A Rounding Error

by Roy Ratnavel

As I sat down to write my thoughts regarding Sri Lanka’s economy on the eve of its 59th anniversary of Independence from foreign rule to Dependence on foreign aid, I couldn’t help but suggest the proud ruling brass of the country change the name of the celebration to a more fitting one – ‘The Dependence Day.’ 

It is, of course, remarkable, wonderful and worth celebrating a country’s independence from foreign rule; but it is not remarkable considering that since independence, Sri Lanka has been a colossal failure. Not to mention, the annual adoration of the country by its current rulers seems eerily modeled after some sort of fanatical regime’s brainwashed brigades and punch-drunk citizens.

There is little to celebrate in a country where the majority of the population lives below the poverty line. Almost 45% of the population makes less than $2 a day – not even enough to buy a loaf of bread. Schoolchildren in Sri Lanka suffer from malnutrition. Foreign direct investments – a key prerequisite for growth - are continuously deprived by global investors. Basic services still remain rudimentary. The general standard of living is on the decline. The rule of law is absent for the most part. A huge number have fled abroad to seek better opportunity and to do better things with their money, resulting in a capital and brain drain. Political opponents, insufficiently loyal followers, independent thinkers and people of the wrong ethnic background have a habit of winding up dead, imprisoned, impoverished or in exile from this independent Sri Lanka. Against this backdrop, other than the brainwashed or the brain-dead, it is hard these days to find any Sri Lankans who feel that 59 years of independence are a matter for rejoicing.

From the beginning of the fall of the British Empire and the end of its global domination, political conflicts have been rampant throughout the world in every decade. Individuals and minority groups have challenged injustice and intolerance, Sri Lanka being one of them, showing that there are common aspects to the behaviour of the human species – chief among them is “lack of equal economic opportunities.” Intolerance has been repeatedly challenged throughout the last six decades since independence in Sri Lanka, and the first victim has been the Sri Lankan economy. 

It is hard to exaggerate that Sri Lanka has long been one of world’s sad cases, and for many years, the economy has been an anemic one with deteriorating prospects. The reason: unimaginable incompetence by consecutive leaders of the country, accompanied by a group made of the world’s top corrupt politicians and thugs, who have been coursing through the country like microbes and rats in sewer systems. These corruptors are not the cause, but the catalyst of the current economic mess.

Sri Lanka is a country where corruption and weapons dominate; the economic slaughter of innocents has become a form of development aid. Bad decisions by leaders since independence has brought a deep division and dishonor to the nation, and built for the island a durable reputation as one of the most dishonest, least trustworthyl and most dependent countries on the planet.

After independence, the 1950s were the Age of Excitement for the island. After that came the Age of Intolerance, followed by the Age of Corruption. And, now the country has entered the Age of Corruption and Destruction.

I hear, once Sri Lanka was a great country. After civil strife, it's goodbye to all that. If you want to see Sri Lanka as a whole, the best view is from the moon. The second best is from outside its borders. Vast numbers of Sri Lankans have fled the country or been forced to uproot families to avoid violence and to find better economic opportunities outside its borders. About 800,000 Sri Lankans work abroad, 90% in the Middle East. They send home about 1 billion U.S. a year. According to the World Bank, ‘Remittances’ - money sent home by Sri Lankans working abroad – is a significant contributor to the economy and accounted for 7.3% of Sri Lanka’s 2006 GDP.

Sri Lankans are collectively digesting the bitter lesson that racial intolerance has led to missed economic opportunities. This is not just the failure of one particular hubristic Sri Lankan policy. It's about profound structural shifts which Sri Lankan politicians cannot seem to understand. It's the war, stupid.

For starters – war is not good for an economy. War is a drain on a society's resources. Instead of investing in long-term assets that keep providing value for the country – such as, say, manufacturing plants or infrastructure - money and resources go into making bombs, which literally self-destruct, while the smart, diligent people have their brainpower and their energies diverted by war – and, oh, by the way, many get maimed or killed.

This piece is not intended to be an economic paper. However, I feel the profound need to dissect a few economic figures, largely misunderstood by many, in order to dispel the myth of Sri Lanka’s robust growth and highlight the point that the political darkness that has engulfed this sad nation has, in fact, killed its economy.

Sri Lanka is experiencing an economic misfortune largely invented by its own successive governments. Already, its ballooning debt and current account deficit is beginning to translate into out of control inflation, which has forced the currency to depreciate given the enormity of the problem. Politicians uttering buzzwords like “reform” and “robust GDP” won’t get the country far.

The myth is that the Sri Lankan economy is growing at about 7% a year. The reality is that the economy is contracting by 13.5% a year – based on the numbers I have obtained from various publications. Allow me to expand.

