Antonio, a desperate father, and his young son are looking for a bicycle, stolen the day before. Antonio chases the thief but is thrown off the trail by the latter’s confederates. The police have told Antonio there is little they can do. Finding the bicycle is crucial, for without it Antonio might lose the job that was so hard to find during the hard times of the 1940s. It is not a story about a bicycle but one about poor men, women, and children in Europe during the great depression.
Bicycle Thieves, the neorealist drama film. Italy, 1948.
“Twenty-Five, Twenty-One” the 2022 K-Drama, prima faice appears to be a love story, but it is more or less the Asian version of Bicycle Thieves. Set in 1998 with Korea’s financial crisis as the backdrop, this TV series is about how five people and their families manage during an economic crisis.
There is one important difference between the two creations. The story in the second one depicts the outcome of an IMF program. The difficulties the characters faced are due to IMF suggested austerity measures, it implies. What is known as the ‘East Asian Financial Crisis’ elsewhere, is even today called the ‘IMF Crisis’ in Korea.
Fast forward. Sri Lanka, late 2022. The island nation is negotiating an IMF package. People have been told the IMF would not impose any conditions, it would be just us cleaning our own mess. So everything was supposed to be in our hands.
When requested the IMF assists economics in balance of payment trouble. As any lender it also concerns itself with the borrower’s loan repayment capacity. If a country has been living beyond its means, then the reforms to reign in the profligacy will lead to some austerity. This is what Sri Lanka is about to face. If the conditions of previous IMF bailouts were less severe, that was because this time around Sri Lanka has lived far beyond its means. Sri Lanka’s debts are now unsustainable.
When you hear the whip-crackers, a Sinhala saying goes, you know the ‘Perahera’, or procession will follow. The government is market pricing utilities and fuel, instead of offering subsidies funded by loans. The next seemingly logical step would be to raise corporate and personal income taxes to around 30%. That would mostly be achieved before the end of 2022. You may call them the first set of reforms.
For people this will seem naked austerity. Every one of the above will add to their hardships. Eventually, every income earner will be pushed downward by high inflation and taxes. Upper middle class to the lower middle class; lower middle class to the poor. The worst hit would be the poor who would be forced to give up some of their most basic needs. Imagine having to pay double for every good and service, without a change to income.
Before the economic crisis, according to the Department of Census and Statistics, the average monthly income of a family of four in Sri Lanka was Rs 53,000 and the expenditure Rs 47,500. To be conservative, let’s assume prices have not doubled, but increased by 85% – the same as the rupee devaluation against the U.S dollar. Let’s also assume family income has increased by 25% in nominal terms, though that is unlikely for many families. So the new income and expenditure figures will be Rs63,600 and Rs 87,875. The gap is Rs 24,275. So most of the poor and lower middle-class families would be forced to reduce their consumption by at least that level. Reducing food consumption means at least partial malnutrition for many families.
Sri Lanka’s conditions post-IMF bailout – presuming it happens – could be similar to those of Greece where economic conditions deteriorated immediately after the IMF program was implemented in 2012. This was no surprise. The fiscal measures that reformed Greece’s economy reduced consumption for families due to higher interest rates and high taxes. What they did not expect was its severity. The Greek economy slid into the deepest and longest peacetime depression of any advanced country since the 1930s. In 2013, IMF’s economists had to admit that the Fund had gotten things wrong in Greece. Even after a decade, the per capita GDP has not returned to the pre-crisis level. It’s not to suggest all this happened due to the IMF suggested reforms, things may have become much worse if not. Greece’s IMF program was not supplemented by deep enough national efforts towards a sustainable path.
The other inevitable outcome will be job losses. Korea in 1998 was a classic example. By the time of the 1998 financial crisis, the Korean labor market was at near full-employment status, with an unemployment rate of a little more than 2%. The crisis struck in 1997. Financial market was paralyzed. The high-interest rate policy steered by IMF led to the fall of many businesses – including a few chaebols, the Korean conglomerates – with others restructuring. Massive layoffs were followed to reduce labor costs. The Korean labor market faced a record-high unemployment rate of 7% in 1998 and 6.3% in 1999 for the first time since the 1960s. The unemployed skyrocketed from 568,000 in 1997 to 1.49 million in 1998 – nearly a million within just one year.
How and if Sri Lanka would be hit by the tsunami of unemployment is uncertain. Already tens of thousands of small companies have gone out of business or downsized, while public sector employment has doubled in just over a decade to 1.5 million by 2021.
Interestingly that may not be how things unfold. Public sector employees are guaranteed employment.
Back to Korea. The East Asian nation, of course, sacrificed more than jobs. The Korean government requested its people to donate their gold to repay the debt. During a four month long campaign gold was collected at six banks. About one-quarter of Korea’s population participated in the campaign representing all social classes, selling gold such as wedding bands and sports medals. From a series of such campaigns South Korea collected $ 2.2 billion, an average of 65 grams (2.3 oz) of gold per household was collected. So, what are Sri Lanka’s choices? Very few. A fair amount of economic pain is certain. Sri Lanka can, of course, decide to take the pain for a short period, a few years, and get the crisis over with, like Korea did. Or, without reforms that put the economy on a sustainable growth path, it may suffer from it for decades, like Greece. Doing nothing – will automatically place us besides Greece, of course without most of the securities that came with that country’s EU membership. Austerity is no joke. The sooner we realize that, more are the chances we have for the first option.