The 64 years of independence that we have just celebrated are years characterised by economic policy changes and lost opportunities. As a vibrant democracy we can take pride that the country changed its governments democratically. Yet each political change brought about economic policy changes that created uncertainty.
Since 1994, there was a degree of stability in economic policies that could be described as continuity with change. Yet the last few years have seen changes that are once again departing from continuity in economic policies. These economic changes together with external shocks and internal strife have resulted in a much lesser economic performance than the potential. Adverse terms of trade and fluctuations in global demand have affected exports adversely. Internal disruptions such as ethnic conflicts, insurgencies, terrorism and a protracted civil war have hampered economic development.
Today's column discusses economic policy changes in the first three decades after independence till economic liberalisation in 1977. Next Sunday's column will cover the two decades after liberalisation from 1978 to 1997. The subsequent column will discuss the post-1977 period and contemporary policy positions.
Overview of political and economic regimes
The post-independent economic policy changes were owing to changes in government. The first policy change after independence was in 1956, which was a political and economic turning point. The period from 1956 to 1965 ushered in a phase of socialism that gave way to a five-year return to a partially liberal regime. The period from 1970 to 1977 was one of severe economic difficulties owing to continued external shocks and economic disruption due to a youth insurgency in the south. The external and internal shocks and misguided economic policies resulted in an era of poor economic performance and hardships.
This period was followed by a change in regime in 1977 that led to radical changes in economic policies, which is described as one of liberalisation of the economy. Although there were political changes since then, there weren't fundamental changes in the framework of economic policies though within it there have been changes in emphasis and content. The political change in 1994 can be best described as a period of continuity and change in economic policy. However, more recently there has once again been a tilt towards state capitalism.
First post-independent regime (1948-1956)
Independence in 1948 did not mark a watershed in economic and social policy. The economic and social welfare policies begun prior to independence with the adoption of the Donoughmore Constitution in 1931 continued till the first change of government in 1956.
Agricultural development took pride of place, with an accelerated implementation of dry zone resettlement (colonization) made possible by eradication of malaria in 1946. Self-sufficiency in food, particularly the staple rice was a priority in economic policies. The restoration of irrigation reservoirs and the settlement of people in the eastern dry zone of the country to achieve greater self-sufficiency in food were economic priorities. Improvements in health and education facilities were complementary to this objective. Complementing this was a food ration scheme begun during the war years that subsidised basic foods. There were only a few efforts at industrialisation.
Tilt towards socialism 1956-65
April 1956 marked a significant change in the country's political, cultural and economic history.
The change of government in 1956 had important repercussions on economic policy. It marked a shift from a liberal capitalist regime to one that tilted towards socialism. Economic policies shifted from liberal capitalist policies towards socialism. The commanding heights of the economy were brought under state ownership and control and new state enterprises were established. Economic policies shifted towards greater self reliance through import controls and import substitution.
Import substitution in agriculture through agrarian reforms was an important feature of economic policy. There was lesser dependence on Western countries with foreign relations veering towards the Eastern Bloc in the pursuance of "non-aligned" foreign policy. The adoption of Sinhala only as the official language had significant political and economic consequences.
Philip Gunawardena's term of office as Minister of Agriculture in the coalition government resulted in several agrarian reforms. Comprehensive policies covering land tenure reform, marketing, credit, crop insurance and development of village level farmer organisations were recognised and policies formulated to establish these.
Although the significance of these years lay in the new directions Gunawardena gave to peasant agriculture, he is best remembered for introducing the controversial Paddy Lands Act of 1958 whose main objectives were to provide security of tenure of a permanent and heritable nature and regulate the rents paid by tenants. The control of tenancy rents stipulated in the Act was designed to alter tenurial conditions towards an incentive-oriented rental structure that would remove disincentive effects with respect to the adoption of improved practices.
However the implementation of the Paddy Lands Act was flawed owing to administrative deficiencies and feudal agrarian structures.
The post-1956 agricultural policies attempted to broaden the emphasis on food crop production beyond paddy cultivation to subsidiary food crops and to livestock. The Guaranteed Price Scheme (GPS) was extended to cover red onions, chillies, green gram, kurakkan, maize and a few other crops. There was a new emphasis on research and extension for other crops.
Yet this attempt had limited success owing to fairly free imports. The exceptions were perhaps potato production that nearly doubled from about 678,000 pounds in 1958 to 1,250,000 pounds in 1961 and poultry and egg production, which more or less met the domestic requirements. This thrust in agricultural policies continued into the 1960s and achieved a degree of success.
Return to liberalism: 1965 to 1970
The government which took over office in 1965, attempted to return to a free market economy. It encouraged foreign investment and assured investors that their investments would not be nationalized, and if nationalized, that full compensation would be paid. A dual exchange rate was introduced in 1966. Non essential items were imported at a higher rate of exchange and non-traditional exports earned rupees at a higher exchange rate. Although there was limited liberalization in trade, the import substitution policies continued. A new impetus was given to food crop agriculture with a "Food Production Drive". This resulted in an impressive growth in output and yields of food crops.
Socialism and inward-looking policies (1970-77)
This period witnessed profound changes in the ownership and management of economic enterprises. The commanding heights of the economy were vested in the state. Bus transport was nationalised in 1958. In 1961 the Bank of Ceylon was nationalised and the People's Bank and the Insurance Corporation were established as state enterprises. The plantations were taken over by the state in 1972-74 and several state industrial enterprises were also established.
From 1970 to 1977 the country moved into an import-substitution industrial strategy, which attempted to manufacture a wide range of consumer items. This policy did not change the economic structure, even though a wide variety of industrial goods were produced. In fact the relative position of manufacturing in national output even declined from 15 per cent in 1960 to around 14 per cent by 1977.
In retrospect, it is now understandable why the import substitution strategy for industry failed. A small country with few raw materials, inadequate capital and technology and a very small domestic market, cannot produce quality industrial products at competitive prices. Widespread import substitution can only lead to worse balance of payments problems than those it attempts to solve.
Three decades after independence the Sri Lankan economy remained substantially an agricultural one with nearly 30 per cent of GDP being from agriculture and only 14 per cent from industry. It was still largely an agriculture-based export-import economy. In 1977, Agricultural exports accounted for 79 per cent of exports and industrial exports were only 14 per cent and the import structure had not changed much with 42 per cent of imports being consumer items.
Despite the considerable increase in domestic agricultural production, food imports accounted for the bulk of imports in 1977. In 1951 food imports accounted for 45 per cent of total imports. Rice imports alone accounted for 15 per cent of total imports. In 1977, food imports were still 36 per cent of total imports, with rice imports alone being as much as 15 per cent of total imports. The explanation for this paradox is that the increased food production was absorbed by the increase in consumption of the population that had increased by 85 per cent between 1950 and 1977.
The structural changes in the economy from 1950 to 1977 were more or less gradual and sometimes even imperceptible. In contrast, the period, from 1978 till today, that is often described as the post-liberalisation era saw dramatic changes in the economy. It is to the discussion of these that we turn in next Sunday's column.