Economy: 58-year ride on a roller-coaster
It is fitting for us to reflect today on the fifty-eight years since Independence in 1948.
A more balanced assessment insofar as the economy is concerned is that the performance in the post-independent era could have been much better than what we have achieved. For this there are both economic and non-economic reasons on which we may ponder today.

One of the least appreciated factors that determined the course of our economic, political and social development was the rapid population growth in the first three decades after independence. Paradoxically, the social achievements from just prior to independence caused considerable strains on the economy. The curtailment of the death rate described by a demographer as the amazing decline in mortality, led to a drastic and sharp increase in the rate of population growth. Population grew by 2.8 per cent in the 1960s. Even in the 1970s population grew by as much as 2.4 per cent. This surge in population growth led to a doubling of the population by1978, 30 years after independence.

The strains caused by this population upsurge on the country's economic resources were enormous. This was particularly so as the country had adopted a costly social welfare package that included free education, health and food subsidies. The increase in population meant that these expenditures increased sharply especially as international prices of rice and wheat were also rising.

The strain was not obvious at first owing to the good prices that agricultural exports of tea and rubber fetched till after the Korean boom in the late fifties. Once the prices of exports declined the fiscal and foreign exchange burden was enormous. Consequently the country moved into a controlled inward-looking economy with further aggravation of economic conditions and deterioration of living standards. The socialist ideological orientation made things worse in the 1970s. However one has to temper the criticism with the fact that unlike today, the economic and political mode of thinking in most developing countries, including our giant neighbour India, was socialism.

It has been contended that the relative prosperity of the early post-independent years led to complacency and an inertia to adopt policies for diversifying the economy. This was also due to faith in agricultural fundamentalism of the Senanayakes, who believed that a land owning peasantry was the pride of a nation and a bulwark against a communist revolution and that the ownership of land was conducive for development of a healthy democratic society. A further consideration was the need to be self-sufficient in food, especially rice. Hence colonisation or land settlement took pride of place and the transition of the export- import economy took its own time.

The first steps to industrialisation came as a response to the foreign exchange crisis of the 1960s. The import substitution strategy adopted in the 1960-65 and 1970-77 period proved to be fundamentally flawed for a small economy. The economic reforms introduced in November 1977 marked a turning point. The economic reforms included the liberalization of trade and exchange controls and the introduction of an economic strategy dependent on private investment and market forces. Foreign investment was encouraged and a greater reliance was placed on exports. To support these policies, the Government devalued the rupee and adopted a floating exchange rate. An export-led economic strategy was a cornerstone of the new policies as it was accepted that high rates of economic growth could be achieved only by increasing new industrial exports.

The new policies laid greater emphasis on private enterprise and with the process of privatisation that began later, the role of the state in production and distribution diminished.

The economic reforms and enhanced foreign funds led to a high rate of economic growth till 1983, when ethnic disturbances resulted in a setback. The subsequent period of terrorism undermined business confidence, foreign investment and tourism, besides dislocating agriculture, fisheries and a few industries in the North. The insurgency in the South from 1987 to 1989 dislocated work and seriously impaired economic activity. The economic growth rate fell from 4.3 per cent in 1986 to 1.5 per cent in 1987. In 1988-89 growth averaged only 2.5 per cent.

The weak economic performance in the late 1980s led the government to adopt further structural reforms to strengthen budgetary management, reduce inflation and improve the balance of payments and external reserve position that had weakened considerably.

The economy was liberalized further after 1989. The tariff structure was simplified and import duties reduced, foreign exchange restrictions on current account transactions were removed. In the latter half of 1989 the government depreciated the rupee by about 17 per cent, cut budgetary expenditures by 20 per cent and allowed market interest rates to prevail. Other reforms during 1989-93 included the restructuring of the tax system to eliminate distortions and reduce tax on savings, a reduction in the maximum rate of corporate tax to 35 per cent and personal taxation to 40 per cent. The process of privatisation gained momentum and by end of 1993, 42 state enterprises had been privatised. The restrictions on foreign investment in the Colombo Stock Market were removed.

Despite the change of government in 1994, there was a continuity of economic policies. The government gave private enterprise the lead role in economic activity and pledged to support private enterprise and characterized its strategy as ‘open economic policies with a human face’.
The government introduced a new safety net for the poor: Samurdhi, which was similar to the earlier Janasaviya programme.

The economic reforms since late 1977 had a significant impact on the structure of the economy and changed the basic character of the Sri Lankan economy. The share of manufacturing in GDP that had declined to 14 per cent by 1977, increased sharply to 20 per cent by 1990 and to about 27 per cent currently. The contribution of agriculture to GDP declined to only 16 per cent of national income by 2005. There was a sharp increase in the contribution of the services sector from 40 per cent in 1977 to 55 per cent today.

These structural changes in the economy are reflected in the country's trade pattern. Agricultural exports that dominated the export structure from the beginning of the plantation economy till the 1980s declined to only 19 per cent in 2004. Notwithstanding these compositional changes in exports and imports, Sri Lanka's trade dependence (imports and exports as a proportion of GDP) remains high. In 1950 the country's trade dependence was 70 per cent. It was only marginally less at about 68 per cent in 2004.
Yet the character of the trade dependence has altered significantly. The trade dependence is more industrial than agricultural. Manufactured goods dominate exports. Raw materials and capital goods for industries account for a larger share of imports than food and other consumer imports.

There has been substantial progress as well. Per capita incomes have increased fourfold to over US$ one thousand, a country that imported most of its food requirements with a population of only 7 million now more or less feeds herself, the expectation of life at birth has risen from around fifty years to 72 years, adult literacy has reached over 90 per cent, rates of infant and maternal mortality has been reduced significantly and communications have improved considerably. And all this has been achieved in a context of a vibrant, if not excessively vibrant democratic system.

Although the country has achieved much in these 58 years, it has been inadequate to resolve pressing social and economic problems of poverty, unemployment and inadequate incomes for a significant proportion of the population. The lack of pragmatism in economic policy formulation, ineffectiveness in implementation of economic programmes, excessive opposition to reforms, excessive unionisation, and indiscipline, deterioration in law and order, weakened public administration and inability to resolve the ethic crisis have all enfeebled economic progress. Other nations that were behind us have overtaken us.

The pace of economic growth cannot be accelerated adequately until peace is achieved and our vision is focused on reforming political, cultural and social values.

Back to Top

Back to Columns

Copyright © 2001 Wijeya Newspapers Ltd. All rights reserved.