Here's a hypothetical example to show the story of corruption and theft in Sri Lanka and why it's really painful to reverse it - for reasons that you might not realise!
#SriLanka #lka #EconomicCrisisLK #SriLankaCrisis #corruption
#SriLanka #lka #EconomicCrisisLK #SriLankaCrisis #corruption
2/ Let's assume some 20 years ago, in an election, a politician's crony friend donated some 100m LKR to an election campaign. In return, the crony wanted at least 200m LKR in profit a year in some way if the politician got elected.
3/ The politician gets elected. Now, he must help his crony friend.
Can he explicitly steal 200m and give every year? Nah, that's too easy to trace.
Instead, he creates an opportunity for the crony friend to earn that kind of money.
Can he explicitly steal 200m and give every year? Nah, that's too easy to trace.
Instead, he creates an opportunity for the crony friend to earn that kind of money.
4/ Let's say in order to try and limit who gets the benefit, the politician works with the government to make a policy that any business that owns turquoise hats (a relatively scare resource) gets upto 200m LKR in tax breaks.
It's a means to give the 200m to his crony friend.
It's a means to give the 200m to his crony friend.
5/ Now, the crony is quite happy since he had a bunch of turquoise hats and he's the one that proposed this policy in the first place (behind closed doors, of course).
He's well in line to get 200m LKR as tax breaks and makes a big profit on his 100m election investment :)
He's well in line to get 200m LKR as tax breaks and makes a big profit on his 100m election investment :)
6/ But the thing is, it's not just him.
The profit he earns means that his company now has more money to spend. He gives his executives big bonuses, he can buy nice cars, he can buy himself some luxury holidays.
Everyone else that benefits from his spending also does well.
The profit he earns means that his company now has more money to spend. He gives his executives big bonuses, he can buy nice cars, he can buy himself some luxury holidays.
Everyone else that benefits from his spending also does well.
7/ Just because crony friend is corrupt, doesn't mean everyone that engages with him is corrupt or dishonest. But now, their lives and incomes are directly tied to how dishonest the crony friend can be.
8/ But this turquoise hat policy isn't limited to the crony friend. Once this is in place, even perfectly legitimate honest people will realise that it makes perfect sense to also use the same tax break.
9/ Now they also start buying turquoise hats, spending their money on this for the massive benefits instead of needing to invest in measures that have at least some chance of failing. Turquoise hat investment is a 100% guaranteed gain after all :)
10/ Then everyone that benefits from this will also again have their lives and incomes tied to the presence of turquoise hats in their economy. Something that doesn't add a lot of value (sure, the hat industry does well, but beyond that?) to the economy.
11/ Remember, this happened 20 years ago. For 20 years then, the economy has been becoming more and more reliant on the benefits that turquoise hats create.
Of course, there are plenty of cronies and politicians also benefitting from this.
Of course, there are plenty of cronies and politicians also benefitting from this.
12/ But the thing is, as this example clearly shows, an economy dependent on just hoarding turquoise hats (that started and continued for corrupt crony reasons) is just ridiculous.
The "wealth" and "income" generated by this economy is well, fake.
The "wealth" and "income" generated by this economy is well, fake.
13/ That means that the money is likely coming from somewhere else - in many cases this is debt. Eventually, the country would take up so much debt to finance this turquoise hat economy, and the turquoise hats don't really make enough money to be able to pay back.
14/ At some point then, getting more debt becomes too costly. The only way to solve the issue is to get rid of the frankly stupid turquoise hat benefits being given.
But now, this is painful. Very very painful.
But now, this is painful. Very very painful.
15/ It may have started (and kept going) due to corruption and cronyism, but a significant chunk of the economy is now dependent on turquoise hats. People have taken loans to build houses because turquoise hats increased their incomes. They dine out more, they buy larger cars
16/ It could be that very very few of these people wanted or asked for the turquoise hat economy in the first place. But because the economy became structured around the turquoise hats, they really had no option but to tie themselves to it either.
17/ Now, removal of the turquoise hat economy will mean pain to many people, because their economic strength was based off a story that can't get told anymore.
18/ What's the way through this? Unfortunately, I don't see a way to avoid this pain of adjustment. The only way is either see the pain through and end up in a more realistic economy OR somehow get back to a turquoise hat economy that will fail harder later.
19/ That's the sad reality of living in a turquoise hat economy.
The pain of the adjustment can force us to be more mindful in the future, and force our leaders not to make our economies into turquoise hat economies. That's an opportunity to take.
The pain of the adjustment can force us to be more mindful in the future, and force our leaders not to make our economies into turquoise hat economies. That's an opportunity to take.
What I explained was the idea of the "bezzle" in economics, so check out how that idea works here too carnegieendowment.org/chinafinancial…
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