Columns - The Sunday Times Economic Analysis

Distractions from economic development

By the Economist

Sri Lanka continues to be distracted from its priority task of economic development. The propensity of the country to distract itself from economic priorities has been a feature of post independent Sri Lanka. This is in stark contrast to the experience of Singapore and Malaysia, two countries that had similar problems. These countries managed the potential ethnic conflicts of their multi-ethnic societies so as to enable their economies to prosper. Some of the methods used in Malaysia may not bear scrutiny on the basis of minority rights, but the reality is that a country that faced serious ethnic violence was able to contain these and focus on the economic development of the country.

In turn their economic prosperity contributed to the containment of ethnic problems. Economic attainments, such as the increases in per capita incomes, reduction in poverty and increased employment opportunities, succeeded in diffusing and distracting people from ethnic issues to their material improvement and developmental concerns of their country. The economic strategy included a range of policies to improve the welfare of the people and raise the incomes of the deprived classes within an overall economic development programme. Political mechanisms to contain conflict and reduce ethic oriented policy too played an important part.

Singapore adopted a policy of putting language and ethnic issues out-of-the-way by uniting the people by means of adopting English as the common language that brought about both ethnic harmony and an impetus to development by the advantage of proficiency in an international language. The emphasis on English rather than Chinese, Malay or Tamil as official languages not only diffused tensions but conferred economic advantages to the trading nation.It would be impractical to suggest that these languages and other policies could have been replicated here.

Sri Lanka is a different country in many ways from these two and the most important difference is that the issues had to be resolved within a democratic framework and not under an authoritarian regime. Nevertheless the incontrovertible fact is that the leadership was able to contain ethnic and language conflicts in society. In contrast Sri Lanka failed to contain the ethnic tensions. In fact several leaders pandered to the ethnic and religious emotions of the people and ignited and encouraged parochial interests for their own political advantage.

There is a truth in the assertion at least to some extent, that the ethnic problem was ignited by politicians of many different backgrounds. The impact of the ethnic and language conflict was an important factor in slowing down the momentum of growth at crucial stages of the country’s economic history. Consequently inadequate economic growth achieved resulted in unemployment, poverty and economic dissatisfaction of a high order. There can be no doubt that these issues received insufficient attention owing to the distraction of governments towards religious and ethnic issues. Consequently the country was badly disrupted by two violent youth uprisings in April 1971 and in 2008-2009. The latter had such an impact on the economy that for the only time in the country’s history the economy recorded negative growth.

In a decade after independence the first ethnic disruption occurred. Quite apart from the loss of life and property it eroded national unity, polarized ethnic differences and resulted in a severe brain drain. When the economy was progressing at a rapid pace after liberalization of the economy in 1977, the high rate of economic growth had a setback after the July ’83 ethnic disturbances. The story since then is one of aggravation of the problem leading to terrorism and counter terrorism and a civil war of enormous proportions. These had severe repercussions on economic growth. Public expenditure was distorted, the public debt increased due to unproductive war expenditure, large fiscal deficits were recurrent and growing, foreign investment became a trickle, tourism from which much was expected languished and parts of the country’s economy virtually ceased functioning.

The end of the war last year and the eradication of terrorism signalled a time for a new opportunity for economic growth. At first there was hope that a rich peace dividend would be forthcoming. In the year and a few months after that a high rate of economic growth is becoming a mirage. Instead of the country buckling down to the reconstruction of the economy, settlement of the grievances of the minorities, reconstruction of the North and East, the focus was once again distracted by two elections that engaged the nation for several months. The elections over there was the imprisoning of the army general on a number of charges, victory parades, diplomatic disputes and the drama of a cabinet minister’s fast un
to death to tame the Secretary General of the UN. These are hardly the actions of a country eager to develop rapidly.

Meanwhile the country’s public debt is growing to proportions where the revenue is inadequate to meet the debt servicing costs, the trade deficit is widening, unemployment is increasing and the prospect of rapid economic growth is waning. It would however be misleading if we ignore economic gains as well. These include an increase in agricultural output from the North and East, increased fisheries production though temporarily disrupted by the monsoon weather, an increase of tourism by about 45 per cent over that of the same period last year, continuation of infrastructure development and successful borrowing to raise the foreign exchange reserves to over US$ 6 billion. Despite these gains there is a growing concern that the initial spurt in growth owing to the peace cannot be sustained and that the government’s target of an 8 to 10 per cent growth will not be achieved owing to the fundamental political and economic weaknesses.

The government has failed to develop stable political conditions and an environment conducive to investment and growth. The economic potential of the country remains under realized and the attainment of the government’s goal of 8 per cent on a sustained basis is doubtful. Soon after the budget debate that has been characterized as a non event that generated more heat and parliamentary misconduct than light on economic policy, the country was distracted towards a so called fast unto death that may have done much harm to the image of the country and the economy. The economy is very much dependent on trade with the rest of the world, and particularly with western countries. It is also dependent on capital and technology from the developed world for high growth. The developments of the past week and those of past months have hardly been for the good of the country’s economy. Recent events have distracted the country’s efforts once again from the economy, raised doubts on the safety for foreigners and foreign investment and altogether tarnished the country’s image.

A serious concern for economic development requires a quick resolution of the minority problem through acceptable constitutional reforms. Issues with the rest of the world should be resolved diplomatically in the interests of the economy. Fiscal consolidation through reduction of government expenditure in wasteful ways and reduction of public enterprise losses should be undertaken. Law and order should be established and the safety of property right ensured. The realization of the full potential of economy in a time of peace requires economic policies that would increase savings and investment at home and attract investments from abroad.

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