Lanka Adrift In Tempestuous Seas

By Kumar David –

There are three dangerous global trends. The first is not new, it is the growth of right-wing extremism in the US; the second is more recent and commenced in 2022 with the Russian invasion of Ukraine. The third is the prospect of Sino-US military hostilities. All three will affect this country. Right-wing extremism turned perilous in the US with the election of Donald Trump whose Administration has lived alongside hate groups and an extreme legislative agenda (anti-environmental, anti-feminist, anti-LGBT). In the state of Idaho extremist Ammon Bundy has a chance of being elected State Governor. 

America

With disarray in the Democratic Party which fears defeat in mid-term Congressional elections in November and a likely return of Trump to the presidency in 2024, the stage is set for a further drift of the US to right-extremism. Trump seems near certain to be re-elected in 2024 unless convicted of illegalities and barred from contesting. But this may lead to unrest led by the large white working-class base of the Republican Party. It is reasonable to speculate that the United States is on its way, if it happens then for some years only I am sure, to turning right-extremist. What difference will a temporary death of democracy in America mean for midgets like Sri Lanka?

The truthful answer to this is curious; it belongs in the domain of “known unknowns” meaning that we know that the effect could swing in two entirely different ways. The US is the world’s premier military and diplomatic, and one of two leading economic powers. Its influence is large and if it chooses to hound Lanka’s war-criminals and leaders who savaged human-rights it can make life hard for such vermin. On the other hand a right-extremist influenced USA may swing the other way, it could for reasons of its own cut a deal, as it has often done, with the military, leaders who are the scourge of democracy and mass murderers – think Pinochet and dozens of brutal Latin American regimes in the last 50 years.

Russian military losses in Ukraine are huge; some estimate as high as 60,000. (Ukrainian military losses seem to be less than a quarter of this). Both sides are digging in for a cold winter of attrition and trench warfare extending well into 2023; the invasion truly is a gigantic Putin blunder. The Ukraine-Russia policy of zero-integrity Trump’s mongrel hypothetical second Administration, supported by fascist trends in the US can be bizarre. His empathy for Putin, antipathy to NATO and the resemblances of US right-extremism to its European counterparts make outcomes unpredictable. Meanwhile Ukraine’s Zaporizhzhia nuclear plant is under attack by Russian artillery; bombing nuclear power plant is not banned by international law. It’s a dangerous world. Big countries have deep enough financial pockets and sufficient economic resources to mollify their populations, a small country is a hapless skiff adrift on a tempestuous ocean.

Europe

Outcomes seem more predictable in post Ukraine-invasion Europe. Western Europe’s choices are stark. The continent is desperate to minimise dependence on Russian gas, coal and strategic materials – the poor spend an astounding 50% of their income on energy. Germany’s long-term energy plans have come unstuck, the drive to a green future has been reversed. Mothballed coal power stations are to be brought into service and three nuclear power plants that were to be decommissioned have been given a lease of life. This is bad news all round, instability in energy markets is not good for anyone, especially small fry. 

Apart from energy dependence, Germany, Europe’s largest economy, is also dependent on Russian metals and minerals as are other European industries to varying degrees. Russia has rich reserves of manganese, chromium, nickel, platinum, titanium and the conventional materials iron ore, copper, tin, lead, tungsten, diamonds, phosphates, and gold. Siberia nurtures one-fifth of the world’s timber. Although Lanka is of miniscule significance, Europe’s desire to keep open international supply chains on which its industries depend will be helpful in our quest to preserve GSP+ benefits. 

On other counts too, the post invasion environment is troublesome. Russia is the largest urea exporter; one reason for surging fertilizer prices is prices of natural gas and energy needed in urea production. (As of mid-2022 there were indications that urea prices would decline in later this year due to a slow start to seeding in the US). Russia is one of the world’s largest exporters of nitrogenous fertiliser, phosphates and potash. Ukraine and Russia are big food exporters and the imbroglio will lead to higher global food prices. All these concerns affect Sri Lanka agriculture directly and via their effect on world food prices. 

 

Sino-US conflict

The danger of spreading Sino-American conflict is chilling for everybody, especially the countries of East Asia, the Far East and the littoral states of the Indian Ocean. Nancy Pelosi’s high-profile visit to Taiwan at this time was foolish and provocative. Pelosi visited the island in defiance of threats from Beijing which views Taiwan as a breakaway province and warned it would consider the visit a major provocation. It was undertaken entirely in the hope of gaining votes for the Democrats in the November 2022 Congressional elections, which expectation will come to nought. It so incensed China that for the first time it conducted military drills that butted into Taiwan’s territorial waters. Outright Sino-US conflict confined even to this theatre is unlikely because neither side has the appetite to escalate, but the visit has destabilised the region and increased the cost of shipping in East Asia and through the Malacca Straits. 

