Any expectation of a spectacular spurt in economic growth is unrealistic for three fundamental reasons. First, the end of the war per se is inadequate to provide the surge to growth. A long-lasting robust peace is the actual precondition for economic development. Second, the global conditions are not very conducive to the country’s growth especially the limitations with respect to export growth. The third factor of importance bearing on the country’s economic performance is the fundamental weaknesses in the economy and economic management. This third condition is in many ways the most important once peace is established and perhaps the most difficult in the Sri Lankan political culture.
As we pointed out in previous columns there would be immediate gains to the economy with some sectors able to increase production. Yet the sustained real gains would come only when there is certainty that the country has returned to permanent peaceful conditions. This, as political commentators have pointed out, is not as easy to attain as apparent at first glance. An acceptable devolution of power is the need of the hour. Regrettably the diverse views and positions of political parties would hamper the final settlement. As seen in the past, opposition to an acceptable system of devolution of power has been the experience in the post independent history of the country and the country’s political evolution.
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Even after a half century of ethnic violence (since the ethnic disturbances bloodshed of 1958), there are those who think there is no ethnic problem in the country. Even in recent weeks we have heard vociferous proclamations that the Tamils have no disadvantages that the majority Sinhala community suffers from. This perspective is a stumbling block to the achievement of a durable peace. This is particularly serious as in the face of victory, there is a feeling that there is no need to give “concessions” to the minorities.
The idea of devolution of power as well as that of a federal constitution has been anathema to a number of sections of the community for quite some time. Devolution of power may not be acceptable to several sections of the polity. Therefore a bold leadership with a vision for a peaceful Sri Lanka and the courage to implement a reasonable and fair arrangement is essential. Yet such a vision may be hampered by many who think this is a Sinhala Buddhist country and that the other communities must bear their minority status and be second class citizens. An acceptance that Sri Lanka is a pluralistic society is the basis for a reasonable political settlement. The question is whether the majority could be magnanimous in victory.
We have emphasised that the country’s economy would be constrained by the global recession. This is especially so with respect to the country’s industrial exports. Although the recession is not likely to recede quickly, there is little doubt that it would in the fullness of time, perhaps in another year and a half.
Therefore economic policies must be oriented towards an expectation of better days ahead than bogged down by a pessimism derived from current global conditions. It may be opportune to think in terms of creating conditions for a more diversified export structure. Furthermore, Sri Lanka’s domestic market at a per capita income of around US$ 1300 and a population of over 20 million should not be viewed as being too restricted a domestic market for several lines of production. While the economies of scale and specialisation would only be possible with access to export markets, there are also lines of production that could cater to the domestic market economically.
The revival of cement production, chemicals and other industries in the North are economic possibilities of advantage to the economy.
The third factor that would hamper the economy achieving its full potential would be the fundamental weakness in economic management. The large focal deficits over several decades, the mounting public debt, the inflationary pressures in the economy and balance of payments difficulties, are some of these fundamental weaknesses. This may in fact be the most difficult area of reform as there appears to be little appreciation of how fundamental weaknesses affect the economy’s performance. On the expenditure side there is a need to curtail wasteful and unproductive expenditure. Thus far the excuse for the fiscal imbalance has been the need for a huge war expenditure of over 7 percent of GDP. This would no longer be a valid excuse. Yet a government neither sensitive to the need for fiscal discipline nor appreciative of the iron laws of economics is likely to continue its imprudence in expenditure.
The prospect of a lowering of inflation owing to lower import prices of oil and food will not be immediately forthcoming, as inflationary pressures are inherent in the economy owing to fiscal indiscipline.
Furthermore taxation measures would keep prices of these items high. As the former Governor of the Central Bank of Sri Lanka, A.S. Jayawardena pointed out recently in an interview with the Montage magazine: “Inflation is a long-term process. Seeds of current inflation have been implanted by several years of deficit financing and monetary expansion in the past. Inflationary expectations cannot be switched off instantly. It requires sustained prudence in economic management. Hence bringing down inflation on the expectation of a decline in import prices may prove difficult.” The most important prerequisite for sustained long term growth is “sustained prudence in economic management”. That may be the most difficult to achieve in a country where economic policies are dictated to by political considerations and short term political gains. The fundamental weaknesses in the economy require to be addressed to provide an environment conducive to economic growth.
In a nutshell the path to economic prosperity that has been reawakened by the impending end to a prolonged and expensive war requires three pre-requisites to be fulfilled for economic growth and development. Without these the objectives of raising per capita incomes, reducing unemployment and alleviating poverty and regional and other disparities cannot be achieved. These are, the attainment of peaceful conditions in the country through an acceptable constitutional settlement, the abatement of the global recession and the pursuance of good principles of economic management. |
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