Sustaining a state in conflict: Politics of foreign aid in

Sunil Bastian

This study focuses on the politics of foreign aid to Sri Lanka from developed capitalist countries of the West, Japan and multilateral agencies during the period Making Ends Meet: Women’s 1977 to the end of the armed conflict between Sri Lankan security forces and the Sustaining a state in conflict: Liberation Tigers of Tamil Eelam. This period is characterised by economic policies Livelihoods in Post-War Sri Lanka that emphasised openness to global capitalism, markets and the private sector, Politics of foreign aid in Sri Lanka and an armed conflict resulting from the demand by the Tamil minority for a separate state.

The study seeks to unpack the role played by foreign aid within this political economy. The approach taken by the study looks at foreign aid as a political factor within Sri Lanka having a complex relationship with the state and the ruling elite.

The study shows that foreign aid was an essential element in sustaining the Sri Lankan state while it engaged in an expensive war. It provided resources and legitimacy within the structures of global governance. The primary reasons for this were the liberal economic policies followed by the country. But, at the same time, it was also a force that sought a political solution to the conflict, highlighted violations of human rights, and supported various initiatives in finding a solution. In short, it was neither the do-gooder that many liberals believe in, nor the foreign devil that Sinhala nationalists like to see.

ISBN 978-955-580-219-2

9 789555 802192 VasukiSunil BastianJeyasankar Printed by Horizon Printing (Pvt) Ltd. Savini Ganhewa

Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Sunil Bastian

International Centre for Ethnic Studies September 2018 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

2018 © International Centre for Ethnic Studies and Sunil Bastian 2, Kynsey Terrace, 8, Sri Lanka E-mail: [email protected] URL: www.ices.lk

ISBN 978-955-580-219-2

Printed By: Horizon Printing (Pvt.) Ltd. 1616/6, Hatharaman Handiya, Malabe Road, Kottawa, Pannipitiya

Front Cover design by Horizon Printing (Pvt) Ltd. Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Sunil Bastian*

* Sunil Bastian works in the area of political economy. His current research interests are the politics of state formation and development of capitalism in Sri Lanka. He has published widely and is the editor of Devolution and Development in Sri Lanka (1994). He co-edited with Nicola Bastian, Assessing Participation, A debate from South Asia (1996), and with Robin Luckham, Can Democracy be Designed? The Politics of Institutional Choice in Conflict- torn Societies (2003) published by Zed Press, London. In 2007, he authored (,) The Politics of Foreign Aid in Sri Lanka. Promoting Markets and Supporting Peace (2007). He has been a Senior Research Fellow at the International Centre for Ethnic Studies, Colombo and was the chairperson of the Centre for Poverty Analysis. He has more than two decades of consultancy experience with a range of donor agencies. iv Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Contents

List of Tables...... vi

List of Figures...... vii

Acknowledgements...... ix

Introduction...... xi

1. The challenges of state formation in a multi-ethnic society...... 1

2. Politics and the history of foreign aid in Sri Lanka...... 24

3. Liberal capitalism, a separatist challenge and foreign aid ...... 55

4. Foreign aid responding to the conflict...... 89

5. Foreign aid and the collapse of neoliberal peace ...... 125

6. The hegemony of Sinhala nationalism, capitalism and foreign aid...... 159

Bibliography...... 195

v List of Tables

Table I National security periods and distribution of American foreign aid (%) xiv

Table 1.1 Transition from the Kandyan kingdom to Ceylon under the British 2

Table 1.2 Land alienation by the state 1953-1985 (ha) 17

Table 1.3 Percentage of Sinhalese and Sri Lankan Tamils – Eastern Province 19

Table 2.1 Aid commitments from selected countries (1970-1977) (US$ mln) 41

Table 2.2 Net Receipts of Development Assistance 1978-1987-Key Donors 47 (in US$ mln)

Table 2.3 IMF loans 48

Table 2.4 Integrated Rural Development Projects (1977-1987) 50

Table 3.1 Defence expenditure (selected years) 77

Table 3.2 Project aid disbursements as a share of public investment (per cent) 77

Table 3.3 Major donors and the component of the Mahaweli funded by them 82

Table 4.1 Election Violence (1999-2004) 95

Table 4.2 Net Receipts of Development Assistance 1988-2001 - 109 Key Donors (in US$ mln)

Table 4.3 IMF loans 110

Table 4.4 Commitments by Donors to Humanitarian Assistance (at the end of 2000) (US$ mln) 114

Table 4.5 Selected economic indicators (1999 – 2003) 122

Table 4.6 Performance of the UNP in PR elections 124

Table 5.1 Selected indicators of foreign aid 2000-2003 (in LKR mln) 142

Table 5.2 UNP/UNF electoral performance (% of valid votes) 155

Table 6.1 Total loans and grants 2006 - 2015 (US$ mln) 181

vi Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

List of Figures

Figure I Areas won by each party in the 1977 election xxix Figure 2.1: Net Receipts of Development Assistance from 1960/61 to 1969/70 (in US$ mln) 35 Figure 2.2 Net receipts of development assistance 1978 – 1987 (in US$ mln) 46 Figure 2.3 Total aid commitments from the Aid Group and the socialist block 1970-1987 (US$ mln) 52 Figure 3. 1 Map of the Mahaweli Development Programme 84 Figure 4.1 Defence Expenditure (1981 – 1996) 99 Figure 4.2 Net Receipts of Development Assistance (US$ mln) 110 Figure 5.1 Net receipts of development assistance 2002-2005 (in US$ mln) 142 Figure 6.1 Net receipts of development assistance 2006-2015 (in US$ mln) 180

vii viii Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Acknowledgements

I published a monograph with the title ‘The Politics of Foreign Aid in Sri Lanka: Promoting markets and supporting peace’ in 2007, while I was working at the International Centre for Ethnic Studies. Part of the title indicates my long-term research interest – the relationship between opening up the economy and the national question of Sri Lanka. The guiding concepts in analysing political fall- out from the unresolved national question were the notions of conflict and peace. I looked at politics of foreign aid primarily through their role in conflict, conflict resolution and peace.

This was also a time when I worked in a number of consultancies funded by aid agencies in the area of peace and conflict. My consultancy assignments rapidly moved from the earlier focus on poverty and development to conflict issues. I was often referred to as a ‘conflict specialist’ in these assignments, a term that could be interpreted in many ways. This was also a period of dramatic political developments in Sri Lanka, marked by trying to engage in direct negotiations with the LTTE, followed by a military victory over LTTE and consolidation of the territory of the Sinhala nationalist state.

It was this experience of working with aid agencies in the context of significant political developments in Sri Lanka and continuous reflection as a researcher that prompted me to question the notion of conflict as the key concept to approach what is happening in Sri Lanka. I realised the importance of going back to focus on the state, which had earlier my interest. What happened in Sri Lanka from 1977 to 2009 can be interpreted as consolidation of a state in the context of the new period of the economy. My objective became to study the role of foreign aid in this context.

I could only give my attention to the study after June 2016. Up to that point, for a period of five years, I was kept busy in a consultancy that covered the war affected North and East. It was also not easy to reflect on foreign aid as a subject of research, while trying to use it as a means of achieving various things in the field. My task got complicated by the fact that by then, I was spending part of time in the UK in order to

ix be with my family. On one hand it created practical problems, because my secondary material was scattered in two countries. On the other side, the distance helped me to get away from the instrumentalist discussions on foreign aid and created space for me to treat foreign aid purely as a subject of research.

As usual my wife, Nicky, who has previously worked with agencies supported by foreign aid and is also a professional copy-editor, went through the text. Her contribution was not just in terms of copy-editing, but also on substantial issues. Her constant encouragement to give up consultancies and get on to my own writing was certainly a factor that motivated me all along. I am thankful to her for this support. I am also thankful to Ms. Samurdhika Sylva, from the English Department, , for taking a final look at the text.

Finally, I would like to thank the International Centre for Ethnic Studies for agreeing to publish this study. I would like to dedicate this to the memory of Neelan Thiruchelvam, who was one of the founders of ICES and created the space for many of us to engage in research on subjects that motivated us.

x Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Introduction

The subject of this study is the politics of foreign aid to Sri Lanka from developed capitalist countries of the West, Japan and multilateral agencies during the period from 1977 to 2009. The main focus is foreign aid channelled to the Sri Lankan state, although foreign aid to non-state actors is considered wherever necessary.

The introduction begins with the framework used in the study to understand the global politics of foreign aid during the Cold War and post-Cold War periods. This is followed by the approach taken in the study to analyse the politics of foreign aid in Sri Lanka, and a summary of main conclusions. It ends with a summary of the chapters that follow.

Foreign aid during the Cold War period

Foreign aid has always been an integral part of the foreign policy of developed capitalist countries.1 The beginning of foreign aid from developed capitalist countries in the West dates back to a number of historical events in the middle of the last century: the interest of former colonial powers to maintain an influence over former colonies that had become independent; the Marshall Plan - to reconstruct war-ravaged Europe; the need to stabilise the world capitalist economy, which had been hit both by the recession of the 1930s and the Second World War; and the need to counter the influence of the Eastern European bloc led by the Soviet Union as a countervailing power to Western capitalist countries.

Following the end of the colonial period, former colonial powers were keen to maintain political and economic links and influence with their former colonies. There were strategic, as well as economic, interests behind this. In many countries, colonial powers continued to maintain economic interests even though political control had receded from them. This was true for both the British and the French, the major departing colonial powers.

1 See Baldwin (1985) and Lancaster (2007) for analysis of foreign aid as a part of foreign policy.

xi Britain ‘established a form of foreign aid to overseas areas during the colonial period - for example, under the Colonial Development Act of 1929 and the Colonial Development and Welfare Act of 1940’ (Degenbol-Martinussen and Engerberg- Pedersen, 2003, p. 86). As the colonies became independent, funds were channelled to them through various forms of development assistance. For the British, the establishment of the Commonwealth and special mechanisms like the Colombo Plan became major sources of development assistance to former colonies. In the case of the French, development assistance has been, and remains, much more explicitly linked with the former colonial territories. Degnbol-Martinussen and Engberg-Pedersen point out that ‘It is characteristic for French aid that it is strongly concentrated in the country’s own former colonies, especially in Africa and also, in recent years, in Indochina … Part of the aid (13-15 per cent) goes to the French overseas territories that belong to the group of high income countries and territories’ (2003, p. 83).

However, most analysts credit the Marshall Plan of the United States as being the beginning of the modern form of foreign aid. In the aftermath of the Second World War, US support to war-ravaged Europe – the Marshall Plan – contributed to the establishment of development assistance as a major activity of developed capitalist countries. The proposal made in 1947 by the USA’s foreign minister, George Marshall, is considered by some as one of the first comprehensive proposals regarding development assistance. The idea was to give massive aid to Europe to help it rebuild following the Second World War. The Marshall Plan was initiated in 1948, at the same time as the Organisation for European Economic Co-operation (OEEC) was set up, the predecessor of the Organisation for Economic Co-operation and Development (OECD).

A little-noticed fact is that the Marshall Plan also contributed to the beginning of the Cold War. A recent biography of Stalin revealed that initially the Soviet Ministry of External Affairs in Moscow explored the possibility of obtaining help through the Marshall Plan. This was in the context of the Soviet Union being not only an ally of the West in its fight against Hitler’s Nazism, but also a country needing funds for post-war recovery. ‘The answer was that the Americans made open markets condition for aid’ (Service, 2004, p. 505). This was never going to happen under state

xii Sustaining a state in conflict: Politics of foreign aid in Sri Lanka socialism in the USSR, and Stalin was convinced that the ‘Marshall Plan intended to undermine Soviet hegemony over the countries of eastern Europe by providing them with American financial help’ (Service, 2004, p. 505). Therefore, the programme that began foreign aid in its modern form was ‘tied to geo-political objectives of the USA and these included drastic reduction of the USSR’s power in eastern Europe’ (Service, 2004, p. 505).

At his inauguration the following year, President Truman presented the first plan for the expansion of American foreign aid: it was to include developing countries threatened by communism, either from outside or from within. Truman’s proposal was included in the so-called Act for International Development, approved by Congress in 1950. ‘Among the countries that especially benefited from this law were South Korea and Taiwan, which received considerable transfers of resources from the USA starting in 1954’ (Degenbol-Martinussen and Engberg-Pedersen, 2003, p. 8). Hence, foreign aid became a tool of countering the influence of the Soviet bloc in what came to be known as the ‘Third World’ – a term that lumped societies with diverse histories into a single manageable category.

Foreign aid as a part of Cold War politics had an impact in all parts of the so-called Third World. Although for the developed capitalist West and the core of the Soviet bloc the period after the Second World War was a ‘Cold War’, a term coined primarily to depict relations between the capitalist West and the Soviet bloc, it was a pretty hot war in many parts of the post-colonial world.2 In the case of Indo-China, where there was a growing influence of communist movements with support from both China and the Soviet Union, this link between development assistance and strategic interests was explicit. This was also partly true in Latin America, which the US foreign policy establishment considered as their backyard and therefore their area of dominance. In the Middle East, various forms of Arab nationalism threatened the hegemony of the West in an area that was strategically important for the West. Africa also became an arena of this competition where development assistance played a significant role. Finally, even in the case of South Asia, where the ideas of non-alignment – a concept coined to give primacy to the interests of the post-colonial countries – were much

2 See Burleigh (2013) for a recent analysis of these ‘hot wars’ during the Cold War period.

xiii more established thanks to leaders like Nehru, development assistance was a critical factor in the game for influence between Western and the Eastern bloc countries.

Table I below shows the flow of US assistance for various periods. This data clearly shows the link between the flow of development assistance and strategic interests of the US. The two superpowers confronted each other through proxy wars in some areas – such as the conflict in Indo-China, which ultimately led to the defeat of the US, and national liberation struggles in Latin America and Africa. Development assistance was closely linked to the strategic objectives of Cold War politics in these cases.

Table I. National security periods and distribution of American foreign aid (%)

Marshall Vietnam Vietnam Camp David End of the Plan mobilisation settlement agreements Cold War 1964-73 1973-79 1979- 1989- 1949-55 1964 1973 1979 1990 1950 Israel, Egypt - 3 5 68 47 Remainder of Middle East, 8 36 13 13 17 South Asia East Asia 12 25 71 6 4 Latin America 1 23 6 4 17 Africa - 8 4 6 8 Europe, Canada 80 5 1 2 7 Source: Degnbol-Martinussen and Engberg-Pedersen, 2003, p. 77

When it came to the objective of promoting and managing global capitalism – the other agenda of foreign aid – the important landmark was the establishment of the two Bretton Woods institutions – the World Bank (WB) and International Monetary Fund (IMF). Both these institutions were set up to regulate and manage the international capitalist economy. Two major factors in the establishment of these institutions were the global recession in the 1930s, and the need to get capitalist accumulation moving after the Second World War. Soon this political role began to have an influence on post-colonial societies. These institutions began to play a role in transferring assistance to these societies and influencing management of their economies. xiv Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Development assistance was firmly established as a part of the foreign policy of many developed capitalist countries by the 1950s. The flow of assistance was underpinned by ideas that reflected how these countries and aid agencies viewed the post-colonial world and its evolution. When it came to the economy, of course the expectation was capitalist growth. However, there was a significant influence of Keynesianism, which believed in the need for state intervention to bring about economic growth. This meant the state playing a key role in economic development of post-colonial societies and foreign aid supporting states of these countries. Foreign aid support was based on two key assumptions: ‘that aid constitutes additional resources, and that these are important for accelerating development’ (Riddell, 1987, p. 85).

Walt Rostow, the American economist who articulated the stages of growth theory, was one of the first economists to link aid theory and economic growth. Healso brought the terms ‘developed’ and ‘underdeveloped’ into the debate on foreign aid. According to his stages of economic growth theory, countries go through several stages to achieve an ‘era of high mass consumption’ and ‘self-sustaining growth’ (Riddell, 1987). He elaborated that ‘the most important phase in achieving this developed state was the process of “take-off into self-sustaining growth”; the take-off stage is a relatively short period that is prepared by creating the social and economic conditions for self-sustaining growth’ (Riddell, 1987, p. 87). Therefore, according to ideas that prevailed at the beginning of the foreign aid enterprise, foreign aid is needed for a relatively short period of time, when countries can be supported to achieve the take-off stage. In other words, foreign aid to developing countries was to be a temporary phenomenon.

Rostow’s ideas on the stages of growth and the role of aid were elaborated in much more detail in the 1960s by writers like Holis Chenerey, Alan Strout and Rosenstein- Rodan. Chenerey and Strout’s contribution, published in the American Economic Review in 1966, is still considered a classic in mainstream aid theory. In this article, they set out to ‘investigate the process by which a poor, stagnant economy can be transformed into one whose normal condition is sustained growth’ (Chenerey and Strout, 1966, quoted in Riddell, 1987, p. 89). The model that Chenerey and Strout developed is characterised by two types of gaps in domestic resources that can be

xv filled by external assistance. Riddell explains these two gaps as follows: In the first, called investment-limited growth, skills and savings are in short supply. In the second, trade-limited growth, foreign exchange is in short supply because export earnings are lower than import needs. Foreign aid can help to bridge each of these gaps at the different stages of development, thereby fulfilling the overall function of assisting the acceleration ofthe growth rate until the self-sustaining stage is achieved (Riddell, 1987, p. 90).

Beside theories that supported capitalist growth through new investments, aid agencies were also influenced by orthodoxies of the modernisation theory. The overall vision was that developing countries would become modern societies in the image of the developed countries. The basic assumptions of this image were that the countries emerging from colonialism would be capitalist, they would evolve towards liberal democracy as it is known in the West, and will be friendly towards developed capitalist countries in their foreign policy. The fundamental idea of Western capitalist countries being a model that the post-colonial world should aim for still remains a part of the orthodoxy of donor countries.

Foreign aid – post-Cold War

The post-Cold War politics of foreign aid from developed capitalist countries needs to be analysed within a framework of a new period of global capitalism and the demand for security. A political event that consolidated the triumph of liberalism in economics as well as politics was the collapse of the state socialist system in the Soviet Union and Eastern European bloc in 1989. Ideologically, the collapse of centrally-planned state socialism removed the only real alternative economic model to capitalism that the world had seen. This also meant the end of the attraction of any type of political system with a single-party domination, whatever slogans were used to legitimise it. In other words, liberalism triumphed in economics as well as in politics.

xvi Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

What came to be known as neoliberalism began to dominate in the ideological debate on the economy from 1970. As put aptly by Harvey, Neoliberalism is a theory of political economic practices proposing that human well-being can best be advanced by the maximization of entrepreneurial freedoms within an institutional framework characterized by private property rights, individual liberty, unencumbered markets, and free trade. The role of the state is to create and preserve an institutional framework appropriate to such practices (Harvey, 2007, p. 22). The state was, of course, expected to set up a security apparatus and legal framework to secure private property rights and markets. The market imperative was extended to areas such as education, health, social welfare and environmental pollution. If there were no markets operating in these areas, they must be created through state intervention if necessary (Harvey 2007). Apart from this, the role of the state was expected to be minimal. The state was not expected to interfere in the market mechanism, and of course not expected to have any role in economic production. Riddell explains that ‘At its centre is an extreme optimism about the efficacy of the market, and the overriding benefits of a non-distorted price system and private enterprise to achieve sustained and accelerated development on their own’ (1987, p. 157).

Philosophically, these extreme versions of market fundamentalism are drawn from the thinking of writers such as Friedrich Hayek and Robert Nozick, for whom any form of state intervention in the economy conflicts with the individual’s inalienable right to liberty and freedom. There was also the questionable assumption equating free markets with individual liberty. More than championing liberty of individuals, the ascent of neoliberalism in the late 1970s amounted to restoring the power of capital and class that had been threatened through state intervention in welfare, struggles of the organised working class, and even victories of national liberation movements in post-colonial countries.

Foreign aid became one of the principle channels to implement these ideas. At the political level, this rationale for foreign aid was expressed by the Reagan administration in the US. These policies were articulated in a two-volume report prepared by the

xvii Presidential Task Force on International Private Enterprise (USAID, 1984). This policy document argued that reliance on individual initiative, free competitive markets and the private sector are essential for Third World development. The role of development assistance should be to promote these elements. The report was also critical of current practices in development assistance that were not giving enough attention in these elements (Riddell, 1987, p. 158).

The World Bank’s version of these policies was the sweeping structural adjustment programmes that mostly aimed at limiting the state’s involvement in economic development. The state was to withdraw from the production sphere, stop its regulatory intervention in the private sector, and generally reduce its expenditure, including that on health and education. Foreign aid to relieve poverty remained on the agenda, but since the structural adjustment programmes did not include any considerations worth mentioning of their effects on the poor, the result was a strong toning down of poverty alleviation measures (Degnbol-Martinussen and Engberg-Pedersen, 2003, p. 27).

Although extreme market fundamentalist views do not still have the same influence in donor discourses, the fundamental objectives of promoting competitive markets and the private sector, and opening economies to global capitalism, have become the cornerstone of current policies of aid agencies in the sphere of economic development. It has been realised that the process of deepening capitalist relations will not take place just by freeing up the markets. Many other ingredients are necessary for this objective to be achieved, of which state reforms became crucial.

In addition to the triumph of liberal ideas in economics, the end of the Cold War also generated a hope that the world would be a peaceful place. Among the liberals, there was the expectation that the end of Cold War politics would mean the end of the proxy wars of the Cold War. There was even the pious hope, especially among those looking towards promoting democracy all over the world, that the West would cease to support authoritarian leaders for strategic reasons. Liberal triumphalism and a peaceful world were to be the hallmarks of the post-Cold War world.

xviii Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Although there was a reduction of conflicts in the years immediately after the end of the Cold War, this euphoria was short-lived. The peaceful world that was expected has not arrived. In 2014, the Uppsala Conflict Data Program (UCDP) recorded forty armed conflicts in twenty-seven locations. In 2013, the number was thirty- four. 2014 is the third consecutive year in which numbers have gone up (Global Political Risk, 2016). A qualitatively new scenario has emerged due to the challenge of political Islam. Some analysts argue that we might be witnessing the emergence of a truly global Islamic militancy, which will have an impact in many parts of the world. This political phenomenon entered world politics in a dramatic way with the attack on the centre of world capitalism on 11 September 2001. The reaction of capitalist powers was led by the US and the UK. This has resulted in a regime change in Afghanistan and the occupation of Iraq, a little more than fifty years after Iraq gained independence from colonial rule. Islamic groups have countered this occupation. Violent conflict has flared up both in Iraq and many other parts of the world. An entire area of the Middle East and North Africa has been destabilised with the destruction of states, resulting in the movement of a large number of refugees. UNHCR estimated this to be around 60 million in 2014, the highest number since the Second World War (Global Political Risk 2016). Therefore, rather than a peaceful world based on values of liberalism in politics and economics, the post-Cold War world is characterised by globalisation, or the expansion of capitalism, and security concerns spread around the world. The twin phenomena of globalisation and conflict provide a better framework to understand the world that we are living in today.

The reasons for these conflicts are many and complex. There is a need to analyse each case in its historical and social context. But uneven development, which is a principal characteristic of global capitalism, is certainly a factor that affects conflict situations in a world of globalised capitalism. In contrast to the benevolent vision of global capitalism and markets found in liberal peace, the spread of markets and capitalism is a contradictory process that benefits some while excluding others. This is the reason for the unprecedented level of inequality seen today, globally as well as within countries. However, in a globalised world, exclusion due to the logic of capitalism does not mean isolation. Those excluded are reintegrated into the globalised world as sites of conflicts, instability and all sorts of criminal activity

xix (Duffield, 2001). Therefore, parts of the global periphery are now seen as a security threat. Donor polices aim to tackle these security issues arising from the excluded periphery.

This redefinition of the underdeveloped world as a security threat to developed countries happened in the context of the collapse of the Soviet Union and the disappearance of the communist threat to the West. In the context of this historical moment, ‘both international norms about domestic institutions essential for international order and new or redesigned international economic and security institutions were up for redefinition’ (Woodward, 2017, p. 27). Making use of this situation ‘activists and policy analysts in the United States and Europe also seized the opportunity to propose a redefinition of national and international security to replace the anti-communist focus’ (Woodward, 2017, p. 4). In this redefinition, the underdeveloped periphery became the source of insecurity for the developed world.

The post-Cold War concerns of hegemonic Western powers about the periphery as a source of conflict and insecurity in a new world order have had an impact on international organisations and aid agencies. Since the beginning of the 1990s, the policies of aid agencies from developed capitalist countries have responded to this new security threat. This has resulted in an explosion of research, new policies, indicators and new institutions, which has absorbed a significant amount of donor funding. There is no space here to cover the entire gamut of these developments. What is given below are some of the significant events, and more importantly ideas, that drive this desire for security in a world order dominated by the West.3

A significant landmark was the publication of An Agenda for Peace in 1992, authored by the former Secretary General of the United Nations, Boutros Boutros- Ghali (Boutros-Ghali, 1992). An Agenda for Peace was concerned not only with the reality of conflicts, but also with preventing or mitigating them. This required getting involved with causes, or underlying reasons, of conflicts. In theory, this meant intervening in a complex set of issues in societies where these conflicts prevailed.

3 See Woodward (2017) for a thorough coverage of these policy developments, and for one of the best critiques of the concept of failed states and why such a questionable idea persists within aid agencies. xx Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The same year that the Secretary General’s report was published, the UN established the Department of Humanitarian Affairs (DHA), which later became the Office for the Co-ordination of Humanitarian Affairs. Keeping with the mitigating objectives of An Agenda for Peace, the DHA embarked on the development of an early warning system in relation to conflicts. This early warning system began to monitor some 144 indicators covering social, economic and political aspects. The objective was to detect conflicts before it erupts. The large array of indicators that the DHA was interested in demonstrated the wide range of social and political processes that must be considered if conflicts are to be mitigated.

Within the OECD, the Development Assistance Committee (DAC) set up an informal task force on Conflict, Peace and Development in 1995. Woodward explains, ‘In 1998, the DAC task force issued a major policy paper, ‘Conflict, Peace and Development Co-operation on the Threshold of the 21st Century’, followed by operations guidelines agreed in 2000 (and published in 2001)’ (2017, p. 39). According to the operations guidelines, economic well-being, social development and environmental sustainability and regeneration are major goals of development co-operation that require structural stability. Structural stability embraces the mutually reinforcing goals of social peace, respect for the rule of law and human rights, and social and economic development. It is supported by dynamic and representative political structures, including accountable security systems capable of managing change and resolving disputes through peaceful means (OECD, 2001, p. 17).

The World Bank entered the debate from a different angle. The failure of the World Bank’s classical structural adjustment policies during the 1980s, which is now called a ‘lost development decade’ and possible failure to pay back loans, especially by African countries, motivated the World Bank to look at the quality of states. Instead of a critical look at the assumptions of structural adjustment policies, the Bank began to focus on the nature of the states of developing countries. Under the presidency of James Wolfensohn, a Task Force on Failed States was appointed, and it published a new framework in April 1997 (Woodward, 2017). From this beginning, the World

xxi Bank’s interest in failed or fragile states has developed in different directions. It has launched special studies to focus on the link between economic policies and conflicts. In 2003, the results of these were published in Breaking the Conflict Trap: Civil War and Development Policy (Collier et al., 2003). The Bank has also established a Post-Conflict Unit, especially to deal with reconstruction of societies after peace has been established.

These initiatives by multilateral agencies paralleled developments within bilateral donors. In the UK, for example, in September 1995, the minister in charge of Overseas Development Administration (ODA) approved the introduction of conflict resolution as part of the aid programme. The British minister incharge of development aid even voiced the more controversial idea that development aid fuelled conflicts in developing countries. The following year, the ODA set upa special study group to study and make recommendations on how to handle conflicts through aid programmes. This work is now incorporated into the Humanitarian Assistance Department of the Department for International Development (DFID), the successor to the ODA. The UK government is often credited with carrying out the most far-reaching institutional reforms to deal with conflicts. Because of these reforms, the British government has established mechanisms that allow the Foreign Ministry, Ministry of Defence and DFID to work together when dealing with conflicts.

The biggest impetus to link development assistance policies with conflict has probably been in the US. Even before 9/11, USAID had a special unit called the Office of Transitional Initiatives to handle conflict and post-conflict situations. As a knowledgeable observer of USAID noted, The advent of the Cold War in the late 1940s provided the first grand impetus for foreign aid and for the promotion of trade and investment as instruments for driving the economic advance of the developing countries. The advent of international terrorism, with the finance, powerful methods and weapons, and suicidal determination to exploit the very open society the terrorists despise, should provide a second grand impetus (Muscat, 2002, p. 24). This sentiment reflects the substantial reforms that have taken place in US policy.

xxii Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Other actors that depend on foreign aid and operate on a world scale, such as international non-governmental organisations (NGOs), incorporated conflict as a central concern during this period. International NGOs have always played a prominent role in delivering humanitarian aid in conflict situations. With increased donor support to conflict issues, this work has been consolidated and expanded. Therefore, we now see the phenomenon of these organisations following armed forces of Western countries into conflict-affected areas. The other major group of organisations that have begun to work in conflict situations are international NGOs involved in development. Their interventions in development have been guided by concepts such as community-based development and self-reliance. These concepts were extended to cover conflict situations as well. The focus on conflicts has given rise to a significant number of international NGOs that specialise in conflict analysis and conflict resolution. They carry out numerous studies on conflict in post-colonial societies, try to develop capacities to resolve them, and lobby various governments and international agencies on these issues. They work individually, as well as through networks specialising in this area. In the globalised world, international civil society has joined governments of developed capitalist countries to become critical players in trying to resolve conflicts within the liberal capitalist order.

