As the World Bank Puts Aside Past Wisdom on Public Spending, Will Sri Lanka Pay Heed?

The COVID-19 crisis has forced the World Bank to recognise that private investors will not take the risk of keeping the economy running

20 April by Ahilan Kadirgamar , Devaka Gunawardena


The Covid-19 pandemic is changing the way we think about the world. Even neoliberal global institutions must reckon with the changes. The World Bank’s South Asia Focus Report on the impact of Covid-19 on South Asian economies that was released a week ago marks a major shift in its policy prescriptions for countries in the region.

In the past, the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

pushed for trade and financial liberalisation, as well as the privatisation of public institutions, including public banks. Now, the pandemic and its resulting economic crisis have exposed the volatile rhythms and devastating consequences of the liberalised global market economy.

Political leaders around the world now talk about expansionary fiscal policies, basic income, and a general reorientation away from unlimited globalisation to a focus on domestic production and the importance of public institutions. The new approach has forced the World Bank to acknowledge this shift in its recent report on South Asia.

There are plenty of gaps, of course, in how the World Bank draws these lessons and thinks about them in relation to South Asia. The current crisis, however, is a clear moment that forces the World Bank to suggest solutions that take into account the emerging global debate. Unfortunately, however, the Sri Lankan government is struggling to keep up with these changes.

Moreover, mainstream economic experts the world over, who are supposed to hold political leadership accountable, have also been caught off guard. Therefore, progressives must hold the economic establishment accountable for its irresponsible policy prescriptions drawn from neoliberal global institutions, and its continuing lack of foresight in grasping challenges that grow bigger by the day.

Recognising the problems

The most obvious sense in which the World Bank has been forced to shift is in its analysis of the financial sector. The report itself is sub-titled “The Cursed Blessing of Public Banks”. While the World Bank loathes to admit it, it must now recognise the benefits of fiscal stimulus delivered through public institutions. The World Bank puts in qualifications to justify its previous antipathy toward public banks. It claims that they still have administrative inefficiencies and can be more corrupt than private banks. In reality, however, public banks were forced to load up on toxic assets Toxic assets An asset that becomes illiquid when its secondary market disappears. Toxic assets cannot be sold, as they are often guaranteed to lose money. The term “toxic asset” was coined in the financial crisis of 2008/09, in regards to mortgage-backed securities, collateralized debt obligations and credit default swaps, all of which could not be sold after they exposed their holders to massive losses. from private banks in order to bail them out.

The Covid-19 crisis has forced the World Bank to recognise that private investors will not take the risk of keeping the economy running. As the report puts it, “Sound public banks will have a role to play in the future, and especially in the near term. In the current economic situation, public banks are needed to provide countercyclical lending – as they did during the global financial crisis. And in some cases, they may be needed to inject capital into weak private banks.”

The World Bank further recognises that countries must operate “in a deteriorating global environment, while dealing with fiscal stress and problems in financial markets that were caused by pre-existing vulnerabilities.” Here, policies to expand the stock market in Sri Lanka with the Asian Development Bank’s Capital Market Development Programme (US$ 250 million) and the World Bank’s Financial Sector Modernisation Project (US$ 75 million) are a case in point. The loans taken for that project will have to be paid by the Sri Lankan government. As the recent World Bank report now shows, the Colombo Stock Exchange is down by 23% between Jan 29 and April 3. Along with portfolio outflows contributing to broader capital flight, this slump has hit Sri Lanka’s foreign exchange reserves hard.

Despite growing recognition of the consequences of neoliberal policies, the World Bank report misrepresents fundamental issues that shape Sri Lanka’s response to the crisis. In particular, the World Bank cites Sri Lanka’s “fiscal stimulus,” such as the tax cuts after the presidential election. This supposed stimulus has not benefited communities lacking essential supplies after the onset of the Covid-19 crisis. Many countries have responded with significant fiscal stimulus packages after the crisis: the US (10% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
) and in South Asia, India (1%), and within the country, in the State of Kerala (2.5% of Kerala State’s GDP), Bangladesh (2.5% of GDP) and Pakistan (2% of GDP).

The relief offered in Sri Lanka after the onset of the crisis is nowhere near the scale necessary to try and address the economic disaster. A back-of-the-envelope calculation shows that given Sri Lanka’s GDP in 2018 was Sri Lankan Rs 14,450 billion, the much talked about Rs 5,000 cash grant from the government, even if it is provided to 4 million households, is a mere 0.13% of GDP. Furthermore, Rs 5,000 is hardly enough to pay for a rural household’s essential provisions for a week. The Rs 50 billion stimulus in the form of debt relief to SMEs and others is just 0.35% of GDP. In this way, the Sri Lankan government has been all talk and little action in terms of real economic relief.

Holding the economic establishment accountable

The World Bank forecasts a GDP contraction of up to 3% (that is, – 3% growth) for Sri Lanka, and a corresponding increase of poverty to nearly 44% of the population. Sri Lanka’s local economic establishment remains far behind experts in neighbouring countries such as India, and even neoliberal global institutions such as the World Bank. This is evident in the fact that even until two weeks ago, most Sri Lankan economic experts were considering economic growth predictions of around 2%.

The World Bank Report forecasts economic contraction—meaning, negative growth—of between 0.5% and 3%. Sri Lanka’s mainstream economists will now follow the World Bank and revise their growth estimates down. This style of frivolous analysis by Sri Lankan economists, cosy with neoliberal global institutions, has systematically weakened the Sri Lankan economy and made the country incredibly vulnerable to the Covid-19 crisis. Has the underlying economic framework of these economists changed?

Moreover, even the World Bank’s latest estimates must be viewed in a critical light. The World Bank Report gives a relatively rosy prediction for GDP growth in India of 1.5% to 2.8% over the next year. However, two Indian economists, Kanitkar and Jayaraman, using their input-output model predict that depending on the length of lockdown, between 13 days and 67 days, the loss to GDP could be between 7% and 33%. Indeed, it is common sense that every day of curfew, which results in the loss of production of goods and services, will hit GDP growth. With its positive growth predictions, the Sri Lankan economic establishment appears to lack even basic common sense in understanding the dynamics of the crisis.

It took a supply shock, a demand shock, and a financial shock for economic experts to start waking up to the negative effects of neoliberal policies such as trade liberalisation, financialisation and privatisation. Those around the world who have emphasised the need for food security and local production of essential goods appear vindicated. All this will be cold comfort, however, for the growing section of the population exposed to the most severe effects of the crisis if there are no major shifts in the political and economic priorities.

Source: The Wire




Other articles in English by Ahilan Kadirgamar (8)

Devaka Gunawardena

The author is researcher and holds a holds a Phd from the University of California, Los Angeles.

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