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November 5, 2022 Reading Time: 5 minutes

By now, the world is painfully aware of the ordeal facing Sri Lankans. In Sri Lanka, schools are closed, fuel is limited, and food is scarce. In spring of 2022, nine in ten families were skipping meals, but the country was unable to buy the goods it needed from abroad. Consequently, protests have ensued since March. Sri Lanka owes more than $51 billion USD to foreign lenders, of which $6.5 billion is owed to China. Interim President Wickremesinghe has said that the “government would print money to pay employees’ salaries,” despite this move likely boosting inflation even further, in a country already headed toward bankruptcy. Sri Lanka’s foreign currency reserves have dropped to around $250 million, a staggeringly low number compared to its $7.6 billion reserves at the end of 2019.

Experts’ responses to Sri Lanka’s economic crisis have varied. On the topic of the shift to organic fertilizers, some blame the left-wing green utopian political scene. Others claim the primary cause was the Prime Minister falling “under the spell of Western green elites peddling organic agriculture and ESG (environmental, social, and governance)” with its near-perfect ESG score of 98 percent. Equally as important are exogenous economic factors, such as the COVID-19 pandemic’s impact on Sri Lanka’s tourism industry, which accounted for almost 12 percent of the country’s GDP and has now fallen to only 0.8 percent. COVID-19 was not the only contributor to the tourism hit, however. In October 2019, areas in Colombo and Eastern Sri Lanka were targeted by suicide bombers who killed 42 foreign nationals, causing tourist arrivals to drop by approximately 70 percent. 

Too Far, Too Fast: The Chemical Fertilizer Ban

Although he promised a decade-long conversion process, on April 26, 2021, President Rajapaksa implemented an overnight ban on synthetic fertilizer and pesticide imports. With virtually no warning (and in some cases no training or experience), millions of Sri Lankan farmers were forced to shift to organic fertilizers. The ex-President has since admitted his mistakes, stating that they “need to be rectified” in order to “regain the trust of the people.”

Agricultural scientists had warned Rajapaksa that shifting from synthetic to agricultural methods required a much longer transition period. Proceeding so quickly, they cautioned, could cause a broad, disastrous crop failure.

Rajapaksa initially justified his decision to ban chemical fertilizers by arguing they were leading to “adverse health and environmental impacts,” and that “such industrial farming methods went against the country’s heritage of ‘sustainable food systems.’” The former assertion has been disputed by health experts; the second is likely accurate but incidental. Sri Lanka’s tremendous agricultural success is built upon Norman Borlaug’s Green revolution of the 1960s and ‘70s. Turning away from the traditional farming Rajapaksa was referencing, constrained by climate and disease, points toward the scientific innovation where Sri Lanka’s great bounty was born. 

Is it possible that Rajapaksa wasn’t aware of the complete and utter destruction of the agriculture sector that would follow? More than possible, it seems rather likely. Politicians seek to acquire and retain power, and the purposeful start of an agricultural collapse is vastly at odds with doing so. One supposes that, at the very least, he was aware that some problems could arise. It seems more likely that he and his cabinet expected that any troubles would be manageable, and the policy quickly reversible, or at least easily blamed on other origins. 

Another widely referenced explanation for the difficult-to-comprehend policy is an attraction to woke ideologies, in particular the “environmental” component of ESG frameworks. Indeed, left green ideas and speech were invoked periodically, but the foolhardiness of changing the foundation of the nation’s agriculture overnight must still have been clear.

Some other factors undeniably influenced the seemingly preposterous decision. 

One was the rapid loss of Sri Lanka’s foreign exchange reserves. With tourism, remittances, and trade plummeting in the wake of the 2019 terror attacks and later pandemic mitigation policies, a critical inflow of dollars, euros, and pounds was reduced to a meager trickle. Conserving the shrinking pile of foreign currencies was undoubtedly an utmost priority given the cost of service on Sri Lanka’s massive debt, incurred over the previous decade, on top of rising prices, as an inflationary updraft began in early 2021. 

