What are the causes of the economic crisis in Sri Lanka?

The economic crisis in Sri Lanka did not appear suddenly but has been in the making for some time. Covid-led destruction devastated the tourist industry and government policies have further accelerated the crisis. The recent reduction in Value Added Tax and President Gotabaya’s mismanagement is not the sole causes of the current crisis, as the right-wing opposition claims. The economy was in danger well before that, and the crisis was looming even during the so-called ‘fastest growth” period. Sri Lanka was not ‘exempt’ from the world economic crisis nor is it unique in any way. Like many other neo-colonial countries, Sri Lanka has been a debt-driven economy for a long time. If anything, the current crisis can be linked to outright neo-liberal policies that started in the late 1970s. Though the origin of the crisis can be traced back to then, it is wrong to compare the conditions that existed for the masses then and now, as is often done by many right-wing and liberal commentators. Except for the bread queues, no real comparison can be made. It is worth reminding ourselves how Sri Lanka’s economy evolved over the years and the key turning point that took place in the late 70s.

Under British rule, economic activity was dominated by tea plantations. Over 90% of exports were plantation products, and these remained vital even after the end of colonial rule. However, the newly formed right-wing government’s first act following so-called independence in 1948 was to attack the rights of plantation workers as they provided a base for the emerging strong left force, the Lanka Sama Samaja Party (LSSP), which was the official opposition in the first parliament elected in 1947. However, the government could not get its way and was forced to implement many welfare measures. Having excluded most of the plantation workers from citizenship and thereby the right to vote, the United National Party (UNP) secured a landslide win in the 1952 parliamentary election. However, this election did not give the weak capitalist class full power. During this first term, they were forced to spend over 50% of government money on welfare and services. Government subsidies alone stood at 22% of the budget. Every attempt to ‘liberalise’ the economy by then finance minister JR Jayewardene (JRJ) was fought back and defeated.

This struggle resulted in the general strike of 1953 and a decisive defeat for the UNP-led government, thus beginning a new period of reduced imports and investment in local farming and industry. In the following election (1956), the UNP was reduced to 8 seats, the SLFP-led coalition won, and the LSSP came second with 14 seats. The SLFP, founded in 1951, combined left-populist policies and a move towards a “non-aligned” international position with communalist policies, which were reflected in Sinhala replacing English as the official language, a move that alienated the Tamil speaking minority. A newly-established national planning council started to implement a ten-year plan which helped to reduce unemployment. Subsidies for farming increased, resulting in a 27% increase in paddy fields cultivation, for example. The guaranteed price for paddy rice also increased a few times.

Following the landslide victory of the SLFP-led popular front coalition, which included the LSSP and Communist Party in 1970, a new period emerged. The food drive initiated in 1973 accelerated local food production. The land reform bill of 1972 that took over 61% of land into state hands, and made funds and loans made available to farmers, increased local agricultural productivity. Key parts of the economy, including plantations (what they called the ‘commanding heights’ of the economy), were brought under state ownership. From the early 1960s to 1974, living standards, in general, increased, with much better wealth distribution. Welfare measures also helped to reduce income inequality.

However, this was being implemented just as a long upswing in the world capitalist economy was coming to an end. This hit Sri Lanka hard. At the same time, various workers’ groups and societies that emerged in that period demanded more. Democratic control by workers and full implementation of a planned economy were not in place. That could have led to the development of industries and at least a more sustainable situation when the crisis hit in the late 1970s. Lack of planned investment in industries failed to develop the real economy in any substantial way. The establishment of co-operatives (800 multi-purpose co-operative societies that existed across the country) is not an alternative to elected workers and farmers’ committees to oversee production and distribution. Without central planning, the government continued its reliance on capitalist fiscal policies and profits that could be generated by state-owned industries and plantations. While the local market was nowhere near enough, the government also resorted to a so-called ‘wealth tax’ and a 30% tax on luxury items to generate revenue. Prime Minister Sirimavo Bandaranaike’s model of a “self-sufficient” economy, at best a Keynesian measure, was destined to fail, as unemployment and defaults on small business loans continued to rise.

The formation of the left coalition government in Sri Lanka also coincided with the ‘Nixon shock’ – a series of neoliberal policies named after the now-discredited former US president, Richard Nixon. These policies started to be implemented as inflation increased and there was a growing crisis in the world economy. This period marked the emergence of monetarism and neoliberalism. These were to make the working class and poor pay the price for the capitalist economic crisis.

The oil shocks and global recession of 1973–74 also hit Sri Lanka hard. The high cost of imports, such as fertilizers, fuel, and other key commodities, was also a key factor that led to the sudden increase in prices in 1974, during the left coalition government. Trying to work within the capitalist system, Sirimavo’s government response was brutal. While implementing a ‘ration’ system to distribute the limited food and fuel, the government started to implement various austerity measures. Subsidies were cut. This provoked a ferocious reaction among workers and farmers. However, the economy was still growing and previous measures had prevented widespread hunger and famine from developing. The strong mood that existed among the workers and farmers was about improving conditions rather than going back and reversing all the measures that had been taken.

