Sri Lankan ISBs in the secondary market in 2021 may have had some inside information that Sri Lanka was going to pay in full, but I would think that even this information was not reliable and they were taking a risk. So I would put the blame for the current crisis squarely on the government.

What will be the impact of the economic reform measures for normal Sri Lankans?

Shanta D:In your article you state that, “Even if this government (then headed by Gotabaya Rajapaksa) lasts, it would be too weak to carry out the stringent economic reforms that the IFIs are likely to impose on Sri Lanka.” How do you know that the economic reforms are “stringent”? The program that is currently being negotiated between the government and the Fund includes tax increases, subsidy cuts, targeted cash transfers, interest rate increases, and exchange rate flexibility. They are not what any of us would call stringent.

Tax increases and subsidy cuts

Ram M:Tax increases and subsidy cuts can work in a “normal” situation. But in the context of an economic contraction they have the potential to move us in a downward economic spiral. In terms of tax increases, my concern is not about income tax, property tax or taxes on business profits. But particularly regressive taxes – such as VAT – that have a significant impact on the poor.

Shanta D:First, the international evidence on whether the VAT is regressive or progressive is ambiguous, leaning towards neutral or mildly progressive. Second, in the Sri Lankan case, note that the Rajapaksa administration reduced VAT rates by seven percentage points in November 2019. Did the poor benefit from this? I think the reduction was to benefit some powerful business interests. So the increase in VAT will also likely hurt those interests. Third, in the current situation in Sri Lanka, an increase in taxes, including VAT (which by the way is one of the most efficient ways of increasing revenues), is likely to reduce inflation, which helps the poor and, by making the fiscal balance more sustainable, will bring in foreign exchange, both through the IMF program and the debt restructuring.

Ram M:I want to just focus on whether or not VAT is regressive – not the repercussions of reducing the fiscal deficit on the poor. That is a bigger and separate debate – where the answer I think is that it depends on what the money is used for. Of course VAT is an effective way to increase revenues. And yes – the rich spend more – so VAT will lead to a larger share of taxes on the rich. But it leaves untaxed – income, wealth, property and savings. So isn’t the answer a combination of VAT and other taxes. And shouldn’t we be shoring up our capacity to tax, not just look at VAT?

Shanta D:Yes, of course we should be looking at other tax instruments as well but in the short run, the VAT is the most effective instrument we have to raise revenues. The other tax that we should be considering is rescinding all the tax incentives given to investors. This to me is the biggest scandal. A number of rich investors, foreign and domestic, pay no taxes because they received tax holidays when they invested in the country. First, the international evidence is these tax incentives don’t result in higher investment. Secondly, at this time of acute revenue shortage, when ordinary Sri Lankans are having to tighten their belts, it is unacceptable that this group of rich people get away Scot free. To be sure, taxing them would mean abrogating the agreement that they pay no taxes. But we have already abrogated a series of debt contracts (ISBs, etc.), so I don’t see why we shouldn’t do the same for these investment contracts.

That said, we should keep in mind two things. First, the VAT has proven to be a really effective instrument around the world, and especially in developing countries, as a minimally distorting form of taxation. Second, we should be trying to achieve our equity objectives through the fiscal system as a whole rather than separate the revenue and expenditure sides. Most developing countries try to achieve a neutral tax system and achieve their redistribution objectives through the expenditure system (it’s the reverse in developed countries). So I think you should focus on the impact of the fiscal system on the poor rather than looking at each tax instrument. The latter is in fact dangerous. I’ve seen many countries that introduce a highly progressive income tax system but one that doesn’t generate much revenue (Sri Lanka is a bit like that). They then don’t cut expenditures so they run huge fiscal deficits that lead to inflation, debt crises and the like which end up hurting the poor very badly.

Interest Rates

Ram M:On the increase in interest rates, while you need to fight (hyper) inflation, what about a situation where the poor are indebted and spend significant parts of their income servicing debt. How is this affected by inflation – positively or negatively. If I am poor and heavily indebted, would inflation be a good thing?

Shanta D:In general, inflation helps debtors and hurts creditors (because the real value of what they have to pay back is eroding). If there are genuinely poor people who have high debts, there are ways of forgiving their debts. But you need to be careful here. Many of the people who claim to be poor and indebted are not poor (that’s why they were able to take on the loans in the first place). For instance, many tuk-tuk drivers borrowed to buy their tuk-tuks. But these are mainly urban dwellers in Colombo who come from the 80th percentile of the income distribution. In general, we should avoid giving relief to specific types of workers or sectors. The cash transfers should be given to poor people regardless of which sector they work in.

