Ethnic tensions and political gridlock more damaging to economy than bomb blasts

The current political gridlock, communal tensions and political environment are much more severe constraints to economic recovery and development than the Easter Sunday bomb blasts. With the restoration of security, the economy could recover from the setbacks it suffered following the bomb blasts. However, the subsequent ethnic violence, communal tensions and political chaos are likely to have serious economic repercussions.

Two months after the horrendous tragedy, the economy is being ground to a halt by the subsequent communal tensions and political gridlock between the President and the legislature and the consequent state of political paralysis. The current political gridlock between the President and the Prime Minister is damaging the economy much more than the Easter bombings.

Impact of bomb blasts

In my previous columns, I have pointed out that the main economic consequences of the Easter Sunday bomb blasts were reduced tourist earnings, declining incomes of those in tourist related activities, lower foreign investment and the disruption and slowdown in the economy in the immediate aftermath of the bombings.

Tourism

Tourism was deemed the worst-hit economic activity after the April 21 blasts. Prior to this monstrous crime, it was expected that tourist earnings would increase from US$ 4 billion in 2018 to US$ 5 billion this year. After the bombings this expectation was revised to US$ 3.5 billion. There was also a hope that peace and security could revive tourism by the end of the year. The current conditions may not enable this revival.

In the current inhospitable context, it is unlikely that even the revised figure of US$ 3.5 billion could be achieved due to the communal tensions and political instability.

Foreign investments, too, may dry up, not due to the bombings, but the political confusion and communal tensions. The political instability makes Sri Lanka one of the least attractive locations for foreign investment, compared to India, Bangladesh, Vietnam or Malaysia, where the certainty of policies is assured.

Recovery

The economy was expected to recover from these setbacks once security was restored, provided there were no backlashes of communal violence. Security has been restored, but organised and orchestrated communal violence has stymied the economic recovery.

Political gridlock

The virtual incapacitation of the government due to the current political gridlock is another key concern. There appears to be little prospect of resolving this impasse that is vitiating the implementation of economic policies, eroding business confidence, deterring foreign investment and retarding economic recovery.

Communalism

Of much more consequence to the long-run economic growth of the country is the re-emergence of religious and ethnic communalism. This has been the most damaging factor in the nation’s post-independent economic development.

Preoccupations

Popular preoccupations and debates are about whether the country is a Buddhist country, prospective candidates for the presidency, disagreements between the executive and the legislative branches of government, banning of power saws to preserve the forest cover and other issues that are of little consequence to the recovery of the country’s current shattered economy.

Political milieu

This political milieu is harmful to the economy. Most politicians are showing an utter disregard for the economy in their quest to retain or grab power. Economic development has been pushed to the backburner.

Poor

Those likely to be affected most by the economic downturn are the poor, whose employment, incomes, livelihoods and future are bleak in a stagnant economy. Government leaders talk about poverty alleviation, but their actions and words do not match.

Political gridlock

In as much as the communal tensions and sporadic violence are harmful to the economy, the current political gridlock paralyses much needed affirmative actions for economic recovery and development. The political environment is anything but conducive for economic recovery. It would contribute further to the country’s economic malaise.

Foreign investment

Illustrative of the non-pragmatic policy orientation of the people is their attitude towards foreign investment. While the need for foreign investment to develop the country is admitted by all parties, whenever there is a large foreign investment, whether it is the Hambantota harbour, the Hambantota industrial zone or the Colombo Port City, there is virulent opposition on the grounds that the country’s assets are being sold to foreigners.

Colombo Port Terminal

The latest illustration of this is the opposition to the development of the Colombo Port’s East Container Terminal (ECT). The development of this terminal will be of much economic benefit for the country, as has been the case with the development of the other two terminals with foreign collaboration.

The Indian collaboration is especially important as most of the transshipment from this terminal would be to Indian ports and the Japanese financial investment is on favourable terms.

Spurious objections

The spurious objection that we are selling the terminal to India was as expected, in spite of the fact that the Sri Lanka Ports Authority (SLPA) retains full ownership of the terminal.

Indian Prime Minister Narendra Modi’s brief visit provided the opportunity for the publicity.

This tendency of opposing foreign investment retards economic growth. It is in contrast to the attitude of our South and South East Asian neighbours, whose economies have been propelled to high growth by especially foreign direct investment (FDI).

Expected recovery

The bombings of the churches were considered a setback to the economy for the reasons cited earlier. Yet, an economic recovery was expected sooner than later as there was no economic destruction, The production capacity of the country remained intact with agriculture and industry largely unaffected.

It is the aftermath of the bombings that have affected the economy. The well organised and orchestrated attacks in several places increased tensions and disrupted economic activities. The protests, fasting unto death, hate speech and political confusion have damaged the country’s economic development.

Conclusion

Ethnic violence has been the most serious obstacle to the country’s post-independent economic development. It is not only the immediate and proximate impact of such violence that has resulted in an economic performance below the country’s potential. It is the long-run weakening of the country’s economic capacity.

It is now clear that the country’s political and cultural milieu, too, are serious impediments to economic development. Instead of these factors developing into a more hospitable mode, they have intensified and paralysed the economy. Consequently, the annual average rate of economic growth is likely to hover around the long-term average of 3.5 percent.

The country’s political culture, cultural milieu, political leadership and behaviour are not conducive for rapid economic growth. Unless there is a drastic change in these, rapid economic development is impossible.

As State Finance Minister Eran Wickramaratne said recently, “The biggest uncertainty an investor going forward is not economics but politics and what could happen in the next few months.”

Rapid economic growth is a distant dream in the country’s political and cultural context.