The lost decade
View(s):For 30 years prior to 2009 we had a big excuse – the conflict! We missed many opportunities, and kept looking at how other countries in the region were exploiting them and surpassing us. We were left behind, but we had an excuse. 
Sri Lanka was once on the top of the list of “second-tier newly industrialising countries” in Asia after the rise of four dragons – South Korea, Singapore, Taiwan and Hong Kong. But we never became a newly industrialised country (NIC) like them. Sri Lanka was once named as one of the best investment centres in Asia. But we never received foreign investment above US$ 1 billion a year. In spite of all that, however, in just 20 years after policy reforms in 1977, we flipped over the primary and manufactured export structure; but we never sustained our export growth compared to many other emerging countries in Asia which grew.
Even if conflicts in the North as well as in the South were a big excuse for all that, what Sri Lanka achieved in the midst of conflict was never under-estimated in comparative studies. The following is a quotation from an international research study in the late 1990s titled, “Democracy, Conflict and Development” which confirmed it:
“Unlike most conflict-ridden countries, Sri Lanka has enjoyed sustained economic growth and continued overall improvement in human indicators even while suffering violent conflict on a large-scale. This experience therefore shows that economic development in itself does not guarantee reduced conflict, nor does conflict invariably prevent economic growth.”
The conflict was over with a military victory and peace was established in 2009. Today, as the end of the year 2019 nears, I thought of looking back and reflecting upon what we have achieved – rather, what we have not achieved – over the past 10 years.
The conditions were right internally as well as globally, but it was a “lost decade” even without an excuse! Let’s shed some light on this issue at least for the sake of next 10 years (2020-2030).
Slowing down growth
It is the “economic progress” of a country that would ensure achieving all its development requirements as well as macroeconomic stability in a sustainable manner. 
People receive higher incomes, not because the government announces an increase in public sector salaries. Increase in incomes comes from the increase in production and productivity through economic progress. The economy can create job opportunities, not because the government opens up recruitments to the public sector. Job opportunities emerge because economic expansion demands for various types of human resources – skilled, semi-skilled and unskilled. People can get away from poverty, not because the government can provide various “handouts”. Poverty declines, because people find productive jobs and, then receive incomes for their work.
Economic progress is measured by the rate of real GDP growth. It is Asia which has become the fastest-growing region in the world. In the midst of high performing Asian economies, it is quite strange that Sri Lankan growth rates started to fall.
Immediately after the end of the war, there was around 8 – 9 per cent rate of GDP growth mostly due to improved capacity utilisation as well as due to construction and re-construction activities. Yet it was never sustained during the subsequent years which were marked by falling growth rates.
While average rate of GDP growth in South Asian and East Countries was around 6 – 7 per cent a year, the growth rate of Sri Lanka dropped to its lowest levels of around 3 per cent. The rate of GDP growth for 2019 is yet to be announced. However, the first nine months of the year (Jan – Sep) reported 2.6 per cent rate of GDP growth pointing towards the lowest rate of GDP growth for 2019.
If the rate of growth has been falling down, there is no logical reason to anticipate higher incomes, job opportunities, and poverty reduction. And there is no reason to expect higher tax revenue for the government and better export performance.
More borrowing, less investment
What is surprising about the worsening growth performance in Sri Lanka was that it was in the middle of new opportunities emerging in the global economy.
This was a time period that the world economy experienced a global shift in its production base from advanced countries to developing Asia in the form of investment re-location. It was a global economic reality that caused both the rise of Asia and the fall of the West just like two sides of the same coin.
The result of the investment re-location could be seen with growing foreign direct investment (FDI) outflows and their increased diversion towards Asia. Yet, in spite of the established peace with the end of the war, Sri Lanka did not benefit from the global FDI outflows. For some reason, Sri Lanka was more interested in “foreign borrowing” than “foreign investment”. Obviously, it should have been the other way around!
There was a massive market expansion in Asia too in order to accommodate growing exports from emerging developing countries. While more than half of the people in the world live in East Asia and South Asia, India and China alone are the home for 2.6 billion people. With higher growth performance, there were high income classes and new consumer societies emerging in Asia, allowing developing countries to penetrate into their expanding markets. But Sri Lanka failed to benefit from the Asian market expansion.
Apart from FDI growth and export market expansion, it was also a “low-inflationary” policy environment all around the world. And for some reason, Sri Lankan’s inflation also moved closely with global inflation. As a result, unlike in the past, developing countries didn’t have to struggle with their monetary policies to curb inflation. 
Advanced countries took advantage of “low-inflation” to inject money, and more and more money. And at least part of that money also flowed into developing Asia, stimulating their economies. But we in Sri Lanka did not see that difference.
Shortcuts to prosperity
We have just highlighted two important conditions that would ensure rapid growth of any economy: Foreign investment and export growth. The irony is that we have rejected both, but on the contrary we expected to become a fast-growing economy in Asia.
Foreign investment is needed for a country because there is a limit to generate own savings for investment. Apart from investment funds, there are many other benefits which would come along with foreign investment as a package – technology, management, human resources, and global market access.
Export growth is needed because economic expansion is constrained by the size of the market. Apart from that there are other benefits that come alone with export growth such as global exposure, competition, and stable exchange rates.
Now we have short-cuts for developing countries to achieve prosperity fast:
1. Countries do not have to waste time to experiment with different policies and re-invent the wheel, because the set of policies is clear enough and established.
2. Countries do not have to wait for capital accumulation from their own savings, because capital is available on a global scale awaiting better locations for investment.
3. Countries do not have to seek or build markets, because they only need to enter the unlimited global markets which are now open all over the world.
Many countries have been making use of these short-cuts to achieve fast growth causing a dramatic economic change. But we have failed to see it and acknowledge it.
The lack of global exposure even through the formal channels of communication and education, continued to keep us in our island mentality. Our opinion makers told us that we are fine with our own jackfruit, breadfruit and coconut so that we don’t need to be spoiled with globalisation. As a result, we were blind-folded for the global change which didn’t inspire us.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).