Sri Lanka’s new central bank chief slams ‘neo-liberalism’

ECONOMYNEXT – Sri Lanka’s appointed central bank governor W D Lakshman said he wanted find alternatives to ‘neo-liberal’ policies that the island is said to follow, as there was a prevalence of poverty, under-employment and employment despite multiple state programs to change.

“Decision makers in different sectors of the economy are confronted with challenge of searching and identifying alternative policy sets of greater efficacy than the neoliberal policy set we have been working on so far,” Lakshaman told reporters after his first monetary policy meeting.

“I hope to be able to make my contribution in this search for alternatives.”

In Sri Lanka, policies followed by the United National Party under Ranil Wickremesinghe at one time were labeled neo-liberal by opposition activists such as Wimal Weerawansa who also wrote a book, Ratata Uwamana Wama.

Neo-liberalism also referred to policies devised in the 1980s developed by Western advocates as a push back against Keynesian style interventionism that became popular in the West and developing countries backed by unstable currencies.

Both UK and US currencies and Bretton Woods system itself collapsed in the late 1969 and 1970s, leading to stagflation in the West and the complete closure of Sri Lanka’s entire economy in the decade.

The UK also expropriated with leftist in power after World War II, and illiberal rulers in newly independent nations followed suit, expropriating both local and foreign investors, reversing freehold land and creating state Mercantilist monopolies in the style of the Dutch and Britsh East India companies, critics say.

Though Sri Lanka opened the economy in 1980s, there was no monetary stability, leading high inflation and depreciation.

The Keynesian interventionist policies were not adopted by Germany, Japan, Hong Kong or Singapore or Malaysia who opted for classical liberal style sound money as a foundation for policy.

Countries in Latin American in particular which had some of the worst soft-pegged central banks in the world – set up at the behest of US in some cases – also faced debt and currency crises.

Argentina whose GDP was a little behind the US and sometimes exceeded it began to decline rapidly after the BCRA was set up in 1935 and is an example to the world of bad central banking and debt/currency crises.

This led to a set of policies called the Washington consensus, involving free trade, smaller deficits, cutting state spending, lower marginal tax rates, respecting property rights, promoting foreign direct investment, but also more flexible exchange rates.

The semi-floating exchange rates however failed to provide monetary stability in many countries, dragging down entire policy frameworks including in Sri Lanka in the 1980s.

‘Neo-liberalism’ may however have more or less elements depending on who defines it.

“Questions are being raised extensively about the validity and relevance of Washington Consensus on neo-liberal type of policies to achieve the desired goals of inclusive, sustainable and shared development,” Governor Lakshman said.

“This questioning may also apply to central banking nowadays.”

Washington consensus was a term coined by British Economist John Williamson, and is also broadly called neo-liberal by some.

Many of the best performing countries in East Asia also followed policies of free trade, foreign direct investment, backed by hard money central banks with strong pegs or currency boards.

East Asian nations were among the first in the world to draw large volumes of foreign direct investments and benefitted from the wave of trade liberalization advocated by liberal policy makers, building so-called global value chains by exporting to the Western nations which had cut import duties.

Later countries like Vietnam also adopted similar policies, freeing trade – with no domestic crony private sector to oppose it – scrapping price controls and duties on especially on agriculture and fixing its central bank, drawing in FDI and now engaging in mass privatization.

Governor Lakshman said Sri Lanka had depended too much on debt and there was not enough foreign direct investment.

Analysts however had pointed out that Sri Lanka’s last UNP administration followed broadly illiberal policies of monetary instability, including currency depreciation to help export special interests at the expense of society, price controls, retrospective taxes, no privatization, pushing up state salaries, licensing and re-regulation.

The mis-mash of consfused policies had been dubbed ‘neo-illiberal’ by some.

You may also read:

Sri Lanka heading for Sozialpolitik not a social market economy : Bellwether

What went wrong; Sri Lanka’s illiberal economics and unsound money: Bellwether

Sri Lanka to ban grain imports in neo-illiberal high

The current administration has however cut taxes saying too many taxes were stifling the private sector, cut the marginal personal income tax rate to 18 percent, so that it works like a flat tax demanded by hard-right libertarians and also promised to de-regulate.

High rates of income tax destroy capital, investments and future jobs. (Colombo/Dec27/2019  – Update II)

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