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Surviving the World economic crisis

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The outbreak of the Covid-19 pandemic precipitated a world economic crisis. Many commentators suggest that the pandemic caused the crisis. In actual fact, several economists, such as Sri Lanka-born Howard Nicholas, have predicted this economic downturn for several years.

The roots of the crisis go much deeper than the Coronavirus. The economies of the world are mired in debt. Because of the hegemony of the financial elite, companies in the advanced industrial nations have not, for years, invested in new plants and machinery but have, instead, used government subsidies to buy back their shares from shareholders. Investors have used this mechanism to increase the apparent value of their assets, enabling them to borrow more from banks.

This is because investors expect to make money, not from the dividends enabled by company profits, but by speculating in company shares. Many of the so-called “unicorn” companies (new, fast growing companies valued at over US$ 1 billion) make no profit, but grow because investors believe they will grow in value.

Economic stagnation

For the same reason, many big companies, such as Apple, Facebook and Google, instead of increasing their own value by investing in production, or research and development, buy other companies. Profitability is increased by reducing staff numbers, or hiring temporary staff at much lower remuneration, often on a “gig” (for-the-job employment) basis. This in turn has an effect on workers’ purchasing power, which affects the growth of markets negatively.

This kind of economic stagnation occurs from time to time. It used to be solved by more “inefficient” companies (that is, companies that do not make a profit, even if they happen to be more efficient by other criteria) going bankrupt, and more profitable companies expanding into the space they create. This has changed now. For example, the old hiring-car-based company Hertz, which made a profit of US$ 168 million in the last quarter of 2019, went bankrupt, while Uber, which made a loss of US$ 1.1 billion in the quarter, is doing famously. Companies able to attract capital prosper, while those seen as not expanding, fail.

The economy recovers from such crises by investing heavily in new technological methods to increase productivity. In the last two decades, however, companies in the West, especially in the USA, have invested in technologies that enable them to extract the greatest profit from “gig” labour, and essentially in sales, delivery and other services, rather than production.

On the other hand, East Asian countries have invested heavily in high-tech manufacturing industries. China, Japan and South Korea, together, account for two thirds of all new industrial robot installations, while Europe and North America only account for 30%. In the context of the current crisis, such countries will probably lead the recovery, with brand new technologies. Other up-and-coming industrial powers, notably Vietnam, Iran and India, will also accelerate their technological capabilities.

The continued economic stagnation, in the USA, has several corollaries. In the first place, as the world’s biggest consumer of imports, the exports of export-based economies will suffer. In the second place, investors are fleeing the US Dollar for gold, the price of which has risen from US$ 48,000 per kg in March to over US$ 65,000 per kg today. The consequent fall in the value of the US dollar (from € 0.94 in March to € 0.85 today) means that exporters will be even more disadvantaged.

The USA is also the world’s biggest consumer of petroleum – using more than the combined consumption of the next two countries, China and India. The price of crude petroleum in Dubai fell from US$ 64 in January to US$ 23 in April. Although the price rose again, to US$ 43 in July, the lower value of the US Dollar means that the real increase is less than this. This means the income of the Middle East and Russia will be affected severely.

Different approaches

How have other countries coped with the economic downturn? The USA, China and Germany represent three different approaches to the problem.

Apparent economic growth, in the USA, before the pandemic, was based on short-term, low wage jobs. Once Covid-19 hit, the country experienced its fastest unemployment growth in history. In reaction, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which budgeted US$ 2 trillion (10% of GDP) to boost the economy. More than half of this went to companies, while less than a quarter went as compensation to poor people losing their jobs or otherwise affected by the crisis.

This stimulus package helped cushion the collapse of the US economy. However, the payments made to the affected poor people often went to pay immediate food and rent needs. Most of the consumer spending due to payments to individuals went to online delivery companies, such as Amazon and Uber, which employ workers on “gig” terms. They did not spend it in shops and supermarkets which employ permanent staff, so unemployment rates remain high.

Unfortunately, even this funding ended at the beginning of August. The government and the opposition (which controls the legislature) argued about a new stimulus package. President Trump wanted to spend only US$ 1 trillion, reducing payments to unemployed people. The opposition Democratic Party wants to spend US$ 3 trillion, mostly on benefits to the affected people and on government programmes, including schools. The two sides could not agree.