According to Wikipedia’s definition, a region’s gross domestic product, or GDP, is one of several measures of the size of its economy. The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time and represented by the following equation.

GDP = Consumption + Investment + Government spending + (Exports − Imports

The trouble with this equation is that it does not account for inflation; therefore the GDP only reports numbers before inflation, otherwise know as the ‘Nominal GDP’.

Real GDP, on the other hand, is reported after taking into consideration changes in ‘Price Levels’ and is simply known as inflation adjusted GDP, represented by the following equation:

Real GDP = [Nominal GDP – Inflation]

In January 2007, Sri Lankan inflation jumped 1.5%, which pushed 12-month inflation to 20.5%. Therefore, in the case of Sri Lanka, the real GDP is a whopping negative 13.5% [Nominal GDP – Inflation = 7% - 20.5%].  Thus, the economy is significantly contracting. This contraction is likely to continue as the economists have been warning that Sri Lanka’s inflation would continue to rise despite falling oil prices because of excessive money printing to finance the budget deficit produced by the ongoing war.

Even if someone makes a case for a ‘Real’ GDP of 7% it still doesn’t show the true picture.  Most economists do not use overall ‘GDP’ but ‘GDP per capita’ as the most comprehensive measure of how well an economy is doing.  The per capita bit is important because, even though China has a GDP much larger than many countries, the sum is spread across 1.3 billion people. Although the U.S. grows at only around 3% yearly, it is one of the most successful economies because its population is only one third of China's. While the U.S. has a low GDP growth, it does win the prize for having a very high level of GDP per capita. 

Sri Lanka, on the other hand, has a nominal (before inflation) GDP per capita of $999.50 according to the 2005 World Bank Report. It is a ‘Lower-middle-income economy’ by the World Bank’s definition, with an assigned per capita rank of 126th out of 186 listed countries. By 2005 income per capita requirements set by the World Bank, a country with less than $1025 per capita lacks the financial ability to borrow and can only borrow in the form of aid.

(Bigger chart)

Back to GDP.

One year's GDP number is very misleading. We need to look at long-term trends. It's important to look at data in its historical context to get the true picture and to never look at the GDP number in isolation. Looking at GDP growth historically, the economic expansion in the 2000s was actually relatively small compared to expansions in the 1950s, 1960s, and 1970s.

Although fast growth is almost always taken as a sign that things are getting better, most of the fastest growing countries are the developing nations that have started from a low base and are playing catch-up.  When countries have finally caught up and have a high level of per capita income, their growth almost always slows to 2% to 3% because, from that point on, it is pretty much driven by population growth and the productivity gains that come from innovation, rather than from borrowing money and new technology from other nations, which is what happens during the catch up phase.

Another problem with the 7% GDP number is that, as the old saying goes, “Even a blind squirrel finds a nut sometimes.” Emerging markets generally have had a massive run over the last few years due to the tail-wind from global growth fueled by a cyclical commodity run. Sri Lanka, the blind squirrel, was able to find a nut or two in this favourable global economic condition. It is a commodity-led boom. Due to such dependency on the global market and a lack of domestic demand, the economic outcome for a country like Sri Lanka tends to be too binary in nature – the economy does well or it doesn’t. This risky nature of the economy may explain the lack of foreign direct investments.

Most of Sri Lanka’s GDP number is generated from what economists call “Labour Arbitrage” – a fancy term for cheap labour. Once global companies finish exploiting that, the game is over for the country - unless the country slowly transforms itself and becomes a manufacturer like China. Currently Sri Lanka neither has the intellectual nor physical infrastructure in place for that to take place. And, at this rate, has no plans of doing so.

The government’s current account deficit is fueling inflation and killing the country – death by a thousand cuts. Figures show currently the budget deficit has reached 9% of GDP, and despite all this, the excessive public spending continues. The situation is so bad even the International Monetary Fund (IMF) couldn’t take it, so it decided to shutdown the Colombo office in February and leave Sri Lanka. The Sri Lankan trade deficit has exploded to 3.2 billion U.S in the first eleven months of 2006 – a year over year increase of 33% from the same period of 2005 – the price of war and extremism.  A far higher proportion of the budget goes to pay gunmen to kill and intimidate their fellow citizens rather than to medical personnel. It’s quite an irony when the leader of Sri Lanka's radical government calls his foe an “extremist.” 

That Sri Lanka's government is deciding to spend its national wealth only in improving its national manhood on the battlefield should be shocking to all of its citizens. More soldiers and money searching for an elusive "victory..." Eventually, one day, the situation may get to a rational point in the Sri Lankan national question debate, some higher plain where its abused citizens can no longer hear the juvenile caterwauling that currently drowns out any sensible discussions.

