Columns - The Sunday Times Economic Analysis

Missing opportunities for economic development

By the Economist

Once again the country has been immersed in a controversial political and constitutional issue. This is in fact the latest in a continuous series of political issues that have been the main focus of the nation since the ending of the war 15 months ago. There is talk about achieving a high rate of economic growth but the focus has not been on the economy. If truth be told, many of the events that have preoccupied the government and people were not merely a distraction but were counter productive to the economy. The image of the country is once again not one that is in a hurry to achieve high rates of economic growth and development.

Professor Donald Snodgrass characterized the first fifty years of Sri Lanka’s independence as one of lost opportunities. This was in the paper he presented in 1998 at the Central Bank of Sri Lanka conference to celebrate the regaining of independence. He has put forward this idea in several journals and a book since then. Twelve years later and after the end of the war, the greatest obstacle to development according to Snodgrass and all other commentators, we appear to be missing another opportunity and becoming a nation left behind.

It is widely recognized that the war over nearly three decades and terrorist activities were the most serious setbacks to the country attaining a higher rate of economic growth. Other internal shocks that the country faced were the two insurgencies of the JVP. Both these were also very serious setbacks. In fact they had an even more serious adverse impact on the economy in the years they lasted. The 1971 insurgency was put down in a short period. Yet its shock effects were damaging to the economy. Defence expenses that were less than 1 per cent of GDP rose to above that for the first time and became an economic burden. Yet the direct impact of the insurgency was limited and brief. It was not so when it came to the second insurgency in 1988 and 1989. This insurgency not only lasted a longer period and impaired economic activity even more than the terrorist activities of the LTTE. Their combined effect was a huge setback to economic growth in 1988 and 1989.

Then terrorism and the war were serious impediments to the country’s economy. Foreign investment as well as domestic investment, tourism, fisheries and agriculture in the North and East were direct casualties. The indirect impacts were worse. The huge defence expenditure was a crushing burden that led in turn to persistent large fiscal deficits and in turn to a huge public debt and debt servicing costs. It has now reached the horrendous level where the debt servicing costs are higher than the revenue the government can mobilize. The debt burden is a serious impediment to economic growth.

The reconstruction and rebuilding costs of the war devastation is beyond the capacity of the government. Only substantial foreign assistance could help rebuild the divested areas and provide reasonable living conditions to the people affected. The flow of such assistance is far below the original expectations. A country embroiled in political squabbles hardly inspires international assistance.

It is through a process of economic recovery that the country would be able to take care of the livelihoods of the people in the war affected regions. The end of the war and terrorism was looked upon as a watershed in the political history of the country that would bring about an economic upturn. The end of the war was seen as the beginning of an economic war that would put the country into a high trajectory of growth. The government expected to achieve an 8 per cent rate of growth moving to double digit growth after six years. There is considerable skepticism that the country is in such a trajectory. There is no evidence of higher investment. Foreign investment appears to have declined. The main reason for the slow progress in the economy has been the government continuously distracting itself from achieving a lasting settlement to the ethnic issue and forging ahead with the economic tasks. Another opportunity lost?

The current preoccupation with a constitutional change is the most recent distraction from a full thrust to economic development. It was at first the series of elections that distracted the nation, next, the imprisonment of the former Army Commander and then efforts to change the constitution. All these have been serious distractions. Conflicts with the UN and comedian acts by ministers, lack of diplomacy with the Western countries are other aspects that have deterred a stronger economic course that could have reaped a larger peace dividend.

All these have created the impression that the seriousness of the government to pursue economic goals is weak. The chaotic political situation is not at all healthy for economic growth. The fact that the large amounts of foreign investment that has been spoken of at the time of ending the war has not materialized is a clear indication of the impact that the political activities have created. The purchase of the shares of Sri Lankan Airlines, the intention of the government to buy back Shell Gas, the government’s large stake in private banks have all been discouragements to private foreign investment. There have been large inflows of capital into the stock market, but these are short term capital movements that can actually result in a large outflow of capital either due to domestic or international developments as happened before. Investors in the stock market are likely to make profits and take these away. It is foreign direct investment that is needed.

Dr Sarath Amunugama once made an interesting statement that the economy would grow at 5 per cent without the government. More critical commentators would say that we can achieve a 5 per cent growth, in spite of the government. It is likely that the country will achieve a 6 to 7 per cent rate of growth this year. This, despite the lack of any serious management of the economy. The low rate of economic growth of last year and the restoration of economic activates after the war are the main reasons for this. The real issue is whether we can sustain this level of growth and increase it. For this there has to be much larger investments by the private sector, foreign investments of more than double the current level has to be attracted and fiscal consolidation is needed. None of these are in place.

It has been argued that the 18th Amendment to the constitution was needed for rapid economic development. This is a highly contentious issue of many dimensions. From a purely economic perspective we hope this is correct and that we will not continue to lose opportunities for economic development.

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