Now to the opportunities from the current crisis

.Shanta D:The two main differences with the current crisis are: (i) the people are already suffering from a government-imposed austerity program (because of the shortage of foreign exchange) before the IMF program has been concluded. To the extent that the IMF program will bring in $4-5 billion in foreign exchange, it will relieve the shortages rather than exacerbate them. So the effect of the IMF program is to put Sri Lankan fiscal policy on a path that can, over time, enable the country to bring in foreign exchange (and pay less to creditors). So I don’t see the IMF program as necessarily “aggravating the crisis”. On the contrary, it is likely to relieve it. (ii) the people in the Aragalaya movement clearly see the link between the government’s failed economic policies and their dire economic situation today. They don’t blame Covid or the Ukraine war–they know it was the misguided policies of the administration (including the delays in going to the Fund and undertaking a debt restructuring) that got us into this mess.

Some of them seem to understand that subsidies are not helpful when you run out of money to pay for them. This is a huge improvement in thinking from, frankly, what I hear from Sri Lankan politicians from the left and the right. The logical extension of this argument is that, if the government’s policies led to the current situation, then to get out of the situation, we must reverse those policies. That is exactly what the economic reform program is doing–reversing the tax cuts of November 2019, reducing regressive subsidies, expanding targeted cash transfers, cutting government borrowing from the central bank, raising interest rates, making the exchange rate flexible, and approaching the IMF and embarking on a debt restructuring. So the demands of the Aragalaya movement are consistent with the IMF program. We should seize this unique opportunity to galvanize the support of the Aragalaya movement in order to counter the usual objections from senior politicians to the economic reforms on grounds that they will not be politically acceptable. Most of these objections stem from an effort to protect the rents accruing to their particular political base. This is a chance to call their bluff.

Ram M:I agree that just because the IMF helps bailout Sri Lanka, need not mean then President Gotabaya (and now President Wickremesinghe) will continue in power. Whether or not a President or government continues, depends on the opposition and the protesters and their ability to out manoeuvre those in power, politically. And making people suffer in order to get a government out is not only unconscionable, but also not likely to succeed (again look at Lebanon). In this regard, I do think that we should separate these two issues, even as we use, to the extent possible, the economic pressure to press for political reforms.

(Ram Manikkalingam is the Director of the Dialogue Advisory Group and a Visiting Professor at the University of Amsterdam.

Shanta Devarajan is a former Chief Economist of the World Bank and a Professor at Georgetown University.)



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Features

When Sri Lankan stories find their own voice

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…Sarasavi takes English writing beyond the bookshelf — and dreams of taking Sri Lankan stories to the world

By Ifham Nizam

What happens when readers finally see themselves in the pages of a book?

For Amendra Haputhanthri, Director of Sarasavi Bookshop (Pvt) Ltd, the answer is profound: something changes. A place, a culture, a memory and an identity that may have remained invisible suddenly become visible through literature.

“Nothing is as exciting for us as finding our own place or our own stories in a book,” Haputhanthri says.

It is this conviction that lies behind Fairway Street of Stories, a three-day literary celebration designed to place Sri Lankan English writers and their stories directly before readers.

The event, organised by Sarasavi, will take place from September 4 to 6, from 10 a.m. to 10 p.m., at the Dutch Hospital Precinct, bringing together more than 1,000 titles by Sri Lankan English writers and a programme featuring author readings, book signings, children’s activities, an open mic and what promises to be one of the more unusual attractions — a book club quiz.

Eight authors will participate in readings and meet-and-greet sessions, giving readers an opportunity not merely to buy a book but to meet the person who created it.

Two book clubs, each represented by four members, will battle it out in the quiz. The winning team will receive a one-night stay at Fairway Hotel, while the runners-up will receive a book pack and a Sarasavi discount voucher.

There is also something for children, with a children’s author conducting a reading followed by an interactive session.

Every Story, another partner of the event, will explore women’s experiences through reading and drawing, while the open-mic platform will give unpublished writers an opportunity to read their poetry, prose and memoirs before an audience.

But Fairway Street of Stories is about far more than three days of literary entertainment.

For Haputhanthri, it represents another step in a much larger campaign — to bring Sri Lankan English writing out of the shadows, build a stronger reading culture and eventually take Sri Lankan stories to international readers.

A literary mirror

Her own journey towards this mission began inside Sarasavi.

When Haputhanthri joined the company, she was involved in the imports section. Selecting books meant going through publishers’ catalogues and reading synopsis after synopsis.

Among the international titles, she began encountering familiar names.

“Ashok Ferrey, Michael Ondaatje, Shyam Selvadurai and even Carl Muller,” she recalls.

They were Sri Lankan writers, but their books had been published overseas.