The aims of this latest President is to bring military stability, and upgrade military infrastructure through billions of dollars of additional foreign aid to strengthen the legitimacy of his government.  All of these measures are supposes to buttress a land of Sinhalese, Tamils and Muslims in a federated Sri Lanka. Apparently, his illusions are endless. Someone should remind him of the ancient wisdom from the Dakota tribe, which says that when you discover you are riding a dead horse, the best strategy is to dismount. For President Rajapaske, the temptation to stay on a dead horse is overwhelming.

The first question to ask is the simplest: What would lead any reasonable person to believe that a new policy drafted by Rajapakse – which by the way sounds the same as every other policy in the past drafted by every other President - would be any more successful than the previous government's? Sri Lanka has been the victim of a persistent campaign of war for peace by successive governments. No doubt it may win a few battles – but as history has proven, it fails to win the war. 

The war has been a catastrophe for Sri Lanka. With his new agenda of increasing hostilities, the next President will be further inheriting a war he or she did not start from which there is no escape.  The hawks urged the President to return to war, demanding his finger remain on the military button. That’s about all he has left currently, besides the choice of revolting sycophancy.

The p resident retains enormous power under the constitution, but this presidency is shot. Forget about social programs, health-care, growing income equalities, out of control inflation or anything else significant. The President hasn’t got serious proposals in these areas or, if he does, he lacks the political muscle to get anything accomplished. He is an untested political newbie who speaks in motherhood generalities and may not have the spine, the substance and the real-deal of leadership to match the manifest goodies of a photo-op or feel-good sound bites. Andy Warhol once said that everyone will have their 15 minutes of fame. To President Rajapaske – the time is up!

The economy cries out for new structure and policy, but the multilevel, corrupted diffusion of power makes that hard to achieve. The real question is not whether such improvement can be achieved, but how it might be achieved. Here is a hint. Billionaire investor Charlie Munger once said, when addressing problems relating to investments, “You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few.” He reckons most people approach such problems the same way they approach any problem. “This is a dumb way of handling problems,” he adds. Sri Lankan politicians should take note and avoid the same old ‘dumb way.’

The past misuse of aid money is a matter of public record. Several billions of aid in the past – far more per capita than most countries ever received - have disappeared due to corrupt acts orchestrated by the Houdinis’ of the Sri Lankan government. It is clear to many that Sri Lankan leaders only seem concerned about their own well-being when trying to obtain foreign funds.

One thing that can be said on the President’s behalf is that his candour is impressive. Faced with the choice between lying about his desire for ‘peace and prosperity’ or being honest about ‘war and misery’, he has chosen the latter at the risk of being denied of foreign aid by donor countries. Perhaps it is not candour. Some might say that he possesses poor diplomatic instincts – or some might say stupidity, but that would be rude.

I used to take an almost perverse delight in being politically incorrect about countries with bad leaders – Somalia for example. Now I see otherwise: There is no humane way to destroy a country. In global terms, perhaps Somalia is in worse shape than Sri Lanka, but then again Somalia hasn’t had a government for 16 years. Sri Lanka has an elected government – not that most Sri Lankans will notice, as the country’s standard of living, once one of the best in South East Asia, has been in steady decline for years as the collective economic misery compounds.

Besides learning from almost six decades of Sri Lankan experience that Religion and Politics are always a volatile mix, what else can one learn from this sorry country’s miserable existence on this planet since independence from the British in 1948? Albert Einstein’s insight was never more apt: “We cannot solve our problems with the same thinking we used when we created them,” said one of humanity's biggest brains half a century ago.

In Sri Lanka, delivering economic stability and opportunities has been a problem, despite all the rhetoric by its leaders. Global markets are complex, business landscapes keep changing, information is ambiguous, and then, of course, there’s the Sri Lankan 'dumb' factor. Given the abominable situation in Sri Lanka, every Sri Lankan who fails to vociferously urge the government to be responsible forfeits the right to personal peace of mind.

Sri Lanka – a sinking ship. Reintroducing the same old bad policies is like rearranging the deckchairs on the Titanic. Will Sri Lanka grasp this reality and move forward with constructive economic and ethnic policy? Or will the dumb factor and the intolerance that has dominated the country since independence continue to curse the country? Will the country continue to stubbornly head toward economic failure?

Despite its claims of an estimated 7% GDP growth in 2007, Sri Lanka currently is as an insignificant player on the global stage, representing a mere 0.0014% of the total global GDP – mathematically speaking, A Rounding Error!