Shackles on Development
Posted on December 1st, 2022

Sugath Kulatunga

This is a season for scapegoating. Aragalaya blames Gota for all the ills in the economy and called for his resignation and demanded that both Gota and MR must go. Later they added Ranil to the list of expulsions. Maithree swears that only an all-party govt can find a solution. Minister Wijedasa thinks that without a legal solution no economic solution can be found. The JVP and FSP insist that the solution must be extraconstitutional.  All these snake oil vendors claim that a solution to the present economic crisis is in only their prescriptions.

At the same time the economic wizards who are responsible for the catastrophe are busy firefighting with their monetary arsenal. None of these specters or their minions have the honesty and courage to say Mea culpa and own up their doctrinaire blunders and profligate behaviors in the past.

Meanwhile people were dying in fuel and gas queues. Children are starving at home. Media is not in short supply of their variety of high-octane fuel which they are gleefully adding on to the fire. There is a severe escalation in all prices. Inflation is running at over 60 percent. There is increase of crime and desperation.  A social upheaval of a catastrophic proportions is in the making. Vultures are on nearby treetops waiting for the mutilated cadavers. Media is adding fuel to the fire. Nary a word on the real problem and how it can be solved.

The present economic debacle is the result of irresponsible policies of political leaders and criminal negligence of economic wizards in the Central Bank and Ministry of Finance.

The simple explanation of the present crisis is the chronic adverse balance of payments situation of the country. In the pre-Corvid the returns from foreign employment and tourism mitigated the crisis. But the vulnerability of these two sources was soon demonstrated. The only solution was and continued to be the closing of the adverse trade balance. The proven path is in industrialization and not in subsistence agriculture which is practiced in Sri Lanka. The country has a high density of population, and the land man ratio is high. In modern agriculture with the introduction of new technologies there is a drastic reduction in employment in agriculture. But Sri Lanka has not given industrialization any priority.

At independence Sri Lanka (Ceylon) had a stable democracy, sound economy, and an effective public service and external assets equal to 100 percent of annual import value. We were second to Japan on almost all social indicators and above South Korea as late as the mid-sixties. Singapore‚s per capita income was just a little bit higher than Sri Lanka at that time. It is now over USD 64,000 whereas ours is USD 3845. The oft repeated question is why did Sri Lanka with better physical resources failed to advance like Singapore.

What went wrong? Did we have the correct policy mix? What were the unforeseen events which impacted on the destiny of the country?

This note is impressionistic but unbiased. It tries to focus on turning points in the political and economic trajectory of the country and the consequential policy determinations.

1. In 1944, the State Council resolved to launch a State Project of Industrialization in Ceylon. In the same year there was the – Industrial Corporation Bill. The concept of socialist industrialization was keenly advocated by the Marxist parties which believed that full employment could be achieved only through industrialization. In the same year J.R. Jayawardene (JR) moved a motion in the State Council for the ‚preparation of a complete plan for industrialization‚ There was a firm bipartisan consensus on industrialization with a different emphasis on ownership. D.S. Senanayake (DS) was a prime mover of the plan for industrialization.‚

At the general election of 1947 the UNP fell short of a majority, and had to form a government in coalition with the All Ceylon Tamil Congress. The success of the left parties at the 1947 election alarmed DS who was an astute politician. He was aware that the left could build a mass base with industrialization. DS also had a staunch commitment to the development of agriculture through colonization. But his prime motive was to create a pool of peasant farmers who would be a strong base for the UNP. The project had both a nationalistic and political flavor and was vigorously pursued in the face of criticism from the left parties. But for the political bias, DS could have steered a two-pronged strategy for the development of the country leading to food security and full employment. We had the funds, human resources, and the infrastructure to venture into manufacture. But politics prevailed.

This was the most important opportunity missed by independent Sri Lanka for an early start in a manufacturing-based economy.

2.DS denied SWRD Bandaranayake (SWRD), who was at the time the leader of the House, his due place, and maneuvered to get his son Dudley Senanyake to succeed him as Prime Minister. This maneuver also kept JR, the best brain in the party, out in the cold. If JR succeeded DS, he who believed in planned industrialization could have introduced industries with modern technology with the help of the Japanese who were under obligation to him for his open support to Japan on war reparation conference at San Francisco in 1951,where he rejected reparations and quoted the Buddhist saying: nahi verena verani.