There was something different about reading them.

“These were Sri Lankan stories. I felt closer to those stories than reading a story from New York or London. This is more close to me. I felt it.”

That feeling became more powerful when she encountered a speech by Michael Ondaatje at a Gratiaen Trust award ceremony.

Ondaatje’s reflections on discovering Sri Lankan writers and finding a literary representation of one’s own country struck a deep chord with her.

It made her think about what happens when a reader finally encounters his or her own world in literature.

“I felt enlightened, basically, to find that,” she says.

From that point, she began giving greater prominence to Sri Lankan writers writing in English on Sarasavi’s shelves.

A special rack was created for local English-language authors, while staff members were encouraged to speak to customers about these books rather than simply allowing them to disappear among thousands of other titles.

The idea was simple: recommendation can create discovery, and discovery can create readers.

The books that never reached readers

But another conversation would reinforce Haputhanthri’s sense of responsibility.

At the launch of Chiara Mendis’s Lanka Box, she spoke with Jeremy Muller, son of the late Carl Muller and founder of Jam Fruit Tree Publications.

The conversation turned to Carl Muller and his celebrated work.

“I asked Jeremy, is The Jam Fruit Tree his first book?”

The answer shocked her.

Jeremy told her that Muller had written around 200 manuscripts before that — manuscripts that were eventually burnt because nobody wanted to publish them.

“Those stories never came to the public,” Haputhanthri says.

“Just imagine how much of a loss that is.”

The conversation also touched on another writer whose work never found a sufficient publishing platform.

For Haputhanthri, the message was unmistakable.

Publishers and booksellers have a responsibility not merely to sell established authors but to help promising voices find readers.

She remembers invoking a familiar principle from Spider-Man: great power comes with great responsibility.

“I remembered that there is something that I have to do, something that no one has done before. It’s to promote and bring these authors to the marketplace.”

That thinking gradually evolved into initiatives that provide authors with spaces for launches, readings and interaction with readers.

Fairway Street of Stories is an extension of that philosophy.

More than selling books

Haputhanthri is emphatic that Sarasavi’s role should not be reduced to selling books.

The company’s vision, she says, is built around making books available and contributing to an intelligent and educated generation enriched with good morals.

“This particular event coincides with the Sarasavi vision,” she says.

The books at the event will be available at a 20 per cent discount, but the real objective is to encourage people to pick up a book, meet an author and begin reading.

“Books should add some value to you. They should give you personal growth. It should not be a waste of money.”

For Haputhanthri, the moral dimension of reading is particularly important.

She sees reading as something capable of shaping not only knowledge and intelligence but also character.

That philosophy, she says, is deeply connected to Sarasavi’s founder, an avid reader who continues to contribute to the company even at the age of 82.

“He is still coming to work. He’s still advising us. I think he is the reason that Sarasavi is what it is today.”

A country full of stories

The challenge now is to ensure that Sri Lankan stories do not remain confined to Sri Lanka.

Haputhanthri believes the country possesses a wealth of material capable of attracting international readers.

“We need to take our stories to the global arena,” she says.

Sri Lanka’s food, landscapes, wildlife, history and culture have already attracted worldwide interest. Literature, she argues, should be no different.

“People will love our stories. As much as they love our food and our culture and our country itself, they will definitely love our stories.”

But getting there requires more than simply translating a book and putting it online.

Good translators, editors and proofreaders are essential.

“The editor’s role has not been recognised enough,” she says.

She points to internationally published Sri Lankan writing as evidence of how much editorial work can go into transforming a manuscript into a book capable of reaching a global audience.

The journey to the international market, she believes, could begin regionally.

“We don’t have to go to UK level, but at least to India level. From there we will start.”

Haputhanthri has raised the subject with major international publishing houses whenever she meets their representatives, including Penguin Random House, HarperCollins, Macmillan, Bloomsbury and Hachette.

She also sees opportunities in developing online platforms through which Sri Lankan books could reach readers overseas.

It is a mammoth task, she admits.

But somebody has to begin.

The danger of not reading

There is another issue that concerns Haputhanthri — the tendency to copy rather than create.

Sri Lanka is a small market, she says, and businesses sometimes repeat what others have already done rather than thinking differently.

“If you think widely, if you think out of the box, you can come up with new ideas and businesses in the book trade itself.”

For her, the solution is surprisingly simple.

Read.

“Only a reader would do that.”

She believes originality itself is linked to reading because exposure to different ideas allows people to think beyond the obvious.

“The copying part is that originality is not coming from you, simply because you don’t read books.”

A simple invitation

Ultimately, Haputhanthri’s message about Fairway Street of Stories is not complicated.