These reforms in institutions and practice within aid agencies to meet new security threats were buttressed by a set of hegemonic ideas. A key idea was to identify states affected by conflicts as failed states. Later on, adjectives such as fragile were added to characterise these states. Although this concept makes no sense conceptually or empirically in understanding diverse historical and social situations where there are conflicts, it became a dominant ideology within aid agencies when dealing with conflict-affected countries. It came into existence when the strategic thinking that had prevailed during the Cold War period was extended into the post-Cold War world led by the institutions that were set up immediately after the Second World War under US leadership. All that has happened with the help of this concept is to build capacities within aid agencies for state-building, without much benefit to countries affected by conflicts (Woodward, 2017).

xxiii A critical element of the vision of transforming so-called failed states is the effort to export liberal democracy of developed countries as the best political system available. Degnbol-Martinussen and Engberg-Pedersen pointed out that ‘DAC countries have adopted declarations several times since 1989 in which they maintain that there is a connection between democratic and accountable regimes, compliance with human rights, and an effective and equality-oriented economic policy’ (2003, p. 30). This position questioned the hitherto-accepted view that did not always see a harmonious relationship between capitalism and democracy. For example, for a long-time, US policy-making circles gave more priority to political stability than to democracy in developing countries. This view linked the evolution of sustainable democratic institutions with capitalist growth and the emergence of a middle class. Political stability by any means was a pre-condition. The new position in development assistance took the view that simultaneously promoting market economies and liberal democratic institutions was a desirable and a possible goal. With this addition, the aid industry set itself an explicit political goal – one that earlier had been confined to the foreign policy agendas of donor countries. Therefore, the establishment of liberal institutions in both the economy and polity has become the mainstream discourse of development assistance. The agenda is nothing short of establishing a liberal capitalist order at the global level.

The World Bank and the United Nations Development Programme (UNDP), which do not have a mandate to question the form of regimes in aid-receiving countries, have translated the idea of the liberal democratic state through the notions of good governance. Good governance involves rule of law, predictability, transparency, openness and citizen participation. It has a vision of a state that operates based on law, ensures freedom of the judiciary so that the rule of law can be maintained, is open to citizens’ influence, and is transparent and accountable. For the World Bank, good governance includes progress in public service management, accountability, establishment of a legal framework for capitalist development, availability of information and transparency (World Bank, 1992).

Of course, when it comes to the economy, this rule of law will protect institutions that are essential for the development of capitalism. Politically, it is an attempt to

xxiv Sustaining a state in conflict: Politics of foreign aid in Sri Lanka break the control of various interest groups that could dominate the state, and might get in the way of the promotion of markets and capitalist development. Through the establishment of the rule of law, it is hoped it will be possible to create a state governed by rules that would be conducive to the development of capitalism.

While this expanding agenda of foreign aid has brought the liberal discourse into economics and politics, other issues, such as social policy, women, and concern about the environment, that began to come into prominence in the 1970s within aid agencies, have continued to be present. But these concerns are always maintained without challenging the neoliberal order. For example, a discourse on development began to argue the need to go beyond a discussion on economic growth. Now these concerns have been trapped within the notion of poverty alleviation propagated by aid agencies. Gender became a principal concern from the mid-1970s. Initially, it was brought in through the concept of women in development, focusing on how to bring the benefits of development to women. Later, this was extended to a discussion on structures in society that construct and maintain gendered relationships. If this concept is taken seriously, it will question the fundamentals of the liberal order promoted by donors. However, this is often not the case when gender issues are incorporated into donor policies. Finally, from the beginning of the 1970s, the environment became a principal concern. Here, too, it is incorporated within the larger objective of developing a liberal capitalist order, rather than having a fundamental critique of the capitalist order based on the unsustainability of this model of development.

The final element in this agenda of developing a liberal capitalist order is an emphasis on promoting and strengthening civil society as a countervailing force to the state. For liberal theory, which is always sceptical of excessive state power, promoting civil society is per se a desirable goal because it can check the power of the state. The contradictory nature of civil society, or the fact that civil society might have very ‘uncivil’ elements, is not recognised. In translating the notion of strengthening civil society, donors have focused on supporting and strengthening NGOs. NGOs have now become a powerful force both nationally and internationally. The very emergence of these organisations has reconstituted civil society space. NGOs

xxv have become a major channel for achieving the expanding agenda of development assistance. Theoretically legitimised as civil society, they are now a key player within the aid industry. Therefore, this post-Cold War political agenda brings Western governments, aid agencies, militaries, private sector organisations and NGOs together into what Duffield calls strategic complexes of global governance (Duffield, 2001).

The dominant ideas within aid agencies, incorporating the objective of promoting capitalism and security at a global level, have now come together within the notion of liberal peace. Liberal peace views global capitalism and globalisation based on free markets as a benevolent system that incorporates more and more people into a market economy, bringing about an interconnected world that spreads prosperity and freedom into all corners of the world. The elements that go into promoting this political vision include developing a market economy, establishing liberal democracy, reforming the state based on liberal principles, addressing the problems of marginalised social groups such as women and minorities through a discourse of rights, promoting human rights, and strengthening civil society as a countervailing power to the state. These add up to a vision of the total transformation of aid- receiving countries based on liberal principles. The other key feature of this vision, which is often implied, is the continuation of Western hegemony, led globally by the United States.

This formula of liberal peace propagated by aid agencies, which combines liberal market economies and liberal democracy, is nothing new. Some of the ideas of trying to bring in peace and prosperity through free trade and transplanting liberal democratic institutions from the West were prevalent in the classical period of imperialism that focused on territorial domination (Kiely, 2010). These ideas have a long history ‘that stretches back to the likes of James Mill and John Stuart Mill, right through to the current case of integrating rogue and failed states in the twenty-first century’ (Kiely, 2010, p. 3). These ideas accept the hegemony of the US in the current global order. Some writers see this as a political project that underlies a new form of liberal imperialism. What we see now is the re-emergence of this political project in the twenty-first century. We need to take this political project and its implications seriously in order to understand the politics of foreign aid in recipient countries. xxvi Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Sri Lankan case study

This study arose out of a puzzle posed by Sri Lanka for those engaged in debates on foreign aid and conflict. Although Sri Lanka suffered from an armed conflict with all its social costs for more than three decades, it never became a country where the state totally collapsed or the economy was undermined. Obviously, there were costs to the economy, and it will take a long time to understand and take care of the social costs of the armed conflict. Nevertheless, it did not fit into the pattern usually found in literature on conflict-affected states. What is more, in 2009 the Sri Lankan armed forces managed to defeat militarily one of the most well-developed armed groups in the word, the Liberation Tigers of Tamil Eelam (LTTE). In addition, in 2010 the country was classified as a low-middle income country by the IMF. The question is how did this happen? What was the role played by foreign aid in this historical process? These are the questions that motivated this study.

Much of the literature on foreign aid starts from the policy agenda of donors. By and large it focuses on how to implement the agenda of aid agencies and how to assess its impact. There is a general acceptance that the policy goals of aid agencies are benevolent, and therefore the next task is to see how they can be implemented. The much-publicised discussion on ‘local ownership’ within foreign aid agencies reflects this dominant perspective. Promoting policies of donor agencies remains the main objective even in this discussion. The question then is how to ensure that the recipients feel that they own the policy agenda of donors. Hence the need for so- called local ownership.

In contrast to this line of analysis, the starting point of this study is the political economy of Sri Lanka between July 1977 and May 2009. Both July 1977 and May 2009 signify critical events in the post-colonial . The election of July 1977 brought into power the centre-right United National Party (UNP), which inaugurated a new period of capitalist development. It emphasised the private sector, markets and openness to global capitalism. Regimes elected subsequently have continued with these policies. Although there are differences in how these policies have been implemented by different regimes depending on their political

xxvii composition and ideological orientation, there has been no going back to a situation where pre-1977 ideas became hegemonic in economic policy. Therefore, if we look at the post-colonial economic history of Sri Lanka, post-1977 stands out as a new period.

In addition to these new directions in economic policy, the 1977 general election signified a turning point in the history of state formation in post-colonial Sri Lanka. The primary factor was the Sinhala nationalist character of the state, and failure to develop a state structure that could accommodate the plural character of Sri Lankan society. This resulted in the Tamil United Liberal Front (TULF), the principal political representative of the Sri Lankan Tamil minority, contesting the July 1977 general election on a platform of a separate state. The election result showed how polarised the country was. On one side the UNP, contesting the election on an agenda of a new period of capitalist development, won the election with a five-sixths majority in parliament. On the other side, the TULF, contesting on a separate state demand, swept the Northern Province and won the bulk of seats in the Eastern Province (See Figure i). The Tamil separatist struggle soon evolved into an armed struggle, with the LTTE becoming the strongest militant group. The Sri Lankan armed forces were sent to the North in 1979 after the enactment of the Prevention of Terrorism Act. The armed conflict prevailed for more than thirty years. At times the LTTE controlled significant sections of the Northern and Eastern Provinces.

xxviii Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Figure I. Electorates won by each party in the 1977 election

Source: Somasekaram et al., 1997, p. 175

This meant that polarisation in the country due to challenges in state formation came into sharp focus right from the beginning of the new phase of capitalism in 1977. From this point, the Sri Lankan Tamil demand for a separate state, and the armed struggle that followed, became the biggest challenge faced by the ruling elite in their effort to promote capitalism. Therefore, one of the major political objectives of the ruling elite was to regain control over territory of the Sinhala nationalist state. While Sinhala nationalism was an important driver to regaining control over the territory of the Sinhala nationalist state, this was also necessary for the development of capitalism. This was achieved with the military defeat of the LTTE in May 2009. With this event the Sri Lankan ruling elite, dominated by Sinhalese, consolidated the territorial unity of the state, removed a major factor undermining capitalist growth,

xxix and reasserted the Sinhala nationalist character of the state. But the fundamental issue of reforming the state in a plural society remains a political objective that needs to be tackled.

Conceptually, this study bases itself on two strands of thought in order to understand the political economy of Sri Lanka from 1977 to 2009. The starting point of one strand is the Marxist debate on the state and capitalist development. The Marxist debate has moved from trying to read the state from the dynamics of capitalist development alone, to a notion of relative autonomy and to David Harvey’s analysis of different logics of state and capital. State formation has been an essential part of capitalist development, but the details of it have to be worked out in a particular historical context, Harvey calls for a recognition of the distinction between the logic of state power and the logic of capital. According to him, a distinction arises between logic of power, driven by territorial imperatives and political interests, captive to all of the complexities involved in place-making and the evolution of expression of popular will (such as nationalism) in the public sphere, and capitalist logic of power that arises from the accumulation of money power in private and corporate hands searching for endless growth through profit making (Harvey, 2010, p. 204). This also allows us to bring in the relatively independent role that nationalism plays in state formation in a context of capitalist development.

The other dimension that is relevant for Sri Lanka is the recognition that nationalism itself can be a crucial factor in capitalist growth.4 Although neoliberals find it difficult to understand, the combination of nationalism and capitalism is a common phenomenon in the history of capitalism. These two phenomena can easily co-exist and supplement each other. In the case of Sri Lanka, the new period of capitalism begun in 1977 co-existed with the Sinhala nationalist state. At the level of the capitalist elite, there has always been a section of capitalists who were Sinhala nationalist in their political persuasion. Other sections of the capitalist class could co-exist with Sinhala nationalism, although their personal political persuasions

4 For a recent analysis of this question, see Greenfeld (2003).

xxx Sustaining a state in conflict: Politics of foreign aid in Sri Lanka might be otherwise. These political forces did not want economic policies to shift from the direction of an open market policy, but would be supportive of a highly- centralised Sinhala nationalist state.

The question that is posed by this study in the context of Sri Lanka’s political economy is: what was the political role played by foreign aid from developed capitalist countries, multilaterals and Japan in this critical period of Sri Lanka’s contemporary history? In the period covered by the study, the flow of external assistance and the role of aid agencies in Sri Lanka expanded significantly. In this context, foreign aid was not some sort of an external factor. It was an actor within Sri Lankan politics with its own political agenda. Peter Uvin, in his seminal study on foreign aid and violence in Rwanda, argues that there are two images of foreign aid. In the first image ‘development aid is external, whereas the political processes that caused genocide – civil war, competition for power, racism, ideological radicalization, militarization, human rights violations – are internal’ (Uvin, 1998, p. 225). Whereas according to him the more relevant picture is ‘where foreign aid is so important that it is nearly impossible, or meaningless, to separate it from socioeconomic and political processes that take place domestically’ and ‘any separation between them is artificial and meaningless’ (Uvin, 1998, p. 226).

As will be seen from the study, the politics of foreign aid agencies that operated in Sri Lanka during this period was largely guided by ideas embedded in the post-Cold War neoliberal political project described above. This basically assumes that liberal market policies and liberal democracy can provide answers to the world’s problems. The search for peace was also guided by these ideas. In addition, the search for peace is dictated primarily by strategic interests and the desire for security in a world dominated by global capitalism.

However, this dominant role played by foreign aid, and the ideas dominant in these agencies, did not operate in Sri Lanka in a political vacuum. The political elite and bureaucracy of Sri Lanka had their own agenda, ideas and various strategies to deal with donors. These agendas are found at policy level, as well as in relation to specific programmes and projects. The ruling elite was not some kind of passive recipient

xxxi of aid. This does not mean that this relationship was always antagonistic. On the contrary, as we shall see in the study, especially in the area of economic reforms, there was a significant level of agreement and joint effort to push through reforms. But there were other areas, especially in relation to political reforms, where there were differences of opinion between donors and the Sri Lanka elite. To complicate matters, it is also difficult to study this relationship by treating donors as a monolithic unit. The politics of each donor had an impact on this relationship. Finally, these agencies also operated in an environment where there were Sri Lankan political movements which cannot be simply understood through the term civil society often used by donors. Hence, in order to understand the political outcomes of foreign aid in Sri Lanka, driven largely by a post-Cold War neoliberal project, it is necessary to place it in the specific historical and political context of Sri Lankan society. The purpose of this study is to contribute to such an understanding.

The basic message that this study wants to convey is that inaugurating the new period of capitalist development supported the ruling elite of Sri Lanka in its task of consolidating the territory of the Sinhala nationalist state. Foreign aid played a key role in this agenda. Because of inaugurating the new period of capitalism, the Sri Lankan elite secured massive support from developed capitalist countries of the West, multilaterals and Japan. The generally pro-Western foreign policy of the country augmented this support. First and foremost, this support was in the form of resources channelled through foreign assistance. There was budgetary support from the IMF and support for public investments. Secondly, the country had legitimacy within the structure of global governance led by the West. In other words, Sri Lanka was never a rogue state, and in the eyes of donors did not come anywhere close to it. This also meant, in a world where economic sanctions are widely used for political purposes by developed capitalist countries, Sri Lanka did not come under such sanctions until the country’s foreign policy strengthened relations with China towards the end of the period covered by the study. The basic outcome of this relationship with donors from the developed capitalist countries and multilaterals was that the country could continue on the path of capitalist transition while waging an expensive civil war. Even when the government had to spend funds on a military strategy, there were always funds from external sources to continue with normal

xxxii Sustaining a state in conflict: Politics of foreign aid in Sri Lanka development activities. Imagine a situation where Sri Lanka had not liberalised the economy in 1977, and had a less friendly foreign policy towards developed capitalist countries of the West. Sri Lanka could not have sustained an expensive war and at the same time become a low-middle-income country. This means external support was an essential factor in sustaining a state involved in the battle to control its territory.

However, as argued above, the neoliberalism that prevailed globally in the post- 1977 period was not just an economic project. It was essentially a political project that hoped to reform the world based on liberal principles in economics as well as politics. Most importantly, it also believed that these principles would bring in a peaceful world. Therefore, assistance to Sri Lanka had both these economic and political dimensions embedded within it. This included solving Sri Lanka’s conflict through political means, and upholding democratic and human rights. While the ruling elite and external backers could see eye-to-eye when it came to promotion of the economic agenda, this was not the case when it came to the liberal political agenda. Throughout the post-1977 period we see episodes where ruling elites clashed with donor countries on issues related to political solutions to the conflict, and democratic and human rights. In addition to this, the emphasis on the liberal political project strengthened many non-state actors in their struggle for rights in various spheres of society.

This analysis shows the contradictory impacts of foreign aid. It is neither a ‘do-gooder’, as many liberal cosmopolitans who look towards Western influence through foreign aid to solve many of our problems believe, nor is it the ‘foreign evil’ that nationalists tend to see. It is a much more complex picture. In understanding this complex picture, the defining factor is the historical and political context of the country in which donors operate. This is what donors need to understand. However, in contrast to this, we are now saturated with global blueprints that are emerging from capitals of aid-giving countries, which are imposed on diverse historical situations. This not only ignores the diverse histories of societies that are lumped together as developing countries, the Third World or societies with failed states, but carries the danger of making the situation worse.

xxxiii At the end of the period covered by this study, the fundamental issue of building a legitimate state in a society where there are several identity groups has not been addressed. There is only a situation where the territory of the Sinhala nationalist state has been consolidated through military means, and where foreign aid played a critical role. Therefore, capitalist development is taking place in a society where the contradictions generated by the logic of the state have not been resolved.

The chapters of the book cover the following: Chapter 1 shows the historical background that led to a situation where, on one hand, the country inaugurated a new period of capitalist development, while political representative of Tamils demanded a separate state. This historical background is essential to understand the post-1977 political economy of Sri Lanka. Chapter 2 focuses on the history of foreign aid in Sri Lanka during the post-colonial period. This aims to show how a country that had access to aid from diverse sources got locked into aid structures from developed capitalist countries and multilaterals after the new period of capitalism was inaugurated in 1977. The most important alternative source to aid from developed capitalist countries was assistance that Sri Lanka received from the state socialist bloc led by the Soviet Union. The collapse of the latter, and the shift in economic policies from state-led capitalism to what is popularly called an ‘open economy’, were the main reasons for the dominance of financial resources from the developed capitalist countries and multilaterals.

Chapters 3 to 6 form the core of the study. These chapters map out the relationship between the politics of aid agencies and the agenda of the Sri Lankan elite to reassert control over territory of the Sinhala nationalist state. The key objective is to understand the evolution of aid policies and their politics in Sri Lanka in this context. Chapters 3 and 4 map out this process. Chapter 5 covers the high point of liberal peace in Sri Lanka with the mediation of the Norwegian government and its subsequent collapse. This resulted in a regime, led by Rajapakse, coming into power and fulfilling the objective that the ruling elite at the centre always had– consolidating the territory of the Sinhala nationalist state by destroying LTTE militarily. The last chapter covers the interesting relationship between aid agencies and the Rajapakse regime.

xxxiv Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Chapter 1

The challenges of state formation in a multi-ethnic society

This chapter focuses on the challenges of forming a state in a multi-ethnic society in the period before 1977. The inability to find adequate answers to these challenges led to Tamils demanding a separate state in the July 1977 general election. There were a complex set of reasons for this political outcome.

British rule laid the foundation for the modern Sri Lankan state. The same period saw the beginning of ethnic identities being used to decide on issues of political representation. On the other side foundation for capitalist transition was established through the plantation economy.

In the post-colonial period state formation was based on three mechanisms: electoral politics, the hegemony of Sinhala Buddhism as a state ideology and strengthening of state-led capitalism, and a set of policies, some of which constituted the so-called welfare state. This led to relations with Sinhalese population in general and rural Sinhalese in particular being the key to post-colonial state formation.

The contradictions arising out of the presence of vibrant electoral politics, state commitments to certain welfare policies, and the hegemony of Sinhala Buddhist nationalism played a role in the emergence of Tamil demand for a separate state. Nevertheless, however complex this process, it is also clear that it is within this history of the country that we have to find the answers to Sri Lanka’s problems. There is no sign of any of these factors disappearing or even minimising their importance within the Sri Lankan polity. This search for solutions cannot ignore the resilience of electoral politics, the continuous demand for social justice in the distribution of resources, and the vibrancy of nationalist politics.

1 Colonial antecedents

The British captured the Kandyan kingdom, the last stronghold of Sinhala kings, in 1815. After several centuries, the entire territory of came under a single political authority. In the history of state formation in Sri Lanka, this was the beginning of the period of the colonial state. While previously, various forms of authorities and forms of rule existed in the island, the colonial state under the British led to political unification of the island, centralisation of the administration, the establishment of a road and rail transport system in the island, and of port facilities through which the island’s economy was linked to the imperial centres.1

The 1833 Colebrook-Cameron reforms unified the country administratively. The territory under the Kandyan kingdom was amalgamated with the rest of the country, recast under the colonial administration and named using the points of a compass (Perera, 1999). In subsequent years, four new provinces were created – North- Western (1845), North-Central (1873), Uva (1886) and Sabaragamuwa (1889). These provinces were divided into districts. A government agent became the head of each district.

Table 1.1 Transition from the Kandyan kingdom to Ceylon under the British Provinces in British Kandyan Kingdom Districts in British Ceylon Ceylon Nuwarakalaviya and the Northern Jaffna, Mannar Wanni Eastern Tamankaduwa and Bin- Trincomalee, Batticaloa tenna Sabaragamuwa, Patha Uva Galle, Tangalle, Matara, Ham- Southern and Wellassa bantota

Sath Korale, Thun Korale, Western Sathara Korale and Patha Colombo, Chilaw, Puttlam Bulatgamme Central districts of the Central Kandy, Matale kingdom Source: Adapted from Perera, 1999, p. 46

1 See Gunawardena 2008 for a history of state formation in Sri Lanka.

2 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The other development during the colonial period that had a far-reaching impact on the country was the decision by the British to appoint what were called unofficial members based on ethnic identities to the Legislative Council established under the 1833 Colebrook-Cameron reforms. The initial formula was three Europeans, and one each to represent Sinhalese, Tamils and Burghers. In 1889, two more positions were created - one each for Kandyans and Muslims. Subsequent representation was a mixture of group identities and territorial units. Over the years, the role of these representatives expanded and laid the foundation for the gradual transfer of power to the local elite. There were elections to these positions but based on a very narrow voter base. These developments during the period of British colonialism were the beginning of modern identity politics in Sri Lanka. From the very beginning, group identities became a key category through which political representation was articulated. The emerging political elite utilised these identities for seeking political power. In this way, group identities became an organising principle of politics, with major consequences for the country during the post-colonial period.

In 1931, along with granting universal franchise through the recommendations of the Donoughmore Commission, representation shifted to territorial units. It is interesting to note that the granting of universal franchise was opposed by most of the future political leaders of post-colonial Sri Lanka. According to many representatives of the colonial bourgeoisie, the masses were not ready to choose their own leaders, still a familiar position on the part of the elite in many parts of the world. The exceptions were the labour leaders. Goonesinghe, who led the Ceylon Labour Party, ‘was the one prominent political figure to advocate universal suffrage before the Donoughmore Commission’ (De Silva, 2005, p. 519).

When it came to designing an electoral system, the issue that dominated was whether Sri Lanka should have ‘communal’ or ‘territorial’ electorates. The idea of communal electorates was the legacy of group representation, which prevailed from the time of the first Legislative Council. Those favouring communal electorates argued for separate electoral registers for different ethnic groups, and balanced representation of ethnic groups in the parliament. The elite of politically prominent minorities, especially from the Sri Lankan Tamil community, championed this position.

3 Tamil leaders were apprehensive of the power that the demographically dominant Sinhalese would enjoy in parliament with a system of universal franchise. The Sinhalese elite who argued for territorial electorates held the counter-position. This was the demand to have a single electoral register, divide the country into spatial units, and to hold elections on this basis.

This debate was resolved in favour of territorial electorates by the Donoughmore Commission. Although the British perceived Sri Lankan society through ethnic categories, their vision for the future Sri Lanka was a nation-state in the European model: A nation-state that would transcend what were called communal identities. The commissioners believed that communal representation would prevent the development of a true national identity A single electoral register for all citizens, with the entire country being divided into spatial units called electorates, was expected to develop a national identity. Sri Lankan history has shown the false assumptions in these ideas. Neither communal representation nor territorial representation provided an answer to the complex question of representation in plural Sri Lanka.

The process of granting independence was a gradual one. Independence was achieved through negotiations between the Sri Lankan colonial bourgeoisie and the imperial power. The key ideas that determined the nature of the Sri Lankan state during the post-colonial period were formed during the period leading up to independence. Although there was discussion of a federal form of government, and several political representatives even put a set of proposals for a federal system, this failed to make an impact. On the contrary, the post-colonial state was based on the colonial notion of a centralised state.

When Sri Lanka gained formal independence, the state structure was based on the Westminster model with two legislative chambers, a prime minister with a cabinet of ministers having executive power, and an appointed governor-general remaining as the representative of the British Crown. In the judicial system, Sri Lankans could appeal to the Privy Council in Britain if any legislation violated the constitution.2 2 This provision, which allowed the Privy Council in Britain to become the final court of appeal, played a critical role during crucial political events in post-colonial Sri Lanka. The Privy Council acquitting a group of officers from the armed forces who were accused of plotting a coup against the government in 1962 was perhaps the most important political event where the remnants of colonial structures had an impact.

4 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Thus the local elite secured power in a centralised post-colonial state, which they themselves had been involved in constructing together with the colonial power. It is very clear that the discourse on the structure of the state was determined by ideas that dominated in Britain. The future Sri Lankan elite were willing executors of these ideas.

Several measures were introduced to safeguard the rights of numerically smaller ethnic groups. These were: a) distribution of seats in parliament so that there was some degree of balanced representation between the majority Sinhalese and all minorities (multi-member constituencies in electorates with pockets of minorities were one device used to ensure this); b) a second chamber into which minority representatives could be appointed; and c) a special clause in the constitution, 29 (c), which made it unconstitutional to confer on persons of any community or religion any privilege or advantage that was not conferred on persons of other communities or religions. By this it was hoped that the constitution could prevent special privileges being granted to the majority community.

In addition to forming a centralised state, British colonialism also laid the foundation for capitalist transition. The very fact of unifying the territory through a single political authority was an important step in unifying fractured markets, an essential condition for the development of capitalism. Colonial capitalism also established the plantation industry, which linked the country’s economic development with global capitalism. In this process, the passage of the Crown Land Encroachment Ordinance of 1840-41 was a crucial first step. The flip side of the enactment of the Crown Land Encroachment Ordinance was the sale of land to establish the plantation industry. Over 1,000,000 ha of land was sold to the private sector between 1833 and 1930, mainly to invest in coffee, tea, rubber and coconut plantations (Sri Lanka Sessional Paper III, 1990).

The introduction of the plantation industry as the foundation of capitalist transition in Sri Lanka brought about a significant spatial transformation of the island. This began during what is called the coffee period. Initial growth of the coffee industry was from 1835 to 1845, and there was further acceleration of growth in the mid-

5 1870s (Peiris, 1996). Peiris points out that ‘At the zenith of prosperity of the coffee industry, when its frontiers enclosed virtually the entire highland area of the Wet Zone, the extent of land under European-owned plantations alone totalled up to about 2,75,000 acres (111,000 ha) with another 75,000 acres of coffee owned by local people’ (Peiris 1996, p. 131). From this beginning, spatial transformation due to the plantation industry spread more widely. The tea industry transformed the bulk of the highlands, parts of Sabaragamuwa and the districts of Galle and Matara. Rubber and coconut encompassed the south-west quadrant of the country. Infrastructure development to assist capital accumulation of the plantation industry transformed the island.

Finally, it also involved significant demographic changes, both due to settlement of the Indian Tamil labour brought in from India and significant shifts of the population to the Wet Zone. The latter included movement of the Sri Lankan Tamil population from the Jaffna peninsula in search of employment opportunities in the colonial administration and modern sectors of the economy. Therefore, during the colonial period, the spatial transformation brought about by laying the foundation for capitalist transition was as significant as spatial transformation due to state formation.

During the colonial period, capital from the colonial power dominated the plantations. But it also formed the foundation for the formation of an indigenous elite and a professional class. By 1972, the year when land reforms placed a ceiling on private ownership of land, 68.1 per cent of tea, 85.8 per cent of rubber and 95.8 per cent of coconut acreages were owned by local capital and smallholders. The rest were British-owned estates (Peiris, 1996). Most future leaders of the country came from the classes that acquired wealth during the colonial period. If we consider the fact that the plantation industry included coffee, tea, rubber and coconut, the interests of the local elite in the plantation economy were significant. Some of them owned part of the plantation land; others acquired wealth through ancillary services linked to the plantation industry. The plantation industry, colonial service, expansion of education and professions that emerged during the British period formed the basis of the national elite that later began to rule the country.

6 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The plantation industry demanded a labour force that was permanently resident in the estates. Production relations of the estate system were based on the availability of a cheap, docile labour force ready to reside in the estates and depend on the estates for most of their needs. The demand for labour for various activities involved in running an estate was seasonal. Resident workers could be assigned to any of these activities depending on the availability of work, and they received wages depending on the number of days they worked. The labour force needed for production was brought from another colonial domain – the southern part of India – since it was not readily available from local sources. The labour was brought from the impoverished villages in South India. This transfer of labour was an organised business, with labour contractors playing a key role.

It is also important to remember that, contrary to the rhetoric of Sinhala nationalists and the implications of treating plantations as enclaves cut off from the villages, the plantation industry provided economic opportunities to the Sinhala population that resided outside plantations. There were economic opportunities in the early stages, when land was cleared for plantations (Meyer, 1992). Trading classes from various parts of the country established themselves in townships in the plantation areas. Plantation crops such as low country tea, rubber and coconut were not confined to the hill country, but were found in many parts of the Wet Zone, and some of this was grown by smallholders.

