The World Bank summarizes Sri Lanka’s economic difficulties as follows: “Sri Lanka’s macroeconomic challenges are linked to years of high fiscal deficits, mainly due to weak revenue collection and eroding export competitiveness due to a restrictive trade regime and a weak investment climate. The description could fit many other economies, including Malaysia’s, which is why the crisis has prompted much commentary on the parallels and prospects of these countries.

Sri Lanka has had years of budget deficits and yet a populist government has promised and delivered tax cuts. It has an economy whose production structure remains largely the same. Sri Lanka’s economic problems are summed up in two figures: its dual fiscal and current account deficits, meaning the country spent more than it earned, and its production of tradable goods and services was insufficient to make up for shortages. All of this meant that it was a borrowing economy and because there were no surpluses in the economy, it was borrowing from outside, which added another dimension of risk.

The Covid pandemic has shattered the already shattered economy, which largely depended on tourism and remittances from Sri Lankans abroad to bring in foreign currency. When these two pipelines stopped flowing, the economy collapsed. There was simply no money to pay for imports and to service existing loans, which then led to defaults. And as the currency weakened and shortages occurred, inflation soared and a vicious cycle ensued. The misery of this economic collapse is far worse than that of Covid-19. It’s much more intrusive.

For all its advantages when it gained independence, its economy never really developed beyond what made it economically useful to the British – the production of tea and minerals. India is the neighbor with 1.38 billion people compared to 23 million in the country and yet they have lived separate economic lives. This has its origins in the way history has unfolded between them, but they have not been able to go beyond this conjuncture, and this lack of economic integration has been particularly harmful for the Sri Lanka. The potential to take advantage of such a neighbor to develop its merchant sector has never been exploited. He continued to do the same things while not attracting other investors. When things got desperately bad, the government embarked on wacky schemes that made conditions worse.

It is politics that is defined by the incendiary combination of race and religion that held back and ultimately caused the economic crisis in Sri Lanka. Here we see parallels. There are always intertwined interests of economic and political elites everywhere, but when power is concentrated among a few in the presence of weakened institutions, it is both corrupting and debilitating. One would have thought that such powers would make it possible to make difficult decisions, but this is rarely the case. Political interests would generally be motivated by self-preservation and self-perpetuation; they are rarely altruistic. Political survival can come at the expense of almost anything, including things that are economically bad or socially divisive.

If Sri Lanka was largely a case of bad politics creating bad economy, Venezuela is arguably a case of bad economy causing bad politics. Venezuela still has the largest oil reserves in the world. This manna from heaven is a natural endowment, potentially good for the country in the long term, but which must be managed carefully for this to be true and avoid the resource curse – the inability of many economies to fully benefit from this natural endowment. . The hydrocarbon economy is still the dominant part of the global economy, so oil wealth is still wealth. Oil-rich states are still producing oil and, despite cyclical prices, making money.

The jury is still out on whether oil-dominated countries have successfully hedged against the day the oil runs out or when demand dwindles, but Venezuela, the country with the largest oil reserves, stands alone. country of this type to have gone bankrupt. . Venezuela had the Sri Lankan experience much earlier.

Governance is always problematic in economies dominated by extractive natural resources such as oil and gas and all types of minerals. This argument can also be extended to large-scale plantations; they are extractive in a different sense, and plantations involve large tracts of land and access to those lands, like access to mining areas, involves the state and therefore political lobbying of some kind. The oil and mining companies take care of the government which is supposed to take care of the people.

Regardless of how natural resources are extracted or cultivated, and how the revenues from these activities are paid into the treasury, it is true that the government’s liability is markedly different if the revenues entering the treasury were instead taxes paid by the population. The issue of taxation without representation is precisely about how taxpayers’ money is spent. A collection of citizens who mostly do not pay taxes still expect things from the government, but do not hold the government accountable for how it generates revenue and how it is spent.

These dynamics create bad politics because citizens see government as gatekeepers instead of elected managers and guardians of their collective interests. The Venezuelan experience shows how politics became dominated by the military or a strongman who, despite oil wealth, left behind a large part of the population. This eventually gave rise to populist politics that led to the election of leaders who spent the wealth created by oil without investing in new productive capacity – an unsustainable path ready to collapse regardless of intentions. This is where Venezuela was: a major oil producing and exporting economy that validated the resource curse.

Although Malaysia is not exactly Sri Lanka or Venezuela, it shares parallels with both countries. Developments over the past two decades are eerily similar. While budget deficits have persisted for more than two decades in Malaysia, the current account, although still in surplus, is barely in surplus. We are also witnessing the same paralysis in taking corrective action in an increasingly divisive environment, while slowly sliding downwards.

Rents are a key element of the Malaysian political economy. Resource-based industries and the plantation sector, and real estate development can also be included in this group, are all defined by rents. Any business that essentially depends on state approval contains rents. Even the so-called distributive policies of government are actually about distributing rents in the form of quotas, permits, licenses or contracts. Where there are rents, there are all sorts of rent-seeking activities that are totally unproductive economic activities at the aggregate level, but interesting ventures at the micro level. These competitions for rents are not only wasteful and distort the allocation of resources, thereby creating inefficiencies everywhere, they corrupt and undermine the rule of law, which is why investors are turning away from these jurisdictions.

The failure of distributive policies over all these decades to tackle inequality or create a vibrant commercial class is proof enough that they don’t work. They benefit those who are already capable, winners in the lobbying game, and waste a lot of resources. Beyond that, these policies inhibit the growth of new businesses. Farmers who cultivate state land to develop competitive productions, despite the absence of any security of tenure, will always lose against the lobbyist of a real estate developer.

Rentier culture is anti-competitive and inhibits innovation and risk-taking, which largely explains the problems Malaysia faces in creating new sources of economic growth. As was the case with Venezuela, there was never a question of a lack of resources, whether to help the needy or to develop the economy. There were only inefficiencies, waste and leaks. That’s why we’ve spent hundreds of billions on infrastructure and have bigger traffic jams and floods.

I wrote in a previous essay warning how the normalization of monetary policy in developed economies in the post-Covid era, made much more complicated by the Russian-Ukrainian war, will pose serious challenges to the Malaysian economy. We are not where Sri Lanka was before its default, but we are seeing the telltale signs: a weakening ringgit, rising inflation, rising costs of financing fiscal deficits, and elements of fiscal populism despite the decline in income. We have seen an economy unable to create well-paying jobs. This year will be another difficult year and the months to come will be quite revealing.

Some have argued that the solution is “strong” government, which I disagree with. It will simply be exploited to gain votes or suppress dissent. We need an effective government to deliver basic services and protect our rights and freedoms, and a government that doesn’t get in the way. Avoiding the fate of Sri Lanka or Venezuela requires less government, not more – to achieve a good economy despite bad politics.

Dr Nungsari A Radhi is an economist