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No single factor has retarded the country’s economic development more than communal violence. The current communal tensions in several parts of the country could create instability and uncertainty that would destabilise the economy beyond recovery and mark the death knell of the country’s efforts to resolve the current economic crisis.

Orchestrated no doubt with intent to destabilise the government and pave the way for a regime change, the roused communal feelings would aggravate the current economic crisis and cause enormous hardships to the livelihoods of people. The containment of these communal tensions is imperative for economic recovery and growth.

Economic repercussions
Global reactions to communal violence could worsen the country’s trade imbalance and create a severe balance of payments crisis. Tourism that is booming and has tremendous potential to contribute to economic growth could have a severe setback owing to ethnic violence as happened in 1983. The already low foreign investment could dry up and capital outflows would aggravate the weak external finances. The further flight of intellectuals, professionals and scientists would weaken the country’s capacity for development.

The consequences of communal violence are horrendous and must be averted at all costs. We must learn from our horrendous past experience that we recount here.

Past experience
Sri Lanka’s post-independent history is replete with economic setbacks owing to ethnic violence. The cumulative economic impacts of these ethnic disturbances are incalculable. Beginning in 1958, communal violence was repeated in 1977 and exploded in July 1983. These ethnic clashes had irreversible setbacks to the economy. The ethnic disturbances of July 1983, terrorism and the long drawn out civil war was the severest impediment to the country’s development.

Riots of 1958
The ethnic riots of 1958, though relatively short, were the initial setback to the country’s development. In addition to the physical destruction, human suffering and fatalities, it led to an exodus of talented persons. It was first wave of a brain drain that was repeated too often. Sri Lanka was the poorer for the flight of academics, professionals, scientists, technicians and qualified persons and a depletion of the English educated. The brain drain was not only of educated Tamils, but of Burghers, Sinhalese and other educated minorities, Communal tensions and the fear of violence have been responsible for the country’s loss of much talent and skills ever since.

Black July ‘83
The ethnic violence of July 1983 was the most serious setback to the economy. The initial post-liberalised years saw a re-emergence of the economy. From an annual average economic growth of 3.2 percent during 1970-77, the economy spurted to an economic growth of 8.2 percent in 1978 and an annual average growth of 6.2 percent in 1980-83. There was every prospect of achieving high rates of economic growth when the ethnic violence of July 1983 dashed the country’s prospect of achieving rapid growth. In 1983-84 economic growth slipped to 5 per cent and in 1985-89, the economy grew by only 3.2 percent.

Economic disruption
The ethnic violence of July 1983 disrupted economic activities in many ways. Tourism that had grown rapidly till 1983 had a serious setback, foreign investment dipped and the optimism and business confidence evoked by economic liberalisation took a severe beating. It led to large scale out migration, the consolidation of the LTTE, terrorism and a 27 year war. These had irreparable damage to the economy.

Economic setback
The damage inflicted was a permanent setback to the country’s economic capacity and potential. Dr. Saman Kelegama has captured the adverse impact of the violence succinctly: “The 17-year war was costly and deterred foreign and local investment, reduced tourist arrivals, caused immense damage to the country’s infrastructure, and above all led to many deaths and brain drain of skilled labour.” Furthermore: “The costly war, among others, led to large budget deficits (exceeding 8 percent of GDP) during the 1990s. Large scale domestic and foreign borrowing to finance the budget deficit accumulated as large public debt over the years, so much so that by the year 2000, public debt to GDP ratio had exceeded 100 percent.”(Development Under Stress 2006)

Foreign investment
Foreign investment so vital for a speedy takeoff of the economy was choked, Kelegama has pointed out that: “The uncertainty created by the war was the main deterrent to foreign investment — which acted as a catalyst to the growth process. Some examples would suffice to indicate the missed opportunities. Two major electronic multinational companies — Motorola and Harris Corporation — had finalised plans to establish plants in the Export Processing Zone prior to the change in the political climate in 1983. Harris Corporation even started building a plant with an initial employment capacity of 1850 workers.” Both these companies withdrew from Sri Lanka after the 1983 ethnic riots. Motorola shifted to Malaysia and Harris Corporation went elsewhere leaving a half-built plant in Sri Lanka. Besides these two corporations, Marubeni, Sony, Sanyo, Bank of Tokyo, and Chase Manhattan Bank, that were in the pipeline to invest in Sri Lanka decided against investing in Sri Lanka after 1983.

As Dr. Kelegama points out, if these investments had materialised, they would have given a strong signal to other large multinational companies to start industries in Sri Lanka, We lost an “opportunity of taking a big leap forward.”

Pervasive impact
The impact of the war was far more pervasive than some of the specific areas of economic retardation, such as fisheries, cultivation of food crops in the North and East, tourism, foreign investment and economic and social infrastructure. The cumulative impact of the war was the weakening of the macroeconomic conditions, out migration, disruption of economic activities, drying up of foreign investment, crash of the tourist industry and the increasing risks perceived by local and foreign investors that impeded economic development.

Wrapping up
The current communal rumblings are a severe threat to the economy. In the midst of a global slowdown and other external setbacks, the repercussions of another wave of ethno-religious violence would be horrendous. There must be a strong commitment to national unity backed by stern actions that deter acts of hatred and violence against any group or community. Both Singapore and Malaysia were able to avoid communal violence owing to firm governmental actions that prevented the arousal of communal feelings. Inaction by the government can once again ruin the economy.