The plantation industry formed the base of the Sri Lankan economy for a long time to come. The bulk of foreign exchange earnings and most revenue came from this sector. Therefore, from the very beginning, capitalist development in Sri Lanka was linked to the global economy. It was an export-oriented economy with all the instability brought about by this. The imperatives of global markets had an impact on Sri Lanka. In addition, the dependence on a single sector introduced during the colonial period was a fundamental weakness in the economy. For example, during the post-colonial period, the country faced severe economic problems when export earnings were inadequate. Sometimes it was difficult to ensure even essential imports. It was in this context of underdeveloped capitalism inherited from the colonial period that post-colonial Sri Lanka had to manage its state-society relations.

7 Post-colonial state formation

In the post-colonial period, a major political focus of the ruling elite was managing relations with the Sinhala Buddhist community that formed the majority ethnic group. This was the pre-dominant variable in state formation and state-society relations in post-colonial Sri Lanka. Three mechanisms were crucial in this process – the institutionalisation of electoral politics, hegemony of Sinhala Buddhism nationalism as a state ideology, and state-led capitalist development together with policies that formed a part of the so called welfare state. All three were important in managing relations with the majority Sinhala community. This had to be done in the context of underdeveloped capitalism based on an export economy depending on three major crops inherited from British colonialism. It is the contradictions of this agenda that led Sri Lankan Tamils to demand a separate state by the time general elections were held in July 1977.

The institutionalisation of electoral politics brought in a totally different process in determining state-society relations during the post-colonial period, compared to the top-down process mediated through a tiny elite during the colonial period. The Sri Lankan voter participated enthusiastically in elections. As pointed out by Amita Shastri in an article published in 1994, the average voter turnout of 77 per cent under the first-past-the-post system of elections was extremely high when compared internationally. It places Sri Lanka tenth, between the United Kingdom and Canada, in a ranking order of countries worldwide that have had democratic elections continuously since 1945/1950, have a population of over 3 million persons and a system of voluntary voting. The Sri Lankan case is noteworthy in that turnout increased from 55.1 per cent in 1947 to 86.2 per cent in 1977, an astounding increase of 31.1 per cent! This figure puts it far beyond all other increases in turnout – the highest increase being that in Sweden of 10.6 per cent (Shastri, 1994, p. 330). Making use of this power of the vote, Sri Lankan voters regularly changed the party in power. Thus, elections played a key role in getting the consent – especially of the majority Sinhala community – and thereby legitimising the state, at least among them.

8 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

In addition, electoral politics led to a shift in the social composition of the political elite. At the time of independence, the political elite had been primarily drawn from those who accumulated wealth or positions of social standing during the colonial period. This was the English-speaking westernised colonial bourgeoisie. With the institutionalisation of electoral politics, it was clear that this tiny minority could not hold on to political power on its own. A new political leadership emerged from the rural middle classes. They were Sinhalese from rural areas, and more Sinhala nationalist in their outlook. Some writers have used the term intermediate classes to identify these social groups (Singer, 1964; Shastri, 1983; Coomaraswamy, 1988). In fact, an informal but effective social coalition between the urban upper-class political elite and the new rural middle classes emerged in electoral and parliamentary politics. The general election in 1956, when the UNP regime that inherited power from the colonial masters was defeated by the (MEP),3 was a landmark event in consolidating the power of this class bloc. This was also the beginning of the two-party system in Sri Lanka, and was an inevitable result of electoral politics. This has been the class bloc that has ruled the country during the post-colonial period.

While electoral politics broadened the social base of the ruling elite, it had a negative outcome on the checks and balances introduced to protect the rights of minorities at the time of independence. Post-colonial history is one of the ineffectiveness of these mechanisms in the face of the electoral power of the Sinhalese. The result was the hegemony of Sinhala-Buddhist nationalism in state ideology that became a major factor in managing state-society relations.

The first landmark in the breakdown of the checks and balances wasthe disenfranchisement of the bulk of the Indian Tamil population. Numerically, there were more Indian Tamils than Sri Lankan Tamils at the time of independence. Immediately after independence, Sri Lanka enacted the Citizenship Act of 1948 and the Indian and Pakistani Resident (Citizenship) Act of 1949. These laws created two categories of citizens: citizens by descent, and citizens by registration. The latter

3 The MEP was a coalition led by the (SLFP), the second largest political party in Sri Lanka. Other members of the coalition were Viplavakari Lanka Sama Samaja Paksaya, led by Philip Gunawardena, and Sinhala Bhasa Peramuna, led by W. Dahanayake.

9 category was aimed at deciding the status of so-called recent immigrants. They had to fulfil extremely stringent criteria to qualify for Sri Lankan citizenship. Thus, one of the very first Acts in independent Sri Lanka, which defined citizenship in post- colonial Sri Lanka, started to undermine the checks and balances that had been incorporated to safeguard the rights of minorities. It also meant that Sri Lanka was no longer a country that enjoyed universal suffrage.

The disenfranchisement of the bulk of the Indian Tamil population undermined the idea of balanced representation in parliament. Balanced representation would have meant that there would have been a sizeable number of minority representatives, and the ruling political parties that represented the majority would not have been able to ignore them. Subsequent changes in delimitation shifted the political balance in parliament towards the majority to a very significant degree.

A little noticed outcome of this step is how it benefited plantation capital. From this point plantation capital had access to a source of disenfranchised cheap labour belonging to a minority group, who for a long time were alienated from mainstream politics. Trade unionism became the principal means through which the working class in plantations could struggle for their needs. Disenfranchisement meant, in contrast to the rest of the population, the plantation working class could not utilise mainstream politics to push their demands.

With the coming into power of the MEP in 1956, the Sinhala Buddhist identity became the hegemonic identity of the state. The Sinhala Buddhist character of this centralised state was further strengthened by an idea that linked the entire island with Sinhala Buddhism. This discourse argues that the island was specially chosen to protect Buddhism in its purest form. The political project to carry out this mission was to control the entire island through a highly-centralised state. Thus, the majority community became a strong defender of the centralised state constructed during the colonial period.

The passage of the in 1956, which made Sinhala - the language of the majority community - the only official language, also signified this political

10 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka development. It effectively ended the two-language formula that had been accepted by the Sri Lankan polity. By making a certain level of Sinhala mandatory for public sector jobs, it discriminated against Tamil-speaking people in their access to these jobs. The Official Language Act also demonstrated the ineffectiveness of the afore- mentioned Section 29 (c) as a means of protecting minority rights in the country. The Act was followed by many other policy decisions that helped to establish Sinhala Buddhist hegemony.

The next significant event in this breakdown of institutions that had given some protection to minorities was the enactment of the first home-grown Republican Constitution in 1972. This constitution ended the dominion status of Sri Lanka. Up to 1972, Sri Lanka had the Queen of England as the head of the state and Sri Lanka could appeal to the Privy Council in Britain. Hence the 1972 Constitution had elements that did away with the last vestiges of colonial rule. It also created a political structure that ensured the superiority of the legislature. However, the framers of this constitution had little regard for minority demands. They removed the safeguards in the previous constitution, gave a pre-eminent position to Buddhism in addition to the Sinhala language, and most importantly, concentrated all power in the Sinhala- dominated legislature. The ethnic polarisation was such that scant attention was given to any demand for regional autonomy. The Federal Party, the main political party representing the Sri Lankan Tamil minority, put forward a proposal based on the concept of regional autonomy. When the resolution on language was discussed, the Federal Party moved an amendment to make Sinhala and Tamil official languages in Sri Lanka. This was rejected by the Constituent Assembly by 88 votes to 13. The Federal Party withdrew from the Constituent Assembly.

The expansion of the state sector in the economy within an overall capitalist framework and implementation of a range of social policies was the other major feature in managing state-society relations in post-colonial Sri Lanka. This state capitalist regime prevailed from the mid-1950s to the mid-1970s.4 This also meant a lesser degree of openness of the economy to global capitalism. The emphasis on the

4 See, Ivanov, 1969, Gunasinghe, 1990 and Liyanage, 1997 for a discussion on state capitalism in Sri Lanka. Ivanov, 1969 is in Russian. See Bastian, 1980 for an introduction to the analysis of Sri Lankan state capitalism by Russian scholars.

11 state sector in the economy was legitimised through various arguments. Contrary to the widely-held belief that it was some idea of socialism propagated by the Left that was solely responsible for expanding the role of the state in the economy, depending on the state to drive development was a much more widespread idea.

In the run-up to independence, hardly any member of the future political leadership believed in an economic ideology relying on private-sector-oriented free markets and openness to global capitalism as it is propagated at present. It is very difficult to find a commitment to this type of ideology at any significant level. Onthe contrary, the state was expected to play a prominent role in the economy. At the time of independence, the emphasis on the state was especially true for industrial development. The programme adopted by the , the key political actor in the drive for self-government, stated ‘The State will promote and assist the development of every industry. All key industries will be state owned’ (quoted in Roberts, 1979, p. 402). The broad outline of the development vision of the first UNP regime after independence consisted of continuing with the privately- owned plantation sector inherited from the colonial period, but the state playing a key role in industrial development as well in improving the agrarian sector. This commitment of the UNP to the agrarian sector continued at least in the early period of the more liberal economic policies. The UNP in its six-year plan from 1947 to 53 ‘envisaged a major role for the state in both agriculture and industry’ (Gunatilleke, 2004, p. 77). When the plantations were taken over by the state in 1975, the UNP supported the bill in parliament. The UNP became worried about the management of plantations only after they came under state ownership (De Silva and Wriggins, 1994). The state was seen as the major driver of industrialisation throughout the post-colonial period. Several projects were begun in the state sector producing various industrial goods. There was a very prominent active promotion of state-led industrialisation from the mid-1950s.

The changing class composition of the ruling bloc from the mid-1950s led to the expansion of the role of the state in various sectors. A major factor was the dilution of power of the colonial bourgeoisie through electoral politics, and the rise of intermediate classes to become a part of the ruling bloc in the country. This led to the state taking over a number of sectors of the economy owned by the private sector. 12 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

This affected public transport, ports, banking, insurance, petroleum distribution and wholesale trade. It is also important to note that the change of government in 1965, when the UNP came back into power, did not reverse these policies. There was no talk of privatisation as we have now. The 1970-77 United Left Front government extended state ownership significantly. In 1975, the privately-owned plantation sector was taken over by the government.

The other important driving force for the expansion of the state in the economy was economic nationalism, which had multiple origins.5 From the time the colonial economy started expanding, national or local capital wanted a share of it. A recurring theme during the colonial period was how the colonial government was depriving them of these economic benefits because of special favours given to foreigners. This continued during the post-colonial period. It has not disappeared even after the economy has been made more open to global capital. This demand of national capital always calls for intervention by the state for their benefit. The nationalist character of the demand for state expansion is unmistakable in the rhetoric of anti- imperialism. This aspect was prominent when the plantations were taken over by the state in 1975. For the Sinhala nationalists, this was redressing economic discrimination carried out during the colonial period and protecting the economy from foreign domination.

Another characteristic feature of the post-colonial pattern of economic development was the emergence of a series of policies that focused on the welfare of the population. This has given rise to the notion of Sri Lanka as a welfare state, although what the Sri Lankan state provided to its population was very different to the welfare state that had emerged in developed capitalist countries. The Sri Lankan focus through these policies was much more modest and depended on the characteristics and political struggles of the Sri Lankan society. The benefits of these policies were mediated through its class structure.

The politics of the evolution of these policies had their own dynamics. A number of reasons contributed to this, and some of these policies predate independence. The

5 See Roberts, 1979 and Oliver Jr., 1957 for an account of economic nationalism before changes in 1956.

13 impact on the country of the global economic recession of the 1930s, concerns about the conditions of the working class in estates, the problem of landlessness in rural areas, the granting of universal franchise in 1931, Left political activism from the 1930s, the need for preventive services due to a malaria epidemic, and the prevalence of a highly unequal education system, contributed to a robust discussion on social policies. Each of these contributed to the implementation of a set of policies that became a characteristic feature of Sri Lanka’s polity.

The first minimum wage legislation was enacted in 1927. This was a result of pressure from the Indian government, which threatened to halt the flow of labour to plantations if conditions did not improve. Very soon, concern about the wages and conditions of employment of the working class in other sectors was taken up. The right to form trade unions and withhold labour to win workers’ rights became the norm. Universal food subsidies, brought in to ensure basic food items – including rice, the staple food – at a subsidised rate during the war period became a main component of welfare policies. Sometimes this has been legitimised with the argument that the state should ensure a minimum level of nutrition to the poorest sections of the population. By the time universal adult franchise was instituted in 1931, the education system consisted of two clearly demarcated classes of schools. On the one hand, there were free Sinhalese and Tamil language schools dispersed throughout the country. The main objective of these was to provide literacy in the national languages. They had poor facilities. On the other side, there were English language schools in urban centres, liberally assisted by the government, catering to children from a small elite section of the population. They could provide a much more comprehensive education. This inequity became the motivation for the well- known Kannangara Report published in 1943 (Kananagara, 1943). This report recommended the provision of universal and compulsory free education. This became the cornerstone of the state educational policy, and Kannangara became popular as the ‘father of free education’.

Finally, a major part of state-led development was to protect the smallholder peasantry, the bulk of whom are Sinhalese. There are several reasons behind these policies. Once again, these go back to the pre-independence period. The impact of

14 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka the economic recession of the 1930s in villages in Sri Lanka was one of the reasons for concern about the conditions of the peasantry. Although there are a few studies looking at the conditions of the peasantry during the colonial period, more studies focus on this issue during the post-colonial period. Most studies paint a picture of problems faced by the paddy economy, the need for the peasantry to depend on wages, and the growth of landlessness (Sarkar and Thambiah, 1957; Morrison et al., 1979). Although some of these studies lament the disintegration of the village, implying a questionable assumption of the presence of integrated harmonious villages in the past, they help us to understand the difficulties faced by smallholder paddy agriculture due to the expansion of the impact of market forces.

Another reason why the problems of the Sinhala peasantry could not be ignored during the post-colonial period was electoral arithmetic. The Sinhalese formed the large majority of the electorate. Any political party hoping to form a government could not ignore the rural areas and the peasantry. In addition, the electoral system had an inbuilt advantage for rural areas. For example, if we take the 1970 and 1977 elections, the last to be held under the first-past-the-post system, voters per member ranged from 16,461 to 70,236 in 1970, and 19,925 to 64,190 in 1977. Less urbanised rural areas needed fewer voters to elect a member. This was a deliberate policy adopted during delimitation of electorates. It was based on an argument that underdeveloped rural areas needed more representation so that their development needs could come to the attention of the legislature.

The third reason for the focus on the peasantry was that self-sufficiency in rice became a major development objective. By the time Sri Lanka achieved independence, the country had established a policy of subsidising the price of rice, which was distributed through a network of co-operatives. Every adult had a rice ration book, which entitled them to a certain measure of subsidised rice. But this rice had to be imported, using foreign exchange earned from exports of plantation product. As mentioned above, it became more and more difficult to fulfil the import needs from foreign exchange earned from plantation crops. Attempts to tamper with the rice ration led to the fall of the government elected in 1952. This was a precursor to the defeat of the UNP in 1956. Therefore, self-sufficiency in rice was a major

15 development objective. This focus continued throughout the post-colonial period. The green revolution technology introduced from the mid-1960s played a major role in this interest. All this meant a special focus on the paddy-producing Sinhala peasantry in development policies.

Since independence, various Sri Lankan governments have established a range of policies to protect the peasantry. Tenure reforms, through legislation like the Paddy Lands Act of 1958 and land reform in 1972, attempted to address problems in rural areas by the state taking over land, subsidising inputs in agricultural production, providing credit at low interest, setting up a state agricultural extension service that provided services free of charge, providing free irrigation facilities, not taxing the agricultural sector, and the state acting as a buyer in the paddy market so as to ensure a guaranteed price to the farmer. These were among the major policy measures implemented to assist the rural peasantry.

One of the important policy shifts that took place in the run up to independence was to maintain ownership of the land that came under the state due to the implementation of the Crown Land Encroachment Ordinance 1840-41 as state property. This was a reversal of policies of colonial capitalism, where this land was given to the highest bidder to establish plantations. In other words, state interventions prevented the development of capitalist social relations over land. This has been an interesting development in the economic history of Sri Lanka, with major implications for capitalist development. It is no surprise that these polices have come under attack in the period of neoliberal capitalism implemented after 1977. It is also important to notice that these policies were inaugurated by the UNP, who later gave leadership to liberalising the economy, but continued to maintain state commitment to the peasantry.

It is this shift in land policy that paved the way for implementing land settlement schemes. Under these schemes, the state undertook to develop infrastructure facilities for cultivation, settle people and provide services for cultivation. These schemes were managed by a centralised state bureaucracy. The policy objectives included both improving the income of the peasantry and improving paddy agriculture.

16 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The following table gives a summary of land distributed under various schemes by the state.

Table 1.2 Land alienation by the state 1953-1985 (ha)

Major colonisation schemes 175,941 Village expansion 357,239 Highland settlements 13,565 Youth settlement 7,964 Regularisation of encroachments 205,762 Middle class allotments 55,019 Land grants (special provisions) 9,980 Rain-fed farming settlements 5,363 Total 830,833 Source: Madduma Bandara, 1998, p.

It is important to note that far more land was distributed through village expansion schemes and through regularisation of encroachments. The category of encroachments on state land was a product of Waste Land Ordinances, which made the state the main landowner; when poor peasants used this land for cultivation because there was not enough land, they became an encroacher. Given the reality of landlessness, the practice of the government was to regularise the ownership through a permit system.

The socio-economic conditions of the peasantry, electoral politics and the need for self-sufficiency in rice were reasons for land settlement policies. In addition, they were certainly legitimised through a Sinhala nationalist rhetoric. The opening of Dry Zone areas through state intervention was equated with restoration of the glorious ancient civilisations of the Sinhalese, which were believed to have existed in these parts of the country in ancient times. The peasantry and paddy cultivation formed the bedrock of this civilisation. The duty of the state was to restore this civilisation. Images of the ancient hydraulic civilisation were often evoked to legitimise development policies with a bias towards the rural peasantry. Politicians who have been in charge of these development schemes have even compared themselves to

17 the kings who built ancient irrigation schemes in the Dry Zone – King Dutugemunu of the Anuradhapura period and King Parakramabahu of the Polonnaruwa period being the regular targets of such contemporary, post-colonial projects of personal glorification.6

Another aspect of this nationalist rhetoric on land is the attempt to claim exclusive rights over a particular spatial unit for an ethnic group. This rhetoric is found among both Sinhalese and Tamils. While Sinhalese claim ownership of the entire island, Tamils have exclusive claim over two spatial units created by British colonialism – the Northern and Eastern Provinces. In Tamil nationalist politics, these are known as ‘traditional homelands’. History is used to legitimise these exclusive claims. Although politically these two groups of nationalists are on opposite sides, they have much in common because of the conceptual framework used for these arguments. Two major problems that these arguments face are: a) the veracity of these claims depends on available historical knowledge, and there is the question of how far in history do you go to prove this claim; b) the further back in history you go, the more difficult it is to affirm a link between contemporary ethnic identities and those in the past, unless you fall back on questionable primordialist interpretations of identity.7 Of course, nationalists from both sides are not worried about the class nature of land ownership and its implications.

However, a key issue that contributed to worsening relations between Sri Lankan Tamils and the Sri Lankan state, and to the demand for a separate state by Sri Lankan Tamils, was the change in ethnic demography in the Eastern Province due to land settlement, and its impact on the balance of political power in the district. The Eastern Province in Sri Lanka consists of three districts – Trincomalee, Batticaloa and Amparai. As shown in Table 1.3, there has been a significant shift in the ethnic composition of these districts between 1921 and 1981. 1921 was before the beginning of large-scale land settlement policies, and 1981 is the last census before the escalation of the conflict. The most important demographic shift has been the increase in the

6 See Tennekoon, 1988 for an excellent account of how the ideology of Sinhala nationalism had an impact on the Mahaweli. 7 In these primordialist interpretations of ethnic identity, present identities have existed without change since the beginning of history.

18 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka proportion of the Sinhala population, with a parallel decrease in the proportion of the Tamil population in Amparai and Trincomalee districts. The ethnic composition in the Tamil-dominated Batticaloa district has remained more or less static. Land settlement policies, especially through the Scheme, contributed to these demographic changes (Pieris, 1992).

Table 1.3 Percentage of Sinhalese and Sri Lankan Tamils – Eastern Province

Sinhalese Sri Lankan Tamils 1921 1981 1921 1981 Trincomalee 4.5 33.6 53.2 33.8 Batticaloa 1.9 3.2 68.5 70.8 Amparai 8.2 37.6 30.5 20.0

A direct outcome of this demographic change was in electoral politics. Demographic changes in Trincomalee and Amparai districts gave rise to two new electorates – Seruwila in the Trincomalee district and Amparai in the Amparai district – which are now always represented by Sinhala-dominated political parties. This has changed the electoral representation of the East, and has benefited the political parties representing the interests of the majority community. It altered the delicate electoral balance between the majority and minority political representation in the Eastern Province.

Despite the contradictions generated by land settlement policies, and given the current fashion of the undermining commitment of the state to social welfare under neoliberalism and the promotion of markets at any cost, it is important to recognise that the impact of state-led development policies was not all negative. As shown above, distribution of state land was not only for agriculture but for many other purposes. One result is a large proportion of Sri Lankans living in houses built on land they own. Without the support of the state, a large section of the population involved in smallholder agriculture would have found it difficult to sustain their livelihoods. These positive outcomes do not mean that these policies had no limitations. After all, they were mediated through a class structure and operate within a capitalist economy. State intervention could not prevent capital accumulation in agriculture leading to class differentiation. 19 State investment in health and education has been responsible for improvements in indicators in these two sectors since independence. These policies have been established as the norm, and the state cannot ignore its responsibilities in these areas. Perhaps this is more important than the indicators themselves. The biggest impact of these policies has been on social mobility. Without these policies, it would have been difficult to imagine social mobility in rural areas. Politically, this led to breaking the hold of the westernised English-speaking colonial elite on the country. This explains the resistance to some of these policies from various interest groups. What cannot be denied is that Sri Lanka’s commitment to welfare policies has generated a set of ideas that are still used in the struggle against social injustice in the new period of capitalism that gives prominence to markets. In the current context of deepening capitalist relations after consolidating the state through military means, it is important to revisit these ideas and renew them for contemporary struggles. When it comes to land policies in a context where powerful forces are pushing to allow interests of capital and market mechanisms to determine the allocation of state land, we need to look back at Sri Lanka’s post-colonial experience without the ideological blinkers of neoliberalism. This will be extremely relevant for those concerned with the conditions of the poor peasantry in the North and East who have been battered by several decades of armed conflict.

The Tamil demand for a separate state

The political response of the minorities to the breakdown of checks and balances to protect their rights agreed at the time of independence, the emergence of the hegemony of Sinhala nationalism, and the negative impact of state-led development, came primarily from Sri Lankan Tamils. Although Tamil nationalist politics evolved to a point of demanding a separate state during the post-colonial period, its antecedents can be traced back to the Tamil revivalist movement led by Arumuga Navalar in early nineteen century (Cheran, 2009). According to Cheran, ‘The emergence of Sri Lankan Tamil nationalism must be linked to colonialism and cultural, literary and religious competition between Jaffna and Tamil Nadu (Cheran, 2009, p. xiii).

20 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Sri Lankan Tamils considered themselves as equal partners with the Sinhalese in the historical process of Sri Lanka’s state formation. The demand for parity between the Sinhala and Tamil languages put forward by Sri Lankan Tamils in the run-up to independence reflected this political position. But the Sinhala majority viewed the entire island primarily as a Sinhala Buddhist country. The Tamil political leadership agreed to safeguards at the centre at the time of independence, although some of their leaders had wanted more than what was agreed. With the ascendance of Sinhala nationalism, the demands soon changed to ones based on regional concepts. The Federal Party was formed in 1949, and Tamil political representatives put forward a demand for a federal system of government. This was a direct political outcome of the Citizenship Act, which deprived the majority of the working class in plantations of their citizenship.

The principal modes of political action of the Tamil leadership during the early period were peaceful forms of protests, in contrast to the armed struggle that became prominent later. These included using their presence in parliament to make their demands, and extra parliamentary agitation using Ghandian methods such as Satyagraha, civil disobedience and non-cooperation campaigns. In addition, the Federal Party continued to conduct negotiations with parties in power to find solutions to their grievances. A recurring phenomenon was the two major parties, the UNP and the MEP, seeking the support of the Federal Party when they did not have a majority to form a government. The Federal Party made use of these occasions to press their demands (Wilson 1988). However, the extra-parliamentary action faced suppression by the state security apparatus, and violence by Sinhala extremist thugs. The enactment of the Sinhala Only Act was marked by the first serious ethnic violence in post-colonial Sri Lanka. It was a matter of time before the conditions were created for more militant forms of politics to emerge.

While the Citizenship Acts and making Sinhala the only official language undermined the agreement at the time of transfer of power, a major achievement in resolving Tamil grievances was the signing of the Bandaranaike-Chelvanayagam Pact in July 1957. This was based on a draft Regional Council Bill presented by Prime Minister S.W.R.D. Bandaranaike. This bill proposed a regional council system for Sri Lanka.

21 The Northern Province was to be one region, and the Eastern Province divided into two or more regions. Regions could co-operate on specific issues. Regional counsellors were to be elected, and these councils were to have powers to select beneficiaries in land schemes as well those employed in government institutions managing such schemes.8 On a closer look, one can see the continuity of the ideas in this agreement in current debates on devolution. However, this was opposed by Sinhala nationalists within the government, as well as the UNP. Led by J.R. Jayawardene, the UNP organised a march from Colombo to Kandy to oppose the agreement. In the face of this opposition, the prime minister abrogated the pact. This practice of promising the Tamil leadership a solution and then going back on it occurred again in 1968. This was the fate of the Senanayake-Chelvanayagam Pact signed in 1965. This was to set up a District Council scheme. Once again in the face of Sinhala opposition, this time led by Sri Lankan Freedom Party and some of the Left parties, the prime minister went back on the agreement.

The emergence of the separatist demand coincided with the enactment of the first Republican Constitution in 1972. Several other events in the 1970s contributed significantly to the deterioration in ethnic relations. These included an incident involving a shooting by police in Jaffna at the time of the Tamil Researchers Conference, and the introduction of new admission schemes for entrance into university. In May 1972, the Tamil United Liberation Front (TULF) was formed, and on 14th May 1976, the TULF, in its first convention in Vaddukoddai, passed a resolution demanding a separate state and contesting the 1977 general election on this basis. The resolution declared that the Tamils of Ceylon by virtue of their great language, their religions, their separate culture and heritage, their history of independent existence as a separate state over a distinct territory for several centuries till they were conquered by the armed might of the European invaders and above all by their will to exist as a separate entity ruling themselves in their own territory, are a nation distinct and apart from Sinhalese (The Vaddukoddai Resolution, 1976).

8 See International Centre for Ethnic Studies, 1996, Appendix E for the full text of the agreement.

22 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

On this basis, the resolution demanded a separate state covering the Northern and Eastern Provinces.

The Tamil demand for a separate state encompassing two of the spatial units first created during the colonial period for controlling the territory, transformed the politics of relations between Sri Lankan Tamils and the Sri Lankan state into a question of state power. It gave new meaning to the provincial boundaries created during the colonial period. From this point, it was difficult to articulate the issue as an ethnic conflict or through categories of identity conflicts. As Uyangoda put it, the Sri Lankan conflict became an issue ‘about all those dimensions plus something more fundamental than all of them. It is about non-negotiable contestation for state power’ (Uyangoda, 2011, p. 36). Therefore, when Sri Lanka introduced a new period of capitalism in 1977, it was also facing a political issue challenging the power of the centralised state to control its territory.

23 Chapter 2

Politics and the history of foreign aid in Sri Lanka

The flow of foreign aid to the government of Sri Lanka was influenced by the broad direction of Sri Lanka’s economic and foreign policies. For example, when Sri Lankan economic policies were sympathetic towards promoting the interests of private capital, local or foreign, and foreign policy shifted in the direction of supporting capitalist countries in general and more specifically became pro-Western, the aid flows from these countries improved. Similarly, a shift away from this reduced aid flow from these countries.

Although this formula holds broadly true, the picture is more complex when it comes to specific details. This is simply because Sri Lanka was never a country that was sharply committed to a particular direction in both economic and foreign policy. Even when policymakers were committed to economic policies that were pro-market, private sector-oriented and open to global capitalism, the state sector played a significant role in the economy. In foreign policy, it was always a game of balancing relations with a number of actors. When there was a shift away from a pro-Western foreign policy, there was never a significant alliance with any other power bloc. Hence, it has been a situation where the country received foreign aid from all sides, of course with a degree of variation depending on the politics of the regime in power. It must also be noted that Sri Lanka managed to secure assistance from sources outside the OECD framework - most notably from Middle Eastern countries, China and India.

