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We were told the free market was the only way forward for development, and were demanded to abandon our social welfare policies

The internal dynamics are characterised by rapidly rising asset prices and other speculative transactions that can lead to a financial collapse as with the bursting of a bubble

The current global era is dominated by finance. Following the long economic downturn of the 1970s with falling profits, capitalism shifted towards an accumulation strategy centred on finance for profit generation. This latest phase of capitalism, which is known as neoliberal globalisation, is in fact a project of the financial capitalist class. These decades are characterised by a tremendous increase in inequality between the countries in the global North and South, along with income and wealth inequality within countries. 

In this column I address the crisis tendencies of global finance, which for close to five decades has been the engine of capitalist accumulation. An impending financial crisis is bound to affect the global order; which is led by financiers in Wall Street and the City of London, and moulded by the International Financial Institutions (IFIs) with the backing of the Treasury of the United States, particularly the International Monetary Fund (IMF) and the World Bank. Furthermore, even the other clones of these multilateral financial institutions such as the Asian Development Bank, and for that matter the BRICS Development Bank, are likely to face dramatic changes. With the unravelling global order, what should small states like ours do?

Liberalisation and decay

Sri Lanka went through liberalisation starting in the late 1970s under the Structural Adjustment Programmes of the IFIs, and commonly known here as open economy reforms. We were told the free market was the only way forward for development, and were demanded to abandon our social welfare policies. 

Sri Lanka took forward privatisation of some of its essential services. The country opened itself to imports, including of goods produced locally, and so-called foreign investment, which did not lead to any vibrant export sector but only a footloose garment sector. The consequence was the abandoning of local production, with foreign earnings dependent on the fickle tourism sector and underpaid migrant workers’ remittances from the Middle East. The garment sector is now collapsing under the Trump trade shock. The tourism sector and migrant remittances will grind to a halt under the next global shock whether it be a pandemic, wars in other parts of the world or for that matter recessions abroad. 

The decayed state of Sri Lanka’s economy is not an aberration, and nor was it only caused by corruption, as our elite – who actually gained from rising inequality – would have us believe. It is the same fate for much of the global South trodden by neoliberal economic policies. The export-led growth strategy is flawed, as it creates a race to the bottom with all developing countries competing for the same market. Regardless, Trump’s tariffs, including the 30% to be levied on Sri Lanka’s exports to the US, have abruptly put an end to the possibility of export-led development, not to mention the sudden job losses in our economy. Meanwhile, the IMF and World Bank – determining Sri Lanka’s policy trajectory – continue to focus on what benefits global finance capital, which is more austerity to offset the impact of the trade shock and tourism related investment to absorb speculative finance in real estate and infrastructure. The rot that has set into the economy cannot be reversed by the very same neoliberal policies that are the cause of economic decay!

IMF and its phases

The IMF in shining armour is not as invincible as it is portrayed in Sri Lanka today. The early to mid-1990s was considered to be one of hyper-globalisation, when global trade growth was almost triple global GDP growth. The World Trade Organisation (WTO) was formed in 1995, and there was much talk of the “East Asian Miracle”. Then came the East Asian Crisis of 1997, where the IMF programmes in South East Asia led to further contraction and tremendous social suffering. To gloss over the liberalisation push prior to the crisis and the failed response by the IMF, the Western establishment claimed these countries were facing the consequences of “crony capitalism”. As expected, the North Atlantic Financial Crisis of 2008, did not lead to labelling the Western economies as “crony capitalism”. Indeed, such hypocrisy and double standards have been characteristic of the West since colonial times. 

Nevertheless, the East Asian Crisis and its aggravation by the IMF programmes led to its de-legitimisation; there were very few IMF programmes in the early 2000s. The IMF’s stature only recovered with the infusion of tremendous liquidity into the global capital markets and the IMF by the Western states responding to the fallout of the North Atlantic Financial Crisis. 

Sri Lanka itself, after the end of the civil war in May 2009, went into two IMF programmes in 2009 and 2016, which gave the green light for successive governments to borrow extensively in the global capital markets. Thus with the support of the IMF and global finance capital, Sri Lanka did what it did not do during the difficult decades after independence or for that matter the gruelling decades of civil war, that is default on its debt!

Crisis tendencies

The Trump regime, with its trade tariffs, has for all purposes killed the WTO. What will become of the other two neoliberal institutions resident in Washington? Will they survive by openly displaying their cronyism towards Trump or will they be buried by him? Or will a crisis of global finance capital make them redundant?

In reality, the crisis tendencies of global finance capital carry larger consequences than the fate of crony IFIs. I argue that the 2020s are similar to the decade of the 1930s, with the global order unravelling. At the heart of this global disintegration is the unsustainable class project of finance capital.

Even as the US loses its leadership in the world, it desperately seeks dominance with threats of wars, rather than its earlier strategy of global hegemony constructed through global institutions, neoliberal ideology and of course its military power. While financial accumulation was the foundation of US hegemony, the global financial regime is facing both inherent factors and external shocks aggravating crisis tendencies. The internal dynamics are characterised by rapidly rising asset prices and other speculative transactions that can lead to a financial collapse as with the bursting of a bubble. This is what Hyman Minsky argued with his financial instability hypothesis. The 2008 financial crisis is one such episode, but the causes of that bubble were not addressed and have only been eclipsed by another bubble.

Next, there are many other crisis possibilities. Climate shocks and wars can lead to massive destruction of high valued assets. For example, coastal cities devastated by storms, or technology and energy centres are destroyed by wars, can lead to financial and banking crises due to the loss of collateral underlying heavily leveraged lending. The sudden destruction of physical assets can wipe out financial assets, resulting in financial contagion affecting the deregulated global financial system. 

Polarisation and the unravelling global order reduces the capacity of the global capitalist establishment to coordinate policy and address early signs of such financial crises as in the past. Thus financial crises can rapidly escalate, which are difficult to contain even with coordinated responses of the Treasuries and the Central Banks of the powerful states. 

What is to be done?

In this gloomy world, what should countries like Sri Lanka do? Our President has recently mentioned to the Deputy Managing Director of the IMF that this should be Sri Lanka’s last IMF programme. I would say Sri Lanka’s ongoing programme may well become part of the last set of programmes of the IMF, as the future of the IMF itself is in question. Sooner rather than later, Sri Lanka needs to exit its current IMF programme. so that it can launch measures of economic stimulus to address the continuing national economic crisis. 

Next as global finance itself is on shaky ground, the idea of returning to the global capital markets for development financing should be eschewed. International Sovereign Bonds led Sri Lanka into a debt trap, and such borrowing will be even more devastating in the future.

In this context, financialisation is not just a problem at the global level, it has encroached deep into the body politic of our country. The tremendous extraction through microfinance and leasing by finance companies has undermined production in the countryside. Therefore, it is also high time we considered abolishing private finance companies. 

The problem of finance is that, money seeks profits merely through money rather than production. And if we are to salvage our economies, we need to become free from rule by finance. The challenge ahead both globally and nationally, is how to do that with the least damage. We must avoid the fate of the 1930s that saw a depression, fascism and a world war.

Ahilan Kadirgamar is Senior Lecturer in the Department of Sociology at the University of Jaffna, Sri Lanka.

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