The strength of the worker’s movement, at that time, contributed to the mood and determination to fight back against any attack on conditions. The government moved more to the right. The LSSP ministers were expelled in 1975, although the communist party remained in the government until early 1977.

Both the government and opposition aimed to crush the militancy of the masses as they felt threatened by the increasing activism that culminated in widespread protests and strikes in late 1976 and early 1977. The opposition, then led by JRJ (JR Jayewardene), used the opportunity to step up its reactionary campaign. Their so-called vicious ‘civil disobedience’ campaign highlighted the bread queues and some of the hardships that the population faced. The opposition claimed they wanted to organize one hundred meetings a day. The core of their campaign was also Sinhala Buddhist chauvinism. The militancy that emerged among the Tamils and their demand for self-determination was used by JRJ’s goons to whip up Sinhala nationalism. The government reacted by presenting itself as true Sinhala nationalists, attacked media freedom, declared a curfew, and banned public meetings.

This agitation and fearmongering about the Tamil militancy divided the country and scaremongering about the threat of a Marxist coup to take power, and the hardship felt by the masses led to the landslide victory of the UNP in 1977. JRJ’s government then introduced neo-liberal policies, which earned him the nickname of ‘Yankee Dickie’. He began to reverse the policies of the previous government, so beginning a new period. Sri Lanka became the first Asian country to have a so-called ‘open economy’ – meaning all resources are freely made available for plundering by local and international capitalist vultures. JRJ was able to do this by brutally suppressing the workers’ movement, and trade unions, and declaring war against the Tamils, in general. He infamously declared to the Tamils in the parliament that “If you want war, we will give you war”. The deterioration of ethnic relations and the emergence of armed Tamil militancy, and the emergence of the credit bubble, can all be traced back to this period.

The class collaborative politics of the LSSP (particularly their participation in the 1964 and 1970 popular front governments) was one of the key reasons that led to the historic collapse of the left in Sri Lanka. Seeking a solution to the misery of the masses within the boundaries of capitalism is grave a mistake that the LSSP leaders made, and which the left in Sri Lanka needs to learn from.

No solution can be found on a capitalist basis 

The inherent contradiction in capitalism produces various crises. Seeking a solution to the current crisis on a capitalist basis will only mean accepting devastating consequences for millions of people. There is also no lasting solution that can be found on a Keynesian basis or with neo-Keynesian Modern Monetary Theory (MMT). Indeed, Sri Lanka stands as clear evidence of how MMT cannot be a global solution to the current economic crisis. Even the prominent advocate of MMT, Stephanie Kelton, agrees that it is an exclusive theory – only suitable for a few rich nations that have so-called monetary independence (The Deficit Myth, Kelton). One of the key understandings further confirmed by the consequences of Covid is that every problem that humanity now has demands a global solution. MMT supporters ignore the powerful interconnection that exists between economies. They also ignore the neo-colonial relationship that the most economically powerful country has with the rest of the world. In some senses, modern Keynesian ideas, if implemented, will add to the misery for millions in the neo-colonial world.

Economically weak countries simply do not have the means to utilise a large percentage of GDP as a stimulus, to manage an ever-increasing debt bubble, or even to control interest rates and inflation. Some claiming to be on the left, such as Democrat party congress representative, Alexandria Ocasio-Cortez, in the US, argue that the MMT methods can create full employment. Leave aside the bogus promise of full employment under capitalism this would be done at the expense of the rest of the world’s poor.

The so-called ‘progressive’ liberals in poor nations, who, in effect, are no different from the western Keynesians, argue for mild capital controls and a form of decoupling from the world market as a way to increase domestic production. They seem to have not learnt any lessons from history. Various forms of Keynesianism have now been revived as a potential solution to the capitalist crisis as they can find ‘no other option’. Keynesianism is often mistakenly credited for ‘saving capitalism’ from the depression of the 1930s; it reveals the intention of these ‘lefts’ to work well within the framework of capitalism and their inability to come out with anything that can challenge capitalism (even after some admit that the crisis is systemic). But they are also wrong about the so-called success of Keynesianism. In fact, it was World War 2 – the destruction of value on a mass scale – that was the dominant feature acting as a ‘reset button’ to save capitalism.

Capitalist governments acting in the interest of profit-making will not pick and choose the commodities that will be allowed to circulate in the interest of the masses. Various similar measures made during Sirimavo’s period failed. This was mainly due to the fact that even the local production of essential items is very much interlinked to other key commodities that need to be imported and which are essential for production. Even if an element of planning was introduced at that time, it could not have survived in isolation. The idea of isolated self-sufficiency is not possible for any country, let alone a small nation that has very limited resources. It cannot be fully successful even as a temporary measure. Even if a workers’ led government came to power, it may have to make deals with those who are willing to provide essential goods and commodities without compromising the workers and poor. Hence it will be vital for such a government to appeal to the working masses in the region and internationally for support. Winning the support of the working masses in India and Pakistan, for example, will be vital for the survival of any workers’-led government in Sri Lanka. Revolutionary changes in these countries can lead to the voluntary formation of a socialist confederation that could put in place a plan to organise resources in the interests of the wider masses.

