“The idea that the market should be allowed to make major social and political decisions; the idea that the state should voluntarily reduce its role in the economy, or that corporations should be given total freedom, that trade unions should be curbed and citizens given much less rather than more social protection – such ideas were utterly foreign to the spirit of the time. Even if someone actually agreed with these ideas, he or she would have hesitated to take such a position in public and would have had a hard time finding an audience.”
– Susan George (Bangkok, 1999)
These remarks by American political scientist Susan George were part of a speech discussing neoliberalism, the accepted economic policy orthodoxy of the time, in the context of post-war policies from 1945-1950.
Author and activist Naomi Klein describes three broad aspects of neoliberalism as “privatisation of the public sphere, deregulation of the corporate sector, and the lowering of income and corporate taxes, paid for with cuts to public spending”.
Those with such tendencies will often speak of liberalisation of trade but not of enhancing industrialisation, they will insist on deregulation of industry but not on environmental protection, targeting of welfare and benefits but not investment in education and skills, or reductions in social welfare but increases in defence spending.
The global free trade regime has received close attention over the past two decades at least. It is thus worth noting the American critique of free trade as part of neoliberalism and the accompanying Washington Consensus, which has animated a shift away from the traditional political centres of both political parties.
This shift is characterised on the Left by the 2008 candidacy of Barack Obama and more recently, Bernie Sanders; on the Right, by the unexpected candidacy of Donald Trump. The main ideological tie that binds Obama, Sanders, and Trump and many more in an American context is their opposition to the “shipping our jobs overseas,” as Obama would repeat on his 2008 campaign trail.
Yet neither the Obama nor Trump Presidencies aligned with their campaign rhetoric; Obama pushed for further entrenchment in trade deals such as the Trans-Pacific Partnership (TPP) while the US saw a net outsourcing of jobs as well as further deterioration of the trade deficit with China under President Trump.
An article published by the Europe-based Centre for Economic Policy Research (CEPR) authored by Teresa Fort et al. notes: “US manufacturing employment has been falling since 1979, with particularly sharp declines in 2001 and 2007.” At least part of the decline is attributed to manufacturing operations shifting overseas to take advantage of lower costs, specifically labour costs.
The Obama and Trump anti-free trade campaign rhetoric was a direct reaction to the collapse of American manufacturing, something the voting public noticed. Many progressive American writers and economists from Glenn Greenwald and Matt Taibbi to Paul Krugman and Robert Reich have drawn a straight line from the loss of US manufacturing jobs and the decline in wages to the economic degradation of former industrial cities and the rise of a Trumpian brand of right-wing populism.
Incentives, not ideology
Meanwhile, deregulation invariably leads to risk-taking behaviour and environmental degradation by private enterprises, often in collusion with the state.
Writing in an Indian publication in July 2022, Malaka Rodrigo notes that one of the first moves made by President Gotabaya Rajapaksa’s ‘business-friendly’ administration was to “revoke the requirement of a permit for the transportation of sand,” which ignored the illegal “encroachment and clearing of forests to facilitate villagers and loyalists”.
According to Hemantha Withanage of the Centre for Environmental Justice (CEJ), the villagers began using the President’s “PR programme ‘Gama Samaga Pilisandara’ [Dialogue with the village] to bypass environmental regulations” through encroachment of an elephant corridor near Udawalawe National Park, a road project in a sensitive ecosystem within Sinharaja, and the transfer of non-protected forest administration to local authorities for agriculture and development including biodiversity-rich habitats and sanctuaries.
When Sri Lankans think of successful nations with fast-growing and stable economies, there are some obvious candidates: Singapore, India, Vietnam, South Korea, and Taiwan. All success stories of the Asian Century; nations that were able to rapidly grow their economies, albeit with imperfections – some more pronounced than others.
Sri Lanka might seek to emulate the governmental and structural features of such nations. Simply including the words ‘export-oriented industrialisation’ in a speech will not suffice. The Sri Lankan political class is yet to fully grasp the fact that development in these countries had significantly more to do with State intervention and organisation than with any elusive ‘invisible hand’ or even with maximising their own competitive advantage.
The Government of Singapore plays the role of an intrusive regulator in every aspect of the economy, India’s industrialisation was driven by its State, Vietnam is a one-party socialist republic, and the state involvement in the Taiwan Miracle is well documented.
A recent piece by Uditha Devapriya puts the issue succinctly, commenting on the Budget speech: “President Ranil Wickremesinghe notes that we have borrowed from other countries and ‘got lazy day by day’. The first point is correct… but the second point misses the first: the issue isn’t that we have got lazy, but that we have never shifted from commodity exports to manufacturing.”
This is not a question of expertise, capital, or labour; it is a lack of incentives, and this is the fine balancing act that policymakers must appreciate – the need to become part of the global supply chain whilst incentivising industry in a manner that does not encourage rent-seeking and instead demands innovation.
