At the human level, victims tend to lose and strivers tend to win. For nation-states, it is the same.
Countries that embrace free markets, capitalism, comparative advantage, and high levels of internal savings succeed. By contrast, countries fail when they reject these things in favor of current consumption financed by external debt. Often, however, these same failing countries blame “dark” external forces for their economic and social misery.
Bangladesh is an example of a country that is striving and succeeding. Sri Lanka is a nation-state that ignores facts.
Sri Lanka’s economic problems are self-made: dirigiste economic policies, widespread corruption, creating excessive money supply — consequently causing hyperinflation. Sri Lanka also deliberately rejects agricultural comparative advantages while embracing organic, supposedly sustainable agricultural policies that are obviously unsuited to its climate. As a result, the nation-state of Sri Lanka is on the verge of collapse.
In 1981, when I was posted to Dhaka, Bangladesh, as the regional legal adviser for the Agency for International Development, the per capita income of Bangladesh was about $100. The nation was an economic basket case still recovering from its civil war with Pakistan. But Bangladesh embraced capitalism, free markets, and a freely convertible currency and focused on developing its agricultural sector and utilizing its abundant supply of low-cost labor. The USAID mission under the leadership of Frank B. Kimball strongly supported the Bangladeshi government’s focus on markets, agriculture, and garment manufacturing. Today, Bangladesh has a per capita income of over $2,000 and is on the verge of joining the middle-income group of nations.
In 1980, Sri Lanka had a per capita income of almost $300. Just a few years ago, Sri Lanka had become a member of the middle-income group of nations. It had a per capita income of almost $4,000. Today, however, Sri Lanka and its people are destitute. This is not because of pressure by the West to borrow and consume, as some progressives assert, but rather because of gross corruption and incurring excessive debt offered by China. The immediate causes of the economic collapse include irresponsible fiscal policy, slashing taxes without offsetting spending cuts. Tax revenues fell from 12% of GDP to 8%. The fiscal deficit exploded to 12% of GDP. The central government has made things worse by printing money to cover necessary budget expenses. Sri Lanka’s foreign debt rating is another problem. In the latter part of 2020, credit rating agencies downgraded Sri Lanka to near-default status with the result that the country was largely excluded from international capital markets.
Progressives in Sri Lanka and worldwide blame Western capitalism and ignore the stark reality. The West warned Sri Lanka about China, printing money, high levels of corruption, and the dangers of low agricultural yields. Sri Lanka sees itself as a victim. But until its policy elites hold themselves accountable, Sri Lanka will remain an economic basket case.
James Rogan is a former foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
