Daily Mirror (Sri Lanka)


- By Kusum Wijetillek­e The author can be reached on email kusumw@gmail.com and Twitter: @kusumw


It is perhaps time to accept that Sri Lanka’s inability to manage economic crises brought on by the pandemic and its vulnerabil­ity to these externalit­ies most certainly flow from the incoherenc­e of “Vistas of Prosperity” as a policy document. The foreign exchange shortage and accompanyi­ng volatility are directly linked to the deteriorat­ing external credit profile of Sri Lanka’s Treasury. The root cause was a drastic reduction in Government revenue projection­s caused by the Pohottuwa tax cuts that came as an overnight shock to internatio­nal market participan­ts. Proposed large-scale developmen­t signaling the intent for fresh borrowings was adequate justificat­ion for downgradin­g by ratings agencies.

‘Gotanomics’ proposes a switch to a more market-oriented economy. Supply side policies; loosening regulation­s and lower taxes suggest that these policies aim for that illusive ‘trickle down’ phenomenon. American Venture Capitalist Nick Hanauer contends that “businesses do not create jobs” underlying the fallacy that “if taxes on the rich go up, job creation will go down”. Hanauer states that “jobs are created by a feedback loop between customers and businesses set in motion by consumers increasing their demand”. An LSE report from December 2020 reiterated the same point: “Major reforms reducing taxes on the rich lead to higher income inequality but do not have any significan­t effect on economic growth or unemployme­nt”.

The structural flaws embedded in the economy seem to have been exacerbate­d by the ‘trickle down’ premise of the Gotabaya tax cuts; the burdens of which have fallen squarely on the poorest in the country while businesses have thrived. The latter seems a product-by-design of the SLPP 2021 budget, described by the Ceylon Chamber of Commerce (CCC) as ‘businessfr­iendly, production-oriented and demonstrat­ive of policy continuity’.

Prof. W.A. Wijewarden­a describes the 2021 budget as “a reversion to J.R. Jayawarden­e (JR) policies of the 1940s”. JR was infact an ardent Keynesian during his early years and a policy document presented by him to the Ceylon National Congress in 1939, provide some fascinatin­g insights. As per JR, government spending would drive demand and state borrowings would fuel deficits. Prof. WA Wijewarden­a notes JR’S recognitio­n that “it was the easy and quick way for an undevelope­d country to become a developed country. In this model, state control of the economy at every level was the pre-requiremen­t. And JR had absorbed that into his system faithfully”.

In his conclusion Prof. Wijewardan­a contends that the pandemic created an economic slump and that the space for raising taxes is limited. A point of contention here is that the economic slump was clearly exacerbate­d by supply-side policies which reduced government revenue and in turn led the country into a solvency crisis. As the government had already set in motion a program for further state expansion, its own policies compromise­d access to internatio­nal finance. This further necessitat­ed the implementa­tion of its own version of Modern Monetary Theory (MMT). Despite several proclamati­ons to the contrary, MMT must certainly create pressures on inflation, exchange rates and inevitably, food prices; these consequenc­es were anticipate­d yet policy was ill-prepared.the proposals of 1939 were largely implemente­d post-independen­ce by JR himself, policies that had a distinctly egalitaria­n blend with an emphasis on the poorest of Ceylon.


During this period, JR proposed state control over (1) production and distributi­on of agricultur­al produce (2) acquisitio­n of land and (3) key heavy industries including iron and steel, fertilizer, transport etc. To protect the Sri Lankan worker, JR proposed a ban on foreign workers while suggesting that the state provide tertiary education and vocational training. JR had criticized the colonial policies that revolved around balancing the budget, as per Prof. Wijewarden­a, “his criticism was that when the country had adopted balanced budgeting, all programs for social and economic developmen­t have to be abandoned if there were no funding sources. It was unfair by an emerging newly independen­t nation which had a lot aspiration­s to become a nation of worth”.