Dudley who inherited the leadership was a perfect gentleman but a weak leader. He followed the policies of DS in giving priority to agriculture. He resigned in the face of a civil disobedience campaign (Hartal) organized by left parties. With his resignation Sir John, the strong man in the UNP became the Prime Minister. Sir John took over the leadership at a moment of history of politics in Sri Lanka when there was a tempest of opposition to the policies of the UNP. It also coincided with a socio-cultural groundswell spurred by the Buddhist Commission Report. The flamboyant style of Sir John was not helpful in resisting the forces against the UNP.

3. The wrong choice of the successor by DS was the next miss of opportunity.

The creation of a new party by SWRD resulted in both positive and negative consequences. The split created divisive politics based on ideology and ethnicity. This was the dawn of the era of chauvinistic and emotional politics. However, SWRD believed in planning and development based on nationalism and state ownership. He established a Planning Secretariat which formulated a 10 year plan in consultation with renowned development economists such as Gunnar Myrdal, Joan Robinson, Kenneth Galbraith and Nicholas Kaldor. It is reported that Myrdal recommended the invitation of foreign investors on a Build Operate and Transfer basis. The period of foreign operation was to be limited to 20 years. (The Prima investment during the time of JR was on this basis). The ascent of SWRD was supported by the Pancha Bala Vegaya led by leading Buddhist clergy some of whom acted as kingmakers. The assassination of SWRD by the same kingmakers terminated the planned development in the country. The danger of depending on assumed kingmakers is a lesson for all national leaders. The proposals and the 10-year plan of SWRD were not implemented by subsequent governments. This was a big miss.

4. On the demise of SWRD, Philp Gunawardhane, the most dynamic and experienced minister in the MEP government was denied the Prime Minister‚s position. That prevented the continuation of the 10-year plan. At the same time the country lost the opportunity of realizing the best of the left parties which had the talent and the dynamism. It was also partly due to the misplaced ideological stance of the left. Left politics had its origins in the Suriya Mal Movement and was politically entrenched in the rural coastal and the Kalani valley Districts. But they believed in a permanent revolution achieved with the support of the plantation population and the trade unions, and neglected the rural population. Left politics was also fragmented on theoretical trivialities. Except leaders like NM and Philip, other key party cadres were too dogmatic. How removed some segments of the left from ordinary people was reflected in the very names of the parties like Bolshevik Leninist party.

5. The left movement had the opportunity to support SWRD who was getting alienated with the rightist groups in the SLFP. Had they joined the MEP the hand of SWRD and Philp would have been strengthened and the reactionary elements eliminated. Even after SWRD the left elements in the MEP would have continued to rule.

This was another lost opportunity.

6. The 1962 military coup attempt and the 1971 JVP adventure saw the emergence of the strong man Felix Dias in the SLFP, who opposed the smooth operation of the coalition between the SLFP and the left in the 1970 government. This denied the country of the continuing services of intellectuals like NM and Colvin. Felix was smart but arrogant and had an inherent, feudal aversion to socialism.

7). The 1977 JR regime missed many opportunities under fortuitous circumstances, and  made more self-inflicted blunders and evaded emerging opportunities. The 1977 regime established new institutions like GCEC and EDB for investment and export development (which had origins in the previous regime) but introduced a wide-ranging package of neoliberal policies. The government removed all import controls and opened the floodgates to imports. These free-market policies destroyed many nascent domestic and import substituting industries and had a severe adverse effect on domestic agriculture. The import liberalization diverted most of human and financial resources into import related activities. Although the government was keen to encourage exports the sector was starved of finance which went to meet the incessant demand for import and construction activities that carried minimal risk. The Banks were more than happy to finance these activities which involved low risks. Import finance was recoverable in a short time. Finance for exports and investments in export projects carried interest rates as high as 25 percent. The 1977-regime went into a frenzy of unwarranted and unplanned privatization of state enterprises. This was contrary to the successful development model of Singapore, which adhered to the basic principles of a free market economy, but never shied away from state planning or state ownership where deemed important. The premier State enterprise Temasek Holdings of Singapore’s has nearly $300 billion in equity holdings.

The JR regime did not focus on economic restructuring other than dismantling existing institutions like the Marketing Department and the Paddy Marketing Board which were the connecting links between the producer and consumers of food products. The adverse impact of this policy is felt even today. Unlike Sri Lanka, in 1979, the Singapore Government started a program of economic restructuring. This was achieved by modifying education policies, expanding technology and computer education, offering financial incentives to industrial enterprises and launching a productivity campaign‚. Sri Lanka Government had no innovative policies. Even today the education system in SL is not producing the manpower to fit the needs of skills and knowledge for now and the future.