If all this sounds complicated, that’s because it is. It might also be why President Wickremesinghe seems eager, by his own admission, to ‘sell the family silver’ because the alternative – real policy – requires much more time and political capital than the President has available to him.
Feudal politics, neoliberal economics
Ranil Wickremesinghe, having lived at the sharp end of politics for some 30 years, is still able to inspire an intensity of support and loyalty that borders on dogmatic. While this base of support has been shrinking rapidly, true believers still exist and were no doubt purring at post-Budget comments made by the President recently.
“They still ask, why are you selling profit-making enterprises? Look at the SLT, it’s making profits. Ask the Secretary of the Treasury what profits are made and how much more money we are to pump into the future. We have to decide whether we want to strengthen the people or whether we want to take public money and strengthen the Insurance Corporation. My priority is to look at the people and not these companies and buildings. We are selling it so that we can put this money into foreign exchange reserves and strengthen the rupee.”
These comments are a perfect encapsulation of why Wickremesinghe remains so popular in some circles and yet so reviled in others. Often called a ‘neoliberal’ in the distinctly pejorative sense, the President does little to combat the label and in fact seems to revel in it. He continued: “…I will tell you one thing. If I can sell more and put seven billion back, I will do it…” A statement that further reveals his ideological compass.
The neoliberal caricature of Ranil Wickremesinghe is widely discussed in the local and international press.
A July 2022 piece from The Wire (India) by Devaka Gunawardena and Ahilan Kadirgamar notes that “Wickremesinghe prides himself on his neoliberal leanings”.
Economist Umesh Moramudali made a similar point in an Al Jazeera report that same month: “In the 1970s and 1980s he was a neoliberal like his uncle Junius Richard Jayewardene, but he has also adopted some pragmatic measures.”
Writing for the Jacobin magazine in January 2019 in reference to the protest movement in support of the Wickremesinghe Premiership during the 2018 constitutional ‘coup,’ Kanishka Goonewardena states that “its ideologues would have done better to note that without addressing the pernicious Sri Lankan fusion of feudalism in politics and neoliberalism in economics, the ‘good governance’ project was from the start as good as dead”.
In a piece from November 2022, Uditha Devapriya contends that the recent Budget presented by Wickremesinghe was “perhaps the most neoliberal budget from the last five or six years”.
When the President states that he would “sell” as many State-Owned Enterprises (SOEs) as it would take to raise $ 7 billion (even though total Government debt is around $ 50 billion), it exposes a multitude of complexities regarding State divestment and privatisations.
A 2018 research paper published by Saul Estrin et al. studied the various literature from the previous 40 years of privatisations in both developed and developing nations, noting that “some privatisation failures in the 1980s and 1990s” meant that developing countries needed “more emphasis in policymaking” to create “the preconditions for successful privatisation… In place of a simple pro-privatisation bias characteristic of the Washington Consensus, it is now proposed that governments should first provide a better regulatory and institutional framework, including a well-functioning capital market and the protection of consumer and employee rights. In other words, context matters: ownership reforms should be tailor-made for the national economic circumstances, with strategies for privatisation being adopted to local conditions.”
Estrin notes that “privatisation can also affect the distribution of income… As public enterprises tend to be overstaffed prior to privatisation, private ownership can lead to… disproportionate redundancies for specific categories of worker (low-skilled, for instance). The study by Chong and Lopez-de-Silanes (2002) based on a survey of 308 privatised firms (covering 84 countries) over the period 1982 to 2000 showed that employment was reduced in 78% post-privatisation, likely worsening income distribution.”
Further, privatisation without competition has been shown to lead to an increase in prices of services and “private owners may decrease their engagement in specific, low-return market segments, which may disproportionately affect the poor”.
The Indian experience
As is the case in Sri Lanka today, India in 1991 was undergoing a severe Balance of Payments (BOP) crisis which forced the Government’s hand, necessitating reforms including the ’91 Industrial Policy which sought to encourage private enterprise. India embarked on divestiture through partial privatisations and strategic sales, with the state only divesting minority stakes, retaining management control.
Estrin et al. suggest that in South Asia, privatisations have been rare despite widespread inefficiencies in SOEs, so Sri Lanka is not an anomaly in our immediate region. Research on the Indian experience of privatisation by Gupta et al. (2008) reveals the deep contradictions that a policy of privatisation can create.
In India, there were historical impediments to privatisation as much of India’s industrial base was established with state intervention in the post-colonial period: “Particular sectors had been reserved exclusively for SOEs, such as the infrastructure sector… steel, petroleum, and heavy machinery… the Government nationalised many loss-making private companies; more than half of the firms owned by the Indian Federal Government were loss-making in the 1990s” (Gupta, 2008).
The Indian experience is a warning to Sri Lanka. Despite years of trying, sales of majority stakes in Indian SOEs and the handover of management control only began after the 1999 election rout of Sonia Gandhi’s Indian National Congress by Vajpayee’s Indian People’s Party (BJP). Gupta notes that “even then until 2004 the Government retained an average ownership stake of 82% in all SOEs”.
