ISSN: 1391 - 0531
Sunday December 16, 2007
Vol. 42 - No 29
Columns - The Sunday Times Economic Analysis  

The stumbling block to economic growth

By the Economist

The war and the security situation in the country is the most serious stumbling block to achieving the economic potential of the country. The momentum of economic growth cannot be accelerated without a resolution to this problem. Paradoxically, the gains on the war front appear to defer a permanent and durable solution to the problem of the Tamils. Efforts to find a negotiated settlement or even to propose a solution to the problem have taken a back seat.

There appears to be a 'school of thought' that the government must eliminate or seriously weaken the LTTE before a solution is meted out. This perspective ignores the need to find a solution right now. In fact if the LTTE is defeated militarily it is likely that the view that the Tamils have no problem may become more pronounced. This is a dangerous path that will not lead to a durable solution to the problem and will be the foremost obstacle to economic growth and development.

It is therefore appropriate to highlight the costs of the war and benefits of a durable peace. High rates of economic growth that would propel the economy to higher levels of per capita income, reduce unemployment and alleviate poverty substantially will remain a mirage unless a durable solution to this problem is found. Both, domestic and foreign investments are prerequisites for generating higher growth. Such investments require an environment of security and certainty. Without these the risks are high and investors would seek alternate avenues for investment of their funds. The war expenditure, not merely in the current year but in the last two decades, has been a fundamental factor in destabilising the economy and eroding the economic fundamentals. In fact it would be quite impossible to provide a macroeconomic environment conducive to higher levels of investment and economic activity without a cessation of the war and a reduction in war expenditure.

In as much as the war is an obstacle to rapid economic growth, the cessation of the war alone will not ensure a climate conducive to investment. The root causes of the motivation for terrorism must be found. And that requires the resolution of the causes for dissatisfaction among the minorities, the Tamil speaking population of the country. It is now clear that the solution would require a substantial devolution of power. This is perhaps what the government wishes to avoid owing to various political pressures. Such devolution of power could itself be a force for higher levels of regional economic growth and reduction of regional disparities in incomes and infrastructure.

We are not for a moment suggesting that the war against terrorism should not continue. In fact the gains on the war front may be helpful in bringing about conditions that are more conducive to economic growth. Yet, the cost of the war has been a serious factor in retarding growth. And that retardation has been brought about in many ways. The sooner the war ends, the future expenditure on the war could be brought within manageable proportions. Besides the actual cost of the war, it appears that war expenditure is prone to waste and corruption. Its inherent lack of accountability implies that the expenditure is larger than necessary. The huge cost on the war is at the root of the problem of the public finances of the country. A war expenditure that has grown exponentially over the years has been a fundamental reason for the increasing public debt, large fiscal deficits, trade deficits and the strain on the balance of payments. Much of the recent foreign borrowing it is feared is spent directly or indirectly on financing the war, thereby increasing the foreign debt servicing costs.

The current danger is that victory on the war is thought to be the means of resolving the problem. The forging of an acceptable and durable solution to the problem of the Tamils has repeatedly been shelved under the carpet. Unless a durable solution to the problem is found, the victory in the war may well be a short term respite. Terrorist activity will be merely curtailed, not eliminated. A few terrorist attacks at critical economic nerve centres are adequate to jeopardise tourism and substantial foreign investment inflows. What is needed is a distinction between the war against terrorism and the fundamental problems of the Tamils. Unless a solution is meted out speedily to the latter, the country runs the risk of credibility of the government's resolve to solve the problem. This is dangerous as it could affect the country's capacity to curb terrorism. On the other hand, if a solution acceptable to the Tamil people is found, that would isolate the LTTE and further weaken their position to an extent that their near elimination may be possible.

A real danger of not facing up to the problem and putting forward a solution is that the international community that is largely supportive of eliminating terrorism may change their stance. Already there are some signs of this. The Hilary Clinton speech and prospects of her election as President of the United States, the several admonitions of the Indian government and the latest move that Dr. Manmohan Sigh's attendance at the Diamond Jubilee of our independence next February is conditional to a solution of the problem, the withdrawal of some aid by countries and agencies are all danger signals. Shelving a solution to the political problem is a sure way of postponing accelerated economic growth.

The political stance is a vital element in bringing about peace and an end to violence. Peace and security could spell a very different scenario for economic growth. Without it the country would wallow in and around the 5 percent rate of growth instead of entering a trajectory of rapid growth. Instead, it would be growth with wide fluctuations in economic performance. Therefore, a government that is really interested in achieving rapid economic growth must give priority to ironing out a solution to the problem. This is as important for economic growth as any other factor. No political solution, no fast track economic growth. It is as plain as that.

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