New Edge Times recently sat down with Thareendra Kalpage to discuss about global economy, digital currency, and Sri Lanka’s Economic reality. Thareendra Kalpage is a well-accomplished corporate business leader, seed investor, and astute observer of the world economy and political situation. Mr. Kalpage, based in Colombo, Sri Lanka, is involved in several business, intellectual, and cultural endeavors. He is a staunch advocate for free enterprise, free market, and private enterprise economies.
For the past two or three years, the world has been experiencing a health and economic crisis. What difference will that make in the world?
As per IMF, here I quote “Global growth is projected to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023, then rise to 3.1 percent in 2024. The forecast for 2023 is 0.2 percentage point higher than predicted in the October 2022 World Economic Outlook (WEO) but below the historical (2000–19) average of 3.8 percent“
That would be the weakest year for the global economy since 2001, excluding the global financial crisis and the worst stage of the pandemic.
I’m concerned about a shift away from neoliberalism, an economic doctrine developed in the 1980s that views the state as an obstacle rather than an enabler of economic development. Neoliberalism was already called into question during the 2007-9 financial crisis, and it is even more so now. I firmly believe that the state should play the smallest role possible, particularly in macroeconomics, and I have plenty of examples from my home country to back it up, but I am concerned that the global economic and political crises have created an environment in which it can be called into question. However, critics have yet to overcome neoliberal notions in business and economic circles, as well as among the general public.
It is likely that the world economy will face recession this year as a result of the rises in interest rates in response to higher inflation
Since you mentioned your home country, there was public pressure to change the system there. Don’t you believe we need to cleanse the system in order to rid ourselves of a certain way of thinking on a global scale?
Yes, it is absolutely required. Take, for example, Sri Lanka. Our Government used to think that the economy was in its own bubble. Individuals, we believe, have their own independent utility, do not know those of others, and do not need to, resulting in no social relations other than the anonymity of markets that presumably level marginal utilities. However, the current situation highlights the significance of social relations. Governments must recognize the importance of public health and, more broadly, public services in sustaining society.
Since the start of the pandemic, there hasn’t been a clear link between the government and the central bank, or between budgetary and monetary policy. This link is important to keep the economy safe from an outside crisis caused by the pandemic and affecting public health and society as a whole.
Is the public debt going to be an impediment in light of the context you mentioned above and governments’ ability to impose the necessary change?
Let me begin by setting the stage. Debts are classified into two types. There is both public and private debt, and both are linked to ethical trust and inequality. Because public debt is social debt, it is a debt of belonging, a component of public service, and something society requires in order to see itself as a whole. Ethical trust is the continuation of action through currency that results in the integration of social relationships into society. As a result, social segmentation and the tensions that result from inequality pose a risk.
If public debt is social, Can a state refuse to pay it?
We need to keep in mind that a state is very different from us, as people. A state lasts forever unless it fails. So what matters is whether or not something can last for a long time. Debt is set up in steps, or “tranches. When we talk about paying off debt, what we really mean is, “This part of the debt will be paid for by another debt”. It’s really that simple.
So what really happened in Sri Lanka?
The viability of the debt is the key factor. The debt discount rate determines whether or not the debt is sustainable. For this debt not to explode, it needs to be extended over a very long time frame. What’s a dollar today isn’t the same tomorrow. Finally, what is the interest rate at which public debt is discounted? It’s the rate at which the economy expands minus the average interest rate on all of the debt. When the discount rate is negative, the present value of a future liability is greater today than at the future date when the liability will have to be paid. This occurs when the growth rate is greater than interest rates
As long as the deficit is manageable, it can be kept. The debt can be manageable if it is invested wisely, for instance in a transformation of the productive system that ensures the preservation of natural capital and adequate economic growth. On the other hand, if the discount rate goes positive, surplus spending is required to keep the debt load manageable. Therein lies the risk of current financial sector thinking: we risk moving from today’s negative discount rate to a positive one, with interest rates linked to rising inflation. In the event of an increase in interest rates, the discount rate on government debt will turn positive, posing a threat to its long-term viability.
The same thing transpired in Sri Lanka. For many years, the government of Sri Lanka borrowed enormous sums of money from foreign sources to pay for public services, state-owned enterprises, and welfare programs, which they then failed to adequately monitor and balance. Those costs, combined with the government’s inability to rein in spending, have contributed to a massive budget deficit.
Finally, everything must be based on manageable debt levels. If debt levels are, in the medium-term, anchored at a moderate level, governments can respond aggressively to large shocks, such as the pandemic or the energy shock. We were far from manageable debt levels.
What are your thoughts on the relevance of a digital currency?
I’m very much in favor of having a digital currency. But The anchor of the monetary system and the anchor of an electronic or digital monetary system should be a state-supplied digital currency. So a transition from closed payment systems authorized by the central bank to open payment systems is required for digital currency.
Platforms like Facebook, which captures the transactional data of billions of consumers for free, can take over payment systems with electronic currency. That is the issue with fintechs, technology companies dominating payment systems. Facebook’s Libra project is an example of this. They have billions of people connected to their platforms, and if they create a global currency, they will be able to dominate payment systems and thus states and regulators are Central Banks are not the fans of that idea and reason that Facebooks Libra project was hot down
Finally, what global issues top your 2023 list?
Having reliable access to energy and nutritious food are two new major concerns for today’s life.
Since February 2022, the conflict between Russia and Ukraine has dealt a severe blow to the global economy, hindering the world’s recovery from the pandemic and contributing to already high inflation in Europe and the United States. As 2023 already upon us, time to put the past in the rearview mirror and make way for the future.
