FINANCIAL CHRONICLE – Sri Lankans must remember the factors that led to the economic crisis and its impact on the nation if they wish to avert a similar situation in the future, according to prominent Indian economist Arvind Subramanian.
Subramanian, who previously served as the Chief Economic Advisor to the Government of India, emphasized that the economic successes of countries like Germany, the United States, and China are founded on a principle that he described as potentially “completely idealistic” and “probably non-implementable.”
During an event organized by The Examiner in Colombo on Wednesday, Subramanian stated, “I am a strong believer that Sri Lankan society needs a mechanism—be it social, political, or institutional—to retain the memory of the crisis and the factors that led to it in the collective consciousness.” He added, “This must remain in your consciousness to prevent its recurrence.”
Subramanian highlighted Germany’s success in maintaining low inflation as a result of their determination not to forget the hyperinflation crisis of the 1920s. “Germany is fixated on low inflation because it suffered severe hyperinflation during the 1920s, searing this experience into the collective consciousness of Germans, leading them to be almost obsessive about avoiding inflation,” he explained. He noted that Germany achieved this through various mechanisms, including central banks, and a broader approach as well.
He also referenced the U.S. Federal Reserve’s experience following the Great Depression of the late 1920s. “The U.S. Central Bank is unique as it mandates not only low inflation but also full employment,” Subramanian said. This dual mandate stems from the memory of the Great Depression and its peak one-third unemployment rate. “That collective memory led to the creation of institutional arrangements aimed at preventing a repeat occurrence,” he stated.
Discussing China’s approach to crisis prevention, Subramanian noted, “If you examine the Chinese Communist Party, you’ll understand the grand bargain struck with the Chinese people. They essentially promised economic growth and prosperity in exchange for limited freedom, vowing to avoid the chaos experienced between the 1950s and 1970s.” He added, “The Chinese Communist Party pledged to prevent the recurrence of such tumultuous periods, establishing a new social contract.”
Subramanian concluded by asserting that similar strategies must be adopted in Sri Lanka. “When people ask how to avoid instability, they often suggest inflation targeting and other measures. However, none of these guarantee against future crises unless there is a consensus within Sri Lankan society to prevent such events,” he said.
