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The politics of economics

Print edition : Apr 22, 2005 T+T-

Economic Policy in Sri Lanka - Issues and Debates,edited by Saman Kelegama; Sage Publications, New Delhi, 2004; pages 522, Rs.995.

GAMINI COREA is one of Sri Lanka's most outstanding economist-civil servants and has held many key positions in that country, as Secretary of the National Planning Council, Secretary of the Cabinet Planning Committee and Senior Deputy Governor of the Central Bank. He has made a mark as an international civil servant, holding many responsible senior positions in the United Nations and its agencies. Of these, the most significant was his position as the Secretary-General of the U.N. Conference on Trade and Development (UNCTAD) from 1973 to 1984. He was a prominent member of the South Commission in the late 1980s and served as its chairman in 2002-03. He has been associated with many academic and research bodies and was President of the National Academy of Sciences of Sri Lanka during 1994-97.

The 22 essays contained in this volume, authored by well-known Sri Lankan economists, social scientists and scholars from outside, are a tribute to Gamini Corea. These essays, says the editor of the volume, "discuss the evolution of policy over the years, the ideology governing the evolution, the debates on policy, and the key economic issues in contemporary Sri Lanka to which Gamini Corea made substantial contribution at one time or another." Together they present a fairly comprehensive account of Sri Lanka's developmental issues and the changing profiles of policies to deal with them.

The background to Sri Lanka's development policies since the country became free in 1948 is the manner in which the island's polity and economy were shaped during the colonial era, particularly during the final phase of that period. Colonial policy towards Sri Lanka, then Ceylon, would appear to have been much more enlightened than it was in the case of India, for instance.

A constitutional reform in 1931 introduced universal adult franchise, possibly making Sri Lanka the only colony to have had that privilege. The natives elected to the legislature on that basis, however, did not have any executive authority, which rested with the essentially foreign bureaucracy. People's representatives could pass certain legislative measures for the welfare of the people. The adverse social and economic circumstances of the people in the post-Depression period gave a sense of urgency to welfare measures. An attempt was made to quantify unemployment and poverty and to suggest measures to tackle them. The field of health care received special attention. Education was emphasised too. And during the Second World War, a food subsidy scheme was introduced.

Thus, when independence came, Sri Lanka already had the basic ingredients of social welfare, thanks to which the country was way ahead of other newly emerging nations in terms of literacy rates and a variety of health indicators. Development literature since then has continued to discuss whether a country with low per capita income can achieve high levels of social progress and whether it can be sustained over time.

Sri Lanka's economy, however, had the typical features of colonialism - dependence on traditional agriculture, a plantation economy that was an external imposition, and a primary goods-dominated export sector. An advanced social sector that substantially defined political discourse superimposed on a backward economic set-up provided the background for development debate and policies since independence.

The initial attempt was to take the economy forward. An emphasis on domestic issues almost bordering self-sustained growth planned and led by the state appeared to be the right thing to do. Development theory of the time seemed to justify it. As for the external sector, the boom following the outbreak of the Korean war made the island's position quite comfortable even to the extent of removing many import restrictions imposed during the Second World War. The United National Party (UNP), which came to power, was not in favour of any comprehensive national planning but came out with a Six-Year Plan (1947-53). A mixed economy was envisaged in which the state would undertake large public expenditures mainly for social welfare, free mass education, food subsidies and free public health services. The state also made a commitment to capital expenditures for economic infrastructure, power, transportation and communications. This plan had no projections of national income and its growth, or of savings and investment, or of balance of payments. These were to be decided by the actual working of the economy. If the deep-rooted structural problems of the economy were recognised, nothing was done to rectify them.

