Pre-1977 closed economy – Some benefits
Posted on September 21st, 2017

DR. JANAKA RATNASIRI Nawala


The recent correspondence on the above appearing in the Sunday Island of 17th and 10th of September prompted me to pen this piece. The recollection of the past emphasizing its negative aspects is fine, lest people forget this era of events which the younger generation is not even aware of. However, there is a positive aspect of it, too. It appears that the Sirimavo Bandaranaike regime’s decision to adopt such a harsh policy towards external expenditure was the result of the refusal of multi-lateral financial agencies to extend financial assistance to Sri Lanka to balance its budget for reasons best known to them. Hence, the government was compelled to take this decision to preserve whatever foreign exchange it had at its disposal, as it did not have any other option.

While the import of even essential goods such as food and medicine were highly restricted, all items considered non-essential and luxury were totally banned. These included motor vehicles for personal use, electrical and electronic items, computers, milk powder, clothing, and cameras etc. These restrictions caused a severe shortage of these items which were in demand among the people. The only way of acquiring such items at that time was to purchase them from people returning from abroad who brought them as personal belongings. It was a common sight in print media, then to see advertisements for them described as “just unpacked”.
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Those who had the financial means saw an opportunity in this situation, which resulted in many of them, particularly the textile traders in Pettah, venturing into manufacture or assembly of such items as electrical fans, radio receivers, cables, refrigerators, electric lamps, bicycles and electrical accessories etc., which were in high demand.  But they had to surmount enormous difficulties in getting the necessary permits to import raw material and machinery, which were issued by committees manned by government bureaucrats. It was a case of imposing barriers and hurdles at every point rather than helping the nascent industries who were trying to get themselves established. Despite these barriers, some of them were successful in getting quality products into the market and a few still remain.The closed economy gave an impetus for the development of the local industry and it was indeed one its benefits.

Then came the 1977 government change, and under its policy of open economy, all restrictions on imports were removed. The market was flooded with all imported consumer goods, and with the Sri Lankan mentality of preferring imported items over the locally produced, it did not take too long for most local industries to vanish from the scene, except for a very few. Today, whatever foreign exchange earned through the exports of our produce, supplemented by remittances by our workforce in the Middle East is all spent on importing all kinds of consumer goods unrestricted. Motor vehicles of all makes and sizes, and most of them with full options, flooded the market as anyone having money could import them, not necessarily through a sole agent.

Travelling around the city in a SUV intended for off-road running and costing over 10 times that of an average motor car, is a symbol of affluence which our politicians love to show. Recently, a politician was heard over the electronic media saying that unless they have a SUV they cannot visit their electorates in the hill country. Anyone travelling around the city suburbs and even away from them can see thousands of unregistered vehicles displayed in vehicle sales centres awaiting buyers. Isn’t this an unwanted waste of foreign exchange?

The government, instead of making an attempt to manage the meagre foreign reserves wisely, itself goes on a buying spree importing fleets of most luxury vehicles for politicians, with no regard to the absence of money in the till. It is shameful of them to run around in luxury vehicles bought with borrowed money. The government can carry on with the policy of unrestricted expenditure because of the support given by foreign “friendly” governments and multilateral financial institutions, who readily advance loans to the government. When the government could not repay the capital and interests with the earnings, it is compelled to take more and more loans, finally ending up in such cases as the bond scam.

Had the post-1977 government, instead of swinging the economy from one extreme of a total closed system to the other extreme of a totally open economy, adopted a middle path, this predicament would not have arisen.  The closed economy helped in establishing many import-substituting industries meeting the needs of the society. These industries were carrying on with great difficulty because of the restrictions imposed on the import of raw material and machinery.  If these restrictions on raw materials and machinery were lifted altogether, while limiting the import of finished goods, especially those goods being manufactured locally, Sri Lanka’s economy would have been much different today.

Such a middle path policy would have helped in developing the local industry, bringing economic benefits to the country, provide more employment to people and create a new class of entrepreneurs. These industries could have been assisted to acquire modern technologies, upgrade their products and even look for export markets. But nothing of that sort happened because of the short-sighted policies of the government. Not only the politicians, but also the policy makers at the helm – Treasury, Finance Ministry and the Central Bank – who advice the politicians are equally responsible for this sad situation.

The open economy also resulted in the closure of several industries that the previous regime commenced with heavy investments using foreign loans. These include the ceramics, textiles, hardware, paper, plywood, fertilizer and paddy processing plants, where even the buildings were razed to the ground in some of them. Their machinery was sold for scrap or removed by politicians as happened with the paper factory at Embilipitiya. It is indeed a pity that these industries which commenced with great hope in the sixties and seventies had to face such a cruel fate. Political interference and mismanagement were also partly responsible for this situation.

It is not too late, even now, for the Government to rethink whether to keep the economy fully open, or keep it half open, leaving room for the local industries to develop. One need not return to the Bandaranaike era by choice, but a continuation of the present fully open economy policy, and extravagant expenditure, will certainly lead the country one day back to that era through necessity.

DR. JANAKA RATNASIRI

Nawala

2 Responses to “Pre-1977 closed economy – Some benefits”

  1. Senerath Says:

    Travelling around the city in a SUV intended for off-road running and costing over 10 times that of an average motor car, is a symbol of affluence which our politicians love to show.

    Those days it was a symbol of dire state of our roads, not affluence.

  2. Christie Says:

    Dear Dr Janaka

    The problem we have is that the control of our economy is not in the hands of the majority of the country let alone the politics.

    Sirima as well as JRJ were both under the influence of the minority Indian Cabal and Cartel. That is the problem we have.

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