It is also important to remember that this picture of aid flows to Sri Lanka has been influenced not only by what happened in Sri Lanka, but also by changes in donor countries. A stark example of this is drop in development assistance from countries that constituted the Eastern European state socialist bloc, led by the former Soviet Union, once this political formation collapsed. As we shall see from the brief history of foreign aid that follows, these countries were important as donors at a certain point in Sri Lanka’s post-colonial history. But with the collapse of the Eastern European

24 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka state socialist bloc in the late 1980s, these countries ceased to be sources of foreign aid. There are similar policy developments, less dramatic, in other donor countries, which also influenced aid flows to Sri Lanka. Although these issues are beyond the scope of this study, it is important to remember that sometimes aid flows to Sri Lanka are determined more by politics and policy developments in donor countries than on local priorities.

The history of the flow of foreign aid to Sri Lanka is discussed below by dividing it into three periods: a) from independence to mid-1950s; b) from mid-1950s to 1977; and c) post-1977. Regime changes in the mid-1950s and July 1977 marked significant changes in many aspects of the Sri Lanka polity, including shifts in economic policy and broad directions in foreign policy. These in turn had an impact on the inflow of foreign aid.

The most important factors to note for the purpose of this study are the political implications of changes in the direction of foreign aid during the post-1977 period. Sri Lanka came to depend totally on development assistance from capitalist countries of the West, Japan and multilaterals during this period. This marked a significant shift in the history of foreign aid of a country which from the time of independence benefitted from the presence of two ideological camps – one capitalist and the other state socialist. But from 1977 onwards, foreign aid became a factor integrating Sri Lanka into post-Cold War neoliberal political projects dominated by the West. The post-1977 politics of foreign aid were significant not only in terms of transferring a greater quantum of resources, but also in terms of hegemonic ideas. Foreign aid became an instrument in the transfer of ideas underlying the neoliberal political project. It is also interesting to note the changes in attitude towards foreign aid that took place from 1977 within Sri Lanka. The more cautious approach towards foreign aid which prevailed in the pre-1977 period was replaced by one that was more welcoming to foreign aid and all the baggage that comes with it.

25 Aid flows to Sri Lanka - from independence to the mid-1950s

Sri Lanka ended more than a century of British colonial rule in 1948. The centre-right United National Party (UNP), which inherited power from the British, was happy to continue with the structures of the plantation-based economy that Sri Lanka had inherited from its colonial masters. There was no intention of tampering with the British-owned plantation sector and other foreign investments in the country. In trade, the linkages developed during the colonial period were further strengthened.

The independence arrangement itself left several linkages with Britain. In 1948, Ceylon became a dominion within the British Commonwealth. The state structure was a unitary model, heavily influenced by the ideas that prevailed in Britain. Granting of independence was accompanied by agreements on defence and external affairs with Britain. Speaking in the House of Representatives on the Motionof Independence of Ceylon, the first prime minister argued about the difficulties faced by the newly independent country in organising its own defence and declared that Great Britain was the only country that had sufficient interest to defend Sri Lanka (Jayawardane, 2005). Under the defence agreement,1 the UK assumed responsibility for giving military assistance to defend the island, and to protect it from aggression and safeguard its vital communications (Mendis, 1986). In return, Sri Lanka allowed Britain the use of the naval base of Trincomalee and facilities for the Royal Air Force at Katunayake. Under the external affairs agreement, the Government of Ceylon was ready to follow resolutions of past Imperial Conferences (Jayawardane, 2005).2 In other words, post-colonial Ceylon agreed to honour whatever was agreed upon during the Imperial Conferences held during the colonial period. These continued links with the former colonial master led to criticism about the type of independence the country had gained. The criticism came especially from the Left. The comparison

1 See Defence Agreement between His Majesty’s government in the United Kingdom and the Government of Ceylon, November 1947 (Jayawardena, 2005, p. 64) and Prime Minister D.S. Senanayake’s speech in the House of Representatives on the Motion on the Independence of Ceylon (Jayawardena, 2005, p. 67). It is interesting to note that this defence agreement figured in the July1983 anti-Tamil violence. Then President J.R. Jayawardene considered that agreement to be still valid in 1983, and requested assistance from Britain to maintain peace in the country. But the British government thought otherwise (Wilson, 1988). 2 See External Affairs Agreement between His Majesty’s Government in the United Kingdom and the Government of Ceylon, 11 November 1947 (Jayawardena, 2005, p. 65)

26 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka was always with India, which became a republic in 1950 – just three years after formal independence. Sri Lanka had to wait twenty-four years to become a republic, and to break links with the former colonial power.

Under the UNP, there were contradictory trends when it came to foreign affairs. On one hand, D.S. Senanayake, the prime minister, expressed views supporting non-alignment (De Silva, 2005). On the other hand, the Senanayake government consistently refused to establish diplomatic and cultural ties with the Eastern European bloc. The Soviet Union repeatedly vetoed Sri Lankan membership in the United Nations, questioning the nature of the independence granted because of the continuing links with Britain, especially in the area of defence. Sri Lanka secured membership of the United Nations in 1955, seven years after the end of the colonial period.

The tilt towards the US was much more pronounced under the premiership of Sir John Kotalawela. He took up a strong anti-communist position during the historical Bandung conference in 1955, which led to the formation of the Non- Aligned Movement. There was also speculation about Sri Lanka becoming a part of new military blocs, such as the South-East Asia Treaty Organisation. This was a part of US strategy to bring Asian countries together into a military bloc in order to oppose the growth of communist movements in Asia. There was also the concern that Britain would support this military alliance, and military facilities in Sri Lanka controlled by Britain would become a part of these structures (Jayawardane, 2005).3 The UNP government also ‘permitted landing rights in Sri Lanka for United States air force planes ferrying French troops to Indo-China’ (De Silva, 2005, p. 624). This was the early phase of what later became the Vietnamese liberation struggle. Prime Minister Sir at one time referred to the Soviet Union as ‘our enemy No.1’ (Nissanka, 1984, p. 249).

3 See P.G.B. Keuneman (Communist Party) Speech on the ‘Proposed South-East Asia Treaty Organization and its Implications for British Bases in Ceylon’ (Jayawardena, 2005, p. 89).

27 The direction of external assistance and foreign aid dovetailed with these trends in economic and foreign policies. Development assistance came either through linkages with the former colonial power, Britain, or the new superpower, the US – which was fast replacing Great Britain as a major influence in Asia. The establishment of the Colombo Plan was an important landmark when it came to the flow of assistance. The idea of setting up a mechanism to channel assistance from the more developed Commonwealth countries to the less developed ones was first raised during the Foreign Ministers’ Conference held in Colombo in 1950. The first finance minister of independent Sri Lanka, J.R. Jayewardene, who later gave leadership to a much greater flow of foreign aid to Sri Lanka from the West, played a critical rolein promoting this idea. The meeting of Commonwealth Heads of State held in London during the same year adopted this idea as a concrete plan of development under the title, ‘The Colombo Plan for Co-operative Economic Development in South and South-East Asia’ or ‘Colombo Plan’ for short. This programme became a major source of assistance from the Commonwealth countries. In addition to traditional links and support from the UK, countries such as Australia, Canada and New Zealand channelled their assistance through the Colombo Plan. It is interesting to note that Japan also joined the Colombo Plan – the assistance given by Japan through the Colombo Plan to Sri Lanka was one of the first exercises in development assistance by post-war Japan.

The foundation for assistance from the US was laid by an agreement signed in 1950 under the ‘Point Four Program’ of President Truman. Much of the assistance was for development of economic infrastructure. The establishment of the Central Bank was also supported by the US. The same year Sri Lanka joined the Bretton Wood twins, the International Monetary Fund (IMF) and the World Bank, which had been set up to manage the post-war international capitalist order. The Bank’s involvement in Sri Lanka began in 1954, with a loan to the power sector (World Bank, 1987).

Some US support to the country was directly linked to Cold War politics. For example, the US managed to obtain facilities within the government-owned Radio Ceylon for the transmission of Voice of America broadcasts through an agreement signed in 1951. This was an important tool in Cold War politics directed by the US State Department. 28 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Despite the continuation of economic policies inherited from the colonial period and a Western orientation in foreign policy, during the period of the first UNP government, Sri Lanka was not a country firmly aligned with the US-led Western bloc compared to many other countries of South-East Asia or Latin America. For example, Sri Lanka did not become aligned to US interests when it came to Cold War conflicts raging in South-East Asia, although there were leaders in the UNP who would have liked Sri Lanka to play such a role. Therefore, Sri Lanka was not a recipient of a significant amount of foreign aid from the US. UNP leaders expressed their frustration about this during parliamentary proceedings (Nissanka, 1984).

A glaring example of Sri Lanka not being totally aligned to the West when it came to dealing with the world, was Sri Lanka’s relations with the other communist giant of the world at that time – Communist China. Sri Lanka recognised Communist China in 1950, although diplomatic relations were only established in 1957. According to some sources, Sri Lanka was ‘one of the first governments to recognise the People’s Republic of China and to sever diplomatic with the Kuomintang regime in Taiwan’ (De Silva, 1981, p. 623). In 1952, in the context of a balance of payments crisis due to a drop in the earning of exports making it difficult for the country to import basic commodities such as rice, the UNP regime looked towards Communist China to obtain rice at a reasonable price. Sri Lanka signed a trade agreement called the Rubber-Rice Pact with China. Mendis pointed out that ‘Under it Sri Lanka obtained a very attractive price for its rubber and purchase of its rice supplies at reasonable prices for a period of five years in the first instance’ (1986, p. 21). As we shall see below, the price of rice and maintaining the rice subsidy were politically explosive issues. Therefore, this agreement had political significance for the UNP government.

However, the signing of this agreement coincided with the Korean War. In 1951, a UN resolution, which considered China an aggressor in the Korean War, imposed economic sanctions on China. One outcome was the end of rubber imports from Malaysia, Thailand and Singapore. Therefore, the Rubber-Rice agreement with Sri Lanka gave China access to a commodity of which they had a shortfall due to the UN sanctions. According to Chinese researchers the agreement also helped to establish credibility of China as a trading partner with other developing countries

29 and China succeeded in finalising trading agreements with Pakistan and Indonesia (Zhu, unpublished Ph.D thesis). The Rubber-Rice agreement with China in 1952 ‘invited reprisals from USA which subjected Sri Lanka to penalties under the Battle Act’ (Mendis, 1986, p. 21). Thus, Cold War politics made its mark on foreign aid during the very first regime that ruled post-colonial Sri Lanka. This was despite the overall pro-Western orientation of that regime. As we shall see below, this was only the first instance when the aid programme to post-colonial Sri Lanka was affected by Cold War politics. Sri Lanka faced several such instances in the years to follow.

A landmark event in external assistance to Sri Lanka was the arrival of the World Bank mission in 1951. W. D. Lakshman described the event as follows: The mission arrived in Sri Lanka in October 1951 and remained until December. Its report, published in 1953, ran to 807 pages (without the index) and was in two parts – Part One (seven chapters) on an overall programme of development and Part Two (twelve chapters) on selected fields. The development thinking and strategy embodied in it influenced economic policies of the UNP regime during the 1953-56 period. These ideas were incorporated in the Six Year Programme of Investment that was adopted in 1955 (Government of Ceylon 1955) (Lakshman, 1987, p. 58).

The ideas promoted by the 1951 World Bank mission had a far greater political impact on the country than the mission ever expected. As argued by W.D. Lakshman, the recommendations of the World Bank mission were evident in two specific policy developments at that time: ‘The first was the gradual closure of a number of public sector industrial ventures started during the Second World War. The second, which was politically and socially more important, was the elimination of food subsidies in 1953’ (Lakshman, 1987, p. 62). Therefore, the very first regime of post-colonial Sri Lanka had to deal with some policy recommendations of donors that became prominent later under structural adjustment initiatives. No doubt faced with an acute budget deficit, the UNP government’s budget for 1953 proposed more drastic reductions in food subsidies than the gradual approach the mission recommended. But the intellectual legitimisation for cuts in subsidies provided by the World Bank mission strengthened the position of those sections of the ruling elite that supported the budget proposals. 30 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The budget proposals of 1953 led to the first mass agitation of independent Sri Lanka. It was the first politically significant conflict precipitated by economic policies. Locally called a hartal, it had all the characteristics of what later came to be known as ‘IMF riots’. The Lanka Sama Samaja Party (LSSP) gave political leadership to the hartal. In the south-western part of the country, mass agitation against the budget proposals went beyond the strikes planned by the LSSP. In some parts roads were blocked, rail tracks removed and buses burned. The government had to use its full force to quell the riots. At the end of the hartal, thousands of people were arrested and detained, and several hundred wounded (Amarasinghe, 1998).

The long-term political outcome of the hartal was much more significant than the violence of the event per se. It led to the resignation of , the prime minister and leader of the UNP, in October 1953. He had been elected just a year before with an improved majority. In the long run, the hartal was the beginning of a series of events that led to the defeat of the UNP in the 1956 elections, and the coming to power of the Mahajana Eksath Peramuna (MEP) led by S.W.R.D. Bandaranayake. He made use of the prevailing socio-economic discontent and rising ideology of Sinhala nationalism to defeat the UNP. This political change had a profound influence on economic policies, foreign policy and on the flow of foreign aid.

Mid-1950s to 1977

The 1956 electoral victory of the MEP marked the beginning of a new era in the post- colonial history of the country. Ideologically, the MEP was a combination of Sinhala nationalism and a broad centre-Left orientation. This had an impact on economic and foreign policies. In economic policies, it gave a greater emphasis to the state within an overall capitalist framework. In foreign policy, the introduction of two new elements had long-term consequences. The first was a more active search for a neutral position in relation to Cold War politics compared to the last years of the UNP rule under Kotelawela. An important event in this shift was the request by the Sri Lankan government to close the British naval and air force facilities still maintained in Sri Lanka. Second was the establishment of diplomatic, trade and cultural relations

31 with the Eastern European countries led by the Soviet Union and with China. The essence of these trends was to balance the overtly pro-Western orientation of the pre-1956 period with the expansion of relations with the state socialist countries. As a result, non-alignment became a central ideology in foreign policy. As stated by a student of non-alignment, in Sri Lanka, the cardinal principles of this policy were: ‘(i) Friendship with all nations; (ii) Peaceful co-existence; (iii) Greater regional cooperation; (iv) Freedom to take decisions on national and international matters; (v) Support for independence movements in countries still under colonial influence and domination; (vi) Championship of disarmament’ (Nissanka, 1984, p. 82). Together they can be considered an effort by a small country coming out of long years of colonial rule to define a position in a world dominated by superpower rivalry. The objective was to steer clear of Cold War political battles, while at the same time taking a position regarding issues like continuous colonial domination in certain parts of the world, and the rapid spread of nuclear weapons. Although some sections of the UNP leadership that ruled the country before 1956 expressed views about non-alignment, it became a cornerstone of Sri Lanka’s foreign policy under the SLFP of Bandaranaike.

In 1957, diplomatic relations were established with the Soviet Union and the People’s Republic of China. Agreements on economic and technical cooperation were signed with China and the USSR in 1957 and 1958 respectively. Assistance from the socialist bloc increased. During the period from 1956 to 1959, the assistance from four countries of the socialist bloc (USSR, China, Czechoslovakia and Yugoslavia) increased to Rs. Mln. 355.9 (Nissanka, 1984, p. 252). While establishing diplomatic relations with the state socialist regimes and consolidating the non-aligned foreign policy, S.W.R.D Bandaranaike, the prime minister and leader of the governing MEP, was careful to maintain links with the developed Western countries as well. This was especially true of the United States. In 1959, under the leadership of the MEP government, Sri Lanka entered into another agreement with the US for development assistance (Nissanka, 1984).

The S.W.R.D. Bandaranaike government was short-lived. In the context of heightened nationalist politics, a Buddhist monk assassinated the prime minister on

32 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

26 September 1959. The party leadership went to the widow of the prime minister, . The Sirimavo Bandaranaike regime continued with more state-oriented economic policies begun in the mid-1950s, expanded relations with the socialist bloc, and continued with the non-aligned framework in foreign policy.

Other than these broad directions in foreign policy, there was a specific event under the Srimavo Bandaranaike government that affected the flow of foreign aid from developed capitalist countries. This was a political reaction on the part of the US government towards the state takeover of petroleum distribution, and the establishment of the state-owned Ceylon Petroleum Corporation.4 Part of the nationalised petroleum distribution was in the hands of two US companies – Esso Standard Eastern Inc. and Caltex (Ceylon) Ltd. The Sri Lankan government and US companies disagreed about the level of compensation to be paid (Jayawardena, 2005).5 The US reaction was to make use of the provisions of the US Foreign Assistance Act, which allowed the US government to utilise foreign aid to protect assets of US companies. In 1963, the US government discontinued its development assistance programme. Sri Lanka lost assistance to the tune of $1.51 million due to this action. Only the assistance covered by the PL480 agreement and supply of flour and milk through Cooperative for American Relief Everywhere (CARE) continued.

The US cutting off aid to Sri Lanka constituted one of the first instances of bringing the Hickenlooper Amendment into effect. This ‘required the president to suspend foreign aid countries that expropriated American property without taking steps that were in his judgement adequate to ensure just compensation’ (Baldwin, 1985, p. 308). US-based researchers have studied the experience of the Sri Lankan case as an example of ‘economic statecraft’, where foreign aid is used to achieve foreign policy objectives. Some authors6 considered this a successful exercise in economic statecraft, claiming that cutting off US aid contributed to the electoral defeat of the Sirimavo Bandaranaike government in 1965 (Baldwin, 1985).

4 Privatising the Ceylon Petroleum Corporation became an important policy agenda of multilateral aid agencies in the post-1977 period. 5 See statement by finance minister, P.B.G. Kalugalla on the suspension of the U.S. Aid to Ceylon (Jayawardane, 2005, p. 129) 6 Here Baldwin is referring to case studies in Knorr (1975) 33 The World Bank followed the US government in suspending its lending. ‘At first the Bank continued lending to the power sector, under the SLFP, but with petroleum nationalization in 1961-62 lending was suspended’ (World Bank, 1987, p. 6). This was an official policy of the Bank at that time, spelled out in a policy memorandum and implemented in several countries where assets of companies from Western countries were taken over by the state (Hayter, 1971, p. 31).

Events during the 1960-64 regime of Sirimavo Bandaranaike clearly brought out the political nature of foreign aid from developed capitalist countries. The political agenda of such aid was closely associated with strengthening private capital and safeguarding the interests of capital from Western countries.

The US cutting off foreign aid increased the relative importance of non-capitalist sources of foreign aid (see Figure 2.1). In 1963/64 and 1964/65 the state socialist block, including China, accounted for 72 per cent and 62 per cent of the net receipts of development assistance (Nissanka, 1984). On the other side, ‘in the first half of the 1960s, aid commitments from the aid group averaged around $15 million a year’ (Bruton, 1992, p. 136). Relations with China expanded on several fronts. Sri Lanka signed a Maritime Agreement with China in July 1963.7 This brought criticism from pro-Western circles. As we shall see later, this history was repeated more recently.

7 See Text of Sri Lanka-China Maritime Agreement, 25th July 1963 (Jayawardane 2005: 201).

34 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Figure 2.1: Net Receipts of Development Assistance from 1960/61 to 1969/70 (in US$ mln)

Source: Computed from Nissanka, 1984

Development assistance from the Eastern European bloc was especially important for the country to continue with a policy of state-led industrialisation. This period saw several projects begun in the state sector with assistance from the socialist bloc to develop an industrial base in the country. This included the establishment of state- owned factories producing steel, tyres, sugar, hardware and plywood. Among the countries from the Eastern European bloc, the Soviet Union, the German Democratic Republic, Poland, Czechoslovakia, Bulgaria and Yugoslavia were important sources of foreign aid.8 Politically, it led to Sri Lanka strengthening links with the socialist bloc, and loosening the links with the West that had been established in the colonial period.

Along with the flow of development assistance, cultural links between these countries and Sri Lanka also expanded. One important aspect of this was an increase in the number of students who received higher education in the Eastern European bloc. Most of these were scholarships at undergraduate level channelled through the Ministry of Education in Sri Lanka. The largest number went to the Soviet Union,

8 For details of assistance from these countries see Ivanov, L.G. 1969. Chapter 8 (in Russian).

35 and the bulk were trained in professional and technical fields. There was also a reverse flow of cultural links with Sri Lanka, such as establishing facilities to learn Russian, and expanding cultural exchanges between Sri Lanka and the socialist bloc.

The biggest impact of establishing diplomatic relations with Eastern Europe and China, and expanding the aid programme with these countries, was at the ideological level. This was more important than the actual level of assistance that Sri Lanka received from these countries, or the specific impact of projects carried out through this assistance. The very fact that Sri Lanka deviated from the Western bias in foreign relations at the time of independence, which the population saw somehow linked to centuries of colonial rule, had a popular appeal in the country. The ready assistance that post-1956 governments obtained from these countries made it possible to operationalise a state-led industrialisation strategy, a cornerstone of economic policies aimed at getting away from export crops inherited from the colonial period. Implementation of projects was accompanied by, for example, opening ceremonies, media supplements and exhibitions that painted a success story for these strategies in socialist countries. These, together, contributed to strengthening the discourse about the role of the state in the economy in general, and the virtues of state-led industrialisation in particular.

This trend of the West becoming less important in development assistance was reversed after the centre-right UNP came back to power in 1965, demonstrating once again the critical role played by the ideological orientation of the ruling party in the flow of foreign aid. The most notable development during the 1965-70 period was the establishment of the Paris Aid Group, which brought together all the major donors supporting Sri Lanka under the auspices of the World Bank. The UNP regime ‘sought the help of the World Bank in organizing the Aid Ceylon Group for the purpose of obtaining external assistance’ (World Bank, 1987, p. 7). The first meeting of the Aid Ceylon Group was held in July 1965.

The objective of the regime was to establish what was called an aid consortium where donors pledge development assistance, rather than a consultative group where donors are merely informed of aid requirements. However, during this period, the

36 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

World Bank decided against establishing any new consortia. Nevertheless, for all practical purposes, the Aid Ceylon Group operated like a consortium (Corea, 1971). Corea pointed out that ‘It was a notable success for Ceylon to have had such a group created. It played a vital role in accelerating the flow of resources to Ceylon and in helping the country meet a critical situation’ (1971, p. 33). An important pre- condition in achieving this notable success was the settlement of the dispute about the level of compensation that Sri Lanka had to pay because of the takeover of petroleum distribution. In other words, a satisfactory solution to the demands of US capital had to be found before the Aid Ceylon Group could be established.

The UNP government from 1965-70 was a coalition. A major focus of the government’s development policies was the promotion of green revolution strategies in paddy agriculture. The role of the state sector continued in the economy. There was no talk of privatisation in the manner propagated under neoliberal policies that dominated the post-1977 period. In the field of foreign aid, some of the earlier trends were checked, but without any major donor influence in the country’s programmes. Gunatilleke argued that ‘The aid programme during this period was not tied to any well-defined programme of conditionality’ (1993, p. 17). The IMF/World Bank prescriptions during this period, ‘while tolerating the existing import/exchange controls, (it) considered it sufficient at this juncture to impose conditions pertaining mainly to domestic fiscal and monetary management’ (Lakshman, 1987, p. 70). The government was asked to review subsidies and welfare expenditure, to keep inflationary financing in check, eliminate operating losses from state sector ventures, to raise revenue by extending taxation to the agricultural sector, to restrain the growth of bank credit to the public sector, to increase interest rates and to promote the private sector (Gunatilleke, 1993). These recommendations did not amount to a significant shift in the direction of development policies. However, during this regime development assistance from Western capitalist countries and multilateral agencies increased. As Gunatilleke pointed out, ‘The net aid flows increased substantially during the 1965-70 period, rising from a meagre Rs. 73 million in 1960 to Rs. 261 million in 1970’ (1993, p. 17). The bulk of this increase came because of increased support from developed capitalist countries in the form of loans (see Figure 2.1).

37 The next landmark in this history of foreign aid was the 1970 general election. In this election, a government led by the United Left Front (ULF), which consisted of a coalition of the centre-left SLFP, Communist Party and the Trotskyite LSSP, came into power. This regime lasted until 1977. The seven years were crowded with a number of developments.

Immediately after establishment of the ULF government, it faced an armed insurgency led by the Leftist Janatha Vimukthi Peramuna (JVP). The JVP was a breakaway group from the Communist Party (Peking Wing). Its social base was mainly the rural youth, and leadership came from the more educated section. The government was taken by surprise by the insurgency, and the JVP managed to take control of certain areas in the country for a few days. It demonstrated that the post- independence formula of managing relations between the Sri Lankan state and Sinhala society through electoral politics, a welfare system and Sinhala Buddhist nationalism was not working. It had not been able to satisfy the needs of a section of the rural Sinhala population.

When the insurgency broke out, the Sri Lankan government appealed for international support in order to meet the threat. It received an astounding range of direct military support from a wide variety of countries. This included Bell Jet rangers from the UK; helicopter spare parts from the US; arms, counter-insurgency experts and helicopters from both India and Pakistan; arms from Australia; weapons, Mig- 17s and armoured cars from the Soviet Union; mountain artillery from Yugoslavia and a soft loan from China (Halliday, 1975). Some have hailed this as the success of the non-aligned foreign policy that Sri Lanka implemented from the mid-1950s.

Sri Lanka’s experience during the 1971 insurgency demonstrates how external assistance operated in the context of internal conflicts in recipient countries during the Cold War period. The international response was direct military support for the security of the state, irrespective of the ideologies and interests that various countries represented. Whatever the disagreement on economic ideology, the state had to be protected was threatened it. Although there were significant human rights violations, these did not figure when this assistance was given. In the chapters that

38 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka follow, we shall see how this approach changed during the post-1977 period. The overall objective of sustaining and protecting the state remained, but with new conditions attached to it.

The ULF regime introduced a new political order by enacting a Republican Constitution in 1972. As shown in the previous chapter, his led to the aggravation of relations between Sri Lankan Tamils and the state. But the 1972 constitution did away with the links with the former colonial power by removing the post of Governor General and links with the British Privy Council. Instead there was an appointed president, and Sri Lankan courts decided on constitutional matters. In international relations, diplomatic relations were established with the German Democratic Republic, People’s Republic of Korea and People’s Republic of Vietnam. Diplomatic relations with Israel were suspended. Sri Lanka’s role in the Non-Aligned Movement expanded. The latter culminated in Sri Lanka holding the Non-Alignment Summit in Colombo in 1976. One other important development in foreign policy was promoting the idea of the Indian Ocean as a Zone of Peace. This was an attempt by Sri Lanka’s political leadership to keep the Indian Ocean free from superpower rivalry. In 1972, Sri Lanka formally presented a resolution on this issue to the UN General Assembly. It was accepted with a large number of abstentions (Mendis, 1986). A UN Ad Hoc Committee was appointed to implement this resolution.

On the economic front, the ULF government pushed state-led development within an overall capitalist framework to an extreme. The culmination of these policies was the nationalising of the plantation sector. The role of the state expanded to include most areas of production and distribution. The idea of an interventionist state in the welfare sector was firmly accepted. The impact of these political, economic and foreign policy developments on foreign aid was mixed.

There were negative reactions from developed capitalist countries to some of the political events. For example, there was a drop in development assistance from developed capitalist countries in the immediate aftermath of the election of the regime. The diplomatic recognition of East Germany resulted in a negative response from the Federal Republic of Germany. The Federal Republic of Germany decided

39 to limit its assistance to existing projects. When plantations were taken over by the state in 1975, ‘the Bank became concerned about the specific arrangements for compensation for nationalized foreign plantations’ (World Bank, 1987, p. 7). Thus, as far as multilaterals were concerned, protecting the interests of foreign capital remained an important goal.

Nevertheless, despite the state-centric orientation of its development policy, the finance minister of the ULF government, who was from the Trotskyite LSSP, was realistic enough to see that Sri Lanka could not break away from aid agencies of the West without a severe social dislocation. In his first budget speech, he argued for a position ‘between undiluted acceptance of the terms and conditions of foreign institutions and the foolhardy rejection of all aid’ (Lakshman, 1987, p. 75). This position guided most of the dealings with aid agencies during the time the LSSP was in government, and Dr. N.M. Perera was finance minister.

But the relationship with multilateral agencies was characterised by resistance to the fundamental orientation in economic policy that these institutions demanded. These demands included a move away from controls, from the large role allocated to the state in the economy, and the generous welfare budget. According to Lakshman, ‘Throughout the period their “character certificates” were chequered with reservations about the viability of the strategy, and the World Bank-organised Aid Group’s contributions to the Sri Lankan regime were consequently low’ (1987, p. 79). Bruton also pointed out that ‘In 1971 the World Bank apparently decided to end all further commitments to Sri Lanka until there were major policy changes, especially with respect to subsidizing consumption’ (1992, p. 138). In the mid-1970s, Sri Lanka began to receive assistance from OPEC countries. Although amounts received were not high, this improved Sri Lanka’s bargaining capacity in relation to the Western- dominated aid group. According to Bruton, ‘it was about this time that the aid group began to shift from program aid to project aid, presumably to seek greater influence on how aid (if not total investible resources) was used’ (1992, p. 137). Levy elaborated that ‘In 1974 almost all aid took the form of support for commodity imports; the next year approximately 50 percent of aid group commitments were targeted to particular projects’ (1989, p. 450).