Even to introduce immediate an emergency economic plan in Sri Lanka – such as non-payment of debt, capital control, and further investment in local production, etc. – the state must introduce a form of a planned economy. The current Sri Lankan state or any of the existing main parties have no such aim. Only a workers’ led government can take such a decisive measure. This is not an abstract question or something that is impractical, as some would dismiss. Those who refuse to go beyond the framework of capitalism reject the idea of a workers’ led government as not practical, or utopian, etc. Even when the question of who governs is brought to the fore by a militant mass movement, the petty-bourgeois elite hangs on to its old ways and narrows its aims to winning the next election and allowing another version of the existing government to come back into power. It is very clear that any pro-capitalist forces that replace Gota’s regime will face the same problems and is likely to be an extension of the previous regime rather than coming forward with a clear alternative. The movement that is developing in Sri Lanka cannot restrict itself to either bringing the right-wing opposition to power or supporting any ‘palace coup’ as a solution. A strong mass movement does not just challenge the existing regime but also decides who controls state affairs in the future. This second aspect of what comes next is crucial for the success of any mass movement.

Marxists who stand firmly on the side of the masses seek lasting solutions, not the renewal of the existing order. The enormous power and sacrifice brought to the street by the masses should not be satisfied with partial victories. The working masses should aim to control state affairs themselves if they want to get what they need. Workers’ control by proxy is not real control.

An interim government – no matter what name is used: temporary, provincial or caretaker – could come into place to control the movement. But even at this stage, workers and militant activists should not disperse or lose their independence. A coalition with bourgeois forces is a compromised position often preferred by those so-called progressives who may claim to act in the interest of the working masses. In effect, they make sure workers’ interests are defeated. It is often the case that bourgeois forces will aim to buy time in the so-called ‘interim period’ to defeat or weaken the power base of the workers and poor masses. The defeat and demise of the LSSP in Sri Lanka provide historic lessons in terms of the failure of policies in coalition with sections of the capitalist class.

Unless the mass movement travels towards taking control, we will not see a solution. In its absence, what are likely are chaos, limited capital control, and further attacks on living conditions. Bourgeois forces and their allies will continue to preach to the workers and poor to ‘tighten their belts’ while doing everything possible to protect their own profits. We will not see investment to increase national productive capacity. Utter chaos and trial and error policies are likely to continue till the ‘return of growth’ that is promised to take place sometime in the distant future – even if growth returns, the workers and peasants will have to put up enormous struggles even just to get back part of what they have lost. This is the reality that is faced by the masses in Sri Lanka.

To avoid this, the mass movement has to take decisive steps. It will also have to take an organisational form with a clear programme. The masses coming onto the streets are only a starting point – and that alone is not enough to bring about lasting change. The regime will hold on to power with the aim of somehow dispersing the ‘crowd’, either through repression and concession or a combination of both. It is also often the case that the bourgeoisie and a section of petty-bourgeois elements of the opposition will limit their scope to minor concessions with the hope of potential reform of the regime. The movement will also face division along ethnic, national and religious lines.

A programme that can hold the movement together and provide a clear way forward is crucial in every mass movement. Such a programme must include the demand for full democratic rights rather than narrowing it to the demand of one section of the movement. Everybody can unite on the basis of the ‘regime must go’ but such a single slogan is never enough to change the system, once and for all.

The sporadic but strong protests that are taking place, at this stage, have not developed into a coherent movement with a clear strategy. This has to change if it is to go forward. All trade unions and workers’ organisations should be invited to be part of it. The vast majority of the Tamils and Muslims have not yet fully joined the movement despite the massive hatred of the Rajapaksa family that exists in these communities. Demands that are relevant to these communities should be taken by the movement to win their support. The abolition of the Prevention of Terrorism Act (PTA) is one such key demand that has already been taken up in the many protests that are taking place. But this is not enough. The release of all political prisoners, releasing all occupied land, defending the religious rights of Muslims, etc. are some of the additional democratic demands that the movement should support.

This also means standing firm against the Sinhala-Buddhist nationalism which can be used by Gota’s regime and their supporters to divide the movement. Taking a correct approach to the national question is also crucial. A mere slogan of ‘equal rights’ is not enough. Without addressing the national aspiration of the Tamils, the youth and active layer of the Tamils cannot be won fully over to the side of the mass movement. Many organisations – even those who are claiming to be Marxist – that are taking part in the mass mobilisation and movement are not willing to articulate any demands that have been prominent among the Tamil and Muslim masses in the country. Hill country workers’ demands should also be prominent. This position can be used by right-wing Tamil and Sinhala leaders to keep the divide for their own benefit. This situation will not change if it is left to an organisation such as the JVP. Non-sectarian committees should be formed by the workers and activists to adopt fresh demands and plans and push for taking full control and implementing a socialist planned economy. Such a force not only will change Sri Lanka but the whole region.

For more on the history of the workers’ movement in Sri Lanka, see the publication History of Resistance by TU Senan https://www.tamilsolidarity.org/product/history-of-resistance/