The anticipation of peace is accompanied with an expectation of a peace dividend and a spurt in economic growth. This is what could be expected if the end of the war leads to a settlement of the problems of the minorities and terrorist activities are minimised to ensure adequate business confidence and security in the country. The ironing out of a satisfactory solution that ensures a robust peace is no easy task. Our focus is on the economic consequences and costs of the peace.
The end of the war while bringing in a peace dividend has economic costs that the country would have to bear. The most recognised of these costs is the costs of reconstruction of the devastated areas. It is apparent that this would be an enormous economic burden, especially for a country whose economic fundamentals are weak. In fact one can hardly expect any country that has fought a war for two and a half decades to have the resources to spend the large amount required for reconstruction. The government has allocated Rs. 500 million for the reconstruction of the North. This is but a fraction of the needs of the devastated North.
There are three broad reconstruction needs. There are a large number of refugees who need to be resettled mostly in new homes. The costs of housing construction and amenities for resettlement would indeed be high. Then the devastation caused by the conflict to infrastructure would require to be repaired. This should not merely be a repair job but one of upgrading too as infrastructure in the North has been neglected for decades. The costs of infrastructure development are extremely high and therefore these costs would be huge. Social infrastructure, like schools and hospitals, as well as physical and economic infrastructure, such as roads, bridges, rail transport, airport and fisheries harbours have to be constructed. There are also economic enterprises that have been shut down with perhaps their machinery and equipment unusable.
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The Kankesanthurai cement factory, the Vallachenai paper factory and the Paranthan chemical industrial plant, are the most notable of these. There are also several private small and medium sized industrial plants that would require financial assistance for resuscitation and expansion of output. All these are very costly. Besides, the large expenditure involved is mostly immediate requirements. They would have to be incurred in the coming months. This makes the expenditure burden particularly difficult for the government. There would also be expenditure over a long run to reconstruct the Northern economy and social infrastructure.
What are the ways of funding the reconstruction costs? First the government itself would have to be a major source of funding. This, as we pointed out, is difficult in a situation of fiscal stringency that we have had over more than a few years. The expectation is that there would be a cut in military expenditure that could be used for reconstruction. There are limits to this reallocation of defence expenditure. At present it is estimated that defence expenditure is around 7-8 percent of GDP. In fact it may be more. It is suggested that this be brought down to 4 percent of GDP. Of the 3 percent thus saved 2 percent could be allocated for reconstruction and the remaining 1-2 percent should be a curtailment of government expenditure to ease public expenditure and reduce the fiscal deficit.
The reconstruction effort would be inflationary in the first instance, though unlike war expenditure, there would be increases in the production of goods and services in the medium and long run. The government should also attempt to reduce public expenditure by cutting wasteful expenditure to reduce inflationary pressures generated by a large fiscal deficit. The government should be prudent in its allocation of resources for reconstruction as well as other expenditure. A drastic immediate cut in defence expenditure is unrealistic. This is owing to some expenditure, like the wages of soldiers that cannot be reduced. Only increases in expenditure over time could be curtailed in the future. It should be possible to cut down expenditure on hardware and ammunition. Since both these items are import expenditure there should be some relief to the trade balance and balance of payments. Another means of economising is to use the redundant military personnel for reconstruction activities. Such redeployment would be a saving of public funds as well as a more cost-effective means of reconstruction.
Private sector involvement should be an important contribution in the reconstruction effort towards increasing production. There would be many enterprises that private enterprise could resuscitate, modernise and expand. Such a policy of handing over indutries to the private sector may be interpreted as a deviation of the government’s declaration to not privatise government enterprises. Sticking to this policy with respect to the revitalising of industries in the North would be economically irrational. Private investment could play an important role in the North. The government should sell the industrial enterprises in the North that are dilapidated to the private sector at attractive prices.
This has a double benefit. Instead of the government spending its very scarce resources, it can in fact earn revenue to spend on other reconstruction expenditure. Given the history of Sri Lanka’s rather unsuccessful public sector industrial experience such a move to offer these industrial units would be a prudent use of scarce resources and also a speedy means of increasing production that would not only benefit the North but the entire country. Regrettably the government has given the private sector a step motherly treatment recently though it may still call it an engine of growth.
The third means of financing the reconstruction is through foreign resources. Whether foreign aid would be substantial is difficult to ascertain at present as the attainment of peace would be a prerequisite for substantial aid flows. The prevailing global recession would not be conducive to generous allocations to foreign countries. In such a global context the available international resources would be limited.
Governments often promise large sums of money but the actual commitments that come later are considerably less, as was the experience with Tsunami aid.
The disbursements of the commitments may also take a great deal of time. The Indian government it is reported is drawing up a plan for the reconstruction of the North that we could expect would have substantial funding. However foreign aid for reconstruction would be tied to conditions in the devolution package, as well as trade related benefits to the donor. There is every possibility that the government may not be willing to comply with these conditions. For these reasons too much reliance on foreign aid for reconstruction could be misplaced.
The end of the war ushers in a new period of reconstruction expenditure. The government would require the assistance of foreign governments and the private sector to enable adequate resources for reconstruction. This would in turn depend on a robust peace. |
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