Global economic crisis :

A way forward?

By S. T. Hettige

Restructuring of Sri Lankan economy following economic liberalization in 1977 resulted in a radical reorganization of production relations in the country. With the collapse of hitherto state owned industries and small family “owned production units such as handlooms, rural labour began to migrate to urban areas, in particular to the Western province.

Increasing concentration of wealth in Colombo and its environs created income opportunities for migrant workers in such areas as construction, personal services and retail trade. Resulting labour shortages in the countryside pushed up wages contributing to higher costs of agricultural produce.

The average daily wage of an agricultural labourer in 1976 was 5 rupees! Today it is about 500 rupees. On the other hand, availability of cheaper substitutes depressed the price of rice, making rural agriculture unprofitable to small farmers. Many farmers either abandoned agriculture or substituted other crops such as vegetables and fruits which are in high demand in urban markets.

Increasing costs of consumer goods and services such as health, transport, electricity and education persuaded more and more people to leave the country for overseas employment, particularly in the Middle East. Within a few years after economic liberalization, labour migration emerged as a major socio-economic issue. In spite of serious controversies surrounding it, exodus of labour has continued unabated.

It is estimated that about 1.5 million Sri Lankan workers are employed abroad, in addition to thousands of skilled persons who have left the country for good in search of greener pastures in the developed West. Meanwhile, the Central Bank is boasting about a very low unemployment rate in the country!

Mass exodus of workers over the last three decades has not only pushed up wages in the country but also created labour shortages in rural areas and in other vital sectors of the economy. The rapid depreciation of the rupee, increasing costs of consumer goods, etc. have also contributed to wage increases.

So much so, the country can no longer offer cheap labour to foreign investors as it did in 1977. On the other hand, even prevailing wage rates not high enough to match the rising cost of living in both rural and urban areas. Hence the continuing out migration of labour.

People who are employed abroad naturally earn much higher salaries than their local counterparts. They are in a position to pay increasing prices. This is the reason why many Colombo businessmen target workers in the Middle East. These businessmen are so sympathetic towards these workers that they help them to transfer their money quickly, offer bank loans, and arrange the purchase of land for building houses!

Migrant families spend most of their earnings locally. Given the fact that there are hundreds of thousands of returned migrants, the demand generated by them for real estate, consumer goods, transport services and private education has no doubt contributed to higher prices for these goods and services. Increasing prices in turn encourage more people to abandon local livelihoods and migrate to other countries for employment.

Yet, it is not feasible for a majority of people in the country to migrate to other countries. Most people have to continue to live in Sri Lanka and rely on local sources of income, be it wage work or self employment. This is the reason why price increases due to endogenous and exogenous factors have imposed severe burdens on low income groups in the country.

Rapid economic growth in India, China and a few other developing countries has resulted in an unprecedented increase in the demand for energy, food and other raw materials. Rising fuel prices have imposed a heavy burden on oil importing countries like Sri Lanka.

Crude oil constitutes a very large part of the import bill. Fuel prices have also added to the cost of production of goods and services. Increasing demand for food in fast developing countries like China and India due to rising incomes of a large segment of the population there is also a significant factor contributing to increasing food prices.

This situation is going to get worse in more and more agricultural land is taken away from food production, in order to produce crops to be used for ethanol production as a substitute for fossil fuel. This is already happening in the United States where farmers are reportedly moving away from food production.

Neo-liberal economic reforms implemented by developing countries like Sri Lanka have led to a reallocation of factors of production in favour of export-led growth including export of labour. In spite of rising wages and emerging labour shortages, Sri Lanka continues to rely on labour intensive production for export earnings.

Though the increasing prices of food and other consumer needs necessitate higher wages, the country can ill afford wage inflation due to increasing international competition. On the other hand, stagnant wages encourage labour migration leading to labour shortages. The latter in turn adversely affect agricultural production. In other words, the country appears to be trapped in a vicious cycle.

Meanwhile the developed countries where the general population has long been used to an energy intensive life style cannot easily move away from present consumption patterns. For instance, long established car culture cannot be easily replaced by systems of mass transit. Hence their tendency to look for alternatives to fossil fuel. Some of the substitutes proposed such as ethanol can only aggravate the global food crisis badly affecting the world’s poor.

Rising oil price is obviously a reflexion of the rising global demand for oil. In other words, the amount of fossil fuel used has been increasing steadily in recent years directly contributing to global warming that everybody is talking about. It is also noteworthy that increasing global trade involves transporting large quantities of goods across different parts of the world. This naturally accounts for a significant share of the energy used today. Recent proliferation of budget airlines all over the world has reduced the price of air tickets but it also had increased the demand for oil.

Economic liberalization that facilitated the movement of capital and labour across countries over the last three decades in an unprecedented manner has thus been a major factor contributing to the current global energy crisis with its diverse implications. It is significant that global institutions and world leaders do not recognize the connection between the two, though it is obvious that it is export-led growth that has accelerated the demand for oil and contributed to the emergent environmental crisis. It is the re-allocation of labour away from localized production of goods and services that has undermined food production and locally-based industries in the developing world, contributing to food shortages and the collapse of local livelihoods. Unless the present neo-liberal model of development is revisited and necessary adjournments are effected, the above trends are more than likely to persist with attendant consequences. Some of these are already evident in many parts of the developing world.

The writer is a Professor of Sociology of the University of Colombo