Come

Especially if you do not consider yourself a reader.

“Just come, especially if you’re not a reader,” she says.

Visitors can sit through an author reading, listen to people discuss books and speak to readers.

They can even approach Sarasavi staff and ask a simple question:

“I’m not a reader, but I want to find this transformational power. How do I do that? What are the books that I should read?”

That, perhaps, is the real purpose of the event.

Not simply to sell 1,000 titles.

Not simply to put eight authors on a stage.

Not simply to conduct a quiz or an open-mic session.

But to create the possibility of a first book.

A first author

A first story that makes someone pause and say: This is my world. This is my story.

And perhaps, from that moment, a reader is born.

For Sarasavi, the ambition is ultimately summed up in a deceptively simple philosophy.

“Our success is the reason is books,” Haputhanthri says. “And what we want to give to society is also the same success through books.”

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Features

World Trade Politics: Canada rebuffs Trump’s tariff blackmail

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Canadian Prime Minister Mark Carney talks with President Donald Trump

by Rajan Philips

The global tariff blackmail of the Trump Administration in Washington ran into the Canadian Sheild last week at the 45th Parallel. After year-long efforts to salvage the legally binding free trade agreement between Canada, Mexico and the US, from Trump’s illegally executed tariffs, Canada’s Prime Minister Mark Carney said enough is enough and pulled out of all trade talks with the US. The cessation of talks is a shocking development in the geopolitics of world trade and will likely turnout to be the trade-equivalent of Donald Trump’s military misadventures in the Middle East.

Carney is now striking a defiant tone, virtually taking off from the departing hurrah of defiance of his predecessor Justin Trudeau. But Carney, unlike no other state or government leader anywhere, brings to his tone and text the sheer gravitas of a former Central Bank Governor of two G7 countries – Canada, during the 2008 Great Recession; and Great Britain during Brexit. His statement after the collapse of the trade talks has been universally called Davos II, the first being Mr. Carney’s January statement at the World Economic Forum in Davos, Switzerland.

Now he is discarding all the moderate abstractions – such as the US monetizing its global hegemony – and is calling Trump’s tariff offensive for what it is – a global blackmail. His remark that the Trump Administration signs its deals in pencil struck a chord in the US, not the White House. The Canadian Prime Minister even alluded to America’s mountain of $40 trillion debt, which the Trump Administration is dismissing as a mere a number, and added what markets do when one’s economic house is not in order. Tongue-in-check he added that Canada’s house is in order.

Sticking Points

One of the sticking points that led to the collapse of the US-Canada trade talks was the last-minute American insistence that Canada should follow the same tariff protocols as the US with common trading partners and that Canada should not pursue free trade agreements with others. That was too much of an ask. Ever since Trump began imposing tariffs on imports from Canada in utter violation of the existing free trade agreement, Prime Minister Carney has been warning Canadians that the old trade relationship with the US is over and that Canada must vigorously expand its trade with non-US partners to extra-compensate for the fallout with the US.

He has been remarkably successful, much to the chagrin of the White House, and Carney’s new defiance is receiving admiration and support from everyone who has had it with Trump. The Chinese are literally applauding, with China’s Global Times calling Canada and China “the only countries daring to respond to US pressure with reciprocal measures. In September, the Canadian Prime Minister is scheduled to address the European Union Parliament while attending the State of the Union address by European Commission President Ursula von der Leyen.

For over a year now, Trump has been striking deals with scores of countries, including Sri Lanka, all agreeing to his terms to avoid being hit with even higher tariff rates. Their implementation has been a nightmare and has gotten worse after the US Supreme Court ruled that the largest category of Trump tariffs was illegal. China has defied Trump tariffs from the outset and has been making bilateral arrangements from time to time. Canada and Mexico have been spared much of the Trump tariffs because of their free trade agreement with the US, but Trump selected specific industries, such as the auto sector, steel, aluminium and forestry products in Canada for imposing 25-50% tariffs. Lately, he added a plethora of Canadian exports from hockey sticks to paper plates for 50% tariff.

At USD 20 billion, the last category of exports constitutes only 5% of the $400 billion worth of Canadian goods exported to the US, but the new tariffs will disproportionately impact small industries and cause the elimination of about 90,000 jobs. In order to avert this, Canada intensified negotiations and was prepared to accept a certain level of tariff regime even though that would be in violation of the free trade agreement. The talks were seemingly going well and an agreement seemed to be in place with Trump announcing that a deal was all but ready for signing. Then all of a sudden and just before midnight on Friday, 21 August, Prime Minister Carney pulled the plug and ordered the Canadian team to return to Canada from Washington.

