It’s the Party, Stupid: Sri Lanka’s Political Turnaround – Part 1

Photo courtesy of BBC

It is not quite a miracle. But it is certainly a very impressive turnaround. From around 1970 until 2021, Sri Lanka seemed to be on an irreversible track toward steadily worsening governance: grand corruption, disregard of the law, ethnic and religious conflict, state violence and (non-military) government incapacity and incompetence. Today, by contrast, following the September 2024 presidential and the November 2024 parliamentary elections, the prospects for more substantive democracy and better governance seem bright. The old political elite and the broader politician class have been replaced almost completely through the most peaceful and fair elections that the country has seen for a long time. The prospect of military intervention in politics has entirely faded. The female proportion of MPs doubled from a very low 5 percent in a year when the global trend was in the other direction. The new National People’s Power (NPP) government, with 67 percent of parliamentary seats, shows every sign of intending to reduce corruption, obey the law, respect expertise, negotiate political solutions to pressing problems and generally rule in accord with the instincts of the educated, middle class professionals who provide so much of its ideological and organisational heft. The policy preferences of the government and the bulk of the population seem broadly to align.

How can we explain this turnaround? I try to summarise the more significant structural and historical causes below. But chance also played a role.

Spectacular incompetence (the stupid)

By far the most consequential of the chance factors was the spectacular economic and fiscal incompetence of the 2019-22 government led by President Gotabaya Rajapaksa. Governments are often incompetent but rarely on this scale. The enormously damaging 2021-22 debt and foreign exchange crisis was largely the work of the government. The key points in the sequence of events leading to crisis were:

• President Gotabaya Rajapaksa was elected in November 2019. At that point, the proportion of GDP collected as tax revenue had been in steady decline since 1991 and had reached worryingly low levels. It was concerning because by that point the government had begun to accumulate significant external commercial debts in the form of International Sovereign Bonds and semi-commercial debts in the form of loans from Chinese banks as well as substantial internal rupee debts. Individual loans become due very regularly and generally need to be replaced by new borrowing. The rate of interest at which new loans are offered depends, among other things, on the lenders’ evaluations of the capacity of the borrower to repay in the future and the consequent risk of losing some or all of the loan through default. In 2019, Sri Lanka was already considered a slightly risky borrower.
• Following the November 2019 election, the government introduced a budget that radically cut taxes to the extent that projected total tax revenue for 2020 would decline by 30 percent. That was seriously unwise because it further reduced the estimated capacity of the government to repay loans.
• Almost immediately, in early 2020, Covid struck. It had an especially damaging impact on an economy dependent on earnings from tourism. In addition, global interest rates began to increase and the US dollar, the main currency in which international loans were repayable, started to strengthen.
• The debt situation became seriously concerning but still not critical. The government had several choices. The easiest would have been to reverse the 2019 tax cuts to assure lenders that it retained the capacity to repay loans.
• Not only did the government not do that but rather it maintained that there was no serious debt repayment problem. The reasons for this denial are still not entirely clear. They appear to be a combination of hubris, the economic illiteracy of the ruling Rajapaksa family and bad economic counsel from senior advisers ideologically very hostile to anything that looked like economic orthodoxy and to the IMF.
• By the end of 2020, the rates of interest that the government needed to pay to roll over its foreign loans began steadily to increase. And the lenders were becoming less willing to re-finance. By early 2021, experts were near unanimous in warning the government that it was heading to a debt cliff edge. Debt repayments were increasing but foreign exchange earnings were depressed. It followed that foreign exchange reserves – the means through which the country could purchase imports of fuel, food, fertiliser and everything else needed – were getting depleted.
• At that point, or even earlier, the government could have gone to its creditors, admitted that it could not continue to pay its foreign debts and invited them for negotiations on an agreed re-scheduling. It did not. Instead, in April 2021, it did something weird. Overnight, it banned all chemical fertiliser imports on the grounds that agriculture should be organic. That saved a little foreign exchange in the short term but further undermined the credibility of the government, angered farmers and reduced agricultural production.
• Finally, in September 2021, when foreign exchange reserves had reached critically low levels, government in effect defaulted on loan repayments without ever trying to reach any kind of agreement with creditors.
• Imports were cut back radically because there was no foreign exchange to pay for them. There is no need here to detail the human cost of the ensuing months of acute scarcity of fuel and other basic commodities.
• The government could not begin to get control of the economic situation until Mahinda Rajapaksa resigned as prime minister in May 2022 and the much more competent Ranil Wickremesinghe was brought in to take his place. Mahinda Rajapaksa resigned only after the aragalaya had escalated into a mass permanent occupation of Galle Face Green on April 9 and his own thugs had openly and viciously attacked the demonstrators there and elsewhere in the country on May 9.