A lot is at stake for Chinese leader Xi Jinping who is making an unprecedented since Mao bid for a third term. Xi who came to power in 2012 placed reunification-with-Taiwan high on his agenda; perhaps he will live to regret it as he will be unable to deliver within any foreseeable time-frame. He may wish to turn to domestic issues but it is hard to see how he can link these to the Pelosi visit.  China is plagued by a property crisis, and an economic slowdown due to its strict zero-Covid lockdown. According to Hong Kong’s South China Morning Post there are fifty million empty flats in China which threaten to plunge the property market into chaos. These two factors have provoked protests but Xi will not be able to link them to the Pelosi visit and distract attention away from domestic failures. It is most unlikely that Xi’s grip on power will be challenged at the 2022 Congress in November but his inability to deliver on reunification will make him look weak in the ensuing period – Party Congresses are held every five years.  This his third-term is likely to be his last.

 

China is unable to make a critical building block of the global economy: top of the line silicon chips. It buys 60% of the world’s supply of semiconductors to drive its vast industrial product output; 90% are made outside the country or by foreign companies in China. It spends more buying computer chips than importing oil. But it is struggling to keep up in the technological arms race. Why? Its champion in the foundry industry (makers of integrated circuits) Semiconductor Manufacturing International Corp last year announced plans to build a 28-nanometre chip but this technology is a decade behind TSMC’s 3-nanometer chip. Taiwan Semiconductor Manufacturing Corp is the world’s top chip maker.

TSMC’s dominance ensures Taiwan’s grip on 60% of the global chip business. Furthermore, nine out of the ten outfits which design rather than make chips (“fabless” or non-fabricating outfits), and also drive innovation are US based; the tenth, MediaTek, is Taiwanese. In various ways the US controls half the global chip market and China only 10% and these are technically less sophisticated, more useful for industrial than military uses. China is pouring billions into a chip-building but faces strategic impediments. It is shackled by geopolitical tensions, a hawkish Washington and economic damage caused by its own zero-Covid policy. The sun does not seem to be shining brightly on President Xi. Increases is cost of Chinese merchandise, disruptions to supply chains and big increases in shipping prices are more bad news. For foreign countries the negative effect is the rising costs of Chinese products.

I do not want to sign off on a depressing note, surely there are things we can do. I have been boringly insistent that we as a country have no option but to tighten our belts. Provision has to be made for the poorest but everybody else will feel the pinch. A graded system of price differentiation for all classes, except income tax gradation, is not feasible. Income tax on the rich will certainly have to be raised and a wealth tax and an inheritance tax introduced. True everybody, not only the rich benefited from 70 years of eating more than we produced and from extravagant imports paid for by profligacy in foreign and local debt. However, it is also true that expensive luxuries (fancy cars, foreign travel, fashionable merchandise) were almost entirely for the benefit of the affluent. An incomes and taxation policy that targets better off incomes is justified.

Contradictions in policy space are unavoidable. Exchange controls have to be relaxed to attract foreign investment and the inflow of capital in general. Then the rupee-dollar relationship will decline at the cost of the former – will 2023/24 witness the horror of LKR 1000 to the $ and therefore near galloping inflation? [Galloping inflation grows at dual or triple-digit annual rates, usually for a brief period. Hyperinflation runs at hundreds or thousands of percent per annum and is a precursor of anarchy, revolution or fascism]. High interest rates to curb inflation will shackle growth, hobble small and medium enterprises and crush the informal sector. 

There is a reasonable chance that the country will navigate these torrents without shipwreck. Though there is all-round acceptance that some degree of belt-tightening is unavoidable, everyone, even aragalaya grants that revolution is not around the corner and agrees that the risk of anarchy is real. Trade unions, liberals and urban and rural folk agree that Ranil must, and can, be kept on a tight leash re democracy. Hence, I am moderately confident that bourgeois-democracy, albeit dowsed with economic hardship will come off the life-support system in say a year and that the IMF, India, Western capitalism, and China will wink and give us a hand to climb out of the mire. Reports say that preliminary agreement on a loan has been reached and will be announced a day or two after these lines are written.

Or like Toselli’s serenade is it only a ‘golden dream’, an improbable ‘vision fair’ that a Colour Revolution may deliver rewards? Perhaps I was optimistic when I gushed in this column on 24 April “The people’s uprising is a colour-revolution, a vision fair, a celebration of happier days to come. The light beaming from the radiant eyes of the young is the first time in our two-thousand-year story, to quote a comment, that we have seen anything like it”. I hope my lyricism is not lopsided. Never has a people’s uprising in Lanka driven out an unjust ruler. Regime change so far has always been by armies brought from India ( Moggallana) or conspiracy between Court and foreign colonisers (Kotte and Kandyan Kingdoms).

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