Will we contract the Dutch disease?
For whatever reason Sri Lanka has enjoyed a great deal of goodwill from time immemorial. The Teardrop Island on the Indian Ocean has had a fascination for travellers and those who dreamed of travel to far-off places. The smallness of the country, her natural beauty, the tea gardens, the compactness in all it has to offer, the smiling faces, the variety of cultures, the openness of society and the hospitality of the people are among the reasons adduced for the empathetic feelings. Whether it is one of these reasons or several or all, the fact is that the country has always fascinated foreigners.

Some of those who have come for a short spell of duty have given up their homeland to live here. The celebrated examples are of course Sir Arthur C. Clarke and former American Ambassador Spain. They are but a few. The irrefutable fact is that the country and people enjoy much affection and goodwill from the world outside. Governments, representatives of countries and multilateral international organisations, international agencies, and non-government organisations have demonstrated this empathy. This goodwill is what made so many people and so many countries come to our aid at the time of the nation's worst calamity. Let us not forget that they have done so whenever the country has had such misfortunes before as well.

The magnitude of the disaster and the television coverage that took the scenes of destruction to the homes of the rest of the world was no doubt the explanation for the extensive response. Individual, community organisations' and government responses were just magnificent. The outpourings of financial aid, the resources of skilled personel and volunteers from the world over were astonishing. International agencies too took prompt action to extend their generous help.

The amount of aid pledged has been enormous and could go a long way in rebuilding the country's devastated areas. As we pointed out last week, all, the pledges that were made may not translate into actual commitments. There may be an element of exaggeration in the real value of the assistance and most of all we may not be able to utilise what is committed owing to our own limited absorptive capacity. "Absorptive capacity" is an euphemism for organisational incompetence, inefficiency, corruption and other misdeeds.

Nevertheless we have substantial amounts pledged that should be used to a maximum in a cost-effective, efficient and expeditious manner. Sri Lanka should be beholden to the generosity shown by the world and the best way the authorities could respond is by making sure that the funds are distributed to the most affected areas irrespective of geography, politics and ethnicity. The Government can exonerate itself well by this commitment to serve all parts of the country, even though the LTTE will use this opportunity to pronounce they are discriminated against.

Spokesmen of the LTTE such as Tamilchelvan have already gone on Canadian TV saying that the tsunami case shows that they need to have sovereignty. In Sri Lanka the LTTE has accused the government of using aid money for buying armaments and tilting the balance of military strength in the government's favour.

Despite such accusations the effort to distribute assistance to all parts of the country must go ahead undeterred. It is indeed gratifying to note the institutional organisations and mechanisms that are being put in place to achieve this objective jointly.

There is little doubt that the Government is strengthening its political popularity. It will use the money for medium to long-term growth for immediate gains. It will also strengthen the hand of the Government in power to increase public control of the economy. This has been the bane of the country for many decades, despite the reforms of recent years. This calamity should not lead us to another calamity of attempting to control the commanding heights of the economy as in the past. The government has enough on its hands to rebuild and improve economic and social infrastructure and support other public services such as improving the capacity to care for the orphaned and destitute.

The inflow of aid is a real danger of the government contracting what economists call the "Dutch disease" - the tendency for governments to fritter away finances imprudently owing to the inflow of aid. As Joseph Stiglitz has said "Indeed, the flow of resources can sometimes actually impede development, through a mechanism that is called 'Dutch Disease'. The inflow of capital leads to an appreciation of the currency, making imports cheap and exports expensive." Wise counsel must prevail to avoid such pitfalls.

This is especially so as the relief that is granted to the country from institutions like the IMF and World Bank are temporary. They are basically a rescheduling of the debt repayments. If that relief is not used wisely the country can end up in a worse position in the years ahead. Can we avoid that snare?

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