The Sunday Times Economic Analysis

The agreement reached by the two main political parties is of utmost significance and importance to the country's future and would unquestionably have an impact on the economy. This agreement that is to be signed tomorrow is indeed historic. Some of its details may be even beyond the expectations of most readers of this column. The consensus on several national issues augurs well for the country. This is especially so with respect to the agreement on the devolution of power. If a durable peace were achieved soon, then the much expected peace dividend would materialise. Without it the economy would keep wobbling along.

Some economists have attributed the alternating economic regimes from liberal ones to socialist ones as one of the prime reasons for the slow growth of the Sri Lankan economy. There was a break from this pattern in 1994 when the SLFP led government declared an economic policy of continuity with change. For the first time since independence there was a degree of continuity and certainty in most economic policies and consequently there was confidence in the basic economic framework continuing. In fact the SLFP government not only adopted the broad framework of a liberalised economy, but also continued the programme in some instances more vigorously than the UNP government. The SLFP that had previously nationalized many ventures, as well as opposed privatisation when in opposition, did some of the more important privatisations, such as of the estates and telecommunications. It is this degree of continuity in economic policies that has been the reason for confidence of investors even in the face of an escalating war situation and a high degree of insecurity in the country. The economy has demonstrated resilience in spite of threats of terrorist activities and a continuing war owing to the continuation of the economic policies introduced in 1977.

The current consensus between the two main political parties could strengthen and consolidate this confidence in the continuity of economic policies. One of the areas of suspicion of the Mahinda Rajapaksa government's economic policies was the inclusion of the JVP as a partner in the election agreement. There were strong elements of disagreement in economic policies between the two parties that deterred implementation of many reforms. Therefore this agreement is particularly important at this juncture to restore the confidence that had been eroded by the SLFP alliance with the JVP that had totally opposite views on many economic policy issues. One of the consequences of this alliance with the JVP was one of change and modification in the SLFP economic policies.

Now that the UNP is in alliance with the SLFP there should be a greater consensus on economic policies. The obstacles to the implementation of several economic reforms may now be removed. The privatisation of some enterprises may also be possible now. These policies could change the attitude of the multilateral agencies that have withheld assistance that has made the government seek commercial loans at high rates of interest. Foreign assistance too could be more forthcoming. If the consensus turns out to be durable, then foreign direct investment flows that are very inadequate at present could increase substantially. This could bolster the rate of economic growth.

The most important impact of the agreement on the economy is however through the attainment of a durable peace. For the first time the two parties have come to a historic agreement on the parameters of a constitutional settlement. The lack of a consensus on the constitutional arrangement has been the most serious obstacle to achieving any progress on the national question. Now that there is such agreement we must move on to get an agreement with the majority of moderate Tamils and Muslims to allay their fears. Then there is the need to get international agreement that the envisaged constitutional arrangement is fair by the minorities. These steps would be crucial to a settlement of the so-called ethnic issue. This does not mean that the road to the attainment of peace would be a smooth one. No doubt there would be parties, a minority though they may be, that would oppose the proposed solution. These elements, including some in both of the main parties, would object to it on grounds that it is in effect granting Eelam or federalism or that it would lead to the division of the country.

An expectation of agreement by the LTTE is futile. Their agenda it is blatantly clear is a different one. It is however now very clear that they do not represent the Tamil people. There interests are diametrically divergent from those of the peace loving Tamil people who desire peace and equal opportunities in all spheres of national life. That must be the objective of government policy. Pursuance of such a policy is less costly than the war and provides what economists call a "Paretto Optimum" solution, one that benefits all and there are no losers.

Now that the government has a substantial majority behind it, it must act boldly and decisively. If they do not seize the opportunity accorded by this agreement, then there is little doubt that the economic consequences would be dire for a long and foreseeable future. A permanent peace by creating a climate conducive to investment would have the beneficial economic consequences that we have mentioned. Pragmatism must override extremism on both sides of the divide to ensure a durable settlement of the problem that alone can propel the economy to greater heights.