Shock Policies and Wage Repression

Ahilan Kadirgamar | 09 November 2022
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The dramatic high inflation of essential goods was not just caused by the unravelling economic crisis, or the war in Ukraine leading to the rise in global commodity prices. Rather, it is a consequence of the shock policies undertaken in March and April this year and continuing to date

Sri Lanka’s economy is collapsing with people pushed to the brink of starvation. There is mounting anger towardsthe Government with the possibility of more waves of protests. The Ranil-Rajapaksa regime’s response is aggressive repression against protestors. Those measures include large scale arrests of protestors and draconian legal measures – using both the law books and by seeking new legal powers for repression – amounting to a concerted attack on democratic rights and freedom. As the protest movement responds to such state violence and coercion, there is an even more insidious form of repression. Working people are now facing crippling wage repression with the spectre of starvation. 

Over the last six months, inflation is on the order of 60% and food inflation has exceeded 90%, but working people’s income have not risen. In fact, their incomes are declining with increasing unemployment and disruption of livelihoods. The dramatic high inflation of essential goods was not just caused by the unravelling economic crisis, or the war in Ukraine leading to the rise in global commodity prices. Rather, it is a consequence of the shock policies undertaken in March and April this year and continuing to date. 

These shock policies include the sudden devaluation of the rupee from Rs. 200 to Rs. 360 to the US dollar, and passing on the 80% price rise to the consumers. It also includes the premature default of Sri Lanka’s external debt disabling the possibility of a gradual and prioritised reduction of imports even at that late stage. In fact, for years now, some of us have been calling for a gradual reduction and prioritisation of essential imports along with a public distribution system to ensure the affordability of food. However, the neoliberal economic establishment wanted a premature default forcing Sri Lanka to immediately surrender to the IMF. The IMF inspired Government’s shock policies dictated floating the exchange rate, market pricing of energy and cutting subsidies. All this was to ensure there was no option but the IMF solution.

This is how, Foreign Minister Ali Sabry, then Finance Minister in April, describes the Government’s move towards external debt default in a recent interview with the prominent Japanese financial newspaper, Nikkei, on November 5, 2022: 

“Our reserves had plummeted to US$20 million—not even enough for half an hour of imports… The situation was very grave. We had so much debt coming up for repayment. ... So we had to make a decision if we are going for a hard default or an orderly default and then engage the IMF.”

Seven months later since the so-called “orderly default”, the IMF funds are nowhere in sight, and even if it were to come through, it would amount to a meagre US$ 2.9 billion over four years, or a mere US$ 60 million a month. The Government and neoliberal propagandists at that time claimed that without the default and IMF support there would be no funds for imports. However, the next International Sovereign Bond loan payment of US$ 1 billion was only due three months later in July. In this context, since April, Sri Lanka continues to import an average of US$ 1.3 billion worth of goods every month. The country is able to continue to import fuel and essential goods, because it is finally prioritising the import of essential goods with its foreign earnings, including from exports and worker remittances. For years, successive governments egged on my neoliberal economists and agencies, refused to restrict or prioritise imports because of their neoliberal commitment to free markets.

The reality is that this default was part of a set of shock policies and a “hard default” for the working people, who have been left to fend for themselves as the price of fuel tripled and the price of bread increased fivefold. It also exposes the naivety of the neoliberal policymakers and think-tanks, who proposed the rosy solution of default, debt restructuring, an IMF agreement and back to borrowing in the international capital markets. Using their own corporate logic, all of them, the policymakers and their advisors including from the neoliberal think-tanks, should be fired for their incompetence. The Ranil-Rajapaksa Government must take responsibility for the current crisis, and the people are rightly demanding that they all go home. What else can one say when an economic crisis, pushed by their decrepit neoliberal ideology with its IMF solution, is crashing the economy with the GDP shrinking by a tenth and people on brink of starvation.

Accumulation or redistribution

 Negative 10% GDP growth is tremendous destruction. However, capitalist accumulation following a crisis depends on such destruction and dispossession. The tremendous wage repression we are seeing today, that is the fall in real wages – what they can purchase with their wages – on the order of thirty to fifty percent due to high inflation, is a favourable situation for capitalist businesses and certainly exporters. The export sectors in particular are making tremendous gains both from the lower real wages and the exchange rate depreciation, which makes them more competitive in international markets, even as lower local costs lead to high profits. The cruel logic of capitalist accumulation is that there are great profits to be made after the economy hits rock bottom. In other words, following the destruction, including business bankruptcies and rising unemployment, accumulation resumes as working people are paid a pittance for their labour and larger profits are reaped by businesses.   

What can confront this logic of capitalism that can even push people to the depths of starvation, is working people’s power and organised resistance. Food, energy and transport, consisting of the most essential needs for the reproduction of working people’s daily lives are being denied, but our progressive intelligentsia, our trade unions and our social movements, all seem to be asleep. Abandoned in the past by progressive forces, the working people have in their millions awakened from the hinterlands and pierced the bubble of Colombo. Trembling with fear of the unfolding calamity that will devastate our younger generations, I hope that our farmers, our fisher folk, our estate communities and the people toiling in the informal sector and the factories, forming the mass of working people, will again take up the challenge.  

Confronting the cruel logic of capitalist accumulation would require progressive demands of redistribution. Indeed, why should working people pay for decades of disgusting conspicuous consumption and accumulation of the Sri Lankan elite as well as the profits of global financiers? The large imports of luxury vehicles, the beautification of Colombo and the unproductive investment in tourism and infrastructure, came at the cost of the hard work of labour contributing to the foreign earnings of the country.

In my engagement with rural communities in the North, they repeatedly talk of the hardship of food, energy and transport. They say if only a few kilograms of rice were available each week, they can sleep without going hungry or not worry about being hungry the next day. In discussions with co-operatives, trade unions and social movements in Jaffna, the idea of a rice subsidy, like the one we had in Sri Lanka before the open economy has been coming up; where about one kilogram of rice per person per week was given free or with a large subsidy. If such a rice subsidy is provided over the next year, it will cost the Government Rs. 200 billion or two thirds of what was allocated for Roads and Highways in the Budget for 2022.

The Budget for 2023 will be announced next week, and by all counts it will be another IMF Budget of austerity in the interest of capital. It is time for a national debate about our economy. Taxes have to rise for the wealthy, and that has to be transferred as relief for the people, including subsidies for food, energy and transport. Unless we confront the cruel logic of capitalist accumulation with working people’s demands for redistribution, the economy may well revive but only after losing a generation. 

The writer is a political economist based in Jaffna, Sri Lanka. 

This article was originally published on Daily Mirror .
Views in this article are author’s own and do not necessarily reflect CGS policy.



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