“The Democratic Party continues to insist on radical left-wing policies that have nothing to do with the China [sic] virus,” Trump said. On 9 August he signed four “executive actions” regarding payment of reduced unemployment benefit, a moratorium on income tax for poor people, relaxing rules on evicting tenants and action on student loans. Critics say the executive actions may not be workable.

“Six guarantees”

China, the world’s biggest manufacturing nation, the first to suffer from the Covid-19 pandemic, has seen its economy recover. According to “The Economist” magazine’s Intelligence Unit in Beijing, local government investment, in public medical facilities, city infrastructure, old community renovations, transport, power grids and telecommunications, drove construction growth. This, in turn, stimulated production of construction-related machinery and goods, driving up manufacturing output.

The Chinese government has revealed a “six guarantees” recovery plan, based on creating jobs, giving financial support to ensure livelihoods, protecting small and medium enterprises, food and energy security, stability of the industrial supply chain, and facilitating the path from lockdown to a vital social life.

The Standard Chartered Bank says that China’s government is prioritising social goals ahead of GDP growth by creating employment and indicating that fiscal policy will be its preferred way to stimulate the economy. Officials have suggested that they are willing to almost double the budget deficit to support gross domestic product growth, while allowing money supply and credit growth to reach higher levels. There also appears to be a clear shift in China’s strategy; moving from an export focus to paying greater attention to domestic demand, to releasing consumers’ potential, and investing in new and traditional infrastructure projects. It projects a growth rate of 2-3% this year, a surprisingly high outcome for an economy which shrank rapidly in the first quarter of this year.

“Green” recovery

Meanwhile, Germany, the biggest European economy, has put in place a radical “green” recovery plan. The € 130 billion plan consists of fifty measures designed to boost consumption and speed-up economic recovery. The Government of Germany’s actions will be structured on this recovery plan. It is based on three pillars: € 78 billion on short-term economic recovery (about), about €5,000 billion on investment in future-proof and green technologies, and, € 3 billion on European and international solidarity (in addition to the efforts of the European Commission’s recovery plan).

Reducing VAT by 3 percentage points (12 percentage points for the catering and restaurant sector) – to stimulate consumption and revive employment in businesses, particularly in the hard-hit food and beverage sector – will cost the government € 20 billion.

The short-term recovery plan includes a huge green effort: subsidies on consumption of renewable energies, together with a carbon tax, will move use to electricity from other modes. In the transport sector, subsidies for buying electric vehicles are doubled, and support is given to battery and charging infrastructure, modernising commercial vehicles, ships and aircraft, and to public transport and railways. The construction sector has € 2 billion allocated for energy efficient retrofitting to existing buildings.

A key point in the plan is the new green hydrogen (produced by electrolysis from renewable electricity) sector, for which the government is allocating € 3 billion to develop 10 GW of electrolysis units by 2040. Together with the budget for European and international solidarity, this will put Germany firmly in the lead in this technological area.

Lanka’s markets

In the second quarter of this year, the USA’s gross domestic product declined by 35%, and the government recorded 23 million people as unemployed, the highest rate in 80 years. In the European Union the GDP declined by 7%, and unemployment increased to 14 million. In Britain, GDP has declined by 9%, driving unemployment up to 2.5 million. In Russia, GDP dropped 8%, and unemployment rose to 1.7 million. Middle Eastern economies will slow by 5%, affecting migrant labour employment.

These are Sri Lanka’s biggest markets. This shrinkage will adversely affect Sri Lanka’s economy. Both exports, and foreign labour opportunities, will decline. With a collapsed tourism sector, this will allow the country little foreign exchange to buy the things it needs.

In this situation, what can countries like Sri Lanka do? There are a few simple answers to this question. First, reduce imports to match the reduction in foreign exchange sources. Second, find new foreign markets to replace the declining economies. Third, find new products to replace the ones currently being exported. Fourth, develop the domestic market for domestic products, to advance the economy.

Of course, walking the talk will be less simple. How can it be done? The path taken by the USA is the road to ruin, while Sri Lanka does not have the financial resources to emulate China or Germany – although it can emulate many of the measures they have put in place, on a far smaller scale. It remains for the state to create the policy parameters to drive recovery on new paths, using our existing resources, and developing indigenous knowledge. New technology will be a large part of this, but we must use it wisely. We have an educated population which can adapt itself rapidly to new skills. That is our biggest resource in this economic battle.

