Sustained economic development undermined by political factors

The inability to achieve a high trajectory of sustained economic growth has been a serious concern. The country appears to be destined to achieve only its ‘autonomous’ rate of growth of 4 to 5 percent in the foreseeable future. The inability of the economy to take off into sustained high growth has been a feature of the 70 post-independent years. The average annual economic growth rate has been only about 4 percent in these seven decades.

The economy grew by over 7 percent only in a few years. Short spells of high growth have been followed by conditions that were unfavorable to economic growth. They included ethnic violence, political instability, inward-looking policies, insurgencies and nearly three decades of civil war.

Short spells

Two spells of high growth were the spurt in economic growth soon after economic liberalization in 1977 and the high growth soon after the end of the war. These spells of high growth could not be sustained for different reasons.

Post-liberalisation

The liberalisation of the economy in 1977 ushered an economic boom till 1982. The economy grew by 8.2 percent in 1978 and averaged 5.9 percent from 1978 to 1984. By 1982 the country was poised to receive large foreign investments that would have transformed the economy to a higher trajectory of growth in the manner of the NICs (Newly Industrialized Countries) of South East Asia. This prospect was busted by the ethnic violence of July 1983, the subsequent terrorism and civil war. The insecurity, high expenditure on the war and disruption of economic activities hampered economic growth. The JVP insurgency of 1988-89 was also a serious setback to the economy as it disrupted most economic activities and economic growth reached the lowest levels.

End of war

There was an expectation of rapid economic development after the end of the war in 2009. In 2010 to 2012 the economy grew at an annual average of 7.2 percent mainly due to the restoration of economic activities in the North and East, the revival of economic activities such as tourism in the rest of the country and reconstruction and development of infrastructure that was largely foreign funded. The economy grew by 7.5 percent in 2010-12.This growth thrust did not have a sustainability as the production capacity of the economy was not boosted adequately with an expansion of tradable goods.

New regime

Much was expected of the new regime formed by the coalition of the two main parties. The positive features of the regime change for economic development were the restoration of law and order and the rule of law, better international relations with countries that matter and the resurgence of tourism.

Despite these advantages, the inability to arrive at a consensus on economic policies, and indeed other policies as well, among the coalition partners, ineffective implementation, and political confusion within the government deterred economic growth. Economic growth slowed down to 4.8 percent in 2015, 4.5 percent in 2016 and as low as 3.1 percent in 2017. Although there is an economic recovery this year, the prerequisites for sustained high growth are missing.

No policy consensus

Perhaps the most vitiating factor that affected the capacity of the Government to pursue economic development policies was the lack of a policy consensus. The Government was conspicuous in its inability to pursue a concerted economic policy despite several statements on economic policy.

For instance the Prime Minister’s economic policy statement on November 5, 2015 could have been a good foundation for a policy thrust for economic growth. However, a few days later the Budget for 2016 did not reflect the policies enunciated in it. It also turned out to be a UNP economic policy statement rather than a consensual one among the two main parties of the coalition. Consequently some of the policies in it were objected to by the SLFP. Such dissonant policy formulation hardly inspires confidence among investors.

LG elections

These contradictions gained momentum in the run up to the local government elections. The election result was interpreted as being due to the SLFP’s cohabitation with the UNP and the dissonance, disunity and internal dissension reached a peak.

This year

Despite the political uncertainty, the economy is likely to achieve a growth of around 5 percent mostly due to autonomous factors such as good rainfall and the fruits of some significant achievements of the Government in expanding exports. However, this year’s economic recovery is not the beginning of a period of high sustained economic growth. Sustained high economic growth requires political stability and clear consistent growth-oriented policies. These have been conspicuously absent since 2015. The current political instability and uncertainty are likely to affect long-term economic growth adversely and stifle economic development.

Future

There is little prospect of such conditions conducive to growth from now on till the next elections. There is even scepticism that the next regime would be a stable one conducive for rapid sustained development. The country appears to be destined to achieve only its ‘autonomous’ rate of growth of 4 to 5 percent in the foreseeable future.

Final word

The current political instability and uncertainty are likely to impact more seriously on longer-term growth and economic development rather than this year’s economic performance. The objective of sustained high growth and economic development that was expected after the end of the war in 2009 and again with the change of regime in 2015 has proved to be illusory.

The expectation of political stability and an agreed economic agenda this year and in the next, in the run-up to the general and presidential elections of 2019-20, may be unrealistic. The economy would be compelled to function in a political environment of uncertainty, confusion and policy indecision.

The inability of the Sri Lankan economy to rise above the average growth of 4 to 5 percent is a serious concern. Sustained high economic growth that is essential for economic development has eluded the country throughout her post independent seven decades. Chief among the factors impeding economic development has been the political conditions that are inimical to adopting economic policies that are of long term benefit for the country. This has been particularly so in the recent past.

The opposition has played an obstructionist role to derail some of the development projects and investment plans, as well as create an environment that was not hospitable for foreign and domestic investment. This does not absolve the present regime of blame for the inadequate economic development.

The Government’s alleged involvement in the Central Bank bond scam was a severe distraction from concentration on the needed policies for economic growth and had a paralysing effect on the capacity of the government to pursue sound economic policies and crippled its implementation capacity.