The Stakes of Sri Lanka

Sri Lanka is going through a major upheaval. You have no doubt seen the scenes of people diving joyously into the pool of the (now, finally, former) President, Gotabaya Rajapaksa. He has just, as I write, landed in Singapore, where he is fleeing the probable legal consequences of his disastrous rule. He was immune from prosecution while President. His brother, Mahinda, had been Prime Minister under him (until he resigned in May) and President before him. In short, it seems like a fairly simple tale of corrupt leaders making fragile a previously relatively successful country through projects that drain the coffers and never materialise and militaristic government, and then paying the consequences come the shocks of an increasingly fragile global economy.

But that is not how the story has been told. Today I want to look at the stakes of our stories of collapse, using one of its most dramatic contemporary examples.

The basic conditions in Sri Lanka were summarised by the FT not long ago:

After the end of a devastating 26-year civil war in 2009, the island of 22mn had the makings of an Asian economic success story. Under governments run by the powerful Rajapaksa family, annual economic growth peaked at 9 per cent. By 2019, the World Bank had classified the island as an upper-middle income country. Sri Lankans enjoyed a per capita income double that of neighbours such as India, along with longer lifespans thanks to strong social services such as healthcare and education. The country tapped international debt lenders to rebuild, becoming a key private Asian bond issuer and participant in China’s Belt and Road Initiative.

This last input from China’s Belt and Road Initiative included a port which, it had been claimed, formed a kind of non-sovereign enclave inside the country, although that framing is heavily disputed. Japan and India are also major investors.

In May, Sri Lanka defaulted on its overseas loans after missing interest payments on two $1.25bn sovereign bonds. It owes more than $50bn. Now, lacking the necessary foreign reserves to get them, there are acute shortages of medicine, fuel and electricity. Hospitals have stopped functioning normally. Inflation is in the double digits. There is a looming hunger crisis.

There are other confounding factors: in April 2019, a series of coordinated attacks on churches and hotels by ISIL killed 269 people, including 45 foreign nationals; then the pandemic hit. Both affected tourism: 5.6% of GDP in 2018, but just 0.9% in 2020, and recovery has since been slow.

What might happen next?

Bloomberg has a map of countries with similarly high levels of debt vulnerability. The domino analogy one might be tempted to make, however, like all analogies, is also a disanalogy: not only are the interactions between parts vastly more complex than it suggests, but also there is nothing automatic about the way the shockwaves might spread out. Indeed, being mediated by financial markets, Sri Lanka’s collapse has no power to affect anything by itself. The collapse will have to be actively propagated by risk managers of all kinds, explicitly making decisions about where the force of the shockwave goes.

The stakes for Sri Lankans are obviously enormous. As of today, the army has been authorised to use ‘necessary force’ to restore order — authorised by a President accused of war crimes in the civil war just 13 years ago.

Collapses are hugely politically contested. In the 38 years since the historian Alexander Demandt famously found some 210 distinct theories for the collapse of the Roman Empire, more have emerged. Theories of collapse matter politically because they allow their proponents to articulate how a healthy functioning society ticks over. Definitely don’t do x! Don’t you know that x led to the collapse of the *Roman Empire*?! Explanations of collapses, like statistics on causes of death, summon us to live differently, but on a social scale. Each collapse, however, is no less specific than each death, although there have been rather fewer (depending on how you count, it's plausible that more people will have died by the time you have read this essay than there have been large-scale collapses).

And, importantly for us, theories of collapse are not just academic exercises that happen after the fact, like air crash investigation teams coming to mop up and redesign systems towards the optimum. The theories themselves are active participants in the collapses.

If what Sri Lanka is undergoing does turn into a full-blown collapse then we have the dubious pleasure of watching people contest the causes of that collapse in real time, both in the political anger of the population and in the pages of the respectable newspapers of the Global North.

Some have suggested that

“lockdowns and constraints on international travel caused by Covid-19 stretched Sri Lanka’s tourism-dependent economy to breaking point. The impact of the pandemic, along with sweeping tax cuts, led the country to run fiscal deficits of more than 10 per cent of gross domestic product in 2020 and 2021, […] The disruption to commodity markets caused by the war in Ukraine has inflated the prices of imported fuel and foodstuffs, including wheat flour and lentils.”

That all sounds perfectly plausible to me.

We already have a plausible story into which this fits, recently neatly summarised for post-pandemic conditions: “That the appreciating dollar will once again inflict pain on the poorer parts of the global economy is already evident. Stability at the core of the global dollar system, ensured by any means necessary, will be countered by tremendous instability in the periphery.” As capital flees for the comparative safe haven of the dollar (and so iteratively strengthen its position as a quasi-Schelling point of the global market), this pushes the price of the dollar higher. Which makes it more difficult for everyone else to buy oil, which must be purchased in dollars. That's particularly tricky for countries like Sri Lanka, where the speed of growth means that investment outpaces actual capacity.

Add in a little concretion in the form of an evidently brutal and incompetent political regime and you have a fairly compelling causal story:

Rajapaksa stacked his administration with relatives and military officials, and used divisive policies and rhetoric to mobilise his hardline base. He made economic decisions, including an idiosyncratic fertiliser ban, that exposed his lack of governing experience.

However, as with all political events of sufficient magnitude, the hunt for causes never stops.

Like other recent state failures, such as that in Iraq and Syria in 2014 that allowed ISIS to flourish, that in Libya a couple of years before, or in parts of Ukraine now, or in the ever-tottering Lebanon, the story is tied up with that of civil war somewhat before.