Vinod Moonesinghe

 



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Opinion

Building trust, a better investment

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The government has allowed private companies to import chemical fertilisers. The farmers had been holding many a street protest against the government’s blatantly unwise policy of shifting to organic farming overnight, but to no avail. The Minister concerned and others repeatedly said that they would not change the government’s decision as it had been made for the good of all the people. The farmers had no problem with organic farming but insisted that the transition had to be phased out to avoid serious adverse effects. But no! The government never relented and tried to show that the street protests were instigated by interested parties including chemical fertiliser companies, to make the government unpopular. The government insisted that chemical fertilisers have caused many ailments including the dreaded kidney disease and turned a deaf ear to the farmers’ grievances.

However, hot on the heels of Mr. Modi’s U-turn last week, the Minister has changed track and tells us that the government, being one which is always ‘sensitive to people’s concerns’, has decided to make chemical fertilizers available through private imports, but would not import them on its own or change its policy of going fully organic. Questioned by journalists, another ruling party spokesperson quipped that the government’s decision came about neither due to the Indian PM’s ‘example’ nor in response to the loud protests. It is a result of the discussions held within the party, he assured.

However, it is unfortunate that the government had to wait for more than seven months to be ‘sensitive to peoples’ concerns’. If the ruling party members had only taken a few minutes to watch TV news headlines, they would have proved their ‘sensitivity’ months earlier, not waiting for Mr. Modi to steal a march on them, so to speak. To any reasonable person, the government obviously has responded to the rampant protests that were actually the climax of a prolonged process, which began with pleading, explaining their predicament, reasoning, chest thumping, expressing disbelief, which gradually culminated in loud protests, burning of effigies and threatening to come to Colombo in numbers. Surely, Mr. Modi didn’t make it any easier for the government to justify its ‘sensitivity’ to farmers’ grievances!

Thus, to any reasonable person, the government had actually responded to the unbridled anger of the helpless farmers, not to their grievances. What’s more, looking at how the government had handled the previous issues of a controversial nature, it is hard to recall any instance where it promptly responded to people’s concerns; it was always a case of responding to people vehemently protesting as a last resort- be it the Port City issue, Eastern Terminal, Teachers’ salary or Yugadanavi Power Plant issue, not to mention the pathetic state of innocent villagers being perpetually traumatized by wild elephant attacks often taking their lives wantonly. In each of these cases, the government, wittingly or unwittingly, seemed to regard the voices of concern, not as appeals worthy of serious attention, but as attempts at disruption or politically motivated interventions. This, surely, does not augur well for the government or support its claim to ‘sensitivity’ as regards people’s concerns.

The government’s decision to compromise on its strict chemical fertiliser ban, which has come soon after Mr. Modi’s reversal of sorts, allows room for the discerning public to make obvious inferences, despite the government’s claim about its decision not being influenced by that of the Indian PM. In fact, the government reps have nothing to gain by pretending to blush when journalists suggest that they perhaps took a leaf from their neighbour. Even at this juncture, people’s representatives seem reluctant to prefer sincerity to affectation; hence the government’s growing aloofness, which is causing a “severe trust deficit”- to borrow a pithy phrase from The Island editorial of November 19.

As the representatives of the public, what any government needs to foster are sincerity and empathy. It is this tacit bond between the people and the government, which will consolidate trust in the long term. Being the party that holds power, the onus is on the rulers to secure people’s faith. Instead, every party that has come to power since Independence has always helped the Opposition to make a five yearly ‘ritual cleansing’ in the eyes of the people. So, the wheel turns.

Susantha Hewa

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Opinion

Don’t harass whistle-blower

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Thushan Gunawardena, who alerted the authorities and the media to a serious fraud taking at Sathosa should not be harassed by the Police as it is clear that he has no political motives and has acted in the public interest.

The Cabinet minister concerned is attempting to show a conspiracy against him when he has failed to prevent such frauds at Sathosa and let it continue as there were benefits flowing to him in addition to his being able to employ family members and manipulate the system for personal profit.

It is patently clear that he is trying to take the investigation in a different direction and prevent changes that would clean up the mess that is contributing to the massive losses at Sathosa.

