The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

The enemy within hinders economic growth
Economists have often analysed the economic performance of the country as being vulnerable to external and internal shocks. Being a highly trade dependent economy what happens in the rest of the world is of paramount significance to our economic performance.

The earlier vulnerability owing to a high trade dependence on a few agricultural exports as well as the import of basic food commodities has been replaced by a new dependence. The current vulnerability arises out of a reliance on exports of a few highly volatile low technology-based industrial products and a high dependence on imports of crude oil, raw material and capital goods.

This high trade dependence is virtually unavoidable for a small country with a narrow resource base and limited technological capacities. The diversification of our export base would no doubt take some time. Therefore the global economic conditions have a most significant bearing on our export dependent economy.

The recent set back to the economy owing to the recession in developed countries is a grim reminder of this economic reality. The gradual recovery of exports in the last one and a half years has added some hope to the economic recovery. The latest figures that consumer spending in the US has increased by 0.9 per cent in the past quarter is not inconsequential to our little economy that must hope that this increased spending would lead to increased imports into the US economy of goods exported by Sri Lanka.

The internal shocks have been probably more serious than the external in their economic impact. These have consisted of two periods of insurgencies; communal riots, especially that of 1983; the long period of civil war and periods of political instability and uncertainty. The economy is now impeded by the uncertainty about the resolution of the political crisis as well as the progress of the peace process and security in the country.

No wonder then that the Institute of Policy Studies (IPS) has placed the political crisis and peace at the centre in the projected scenarios for economic growth in the short and medium term. In the words of the IPS Report "the most significant determinant of the pace of economic growth is the attainment of a permanent and durable settlement to the ethnic problem.

Closely following this requirement is the need for political stability and certainty in the continuity of economic and social policies."The IPS has taken the view that " In as far as the peace process is concerned, the most likely scenario in the foreseeable future is an extension of the current cease-fire and continuous and prolonged discussions rather than a permanent constitutional and political settlement.

The war fatigue of both the government and the LTTE and the international play of forces are not likely to permit the revival of terrorism and a resumption of war. On the other hand, the LTTE demands being acceptable to the majority of people in a democratic manner is unlikely.

Therefore a permanent settlement cannot be foreseen in the near future. There is however a long-term prospect that the prolongation of the current peace dialogue would in the fullness of time lead to a settlement with all parties accepting a pragmatic position on the national issue."

The IPS Report upholds: "If a permanent settlement of the ethnic problem is not realised in the foreseeable future, the short and medium term economic performance will not benefit from a full peace dividend. The country is likely to reap only a partial interim dividend. More specifically this scenario means that the country would not be able to utilise the full amount of aid committed by the donors over the next four years.
Economic activities and development projects in certain areas of the North and East would be stultified and business and foreign investor confidence would not be fully restored."

The Report is however hopeful of a minimalist achievement, " the conviction that there would be no resumption of war and terrorist activities would ensure that economic activity and investment would continue to expand, as it has over the last year or more.
The level of business confidence now prevailing is likely to endure." However before the ink on the IPS Report had dried the situation had changed somewhat for the worse. The political crisis continues to generate doubts even about the prolonged discussions.
We however hope for the sake of the economy and the people at large that hostilities will not commence again.

Then we may at least attain some minimal level of economic growth and development.
In the light of the most recent inability to ensure an acceptable political settlement the economic expectations would have to be scaled down further. The political instability and manouevres have also raised doubts about the continuity of economic policies and the capacity of implementing economic programmes and much needed reforms.

The political instability has vitiated the government's capacity to implement its policies and given it an excuse for poor implementation that is also due to faults of its own.
All these factors are likely to impede not only long term economic growth, but also next year's economic performance. We have no control over the external shocks on our little economy, but recent events point to the enemy within being more potent.

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