Political instability threatens economic recovery
Political stability is a pre-requisite for eco nomic growth. The current uncertainty of
the government continuing in office and the prospect of an early election is a setback to the economic recovery observed in the second half of this year. If the uneasy co-habitation is bad, the uncertainty of the government continuing in office and the prospect of an election are worse. This is especially so as an election under the present constitution is not likely to result in a strong stable government.

The prospect of political instability worsening would change the investment climate, not only for foreign investors but local investment as well. Elections every year is hardly the economic environment for good business decision making. Worse still, a government pre-occupied with retaining power is not likely to make the kind of economic decisions needed to lay the foundation for economic growth. The short policy horizon would make the government take decisions to ensure its popularity rather than decisions that would be advantageous in the long run.

The budget to be presented in early November is likely to reflect the electioneering concerns rather than the long run financial and economic concerns. Consequently the role of the government in long run economic growth would be curtailed. The Budget would be primarily interested in appeasing the populace. Hard decisions, distasteful in the short run but needed for long term economic growth, could hardly be expected. Concessions to relieve hardships at the long run cost to the people are inevitable in such a context. Shortsighted inferior economic decision making is inevitable when the political horizon is short.

In such situations of political instability a strong bureaucracy could be invaluable. India provides us an example of such a strong bureaucracy that could keep the wheels of the economy running, while the politicians squabble for power. Regrettably, the Sri Lankan bureaucracy has been weakened over the years. The country is lacking in a strong bureaucracy owing to both the poor quality of new recruits, to the service and the politicisation of the higher administrative service.

Perhaps illustrative of both these weaknesses is the fact that the present government had to bring in to the administration many retired former civil servants long past their prime. For quite sometime the war has been blamed for the inability of the economy to take-off. The crushing debt service has been advanced as a serious blow to investment. While there is no doubt that the war has been the most serious underlying factor in economic stagnation, the political instability is an equally significant reason for economic stagnation. As we pointed out earlier in this column, even the peace process is in danger owing to the lack of a consensus in the South and the current political instability. In the current configuration of political parties, an election is even more threatening to the economy. Everyone, and especially the business community and foreign investors are aware of the mismanagement of the economy by the previous government. If the People's Alliance were to form a government with the JVP, then the chaotic economic scenario arising from the irreconcilable economic policies of the two parties, would be a blueprint for economic dislocation and confusion. The current political situation is singularly unhealthy for the economy. It can be described as another internal shock to the economy. Just at the time when global conditions were improving, the government was attempting to be orderly in its economic management and the peace process was restoring economic confidence, political instability is posing a threat to the economy.

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