Shifting to organic fertilizer was done in part to save hundreds of millions of dollars (or dollar equivalents) ordinarily spent on acquiring synthetic fertilizer abroad and subsidizing its use. We now know that instead of saving hundreds of millions of dollars, the move made the economic situation vastly worse. Considering the high likelihood of economic crisis if the foreign exchange reserves evaporated, Rajapaksa’s fertilizer edict is consistent with a sort of shell game, a stopgap measure intended to buy time for foreign reserves to begin to flow again. Chemical fertilizers, however, are key to generating above-average crop yields, which are, in turn, crucial for a developing country like Sri Lanka. Rice production, for instance, dropped 20 percent in the six months after the ban was implemented. As a result, the government spent $450 million on rice imports alone, a need fundamentally at odds with the country’s prior self-sufficiency for the product.

Another impetus toward ill-considered environmental policies were the prevailing political winds. Since roughly the election of Donald Trump in the United States and Boris Johnson in the United Kingdom, global political sentiment has been in the throes of a powerful leftward trend, especially in the media, the academy, and many corporate boardrooms. Considering not only the economic vulnerability of Sri Lanka as its foreign exchange holdings were depleted, but repeated accusations of nepotism, corruption, and threats regarding the conduct of the nearly three-decade counter-insurgency, expressing left-sympathetic views was, if nothing else, sound global marketing. Ceteris paribus, a nation with an ESG score of 99 would, in the current political climate, be an easier sell for economic aid than a right-leaning one. Further corroborating this, in the wake of the massive unrest that followed the failure of the policy, new President (former Prime Minister) Ranil Wickremesinghe blamed disruptions on “fascism,” a popular contemporary scapegoat.

Experts and those in the media continue to attribute a single cause to the chemical fertilizer ban. Some have credited the change to comments made by Rajapaksa regarding alleged kidney ailments tied to synthetic fertilizer use. Others claim the policy was implemented due to Rajapaksa’s foolishness and overconfidence, and was inspired by “an increasingly Malthusian environmentalism.” Yet while each of those contain an element of truth, the simple fact that politicians are as self-interested as any other individual (facing incentives predicated upon staying in power and serving aligned interest groups) is a vastly more nuanced take.

Politicians and government bureaucrats alike act primarily in their own self-interest. Each policy decision is a result of multiple factors, but most important are the set of political incentives they face at any given moment. While a neat, public-pleasing narrative can be spun by tying a single cause to a single effect, policy choices are, in reality, always multifaceted and tend strongly to align with political incentives: capturing, consolidating, and expanding the reach of political influence. These basic tenets, rooted in Public Choice Theory, impart powerful analytical tools to the social scientist’s investigatory armaments.

Peter C. Earle

Peter C. Earle

Peter C. Earle is an economist who joined AIER in 2018. Prior to that he spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area. His research focuses on financial markets, monetary policy, and problems in economic measurement. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

Selected Publications

“General Institutional Considerations of Blockchain and Emerging Applications” Co-Authored with David M. Waugh in The Emerald Handbook on Cryptoassets: Investment Opportunities and Challenges (forthcoming), edited by Baker, Benedetti, Nikbakht, and Smith (2022)

“Operation Warp Speed” Co-authored with Edwar Escalante in Pandemics and Liberty, edited by Raymond J. March and Ryan M. Yonk (2022)

“A Virtual Weimar: Hyperinflation in Diablo III” in The Invisible Hand in Virtual Worlds: The Economic Order of Video Games, edited by Matthew McCaffrey (2021)

“The Fickle Science of Lockdowns” Co-authored with Phillip W. Magness, Wall Street Journal (December 2021)

“How Does a Well-Functioning Gold Standard Function?” Co-authored with William J. Luther, SSRN (November 2021)

“Populist Prophets, Public Prophets: Pied Pipers of Lucre, Then and Now” in Financial History (Summer 2021)

“Boston’s Forgotten Lockdowns” in The American Conservative (November 2020)

“Private Governance and Rules for a Flat World” in Creighton Journal of Interdisciplinary Leadership (June 2019)

“’Federal Jobs Guarantee’ Idea Is Costly, Misguided, And Increasingly Popular With Democrats” in Investor’s Business Daily (December 2018)

Books by Peter C. Earle

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April Liu

April is a Research Intern at AIER. She graduated from Mount Holyoke College in May 2022 with a double major in Economics and International Relations. Her research interests lie in data privacy at global and local scales.

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