Estrin et al. are clear “that a move from state to private ownership alone does not automatically yield economic gains. Rather, a number of factors have been found to influence the success of privatisation.”
The thesis is not a rejection of privatisation but a commentary on the inherent challenges and complexities of such a project in the context of recent experiences by other nations. It necessitates the careful selection of which industries to privatise, which SOEs to retain, and which loss-making SOEs to bundle; an evolving of regulatory framework and institutional and political environments.
Perhaps even more crucially, in a Sri Lankan context, the profiles of potential private sector ownership, their likely impact on workers, the perceptions of the citizenry, and the potential for generating monopolies all demand scrutiny.
The final ownership of an SOE is paid special attention by Megginson (2000), noting that in countries which had privatised SOEs through asset sales, the process had frequently been non-transparent and plagued by insider dealing and corruption. For example, the Russian ‘loans for shares’ programme enabled well-connected financiers to obtain controlling stakes in the country’s most valuable firms at prices below market rates.
In Sri Lanka, the State must consider how foreign ownership of Sri Lankan assets might impact Sri Lanka’s domestic and foreign policy. Readers might refer to President Wickremesinghe’s controversial 2017 long-term lease of the Hambantota Magampura Port to a Chinese entity during Yahapalanaya.
The Magampura fiasco
In summary, the Rajapaksa Government spent an estimated $ 1.5 billion to construct the port but soon found that cash flows from the project were inadequate to meet loan repayments. In July 2017, Prime Minister Wickremesinghe’s Government signed a 99-year agreement to lease 70% of the port to China Merchants Port Holdings Company (CMPort) for around $ 1.2 billion.
A Hindustan Times article by Shishir Gupta from June 2022 notes that following the lease, “there was no change to the country’s debt obligations for this project… Sri Lanka continues to bear the debt for the failed port”. At the time, Yahapalanaya was proud of having strengthened Sri Lanka’s foreign exchange reserves. At present, Sri Lanka’s foreign exchange reserves are virtually non-existent and a few months ago, the Hambantota Port was the scene of a geopolitical stand-off with a Chinese ‘scientific research’ vessel.
This transaction awarded control of a strategic asset to a Chinese entity, created geopolitical tensions, and did not materially reduce the nation’s debt burden; the funds received are no longer available to the country and the loans taken to build Magampura are still being serviced by the Treasury. The Magampura fiasco is reason enough for Sri Lankans to view the President’s comments on SOE privatisation with extreme suspicion.
Estrin’s concluding comments: “Privatisation programmes are especially open to manipulation by extractive political institutions and elites in fragmented political environments… Privatisation involves the transfer of productive assets from the state to private hands. Such transfers are, by their very nature, politically sensitive and subject to potential corruption and abuse.”
Other factors required for a successful privatisation programme include an efficient legal system and high levels of corporate governance, liquidity of the capital markets, barriers to domestic entry and competition, and the independence of regulatory institutions. “Successful privatisation requires a competent government with low levels of corruption.”
Selling the family silver
The President’s overarching policy direction is to encourage the privatisation of Sri Lanka’s SOEs, which seems logical enough given the burden of SOEs on the country’s Treasury.
As discussed, divesting SOEs in a constructive and strategic manner is a complex process; in many cases, private sector efficiencies alone will not generate sufficient Returns on Investment (ROI). The liabilities of some SOEs will require the Government to bundle these together with profit-making entities in order to provide value to potential buyers. What the President refers to as “companies and buildings” were ‘national assets’ once upon a time, thus any potential sale should be weighed up against the price and long-term prospects of that asset as well as the importance of that specific industry to national objectives.
It is curious that Wickremesinghe would focus his remarks so intently on the privatisation of SOEs and State divestiture of commercial operations as a short- or even medium-term solution to Sri Lanka’s economic crises. Not only are Sri Lanka’s plethora of SOEs particularly complicated by entrenched interests and stakeholders from various segments of society, but the results of privatisation experiences in developing or transition countries have been mixed and the processes are complex.
Much has been written about worker-union opposition to privatisations; urban Sri Lankans tend to view union agitations as self-serving and against the national project. Estrin suggests that such opposition is in itself a reaction “to the record of privatisation as it spread to middle income and then transition economies (including China)” which was “not always so positive.”
Further, “…privatisation programmes were associated with scandals: inappropriate valuations… the emergence of extreme inequalities of wealth”. It also considers the institutional and regulatory environment and links it to the common recurrence of income distributional issues, presenting an explicit efficiency-equity trade-off; a trade-off that the President has been only too eager to make for the better part of three decades in politics.
(The writer has over a decade of experience in the banking sector after completing a degree in accounting and finance. He has completed a Master’s in International Relations and is currently reading for a PhD at the University of Colombo. He is also a freelance writer and researcher, and can be reached on email: kusumw@gmail.com and Twitter: @kusumw)