It was Sri Lanka’s bad luck that the regime was so extraordinarily incompetent at managing the fiscal situation. On the positive side, the suffering that resulted triggered a near-total popular rejection not only of the Rajapaksa’s but of the political elite generally. Even before the crisis, few people can have been unaware of the viciousness and corruption of those who ruled them. Yet Gotabaya Rajapaksa had won the November presidential election very comfortably against an opponent who was in every sense a more decent human being. And the Rajapaksa’s political party, the SLPP, had won 59 percent of the vote in the subsequent August 2020 parliamentary election. There seems little doubt that, had the Rajapaksa government simply taken standard economic advice in dealing with the debt challenges in 2020 and 2021, the Rajapaksa family would still be major political players and we would not have an NPP government today.

Luck

Three years separated the beginning of the end of the Rajapaksa regime, when economic crisis was declared in September 2021, from the election of the NPP leader Anura Kumara Dissanayake as president in September 2024. That period was politically turbulent. Although it was clear by mid 2022 that the NPP was popular, it was far from obvious that it would eventually be elected to power. Many alternatives seemed plausible. They included military intervention in support of either Gotabaya Rajapaksa or his successor Ranil Wickremesinghe leading to the suspension of elections or a successful – albeit likely very fractious – right wing electoral alliance of Ranil Wickremesinghe with the SJB party, capitalising on fears of the revolutionary extremism of the JVP, the dominant component of the NPP.  Here are three of the things that could easily have gone wrong and derailed the transition to a stable NPP government:

• The forcible occupation of the President’s House by Aragalaya crowds on July 9, 2022 has received enormous media attention. The occupation became something of a party. But the mood had been much darker on the evening of March 31 when thousands of very angry people had tried to storm President Rajapaksa’s private residence at Mirihana. Watching the barriers being overturned live on TV, my thought was, “My God, if they do break in they are going to kill him.” The demonstrators failed to break in and the president was not actually there. But what if things had been different, and the president had been seriously assaulted or killed? The armed forces would almost certainly have stepped in.
• President Rajapaksa eventually fled the country in July and formally resigned a few days later. That resignation made it possible for parliament to choose Ranil Wickremesinghe, already prime minister, to succeed to the presidency, exactly as the constitution stipulates. That constitutional succession in turn placed pressures on Wickremesinghe to hold the September 2024 presidential election when his term expired. What might have happened had President Rajapaksa left the country but not formally resigned? Bangladesh provides a grim illustration. When similarly overthrown by a street revolt in July 2024, Prime Minister Sheikh Hasina fled but refused to resign. The successor government is formally illegal. There is no consensus on the route back to constitutional rule. A range of groups are competing for power while law and order seems gradually to be crumbling. The military seems loath to become more directly involved, but may eventually feel forced to do so.
• During the 2 plus years that he was president, Ranil Wickremesinghe assembled a very able senior economics team, negotiated a major loan and economic restructuring package with the IMF (March 2023) and nearly completed the linked process of agreeing debt reductions/rescheduling with the government’s diverse creditor groups. Had elections been held much earlier, before these deals were wrapped up, an NPP government would have found it impossible to reach any similar agreements or stick to any that had been very recently signed. From the Sri Lanka side, especially the political left, there is considerable basic mistrust of the IMF and similar international and “Western” institutions. It is only on the grounds that the IMF deal is a signed national agreement of more than 18 months standing and visibly stabilising the economy that the new NPP leadership feels able to resist pressures to reject or radically renegotiate it. On the other side, the IMF (and World Bank) leadership were very comfortable dealing with Wickremesinghe but would have found it difficult to trust a novice NPP government burdened with so much anti-IMF sentiment. Had there been earlier elections and an NPP government in 2022 or 2023, the economy would likely still be in crisis and chaos. It currently seems to be recovering quite fast.

Chance played a significant role in the transition from the aragalaya to the election of the NPP government. So too did some more long term historical forces. I discuss three of them below. Before that, to make the story more comprehensible, I summarise two broad points about the character of the previous, problematic political regimes.

The political economy of governance decline

The first point is that the original shift toward authoritarian government, back in the 1970s, was partly a response to what appeared to be major, structural obstacles to economic growth. The shift in governance was not reversed when those economic obstacles began to fade away in the next decade.

