How to Ruin a Country in Four Years
Posted on August 8th, 2019

By Sumanasiri Liyanage Courtesy Ceylon Today

I borrow the title of Servaas Storm’s article that appeared in the ‘Institute of New Economic Thinking’ with slight changes for this week’s column. Prime Minister Ranil Wickremesinghe is well-known for his statements, some of which are of special kind, on the economy. He might have made more than 10 in the last four and a half years. If someone reads his statements since 2015, she/he would find that they are logically consistent as the PM follows very closely the arguments of neo-liberal economists of international financial organisations. 

Neo-liberalism that has been practised by the two main parties in power has been transformed into a kind of fundamentalism under Ranil Wickremesinghe’s regime. Recently he has informed that his Government if reelected for another five years will build an economy that could fully pay off the loans it takes. 

He might have meant both the domestic and the foreign borrowings of the Government. This differs totally and qualitatively from the economic strategy that is aimed at creating an economy in which dependence on borrowing does not arise. Simultaneously, his Government has also announced that the rate of interest would be further reduced before the end of this month. It is a well-known fact that the increase in interest rate under the early part of his regime can be partially attributed to the Central Bank Bond Scam of which perpetrators are also well-known. This week’s column intends to discuss how an easy money policy be linked to build an economy that could fully pay off the loans it is supposed to take.”

Going back to the easy money policy at this moment may be attributed to three reasons. Let me list them first. As Michael Roberts in his Blog noted Interest rates globally hit a new low with negative rates (i.e. interest rates less than zero – so you get paid to borrow!), at their highest share of world Bonds ever.

 In Germany and Switzerland, Government Bond yields are negative.” So following this development initiated by the cuts of interest rate by the Federal Reserve System in the US, the economic advisers of the PM might have proposed to follow suit. FRS slashed its rate by 0.25 per cent last week. Secondly, the proposed reduction of interest rate may be a response to the forthcoming election. Interest cost is a significant portion of consumption and investment expenditure so that the Government that badly needs to come to power once again may see that the reduction of interest cost would be a plus factor. Third reason stems directly from the second. Neo-classical economic theory posits that the reduction of interest rate will have positive impact on investment as it tends to increase profitability.

Rate of Interest and Rate of Investment

We have witnessed this same policy of slashing interest rate and maintaining negative interest rate at least for some sectors of the economy was adopted in the last phase of Mahinda Rajapaksa regime. The policy makers lamented that in spite of the fact that the real interest rate (nominal interest rate – rate of inflation) was negative or closer to zero, there was no increase in investment. 

That low interest rate would increase investment and boost economic growth is a neoclassical myth. Of course, the decline of the interest rate may reflect the competitive position of the manufacturing bourgeoise over the bourgeoisie in the financial sector. As Michael Roberts has informed us, But will cutting interest rates avoid a recession in the ‘real’ economy?  Everywhere the ‘hard data’ are showing a sharp slowdown in economic growth, a collapse of the world car industry, and outright slumps in many large so-called emerging economies. 

 Above all, there is a significant contraction in world trade as the trade and technology war instigated by the US against China hots up.”

In spite of the presence of these hard data, the Prime Minister and his economic pundits expect that artificial manoeuvring of the interest rate using the Central Bank would boost economic growth and contribute to create a so-called creditable economy. This is a myth. However, it does not mean that it would have some positive effects over the sectors that experienced a noticeable decline as a result of 21 April terrorist attacks.  

The Political
Economy of Money

I wish to quote extensively Michael Roberts’ excellent diagnosis of the capitalistic system with regard to the behaviour of money and the real economy. He writes: We all have read articles in the newspapers ‘explaining’ that the Central Bank ‘sets’ the rate of interest. Yet the Central Bank controls neither the quantity of metallic money, the quantity of real capital, nor the rate of profit. Therefore, the ability of the Central Banks to influence interest rates is far less than, what the ‘lay’ public – as many economists – believe it to be.

What today’s Central Banks really control is not the rate of interest but the quantity of token money, measured not in terms of real money – gold – but in terms of dollars, pounds, euros and so on. As the bourgeois media ‘explains,’ they can create ‘any amount of money they wish’ in terms of dollars, pounds, euros and so on. But what good does that do if this money loses its purchasing power even faster than it is printed?

True, the Central Banks generally raise the interest rate during economic booms. But this is exactly the natural tendency of interest rates during economic upswings. Therefore, when they raise interest rates during a boom, they are simply following the tendency of the market, not determining it.”

So what the Prime Minister is proposing is that in the near future there would be an increase in money supply, both token money and credit money. Hence, money supply would increase and as a result, the fiscal deficit will boost up exceeding the limits of Mangala Samaraweera’s Second Budget. None of these policies will resolve the generalised economic crisis or the social, political and cultural crises associated with it. Rather the crisis would aggravate hitting the lives of the people hard, especially of the lower rung of society.

(The writer is a retired teacher of Political Economy at the University of Peradeniya.)

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