40 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Table 2.1 Aid commitments from selected countries (1970-1977) (US$ million)

1970 1971 1972 1973 1974 1975 1976 1977

Total Aid Group 68.0 87.4 48.3 87.5 112.5 249.7 178.1 227.1 World Bank Group 29.0 0.0 0.0 6.0 24.0 29.5 0.0 46.0 UN Group 0.3 4.6 0.9 6.6 2.6 22.3 19.6 15.1 United States 15.3 17.2 14.7 7.0 3.2 37.4 67.4 14.0 Japan 0.1 8.3 11.4 14.0 14.7 16.6 16.7 25.6 EU countries 12.1 31.3 5.1 33.0 51.9 77.6 52.2 74.2 ADB 6.3 7.8 9.3 2.8 2.5 30.0 0.0 22.6

Non-Aid Group 24.2 38.2 84.6 0.0 49.3 127.1 20.1 22.4 Centrally Planned Economies 24.2 38.2 84.6 0.0 37.2 60.2 3.5 4.1 Total 92.2 125.6 132.9 87.5 161.8 376.8 198.2 249.5 Source: Data compiled from World Bank,1984 and World Bank, 1992

This brief history of foreign aid from the mid-1950s shows the political nature of foreign aid. A primary motivation of foreign aid from the developed capitalist countries was the promotion of a capitalist transition in Sri Lanka. In addition, a central objective was protecting capitalist interests from these countries. We have seen in the case of bilateral donors that there is an intimate link between foreign policy and foreign aid. The objectives of multilateral agencies such as the World Bank dovetailed with the political objectives of bilateral donors. As stated in a World Bank study analysing relations between Sri Lanka and the World Bank, in their respective period of office, the two principal governing parties in Sri Lanka have had contrasting growth strategies. Specifically, the period of Sri Lanka Freedom Party Government from 1956-77(sic) was characterised by a system of state control and domination of the economy. On the other hand, the United National Party, which was governing party from 1951-55, 1965-70 and has been in office since 1977, has relied more on private enterprises and ‘market oriented’ incentives. The Bank lent heavily in Sri Lanka during the market-oriented periods of government, while providing much less support to the dirigiste strategy (World Bank, 1987, p. xi).

41 The World Bank also terminated its assistance when foreign companies were taken over by the state. In other words, protecting the interests of foreign capital remained a major interest of the World Bank.

However, despite these ups and downs in the flow of foreign aid from the West, by the end of the 1970s, foreign aid was institutionalised as an integral part of Sri Lanka’s development. The Aid Group functioned, and the Sri Lankan government had regular dealings with donors. Assistance from the socialist bloc also continued. Several European countries became regular donors to Sri Lanka. Sri Lanka also began to receive assistance from the Arab League.

Liberalisation and foreign aid

The 1977 general election brought about an irreversible break in this history of foreign aid. This was a landmark election in the history of electoral politics of Sri Lanka. The centre-right UNP won the election with an overwhelming majority. Due to peculiarities of the first-past-the-post system of elections, the UNP secured 140 members, or 83.3 per cent, in an assembly of 168 members, although it polled only 44.4 per cent of the valid vote. The centre-Left opposition alliance, which ruled the country prior to 1977, was decimated. Its leading party, the SLFP, won only 8 seats. It had 90 seats in the previous parliament. For the first time since independence, there were no representatives of the Left parties in parliament. All electoral indicators showed that the UNP victory in July 1977 ended the era begun by the 1956 elections in politics as well as economics.

The economic difficulties faced during the 1970-1977 period certainly played a role in this massive electoral victory by the UNP. The 1970-1997 period was plagued with scarcity of everyday consumer items and high unemployment, especially among the youth. The UNP manifesto did not spell out the technical details of an economic programme, but it had sections that reflected UNP thinking. On one hand, it criticised the state-dominated economy of the previous regime, calling it state capitalism. It pointed out that ‘The Government’s actions have resulted in State capitalism and have produced a new rich class. Policies on Land Reform have produced a class of

42 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

State sponsored landlords. The benefits of the State-owned enterprises are being appropriated by another section of this class’ (ANCL, 1977, p. 286). On the other side, it lauded the virtues of private property when it said the UNP feels that if you have little property of any kind, a small business or a small house, you are by that much independent. If property throughout the country is widely dispersed in millions of private hands, the power which resides in the ownership of property is also dispersed and power dispersed cannot be used coercively (ANCL, 1977, p. 295).

During the election campaign, the UNP effectively made use of the difficulties faced by the population due to scarcity of essential commodities. The UNP promised ‘an end to the food scarcities, the shortages of textiles and essential consumer goods, an end to the queues that had become part of life of the country under UF regime’ (De Silva and Wriggins, 1994, p. 321).

This regime change marked the beginning of a new phase of Sri Lanka’s capitalist development. Development policies took a decisive turn towards emphasising markets, the private sector, and integrating into the world economy. What was important was the ideological shift in the broad direction in economic policies towards a regime that was open to global markets and foreign capital, and internally friendly towards markets and the private sector. Equally important was the end of certain policies that characterised the pre-1977 period. Ideas such as a belief in a self-reliant economy closed to global capitalism, state takeover of sectors of the economy owned by the private sector, and negative attitudes towards foreign investments came to an end. On the contrary, the 1978 constitution enacted by the UNP government included a specific provision (Article 157) that guaranteed the security of foreign capital invested in Sri Lanka. One final ingredient was a foreign policy that was not antagonistic to developed capitalist countries.

Subsequent developments have shown that 1977 was a watershed in Sri Lanka’s development policies. The UNP, which ushered in this new phase of capitalist development, was defeated in 1994. Since then, apart from 2002-2004, the UNP did not secure power until 2015. The opposition parties who previously had a centre-

43 Left orientation have ruled the country. They have ruled with coalition partners who have come either from the Left parties or minority parties. These political changes have not resulted in any significant reversal of the direction of policies inaugurated in 1977. There have been divergences in some specific aspects of economic policies and some ups and downs in the process of carrying out economic reforms. But if we have a historical sense, and compare the period before and after 1977, notwithstanding specific differences under each regime after 1977, there has been a broad acceptance of the direction inaugurated in 1977.

All governments since 1977 propagate the key role of the private sector as the engine of growth. There is no talk of nationalisation or state takeover of private assets, as happened before 1977. There are no signs of any change in the openness towards global capitalism. Policies to attract foreign investments have become the norm. Article 157 of the 1978 Constitution, which guaranteed the security of foreign capital, has remained in place. No regime has tried to tamper with it. Therefore, the shift in the direction of development policies inaugurated in 1977 is of a structural nature. It is a new phase of capitalist development characterised by liberalising market relations, promoting the private sector as the engine of economic growth, and developing greater linkages with global capitalism.

J. R. Jayewardene, who led the centre-right UNP to an overwhelming victory in 1977, was an admirer of the East Asian type of development model, with greater integration to international markets and a prominent role for the private sector. He had been advocating such policies even during 1965-70, when the UNP was previously in power. As noted by his biographers, Jayewardene, with the help of an Indian economist, proposed to the cabinet of the then UNP government economic proposals that included, a balanced budget; a floating rupee (i.e. depreciation of the rupee); liberalization of imports and abolition of exchange control; and removal of all forms of government restrictions imposed on prices, production and distribution. He recommended a substantial reduction, if not elimination, of consumer subsidies, and a programme of privatization of government- owned enterprises as measures that would help balance the budget (De Silva and Wriggins, 1994, p. 169). 44 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

However, ‘when J.R. recommended them to the cabinet, he got no support’ (De Silva and Wriggins, 1994, p. 169). He had to wait till 1977 to implement these policies.

The ability to secure foreign aid from developed capitalist countries was a critical factor for the UNP to carry out its political and economic agenda. The first budget of the UNP in November 1977 announced key economic reforms, in addition to carrying out a significant devaluation of the rupee. This was followed by IMF approval for ‘the comprehensive program of economic reform’; approval concretely meant a standby arrangement of SDR 93 million (IMF, 1977, p. 23). With this endorsement, the finance minister visited groups of investors and officials of aid-giving nations and agencies (Herring, 2003, p. 145).

Aid agencies responded positively to the steps taken by the UNP regime to liberalise the economy and inaugurate a new phase of capitalist development. As stated by a World Bank study, ‘the Sri Lankan Aid Group and the IMF responded with unprecedented amounts of financial assistance’ (World Bank, 1987, p. 8). The 1978 aid commitments were double the 1976 levels, and it doubled again by 1981 (Sorbo et al., 1987, p. 36). Net flows from all lenders increased from $48 million to $175.9 million in 1979 (Herring, 2003). The Central Bank report published when celebrating 50 years of Sri Lanka’s independence echoed the same sentiments when it stated that Sri Lanka received very little aid from the donor community during the period prior to 1977. The total outstanding aid to Sri Lanka from IBRD/IDA as at end 1976 amounted to US dollars 65 million. As at 30 June 1997, a total of 84 loans amounting to over US dollars 1,900 million had been disbursed and remained outstanding with over 95 per cent being concessional assistance from IDA (Central Bank of Sri Lanka, 1998, p. 205).

45 Figure 2.2 Net receipts of development assistance 1978 – 1987 (in US$ mln) Source: Central Bank Reports for different years

During the first decade of more liberal capitalism, from 1977 to 1987, the number of donors active in the country expanded, in addition to a gradual increase in development assistance. Sri Lanka began to receive assistance from a wide range of countries from the developed West and Japan. As shown by data in Table 2.2, from 1977 to 1987, assistance from Japan (13.3%), the USA (18.3%) and the World Bank (19.0%) dominated in terms of loans. The contribution of Japan (15.2%), Sweden (20.9%) and the UK (25.9%) were significant in grants.

46 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Table 2.2 Net Receipts of Development Assistance 1978-1987-Key Donors (in US$ mln)

Loans % Grants % ADB 213.4 8.9 - - Australia - - 31.2 2.4 EEC - - 63.8 5.0 Euro-Currency 122.5 5.1 - - Canada 109.3 4.6 92.4 7.2 Germany 243.4 10.2 23.1 1.8 IDA 497.9 20.8 - - Japan 345.4 14.5 215.6 16.8 Netherlands 82.9 3.5 82.0 6.4 Norway - - 57.3 4.5 Sweden - - 242.7 18.9 UK - - 297.7 23.2 United Nations - - 52.8 4.1 USA 426.2 17.8 13.5 1.0 Other - - 49.2 3.8 Total 2389.8 1281.5

Source: Central Bank Reports for various years

In addition, the UNP government received regular budgetary support from the IMF. The IMF also established a Resident Representative Office in Colombo.

47 Table 2.3 IMF loans Year Type of loan 1977/78 SDR 133.6 million under a Stand-by Arrangement 1979 IMF drawings of SDR 29.7 million 1980 Extended Fund Facility arrangement for SDR 55.1 million 1981 SDR 176 million under Compensatory Financing Facility and Extended Fund Facility 1982 Compensatory Financing Facility for SDR 39.2 million 1983 Buffer Stock Financing Facility, Stand-by Arrangement and Reserve Tranche for SDR 35.8 million 1984 SDR 20 million under a Stand-by Arrangement and Reserve Tranches Source: compiled from various Annual Reports of the Central Bank of Sri Lanka and reports of the IMF

Several donors changed the status of their programme of assistance to Sri Lanka. For example, the Netherlands upgraded the status of the aid relationship with Sri Lanka and Sri Lanka became a programme country for the Netherlands (Directorate General for International Cooperation of the Netherlands Ministry of Foreign Affairs, 1992). For Norway, a country that will later become an important factor in Sri Lankan politics because of its role as a mediator between the Sri Lankan government and the LTTE, Sri Lanka became a main partner country of development co-operation from June 1977 (Sorbo et al., 1987).

UNP economic policies included several key components. First, it began to dismantle controls that existed on private sector economic activity. Areas hitherto monopolised by the state were opened to the private sector. In parallel, the scope of economic activities of state institutions was reduced. But there was no significant privatisation. Second, there was liberalisation of import trade and exchange payments. The dual exchange rate system that hitherto existed was removed, followed by floating the rupee along a path of gradual depreciation. The food subsidy that existed from the time of independence was removed, and replaced by a food stamp scheme. Third, the private sector began to be considered as the main engine of growth. Steps were taken to encourage foreign direct investment. Finally, export orientation was given a central role (Sorbo et al., 1987; Lakshman, 1987). De Silva pointed out that ‘The

48 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka first budget of the new government introduced on 15 November 1977, announced the principal theme of the government’s economic policy – the establishment of a free economy after two decades of controls and restrictions. The second and third budgets in November 1978 and November 1979 were consistent with the first’ (2005, p. 686). The Central Bank termed this ‘a sweeping departure of tightly controlled, inward-looking, welfare oriented economic strategy to more liberalised, outward- looking growth oriented one’ (Central Bank of Ceylon, 1978).

In addition to changes at the level of the macro economy, the UNP embarked on implementing a state-led infrastructure programme. From 1979 these investments were guided by what came to be known as the Public Investment Programme, prepared as a five-year rolling plan. This became the ‘centre piece of planning in Sri Lanka’ (Fernando, 1997, p. 117). As explained by a former director general of national planning, this planning process was utilised by the government to convince donors of the economic and social significance of these investments (Fernando, 1997).

Identified as lead projects, these projects included the Accelerated Mahaweli Development Programme, which involved the construction of five dams and settlement of thousands of people in the Dry Zone; construction of facilities for an Export Processing Zone near the Katunayake International Airport; a Colombo Master Plan that included expanding the limits of the capital city and construction of a new parliament and several government offices; and a housing programme aimed at building thousands of houses in rural areas. If we add to this the government secured donor funding for nine district-level Integrated Rural Development Projects (IRDPs) (see Table 2.3) spread around the country during the first UNP regime, state-led investments around the country were significant.

49 Table 2.4 Integrated Rural Development Projects (1977-1987)

Inaugurated on District/Province Donor/Technical assistance 1979 Matara SIDA 1979 Hambantota NORAD 1979 Nuwara Eliya Netherlands 1981 Badulla IFAD/SIDA/UNDP 1984 Ratnapura Netherlands 1984 Monaragala NORAD 1986 Kegalle IFAD 1987 Kalutara FINNIDA 1987 Kandy Germany /GTZ Source: Central Bank of Sri Lanka, 1995:68

These lead projects in the context of an economy that was liberalised show the importance of understanding the internal political agency in economic reforms. Although economic policies broadly followed the liberal economic policies that were becoming dominant at that time, the UNP regimes did not follow classic structural adjustment policies advocated especially by multilateral aid agencies. As stated by the biographer of President Jayawardena, the UNP remained committed to what the author calls a ‘mixed economy’ while taking steps to liberalise it (De Silva 2005). There was no idea of privatisation, especially in the case of plantations. Several writers (Nicholas, 1987; Moore, 1990; Herring, 2003) have pointed out that during UNP regimes, despite a significant degree of economic liberalisation, the driving force behind growth, investment and employment performances was not market forces, but rather massive capital expenditure undertake by the state (Nicholas, 1987, p. 135).

For those who analyse economic reforms based on certain ahistorical models, these state-led infrastructure projects are some sort of an aberration from blueprints of neoliberal reforms given in textbooks. On the other hand, if we are interested in the question of what happened and why, and not what ought to have happened, these are not aberrations, but the manifestation of reforms in specific political and historical contexts. In the first decade of the more liberal economy, they reflected

50 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka ideas that were part and parcel of the UNP’s vision of development. For example, if we consider a project like Mahaweli, the largest infrastructure project, there is a continuous history within the UNP political leadership, starting from the founder leader D.S. Senanayake, of a bias towards agriculture, irrigation and land settlement as a major thrust in developing Sri Lanka. Gal Oya, a major land settlement scheme, was implemented under the leadership of D.S. Senanayake. His son, Dudley Senanayake, gave leadership to the green revolution strategy. Therefore, it is not surprising that the UNP, during the period of a liberal economy, undertook a scheme like Mahaweli. Each of the infrastructure projects undertaken by the 1977 UNP regime can be explained in this manner.

This divergence from what was advocated as structural adjustment led to disagreements between donors and the Sri Lankan government. For example, the World Bank was cautious about the emphasis given to lead projects (World Bank, 1987). In the chapters to follow, we shall see several such events. This discrepancy between what was advocated as structural adjustment and policies that were followed by the UNP was so significant that some analysts argued that donors policies was driven by an agenda of protecting the UNP regime that has embarked on a new economic agenda (Moore, 1990).

Another way of understanding what happened in 1977 is to recognise the commonality of the political agenda of the ruling elite of Sri Lanka internally and aid agencies globally. It was in the interests of the local elite to liberalise the economy and integrate it more with global capitalism. But internal political agency was important in understanding how the liberalisation actually took place in Sri Lanka. In other words, liberalisation does not happen in a historical and social vacuum. What was important in securing assistance was the need to adhere to the broad directions of the economic policies favoured by global capitalism, to put an end to policies that threatened state takeover of private or foreign assets, and maintained a non- antagonistic foreign policy towards donor countries. Once these key ingredients of the relationship between donors and Sri Lanka had been sorted out, differences in opinion that arose during the implementing process became a mere technical issue. In the chapters that follow, we shall see how this commonality of the political

51 agenda of the Sri Lankan political elite and donor agencies resulted in a process where foreign aid sustained a state engaged in an armed conflict over a period of three decades.

Foreign aid as an instrument of integrating with the global order of neoliberalism

More than the increase in foreign aid from developed capitalist countries of the West, Japan and multilaterals, the most important political development was that Sri Lanka became almost totally dependent on these sources for foreign aid from 1977 onwards. This was a result of two factors – the increase in aid from these sources due to opening up of the economy, and assistance from the state socialist bloc virtually coming to an end because of the demise of the state socialist system (see Figure 2.2). This meant, as far as Sri Lanka was concerned, the end of the diversity of sources of development assistance that had prevailed before. These diverse sources underpinned different ideologies. From the time of independence, this diversity provided the country not only room for manoeuvre between ideological blocs, but also the ability to secure resources to promote different development models. This came to an end in 1977.

Figure 2.3 Total aid commitments from the Aid Group and the socialist block 1970-1987 (US$ mln)

Source: World Bank, 1984; World Bank, 1992

52 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

From this point, foreign aid came primarily from developed countries of the West, multilateral agencies where these countries had considerable influence, and Japan. The country was firmly locked into funds, aid institutions and ideas from developed capitalist countries. Foreign aid became a major instrument of integrating Sri Lanka with a global system of governance dominated by the post-Cold War neoliberal political project as described in the Introduction. These developments were part and parcel of a wider process of shifting foreign relations. A country that had undergone several centuries of colonial rule and for thirty years tried to find a position in the world independent of Western powers, was now firmly integrated into structures of global governance dominated by Western powers, and led by the hegemony of the only superpower – the United States.

Internally, the cautious attitude that political leaders of the country had towards aid dependency before 1977 vanished. This shift was pronounced more in the case of the centre-Left political parties than the UNP. For example, both S.W.R.D. Bandaranaike and his wife Sirimavo Bandaranaike were cautious about excessive dependence on foreign aid. In one of his speeches, S.W.R.D. Bandaranaike referred to foreign aid as an ‘economic drug’ that Sri Lanka might come to depend on. Sirimavo Bandaranaike was worried about its impact on foreign policy (Nissanka, 1984, p. 253). While seeking assistance from the Aid Group, the Trotskyite finance minister, Dr.N.M. Perera, was also cautious of this dependence. He stated that ‘aid arrangements must be concluded in terms consistent with our self-respect, our independence and our sovereignty’ (Lakshman, 1987, p. 75). These attitudes are remarkably different from what came to dominate after 1977 with the inauguration of more liberal economic policies. When centre-Left parties came back to power as the People’s Alliance (PA) in 1994, their attitude towards foreign aid was no different from that of the UNP.

In the post-1977 period, political leaders were competing against each other to secure assistance. Some of them projected their ability to secure more foreign aid as an important criterion for leadership of the country. Because of these ideological shifts during the post-1977 period, foreign aid became an integral part of the politics of the country. Aid agencies have been involved in a large number of areas of work. These include alleviating poverty, changing the way the poor engage in economic

53 activities, promoting rights of women, reforming the relationship between the state and individuals through human rights, promoting democracy, protecting the environment, changing attitudes towards new diseases like AIDS, resolving conflicts, and redefining security. The agenda of foreign aid today is much larger than economic development, as was the case before 1977. In fact, it is an agenda of the total transformation of Sri Lankan society.

Finally, this integration with structures of global governance led by the US had a profound impact on how Sri Lanka handled the challenge arising from the Tamil demand for a separate state. This study will show the contradictory nature of the impact of this integration in relation to the Tamil minority question. On one hand, primarily because the country had inaugurated the new period of capitalist development integrating with global capitalism, foreign aid supported the Sri Lankan elite in their effort to secure the territory of the Sinhala nationalist state of Sri Lanka. Although it is difficult to come to conclusions about ‘what if’ questions in history, one can speculate that the country’s fate would have been very different if Sri Lanka had not shifted its economic policies towards emphasising markets, the private sector and openness to global capitalism, did not have friendly relations with developed capitalist countries, and at the same time tried to defeat the LTTE through a military strategy. Most probably, the Sri Lankan state would have faced many more difficulties. On the other hand, the elite regularly came under pressure from donor countries because of the liberal dimensions of the neoliberal political project, mainly in areas of democratic development and human rights. However, at the end of the period covered by this study, the fundamental issue of reforming the Sri Lankan state to meet the aspirations of Tamil nationalism has not been fulfilled, but the territory has been consolidated through military means. This will be the story of the remaining chapters.

54 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Chapter 3

Liberal capitalism, a separatist challenge and foreign aid

This chapter covers the period from the July-1977 general election up to the signing of the Indo-Lanka Accord in 1987. As argued in the previous chapter, the election of the centre-right UNP regime marked a new period of capitalist transition. But it also coincided with the Tamil demand for a separate state, which challenged the centralised Sinhala nationalist state. Therefore, the UNP regime under Jayewardene faced two political challenges: First, how to push through the economic agenda - here the focus was possible opposition from the Sinhala polity; Second, how to consolidate the state and deal with the separatist threat.

There have been many attempts to explain the escalation of political violence and armed conflict during the Jayawardena regime (Gunasinghe, 1984; Moore, 1990; Venugopal, 2011; Dunham and Jayasuriya, 2001). These have diverse starting points and focuses of analysis. The analysis in this study focuses on the political strategies of the ruling elite. The basic reasons for the violence and political instability can be found in the political strategies adopted by the Jayewardene regime to deal with the two critical issues that the regime was facing – implementing economic reforms and facing the challenge of Tamil separatism.

When it came to economic reforms and dealing with the Sinhala polity, there was a mixture of institutional design and authoritarian politics. In the case of the Tamil demands, the primary driving factor was Sinhala nationalism within the UNP and the need to consolidate the state for capitalist transition. This led to a two-prong strategy – discussions with parliamentary representatives, Tamil United Liberal Front and military strategy to deal with Tamil militancy. However, the sixth amendment to the constitution passed in the aftermath of anti-Tamil pogrom of July 1983 led to an end of Tamil representation in the parliament leaving only a military strategy. It is in the context we find Indian mediation and enactment of the 13th amendment and establishment of provincial councils with limited devolved power.

55 The politics of foreign aid under the Jayawardene regime have to be understood in this context. This period saw the beginning of a relationship between donors and the Sinhala nationalist state that allowed the state to continue with capitalist development while embarking on a military strategy to consolidate its territory. The military strategy was bound to be costly. But there was always donor funding to take care of capitalist transition and social development, while the resources of the Sinhala nationalist state could be used to wage an armed conflict. In addition to the direct benefits of funding, the very presence of donors and the flow of aid money provided legitimacy to the Sinhala nationalist state within the structures of global governance. Sri Lanka was never a ‘rogue state’. As a result, Sri Lanka did not face economic sanctions from donor countries. The situation would have been worse if Sri Lanka had not taken the path of liberalisation, or did not have good relations with developed capitalist countries. If the country had remained on the path of development that prevailed prior to 1977, it would not have been easy for the Sinhala nationalist state to pursue such a costly war.

The last section of this chapter deals with the Accelerated Mahaweli Programme – a major project under the UNP – and one that absorbed a significant amount of foreign aid. If the project had been implemented as planned in the beginning, it would have changed the ethnic composition in Tamil-dominated areas. Here it is analysed as an example of a project that demonstrates the contradictions of aid policies operating in an environment where the relationship between the state and an ethnic group has deteriorated to the level of an armed conflict.

UNP and the politics of economic reform

The central focus of the UNP’s reforms of the state was driven by the demands of the new phase of capitalist transition. The most important ones were the establishment of a presidential system of government and reform of the electoral system. J.R. Jayawardene, who led the UNP to victory in the 1977 general elections, first put forward these ideas of institutional reform when he proposed more market-oriented economic policies under the 1965-70 UNP regime. In 1966, in a keynote speech to the 22nd annual session of the Ceylon Association for the Advancement of Science, he argued for a presidential system where 56 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

the Executive is chosen directly by the people and is not dependent on the Legislature during the period of its existence, for a specified number of years. Such an executive is a strong executive, seated in power for a fixed number of years, not subject to the whims and fancies of an elected legislature; not afraid to take correct but unpopular decisions because of censure from the parliamentary party (De Silva and Wriggins, 1994, p. 378). In the same speech, he proposed proportional representation (PR) to replace the first-past-the-post electoral system. Jayewardene wanted an electoral system that would give political parties more power over individual members. Jayewardene had to wait eleven years before he could implement both his economic and political packages. The essence of both the presidential and PR systems is the introduction of a new set of institutions that can better manage the legislature and the social forces represented in it.

Making use of the power that he commanded in parliament, Jayewardene moved swiftly to enact the institutional structure that the UNP had planned. The election was won in July 1977. On 22 September 1977, the government put through an amendment ‘which radically altered the constitutional structure of the First Republic’ (Wilson, 1980, p. 29). It established a directly-elected president as head of state. Although it brought about a fundamental change in the existing constitution, the bill was not even discussed by the government parliamentary group. ‘It was only taken up at Cabinet level, duly approved, and in addition certified by the Cabinet as a bill that was “urgent in national interest”’ (Wilson, 1980, p. 30). It was sent to the constitutional court for approval. Under the provisions of the 1972 Constitution, the constitutional court had to give its verdict within twenty-four hours for bills that are considered urgent in the national interest. The constitutional court duly certified the bill. Wilson points out that ‘It was then adopted by the National State Assembly and certified by the Speaker on 20 October 1977’ (1980, p. 30).

Although Jayewardene was in a hurry to establish the presidency, he did not assume office immediately. The presidency was established on20 October 1977, but its implementation was postponed for three-and-a-half months – until 4 February 1978. This allowed Jayewardene to be in parliament and to oversee the next stage of

57 institutional reform – designing a whole new constitution through a select committee established in the parliament.

This select committee was appointed in October 1977. It was primarily a UNP affair. The TULF did not participate in it because it did not address the issues based on which they fought the elections. The SLFP participated at the beginning, but withdrew when they realised that they were involved in a process of replacing, not reforming, their own 1972 Constitution. Since it was a select committee of parties in parliament, none of the traditional Left parties had any influence over it. The Ceylon Workers Congress (CWC), the UNP ally that had a cabinet post, was the only party other than the UNP that participated in the process. The UNP had no serious plans to generate a public debate on the impending changes. Wilson explains that ‘The Select Committee held 16 meetings in all and based its findings on a questionnaire that had been issued to the general public and the evidence, oral and written, it obtained from various political, economic, social and religious organisations. (1980, p. 32). The response to this was extremely limited. As noted by Wilson, ‘Only 281 responses to the questionnaire were received and sixteen organisations and a Buddhist priest presented evidence before the Committee’ (1980, p. 32). The UNP leadership controlled the process tightly. There was very little debate or consultation. Even the idea of civil society participating in this process did not figure in political debates. This was how the presidency, the most important element of the constitution under which Sri Lankans live today, was brought into force.

The 1978 Constitution created a powerful directly-elected president. Constitutionally, the president is the head of the government, the executive and the armed forces. The president has powers to keep any number of ministries under him or her (Wilson, 1980). Most presidents have ensured that key ministries, such as finance, policy planning and plan implementation, and defence, are under them. The president cannot be challenged through a court of law. If there is any irreconcilable disagreement between the president and parliament, the president has powers to dismiss parliament. In a country where checks and balances on the executive through other branches of the polity, such as judiciary and media, are weak, a presidential system with such a concentration of power in one individual is a recipe for authoritarianism. 58 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The first proposals of the PR system, the other main institutional innovation, divided the country into twenty-two electoral districts for electing members to the legislature. The boundaries of these were determined constitutionally.1 Regular delimitation commissions were done away with. The election was to be based on lists submitted by parties. Parties had to obtain a minimum of 12½ per cent of the valid votes to be eligible for seats. The party that obtained the highest number of votes was entitled to a bonus seat. The balance seats were to be distributed among parties according to the proportion of votes that they had gained. The individual members to be elected were to be decided according to the hierarchy on the list submitted by the political parties. Once an MP was elected from a party list, they did not have the option to change their political allegiance to the party. If for some reason this happened, the party had the right to remove the MP and replace them with the next one on the nomination list.

The political intention of the designers of this new electoral system was to consolidate electoral power within the two major parties and bring MPs under the complete control of the party machinery. The 12½ per cent cut-off point would make it extremely difficult for smaller parties to have a say in politics without coming into coalition arrangements with larger parties. The bonus seat conferred on the party that obtained the largest number of votes would ensure a clear winner in each electoral district. Invariably this would be one of the larger parties. The party machinery would decide the hierarchy on the nomination list. Hence, MPs would be dependent on the party for their position. This, together with the anti-defection clause, would bring MPs firmly under party control.

