The Serious Lack of Good Governance and Economic Freedom: Root Causes of Sri Lanka’s Ongoing Turmoil

COMMENTARY Asia

The Serious Lack of Good Governance and Economic Freedom: Root Causes of Sri Lanka’s Ongoing Turmoil

Jul 25th, 2022 3 min read
COMMENTARY BY
Anthony B. Kim

Research Fellow and Editor of the Index of Economic Freedom

Anthony B. Kim researches international economic issues at The Heritage Foundation, with a focus on economic freedom and free trade.
Protestors carry an effigy of interim President and Prime Minister Ranil Wickremesinghe and shout slogans demanding his resignation on July 19, 2022 in Colombo, Sri Lanka. Abhishek Chinnappa / Getty Images

Key Takeaways

Driven lower by reductions in fiscal health and business freedom, Sri Lanka has recorded considerable deterioration of economic freedom since 2017.

The mass protests over the past weeks are the legitimate consequence of poor political and economic governance.

It is in the clear interest of Washington to hold any future government in Colombo to a basic set of good governance standards.

Sri Lanka’s spectacular political downfall over the recent days and ongoing downward economic spiral offers yet another unmistakable reminder: Good governance, both political and economic, matters.

The overthrow by ordinary Sri Lankans of an irresponsible government that bears responsibility for decades of mismanagement wasn’t a revolution. It was instead the result of frustrated Sri Lankans’ desperate outcry against policy failure caused by the feckless government and the country’s long-time political dynasty.

Serious policy hiccups by President Gotabaya Rajapaksa’s government, compounded by shocks caused by the ongoing pandemic and Russia’s unprovoked invasion of Ukraine, have sparked economic and social turmoil in Sri Lanka.

As noted by The Heritage Foundation’s annual Index of Economic Freedom, Sri Lanka has been stuck in the rating of “mostly unfree” economies over the past decade. Its economy is ranked 132nd out of the 177 countries whose economic freedom the 2022 index assessed. 

Driven lower by reductions in fiscal health and business freedom, Sri Lanka has recorded considerable deterioration of economic freedom since 2017 and has further fallen to the lower rankings.

Sadly, from a broader perspective, the country’s unfolding saga has turned out to be a classic case of a train wreck in slow motion.

The current crisis was not completely unexpected. It almost happened months ago with the prior bout of protests when most ministers resigned, including several in the Rajapaksa family, Sri Lanka’s long-time political dynasty. Without elevated and reinforced economic reforms underpinned by decisive political will, Sri Lanka’s economy has been almost hopelessly confined by what amounts to self-imposed economic repression.

Indeed, the mass protests over the past weeks are the legitimate consequence of poor political and economic governance that resulted in shortages, a broader cost of living crisis, and social unrest.

Facing an unavoidable political downfall, the president decided to flee for his safety on a military jet to the Maldives and then to Singapore where he “emailed” his resignation.

The president’s unglamorous resignation effectively put an end to the rule of one of South Asia’s most powerful political families, too. As succinctly noted by a respected Indian foreign policy scholar:

For much of nearly two decades, the four Rajapaksa brothers and their sons have run Sri Lanka like a family business—and a disorderly one, at that. With their grand construction projects and spendthrift ways, they saddled Sri Lanka with unsustainable debts, driving the country into its worst economic crisis since independence. Now, the dynasty has fallen.

Moving away from the brink of violent political confrontation, there does appear to be an orderly transition plan underway to create an interim government via a legal parliamentarian process.

However, ordinary Sri Lankans will be forced to pay an acutely high price for the abrupt transition, given the fact that there is going to be a prolonged and profound economic mess for the foreseeable future. Crushed by the loss of tourist revenue the past five years plus gross economic mismanagement and now runaway inflation, the prospects for a rapid recovery are quite bleak.

Sri Lanka’s ongoing turbulence has also already begun to reshape the geopolitical landscape of the critical region, where the island nation has long been considered as a strategic prize, with both China and India rivaling to jostle for greater influence.

In fact, Sri Lanka, an island nation straddling the Indian Ocean’s crucial trading routes, witnessed a substantial expansion of Chinese influence during the tenure of Rajapaksa from 2005 to 2015. Several multibillion-dollar Chinese investments in critical infrastructure resulted in the rapid accumulation of debt and widespread corruption, offering a model case study for the risks associated with China’s Belt and Road Initiative.

It would be a mistake, however, to draw implications of larger global trends concerning food and energy shortages. In each case, political turmoil is as much a product of domestic issues and/or malicious foreign intervention as global trends. Each crisis needs to be evaluated on its own terms.

Yet there is an unambiguous lesson from Sri Lanka that should be relearned here for other nations.

Good economic governance is about much more than ensuring a business environment in which entrepreneurship and prosperity can flourish. Economic freedom under the effective rule of law nourishes institutional resilience and sustains the overall quality of life.

Undoubtedly, the U.S. cannot give Sri Lanka the political will needed to transform its economy in accordance with free-market principles. However, it is in the clear interest of Washington to hold any future government in Colombo to a basic set of good governance standards.

This piece originally appeared in The Daily Signal