The inability to achieve and sustain a high trajectory of economic growth over the last seventy years has been a significant national failure and regret considering the economic potential of the country. Achieving high sustained growth in the foreseeable future too is unlikely as the political environment, ethnic conflicts, trade union and obstructionist activities and [...]


Reflections on seven decades of post-independent economic growth and structural change


The inability to achieve and sustain a high trajectory of economic growth over the last seventy years has been a significant national failure and regret considering the economic potential of the country.

Achieving high sustained growth in the foreseeable future too is unlikely as the political environment, ethnic conflicts, trade union and obstructionist activities and inability to implement rational economic policies are not conducive to such an achievement.

During the 70 years after independence, the Sri Lankan economy grew by an annual average of only around 4 percent. High growth was achieved only in a few years. Today we discuss the reasons for the varied economic performance and the lessons of the past experience for economic for development.

Growth performance
The economy grew by only an annual average of 3 percent in the 1950s and by 4.7 percent in the 1960s. Owing to severe domestic and international constraints, the annual average economic growth rate decreased to 3.9 percent in the 1970s with it being as low as 2.9 percent in 1970-75. The annual average economic growth rate increased to 4.3 percent in the 1980s and to 5.2 percent in the 1990s.

Economic growth in the first decade of the new millennium was slightly lower at 5 percent. Growth was 5.4 percent in 2010 to 2014 and fell to 4.1 percent in the three years (2015 -17) of the current regime. This year’s growth may reach 5 percent.

Many causes and reasons account for these varied economic achievements. For instance, the liberalisation of the economy in 1977 ushered an economic boom till 1982. The economy grew by 8.2 percent in 1978 and averaged 5.9 percent from 1978 to 1984. By 1982 the country was poised to receive large foreign investments that would have transformed the economy to a higher trajectory of growth in the manner of the NICs (Newly Industrialized Countries) of South East Asia.
This prospect was busted by the ethnic violence of July 1983, the subsequent terrorism and civil war. The insecurity, high expenditure on the war and disruption of economic activities hampered economic growth.

JVP insurgency
The JVP insurgency of 1988-89 was a serious setback to the economy as it disrupted most economic activities and economic growth reached the lowest levels.
During 2000-2004 the economy grew by only 4 percent owing to an energy crisis, insecurity in the country due to LTTE terrorist attacks and the war in the North and East that crippled tourism, agriculture and fisheries.

Despite the intensification of the war, there was an upsurge in the economy between 2005 and 2009 with an annual average economic growth of 7 percent during this time. This was, however, partly due to the large war expenditure boosting growth.

End of war
There was an expectation of rapid economic development after the end of the war in 2009. The economy achieved high rates of growth of 8 percent in 2010, followed by a growth of 8.4 percent in 201l. During the three years after the end of the war (2010-12) the economy grew at a faster pace of an annual average of 7.2 percent, mainly due to the restoration of economic activities in the North and East, the revival of economic activities such as tourism in the rest of the country and reconstruction and development of infrastructure that was largely foreign funded.

This growth thrust did not have a sustainability as the production capacity of the economy was not boosted adequately with an expansion of tradable goods. The economy slowed down in 2012 to 6.4 percent due to the global recession that brought about a decline in exports, the withdrawal of the GSP plus concession by the European Union (EU), adverse weather conditions and the US embargo on trade with Iran.

Sources of growth
The main sources of growth in the post-war years were construction, tourism and other services such as communications, banking and finance. Agricultural growth has been modest and uneven. Exports that fared well in 2010 fared badly in 2011 to 2013, while imports have increased sharply. Consequently trade deficits have been more than US$ 9 billion and a strain on the balance of payments. The redeeming factor, however, has been workers’ remittances that have offset 60 to 70 percent of the trade deficit in most years.

Structural transformation
Despite the moderate economic growth, there has been a noteworthy structural transformation of the economy since 1977. Agriculture’s contribution decreased sharply and services have become the predominant contributor to the country’s national output. The industrial sector (including construction) has also gained in significance. These structural changes are reflected in the country’s trade composition with industrial exports surpassing agricultural exports from the 1980s. The import structure too has changed with intermediate imports being predominant.

