INTERVIEW It is time for the nations of the global South to build their own way, to self-organize, Gary Dymski, a well-known economist and Professor of Applied Economics at the Leeds UniversityMore
Here we go again. The International Monetary Fund (IMF) is in command of Sri Lanka’s economy, barking orders and making demands in an effort to restore macroeconomic stability. The pattern is a familiar one. Back in April 2022, Sri Lanka’s currency collapsed, having depreciated by 44 percent against the U.S. dollar since President Gotabaya Rajapaksa took office in 2019, and, according to our measure, inflation reached a stunning 74.5 percent per year. Sri Lanka even suspended payments on its external debt. Then the IMF fire brigade arrived.
On September 1, 2022, the IMF reached a staff-level agreement to support Sri Lanka’s economy with a 48-month lending arrangement of roughly $2.9 billion. Now, the IMF is withholding the cash until Sri Lanka raises corporate-income and value-added taxes, cuts government spending, and reaches a debt-restructuring agreement with two of its largest creditors, China and India. The IMF is confident that these measures, among others, will stabilize Sri Lanka’s economy.
There’s just one little problem. This is Sri Lanka’s 17th IMF program. In fact, Sri Lanka has been on IMF life support nearly continuously since 1965. None of the previous IMF programs have permanently stabilized Sri Lanka’s economy. Why should the 17th? As the famous, often-misattributed, quote goes: “Insanity is doing the same thing over and over again and expecting different results.” By this standard, both Sri Lanka and the IMF crossed the threshold of insanity long, long ago.
There’s little empirical evidence to suggest that Sri Lanka’s shiny new IMF program will be any more successful than the past ones. A recent working paper by researchers at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise analyzed the effect of IMF loan programs, in the three years following the adoption of a program, on macroeconomic indicators from 2000 to 2010. The authors found that IMF lending arrangements resulted, on average, in a 5.8 percent increase in the unemployment rate, while control-group countries — countries that faced similar economic circumstances but did not implement IMF programs — experienced an average 7 percent decline in unemployment.
Other indicators tell a similar story. Countries with IMF programs fared worse than control-group countries in terms of real GDP growth, real export-value growth, and in the reduction of government debt. This research suggests that many countries would have been better off without any IMF assistance at all.
Sri Lanka’s economy is still in bad shape. Since Gotabaya Rajapaksa was elected in November 2019, the Sri Lankan rupee has shed 52 percent of its value against the U.S. dollar. Using purchasing power parity, one of us (Hanke) accurately measures inflation in Sri Lanka at a roaring 106 percent per year as of January 12. Since May 2022, foreign reserves have officially hovered around $1.8 billion, but a reported $1.4 billion of those reserves are locked away in a swap with the People’s Bank of China. So, if Sri Lanka’s economy needs stabilizing and a positive confidence shock, and another IMF program is not the answer, what is?
It’s time for Sri Lanka to mothball its central bank and replace it with a currency board. A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. It is required to hold anchor-currency reserves equal to 100 percent of its monetary liabilities.
A currency board, unlike the Central Bank of Sri Lanka, has no discretionary monetary powers and cannot issue credit. It therefore imposes a hard budget constraint on the fiscal authorities. Its sole function is to exchange the domestic currency it issues for an anchor currency at a fixed rate.
Currency boards require no preconditions and can be installed rapidly. They have existed in some 70 countries. None have failed, including the one that one of us (Hanke), designed and installed in Bulgaria in 1997. It immediately smashed a hyperinflation, caused interest rates to plunge, forced the fiscal authorities to balance the budget, and, with its positive confidence shock, spurred economic growth.
Today, thanks to its currency board, Bulgaria has the second-lowest debt-to-GDP ratio of any country in the European Union. Even the IMF heaped praise on currency boards a year after the installation of Bulgaria’s. A 1998 IMF publication noted that “currency boards in many countries have achieved impressive economic results, both in achieving lower inflation than other exchange rate regimes and in stabilizing expectations after prolonged hyperinflation.”
As it turns out, Sri Lanka (formerly Ceylon) had a currency board from 1884 to 1950. In 1884, the largest financial institution in Ceylon, the Oriental Bank Corporation, experienced an acute liquidity shortage due to bad loans to coffee plantations and subsequently failed. This sparked a run on two other banks, the Chartered Mercantile Bank and the Bank of Madras. With the crisis escalating, the colonial government quickly established a currency board, issuing fully backed, convertible-on-demand government notes — paper money. With that, the crisis was history.
It’s time for Sri Lanka to do the one and only thing that will permanently remove it from the IMF’s intensive-care ward. It should revert to a currency-board system, like the one it had for 66 years.