The Canadian version of the breakdown is that the Americans were bringing up new demands and restrictions at the last minute and that three of them were totally unacceptable to Canada. As Prime Minister Carney succinctly put it, “We cannot accept what they’ve offered, and we will not give what they’ve asked.” The three unacceptable asks were – to exclude specific trucks produced in Canada from tariff reduction; for Canada to apply to all of its trading partners the same tariffs that US was applying to them; and to remove the requirement for US online and streaming services to provide French summaries and labelling for their products entering Canada.

Free Trade or Tariffs

The free trade vs tariff debate is perhaps older than globalization vs nationalism. Neither binary is wholly incompatible. Free trade and targeted tariffs, not universal tariffs, can co-exist just as the new globalization and the old nationalism can and do co-exist. The bilateral experiences of Canada and the US are instructive on both fronts. For two quintessentially immigrant countries with similar pre-colonial, colonial, and postcolonial multi-cultural experiences, Canada and America are also an odd pair of countries.

Geographically, the two countries are almost equal at close to 10 million square kilometres each, and share the world’s longest border spanning 9,000 kilometres. The US population at 350 million is almost nine times Canada’s 40 million people. The economies and incomes are even wider – US GDP is $31T and per capita income $90,000 vs. Canada’s GDP of $2.3T and $56,000 per capita income. The national debts exceed the GDP in both countries – 125% in the US and 113% in Canada.

Politically, the US began as loose federation and evolved towards greater centralization and has now reached the point, thanks to the Roberts Court, of having a ‘unitary executive’ president in Donald Trump – apparently, not only for America but also for the rest of the world. Canada, on the other hand, began as a highly centralized polity and has considerably loosened over time to become a successful exponent of a bilingual (French and English) parliamentary federalism.

As political historians have noted, the state of Canada forged a nation along a railway stretching from the Atlantic to the Pacific. After World War II and the advent of the automobile and the freight truck, Canada’s sole east-west rail corridor has developed multiple north-south road connections to the US south of the border. The ease and flexibility of the latter has facilitated the expansion of continental trade.

What began as free trade between Canada and the US in the late 1980s has since encompassed Mexico to create the largest free trading bloc in the world. The bloc has a total population of 520 million people and a GDP of $35T. The total trilateral trade is valued at $1.9T, with Canada and the US accounting for $719T. The bloc accounts for 14% ($3T) of the world’s total exports and 18% (18%) of imports. More than quantum of trade it is the cross-border integration of production that has become the hallmark of the North American free trade regime. Nowhere more so than in the auto sector. Auto parts literally go back and forth across borders before they are assembled into a finished vehicle.

Throwing Rocks in the Harbour

The politics of US-Canada free trade has a chequered history. At the turn of the 20th century, it was the Canadian Liberals led by then Prime Minister Wilfrid Laurier who promoted free trade with America which the Conservatives denounced. In 1930, the US Congress passed the Smoot- Hawley Tariff Act to raise tariffs on some 20,000 imported goods as protection from foreign competition at the onset of the Great Depression. The sponsors of the bill were Republican Senator Reed Smoot from Utah and Republican Congressman Willis Hawley from Oregon. They were egged on by the cabinet of then President Herbert Hoover and manufacturers and industrialists. Hoover denounced the bill but was forced to sign it by vested interests.

The external reactions were swift. Canada took the lead in retaliating against the US raising tariffs under the new law. Another nine countries joined the retaliation, many others protested, and all of them found alternative trading partners to reduce trading with the US. The upshot was to aggravate the effects of the depression impacting workers, farmers and their families everywhere. Global trade fell by 66% and the tariff law was put in cold storage. Political punishment came later with vengeance. Smoot and Hawley did not return to Congress and the Republicans were badly defeated as was President Hoover in the 1932 election.

As well, over 1,250 economists had signed a petition asking President Hoover to veto the tariff legislation. Henry Ford visited the White House to make a special veto plea. The President agreed with all of them but signed the bill into law, nonetheless. This was also the time when the celebrated British welfare economist Joan Robinson, famously called retaliatory tariffs, in an appropriately titled essay: “Begger my Neighbours,” as the equivalent of throwing rocks in the harbour of one’s country in retaliation to other countries that have rocky coasts. But Robinson was not necessarily an advocate of free trade and she did not rule out the potential in retaliation in practical circumstances.

Ninety six years after the Smoot-Hawley Tariff Law was enacted and jettisoned, Donald Trump resurrected it to impose 50% tariffs on imports from Canada. The Smoot-Hawley Act allows the President to impose tariffs without Congressional approval. Unlike in 1930, the current Carney government tried negotiations that have come to naught now and precipitated retaliatory tariffs on a much wider scale than in 1930. The trilateral free trade agreement between Canada, the US and Mexico (called CUSMA in Canada) that was renewed during Trump’s first term is also in suspension and there is no indication of its renewal any time soon. The Trump Administration may try a bilateral agreement with Mexico just to spite Canada, but it will have to be on Trump’s terms.