Mahinda Gunasekera

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Opinion

Stanley (Sam) Samarasinghe

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A TRIBUTE TO A PATRIOT

Even with the prior knowledge that the end was near, when the news of the passing away of Sam on the 23rd of November 2021 was conveyed to me, it was difficult to bear. Though living the better part of his adult life in the United States, to those with whom he had regular contact and dialogue, he was ever present. He succumbed to an illness that he bore with courage and fortitude for several years. In that time his enthusiasm to live his life to the full did not diminish. Except family and close friends none had even the slightest inkling that he was battling an invasive enemy within.

I have described Sam as a Patriot, if its definition is “one that loves his country and zealously maintains its interests”, then it fits him well, as he did that in full measure.

Having schooled in Kandy at Dharmarajah College, Sam completed a special degree in economics at the Peradeniya University where his father worked. Having being accepted by both Oxford and Cambridge Universities, he turned to his mentor, Professor H. A. de S. Gunasekera, who had advised him to take Cambridge. He went there with his wife Vidyamali, whom he had met at Peradeniya and obtained his Ph.D. in Economics. They both returned to Peradeniya and Sam became a Senior Lecturer in the Department of Economics. He taught there until 1989, when he left for the United States with his wife and two sons, Mevan and Ranmal. He was appointed Professor of the Development Studies Programme at the USAID, a position he held for many years in Washington. But what is remarkable, is that he continued his abiding interest in the many facets of Sri Lankan life, especially in education and politics and of course, Kandy. He returned to Sri Lanka at least twice a year. While others would spend such breaks as a let up from work, Sam vigorously involved himself in many spheres of activity.

Along with Prof. Kingsley de Silva, he created the only intellectual hub outside of the Peradeniya University in Kandy at the International Centre for Ethnic Studies (ICES). As Director, he secured funding for many academic projects that the Centre did. Sam was instrumental in the ICES buying its own place and then constructing a tarred road leading to the Center. The way he set about it will give the reader an idea of the man Sam was. The road served at least 12 houses. He arranged a meeting of all the householders and sold them a deal that none could refuse. Each household was asked to pay proportionately to the distance from the main Peradeniya Road to their house. At the end of the exercise. Sam refunded the excess in that same proportion!!

Sam was an academic, researching and writing extensively, sometimes collaborating with other academics such as Prof. Kingsley de Silva and Prof. G.H. (Gerry) Peiris. On several occasions, he brought out his post graduate students from the Tulane University, New Orleans (where he was Visiting Professor of Economics) to Sri Lanka and to Kandy, arranged field trips and had them interact with academics and professionals.

His particular interest in Kandy made him do a study of its traffic congestion and organised a public seminar with other experts on the subject. As the President of the Senkadagala Lions Club, Sam obtained funding for many of its projects. In fact, Sam had a penchant for writing up project proposals, an expertise he ungrudgingly shared with anyone who asked for it. He started a monthly local newspaper in 1994, the “Kandy News”, becoming its Chief Editor and its main sponsor. The last issue was a special supplement done in the run-up to the Kandy Municipal Council election in 2018.

When the tsunami stuck the country in 2004, Sam was the lead Consultant of a World Vision programme designed to make a qualitative assessment of tsunami and non-tsunami villages from Kalutara in the Western Province to Kilinochchi in the Northern Province. A task he successfully completed with his team under the aegis of the ICES.

He was an advocate for cooperation and harmony among the races. His involvement in the post tsunami work in Jaffna and Trincomalee with the Lions Club is proof of that, as much as it was when he asked the guests to the nuptial reception of his son Mevan, not to give presents but to contribute towards the project initiated by Mevan and himself in giving school books and equipment to the Tamil Primary School at the Gomorra Estate in Panwila.

My own association with Sam goes back to the time I ran for office as Mayor in 1997. He threw his weight behind me helping out in ways too numerous to mention. That friendship grew and grew and it embraced my family as well. He would ask me to criticise his writing especially on politics. He was a stickler for accuracy and uncompromising on facts. His opinions were rational, practical and unbiased. A bubbly personality, he was always a believer that there are better times ahead. His enthusiasm was infectious. His criticism of events and people were never personal. There is much to take from the life and times of Sam Samarasinghe.

We share his loss with his wife, the two boys of whom he was justly very proud of and his siblings whose welfare he always had. The country is poorer for his passing.

May he find peace in Nibbana!

Harindra Dunuwille

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