This institutional design of the framers of the 1978 Constitution for the electoral system did not go unchallenged. The two issues that generated opposition within the political elite itself were the 12½ per cent cut-off point, and the party machinery being given the right to decide the order of the nomination list – and through that, who had a chance to get elected. The opposition to the first came from smaller parties representing minorities, and there was opposition to the second provision even within the UNP. Thus, the cut-off point was reduced to 5 per cent, and a select

1 See Bastian (2003) for an analysis of the politics of establishing the PR system in Sri Lanka.

59 committee appointed in 1983 introduced a system of preference votes. In this system, voters were given the opportunity to choose the MPs who entered parliament. MPs could also appeal to the courts if the party from which they were elected expelled them. The total effect of these reforms was the dilution of the control that parties could have over individual MPs under the PR system.

In addition to designing institutions to manage the legislature and social pressure through the legislature, the UNP was ready to meet any opposition to its policies through repression and authoritarian politics. The main targets were the leadership of the principal opposition party, students, the intelligentsia and the working class. The government established a special presidential commission in 1978 to investigate what was called abuse of power during the previous regime. Presidential commissions were a provision introduced through the new constitution. The target of investigation was Mrs. Bandaranaike, the leader of the principal opposition party, the justice minister, and the secretary to the justice ministry of the previous regime. The presidential commission found them guilty of abuse of power, and in 1980 all three were deprived of their civic rights for a seven-year period. Although the proceedings had a legal façade, the objectives were political. The move effectively removed the possibility of Mrs. Bandaranaike contesting the 1982 presidential election. By this, Jayewardene managed to remove the only candidate who could have provided an effective challenge in the first election he faced after 1977.

Any type of protest or agitation against the new policies was met with violence and the repressive power of the state. There were several incidents when the police, as well as thugs supported by the government, was unleashed against this opposition. Members of the UNP-sponsored trade union, Jathika Sevaka Sangamaya (JSS), played a special part in this violence. In 1979, the government passed the Essential Public Services Act to prevent strikes in the public sector. Special mention should be made of the 1980 general strike called by Left-wing political parties and trade unions against the new development policies. The government mobilised a massive force against the strikers. Thugs supported by the government attacked pickets, killing a trade union activist. Close to 40,000 strikers were sacked. 2

2 See Obeysekera (1984) for a succinct analysis of political violence in this period. 60 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

A turning point of these authoritarian politics and the undermining of democratic institutions were events that took place in 1982. President Jayewardene called an early presidential election in October 1982, which he won, securing 52.91 per cent of votes polled. Immediately after the election, an emergency was declared. A few days later, President Jayewardene alleged that ‘a Naxalite (revolutionary Marxist) group’ had taken over the SLFP and proportional representation would allow these elements to secure a third of the seats in parliament and paralyse government action. He argued that since he had been given a clear mandate by the people to continue UNP policies for the next six years he could not countenance this. Jayewardene therefore proposed to extend the life of the current Parliament by six years through constitutional amendment (De Silva, 1984, p. 44).

Accordingly, the UNP proceeded with the 4th Amendment, which allowed them to call a referendum to postpone the parliamentary election due in 1983. The 1982 referendum was the beginning of the undermining of electoral institutions in the period of capitalist transition that began in 1977. As pointed out by several writers, (De Silva, 1984; Moore, 1984) this was a reflection of emerging authoritarian tendencies under the UNP. According to a writer who wrote under a pseudonym, Once the decision to hold the referendum had been made, the government immediately took a series of steps which profoundly affected the nature and conduct of the referendum campaign. These included continuation of the emergency; the illegal ‘lamp’ campaign’;3 attacks on and arrests of SLFP organisers; the banning of opposition newspapers and sealing of presses; government manipulation of the state-owned media; and harassment and intimidation of various elements who campaigned for a ‘no’ vote at the referendum (Samarakone, 1984, p. 87)4. It institutionalised violence as a key characteristic of Sri Lanka’s electoral process. It inaugurated a period where counting deaths, attacks and intimidation – along with counting votes – became an integral part of recording elections.

3 The lamp was the symbol for supporting postponement of general election. The UNP blatantly flouted electoral laws in the campaign. 4 The material in this article first came out as a report authored by ‘Priya Samarakone’. Priya Samarakoon is a pseudonym. The climate of fear created under Jayewardene’s UNP was so great that it was dangerous to engage in this type of activity publicly. There are several publications of key political events in this period written under pseudonyms. 61 The primary reasons for the UNP calling an early presidential election and conducting a fraudulent referendum to postpone the parliamentary election were the political imperatives of the new phase of capitalist development. The principal strategy was to ensure the continuation of the parliamentary majority that the UNP enjoyed. The UNP leadership reasoned that the economic reforms of 1977 had a positive impact on the country. But they were not sure what would happen to the economy in 1983 and 1984. They were obviously concerned about the possibility of a more hostile parliament that could undermine the economic reform programme if elections were held in 1983. The strategy was to amend the constitution to call an early presidential election, and use all the power the UNP enjoyed to postpone the general election (De Silva, 1984). This ensured continuity of the UNP majority in parliament to carry out economic reforms for seventeen long years.

UNP defending the Sinhala nationalist state

When it comes to analysing the Jayawardene regime’s response to Tamil demands, it is necessary to remember that there has always been a strong current of Sinhala nationalism within the UNP. Very often this is forgotten because of the pro-Western orientation of UNP leaders, the Westernised social background of some of the UNP leadership, and more recently, because of the leadership that the UNP gave to pursuing a liberal peace agenda. There are many instances in Sri Lanka where, among the political class, westernisation, English education and Sinhala nationalism go together. It is true that it was under the SLFP that Sinhala nationalism established its hegemony within the state. But there has always been a current of Sinhala nationalism within the UNP. Before and immediately after independence, this was seen mostly in relation to how the UNP leadership looked at the Indian Tamil population, and how the UNP made the bulk of them stateless after independence. Just before independence, most of these English-educated westernised leaders had a chauvinistic attitude towards the working class in the plantations. Secondly, from the very outset, the UNP’s attitude towards agriculture and development of the rural areas was imbibed with a Sinhala nationalist imagination. Thirdly, Sinhala nationalism became more pronounced within the UNP from the time the UNP came out in opposition to the Bandaranaike-Chelvanayagam Pact in 1959. Currents of

62 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka what used to be called Ceylonese nationalism under D.S. Senanayake disappeared from the UNP. Jayawardene himself, while giving leadership to the new phase of capitalist development, took numerous steps to ensure his image as a Sinhala Buddhist leader.5 The Jayewardene regime included several staunch supporters of extreme Sinhala nationalism, who consistently opposed any concessions to Tamils. Finally, taking steps to open up the economy does not mean the regime absorbs liberal values, as many liberal internationalists assume. On the contrary, capitalism and nationalism can go hand in hand while an economy is liberalised. The UNP represented a form of conservative Sinhala Buddhist nationalism.

The UNP accepted that the Tamil minority does have grievances. A section was devoted specifically to ‘Problems of Tamil-speaking People’ in their manifesto for the 1977 general election. This accepted that Tamil-speaking people faced problems in the areas of education, land settlement, use of the Tamil language, and employment in public and semi-public corporations. It promised to summon an All- Party Conference to consider these matters, among many other issues concerning minorities (ANCL 1977). The manifesto proposed a system of decentralisation through district development councils. District development councils were to be headed by a district minister, and would consist of MPs from the district, elected heads of local bodies and government officials (De Silva 1989).

The 1978 constitution recognised Tamil as a national language, provided a constitutional right for Tamils to be educated in their own language, Tamil to be the language of administration in the Northern and Eastern Provinces, and the right for Tamils to receive communication from state institutions in Tamil. This emphasis on language rights and decentralisation reflected the focus of policy debates that hitherto dominated Sri Lanka. But the Tamil demand for a separate state, and subsequent armed struggle by a section of the Tamil youth, made this focus redundant.

5 See Kemper S. (1990) for an account of how Jayawardene projected himself as a Sinhala Buddhist leader while inaugurating the more liberal period of capitalism.

63 When it comes to protecting Buddhism, the 1978 Constitution retained word for word the clause from the 1972 Constitution, which gave Buddhism the foremost place. However, while the 1972 Constitution talked about protecting Buddhism, the 1978 version used the term Buddha Sasana. The latter meant it was the institutions of Buddhism, led by various sects of the Sangha, which the state was keen on protecting, and not so much the religion per se.

The all-party Conference that the UNP promised came only after an anti-Tamil pogrom in July 1983. The escalation of the armed struggle after this event, and the UNP’s response to it, undermined any effort at resolution of the conflict through political means. Anyhow, the UNP’s vision of district development councils was far removed from meeting the Sri Lankan Tamil demand for a degree of self-governance in the Northern and Eastern Provinces.

The period of the Jayewardene regime began with violence against Tamils in August 1977, immediately after the general election. An incident at a carnival in Jaffna exploded into a full-scale ethnic riot. This was the first major occurrence of anti-Tamil violence after the famous, or infamous, 1958 riots. This gave an indication of what was to come. The next incident was in 1981, where the victims were largely from the Indian Tamil community. In the same year, at the time of the district development council elections, which were meant to be an answer to Tamil grievances, organised violence in Jaffna led to the burning of the public library. This was an attack on an important cultural symbol of Tamil society.

On the other side, there were violent incidents perpetrated by militant Tamil political groups. Sporadic attacks by Tamil militants on police stations and killing of informants marked the beginning of a new form of political struggle among Tamils. With armed militancy as the dominant form of political struggle, a new political leadership emerged among Sri Lankan Tamils. The new leaders had a different social background to the Tamil political leadership of the time of independence. They were less westernised and were based in the North. Several militant groups took up arms as a means of achieving a separate state. The main groups were the Liberation Tigers of Tamil Eelam (LTTE), the People’s Liberation Organisation of Tamil Eelam

64 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

(PLOTE), the Eelam People’s Revolutionary Liberation Front (EPRLF), the Eelam National Democratic Liberation Front (ENDLF) and the Eelam Revolutionary Organisation of Students (EROS). Subsequent developments gave birth to another political group, the Eelam People’s Democratic Party (EPDP).

Jayewardene responded to Tamil militancy through military means, while carrying on discussions with the TULF representatives in parliament. The government enacted the Prevention of Terrorism Act on a temporary basis in 1979. Subsequently it became a permanent law. The same year, Jayawardene sent armed forces to the northern part of the country to crush the Tamil movement. Jayewardene adopted the style of a monarch giving orders to the army, whose commander-in-chief at that time was his nephew, to crush the militancy in six months and report to him.

This was the beginning of a process of trying to consolidate control over the territory of the Sinhala nationalist state through military means, in the context of a new period of capitalist transition. However, violence in the North continued. The armed forces failed to defeat the militant movement. What we saw instead were frequent reprisals against civilians, harassment of civilians, arrests, detention and torture. The army operations led to widespread violations of human rights. A range of organisations, such as Amnesty International, Human Rights Watch and the International Commission of Jurists, recorded human rights violations during this period. A number of fact-finding missions, including parliamentary delegations, visited and reported on the deteriorating situation. There was also a visit by special rapporteurs from the United Nations Human Rights Commission, who reported on various dimensions of human rights violations.6

The most shocking event in the first decade of a new period of capitalist transition under the UNP was the July 1983 anti-Tamil pogrom. Making use of an incident where thirteen soldiers were killed, the Tamil population, mainly in the city of Colombo and suburbs, was attacked. This was a well-planned attack. Perpetrators went to street after street, armed with electoral registers through which they could identify Tamil houses and properties. Tamils were systematically attacked, driven

6 See Sorbo et al. (1987) for a summary of some of the key reports on human rights violations during this period.

65 out of their homes as refugees, or killed. Their properties were destroyed. Tamils who had been arrested and locked under judicial control within the prison system were attacked and killed. In the anti-Tamil violence ‘at least 2,000 people were killed, and 18,000 homes and 5,000 shops were destroyed; property damage was estimated to be 300 million dollars’ (Herring, 2003, p.140). More than 100,000 refugees fled to Tamil Nadu in India. At the time of this incident, the LTTE was supposed to have had very few cadres. A direct fall-out of the July-1983 violence was a significant increase in the number of LTTE cadres.

The UNP made use of the violence to exclude the elected representatives of Tamils from parliament. By passing the 6th Amendment to the constitution, the government made the call for separation illegal. Tamil representatives who refused to take the oath on this basis were expelled from parliament. This meant that as a result of the violence perpetrated against Tamils, the elected representatives of the Tamil minority were removed from the legislature. Finally, through a series of speeches relayed over television, UNP leaders legitimised the violence as a reflection of genuine Sinhala concerns.7 They also used these speeches to warn against any anti- government activity. One of the objectives of these speeches was to consolidate the UNP’s position among the Sinhalese. Therefore, they argued ‘any anti-UNP activity could be held up as inherently anti-Sinhalese, or conversely that the true Sinhalese or Sinhalese sympathiser has to be pro-UNP’ (Nissan, 1984, p. 184). The UNP also made use of this rhetoric and opportunity to crack down on the JVP. Although it was well known that sections of the UNP were behind the violence, the government blamed the JVP for it. This made the JVP go underground once again.

The anti-Tamil pogrom of July 1983 under the UNP regime demonstrated the power of the more extreme Sinhala nationalist sections of the UNP. This was an organised attack by a section of the UNP precisely at a time the UNP leadership was forced to consider political answers to the conflict (Bastian, 1990). It was not a riot as was popularly termed, but an organised effort to deal with the Tamil problem through violence. In this event we find a systematically organised attack on Tamils,

7 For an analysis of speeches of the president and five leading ministers that legitimised the Sinhala position for the violence, see Nissan (1984).

66 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka disenfranchising them by expelling elected representatives from the parliament, and legitimising the violence as an accepted reaction by Sinhalese to the violence prevailing in the North.

This event also marked the end of negotiations between the Sri Lankan government and the TULF. Most TULF leaders located themselves in India. From this point, the armed struggle of Tamil militancy developed to a qualitatively new level. It also opened the doors for India to get involved directly in Sri Lanka’s conflict. India became involved in discussions with the Jayewardene government and the TULF to find a political answer to Sri Lanka’s conflict. Finally, Jayawardene called the afore- mentioned All-Party Conference that the UNP had promised. But it did not result in a framework acceptable to Tamil representatives. What finally prevailed was the idea to set up a system of provincial councils, which emerged through discussions with India. The proposals were first included as an annex (popularly called Annexure C) to the conclusions of the All-Party Conference.8

Because of Indian mediation, several rounds of negotiations were held in 1985 in Thimpu, the capital of Bhutan, between representatives of Tamil political groups and the Sri Lankan government. Another round of discussions began in Colombo with the direct participation of India in 1986. However, they did not bring about any tangible results. In the meantime, the Sri Lankan government launched military operations to capture the territory of Vadamarachchi. Indian pressure halted the operation before it could achieve its military objectives. The outcome of Indian involvement politically, as well as militarily, was the signing of the Indo-Lanka Accord.

The terms of the Indo-Lanka Accord acknowledged ‘that Sri Lanka is a multi-ethnic and a multi-lingual plural society consisting, inter alia, of Sinhalese, Tamils, Muslims (Moors) and Burghers’(ICES, 1996, p.207). It also recognised that ‘the Northern and the Eastern Provinces have been areas of historical habitation of Sri Lankan Tamil

8 See statement of His Excellency the President and Chairman of the All-Party Conference at the Plenary Sessions of 14th December 1984.

67 speaking peoples’ (ICES, 1996, p. 207).9 Provisions of the rest of the agreement not only accepted that a system of provincial autonomy should be set up to meet the grievances of Tamil-speaking people in the Northern and Eastern Provinces, but also that the two provinces should be merged into a single unit. This merger was to be a temporary provision. A referendum was to be held later to decide what would happen to the merger.

All these principles, and the acceptance of a new institution to confer a degree of autonomy for a merged North-East Province, marked a significant departure from hitherto held positions regarding the minority problem and the nature of the Sri Lankan state. It accepted the multi-ethnic character of Sri Lankan society, and the need for devolution of power on a provincial basis to meet the grievances of the Tamil people. The merger of these two provinces into a single unit had been a long- standing demand of the Tamil political leadership.

However, for political reasons, the 13th Amendment devolved power to all nine provinces, without giving any distinction to the Tamil-dominated areas. This formula did not recognise the crux of the problem of state reform in Sri Lanka. It was only Sri Lankan Tamils who were demanding self-governance. Establishing provincial councils covering the entire country was a ploy to get support from the Sinhala majority. The necessary legislation to establish eight provincial councils covering the entire island, the 13th Amendment to the Sri Lankan Constitution and the Provincial Councils Bill, was passed in November 1987. Provincial councils have an elected chief minister and a governor appointed by the centre. There are three lists which stipulate powers reserved for the centre, powers that are shared by the centre and province, and powers that are conferred only to the province. These are the Reserve List, Concurrent List and Provincial List respectively. In addition, two special appendices on Law and Order, and Land and Land Settlement, set out the powers devolved in these two areas.

9 The Indo-Lanka Accord also had an Exchange of Letters attached to it. This contained issues that were relevant for Indian national security interests.

68 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The election in the amalgamated North-East Provincial Council was held in November 1988. It was held in the presence of the Indian Peace Keeping Forces (IPKF), who came to Sri Lanka to disarm the militants in the Northern and Eastern Provinces. The election was won by the Eelam People’s Revolutionary Liberation Front (EPRLF) that assumed power in the North-East Provincial Council.

The 13th Amendment provided a limited degree of devolution to the provinces. As pointed out by Shastri, ‘the subjects devolved to the Provincial Councils have been critically cut down and hedged by restrictions, while the Concurrent List and Reserve List have been expanded to allow the Centre control over all significant subjects and functions’ (Shastri 1994, p.206). As we shall see later, subsequent governments attempted to reform the 13th Amendment to overcome some of these shortcomings without success. In addition, the 13th Amendment has not been fully implemented. Devolution in critical areas, such as police powers and control over state land in the provinces, has not been implemented. In a context of a highly centralised state, provincial councils have faced many difficulties in exercising even the limited power devolved to these institutions.

The politics of foreign aid – supporting a Sinhala nationalist state in crisis

As shown in the previous chapter, the change in economic policies under the UNP government in July 1977 began a process of integrating the Sri Lankan economy with global capitalism, which was dominated by the neoliberal political project. This process was supported by an increased flow of foreign aid from centres of developed capitalism. But this is also the period when the UNP undermined democratic institutions, and the armed conflict escalated due to Sri Lanka’s inability to develop a state structure that could accommodate a multi-ethnic society. The political objective was to consolidate the territory of the Sinhala nationalist state. Thus, while the country was experiencing violence in relation to political contradictions within both Sinhala and Tamil society, the ruling elite managed to secure foreign aid at an unprecedented level.

69 There is little evidence to show that the deteriorating political situation in the country had any significant impact on the aid policies of bilateral donors from developed capitalist countries, Japan or multilaterals. On the contrary, there are instances where donors legitimised significant events that undermined democratic institutions because the UNP was following economic policies approved by them. For example, in a report published in 1986, the World Bank stated that in 1977 the electorate returned the UNP to power. By introducing more liberal economic policies, reducing controls, and once again promoting private initiative, the third UNP government succeeded in restoring growth. Shortages disappeared and unemployment decline drastically. In the 1982 elections and referendum the population gave the incumbent Government a mandate for another six years (World Bank, 1986, p. 3). In other words, a significant political event that started undermining electoral institutions was legitimised because the regime that began the new period of capitalist transition remained in power. Backed by such opinions, the flow of funds continued.

The primary response of some bilateral donors was concern about human rights. Although some donors raised issues about human rights with the UNP regime, it did not have much of an impact on the government (Hyndman, 2011). As shown by a survey of the proceedings of the Human Rights Commission of the United Nations and the Sub-Commission on Prevention of Discrimination and Protection of Minorities (covering the period from August/September 1983 to August/September 1988), there were several resolutions passed against Sri Lanka during this period (Koshy, no date). Of donors important for Sri Lanka, Norway, Canada and the Netherlands stand out as countries that regularly took up the case of human rights violations in Sri Lanka in these bodies. The USA had a record of supporting the Sri Lankan state in the early stages, but changed its position 1987 because of its own interests. Even in the case of Western countries concerned about what was going on in Sri Lanka, the position depended on how asylum issues played out in their own countries. As mentioned in the survey, ‘the Western group was facing a dilemma. If they insisted that there was growing violation of human rights in Sri Lanka they would be arguing a case for asylum-seekers and against sending back to Sri Lanka

70 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka those who were denied asylum, in the face of mounting opposition to liberal policies of asylum’ (Koshy, no date, p. 40). The important point to note is that this human rights concern at the UN fora did not result in any significant change in aid policies that could have influenced the political path the UNP was following.

The political agenda of multilateral agencies such as the World Bank and the IMF was to ensure economic reform and capitalist growth. Reports prepared by the World Bank for the annual Aid Group meetings conveyed the general picture on how Sri Lanka was progressing on economic reforms, and achieving economic growth despite political instability. For example, a report produced after the anti-Tamil pogrom of July 1983 states that the ‘the Sri Lankan economy improved in several aspects during 1983. In spite of a major drought and the outbreak, in July 1983, of severe civil disturbances, GDP continue to grow though at a marginally lower rate than the preceding year’ (World Bank, 1984, p. 1). Of course, there was concern about political instability, but it was about the extent to which it affected the capitalist growth process. Therefore, concern about the anti-Tamil pogrom in July 1983 was confined to the impact it had on economic activity, investment psychology and the time that the government had to spend on dealing with what was called communal unrest (World Bank, 1984). The following year, a similar report stated that despite continued political and social unrest, the economy achieved a substantial 5 per cent growth rate in 1984 (World Bank, 1985). The focus of the World Bank throughout the period of the Jayawardene regime was ensuring capitalist growth.

It is also interesting how donors dealt with issues such as ethnicity, identity politics and nationalism. Sometimes aid documents show a very simplistic understanding of these issues. For example, a study published in 1987, which looked at the relationship between the World Bank and Sri Lanka since the time of independence, had this paragraph on ethnic relations: Sri Lanka is a multi-ethnic society, with a major distinction between the roughly 75 per cent of the population who are Singhalese by origin and Buddhist by religion, and the almost 20 per cent who are of Tamil origin and Hindu by religion. Singhalese dominate rice agriculture, Tamils plantation labour and, at least until Independence, the professions and, to a lesser

71 extent, trade. Cooperation and co-existence have been the ethos of most of the leadership of both communities, at least until recently. Although generally good relations have characterized most periods, ethnic competition has to be taken into account in government policies at all times and open ethnic conflict has erupted sporadically. Since 1983, it has indeed been amajor factor in all decisions (World Bank, 1987, p. 4).

For many of these actors, the conflict began in 1983. This was also an idea accepted by many donors. This view, devoid of any historical understanding of the country, was a convenient staring point and ignored the fact that Sri Lanka was facing a fundamental issue of state formation that can be traced back to long before 1983. Secondly, the conflict in relation to the Tamil issue was characterised with terms such as ‘civil conflict/communal conflict’, which basically assumes that the reason for the conflict is in society, and has nothing to do with the state that all these agencies were supporting and funding. It is a conflict between Sinhalese and Tamils. In short, the Sinhala nationalist state was not a problem. Then there is the notion that the conflict is something in the North/East, although political centres responsible for the conflict are in the capital where these agencies have their headquarters. The North/East was merely the location where the conflict was fought at its greatest intensity. These three ideas, that the conflict began in 1983, that it is a conflict between Sinhalese and Tamils, and that it is necessary to focus on the North and East, have persisted among donors right throughout the period covered by this study. The end result was less focus on the Sinhala nationalist state.

The other major donors, such as the ADB and Japan, focused their attention on funding infrastructure facilities needed for the new period of capitalist transition. For example, Japan, the largest bilateral donor for most of the period covered by this study, supported development of infrastructure facilities through yen loans. Favourite areas were transportation, telecommunication, and power and energy. Other areas of funding included sectors such as agriculture, fisheries, forestry and water supply (Japan Bank for International Corporation, 2003). As a later analysis of the Japanese Country Strategy stated, this focus was based on a conventional view that development assistance should not concern itself with the internal political

72 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka issues of a recipient country (Japanese Ministry of Foreign Affairs, 2004). The ultimate beneficiary of these apolitical ideas of development assistance wasthe Sinhala elite, the regime in power who had embarked on a strategy to inaugurate a new period of capitalist transition, and a military strategy to secure control of the territory of the Sinhala nationalist state.

In addition to concern about capitalist growth, poverty alleviation through targeted assistance became a dominant idea among donors in the area of social policy. The objective was to focus on households who were below the poverty line, and direct interventions towards these households. At the beginning, the terminology used was a targeted safety net. The implication was that these policies were meant to safeguard the poor from the impact of reforms brought about under structural adjustment. This was supposed to be the main role that the state should play vis-à-vis the poor, while in the long run, economic growth would take place and the benefits would trickle down to the poor.

Soon the safety net was replaced by a notion of poverty alleviation. The method of implementing poverty alleviation projects included several elements. The first task was to get participation of the poor from the planning stage of the project. For this, they had to be mobilised. This is a denial of the agency of the socially marginalised, and does not recognise the struggles that the poor are engaged in on a day-to-day basis. This participation was expected to help identify the beneficiaries of these projects much better, and clarify what was called real needs. The next step was to organise them into groups and make them partners in their own development. The term community is liberally used to identify groups that the projects work with. This implies a picture of social coherence, which is often absent. With the support of donor funding, this participatory ideology became an orthodoxy. A veritable industry emerged to develop participatory methods and implement these projects. These ideas dominated IRDPs spread over several districts, and many other projects implemented by the Sri Lankan government. Similarly, the non-governmental sector became champions of these ideas.10

10 See Bastian and Bastian (1997) for a critical review of these ideas.

73 These interventions also emphasised a notion of self-reliance. This emphasis is part of a long-standing ideology within capitalism, which argues that the lot of the socially marginalised can be improved through their own efforts, without any significant structural change in society. This dovetails with the attempt to reduce the role of the state in the economy and society. Dependence on self-reliant capacities of the poor meant less emphasis on state intervention to help the poor.

Poverty alleviation is a conservative idea that fits very well with the political agenda of the transition to capitalism. Poverty alleviation tries to ensure a minimum level of calorie intake and the fulfilment of some basic needs for the socially marginalised classes, while the better-off sections of the population enjoy a much higher standard of living. Ensuring basic living standards for the marginalised is interpreted as a great achievement in development. It promotes the notion that society can be gradually improved by focusing on and targeting these sections. The analysis that underpins poverty alleviation always focuses on households in isolation from the structures of socio-political power, which maintain this population in such a condition. Therefore, it takes us away from the need to tackle the structures of marginalisation. In the case of Sri Lanka, due to the power of donor money, poverty alleviation relegated to a secondary position the rich tradition of ideas that Sri Lanka had in the struggle to create a better society. Ideas such as universal rights, distributive justice, protecting the poor peasantry and ensuring rights of the working class, which had dominated the Sri Lankan discussion before 1977, were superseded by poverty alleviation.

Given the conservative character of ideas promoted by donors in social policy, and their enthusiasm to support the Jayewardene regime bent on promoting capitalist transition, aid agencies did not pose questions that anybody interested in social policy should have posed in 1977. The paradox in Sri Lanka was how, in a country known for significant achievements in social indicators, the numerically largest minority ethnic group had been alienated to the extent of demanding a separate state. This should have been the major question in the minds of those who focused their funding and activities on social policy. Even a brief perusal of Sri Lanka’s history would have shown that the explanation lies with the nature of the state responsible for these social policies in the past. This type of critical analysis could have unpacked the

74 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka major limitations of these policies, even in the case of the Sinhala population. If the post-1977 discussions on social development and social policy had included these issues, donor responses would have been more relevant to the political situation the country was facing.

During this period, the only critical voices about the increased flow of foreign aid in a context in which democracy was being undermined and an armed conflict was growing, came from a few non-state actors. For example, international organisations concerned with conflict in Sri Lanka raised concerns about funding a state that was involved in a conflict. Among the arguments put forward was concern that foreign aid made it possible for the government to increase military expenditure (International Alert, 1987). In addition, some of the non-governmental funding sources were already funding non-state actors who were concerned about civil and political rights, and the fall-out of the deteriorating relations between the Sinhala nationalist state and Tamil militancy.

This brings us to a fundamental question about the politics of foreign aid in Sri Lanka in a context where the Sinhala nationalist state was engaged in an armed conflict to consolidate territory. The main emphasis of aid politics during this period was to continue to support the centralised Sinhala nationalist state in its efforts to regain control over territory. This happened, not because of any support to Sinhala nationalism, but because ruling classes led by the UNP were taking steps to strengthen the neoliberal turn in economic development. Therefore, economic policies of the ruling classes of Sri Lanka begun in 1977 were in tune with shifts that were taking place in global capitalism. Hence, if the formation of the modern state of Sri Lanka took place under one wave of globalisation under colonialism, now in the latter part of the twentieth century, the same forces were helping to sustain the state when it had come under a threat from a separatist movement.