38 years ago when the first free trade agreement was reached between Canada and the US, the Canadian public was emotionally divided over it. Then Prime Minister Brian Mulroney, a conservative and close ally of Ronald Reagan and Margaret Thatcher, was castigated by critics as “a political weather-vane and an economic comprador.” He narrowly won a bitterly fought election for the Liberals by securing a large number of seats in the two provinces of Quebec and Alberta while coming second in every other province and territory. The free trade agreement turned out to be an apparent boon for the Canadian economy but the real benefits and costs are still debated. The Trump Administration and its tariffs have reignited the old debate.

Before the 1988 free trade agreement, 68% of Canadian exports went to the US, and the proportion increased to 76% over 38 years. After Trump’s tariffs the US share of Canadian exports has quickly fallen back to the old 68% as industries and businesses found alternative markets elsewhere. One of the criticisms of the free trade agreement and its continuity has been that it lulled Canadian governments and entrepreneurs to rely on the US market without exploring alternative market opportunities.

The entire thrust of the Carney response to Trump has been to explore new markets and trade partners outside the US. Thanks to Trump, Prime Minister Carney has the political wind on his back with 80% of the public supporting him in opinion polls. A new trade deal may eventually be reached but if one could be achieved during the remainder of Trump’s term is the question. The bigger question is the implication for all the trade deals that Trump has forced other countries to sign under tariff duress.

Even as the US under Trump is getting isolated in the world, Trump himself is getting isolated in the politics of his own country. People are fed up with his lack of attention to their economic woes, made worse by tariff economics, and his preoccupation with building legacy monuments for himself in Washington. Trump’s approval ratings are down, the Republican prospects in the November mid term elections are getting worse, and almost all of Trump’s initiatives remain mired in courts with no immediate way out. On the Iran front, Trump is giving up on his military strikes that has cost the US $37.5B, and is threatening to carry out “the most crushing economic operation” targeting Iran and its trading partners. To paraphrase a more historic twist of phrase, the new threat may turn out to be – some crushing, some operation.

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Administrative error nearly cost me a year at University

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St. Joseph's College

(Excerpted from In Pursuit of Governance, autobiography of MDD Pieris)

In January of 1956 I entered the second year university entrance form of St. Joseph’s College. There was a nice quiet atmosphere in the school. The discipline was good and the teaching excellent. Mr. Rajapakse who taught us European history was one of the best history teachers that I had encountered even counting the university. So was Mr. Kuruvilla who taught English literature. The English class being small we received personal attention from a fine teacher. I later found that there were few in the English Department in the University to match him, and this included a lecturer from Cambridge University attached for a period to the department.

Father Peter Pillai himself took classes on the constitutional aspects of government, where we had to read books such as “Constitutional Law” by Wade and Philips and “The Law and the Constitution” and “The Constitution of Ceylon” by Sir Ivor Jennings. Father Peter was a remarkable person. He was a Master of Arts, a Master of Science, a Doctor of Philosophy and a Doctor of Divinity. He had a clear and distinguished mind and in spite of his heavy responsibilities as Rector found the time to teach physics in one class, divinity in another and aspects of constitutional development and constitutional law in yet another.

I have been very fortunate in being taught by teachers with experience, skill and very good minds both at Thurstan and at St. Joseph’s. Just to cite one example from Thurstan, Mr. B.J. Perera who taught us history in the fourth form was a research scholar whose learned articles on Ceylon history were being published in “The Ceylon Historical Journal.” We owe a lot to these teachers.

Most schools of course had interesting teachers. They were what could be called “characters.” St. Joseph’s was not an exception. Space would not permit me to dwell at length on this subject. I would therefore mention only one such case. The teacher concerned, taught a language. It was not English. His approach to, as well as his use of the English language was innovative, picturesque and refreshing. Structure and syntax were too confining for his liking. One day therefore, he had requested a startled monitor of the class to “run up downstairs and bring the mark book,” which had been temporarily taken to the office. On another day, he had pounced upon a restless and irreverent class, and threatened them with dire consequences if they “laugh in front of my back!”

These kind of refreshingly interesting sayings naturally evoked a corresponding response from his pupils. Therefore, one day, during a more convivial moment, when this teacher had confessed to having three daughters, one of his more intrepid pupils had politely inquired, whether they were all girls! According to reports, all goodwill and conviviality had instantly vanished. He was not prepared to tolerate such detailed investigation.