Agriculture, fishing and forestry, which contributed about 40 percent of GDP in the 1950s, declined to 23 percent in 1990 and 20 percent in 2000. In 2010 it contributed only 11.1 percent to GDP and fell to 7 percent last year. The share of manufacturing (including construction) and services contribute most to GDP today.

The most significant structural changes in the economy occurred since 1978. Manufacturing, which contributed 16.6 percent of GDP in 1970-77, contributed 19.4 percent in 1993, while agriculture’s contribution fell from 28 percent to 21 per cent during this period. This transformation had as much to do with a relatively stagnant agriculture after 1985, as much as an increase in industrial production till 1994.

The character of services has changed significantly over time. Financial services, tourism, trade and private transport contributes a large proportion of services, compared to the pre-1977 dominance of services related to agricultural exports.

These changes in the economy are reflected in the composition of the country’s export-import dependence. In the first three decades after independence, the country was heavily dependent on primary agricultural crop exports to import food and other imports. Today manufactured exports are more significant. Garments, rubber manufactures, ceramics, leather goods, electrical goods are among the manufactured exports. The economy is highly dependent on imports of petroleum, raw materials, transport equipment and machinery.

The economic growth performance provides interesting insights. The country achieved higher rates of economic growth during periods of high investment. Since the domestic savings rate has hovered around 15-16 per cent of GDP for most of the period, the main increase in investment was from foreign sources. The highest rates of economic growth during the second half of the last century were achieved in the 1978-82 period, when the economy grew by 6.2 percent per year. During this period, foreign investment was highest at about 7 percent of GDP, compared to about 4 percent today.

Low growth
The periods of very low growth have been due to external shocks, internal disruptions or both. In the 1970–74 period, the annual economic growth was only 2.9 per cent. During this period, adverse terms of trade caused by sharp oil price hikes and international food grain shortages, created enormous strains on foreign exchange resources and fiscal operations. The insurgency of 1971 disrupted nearly all economic activities and the growth rate dropped to as low as 0.2 per cent. A severe drought, coinciding with the escalation of international prices of food, fertiliser and oil, led to severe hardships and constraints on economic growth.

The 1987-89 insurgency, which disrupted nearly all economic activities, was mainly responsible for the sharp dip in economic growth from an annual average of 4.8 percent in the previous three years to only 2.2 percent in the next three years (1987-89).

Several other years of low growth were associated with internal shocks. Between 1983 and 1984, economic growth slipped to 5 percent from the average of 6.2 percent for the 1978-82 period owing to the ethnic violence in July 1983. Economic growth fell to as low as 3.8 percent in 1996, when drought conditions, not only affected domestic agricultural production, but created an energy crisis, which disrupted industrial production. In contrast, periods of high growth did not suffer such external and internal shocks.

Inappropriate policies
While these external and internal shocks had much to do with the poor economic performance, inappropriate inward looking policies, discontinuity of economic policies and weak economic management were important factors for slowing economic growth. Fundamentally different economic regimes alternated giving rise to considerable uncertainty, reversal of economic policies and an unsatisfactory climate for foreign and domestic investment. Economic growth rates characterise different policy regimes.

Periods of economic liberalisation, freer trade, lesser controls and lesser state management achieved higher rates of economic growth than periods of state control of the economy. Small economies like Sri Lanka can attain high rates of growth only if they make use of the opportunities of the larger international market. The narrow resource base, small domestic market, the economies of scale for manufacturing and the need to import capital and technology, make it imperative to adopt out-ward looking economic policies. Furthermore, state ownership, control and management breed’s inefficiencies, which diminish the efficiency of capital that we cannot afford and non-competitive economic structures neither provide incentives for improvements in quality nor incentives for improvements in productivity. These developments impair the country’s capacity to compete in international markets.

The overpowering factors that have impeded economic growth have been communal disharmony and politics.

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