Fought until 2009, the Sri Lankan Civil War was a brutal conflict (particularly in its latter stages when two erstwhile Rajapaksa Presidents were major actors) which lasted 25 years. The Lebanese Civil War lasted ‘only’ 15. It’s not the purpose of the this newsletter to recap the entire history of Sri Lanka, but to gesture towards what is removed in the story of collapse that has been propagated in parts of the Global North media.

However, as with all political events of sufficient magnitude, the hunt for causes never stops.

Like other recent state failures, such as that in Iraq and Syria in 2014 that allowed ISIS to flourish, that in Libya a couple of years before, or in parts of Ukraine now, or in the ever-tottering Lebanon, the story is tied up with that of civil war somewhat before.

Fought until 2009, the Sri Lankan Civil War was a brutal conflict (particularly in its latter stages when two erstwhile Rajapaksa Presidents were major actors) which lasted 25 years. The Lebanese Civil War lasted ‘only’ 15. It’s not the purpose of the this newsletter to recap the entire history of Sri Lanka, but to gesture towards what is removed in the story of collapse that has been propagated in parts of the Global North media.

ESG and MMT

Environmental, Social and Corporate Governance (ESG) is a set of standards for measuring the consequences of investments and policies. Perhaps predictably, given the aforementioned fertilizer ban, Tucker Carlson has picked up on ESG as the real cuplrit of the Sri Lankan collapse.

Carlson notes that Sri Lanka’s ESG score runs at a staggering 98.1 out of 100. The bottom 5 countries in the world are China, Russia, the US, Bahrain and Turkmenistan and the top are Burundi, Rwanda, Comoros, Yemen and Cote d'Ivorie. Evidently, it does not correlate in any clear way with standards of living, and there are lots of criticisms to be made. As a ‘woke’ aspect of capitalism, it's rolled by Carlson into ‘the left’, a categorisation I would emphatically reject. I regard as principally a doomed attempt by capital to sew one of the central contradictions of the way its orders nature: that it slowly erodes the resilience of the nature it secretly depends on.

Michael Schellenberger, co-founder of the Breakthrough Institute and the founder of Environmental Progress, broadly agrees. He bangs his now predictable drum: it’s green politics that is behind the disaster. In 2004, Schellenberger wrote an essay on the ‘Death of Environmentalism’ with Ted Nordhaus, who described in his Nobel prize acceptance speech 4C of warming as ‘optimal’.

Schellenberger argues that the fertilizer ban put in place by Chamal Rajapaksa (yep, a brother of the two former Presidents), was to blame. That Rajapaksa argued that “agrochemicals have not significantly increased agricultural production. Rather, they have negatively affected soil fertility, yields, and biodiversity.”

The connections here to the dynamics of the petrodollar are not hard to find. Fertilizer is made of oil; countries without dollar reserves to pay for it are likely to struggle to acquire it when the price goes haywire on the open market. Still, the policy was quickly rescinded, lasting only from May to November 2021. Different accounts dispute the impact it had on the harvest of rice - the staple - and tea - the country's leading export.

It's not my purpose here to argue in favour of some interpretation of this collapse or other, although evidently I think attention to the dynamics of the global oil market is a prerequisite for any plausible account.

But not all theories are evenly structurally like others. The National Review ran with: Sri Lanka Collapses under the Weight of Modern Monetary Theory. MMT is a heterodox momentary theory which suggests that the central bank can create money using fiscal policy and moderate the risk of inflation using taxation. It has been variously reviled and praised by figures across the political spectrum.

The specifics of MMT don't entirely concern us, but there is a further

It is not uncommon for people to meet tragic ends (at least in fiction, where irony is delicious fat): anticipating a certain risk, they shift their behaviour and succumb to some quite unexpected consequence of doing so. An inadequate theory of collapse will do the same: societies that adopted fossil fuels rapidly secured their own medium-term survival at the plausible expense of everyone’s much further down the track.

MMT is widely regarded (perhaps rightly, perhaps wrongly) as a crank theory. Countries that signal that they are going to run it are subject to risk simply because of the signal. Investments are not straightforwardly indexed to economic production, but to the iterated expectations of other investors expectations of that production. And who would invest in a crank country?

Theories of collapse start to matter when they cause the collapses they predict. And that is plausibly what happened in Sri Lanka.

A collapse is almost always to some extent unexpected, but in modern countries linked into the global circuitry of investment, what happens in reality is in a sense merely the fulfilment of a collapse that has already happened in economic models. There is no absolute link, of course, or there would have been no need for investors to dash for

Likewise, Sri Lanka’s economy has not collapsed because everyone has forgotten how to do the things they were gainfully employed in doing. And it has not done so in such short order because there has actually be a failure of effective demand, but because there was the anticipation of that failure. The force of anticipation seriously constrained the actual scope of action.

What does this kind of anticipatory time have to do with the structure of large-scale social organisation?

Suhail Malik, in conversation with Armen Avanessian says “If the leading conditions of complex societies are systems, infrastructures and networks rather than individual human agents, human experience loses its primacy, as do the semantics and politics based on it.” That semantics includes even things as seemingly basic and ineradicable as the sense that the present causes the future and not the other way around.

‘Oversight’ of the situation in the form of financial speculation is, therefore, at once a strategy for reducing and organising risk and itself a major source of that risk.

The question we should perhaps then ask about Sri Lanka is not ‘which theory of collapse explains this best?’ but ‘which theory of collapse itself caused this?'

Stronger still: Sri Lanka wouldn’t have collapsed if no one believed it would.