When analysing specific mechanisms of this process, some have used the notion of ‘fungibility of aid’ to explain the role of foreign aid to the Sri Lankan state in the context of an armed conflict. The authors of a review of Norwegian aid to Sri Lanka published in 1987 point out that ‘All aid is to some degree fungible, i.e. it

75 increases the general capacity of the recipient to do as he wishes and thus in some sense has consequences beyond the sphere in which it is formally to be used’ (Sorbo et. al. 1987, p.5). Thus, if the government of an aid-receiving country is heavily committed to increasing military spending, any aid will to some degree support that. They further point out, ‘While commodity assistance/import support increase the financial capacity of governments to do as they wish to a level equivalent to almost 100% of the value of aid, the percentage is smaller for other types of aid. There is no simple dividing line here, but a continuum' (Sorbo et al., 1987, p. 5). Or, as another writer put it, the use of aid is difficult to pinpoint. Aid funds may replace domestic resources, which then can be used for projects that, without aid, would not have been funded. Then the ‘use’ of aid is essentially determined by the use given the released domestic resources. There are qualifications for this argument, but the general point is valid (Bruton, 1992, p. 136). This means that even when the government had to spend funds on a military strategy, there were always funds from external sources to continue with normal development activities. When there were budgetary problems, there was support from the IMF. A study carried out much later, which focused on foreign aid from Germany and included Sri Lanka as a case study, came to similar conclusions. Among its observations on what it called the negative impact of foreign aid in a context of conflicts such as in Sri Lanka, the study pointed out that foreign aid can stabilise governments who are party to a conflict, send wrong signals to the government, and ease pressure to deal with the causes of conflict (Klingebiel, 1999). Even direct assistance given to non-governmental voluntary organisations, devoted to rehabilitating the victims of internal conflict, will give some support to the government by strengthening the current balance of payments and thus the capacity to import arms.

Foreign aid became crucial for the public investment programme for a country that was increasing defence expenditure significantly in a context of resource constraints (Table 3.1). Between 1985 and 1990, on average, close to 60 per cent of public investment was supported by external assistance (Table 3.2).

76 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Table 3.1 Defence expenditure (selected years) 1982 1983 1985 1988 Total defence expenditure (% government 3.1 4.4 10.2 14.3 expenditure) Total defence expenditure (% GDP) 1.1 1.4 3.5 4.8 Source: Kelegama, 1999, p. 74

Table 3.2 Project aid disbursements as a share of public investment (per cent)

1985 1986 1987 1988 1989 1990 Av. 1985-1990

54.4 59.7 54.1 54.2 68.6 66.8 59.6

Source: World Bank, 1992, p. 77

These public investment programmes were essential for carrying out the normal duties of a state, and to maintain relations with society while waging a war. This was especially important for sustaining relations with the majority Sinhala population. There was support from a large section of the Sinhala majority for a military agenda, based on an ideology of Sinhala nationalism. But the ruling regime could not rely on this support purely based on nationalist sentiments. Especially in a polity that is used to throwing out political parties in power, and expected so much from the state, support for a costly military agenda could evaporate if the state was not seen to be fulfilling other obligations towards society. As shown below in the example of the Mahaweli project, the largest donor-funded project at that time, foreign aid helped to maintain relations with the majority Sinhalese, while the state pursued a military strategy that became more and more costly.

The bulk of foreign aid support received during the period covered by this chapter was on concessionary terms, at relatively low interest and with long-term repayment. This obviously helped the Sinhala nationalist state to manage the foreign debt while moving into a costly military exercise. Hence foreign aid became a source balancing

77 the external account at a time when valuable foreign exchange had to be utilised for pursuing a military strategy. If this assistance on concessionary terms had not been forthcoming, the country could have easily been trapped into unmanageable foreign debt. Over and above this, as long as the regime was sympathetic to reforms demanded by the IMF, assistance was available whenever Sri Lanka faced budgetary problems.

Apart from the specific support that foreign aid provided to a state engaged in an armed conflict to manage its public finances, the expanding role of aid agencies in the country provided a sense of legitimacy within the institutions of global governance dominated by global capitalism. The mere presence of many donors in a country gives the message that the situation is at an acceptable level in the recipient country. The regular IMF assessment of the economy has a wide-ranging impact internationally. It sends signals about the state of the economy to other donors as well as investors. The legitimacy provided by aid agencies was as important for the Sri Lankan state as the financial assistance it received. Despite long years of civil war, civilian costs and numerous reports on human rights violations, Sri Lanka never became a country isolated by the structures of global governance. In a world where economic sanctions are widely used as a political tool, one hardly heard any talk of economic sanctions against Sri Lanka. In other words, Sri Lanka was never in the eyes of Western governments a rogue state, and did not come anywhere close to it. The basic outcome of this relationship was that the country could continue in the path of capitalist transition while waging an expensive civil war.

Funding Mahaweli and the territory of the Sinhala nationalist state

In addition to strengthening the resource base of a state through foreign aid in the context of political violence and a growing armed conflict, the UNP also managed to secure assistance at an unprecedented level for a project that was important for the UNP’s economic agenda and for maintaining relations with the Sinhala majority. This project also had a direct bearing on the Tamil demand for a separate state. As the armed conflict between the Sri Lankan state and Tamil militants escalated, this project became useful for the regime’s effort to maintain control over the entire territory of Sri Lanka. 78 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

This project was the Accelerated Mahaweli Programme (Mahaweli for short). As already pointed out above, changes in the ethnic composition due to land settlement policies and their impact on the balance of political power, especially in the East, had been a major grievance of the Tamil minority. Perhaps this was a key factor in worsening relations between Sri Lankan Tamils and the Sri Lankan state. The Tamil demand for a separate state included the Eastern Province. Therefore, a project that could change the ethnic composition of this area clearly had the potential to become a factor in the escalating armed conflict of Sri Lanka.

In the early 1960s, a Master Plan was developed for Mahaweli with the assistance of the UNDP and FAO. The first large-scale foreign funding was in 1969, to the tune of US$60 million (Bruton 1992: 138). The original plan was to implement the project in three phases, covering a period of thirty years. The UNP decided to accelerate the project and implement it in six years.

The reasons for acceleration were linked to the UNP’s economic and political agenda. As one writer put it, ‘After 1977, although the economy was rapidly liberalised, the resulting short run expansion in private sector activities could not be expected to generate sufficient employment opportunities, and produce adequate food and power. Acceleration of the Mahaweli Project was considered the ideal solution to attain these objectives’ (Karunatilake, 1988, p. 29). Expansion of the capacity to generate power was also important for the new period of capitalist growth. Mahaweli was a major plank in this agenda. By 1996, Mahaweli accounted for 42 per cent of national power generation (Planning and Monitoring Unit, Mahaweli, 1997). The UNP was also keen to complete a project that could be showcased as a major achievement before the next election. What better than a project whose Master Plan covered nearly 30 per cent of the land area of country, and 55 per cent of the Dry Zone. In fact, among many other reasons, the delay in completing the Mahaweli was a factor in the infamous referendum that undermined democratic institutions in the country and postponed the general election due to be held in 1983. According to the UNP’s political calculations, Mahaweli was expected to yield economic returns only after 1983 (De Silva, 1984, p. 35).

79 There were also other political and ideological reasons for giving priority for Mahaweli. As explained by De Silva and Wriggins: J.R. saw the Mahaweli programme as something special, for a number of reasons: it could mean a dramatic breakthrough on a number of fronts - economic, social and technical; it linked contemporary Sri Lanka to the roots of its history - the hydraulic civilizations of old; and it fitted in neatly with the UNP’s traditional commitment to expanding the country’s irrigation network and ensuring food security at a time when the traditional external sources of supply - Burma, for instance - were no longer capable of serving that purpose as efficiently and reliably as in the past (1994, p. 363). In an excellent analysis of the Mahaweli project, Serena Tennekoon has demonstrated how the project had elements of a Sinhala nationalist vision glorifying the past embedded within it (Tennekoon, 1988).

Therefore, while having the potential to undermine the rights of the Tamil minority and become a factor in the conflict, Mahaweli represented a part of a longstanding strategy of maintaining relations with Sinhala nationalism in general, and more specifically, the Sinhala rural peasantry. Especially for the UNP, maintaining this relationship was critical when they were undertaking a significant programme of economic reform to move the economy into a new phase of capitalist development.

The success of Mahaweli was so important for the UNP that it created a new ministry to handle it. The minister entrusted with this was Gamini Dissanayake, one of the ambitious emerging leaders of the UNP. A new structure, the Mahaweli Authority, was created to implement the project. It was headed by a Director General, N.G.P. Panditaratna – the Chairman of the UNP. The entire project was run in a highly centralised manner. There was very little tolerance of any criticism of the project.

The UNP strategy for securing funding for Mahaweli is a fascinating story. It is not easy to get a sense of the strategy to secure funding for this type of project through technical documents. For this we need to go elsewhere. The biggest obstacle that the UNP faced in accelerating the project was opposition by the World Bank on

80 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka technical grounds. The World Bank had concerns about the acceleration process, and the implication of this on the overall economy. The Bank preferred to have detailed feasibility studies, move slowly, monitor the impact of the project and explore different alternatives (Levy, 1989; Bruton, 1992).

The UNP’s strategy was to lobby bilateral donors first, mainly Britain, Sweden and Germany, to secure funding for key dam projects. Lobbying was done by the minister of Mahaweli with the support of the minister of finance. The first target was the old colonial power, Britain, followed by Sweden and Germany. Britain agreed to fund a dam, which was aptly named the . The prime minister of Britain, Margaret Thatcher, came to Sri Lanka to open the project. Sweden and Germany also agreed to fund two dam projects. Once the government got the support of the bilateral donors, the rest fell into place. The immediate target was the Aid Group meeting in May 1978. The results of the meeting turned out to be successful. De Silva and Wriggins point out that ‘Apart from commitments secured in regard to the dams and headworks from several governments, there were additional commitments as well for financing canals and other ancillary down-stream projects’ (1994, p. 374). This is a good example to show that politicians and bureaucrats who dealt with donors to secure funding were not mere passive subjects, but active political agents with their own agenda.

Although initially the Bank had a co-ordinating role in the Mahaweli through the Aid Group, the Bank found that negotiations between the government and bilateral donors were progressing independently (Levy, 1989). Finally, the Bank came around to funding the project, although it had reservations. Some of the literature by the World Bank indicates that the agency realised the political importance of Mahaweli for the UNP, despite misgivings on technical grounds. The World Bank linked Mahaweli with the withdrawal of the rice subsidy, which was a significant policy change under the new economy. As stated in one of the studies of the World Bank, ‘if there was to be a change in this policy there had to be an alternative vision; it was provided by the Mahaweli program, with its echo of the irrigation works of the ancient Singhalese kings, its promise of rice self-sufficiency and the generation of employment’ (World Bank, 1987, p. 16). The study further states: ‘The Bank’s

81 endorsement of the new direction, and of Mahaweli specifically, helped assuage doubts within some donor agencies and governments, and facilitated the provision of unprecedented sums of aid for Sri Lanka’ (World Bank. 1987, p. 16).

The UNP’s strategy to raise foreign aid to accelerate the Mahaweli project was extremely successful. The regime managed to secure funding from a wide range of donors. The Table below (Table 3.3) shows major donors with the components of the project funded. The list includes almost all donors that had hitherto been engaged in Sri Lanka.

Table 3.3 Major donors and the component of the Mahaweli funded by them

Donor country/agency Component of Mahaweli supported

Sweden Kotmale U.S.A. System H Stage II System B System B, C, G, H (Roads) System B & C (Environment) U.K. Victoria System H Stage II IDA System H Stage II IBRD Diversion Studies R.B.T.B. Canal System C (3-6) System B (RB) Canada System B System B (RB) System Stage II N.M. Secretariat West Germany Randenigala Feasibility studies Japan System C-Canal System C-Farm Stage II of System H System C System B Peripheral Roads, Bridges

82 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

E.E.C. Stage II of System H System C, Zone 2 System B Zones 2 and 3 UN system Planning and monitoring Headworks Stage II of System H System B System C ADB Access roads – system B and C Udawalawe Australia System B (Zones 1 and 5) Netherlands System H Stage II S.A. and D.D. Belgium System G China Stage II of System H Malwanagama farm 1 Saudi Arabia System B (2 and 3) System B (RD) Kuwait System C (Zones 3-6) OPEC System B (Zones 1 and 5) Source: Adjusted from Karunatilake, 1988, pp. 54-55

When completed, the Mahaweli project involved the construction of five dams, four of which were used to generate hydroelectricity. It irrigated thousands of acres, settled thousands of families and constructed a large number of rural infrastructure facilities. The Mahaweli Authority reports that ‘By the end 2011, the project was able to open up 102,898 ha of irrigable lands, constructing 10,049 km of canal networks. Over 166,269 families were settled’ (Mahaweli Authority, 2012).

At one time ‘45% of project aid committed between 1979 and 1981 was for the Mahaweli scheme’ (Levy, 1989, p. 442). For some donors, the Mahaweli took the bulk of their aid budget to Sri Lanka. For example, more than 50 per cent of foreign aid that Sri Lanka received from Sweden over a twenty-five-year period (1977-2002) was disbursed between 1979 and 1985 because of its support to the Kotmale project of the Mahaweli scheme (McGillivray, Carpenter, and Norup, 2012). One of the areas under-researched is how aid commitment to such projects served the interests of the private sector in donor countries. This can be a major reason for aid commitments.

83 Certainly, Mahaweli was a source of business for companies from donor countries. Mahaweli involved large-scale construction, and it generated business opportunities for companies from each donor country. The contract for construction of dams went to a company from the country that provided funds. If we take the largest projects constructed during the UNP period, the construction of Kotmale funded by Sweden was handled by Skanska, the UK ODA-funded Victoria project went to Balfour Betty Nuttal (UK), Maduru Oya funded by Canada went to a joint venture of four Canadian companies, and Rantambe and Randenigala to a joint venture between two German companies and one Swiss company.

Figure 3. 1 Map of the Mahaweli Development Programme

Source: Survey Department, 1988, p. 97

84 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

As argued before, land settlement and possible resultant changes in ethnic composition of the Northern and Eastern Provinces and its political implications was a key issue in Sri Lanka’s conflict. The issue was so important it figured during two of the previous attempts to find a negotiated answer to the Tamil problem. The 1957 Bandaranaike-Chelvanayagam Pact agreed to set up a regional council with a degree of autonomy from the centre in the Northern Province, and two or more regional councils in the Eastern Province. These regional councils were to have powers not only in selecting who was given land in areas covered by the regional councils, but also to select government personnel working in these and settlement schemes (ICES, 1996). The 1965 Dudley Senanayake-Chelvanagyagam Pact agreed that in granting land in such schemes, the following criteria should be followed: ‘a) Land in Northern and Eastern Provinces should in the first instance be granted to landless persons in the district; b) Secondly to Tamil speaking persons, resident in the northern and eastern provinces; c) Thirdly, to other citizens in Ceylon, preference being given to Tamil citizens in the rest of Island’ (ICES, 1996, p. 200). The obvious thrust in these agreements was to maintain the existing ethnic composition in the Northern and Eastern Provinces.

Despite this historical background, and in a context where Tamils’ representatives had contested an election on a separatist platform, donors channelled a massive amount of funds to a project, which if successfully implemented, would significantly change the ethnic composition of the Northern and Eastern Provinces. A cursory glance at the map of Mahaweli shows that several of the settlement areas (settlement areas J, K, A and parts of settlement areas L, M, I, D, B and C) were in the Northern and Eastern Provinces. These are settlement areas that should have had an agreement with Tamil representatives, similar to the efforts under the Bandaranaike- Chelvanayagam Pact and Senanayake-Chelvenayagam Pact. But this never took place in planning the project. There is no indication that any donor considered this critical policy issue despite this history. Available data for 1996 shows that from a total of 124,451 families settled, 96 per cent were Sinhalese (Planning and Monitoring Unit, Mahaweli Authority. 1997, p. 9). Fortunately, or unfortunately, for various reasons, settlements in areas J, K, D2, and A could not be carried out. But,

85 as expected, settlements in areas B and L led to ethnic tension and became part of a military strategy.

The settlement in system B, located in the Eastern Province, became a point of ethnic tension. This was a settlement earmarked for both Sinhalese and Tamils. This was opposed by a section of Sinhala extremists, supported by some members of the Mahaweli bureaucracy (Gunaratna, 1988). They attempted to mobilise a large number of Sinhala villagers and occupy land that was meant for Tamils. The entire move was led by a Buddhist monk living in the area. Canada, which was funding the Maduru Oya project and settlement in system B, woke up late in the day to the ethnic implications of land settlement. There was a disagreement between the Canadian funder and the Sri Lankan government about the formula for settling people. While the Sri Lankan government wanted to apply the national ethnic ratio in choosing settlers, the Canadian side preferred the district ethnic ratio. The former would mean a change in the demographic composition of the district in favour of Sinhalese. This disagreement ultimately led to Canada withdrawing from the project.

Exploring what happened when Canada agreed to fund this project in the first place, David Gillies, through interviews with officials with the aid agency Canadian International Development Agency (CIDA) and officers of the Department of External Affairs, concluded that at the planning stage virtually no attention was given to the project’s impact on the fragile ethnic balance of Batticaloa district in which resettlement would occur. There is no evidence of sensitivity to human rights matters such as participation and non-discrimination by, for example, canvassing the opinions of local Tamil politicians or ensuring that an equitable ethnic balance was inscribed into the memorandum of understanding between the two governments. CIDA seems to have uncritically accepted the government’s proposed resettlement formula. Canada’s unwillingness to examine the political implications of the aid project was to prove costly (Gillies, 1992, p. 55). The other aspect that emerges from Gillies’ work is the link between aid agencies and business interests, and how this determines decisions to fund projects despite

86 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka political implications. In the case of the Maduru Oya project, an important factor behind CIDA’s resistance to withdraw from the project was that lucrative commercial contracts had already been signed with three large engineering firms in Canada (Gillies. 1992). The decision to withdraw funds threatened these commercial interests. CIDA’s argument against the decision to withdraw funding was based on a notion that ‘Mahaweli combined sound developmental goals, such as poverty alleviation, relief of population pressure and enhancement of carrying capacity of the most fertile parts of the island’ (Gillies. 1992, p. 58). Obviously, this apolitical discourse of development refused to see the politics behind land settlement schemes when taken up by a centralised state dominated by Sinhala nationalism.

In addition to these controversies about the settlement policy, there are widespread allegations that there had been evacuations of the Tamil population and settlement of Sinhalese in certain strategic places as part of a military strategy of the Colombo government. Several of these incidents were reported from the East. An example that has been repeatedly brought out are settlements in an area called Weli Oya by the Sinhalese or Manal Aru by Tamils. This area was the focus of intense military battles between the Sri Lankan army and the LTTE. There seem to have been similar controversial settlements in the Batticaloa and Trincomalee districts.11

The World Bank, which from the outset had reservations about the acceleration of the Mahaweli project on technical grounds, pulled out of the project in March 1990 (Bruton, 1992, p. 54). An evaluation published in 1998 accepted that the programme had major implications for ethnic relations. Two issues highlighted were the choice of geographical areas to be included in the programme and the settlement policy (Muscat, 2002).

Thus, Mahaweli was one of the most important projects supported by donors in the post-1977 period characterised by a new period of capitalist development and challenges to the security of the state. It increased the energy supply necessary for capitalist growth. It allowed the UNP to satisfy the interests of the rural peasantry,

11 See Muggah (2008) and UTHR (1993) for an account of how land settlement was linked to security strategies.

87 and was expected to generate employment, a key concern of the UNP when dealing with the Sinhala polity. It satisfied the interests of Sinhala nationalist elements. It also provided lucrative business opportunities for foreign capital originating mainly from aid-giving countries. Finally, sections of the Mahaweli settlement became part of a security strategy to maintain the territorial control of the country. Implementation of the policy to achieve these objectives was funded by foreign aid. There was little interest among the donors in the link between the Mahaweli and deteriorating relations between Tamils and the Sri Lankan state, which was tearing the country apart. There was little room for discussing the possible impact of the project on demographic changes, ethnic relations and conflict. The fact that the project was carried out by a highly-centralised Sinhala nationalist state was ignored.

88 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Chapter 4

Foreign aid responding to the conflict

This chapter covers the period beginning with the implementation of the 13th Amendment ending with the beginning with inauguration of direct negotiations with the LTTE with Norwegian mediation. During this period, we see several trends in the politics of protecting and sustaining the Sinhala nationalist state and promoting a new period of capitalist development.

It was a high point of efforts by the Sri Lankan armed forces to consolidate the territory of the Sinhala nationalist state through military means, with counter- attacks by the LTTE. The LTTE had their own state-building project, which at times controlled considerable sections of the Northern and Eastern Provinces. On the other hand, the government successfully crushed the violent JVP challenge to the state. This process involved intimidation, killings and disappearances. Both sides were responsible for the violence, but the government response was more effective.

When it came to efforts at economic reform, the most important political development was the establishment of a consensus between the two major political formations that ruled the country from independence on the broad direction of economic policies − emphasising the private sector, markets and openness to global capitalism. The key factor contributing to this change was the shift in ideology of the previous Centre-Left political coalition led by the SLFP. Specific policy areas illustrating this are privatisation or handing over state assets to private capital, local or foreign, and emphasis on poverty alleviation as the major focus of social policy. With both political formations that had ruled the country accepting the discourse of poverty alleviation, the other ideas in Sri Lanka’s social policy such as distributive justice, protecting the peasantry and labour, and universal rights in education and health, receded into the background. The prevailing conditions of violence and repression, both because of anti-JVP violence and the armed conflict with the LTTE, made it difficult to mount any political opposition to economic reform. Perhaps the only political force in the South that could have given leadership to it, the JVP, was decimated and its leadership killed. 89 This is also the period when donors began to respond to the escalating armed conflict. Many factors, such as incorporating conflicts into aid policies at global level, and refugee flows from Sri Lanka to donor countries, contributed to this concern. This led to changes in aid policies. Between the mid-1980s and the early 1990s a new pattern of aid policies was consolidated in Sri Lanka. It took into account the armed conflict and its implications.

A central feature of these donor policies was continuing support for the economic reforms started in 1977. Even the donors concerned about the conflict supported this economic agenda. Their interest in conflict-related issues did not entail any significant questioning of the economic agenda of capitalist transition. By including conflict as a central concern in aid policies, they began to contribute to the political and security dimensions of the neoliberal project. As a result, there was a high level of aid flows because of the commitment of regimes to economic reform, even while the war was fought at its greatest intensity with a concomitant increase in defence expenditure.

Humanitarian assistance, while ameliorating the conditions of those affected by the war, helped the state to sustain a presence in war-affected areas. The state had various means to ensure that this assistance did not fall into the hands of the LTTE. Hence the overall impact was to sustain the Sinhala nationalist state amidst an armed conflict. In the case of some donors, humanitarian interventions came after the Sri Lankan armed forces had taken control of the area.

However, at the same time, there were areas of international aid that challenged the Sinhala nationalist state. Most donors began to advocate the need for political answers to the armed conflict and negotiations with the LTTE. Violation of human rights became a major concern of donors. There was support for reforms in public policies that were important for a multi-ethnic society, such as language policy reforms. Finally, support for non-party political actors engaged in protecting democratic rights and human rights increased. The former included media freedom. These efforts strengthened the position of political forces that confronted the centralised Sinhala nationalist state engaged in an armed conflict. But it needs to be recognised

90 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka that, in all these areas of support, donors were responding to longstanding efforts, debates and activism in Sri Lanka on these questions. This is what made it possible for these funding efforts to have a traction in Sri Lankan society.

This chapter ends with an account of events in 2000 and 2001. In 2001 there was a contraction of the economy. A number of factors combined to precipitate an economic crisis during these years. It is this economic crisis that prompted the ruling elite of the Sinhala nationalist state to open direct negotiations with the LTTE with Norwegian mediation.

Intensification of political violence and the armed conflict

The Indo-Lanka Accord brought in a very short space of relative peace in the Northern and Eastern Provinces. Almost all the major militant groups agreed with the Accord, gave up the armed struggle and entered the democratic mainstream. However, the peace with the LTTE was short-lived. The LTTE by this time had become the strongest militant group. Compared to the other groups, the LTTE had been consistently less amenable to giving up its separatist demand. A series of events led to a breakdown of the truce between the LTTE and the IPKF, which came to the island to oversee the disarmament of militant groups as part of implementing the Indo-Lanka Accord. A full-scale war broke out between the LTTE and the IPKF in October 1987. At one time, there were 70,000 Indian soldiers in Sri Lanka.

There was also opposition within the Sinhala polity to the Accord and the provincial council system, even though it only provided limited devolution of power to the provinces. One part of the protest was led by the SLFP, which organised demonstrations, satyagrahas and other forms of protests, mainly in Colombo. The JVP and the armed wing linked to it – Deshapremi Jathika Viyaparaya (DJV) or National Patriotic Movement – led the more violent opposition. This campaign was extremely violent, and included assassinations, forced hartals, intimidation and attacks, and sometimes paralysed civilian life in the southern part of the country.

91 The second presidential election was held in December 1988 in an environment of intense violence. The candidate from the UNP was R. Premadasa, who held the post of prime minister. The JVP led a violent campaign to boycott the elections. The opposition was hardly able to campaign. The UNP used the government machinery both to help its election campaign and to protect its party supporters.1 Nevertheless, several key political personnel of the UNP and some of their supporters at rural level became victims of JVP violence. The scale of violence prior to the presidential election was such that it was uncertain up to the last moment whether the election could be held. Even during the last week of the campaign, Colombo was rife with all kinds of rumours about a postponement of the election.

The voter turnout at the 1988 presidential election dropped dramatically due to violence, indicating how democratic institutions had been battered during the post- 1977 period. The overall turnout was only 55 per cent, compared to 81 per cent during the previous presidential election (average turnout for all general elections held up to that point was 78.1 per cent). The result was that the second executive president of Sri Lanka was elected with the support of a mere 27.4 per cent of the total electorate. A general election in February 1989 followed the presidential election – the first general election held under the system of proportional representation.

Systematic suppression of the JVP began after the general election. The suppression took a qualitatively new stage from August 1989 because of the JVP’s death threats to families of members of the armed forces. From then on, the onslaught of the security forces became ferocious. Killings became more common than arrests. Extra-judicial killings, disappearances and death squads were deployed to take care of the insurgency. The impact was felt in most areas apart from the North and East, and it was stark. The situation led to widespread human rights violations and disappearances. Dead bodies on burning tyres became a common scene in the country. People witnessed dead bodies floating down rivers and by the roadside. By November 1989, these operations managed to destroy the armed capabilities of the JVP, and in the same month, the leadership of the JVP was eliminated.

1 See Perera (no date) for an account of the UNP’s strategies to ensure Premadasa’s victory. The name Janaki Perera seems to be a pseudonym similar to the name Priya Samarakoon, the author of an earlier report on the 1982 referendum. 92

Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Unfortunately, this episode of violence has received less attention compared to the violence associated with the armed conflict in the North and East, although mass graves have been discovered as late as November 2012 – twenty-two years after the events. Although numerous reports on human rights have been published, there has been little interest within international human rights institutions to bring to justice those responsible for this large-scale violence in the South – unlike in the case of the Northern conflict. The fact that the victim of this violence was a political force that could mobilise against the new period of capitalism could have played a role in this selective application of international human rights norms. As we shall see later, in the case of the Northern conflict, it was the initiative of states from developed capitalist countries that resulted in resolutions being passed against Sri Lanka in the Human Rights Council. These countries do not have the same interest in pursuing what happened when the JVP was decimated. There was an internal process after the UNP was defeated. Three commissions of inquiry were set up by the PA government that came to power in 1994 to inquire into these events. But these did not result in any significant outcomes.

The coming into power of President Premadasa was also the beginning of the end of the EPRLF-led North-East provincial administration. During his term of office, parliament passed an amendment that gave powers to the president to dissolve provincial councils. This was a significant move that undermined the autonomy and stability of the provincial council system. The North-East Provincial Council was dissolved in July 1990. From this point, the provincial councils only operated in areas other than the Northern and Eastern Provinces. In other words, the provincial system, which was supposed to be a solution to the Tamil demand for self-governance, did not operate in the provinces that Tamils considered to be their homeland. Tamil people in the Northern Province had to wait until 2013 until they could elect representatives to the only body that provided a limited degree of self- governance.

Premadasa’s election campaign also took up a position against the presence of Indian troops in Sri Lanka. In June 1989, President Premadasa proceeded with his demand for the withdrawal of Indian troops from Sri Lanka. The withdrawal of the

93 IPKF began in December 1989, and was completed by March 1990. Parallel to this, in a surprising political move, President Premadasa began direct negotiations with the LTTE in February 1990. The political interests of both Premadasa and the LTTE were not so much a search for a political solution but a desire to get Indian troops out of Sri Lanka. Almost a year of negotiations between the LTTE and the Premadasa regime did not result in any solutions. After the withdrawal of Indian troops from Sri Lanka, the Premadasa-LTTE talks lasted little more than two months. Having achieved its political objectives of the withdrawal of the IPKF with whom they were fighting, and the collapse of the EPRLF-led Provincial Council, which had become a political challenge to the LTTE, the LTTE withdrew from the ceasefire and talks. Large-scale fighting broke out between government troops and the LTTE in mid- 1990.

Elections in 1994 finally saw the end of seventeen years of UNP rule, made possible by cancelling the general election that was due in 1983. The Premadasa-led UNP had been facing a crisis from the early 1990s onwards. The first blow was the formation of the Democratic United National Front (DUNF), led by some leading members of the UNP who were dissatisfied with Premadasa’s style of ruling. These dissident members also tried to bring an impeachment motion against the president. It failed due to non-cooperation on the part of the speaker. However, in 1993, Premadasa became the victim of an LTTE suicide bomber, and the presidency was handed over to the prime minister, D.B. Wijetunge. Wijetunge, held office for a short period and turned out to be a weak president. The UNP regime was merely marking time before it was defeated and turned out of office in 1994.

