> It’s always tempting to play populist and shower your people with underpriced imports in the short term. But in the long term this just never works.
I don't think this is quite true -- I have a feeling the Rajapaksa family is much richer today than otherwise and will continue to be so even if removed from power (just look at the Marcos family in the Philippines or Thaksin Shinawatra in Thailand).
But you'd need to introduce another explainer on the principal-agent problem for that!
Great article. One lesson I draw here is *dont fuck with the people who produce goods and services other people want*. Tourism, tea, food, real things that can be sold.
Makes me grateful to live in a country (US) that, for all its flaws, still makes a lot of stuff, produces a lot of energy, and has a vibrant enough economy such that it can produce companies like substack that give Noah a platform.
Jul 12, 2022·edited Jul 12, 2022Liked by Noah Smith
Great article. I fear for Bangladesh, we've been running relatively large deficits since 2018, and the largest one last year, followed by increased government borrowing. We started experiencing large scale load shedding this month, which is something that didnt happen since 2014. The government said LNG was becoming far too expensive. Several austerity measures have been put in place already.
Hopefully they are smart enough to prevent a sri lanka like crisis.
I'd also note that Sri Lanka shut down their borders for a long time and had strict COVID rules in place despite not being able to afford them. They had a chance to become the one tropical getaway of 2020 with 100% open borders but missed out on that, sadly. Obviously its not their only problem but it was a big part of why it all collapsed.
Not that putting all your eggs in the tourism basket is a good idea, but do you think absent the precipitous drop in tourism revenue, this would have happened? It does seem like it's hard to work around an 80% drop in your major industry.
Also, how do tourist dollars interact with the trade deficit? If I go to Sri Lanka, I'll either withdraw at the ATM or pay with my card, I pay in rupees but my bank (after some calculation) deducts dollars from me. These are rupees added to the Sri Lankan economy, presumably – how does that end up economically across a tourism sector?
I've been wanting to ask if you could write about Lebanon's crisis. But now I can just take this post, swap "Sri Lanka" with "Lebanon" and end up with a pretty accurate explanation of what's going on there.
But why would you single out China, as in "Second, be careful about borrowing a ton of money from foreign governments, especially ones like China"
(quick google): .
Source of Sri Lankan debt: China 10%; Japan 10% , Wold Bank 9%, Market-based borrowings ( mainly US dollar-denominated bonds) 47%, India 2%, Other 9%.
Note; for decades the IMF has signally failed to support infrastructure development around the globe, and only China's BRI has impelled Biden to step up with various BBBW schemes which have yet to materialize.
Finally, another quibble: are price rises due to supply constraints the same as "inflation" (meaning the devaluation of a currency)? Obviously the US dollar is not currently suffering devaluation vis a vis other currencies, as is the case in Sri Lanka., despite the high headline "inflation" rate in the US.
Isn't there some evidence that the slow macro crisis led to the fertilizer ban as Sri Lanka lacked the foreign currency to pay for the fertilizer itself? The organic ag ideology is then just a varnish on top, not the true causative element.
As always, you do an excellent job in digging in and explaining the details. Keep up the good work. And I do love this line, "As usual, Art Laffer was wrong."
Great explanation. Curious how you are thinking about China's quasi-peg of the RMB/USD and their large horde of FX reserves. It pairs with your discussion of OBOR efforts (Chinese infrastructure contractors in Sri Lanka). I think there's a predominant view that OBOR efforts across Asia and Africa are really about exporting excess manufacturing capacity in China which has grown to an arguably unsustainable level as a result of the peg.
Thank you for this thorough, plain-English explanation of a phenomenon we may be seeing more of in the near term.
> It’s always tempting to play populist and shower your people with underpriced imports in the short term. But in the long term this just never works.
I don't think this is quite true -- I have a feeling the Rajapaksa family is much richer today than otherwise and will continue to be so even if removed from power (just look at the Marcos family in the Philippines or Thaksin Shinawatra in Thailand).
But you'd need to introduce another explainer on the principal-agent problem for that!
Great article. One lesson I draw here is *dont fuck with the people who produce goods and services other people want*. Tourism, tea, food, real things that can be sold.
Makes me grateful to live in a country (US) that, for all its flaws, still makes a lot of stuff, produces a lot of energy, and has a vibrant enough economy such that it can produce companies like substack that give Noah a platform.
Great article. I fear for Bangladesh, we've been running relatively large deficits since 2018, and the largest one last year, followed by increased government borrowing. We started experiencing large scale load shedding this month, which is something that didnt happen since 2014. The government said LNG was becoming far too expensive. Several austerity measures have been put in place already.
Hopefully they are smart enough to prevent a sri lanka like crisis.
I'd also note that Sri Lanka shut down their borders for a long time and had strict COVID rules in place despite not being able to afford them. They had a chance to become the one tropical getaway of 2020 with 100% open borders but missed out on that, sadly. Obviously its not their only problem but it was a big part of why it all collapsed.
Posts like this are why substack exists. Thanks for writing this Noah!
Not that putting all your eggs in the tourism basket is a good idea, but do you think absent the precipitous drop in tourism revenue, this would have happened? It does seem like it's hard to work around an 80% drop in your major industry.
Also, how do tourist dollars interact with the trade deficit? If I go to Sri Lanka, I'll either withdraw at the ATM or pay with my card, I pay in rupees but my bank (after some calculation) deducts dollars from me. These are rupees added to the Sri Lankan economy, presumably – how does that end up economically across a tourism sector?
Masterclass in macro economics. Worth a years of business school
I am from iran
Your articles are wonderful
(O_O)🌹🌹
Phenomenal article!
I've been wanting to ask if you could write about Lebanon's crisis. But now I can just take this post, swap "Sri Lanka" with "Lebanon" and end up with a pretty accurate explanation of what's going on there.
Good article. Thanks.
But why would you single out China, as in "Second, be careful about borrowing a ton of money from foreign governments, especially ones like China"
(quick google): .
Source of Sri Lankan debt: China 10%; Japan 10% , Wold Bank 9%, Market-based borrowings ( mainly US dollar-denominated bonds) 47%, India 2%, Other 9%.
Note; for decades the IMF has signally failed to support infrastructure development around the globe, and only China's BRI has impelled Biden to step up with various BBBW schemes which have yet to materialize.
Finally, another quibble: are price rises due to supply constraints the same as "inflation" (meaning the devaluation of a currency)? Obviously the US dollar is not currently suffering devaluation vis a vis other currencies, as is the case in Sri Lanka., despite the high headline "inflation" rate in the US.
Great piece --- one question:
Isn't there some evidence that the slow macro crisis led to the fertilizer ban as Sri Lanka lacked the foreign currency to pay for the fertilizer itself? The organic ag ideology is then just a varnish on top, not the true causative element.
As always, you do an excellent job in digging in and explaining the details. Keep up the good work. And I do love this line, "As usual, Art Laffer was wrong."
Just superb. Thanks for a semester worth of economics in one post.
Great explanation. Curious how you are thinking about China's quasi-peg of the RMB/USD and their large horde of FX reserves. It pairs with your discussion of OBOR efforts (Chinese infrastructure contractors in Sri Lanka). I think there's a predominant view that OBOR efforts across Asia and Africa are really about exporting excess manufacturing capacity in China which has grown to an arguably unsustainable level as a result of the peg.
This is so valuable. Thanks Noah.