Courtesy: National Review. Click here to read the original version of this article
It is time for the nations of the global South to build their own way, to self-organize, Gary Dymski, a well-known economist and Professor of Applied Economics at the Leeds University Business School in UK, said in an interview with Sri Lanka Guardian.
Who will lead them? Not Modi, nor Jinping. Who is the Kwame Nkrumah or Julius Nyerere or Sekou Toure of today;” he asked.
Gary Dymski is an excerpt on monetary economics; macroeconomic theory and policy; banking and financial institutions; economic development; political economy; urban economics; inequality; stratification economics. He has been a visiting scholar in universities and research centers in Australia, Brazil, Bangladesh, Colombia, Greece, India, Italy, Japan, Korea, and Mexico.
“Sri Lanka’s situation has to be widely publicized; there are other countries too – less prominent globally, smaller – who have unpayability problems, but none with the tortured contemporary history that your country is now living,” he observed.
“We need a repurposed set of development banks, controlled by progressive forces willing to move past the capitalist system. This does not yet exist,” he suggested.
Being a member of the council of the Post Keynesian Economic Society (UK), Prof Dymski also is an advisor to the Debt and Development division of the United Nations Conference on Trade and Development (UNCTAD) in Geneva.
Excerpts of the interview;
Question: Are we passing through a period of the worse global recession that could lead to an unprecedented catastrophe? If yes, what is the way out?
Answer: We are in a global recession that could develop in an alarming way. There is already an emerging debt crisis that is catastrophic in many developing countries, and will likely get worse. The slowdown of economic activity as such is unlikely to degenerate into a collapse. But the stagnation will most likely continue. So it is more like strangulation of the economies of countries that are lower in the currency hierarchy. Businesses will fail; financing arrangements will either be sustained on a pretend-and-extend basis or will lead to default. India and China have somehow managed to sustain positive growth rates, but this is offset by the damage that Russia’s Ukrainian war is doing to supply chains and agricultural exports.
Q: Collective action and collective responsibilities are two sides of the same coin which will help us to overcome present challenges. But, I wonder, how we can advocate for all countries to come together in a deeply polarized global society. Give us some food for thought, please.
A: Only when an acute crisis emerges, with the mechanisms for leading out of that crisis prove to be broken, will we see a global consensus for a new global framework toward cooperation emerge. The success of right-wing nationalist movements looking backward to conditions for economic reproduction that no longer exists is a huge barrier now; as those seeking softer ways forward look like naïve idealists, and those wanting to put up barriers to the outside world look like defenders of national honour.
The hope I can give you is this: we must see a renewal of impetus – the broad participation in – the ‘global social forum’ movement when it first began. A global generational mobilization, I think, which is pro-equality and pro-sustainability, critical of capitalism, and esp of financial globalization in the way its developed to now – feeding hyper inequality. I think it’s possible. But this bottom-up, across-the-globe aspect has to be there, I think.
Q: You are one of the signatories who called for Sri Lanka debt cancellation. Do you think it is a realistic approach where all stakeholders shall come to a common platform to execute your demand?
A: The stakeholders have diverse interests; they must be forced to the table. Sri Lanka’s situation has to be widely publicized; there are other countries too – less prominent globally, smaller – who have unpayability problems, but none with the tortured contemporary history that your country is now living. I think it has to be framed in terms of the ‘harm and loss’ debate that is now linking climate-change damage to legacies of colonialism and imperialism, not to mention the greater energy/non-renewable consumption of the elite global-North nations. This can be the basis of a common cause for debt forgiveness, I think. But the nations of the global South have to build their own way, to self-organize. Who will lead them? Not Modi, nor Jinping. Who is the Kwame Nkrumah or Julius Nyerere or Sekou Toure of today?
Q: Why do you think the case of Sri Lanka is essential to rethinking and reshaping the global economic order?
A: As answered earlier – the unique conjuncture of colonial-era imperialism, debt crisis, political instability and ethnic violence are a unique toxic mix, leading to unparalleled challenges.
Q: You have raised a vital point by alleging that International Financial Institutions of not living up to their responsibilities at a time when they are most urgently needed. Do we have an alternative?
A: There is no alternative now. We need a repurposed set of development banks, controlled by progressive forces willing to move past the capitalist system. This does not yet exist. The alternative can be imagined in a post-capitalist framework, in which nation-states are led by progressive leaders – enough of them – to force a global transfer mechanism for supporting the financing of the SDGs and climate sustainability on a world scale. I wish I had a different answer. For now, we must attempt to understand the scale of changes in systems of provision, supply chains, in localized production and consumption, required around the world.
The entities that have the capacity to support this are either too tied to capitalist priorities or they are not seeing the need to think holistically. It is not – it is never – too late. But we have to think beyond the limits that have prevented us from being strong enough to see the required planning framework clearly.