The 1956 elections were won by the left-oriented Sri Lanka Freedom Party (SLFP) and its more leftist allies. Whether the coalition's victory was because of the economic policies it projected or because of the promise to have Sinhala as the only official language will continue to be debated. But the new government set up a National Planning Council with the Prime Minister as Chairman and soon formulated a Ten-Year Plan. The Plan recognised the need for rapid industrialisation for high rates of growth and employment generation and for changing the sectoral pattern of the economy. It envisaged a near doubling of the share of the manufacturing industry in gross domestic product (GDP) during the 10 years. However, the assassination of Prime Minister S.W.R.D. Bandaranaike soon after the launching of the plan and the political unsettlement that followed led to its virtual abandonment, though when the SLFP came back to power in 1960, the new government came out with a Three-Year Implementation Programme (1962-64).

Apart from political changes, economic factors too went against the projections of the Ten-Year Plan, the most glaring being the grave deterioration in the balance of payments. It is rather surprising that the authors of the Plan proceeded on the assumption that a small island economy would for long have a stable external situation. But once events brought to the fore the untenability of the assumption, major changes had to be brought about in import-export policies, capital movements and foreign exchange regimes.

After many ad hoc decisions under succeeding governments (of both UNP and SLFP coalitions), there was a major policy change in 1977 with the convincing electoral victory of the UNP coalition under J.R. Jayewardene. In retrospect, it can be seen that 1977 inaugurated an era of liberalisation and reliance on markets and in that sense a paradigm shift in economic policies. The major plan of the new policy was the opening up of the island's economy not only in terms of trade and exchange rate reforms, but a massive flow of foreign capital channelled into a donor-supported public sector investment programme of land settlement. Indeed, it was more than an economic programme.

The foreign scholar who deals with this phase of development policy in the volume says: "No one who lived through the Jayewardene years would consider them adequately characterised by its economic policies. They were also coloured by a series of highly charged and controversial political measures - constitutional changes [shift from the parliamentary system to an all-powerful Executive Presidential system], repression of opposition and dissent and the muzzling of unions... . The changes were part of the distinctive political-and-economic programme of the Jayewardene government in which economic reform was no more than a part, and indeed of declining importance.... A far more pressing concern was to benefit supporters, reshape political institutions to prevent anyone derailing his vision, and entrench his own party's domination over the longer term." (page 342)

Ranasinghe Premadasa, who followed Jayewardene as President in 1989, used the same approach of a highly politicised economic programme. To quote the same scholar again, "... an already centralised political system and an already politicised bureaucracy were reinforced by Premadasa's determination to intervene politically `to get things done' and to exert partisan political control over public affairs... . Political violence, thuggery and assassination increased, eliminating competitors within the party, intimidating opponents and resulting in a brutalisation of Sri Lankan society" (page 344-45). As is well known, Premadasa himself was assassinated in 1993.

Subsequent history has shown that economic policies in Sri Lanka have become a subordinate part of a highly volatile political system. Another contributor to the volume observes: "Given the political system in Sri Lanka, policy reforms have traditionally been determined by a five or six-year electoral cycle, with the government only implementing a particular policy if its net benefits outweighed its net costs within this short span" (page 376).

The volume offers much more. The debates on a wide range of issues are noteworthy for their academic contents - how to deal with the island's traditional agriculture; what to do with the plantations; should there be a specific industrialisation policy; what is the best way to deal with exchange rates in an open economy; should an attempt be made to diversify exports; what role should state-owned enterprises have in a rapidly marketising economy; how to deal with persisting poverty and glaring unemployment; should migration be encouraged; and more. But, notes one of the contributors: "Policy debate where it exists has been largely confined to the academic realm with little interaction between the academic and policy-making communities" (page 364).

What is otherwise a fairly comprehensive volume has two major gaps. First, should a small island economy pay special attention to its relationships with neighbouring economies or can it proceed as though in a swiftly globalising economic order where physical proximities are of no major concern? To what extent will Sri Lanka's future economic position be affected, for better or for worse, by the new international institutional regime, in particular the World Trade Organisation? Considering the role that Gamini Corea has played at the international level, it is rather surprising that these issues, which will surely have a major impact on Sri Lanka's economic policies in the immediate future, do not get attention in the volume.