Sri Lanka has been in the headlines so much lately that its current woes are public knowledge. Everyone can see the extreme deprivation caused to its population by the absence of basic food at an affordable price on the market and the shortage of petrol at the pump. Those with even a modicum of knowledge of economics can attribute it to dwindling foreign exchange reserves which are needed not only to import food but also to service foreign debt. They would even understand the default on this debt that has now taken place. But the foreign exchange crisis in Sri Lanka is only the symptom of a broader malaise that must be understood. How come a country does not produce enough of even the most basic foodstuffs, such as rice and powdered milk? It’s less easy to understand.

Since the end of colonial rule, Sri Lanka’s political arrangements have been an amalgam of nationalism in politics and welfarism in economics. Ethno-nationalism was fueled to forge a nation-state in terms of Sinhalese identity, the beginnings of which had emerged in the fifties. It is recognizable in the official “Sinhala Only” language policy introduced at the time. Although this may have been diluted later, it reinforced ethnic chauvinism and left the large Tamil-speaking population insecure.

Language deprivation

The origins of Tamil language deprivation are due in part to the appeasement of the Buddhist clergy, who are almost exclusively Sinhalese. This not only caused the alienation of the Tamil-speaking population, but led to the formation of the Tamil Tigers, a terrorist organization, and a civil war. The Tamil Tigers were eventually defeated, but it took over two and a half decades for the Sri Lankan state to achieve this. Meanwhile, there has been an exodus of Tamils, with the better-off heading west and, those who were able to escape, heading for Tamil Nadu.

As Tamils ​​have had a significant presence in the professions, the country has seen a loss of expertise in almost every field. The impact of a loss of technical expertise for an economy is slow and often indistinguishable, but it will certainly affect it negatively, which is what we are seeing happening in India. The civil war is also likely to have dampened investment. While any uncertainty is holding back investment, private investors would be particularly reluctant to commit their money in a period of virtual anarchy. A state that continues a civil war can hardly compensate for this with public investments, as it is bound to be severely limited in terms of funds due to its military operations. Nor would he have had much time to tackle the pressure points that arise from time to time in any market economy, let alone plan economic development. In various ways, social conflicts can therefore hinder the development of a country’s productive forces and its economic growth is affected.

So here we have Sri Lanka’s first cautionary tale for India. Sri Lanka’s woes are economic on the surface, but stem from social conflicts that have been exacerbated by state-fuelled majority identity politics. Identity politics between social groups is a recipe for economic disaster. It would not be wrong to suggest that the inability of the Modi government to even restore, let alone increase, the rate of investment in India is partly linked to the socio-political tension that has arisen in its wake. Conflicts between the Center and the States and antagonism between religious communities are sure ways to deter investment, even if there is some improvement in the ease of doing business. The exit of some wealthy Indians from the country and the exit of foreign direct investment are examples. The inflow of foreign direct investment into India has been high since 2014, but has not been able to offset the decline in domestic private investment.

Political and economic lessons

If the first lesson from Lanka concerns how politics can affect the economy, the second concerns how faulty economic policy can affect an economy’s prospects. The country first entered the world in the 1950s when its economic policy was hailed for its social welfare programs that included subsidized rice. But not everyone was impressed at the time. In his autobiography Home and the World, Amartya Sen recounts how Cambridge economist Joan Robinson described this as a case of “wanting to taste the fruit before growing it”. Mr. Sen suggests that he was not convinced by this view, but his supervisor seems to have been gifted with remarkable foresight. Today, the great lady of the economy of her time could hardly have been against the idea of ​​welfare as such, living as she was in the United Kingdom, the preeminent welfare state of the world. She most likely denounced welfarism, which makes the distribution of consumer goods the centerpiece of economic policy. Anyway, she was right.

In Sri Lanka, distributism seems to have preceded what could be guaranteed by national sources. This newspaper has previously reported on the “Produce or Perish” slogan from the country’s past political campaigns. This would serve as wise advice not only to the three Sri Lankan economists now in charge of getting their country out of the crisis but also to the Indian political class. As India’s economy has grown, many states have increased social spending. Some distributed bicycles to the girls and others televisions to the families. While no form of social protection should be excluded in principle, public finances are subject to an accounting constraint. When incomes are constrained, free bicycles and televisions crowd out spending on measures that increase an economy’s productive capacity, which includes its endowment of schools, hospitals, and the infrastructure necessary for production. There is also an ethical problem to be faced. When welfarism is financed by borrowing rather than taxes, future generations pay for our consumption.

A third lesson from Sri Lanka is not to treat openness to the global economy as a panacea. In the 1970s, abandoning overtly socialist economic policies, Sri Lanka liberalized trade and capital flows. It remains to be wondered how this policy shift might have worked if a decades-long civil war had not intervened, but the reliance on global markets it entailed has not helped the country. A famous theorem in economics, the theory of comparative advantage, encourages a country to specialize in its production and to rely on foreign trade for the goods it does not produce. This assumes that there will be continued demand for the country’s product. The case of Sri Lanka shows us why it can be detrimental for a country to depend on trade for its essential consumer goods. In comparison, the states of India facing food deficit are saved by being part of the Indian Union. Unlike Sri Lanka, they do not need to earn foreign currency to receive food from the national granary, with Kerala being the best example of this arrangement. Sri Lanka’s first task would be to urgently revive its food production sector. As for India, it must learn from its neighbor’s woes and increase its domestic production in all sectors, from oilseeds to renewable energy and defense equipment.

(Pulapre Balakrishnan teaches at Ashoka University, Sonipat)