Civil Society Is Pioneering New Tools to Counter Corrosive Capital. Sri Lanka and PNG Show How. (Part 2)
Novel civic strategies to unlock constructive capital
Can small states and civic actors really hold their own against the corrosive economic influence of China and other major authoritarian powers? In the second post of this two-part series, Inoshini Perera (Verité Research) and Paul Barker (Institute of National Affairs) show how they do just that. They highlight how civil society in Sri Lanka and Papua New Guinea has built accountability mechanisms to attract constructive capital in the face of major power imbalances and debt crises.
Read part one of the series featuring Eric Hontz (CIPE) and Ruslan Stefanov (CSD) here.
Sri Lanka: From Crisis to Financial Innovation
Inoshini Perera, Verité Research (Sri Lanka)
Over the past two decades, Sri Lanka’s capital inflows have deteriorated. Corrosive foreign financing contributed significantly to the country’s 2022 economic crisis, the worst in Sri Lanka’s history. GDP fell by more than 10%, poverty more than doubled to around 30%, the country suffered power cuts and fuel and medication shortages, and the government defaulted on its international debt repayments.
Although many have documented Sri Lanka’s economic struggles, fewer recognize the central role civil society played in the country’s recovery. In the midst of Sri Lanka’s unprecedented pain, local stakeholders—think tanks and other civil society organizations—championed two unique innovations to attract and enable constructive capital.
Innovation 1 – Civil Society Governance Diagnostic: Sri Lankan civil society organizations came together to convince the IMF to recognize governance and anti-corruption as foundational elements of economic recovery, which led to the emergence of the Civil Society Governance Diagnostic. In a historic first, local stakeholders produced their own Governance Diagnostic Report (GDR) to address the economic crisis. This prevented corrupt political leaders influenced by corrosive capital from fully controlling the IMF restructuring process and governance reform agenda.
Innovation 2 – Governance Linked Bond (GLB): Verité Research designed and introduced the Governance Linked Bond (GLB), a new financial market instrument. The GLB is a sovereign bond that allows creditors to reduce interest payments if a country improves its governance, determined by a predefined set of reforms. It is the first sovereign ESG (Environmental, Social, and Governance) bond in the world that is contingent upon governance, instead of environmental or social dimensions. Its design incentivizes constructive capital while discouraging corrosive financing.
The impacts of these unique civil society-led initiatives go beyond Sri Lanka.
For example, Kenyan organizations have adopted the Civil Society Governance Diagnostic Report process prior to IMF engagement on Kenya’s debt obligations.
Through the GLB, global private creditors have formally embraced supporting improved governance and anti-corruption—recognizing the risk reduction benefits. Private creditors are now discussing using the GLB for countries impacted by corrosive capital that struggle with debt transparency and accountability.
Out of the ashes of Sri Lanka’s worst economic crisis, local civic organizations pioneered global innovations that are paving the way for investment that fosters good governance, counters corruption, and generates sustained economic growth for the whole country—rather than just enriching politically connected elites.
Inoshini Perera is a professional with a multifaceted background in investment banking, management consulting, and corporate banking. She serves as a director at Verité Research, an independent and interdisciplinary think tank working across economics, law and governance, politics, and media.
Papua New Guinea: Negotiating from Asymmetry
Paul Barker, Institute of National Affairs (Papua New Guinea)
Civic actors in small states like Papua New Guinea (PNG) have played an essential role in pushing back against predatory foreign direct investment. Since 2014, the People’s Republic of China (PRC) has assumed a prominent role in PNG’s economy. It has become a major player in the country’s construction, ICT, and natural resource sectors, as well as one of three major export destinations for PNG goods (notably LNG and minerals). The majority of the Belt and Road Initiative (BRI) loan financing in the country to date has been opaque—details of loan amounts, durations, and terms remain inaccessible. Additionally, disputes arising from these agreements are often subject to PRC law, rather than PNG law.
The Institute of National Affairs (INA), in partnership with the Center for International Private Enterprise (CIPE), has conducted investigations into a series of financing contracts under the BRI. We found that, as in other countries in Southeast Asia, contracting invariably lacked transparency. Several of these projects have been implemented with insufficient safeguards—for instance, the Kumul submarine cable has repeatedly torn. In many cases, borrowing institutions have also faced severe difficulties servicing the resulting debt.
However, there is a pathway for countries—even small ones like PNG—to secure more constructive forms of capital and investment from the likes of China. For example, the PNG Department of Higher Education succeeded in negotiating with PRC authorities responsible for building the Western Pacific University to secure better terms that included a predominantly PNG workforce and professional participation in design and project supervision. The success of this project confirms INA and other regional institutions’ research findings: where local institutions exert firm pressure and seek accountability, it is possible to secure fairer financing arrangements that permit oversight and transparency. Transparency, awareness, and public consultation with civic groups are musts.
In PNG, civil society has engaged the government and public in a variety of ways, including through consultations and the media, to encourage constructive capital. Civil society organizations have also used forums like the Extractive Industries Transparency Initiative (EITI), the Open Government Partnership, and PNG’s Consultative Implementation and Monitoring Council (CIMC), which is managed by INA. The CIMC provides an official platform for PNG’s government, civil society, and the private sector to discuss key economic and social development issues. In 2022, CIMC, working with a local member of parliament, conducted district-wide consultations with government institutions, businesses, and civil society to identify local priorities. The stakeholders ultimately co-developed a district development plan, which served as the basis for public expenditure in the district budget. Notably, the district plan included provisions that enabled community monitoring, ensuring government and private sector entities adhered to the agreement.
While more progress is needed, the experience of Papua New Guinea demonstrates that civic engagement can successfully strengthen transparency and accountability, even in the face of asymmetric relationships like that of PNG and China.
Paul Barker is the executive director of the Institute of National Affairs (INA), an independent public policy think tank based in Port Moresby, Papua New Guinea. Previously, he served as a special economic sector advisor in the Prime Minister’s Department, where he was involved in wide-ranging agriculture, resource, and governance reviews, reforms, and initiatives.
If you want to dive in deeper, check out:
NED CEO Damon Wilson in The National Interest on How Democracy Promotion Supports Critical Mineral Resilience
The Center for International Private Enterprise on Investing in Latin American Democracy: Impacts of Corrosive and Constructive Capital