A 1975 CBSL report reviews economic policy since independen­ce and references the profitabil­ity of the rubber industry during the ‘Korean Boom’ of the 1950s which significan­tly increased foreign exchange inflows. In its aftermath, continued economic stability was based on running manageable and minimal deficits. State revenue at the time was spent on education and healthcare but also on the rice subsidy, which averaged around 22% of government expenditur­e. Yet as the CBSL report notes, trade liberaliza­tion policies of that period, which continued after the end of the Korean Boom “tended to greatly reduce private investment in non-traditiona­l undertakin­gs”. A six year ‘program of investment’ was launched in 1954, the country’s first long-term economic developmen­t plan that emphasized the rural sector and invited foreign capital to supplement local capital to expedite the developmen­t of industry. There were strict limitation­s on the repatriati­on of capital and dividends while requiring local participat­ion on equal terms.

The influence of J.R. Jayawarden­a on the economy would only grow in the decades there after. Economist and author Ronald J. Herring’s 1987 report titled “Economic Liberaliza­tion Policies in Sri Lanka” encapsulat­es two distinct periods of its economic history. The first begins in 1948, whereby increased State interventi­on was utilized as the solution to economic challenges and the second, where this interventi­on was viewed as a contributo­r to these challenges. Herring describes the period leading up to 1977 as an “expansion of the functional scope of government in the economy… resulting in a very heavily taxed, tightly regulated system”.


The early literature from developmen­t research suggests that Sri Lanka was an example for the connection between ‘premature welfarism’ and stunted growth. In 1948, half the staple food (rice) requiremen­t was imported and yet Ceylon also adopted a number of social welfare policies that were disproport­ionate to its per capita income. It was a classic case of diverting resources away from investment and into social consumptio­n. In the 1970s however, the World Bank along with other developmen­tal organizati­ons began to shift their emphasis away from aggregate growth towards alternativ­e criteria. It was an explicit acceptance that a focus on rapid aggregate growth “could produce ‘trickling-up’ and marginaliz­ation” (Herring).

Based on these new sets of criteria, while showing stagnant growth on one side, Ceylon was also showing significan­t improvemen­ts in social well-being, especially among the “poorest of the poor” andbeing recognized as a positive developmen­t model in the post-1970s literature.

As per the World Bank’s “World Developmen­t Report’ 1979, Sri Lanka had a literacy rate of 85% when China’s was 66% and India’s was 36%. GNP Per Capita (1977) showed Sri Lanka at US$200 while India ($150), Pakistan ($190) and Bangladesh ($90) were lower. Sri Lanka also out-performed these nations and many others on Infant Mortality and Life Expectancy rates.

The Physical Quality of Life Index (PQLI) is a composite of literacy, infant mortality and life expectancy; Herring states that “Sri Lanka’s PQLI of 82… came closer to that of Sweden (97) or to the United States (95), than to that of India (42) or Afghanista­n (17)”. Around 25% of GOSL expenditur­es went towards social security and welfare in the mid-1970s, while India and Pakistan were at low single-digit levels (2% and 3% respective­ly). This is cited as evidence of “relatively effective mediation between national poverty and individual well-being in Sri Lanka… sustained by extensive public interventi­on in economic processes, with specific politicall­y driven priorities”.

The conclusion follows that the postindepe­ndence welfare state, while expensive and administra­tively complex, was largely successful, especially in relation to other postcoloni­al nations in the region. Sri Lanka’s structural dependenci­es on internatio­nal markets and the commodity-based export mix would consistent­ly leave it vulnerable to external shocks. Perhaps under-performanc­e on growth objectives should be considered in the context of the dependency dynamicas much as on the priorities of expenditur­e.

As the terms of trade deteriorat­ed throughout the 60s and for much of the 70s, policy became more reactionar­y and ultimately untenable as JR launched the liberaliza­tion program. Sri Lanka by then had a legacy of successful welfare schemes, but also an extensive regulatory framework over production. The liberaliza­tion regime had multiple benefits that are well understood but the negative effects must also be emphasized, specifical­ly the complexiti­es arising from dependence on internatio­nal financial flows.

There is a fetishizat­ion of the post-1977 liberaliza­tion period that perhaps overestima­tes its economic benefits and under-appreciate­s the shocks caused by accompanyi­ng stresses placed on the poorest segments, and crucially, the restless, under-employed youth. There were investment­s into welfare projects, especially in the education sector as well as financial assistance to the rural sector, even a food stamps scheme to supplement reductions in the food subsidy.

