The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Squandering the peace dividend
Undoubtedly Sri Lanka's economic performance is more dependent on non-economic factors than the economic variables. More precisely, the economic variables that matter most are dependent on political and other developments. Invariably from time to time, and sometimes for long periods, the economy has been plagued by internal instability that has depressed economic performance.

In fact some observers of the economy are surprised that the economy has fared as well as it has done in the past with the many setbacks it has had to face in the past. A dogged resilience and adaptation to prevailing conditions are perhaps the explanation to this relatively reasonable economic performance. Nevertheless, there is no doubt that the economy has failed to grow to its potential owing to these internal shocks.

The civil war extending to about two decades was no doubt erosive of economic growth. When the ceasefire was announced and for months afterwards there was a new expectation of a return to higher rates of growth. The emerging events of the past weeks have unfortunately tended to be an impediment to that confidence.

The setbacks to economic confidence arise out of two interrelated conditions. The first is the refusal of the LTTE to participate in the vital Tokyo Conference that was intended to harness aid for the reconstruction of the affected areas, as well as to obtain international assistance for the country's economic development programme.

In addition, the continuous violations by the LTTE of the ceasefire agreement has cast doubts about the peaceful intentions of the Tigers. The instances of such violations are now too numerous and too well known to be recounted here. These in turn affect the confidence of the majority community about the possibility of a reasonable settlement to the conflict. There is no possibility of a Constitutional settlement of the problem without the support of the majority of people in the country.

The Prime Minister has categorically stated that the constitutional settlement would be brought to Parliament and then placed before the people for their consent in a referendum. This is the correct process for Constitutional change. It requires to be followed in what would no doubt be the most far-reaching fundamental change in the Constitution. Given this situation the events in the North are not assisting in building the confidence of the South in the peace process and ultimately for enabling the Constitutional change.

Taking advantage of this situation, the opposition is flexing its muscles and giving indications that it may topple the government. The consequent perception of political instability on top of the fears that there could be resumption of hostilities certainly erodes business confidence. The dearth of confidence in an enduring peace would no doubt have an adverse effect on both local and foreign investment.

At best what one could expect is that there would be a stalemate with a no peace no war condition in the North and political uncertainly in the South. What this implies, in as far as the economy is concerned, is that the peace dividend that was expected would be frittered away. This does not mean that the current situation has not brought about certain gains. Economic gains, there have been.

About a billion rupees of expenditure on the war has been saved. Had the war continued the expenditure would have increased. The increased agricultural output in the last year has also been partly due to the possibilities of cultivating in the North, East and border areas. The increase in tourist arrivals and earnings from tourism are also due to the settled conditions. There have also been internal trade benefits.

The initial confidence in the peace process added to business confidence and was a boost to the economy. These are no doubt significant gains. Yet they are the minimal gains. Even in each of these areas there is much more potential gains. And the more significant gains are yet to come. Yet, at the very time when these economic gains could be reaped, we are denying ourselves those gains. The reconstruction aid would have not only improved the economic and living conditions in the North and East, but would have added to the financial stability of the economy.

It would have opened out new economic opportunities for the country as a whole. The scale of general economic aid could also be affected by the lack of confidence in the peace process. Aid donors would commit aid on the basis of certain expectations in the economy. If these expectations are diminished owing to the doubts about the peace process then there would definitely be a curtailment of aid.

The economic recovery we have seen since the cessation of hostilities is only a small part of the potential gains. A durable and lasting peace offers prospects of prosperity to the people. But this may not be realised in the foreseeable future owing to the hidden agenda of the Tigers and the political opportunism of the opposition. We are once again squandering an opportunity for economic growth. The lions can roar only if they are united to tame the tigers.

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