The original descent into worsening governance began in the early 1970s, in part because the economy had been badly hit in the two earlier decades by adverse factors outside government control. One was a steady unfavourable movement in the terms of trade that amounted to slow economic strangulation: the value of the tea exports on which the economy primarily depended purchased fewer and fewer essential imports (food, fuel, manufactures) year upon year. The other factor was the acceleration of population growth in the late 1940s. That put heavy pressure on land in this already densely populated agrarian society and, combined with widespread access to state-funded secondary and tertiary education, generated a major political problem in the shape of educated unemployed youth. Both the 1970-77 United Front (leftist) and its successor 1977 UNP (rightist) government constructed (and likely believed) narratives about the need for strong government – and thus more power for the political executive – to deal effectively with deeply rooted economic stagnation and its consequences that included the 1971 JVP youth insurrection. Both the 1970 and the 1977 governments were elected with massive parliamentary majorities and were thus able quickly to introduce new, less liberal constitutions, in 1972 and 1978.

In fact, what had appeared to be deeply-rooted economic challenges soon began to evaporate. The terms of trade ceased to deteriorate after 1975. Soon thereafter, tourism, Middle East employment, aid and garment exports began to provide new sources of foreign exchange. By the 1990s, the economy began to ride the wave of rapid Asian/Indian economic growth. Sri Lanka’s average annual rate of economic growth exceeded the global average. The dynamism of the Asian regional economy, including the rapid growth of the transhipment business in which Colombo Port excels, meant that the national economy could thrive despite ineffective or unhelpful government policies. This external economic windfall gave considerable political leeway to a series of governments that were in varying degrees incompetent, corrupt and using the economy and the public finances primarily for political purposes. Those governments could claim credit for steady rises in living standards which in reality were in large part driven by external economic conditions. This political windfall was eventually squandered in 2019-22 under an unusually incompetent president who enjoyed enormous constitutional and informal power.

The second broad point is Sri Lankan authoritarianism involved the transfer of power from parliament and elected MPs to the political executive, i.e. the executive president and the people in whom s/he chose to trust. That in turn had other perverse knock-on effects on governance.

In the 1950s and 1960s, Sri Lanka was governed through processes that had more in common with the Western European and North American parliamentary democracies than most countries in Asia. Power was relatively widely dispersed, including within the elite class that provided the leadership of almost all political parties and a large proportion of MPs. Those parties were loosely aligned on a left-right spectrum. Voters could – and did – to some extent vote for coherent policy programmes or positions. The new 1972 Constitution initiated the process of concentrating more power in the political executive. The 1978 Constitution amplified that in two significant ways:

First, power was increasingly concentrated in the hands of the newly-invented executive presidency and the people on whom the president chose to confer formal or informal authority. Second, most elected MPs and other politicians who were not in the inner circle were largely excluded from national level policymaking but allowed a wide range of resources and (informal) powers and privileges that gave them a great deal of authority over people in their electorates and the day to day functioning of public sector organisations. Politics and politicians invaded domains from which they had previously been largely excluded. Being a government MP, or simply supporting the government in key votes, became a route to wealth. This mode of distributing government power in turn had other consequences for governance:

• The long established political elite was able to continue to dominate politics through control of the Presidency.
• The long established main political parties began gradually to fragment as all the big political decisions were made through the presidency. Politicians began to jump between parties more frequently. In voting for an MP, voters could no longer have any confidence that they were voting for a clear political position or programme. Personal links, patronage and the emotions aroused by ethnic conflict correspondingly played a bigger role in voting choices.
• Accountability for the use of public resources was undermined. The public treasury was looted on a large scale through, for example, grand corruption at the level of big public infrastructure projects and spending leaks at every level. Conversely, tax exemptions of all kinds gradually drove the ratio of revenue to GDP down to levels similar to those of very poor and troubled countries like Ethiopia and Nigeria.

In sum, Sri Lankan politics remained fiercely competitive at the electoral level and public policy to some (declining) extent remained distributive while the political elite was able to entrench itself in power, exploit public resources with a high degree of impunity and rule in ways that undermined the capacity of the civilian component of the state apparatus to act constructively in the public interest. Capitalists generally did well. They could benefit in many ways, including low taxes, opportunities to profit from political connections, and wide scope to hide (illicit) earnings overseas. But capitalism as a system did not thrive. Public policies were at best weakly supportive of investment, innovation and market competition.

The election of an NPP government based on a strong party organisation; a broad commitment to professionalism, the rule of law and anti-corruption and a (broadly) middle class cadre and electoral base represents a major departure from a kind of politics that had become normalised. I look next at three of the deeper historical roots of this change: the persistence of pluralist socio-political institutions and values; long term changes in occupational structures; and, more contingently, the smartness of the NPP’s political and electoral strategies.