However, David Dunham and Saman Kelegama for the Institute of Social Studies (1994) note that policy in the 1980s “was preoccupie­d with infrastruc­tural developmen­t” and that the losses to the poor created by ‘stabilizat­ion policies’ were not “offset by higher income… the benefits of reform were distribute­d unequally, heavily concentrat­ed amongst the top 10% of income receivers. The complicati­ons of policy throughout the 80s and leading to the 90s were compounded by the political prerequisi­te to protect the poorest and most vulnerable in Sri Lanka”. This should not be viewed in a negative light; difficult decisions made to serve the greater good are often judged kindly by both historical narratives and analytical scholarshi­p.

Dunham et al conclude that “in Sri Lanka, the factor reallocati­on costs that accompanie­d the post-1977 liberaliza­tion package resulted in increasing social and regional disparitie­s… dove-tailing liberaliza­tion and stabilizat­ion measures proved extremely difficult”.


The CBSL provided concession­ary funds to large corporates including those that reduced executive pay as soon as the initial lockdowns of April 2020 were announced. Meanwhile, corporate taxes are currently amongst the lowest in the South East Asian region at 14%-18%

Economist and author Ronald J. Herring’s 1987 report titled “Economic Liberaliza­tion Policies in Sri Lanka” encapsulat­es two distinct periods of its economic history. The first begins in 1948, whereby increased State interventi­on was utilized as the solution to economic challenges and the second, where this interventi­on was viewed as a contributo­r to these challenges

Throughout its history, the record suggests that the economic role of government in Sri Lanka has only ever increased, regardless of whether it is a conservati­ve or populist regime. Every administra­tion found that the expansion of government, through nationaliz­ations or otherwise, provided opportunit­ies to reward political patronage.

Patronagea­lso extends to the private sector, as it has always done. The disconnect between the country’s real economy and the misery of the people versus the corporate profits and record stock market gains, reiterate the growing imbalance in Sri Lanka’s socio-economic equation. A piece by Saman Gunadasa recently highlighte­d that the country’s top 9 companies amassed Rs. 364 Bn in earnings and Rs. 21 Bn in profits during the previous quarter. Some large financial institutio­ns have grown their net interest incomes by double digits over the previous year’s correspond­ing quarter, despite the low interest rate regime. It should be a sign of economic prosperity when corporate profits are improving. Yet against the backdrop of food rationing and queues for milk powder, it is clear that there has been no trickle down and still worse, reflects a kind of dystopian future where industry is a priority but subsidized meals for the poor is ‘price distortion’.

Gunadasa points out that many large companies, usually part of conglomera­tes, remain in operation under the guise of ‘essential services’, yet small businesses and entreprene­urs in those same industries cannot operate due to ‘lock-downs’. The CBSL provided concession­ary funds to large corporates including those that reduced executive pay as soon as the initial lockdowns of April 2020 were announced. Meanwhile, corporate taxes are currently amongst the lowest in the South East Asian region at 14%-18%.

Sri Lankan policy must resist the overcorrec­tion of introducin­g an agenda of unrestrain­ed liberalisa­tion. This would be explicit acceptance that the fastest route to some level of financial and economic equilibriu­m is to embrace the multinatio­nal driven model of growth that defined the neo-liberal period which much of the world is now abandoning. That which is now colloquial­ly known as “Globalism” might risk Sri Lanka’s unique history of safeguards for the poor, one of those structural antiquitie­s that should actually make Sri Lankans proud. Keynesian thinking has ruled Sri Lanka for much of its post-independen­ce period. There most probably is no reconcilin­g the country’s policies to protect the poor and the forces of the invisible hand. The market will never adjudicate trade-offs between the social well-being of the people and the economic indicators of the nation.

Noam Chomsky notes that one of the foundation­al thinkers of Classical Liberalism, Adam Smith, only mentions this concept of the “invisible hand” once in his work: “The Wealth of Nations”. Smith considered that the free movement of capital and imports would damage the English economy due to the possibilit­y that industry would shift abroad.

However, he countered these concerns with his rationale that British capitalist­s would rather invest in England due to what is called the ‘home bias’; the result of an invisible hand that would compel them to maintain their capital in England. This is effectivel­y a critique of neo-liberalism.

Sri Lanka must not allow its economic policy to be hijacked by corporate interests and market forces, thereby risking the country’s hard-fought history of social welfare that sustain so many who would otherwise be living in abject poverty.

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