Year of peace not a year of prosperity
By the Economist
Last week the country celebrated a year of peace. Given what the country had experienced over the previous two decades, the cessation of hostilities provided most people twelve months of security and freedom. People in most part of the country were able to once again move freely without roadblocks, security checks and fear of a bomb somewhere near to them. These are indeed important freedoms.

The year has been one of achievement in this sense. The government has also contained public expenditure on the war, lives are not being lost in the forces and civilian life is not at risk of terrorist attacks. These are indeed important gains that should not be belittled for opportunistic political reasons. Equally true is the fact that the expected economic gains have not been realised.

The year since the cessation of war cannot possibly be described as a year of prosperity. Economists may describe it as a year of economic recovery. The common man is likely to describe it as a year of hardships: a year when their hopes of prosperity were not realised. A year when the costs of living soared to new heights. The reasons for the limited economic progress are twofold. The peace itself is an uncertain one. The full benefits of peace can surely come only after a durable and sustained peace is ensured by an acceptable constitutional settlement.

Many actions by the LTTE can hardly be said to inspire confidence in expecting such a durable peace. The second factor of importance is that peace alone cannot ensure prosperity. Good economic management, sound macro economic policies, political stability, law and order, an improved work ethic are among the many pre-requisites for a good economic performance.

Until a durable peace is achieved we are not likely to benefit from several sources of growth. Foreign aid for reconstruction is likely to be driblets and quite inadequate for the massive rebuilding effort. Not only is the reconstruction unlikely without adequate aid, but the multiplier benefits of the aid on the economy as a whole would not be forthcoming.

The inflow of foreign aid would strengthen the balance of payments considerably and improve the economic fundamentals. These would lend considerable support to growth. Once the reconstruction begins on a large scale the demand for goods from the rest of the country would promote growth in the economy.

The only danger would be the inflationary impact that would have to be carefully managed. Peaceful conditions would also enable several sectors of the economy in the North and East to come into fuller production. Agricultural production has already increased.

Fisheries and tourism are other economic activities that could benefit. The modest economic performance in the twelve months of peace underscores the fact that this column has stressed many times, that peace alone, however important, cannot usher in rapid growth.

It is a prerequisite, not a sufficient condition for growth. One of the reasons for the modest growth last year was that the global recovery was not as promising as expected and the foreign demand for our exports did not grow adequately. In fact till the middle of last year our industrial exports did not fare well.

It was only in the latter part of the year that industrial exports began an increasing trend. Yet the final outcome for the year is likely to be a decline in industrial exports compared to last year.

Once again the external demand environment is rather uncertain and the depressed consumption demand in industrial countries is likely to adversely affect our industrial exports. This underscores the heavy dependence of the Sri Lankan economy on a hospitable international environment. The other issue is the efficiency of our industries that have come into question.

It is vitally necessary that the costs of production be kept down so as to make our industrial exports competitive in international markets. This has at least two dimensions. One is that input costs must be reasonable. The second is that the efficiency of operations must be cost-effective.

There are anxieties on both these. There has been an increasing trend in costs, especially of energy and fuel and several other factors that render the costs of production comparatively high. Once again some of the increases in costs are due to external factors. The higher costs may make our industrial exports not competitive in international markets.

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