Astrology

My father was a student of astrology. He pursued the subject occasionally in his spare time out of personal interest. Sometimes he used to look at my horoscope or my mother’s and say something which by and large, curiously turned out to be correct. Now, after the trauma of changing schools hurriedly he had looked at my horoscope, and one day, in his customary quiet tone said something disturbing. He said that I had entered a bad period which was going to last for five or six years. He predicted the arising of unforeseen difficulties and mental worry and went on to make the startling remark. “This is the worst period in your horoscope. After this, you will never have such a bad period right to the end.”

Finally he said “There is no threat to your life, and you will come through the difficulties, but you will undergo a great deal of mental suffering.” My parents and I have always had a frank dialogue and I understood that my father’s intention in saying all this was to forewarn me. Fortunately nature had given me a strong temperament. I was not one who could easily be demoralized.

I enjoyed a happy year at St. Joseph’s. I found the time whilst studying to play second XI cricket for the school, and thereafter to be selected to the rather small first X1 pool. Mr. John Pulle the well known All Ceylon Cricketer coached the second XI. We had a strong batting line up and he decided that my services would be more useful in the bowling department as I was tall and reasonably well built. He did not want to waste such a physique. One day at practice he took me to the middle of the pitch and said “Pieris, I am going to send you as last man.”

Then pointing to four well known land marks, he continued, “your job is to go out there and hit the ball into Darley Road, The Home for the Aged, Bonjean Hall and the swimming pool. I don’t want singles and twos.” Never had I been given such an open license for anything. He was a hard task master and was not totally satisfied with my subsequent performance. I managed to hit a few over the wall and into Darley Road, once hitting a passing bus. I also succeeded in hitting a few onto Bonjean hall. But the home for the aged and the swimming pool proved beyond me, to the disappointment of Mr. John Pulle.

A shock

With the entrance examination looming, I went for first XI practices and played in some third term matches against some clubs. The main school matches were due to commence in the New Year in January. In the meantime, I had an examination to sit. I had done steady and regular work and was reasonably confident that I would not fare too badly. In a competitive situation, whether it was sufficient to get me into the university was another matter. There perhaps some luck was also necessary.

Father Peter Pillai

We were given two weeks study leave to be spent revising at home, and almost five days of this period had elapsed when one evening a classmate of mine turned up at home on his bicycle. What he had to tell me was most disconcerting. He said “Father Rector wants to see you first thing tomorrow morning.” When I anxiously inquired what the problem was, he was cagey, but under further questioning said vaguely “I think there is some problem about your subject combination for the examination.”

This was a stunning blow. Only the previous day I had quietly told my mother that I thought I was ready for the examination. Now this bolt from the blue had descended. All of us spent a tense and uncomfortable night. Early next morning I was outside the large door of Father Peter Pillars room. The time was about 7.30 a.m. Already, a queue had formed of parents and others who had come to see him. Sharp at 8.00 am. as was the custom, he personally opened the door. I stood out a little to be seen. He saw me and immediately called me in explaining to those ahead of me in the queue that this was an urgent matter.

When we were both seated, he said “I am very sorry, but your subject combination does not fit any of the combinations permissible for the examination. It is also our fault. We should have checked out your subjects, when you entered school. Evidently, Thurstan too had not checked. I have telephoned Balmond (Registrar of the University) and he says nothing can be done unless you change the combination. But it is clearly too late now. There are only a few days to go before the examination. I am really sorry.”

Then seeing the combination of shock and forlornness in my face, the Rector went on to say, “Apparently you cannot offer both Sinhalese and English as subjects for the examination. I do not know why that should be so, but those are the regulations.” Then viewing my complete stunned immobility, Father Peter Pillai, no doubt more to console me than anything else said “I notice that you had obtained a credit in Latin at the Senior School Certificate Examination. The Latin papers consist mainly of several passages in Latin and English for translation and comment. There are no text books to master. Would you like to drop Sinhalese, which is the weaker of your two subjects compared to English and try sitting for European History, Government, English and Latin? Although very late I can get Balmond to agree to a change.”

By this time I was slowly recovering from the blow and beginning to find my voice. I told Father Peter that I had substantially forgotten my Latin since I had not kept up with the subject and that I wouldn’t mind taking a shot at Ceylon History, since I believed I had a knack for History. The Rector appeared quite incredulous at this proposition and most emphatic in his reply. “You will have no chance whatsoever,” he said, adding “Do you know why we do not teach Ceylon history for the university entrance at St. Joseph’s, and teach Indian history instead?” Answering the question, he went on, “That is because of the very high failure rate in Ceylon history.”