On the other hand, JR regime was notorious for deliberate wrecking of opportunities in the field of politics. Power sharing at the periphery has been a demand since the time of independence. After lengthy negotiations the main Tamil party the TULF had agreed to a scheme of decentralization of government at the District level, and a law was introduced in 1980 for the establishment of District Development Councils. It is well known that government circles sabotaged the election of the DC in Jaffna. It is also alleged that the Jaffna library was set on fire during the same time. These episodes made the TULF getting disillusioned with the DC scheme and finally withdrawing from the agreement to work within the scheme. The final outcome is the imposition of an unwanted and divisive white elephant in the country in the form of Provincial Councils.

On the plus side the Accelerated Multi-Purpose Mahaweli Project was launched during this time.

This was a series of self-inflicted harm and lost opportunities.

8) The next criminal blunder of the UNP was the alleged instigation and evading the control of the communal riots of July 83. This single event provided the LTTE the manpower and motivation to fast-track their separatist movement against Sri Lanka and resulted in the commencement of a civil war backed by India. The Black July 1983 also saw the mass flight of Tamil civilians to foreign countries where they formed anti Sri Lanka campaigns and won over the support of politicians in many western countries. It must also be mentioned that the UNP tried in vain to put the blame for the riots on a few opposition political parties. The banning of the JVP on this count kept them out of democratic politics which had its own ramifications.

An idiotic and timid decision with long term and pervasive damage domestically and internationally was the sudden ceasing of theVadamarachchi Operation.

In June 87 the UNP government made a firm decision to wipe out the LTTE from the Jaffna peninsula and bring an end to the terrorist menace. The SL army launched a full-scale operation in May/June 87 in Jaffna peninsula named the Vadamarachchi Operation using over 8000 troops. When our troops were about to capture the LTTE leadership India intervened with a show of force and JR backed out. JR, known as the Fox was outfoxed by the then Indian High Commissioner Dixit who was an obtrusive, obnoxious bully.

If that did not happen the war would have been over 30 years before Nandikadal.

India did not stop there. India bludgeoned Sri Lanka to enter into an Accord and an amendment to the Constitution of Sri Lanka for the establishment of Provincial Councils with powers more than enjoyed by the States of India providing a steppingstone to a future Federal Sri Lanka. In a dubious procedure of letters exchanged, India dictated terms on our foreign policy, use of our harbors and airports, Trincomalee Oil farm, and broadcasting.

With this, development opportunities were stymied for over three long decades.

JVP too was indirectly responsible for the IPKF intervention. JR who was more worried of the JVP than of the LTTE, was forced to invite the IPKF as he did not have the resources and the confidence to fight on two fronts. At this time (1987) JVP had launched a major insurrection in the South. Even with SL troops moved to the South, in this conflict the country lost over 60,000 youth killed by the JVP and state agencies. By November 1988, Sri Lanka experienced near total anarchy. JVP organized strikes that affected all Publics services. The economic damage committed by JVP sabotage was colossal. In addition, the society was traumatized, and violence became the norm.

Two specific misses of FDI which could have been trail blazers and made an immense cutting-edge impact on the technology, export earnings and employment in SL were that of Motorola and Samsung. Motorola withdrew after the 1983 Black July and went to Indonesia. But what we missed with the withdrawal of Samsung which initially showed a keen interest is enormous and tragic. They did not give a straight reply to this writer on why they withdrew but said that SL was not ready for FDI. The reason is anybody ‘guess. What we lost was the gain of Vietnam which welcomed them. During 2020 the value of Samsung exports from Vietnam was USD 54 billion. Samsung Electronics plans to make an additional US$3.3 billion investment in Vietnam this year to make chip parts.

Despite all these omissions and commissions of policy makers, Sri Lanka has shown a remarkable resilience. The country has withstood the disasters of a catastrophic separatist war, two youth insurrections and a devastating tsunami. The country also had to deal with a brazen Indian intervention and palpable and oppressive Western pressure which continues unabated.

According to India’s former National Security Adviser and Foreign Secretary, Shivshankar Menon Sri Lanka’s internal war which ended in May 2009, had cost the country around US$ 200 billion Menon says that this estimate does not include opportunity costs” .

https://www.newindianexpress.com/world/2016/dec/13/sri-lankas-internal-war-cost-us-200-billion-15484

There is no estimate of the economic cost of the two youth insurrections, but the loss of life is estimated at 60,000. Loss of life with the tsunami is estimated as 40,000.

Direct and indirect and opportunity costs of these ordeals are enormous. The answer to Sri Lanka critics why the country has not developed like Singapore to a great extent rests on this background. The total foreign debt of the country of 50 billion US dollars at present is only 25 percent of the 200 billion we lost due to the war.

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