The serious lack of good governance and economic freedom: the root causes of the current crisis in Sri Lanka


Sri Lanka’s dramatic political fall in recent days and the ongoing downward economic spiral offer another unmistakable reminder: good governance, both political and economic, matters.

The overthrow by ordinary Sri Lankans of an irresponsible government that bears responsibility for decades of mismanagement was not revolutionary. Rather, it was the result of the desperate outcry of frustrated Sri Lankans over the political failure caused by the country’s irresponsible government and long-standing political dynasty.

Serious policy missteps by President Gotabaya Rajapaksa’s government, compounded by shocks from the ongoing pandemic and Russia’s unprovoked invasion of Ukraine, have sparked economic and social unrest in Sri Lanka.

As the Heritage Foundation’s annual Index of Economic Freedom indicates, Sri Lanka has been stuck in the ranking of “mostly unfree” economies for the past decade. Its economy is ranked 132nd out of 177 countries whose economic freedom is assessed by the 2022 index.

Pushed down by reductions in fiscal health and business freedom, Sri Lanka has seen a considerable deterioration in economic freedom since 2017 and has fallen further into the lower rankings.

Unfortunately, from a broader perspective, the saga unfolding in the country turned out to be a classic case of a slow-moving train wreck.

The current crisis was not completely unexpected. This almost happened months ago with the previous wave of protests when most ministers resigned, including several members of the Rajapaksa family, Sri Lanka’s long-standing political dynasty. Without high and deep economic reforms backed by decisive political will, Sri Lanka’s economy has been almost hopelessly confined by what amounts to self-imposed economic repression.

Indeed, the mass protests of recent weeks are the legitimate consequence of poor political and economic governance that has led to shortages, a wider cost of living crisis and social unrest.

Faced with an inevitable political downfall, the president decided to flee for his safety aboard a military plane to the Maldives and then to Singapore where he “sent” his resignation by e-mail.

The president’s inglorious resignation also ended the rule of one of South Asia’s most powerful political families. As one respected scholar of Indian foreign policy succinctly noted:

For nearly two decades, the four Rajapaksa brothers and their sons have run Sri Lanka like a family business – and a messy one at that. With their grand construction projects and extravagant ways, they have burdened Sri Lanka with unsustainable debt, plunging the country into its worst economic crisis since independence. Now the dynasty has fallen.

Moving away from the brink of violent political confrontation, it appears that an orderly transition plan is underway to create an interim government through a legal parliamentary process.

However, ordinary Sri Lankans will be forced to pay an extremely high price for the abrupt transition, given that there will be a prolonged and deep economic mess for the foreseeable future. Crushed by the loss of tourism revenue over the past five years, as well as gross economic mismanagement and now rampant inflation, the prospects for a quick recovery are quite bleak.

The ongoing turmoil in Sri Lanka has also already begun to reshape the geopolitical landscape of the critical region, where the island nation has long been seen as a strategic prize, with China and India vying to jostle for greater influence.

In fact, Sri Lanka, an island nation straddling crucial Indian Ocean trade routes, saw a substantial expansion of Chinese influence during Rajapaksa’s tenure from 2005 to 2015. Several multi-billion dollar Chinese investments in critical infrastructure led to a rapid accumulation of debt. and widespread corruption, offering a model case study for the risks associated with China’s Belt and Road initiative.

However, it would be a mistake to draw conclusions from broader global trends in food and energy shortages. In each case, political unrest is as much a product of domestic issues and/or malign foreign intervention as global trends. Each crisis must be assessed on its own terms.

Yet there is an unambiguous lesson from Sri Lanka that should be relearned here for other nations.

Good economic governance is about more than ensuring a business environment conducive to entrepreneurship and prosperity. Economic freedom under an effective rule of law nurtures institutional resilience and supports overall quality of life.

Undoubtedly, the United States cannot give Sri Lanka the political will to transform its economy in accordance with free market principles. However, it is in Washington’s obvious interest to hold any future government in Colombo to a basic set of good governance standards.

This piece originally appeared in The Daily Signal


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