Chinese Financing and Domestic Politics in Sri Lanka—Parallel Evolution across Mid-20th vs 21st Century Episodes of Bilateral Interactions

Abstract

Abstract: This article studies the parallel evolution of Sri Lanka’s domestic politics and China’s foreign financing in Sri Lanka’s post-independence era through four lenses, namely, political opposition, political gains, economic structure, and institutions. We focus on the bilateral relationship prior to Sri Lanka’s economic liberalization and the aftermath of the middle-income transition and add three major findings to the literature. Firstly, Chinese economic engagements continue to have substantial political opposition in Sri Lanka. But the nature of such opposition evolved from ideology-based to sovereignty-based anti-China sentiments, which heavily correlate with elections. Economic relations with China have continued to evolve as political gains, which helped maintain government popularity in the short-to-medium term and exceeded the costs inflicted by political opposition. Secondly, the nature of the bilateral economic relationship has become more complex, moving from being purely government-to-government to involving multiple actors: Chinese policy banks, state-owned enterprises (SOEs), and the private sector. Thirdly, despite differences, Sri Lanka’s governments have utilized economic relations with China for short-term political gains and to avoid structural reforms, especially in the run-up to Sri Lanka’s sovereign default and unprecedented economic crisis in 2022. We conclude that China’s approach to ongoing debt restructuring will affect domestic politics around China’s engagements and affect how the bilateral economic relationship evolves.