By THE EDITORS
July 12, 2022 6:30 AM
NR Daily is delivered right to you every afternoon.
‘I cannot recall any time in the past when we had to struggle so much to get a decent harvest,” a Sri Lankan farmer told Reuters in March. “Last year, we got 60 bags from these two acres. But this time it was just 10.”
These are the real-world consequences of government central planning.
Sri Lanka, under the leadership of President Gotabaya Rajapaksa, decided in April 2021 to become the world’s first all-organic country.
The government banned the use of chemical fertilizers and banned their importation. The move was pitched as creating a self-reliant economy on the island nation and hailed as a great experiment in green policy-making.
Milton Friedman said that if you put the government in charge of the Sahara Desert, there would be a sand shortage.
What the Sri Lankan government has done is almost as unbelievable. There are few better places in the world for agriculture. Sri Lanka is a warm, tropical island with plenty of annual rainfall, perfect for growing rice, tea, cocoa, and spices, and located along numerous ocean-trade routes for easy market access.
With the addition of modern fertilizers and farming techniques, the country went from subsistence farming to commercial farming.
Sri Lanka had been self-sufficient in rice production since 2005. A 20-year-old Sri Lankan has seen the country’s GDP per capita roughly double over his lifetime. In 1990, Sri Lanka’s GDP per capita was about $2,000 greater than in nearby India. By 2020, it was more than $6,000 greater.
But after the fertilizer ban went into effect, rice production fell by 20 percent in only six months.
The country had to import $450 million worth of rice to make up the difference, and rice prices still went up by 50 percent. Tea exports plummeted, costing the economy $425 million. The government reversed parts of the policy in November 2021, but the damage was already done.
These decisions were made worse by a years-long currency crisis brought on by the government’s fiscal profligacy. The Sri Lankan rupee has lost about half of its value against the dollar since March of this year. The Rajapaksas (Gotabaya’s brother, Mahinda, also part of the government) have been on a spending spree since taking office, building unnecessary megaprojects financed by money printing and foreign borrowing. Creditors downgraded the country’s bonds, and Sri Lanka defaulted in May.
Sri Lanka went from lower-middle-income to upper-middle-income, according to the World Bank, in 2019. Now, millions could return to poverty as gas lines, food shortages, and political unrest threaten to undo all that progress.
The name of the government agenda that delivered these results? “Vistas of Prosperity and Splendour.”
It’s not all the government’s fault, though. Sri Lanka has been the victim of bad luck as well. The country depends on exports, remittances from Sri Lankans living abroad, and tourism for foreign currency. Exports were tanked by the agriculture policies, but remittances and tourism revenue dried up because of the pandemic and the decline in global travel.
And two of Sri Lanka’s top three tourism markets were Russia and Ukraine.
All emerging markets are facing challenges amid rising interest rates around the world.
If Jerome Powell so much as sneezes, global markets notice, so it’s no surprise that raising interest rates is having an effect around the world. The last time a Fed chair raised rates to bring down inflation (Paul Volcker in the early ’80s), it helped trigger a debt crisis in Latin America.
Sri Lanka was the first developing country to come undone, but it will not be the last.
Its green agricultural policies and exceptionally poor leadership drove it to collapse faster than other developing countries, but the basic global factors that affected it will affect other developing countries as well. Zambia, Lebanon, and Laos are only three of the numerous other countries that could follow.
But the most concerning is nuclear-armed Pakistan. Located between India, China, and Afghanistan, with 240 million people and a long history of political turmoil and instability, Pakistan already is dealing with soaring inflation and high debt levels; a Sri Lanka-like collapse there would be devastating.
U.S. policy-makers, including central bankers at the Federal Reserve, must pay attention to these global developments.
Volcker’s deft management of the Latin American debt crisis is an underrated part of his legacy; Powell needs to be up to the challenge. Congress should repeal protectionist “cargo preference” laws related to the delivery of humanitarian aid.
And environmentalist zealots should be kept far away from the levers of government power, here and everywhere else.
Rejecting the blessings of modern farming technology and energy production is a recipe for disaster. The rich West might be able to deal with the consequences of reduced production and growth, but the poorer countries of the world will not be able to.
Combining green fanaticism with government power is simply unaffordable.