Govt. castigates even well-meaning criticism of econ policies-report

The resurgence of the ethnic conflict in the past couple of years is retarding the economy, according to a Sri Lankan economist.

In a paper on the economy of peace and conflict in Sri Lanka, Principal Researcher at the Point Pedro Institute of Development, Dr. Muttukrishna Sarvananthan says that the business community (private sector) appears to be apathetic both on the deterioration of the economy and the worsening human security situation throughout the island (not just in the conflict region) because of the belligerence of the government, which castigates even well-meaning criticism of economic policies of the current regime as sympathetic to the cause of 'terrorists.'

He points out that the salient features of the economy during 2006 and 2007 include the remarkable economic (GDP) growth amidst a high intensity civil war but this growth is also coupled with negative growth of the agricultural sector in spite of the fertilizer subsidy and guaranteed purchase price for paddy (indirect subsidy). Sarvananthan further writes that there has been low and declining unemployment, the acceleration of public expenditure, particularly defence expenditure, sustained double-digit inflation, financial repression by way of suppressing interest rates, re-nationalisation and resurrection of bankrupt public and private institutions and international capital market borrowings in lieu of concessionary loans from international financial institutions.

Sarvananthan argues that out of those salient features, only the GDP growth rate and declining unemployment rate have had a positive impact on the people and country. The external sector of the economy has been the most challenging for the government given the limited international isolation because of unrepentant and blatant violations of human rights and humanitarian norms in counter terrorism measures.

The overall argument is that the economy is overly politicized primarily due to the fragile balance of power in parliament and the survival of the government as demonstrated in the recent voting on the budget. In this heavily politicized context, rational and prudent economic policy decision making gives way to ad-hoc survival strategies.

Although the government has a psychological edge over the joint opposition because of its battlefield success, Sarvananthan writes that the lack of economic peace due to growing trade union agitation and public unrest as a result of galloping cost of living could hamper the sustainability of the military putsch in the long run. He further states that the litmus test for the government is how successful would it be to balance the military and economic imperatives for peace in the short and medium terms. The military and economic imperatives for peace are intertwined in the short and medium terms and therefore critical for the government, whereas the political imperative for peace (i.e. finding a lasting solution to the protracted ethnic conflict) appears to be a long-term concern.

Despite the gloomy outlook, Sarvanathan believes there is a ray of hope for the economy due to the steady deterioration in the military capability of the LTTE in the past two years, notwithstanding occasional daring guerilla attacks both closer to the conflict zone and in and around Colombo. There is a close relationship between psychology and economics, especially as regard to investment. Battlefield successes have the potential to give an implicit psychological boost to the economy through a feel good factor. However, political impediments to rational and prudent economic policies (due to the fragile balance of power in parliament) may undermine the potential of the feel good factor boost to the economy.