Finally, he said, “I am sorry, but the best thing to do is to sit for the examination next year.” I had by now recovered my determination and fighting spirit. “I would like to sit for Ceylon History. In any case I have nothing to lose,” I said. The Rector looked at me in a manner of looking at a person who had completely lost all sense and judgement. “Do you realize,” he asked, “that you will have to sit for two papers of three hours each, the first paper covering the period from the very beginning to the arrival of the Portuguese in 1505, and the second paper covering the period from 1505 to the achievement of Independence in 1948? How are you going to cover two years work in a few days?” was his final and incredulous question.

I said, I realized the near impossibility but would still like to try. The Rector agreed more out of pity than any conviction. He promised to ring the Registrar and make the necessary arrangements. Since, I was in school, I met my history teacher Mr. Rajapakse and told him of my predicament. I was very good in my European history and he liked me as one of his best pupils. He spontaneously volunteered to help. He advised me to rapidly do whatever reading that was possible at home. He then gave me specific times to come to school, when he had free periods. He promised to get hold of the past papers for three years and suggested that we sit together and answer as many questions as possible in point form.

I was immensely grateful for this positive attitude and strong support. I returned home to the other pillar of strength, my mother. She had a temperament which refused to panic, which she seemed to have bequeathed to me. Her focus was not on what had happened, but what had to be done in a situation where every minute counted. Her advice was precise.

She said “Son, you told me a few days ago that you felt ready for the examination. Therefore, stop all work on the other three subjects and spend all your time on Ceylon history.” This kind of learning came later to be called total immersion. But immersion needed water. I had to quickly find some books. I searched diligently and found at home my old copies of Father S.G. Perera’s “A History of Ceylon for Schools” which included coverage of the Portuguese, Dutch and British periods, and Professor G.C. Mendis’ “Ceylon under the British.” Some of my friends found relevant books covering various aspects of the total period written by Ratnasabapathy and Horace Perera, as well as Codrington’s “Early History of Ceylon.” I also found a copy of Geiger’s translation of the “Mahawansa.”

I now gave up all thought of revision of the other three subjects and concentrated solely on Ceylon History. As I read, important sections and parts which I had studied years before came vividly to mind. Sitting with Mr. Rajapakse and answering previous question papers in point form focused attention on issues. more precisely and concentrated my mind. I was also hoping that the Ceylon history papers would come during the middle or towards the end of the examination giving me that much more time. But this was not to be. When the time table came, I found that these two papers came first out of the four subjects I had to sit, and on the same day, morning and afternoon! I was beginning to have an increased respect for my father’s reading of my horoscope!

During this difficult period my mother continued to play a pivotal role not only encouraging me, building up my confidence and providing me with extra nourishment, but also seeing to it that I did not overdo things and burn out. She strictly saw to it that I had eight hours sleep in the night. She used always to say “you must rest your brain. You must have a clear mind.” This calm support was invaluable. Ultimately when I finished sitting the two three hour papers, I felt that I stood a fighting chance of passing. So did my History teacher, who listening to me felt that I had done well enough to be at least on the border.

At that time, those who passed all four subjects at one sitting gained direct admission to the university without going through an interview. But those who had passed in three subjects and had narrowly failed in the fourth were called up before an interview board and those who fared well at the interview were admitted to the limited number of places that existed after the direct entrants were provided for. The question was, had I performed well enough in my Ceylon History to be at least called for the interview, and that too if I had done well in the other three subjects.

Strangely enough, the fact that I seemed to have done reasonably well, given the almost impossible odds added to the mental tension which indeed is a natural part of sitting for an important examination. If I had done badly, there would have at least been the relief of recognizing the inevitable. There would have been closure. But now there was the added tension, emanating from the feeling of being possibly so near, but yet so far.

It was a feeling inimical to the kind of mental stability that one would like to have had during an examination period. I sat for my two papers each, in European history and Government and was quietly confident of passing. Then, at last, amidst the gloom came a ray of light, and tidings of good cheer. At St. Joseph’s I had sat for the prize tests for the upper school history prize and the open English prize. Just the day before I was to sit for my two papers in English, which were my final papers, the school sent a message home to the effect that I had won The P.H.C. De Silva Memorial Prize for Upper School English. It was most thoughtful and kind of the school authorities to have done this.

The mental boost and the confidence it gave me just before my English papers were indescribable. Sitting in St. George’s Hall of the University of Ceylon, Colombo, I felt that I did really well. The anxious and somewhat demoralized student who sat this examination in various halls and rooms of the university did not know at the time, that over 30 years later he was to serve as a member of the governing council of the University of Colombo, a separate university by that time. Such are the twists and turns of life and fate.

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