SBD de Silva & Trader Sabotage: Memories of a Great Guru, Part 5


The 1977 US-backed regime swept away the controls, with Sri Lanka’s economy re-shackled to the colonial centre, submitting to the usual IMF demands


Professor SBD de Silva passed away 2 years ago. We recall his near-40-year-old suppressed classic, The Political Economy of Underdevelopment, and stories from the blog eesrilanka.wordpress.com, dedicated to him.  This series was denied publication by all the Sri Lankan media, from the mainstream to the so-called alternative.

Even Kuveni’s Yaksha were making their own machines and clothes eons ago, as the Mahavamsa chronicles. Now an export garment flimflam helps fig leaf the local textile industry they destroyed, promoting multinational “apparel manufacturers” like MAS and Brandix. They make not a pin, needle, thread, cloth, let alone a sewing-machine.

SBD de Silva, as secretary to the Minister of Industries and Scientific Affairs, bore close witness to the 1970-77 government, and its paradoxes: “The professedly leftwing policies of the coalition government, under which the economic controls reached their high point” nurtured a bourgeoisie who then politically swung rightward.

SB noted, though called “a state sector – comprising industrial and trading corporations, the plantations and transport” – it was increasingly controlled by  private business.

A large segment of the import trade was nationalized, but “market scarcities created abnormally high profit margins on the trade that still remained in the hands of private importers and retailers”, while “tax privileges in tourism and the gem trade provided new bases of wealth”.

The extreme profitability of outright trading activities (“easy profits” as President GR now calls it) inhibited genuine industrial development. The profit margins on the import of industrial raw materials, components and equipment for almost final assembly exceeded profits on finished goods imported earlier. The commercial-cum-industrial or pseudo-industrial class were virtually permitted to enrich themselves.

Yet the 1970-77 government, having “nourished private accumulation, also constrained it”. Controls caused a decline in investment outlets, aggravated by a ceiling on house ownership and on landholdings. Shortages of imported equipment & materials led to unused capacity. The licensing system, whereby established importers and ‘approved’ industries alone were eligible for foreign exchange, concentrated surpluses in existing enterprises – thus retarding the mobility of capital.

In Sri Lanka, trade and payments control – a reaction to foreign-exchange problems – lasted from 1960-1977. The 1977 US-backed regime swept away the controls, with Sri Lanka’s economy re-shackled to the colonial centre, submitting to the usual IMF demands: “Trade and payments liberalization, currency devaluation, high interest rates, an open door to foreign capital and the setting up of a Free Trade Zone, and the virtual removal of social welfare subsidies.”

The JR regime then tidied up the labour market, repressing militant unionism and eroding democratic rights. After 1977 – “liberalization” of the economy concentrated incomes, widening investment and entrepreneurial interests, enabling the bourgeoisie to easily expand their wealth. They were allowed “a tax amnesty on undeclared wealth and the repeal of punitive laws against foreign exchange and tax violations.”

But the “accumulation” after 1977 became “money wealth, whose transformation into productive capital [was] hindered by the trading and rentier activities which the open economy spawned.”.

“As in the parasitic cities of the underdeveloped world, the service trades, the urban land market, and the construction of commercial buildings and luxury dwellings… enjoyed a phenomenal boom… [with] enterprises catering essentially to the conspicuous indulgence of an affluent enclave.” Such wealth generation prevents “its transformation into productive capital”.

The new policies generated income disparities, diverting new employment and production to counterproductive activity. Domestic manufactures were affected by the removal of protection, by higher costs for imported inputs and for credit, and by price inflation – making imports more competitive.

A 1978 Central Bank report noted the destruction of the ‘high employment-oriented handloom textile industry.’ Export-oriented industrialization, symbolized by Free Trade Zones, relegated indigenous enterprise to the role of subcontractors to the foreign firms. The FTZ was dominated by the readymade garments industry, with foreign firms enjoying tax holidays, taking over established local firms.

“The rise in imports far exceeded the increased income from tourism and remittances by Sinhala workers in West Asia”. Imports rapidly ran-down the accumulated foreign-exchange reserves. What the Central Bank called the satisfaction of “pent-up demand” turned out to be an import mania involving non-essential goods, many produced locally before “even soap, pencils and erasers” (despite SL being a rubber-producing country).

“A trade deficit in 1978 was followed by a deficit of massive proportions in 1979” reversing the 1976-77 tendency towards small surpluses. “A foreign debt explosion occurred” even before costly investment projects were started. “The full impact of the debt repayment and servicing charges” were only “postponed by the initial grace periods of the loans”. The IMF “in its conventional wisdom” advised open devaluation of the currency for the second time, but the government resorted to “a veiled but continual depreciation of the Sri Lanka rupee”.

The deepening crisis “led the government into strategies of repression designed to ensure its own political survival as the agent of the financial interests it has so spectacularly bred”.

Next: SB, Unilever & The Media

SBD de Silva and the Import-Export Comedy: A Great Guru, Part 4

Two Yakku Haunting the Central Bank, John Exter & SBD de Silva: A Great Guru, Part 3

SBD de Silva, China & the Central Bank: A Great Guru, Part 2

SBD de Silva & the Flames of ‘Cold War’: A Great Guru, Part 1

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