Post-War Sri Lanka: Will the Economy Take Off?

Although the war is over, without political stability and good governance Sri Lankan economy is unlikely to settle to a sustained growth trajectory. Without economic growth and inclusive development the phoenix of war may come to life again.

Singapore’s economic architect, Dr Goh Keng Swee, based on his experience, pointed out that at the developmental stage non-economic factors play a much bigger role than economic factors. Among them, he argued, the role of government is pivotal. The Nobel laureate, Amartya Sen, reiterated these views by arguing that good governance, not less governance, is crucial to addressing the challenges of economic inequality, environmental degradation and terrorism. The importance of political stability and good governance is again re-iterated in the 2008 Growth Report prepared by the Nobel Laureate Michael Spence on behalf of the Commission of Growth and Development.

Political stability is what is most needed for Sri Lanka now. The experience of East and Southeast Asian economies amply demonstrates the importance of political stability in sustaining growth. Single-party rule over a long period provided the platform for a successful take off of their economies. The frequent change of power in Sri Lanka between political parties has created a situation of what the American economist Mancur Olson called a roving bandit. The role of the roving bandit is to plunder as much as possible during his short stay in power without doing anything in return for the plundered. The problem with a single party rule is that it may become a stationary bandit. As Olson pointed out, stationary bandit is still better than having roving bandits around. The stationary bandit has the incentive to make the pie bigger so that he can plunder more while keeping the plundered also better off.

Sri Lanka is less likely to settle to a single-party rule for a long-enough period for the economy to take off.  Given this scenario, an alternative would be for all the political parties to agree upon a long-term economic agenda, a blue print, that the ruling party cannot deviate from without the consent of the other parties.  The objective here is to set the vision beyond a single political term in office and reduce the engagement of the ruling party in crowd pleasing activities to win the next election. Such an agenda guarantees continuity (instead of complete or partial abandonment of previous party’s policy agenda that we have seen in the past) and keeps room open for branching off to new areas.   Obviously the key ingredients of the long term policy agenda need to be worked out carefully.

Political stability does not necessarily ensure quality of governance. Although the leadership matters it is wishful thinking to wait for a benevolent leader to emerge and set everything right. In general quality of governance emerges through the type of economic system and political process in place. Open economy, open to international trade and investment, is one mechanism that tends to improve the quality of governance. (In technical terms, quality of governance is an endogenous variable.) Apart from the experience of the fast growing East and Southeast Asian economies, the disciplining effect of economic openness on the formidable bureaucracies of China and India is quite visible now. Even the most promising leaders in closed economies have failed to bring about the changes they desired because of over-powering bureaucracies. Although the Sri Lankan economy remained opened since 1977, the country could not reap the full benefits of an open economy because of the war. It is unwise not to pursue the open economy policies just because of the uneven impact it had so far on the economy.

Private sector driven open economy does not mean that the Government takes a hands off approach. Government’s heavy involvement in many sectors, at least until the economy takes off, is essential. Sri Lanka has inherited from its past one of the best irrigation systems in the world. Making full use of this and developing the agricultural sector to create a stable domestic economy that can cushion the economy from international shocks that are transmitted through the open economy requires the government involvement and directive. As Singapore has done it Sri Lanka’s successful take-off lies on a “market driven guided economy”.

As a final note I would like to emphasise that the aim should not be for faster growth to catch up with others, the aim should be for sustained growth even at moderate levels. Faster growth comes with a price. Apart from rapid environmental degradation, it also tends to degrade human qualities. Sri Lanka stood out as an outlier in the developing world for its high human development indicators despite being a low income country. The war of course took a heavy toll on the economy and therefore on social programs. It is now a matter of reinvigorating this development process that focused more on the quality of growth.

2 Responses to "Post-War Sri Lanka: Will the Economy Take Off?"

  1. Tilak Abeysinghe   January 28, 2013 at 10:31 am

    Tilak,look up Michael Porter on 'Micro economic Foundations of prosperity' publication about 10 years ago (2002 I Guess). in summary we can mainstream development and growth only if our firms (small/medium and large enterprises) are prospering.They propser if their capacity for competitveness is robust !. Simple follow (1) Gemidiriya Livelihood projects (2) Our very own ÍFC/world bank project 'SME cells in Southern and Sabragamuwa regional chambers (2009) (3) Many Regional development plans /development projects in pipeline (under IFAD,IDA,ADB.JICA) in South ,East and North.

    We have so far not been able to succesfully implement them (sustainable or not) over time.
    Right now my firm is contracted to deliver one such Regional Plan for 2013-1016 .Google Eastern Development Plan 2012-2015 you will see my point.(There are reasons for this call me and you shall know !!)

    Rauff Reffai