The defeat of the UNP in 1994, after 17 years, was certainly a safety valve for the electorate’s anger at long years of UNP misrule. The 1994 general election also saw the maturity of the struggle to protect democracy, and human rights activism during the time of UNP regimes. It was during this election that the country witnessed many organisations coming together to monitor electoral violence. The objective was to ensure free and fair elections, and to restore some degree of trust in the electoral process. These activities had extensive support from the international organisations that had been working with Sri Lankan counterparts on issues of democracy and

94 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka human rights. Hence, these institutions proved to be resilient, despite concerted attacks on democratic and electoral institutions. The other important feature of the 1994 election was the agreement between the two major parties on certain key aspects of the resolution of the conflict. During the election campaign, both parties agreed on the need for negotiations, and the need for reform of the highly-centralised Sri Lankan state to devolve powers to the North-East. This meant that the leading opposition party, which opposed the Indo-Lanka Accord and the 13th Amendment, had come around to the position of negotiations and devolution.

The electoral defeat of the UNP eased the repressive conditions in the South. But episodes of political violence continued, especially during elections. But now at least there was the possibility of systematically monitoring this violence. Table 4.1 summarises data on election violence for several key elections after the PA came to power. What are called major incidents include murder, attempted murder, hurt, grievous hurt, assault, threat and intimidation, robbery and arson.

Table 4.1 Election Violence (1999-2004)

Election Year Major Minor Total Incidents Incidents

North Western Provincial Council 1999 887 670 1,557 Presidential Election 1999 886 928 1,814 General Election 2000 1,095 924 2,019 General Election 2001 1,853 1,420 3,273 Source: Reports of the Centre for Monitoring Election Violence, Centre for Policy Alternatives, Colombo.

Soon after its election victory in 1994, the PA embarked on another round of negotiations with the LTTE. In August 1995, the PA government outlined its constitutional proposals to resolve Tamil grievances with concepts that transcended the limitations of the 13th Amendment. The objective was to set up regional councils within a constitutional framework, in which Sri Lanka would be a union of regions. In this union of regions, legislative power and executive power would be exercised both

95 by the centre and the regions (Sriwardena (ed) 1996: Appendix A). The proposals reflected a willingness to do away with the notion of a unitary state. This had been introduced in the 1972 Constitution, and had been a stumbling block towards greater devolution. The PA government also proposed to delete articles in the constitution that prevented parliament from alienating its powers to any other institution. These elements in the new proposals were certainly a move towards a federal form of government, although the words were not used in the text.

There is no doubt that these original proposals of the PA were the most far-reaching ideas presented by a government to restructure the Sri Lankan state. As could be expected, the proposals of the PA government met with severe opposition from the Sinhala extremist elements. The proposals also did not receive support from the UNP. They had a long gestation period in a parliamentary select committee. What ultimately came out from these deliberations at the end of 2000, was an emasculated version of the original proposals. On one hand, the PA had given in to Sinhala extremists and diluted the proposals. On the other side, the UNP was playing the usual game of partisan politics. The ultimate outcome of all of this was that the PA withdrew its proposals from parliamentary debate.

The negotiations of the PA with the LTTE were short-lived and did not achieve much. In April 1995, the LTTE broke the ceasefire that had been established. This led to an all-out war in the North-East of the country, with all its social consequences. Many reports have documented arbitrary arrests, detention, torture, killing and disappearances targeted mainly at Tamils during this period. Commenting on the PA government’s human rights record, a report by Amnesty International released in August 1996 concluded that, in the context of renewed armed conflict since April 1995, extrajudicial executions, disappearances, torture and widespread arbitrary arrests continue to take place (Amnesty International, 1996). Military efforts to sustain the centralised Sinhala nationalist state were conducted without regard to how it affected civilians. The Northern and Eastern Provinces were under various forms of economic embargo. This had a widespread impact on the Tamil population. Tamil people living in other parts of the country were under constant surveillance. People from the war-affected areas were expected to register at police stations even when they stayed with relatives in other parts of the country. 96 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The period between the Indo-Lanka Accord and the beginning of direct negotiations between the Sri Lankan government and the LTTE with Norwegian mediation in 2002, is a period in which we witnessed a very high level of social costs and brutality of two state-building projects. One project sought to maintain a centralised Sinhala nationalist state and promote capitalist development, and the other, by the LTTE, had the objective of creating an Eelam. It was also undermining the objective of economic growth. This is the period when the discourse of economic and social costs of the conflict became prominent. As pointed out by an international comparison, Sri Lanka became the focus of a relatively a higher number of studies that pointed out the high economic costs of an on-going war (Lingren, 2005).

A study undertaken by the National Peace Council in collaboration with the Marga Institute published in 2001 shows that by 1998, the war had resulted in 50,000- 60,000 deaths (National Peace Council, 2001). Around half of these were civilians. There were an estimated 10,000-15,000 disabled soldiers. In addition, close to 800,000 people were displaced, and a large number of Tamil people had left the country. With the continuation of fighting, these numbers kept escalating. Then there are those aspects of the war that cannot be quantified. These numbers are only a beginning to understanding how the armed conflict affected the civilian population. If we add to this, dimensions such as the trauma of war victims, the environment of insecurity that people lived in, the impact on crime because of the availability of small arms, and general brutalisation of the society, the impact of a long-drawn-out civil war has been immense.

A number of political leaders and political activists who opposed the politics of the LTTE were eliminated. This included Tamil political leaders, a prime minister of India and a president of Sri Lanka. There was an attempt on the life of President Kumaratunga. These leaders and political activists came from all ethnic groups. Civilians from all ethnic groups also suffered at the hands of the LTTE. Special mention should be made of the expulsion of Muslims from Jaffna in October 1990. These were people who had lived for generations in the Northern Province. This ethnic cleansing by the LTTE showed familiar features of many political movements fighting for rights of minority ethnic groups. Very often they themselves are chauvinist, and a mirror image of the oppressor that they are fighting against. 97 For those interested in military aspects, there were spectacular victories of the LTTE when they overran army camps located in the North and East. The government launched a military operation codenamed ‘Operation ’, with the objective of wresting control of the Jaffna peninsula, the heartland of Tamil politics, from the LTTE. The operation lasted for about seven weeks and the army moved a dozen miles and secured Jaffna town in late December 1995/early January 1996. The LTTE withdrew into the jungles to continue the war. During the period, significant parts of the North and East were either totally or partially under the control of the LTTE. The government could not cover the entirety of the Northern and Eastern Provinces during the 2001 census.

Finally, this all-out war against the LTTE obviously resulted in increased defence spending (see Figure 4.1 below). By 1996, defence expenditure absorbed 20 per cent of government expenditure, and accounted for 6.0 per cent of GDP (Kelegama, 2006). This high defence expenditure was a subject of discussion during negotiations with the IMF in 2001 for a stand-by package to rescue the economy in crisis. In the Letter of Intent, which stipulates conditionality for the IMF support, it was noted that ‘security-related expenditure rose substantially in 2000 in response to the escalation of conflict in the north of the country to 5 ½ percent of GDP’ (, 2001). The Letter of Intent also notes that ‘in the past, a substantial component of military imports was financed by loans – amounting to 26 percent of total defence related imports in 1999, and 32 percent in 2000’ (Daily News, 2001). While the Sri Lankan state utilised its own resources to finance these direct costs of the military strategy, continuous support from donors enabled the Sinhala nationalist state of Sri Lanka to bear this cost, sustain an economy and fulfil other functions expected from a state.

98 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Figure 4.1 Defence Expenditure (1981 – 1996)

Political consensus on economic and social policies

It was in this context of a violent campaign by the state to suppress the JVP, an armed battle with the LTTE to secure the territory of the Sinhala nationalist state, and the presence of Indian troops for a short period, that the Sri Lankan government began some of the key economic reforms that were a cornerstone of the neoliberal agenda. This included privatisation of state enterprises or handing over assets of the state sector to private capital, local or foreign. This was a crucial step for the new period of capitalist development.

Although the UNP began the new phase of capitalist development in 1977, during the first decade there had not been any serious efforts to privatise state assets. The passage of two acts of parliament in 1987, Conversion of Government Owned Business Units (GOBU) into Public Corporations Act No.22 of 1987 and Conversion of Public Corporations or GOBU into Public Companies Act No.23 of 1987, are considered the first concrete steps in privatisation. This happened towards the end of the Jayawardene period.

99 Actual privatisation began during the second UNP regime led by President Premadasa. ‘This phase of privatization, from 1989 to 1994, saw the partial and full divesture of around 43 commercial enterprises, with gross receipts of approximately Rs.11.6 billion’ according to Knight-John (2004, p. 366). The politics of privatisation is a heavily under-researched subject in Sri Lanka. Most available writings are by economists promoting the neoliberal agenda, with a focus on why privatisation fell short of its desired goals, rather than explaining the process in terms of the logic of Sri Lankan politics of capitalist transition.

The complex political issues faced in this crucial step in capitalist transition can be seen by looking at how the Premadasa regime handled privatisation. To manage this difficult part of economic reforms, the UNP regime of Premadasa utilised a range of strategies. For example, the government launched a publicity campaign and coined the term ‘peoplisation’ to sell privatisation to the general public. This contrasted with the term ‘nationalisation’, which was used when private sector ventures were taken over by the state. In the case of politically-sensitive sectors like the plantations, there was a step-by-step approach. The state takeover of this sector in 1975 was supported with nationalist and social justice arguments. Even the UNP supported it in parliament. Hence putting the plantations back to private hands was going to be politically difficult. This is why the government decided to carry out privatisation in stages. The state-owned estate sector was divided into twenty-two state-owned companies. First, the management of these units was transferred to private companies, while the state maintained ownership. Then shares of the state- owned companies were sold to the private sector. Politically, the most important factor was that the government secured the support of its ally, the Ceylon Workers Congress, which controlled the largest trade union in the plantations.

The general atmosphere of repression, and draconian laws like the PTA that were in place to quell both the Southern insurgency and Northern militancy, created a more conducive environment for the Premadasa government to carry out these reforms. In fact, the brutal suppression of the JVP was an essential condition to begin the privatisation process. The vicious counter-offensive launched by the government, which included human rights violations on a massive scale, put the lid on any form

100 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka of protest or democratic action. Given what the country was going through and the climate of fear generated, there was little space for protests or democratic action against the economic reforms that the government was embarking upon.

The privatisation agenda begun by the Premadasa regime continued under the PA government. In her first policy statement to parliament, President Kumaratunga announced that ‘the Government will embark upon a major programme of selective and carefully planned reform of public sector enterprises in 1995. This will include major ventures in the services sector, especially in aviation, in transport and in insurance’ (Kumaratunga, 1995, p. 187). Roughly the same number of entities were privatised under the PA regime as during the Premadasa regime. Gross receipts were about Rs.46.2 billon (Knight-John, 2004).

However, the more important fact underlying the continuation of the privatisation policies critical for the new period of capitalism was the political consensus on economic policies that had developed by this time between the two main political formations that had ruled the country since independence. The main constituent elements of the PA government were the SLFP, and what in Sri Lankan political lexicon were called old Left parties. In the past, they had formed a Centre-Left political coalition. By aligning economic policies of Centre-Left parties to the ideology of a liberal economy, the PA government brought in a consensus among the political class regarding economic policies. In this process of transition, the power of the more urbanised and westernised elite who controlled centres of decision- making within the PA was important (Moore, 1997). As studies on political elites have shown, despite long years of electoral politics and broadening of the social base of political parties, urbanised and westernised elite groups had greater control of key cabinet positions (Coomaraswamy, 1988). Hence, they would inevitably play a critical role in shifting policies. With this ideological shift, any ideological differences between the two political formations regarding economic policies became marginal. Both came to accept the economic agenda begun in 1977. Not only that, any serious opposition to the new phase of capitalist development from political parties that had an electoral base among the Sinhalese disappeared. From this point, there was a broad ideological consensus between international backers of these economic

101 policies and the political class when it came to economic policies. The JVP, which could have been the only political formation among the Sinhalese that could have mounted an opposition, was decimated.

In addition to embarking on privatisation amid violence, both major political formations that ruled the country adopted the key idea of poverty alleviation, which had begun to dominate the neoliberal economic agenda as the major plank in social policy. The UNP and PA regimes established national-level poverty alleviation programmes called Janasaviya and Samurdhi. As we have already mentioned, the dominant discourse of development during the post-1977 period is characterised by two strands. On one hand, there is an emphasis on markets, liberalisation and private sector economic growth. On the other hand, for the socially marginalised, it is poverty alleviation or ensuring a basic minimum standard of living. This is to be done through targeting the poor, and getting their participation in the process of implementing these programmes.

By adopting this perspective as its main plank on social policy, the PA completed its ideological shift towards neoliberalism. There was no more talk of the radical distributive policies of the 1970-77 period. An interesting aspect of these programmes is how with each change of regime there is a new name, new slogans and a new set of institutions for implementation. They should have catchy names for legitimisation to the public. We had the Janasaviya (people’s power) under Premadasa and Samurdhi (prosperity) under the PA. Janasaviya, being the brainchild of the president, had the entire state machinery working for it. Government bureaucracy down to the lowest level had to give this programme a priority. For implementation of Samurdhi, a special authority was established through the Samurdhi Authority of Sri Lanka Act No.30 of 1995. This authority established an implementation structure reaching the most local level. This became a haven for political appointees. It is not clear whether these efforts ‘to develop’ the poor have had any significant impact on reducing poverty. The most likely reason for any improvement in even the minimum level of living standards for the socially marginalised in Sri Lanka in recent times is due to how labour markets have operated.

102 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Finally, it needs to be noted that at least during the Premadasa regime, the prevalent violence and political instability, especially in the southern part of the country, was a key reason for the regime to begin these poverty alleviation programmes. Premadasa, when he was the prime minister, made his case for what he called a new departure in the concepts of development, to tackle issues of poverty and unemployment. Premadasa’s rationale for this was clearly the political instability that the country was facing. In his submissions to the cabinet he argued that ‘Sri Lanka is going through a very critical period. There is irrefutable evidence of growing poverty. Since 1983, national resources had to be diverted from development to defence. A few have begun to pose an armed challenge to the state and to civil society’ (Premadasa, 1988, p. 1). However, for him, the armed insurgency that the country was facing was ‘only a symptom of the much deeper cause – poverty and insecurity’ and to meet this situation, ‘a new fundamental policy and programme response is an urgent need’ (Premadasa, 1988, p. 1). In the cabinet paper, he articulated the basic concepts of his answer to the crisis that Sri Lanka was facing. He called this ‘People-based Development’. The UNP manifesto for the December 1988 presidential election made these concerns of Premadasa its key message. It called for a ‘New Vision’ and a ‘New Deal’ for Sri Lanka. The three principal objectives of this new vision and new deal were: restore peace, enforce discipline and alleviate poverty.

Donor responses to conflict and instability

Due to the escalation of violence in Sri Lanka and global-level developments that resulted in aid agencies incorporating conflict and security as a major aspect of their policies, from the late 1980s and early 1990s, conflict became a major concern of aid policies in Sri Lanka. The primary driving force for this concern was violence and the ensuing instability, rather than the structural reasons for violence which demanded a focus on the state and the hegemony of Sinhala nationalism. As we shall see, this slant among donors ultimately made security of the Sri Lankan state the primary concern.

The violence was also having an impact on the agenda of aid agencies. The objective of strengthening capitalist development was getting affected. As pointed out in a

103 World Bank briefing for the 1990 Aid Group meeting, the growth rate in the 1987- 89 period had come down to a mere 2 per cent a year, and the economy was facing a balance of payments crisis by mid-1989 (World Bank, 1990a). The impact of the conflict contributed to this situation. Due to unstable conditions created, especially by the JVP-led violence and counter-attack by the state, it was not easy to implement donor-funded projects in regions affected by this violence. Many agencies had to bring their staff to Colombo due to the security situation. Even in Colombo, you could not get away from the impact of violence. There were grotesque scenes, which included dead bodies both on roadsides and in waterways close to Colombo.

Another factor that made it difficult for aid agencies to ignore Sri Lanka’s conflict was the flow of Tamil refugees to donor countries. This flow of refugees, who normally ended up seeking political asylum, expanded significantly after the July-1983 anti- Tamil pogrom. By 1987, close to 100,000 Tamils had claimed political asylum in Europe (Rodgers, 1992). According to a UNHCR report, ‘During 1990-1995, some 3.7 million applications for asylum were submitted in Europe (75 per cent) and North America (25 per cent). Main receiving countries were Germany (1.5 million applications) and the United States (674,000)’ (UNHCR, 1997, p. 4). ‘Between 1992 and 1999, Sri Lanka was the lead country of refugee claims to Canada’ according to Hyndman. (2002, p. 23). As significant refugee flows always do, Tamil asylum seekers became a politically controversial issue, especially in Europe. As Rodgers points out, ‘Throughout the 80s, Sri Lankan Tamils were to become one of the most visible and controversial refugee communities as their numbers increased’ (1992, p. 7).

One response of some countries was to try and repatriate those who failed to get asylum. By the time Sri Lanka began negotiations with the LTTE in 2002, five European countries had managed to secure agreements with the Sri Lankan government to repatriate rejected asylum seekers. These were Switzerland, Netherlands, Denmark, Norway and Italy (The Refugee Council, United Kingdom, 2001). One major achievement for the European Union during negotiations between the Sri Lankan government and LTTE with Norwegian mediation was to secure a similar agreement applicable to all member countries. This took place during the

104 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka visit of the Sri Lankan foreign minister to Brussels in July 2002. Reading what went on during negotiations for the first such agreement between Switzerland and Sri Lanka, you get some idea of what happens to people caught in a violent conflict at the hand of government policymakers in donor countries. There are attempts to define whether these are ‘economic’ or ‘political’ refugees, as if it is easy to categorise human beings fleeing their birthplace due to a war in this manner. Then there is an equally important discussion on whether it is ‘safe’ to send people back (Laager, 1995). These attitudes on the part of the Western states question the mythology of the borderless globalised world that the liberals often talk about. Borders were open to capital, but not so much to victims of an armed conflict. For our purpose, it is important to note that incorporating conflicts into aid programmes had a direct political relevance for a critical political issue within donor countries. Stemming the flow of refugees became one of the political objectives of foreign aid.

However, recognising the reality of armed conflict and political instability in Sri Lanka did not generate a uniform response from donors. Aid agencies had diverse political agendas within the neoliberal political project, and their response was determined by them. According to some analysts, the different positions held by donors led to disagreements among them during the annual Aid Group meeting held in Paris under the auspices of the World Bank. ‘In the late 1980s and early 1990s, the Consultative Group Meetings between bilateral donors and the International Financial Institutions in Paris provided the venue for sometimes heated discussions on whether good governance and human rights issues should be considered development issues and thus addressed with development instruments’ comments Bush, in relation to this issue (2001, p. 23).

One can get a glimpse of the diverse political positions held by aid agencies if one unpacks the closing statement of the chairman and the press release by the World Bank at the end of the Aid Group meeting held in October 1990 (World Bank, 1990b). This meeting was held during the time of the Premadasa regime. By this time the regime had begun its ferocious attack on the JVP. Some of the victims were well known personalities, and human rights violations by the regime were getting massive publicity both in Sri Lanka and abroad.

105 The bulk of the closing statement of the chairman, the representative of the World Bank, is on economic reform and what the government needs to do in this regard. The government is also commended for carrying out economic reforms and restoring financial stability even in the middle of political instability. However, the press release also points out the concern of several donors on the human rights situation and the need for a political solution to conflict. It mentions a ‘joint statement issued by members of the European Community on the threats to human rights in Sri Lanka and indicated this, among other factors, would be considered in formulating future assistance plans’ (World Bank, 1990b). But the chairman’s statement squares the circle by saying that ‘the meeting also recognized, however, the complexity of the situation and expressed sympathy with the difficulties being experienced to restore peace which was essential to realize better economic opportunities for all parties concerned’ (World Bank, 1990b). The word ‘complexity’ becomes a useful word to camouflage the political agenda of continuing support to the Sri Lankan state. Of course, the Aid Group never even considered recommending any withdrawal of foreign aid. On the other hand, the press release notes that ‘donors voiced their continued support for the government’s economic development program and indicated their assistance for 1991 at about US$ 1.0 billion equivalent, fully meeting the World Bank recommendations’ (World Bank, 1990b). Almost a third of this assistance was to be released without much delay.

As far as multilaterals were concerned, this was a high point of significant economic reforms. While the armed conflict re-emerged after the collapse of a short-lived peace after the Indo-Lanka Accord, multilaterals, together with the Sri Lankan government, undertook a concerted effort to push through economic reforms. In 1989, in its annual assessment of the economy, the World Bank declared that although the economy was affected by the armed conflict, ‘on the whole, however, the economy has continued to develop and to respond to incentives, even though at a rate considerably below its potential. All in all, the resilience of the economy, its ability to weather a high level of disturbances and its responsiveness to improved incentives are remarkable’ (World Bank, 1989, p. 4). Thus, the focus was on continued reforms necessary to strengthen capitalism, support to regimes so long as they continued in this direction, and readiness to support the Sri Lankan government.

106 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

In contrast to multilaterals, the aid policies of most bilateral donors were influenced by incorporating conflicts and their implications as a key issue. Many representatives from bilateral agencies raised questions about the conflict, human rights violations and the need to link these issues with aid policies. However, the policy reforms took diverse forms. Some adjusted their programmes to include some aspects that they believed were linked to resolving the conflict. For example, the Swedish Country Strategy for 1998-2000 introduced a conflict perspective. The focus became peace and democracy, and pro-poor growth (Sida, 1998). DIFD, whose engagement in Sri Lanka was limited, maintained their focus on the very poor, and began to explore the question of the impact of the war on the poor (DFID, 1999).

Some bilateral donors went beyond this and began to review their entire framework of funding to Sri Lanka. The Norwegian aid review that was cited previously (Sørbø et al., 1987) was one of the first comprehensive reviews that considered the question of foreign aid in a conflict situation. The report makes its recommendations based on three possible scenarios: A conflict scenario where there is an escalation of the violence; a transition scenario where there is a possibility of transition to a much more peaceful situation; and a peace scenario where there is an active search for a peaceful settlement. The recommendation in the case of the first scenario is to withdraw funds; in the case of the second scenario, to maintain the programme at the same level with some changes in the components; and if there is a peace process, to be ready to increase funding. Generally, support for peace and reconciliation became a major focus for the aid programme of Norway.

Countries such as the Netherlands and Canada revised the framework within which funds to Sri Lanka were allocated. Sri Lanka had the status of a programme country for the Netherlands development cooperation programme from 1977 to 1990. When the Netherlands list of countries eligible for Dutch ODA was revised in 1990, Sri Lanka was reclassified as a sector country, because of political instability and the human rights situation. Funds came from an overall Sector Fund for Asia (Netherlands Ministry of Foreign Affairs, 1992). As discussed in the previous chapter, Canada withdrew from funding the Sri Lankan government due to disagreements over Mahaweli settlements. Due to further escalation of violence, priorities of Canada

107 shifted to strengthening governance and human rights, community-level social and economic development, and gender equality. Funds were channelled to the non- government sector (Gilles, 1992).

Compared to this, assistance from Japan, the largest bilateral donor and the donor responsible for the highest quantum of grants, continued to cover five traditional areas of development focusing on economic growth and social development. These were: ‘(a) Construction and improvement of economic infrastructure, (b) Industrial development, (c) Agriculture forestry and fisheries, (d) Human resource development, and (e) Improving health and medical services’ (Cooray, 2003, p. 229). These were determined by the Country Specific Aid Research Committee in 1991 (Cooray, 2003). However, by the year 2000, the Japanese government was also concerned about conflict and its links to the aid programme in Sri Lanka. During the proceedings of the Development Forum in 2000, Japan emphasised resolution of the conflict as the overriding priority of the Sri Lankan government (Bush, 2001). This was a precursor to much more significant changes that took place in Japan’s aid policy to Sri Lanka, prompted by direct negotiations between Sri Lanka and the LTTE in 2002. In 2002, ‘the Country Specific Aid Programme identified a sixth area, namely activities to support the on-going peace process and to support rehabilitation work in the north and east’ (Cooray, 2003, p. 229).

The diverse policy responses during this period are reflected in the pattern of aid flows during the period between the Indo-Lanka Accord (1987) and the last year of the Chandrika Bandaranaike Kumaratunga regime. The overall outcome due to incorporating conflict as a major concern by some donors was a drop in the grant component that was channelled through the Sri Lankan state. This was mainly due to policy changes by European donors and Canada. But Japan, which had been the main source of grants, remained committed. On the other side, there are sharp increases in the flow of loans, especially in 1991, 1995 and 1998. The single most important reason for this was economic reforms that the ruling regime was embarking on, and continued support of multilaterals and Japan.

108 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Because of these changing patterns in sources of funding, Japan, ADB and the World Bank accounted for the major share of net receipts. This picture has been confirmed by calculations based on aid commitments. A study published in 1994 concluded that ‘The Sri Lanka aid programme at present is heavily dependent on three major donor agencies, i.e. the World Bank, ADB and Japan. Together they account for about four-fifths of the total aid commitments’ (Kuruppu, 1994, p. 8). In addition to this, Sri Lanka concluded four agreements with the IMF between 1987 and 2001. Three of these were linked to structural reforms that both the government and IMF were keen to implement. The last, approved in 2001, had the objective of propping up the economy which was facing difficulties.

Table 4.2 Net Receipts of Development Assistance 1988-2001 - Key Donors (in US$ mln)

Loans % Grants %

ADB 1299.0 37.4 27.6 1.3 IDA 1080.7 31.1 - - Japan 1285.4 37.0 769.6 37.7 Canada - - 65.8 3.2 Germany - - 30.2 1.5 Netherlands - - 110.4 5.4 Norway - - 164.3 8.0 UK - - 88.6 4.3 United Nations - - 91.7 4.5 USA - - 346.8 17.0 Other - - 148.2 7.3 Total 3472.5 2042.0

Source: Computed from various Annual Reports of the Central Bank of Sri Lanka

109 Figure 4.2 Net Receipts of Development Assistance (US$ mln)

Source: Computed from various Annual Reports of the Central Bank of Sri Lanka

Table 4.3 IMF loans

1988 Compensatory Financing Facility and Structural Adjustment Facility for SDR 153.4 million 1989/90 SDR 111.5 million under a Structural Adjustment Facility 1991/94 Enhanced Structural Adjustment Facility for SDR 280 million 2001 IMF approves $253 million Stand-By Arrangement for Sri Lanka Source: Compiled from various Annual Reports of the Central Bank Reports of Sri Lanka and IMF new releases.

Aid, the Sinhala nationalist state and the neoliberal political project

Towards the end of the period covered by this chapter, one can identify a set of policies among donors that can be considered as the specific manifestation of the neoliberal political project in Sri Lanka. First and foremost was the continuing support to the process of strengthening the new period of capitalist development begun in 1977. Even the donors who were not directly funding this agenda were broadly

110 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka in agreement with these reforms. Second, there was an increase in humanitarian assistance, which, while helping people affected by war, contributed to maintaining the presence of the Sinhala nationalist state in the war-affected area. While both these policies were consolidating the existing state, other policies supported reforms in public policies that contributed towards building a state suited for a plural society. The most important in this category was support for bilingual policies. Similarly, donor support to non-party political actors promoting state reforms, and defending democratic institutions and human rights, challenged the existing state. Finally, the relative success of support for developing a bilingual policy and political activism of non-party political actors was largely due to fact they were responding to longstanding struggles in Sri Lankan society.

Leading donors in the agenda for continuing with economic reforms to strengthen capitalist transition were the two multilaterals (World Bank and ADB), Japan and the IMF. As noted before, by this time they accounted for the bulk of foreign aid to Sri Lanka. The political objective of these donors was supporting the Sinhala nationalist state and the regime in power so long as economic reforms continued. Arve Ofstad, who was the UN Resident Coordinator in Sri Lanka from 1995 to 98, and therefore had a good overview of what was going on within the aid agencies, in a seminal article calls this the ‘traditional development agency’ approach (Ofstad, 2002). This ‘approach was clearly government-friendly with indirect and passive support to the government’s overall strategy’ (Ofstad, 2002, p. 167). In addition, due to the strong agreement between the ruling regime and multilateral agencies, these agencies seemed to have had greater influence on the policy dialogues between other donors and the Sri Lankan government (Ofstad, 2002).

During this period, the World Bank and the IMF operated in coordination to ensure that key economic reforms were carried out. These two agencies, together with some of the key government officials and consultants supportive of the reforms, produced a set of policy papers and studies pinpointing reforms that needed to be done (IMF, 1989; IMF-World Bank, 1990; IMF, 1992; World Bank, 1996). The Sri Lankan names in some of these reports give a glimpse of the Sri Lankan academic, professional and bureaucratic elite that joined the multilateral donors and political

111 elite to pursue these reforms. Some of the documents gave details of the reforms that must be carried out, including dates by which they should be done. Reforms covered government budget, exchange rate policy, public administration reform, infrastructure, labour market, education, health, social safety net, trade and tax reform and financial sector reform (including privatisation of the Bank of Ceylon and the People’s Bank) (IMF, 1989). In addition to these reports, there were specific studies looking at policies such as administrative reforms, reform of labour laws and strengthening of land markets to generate agricultural growth. In other words, this was a full agenda of economic reform in the middle of an armed conflict and a bloody insurgency.

Reading strategy documents produced by the other multilateral donor whose funding was important during this period, the ADB, is like reading documents that donors used to produce during the Jayewardene regime. It is the same discourse of Sri Lanka achieving precious development objectives, although there was an armed conflict with considerable social costs and killings. For example, the country strategy published in 1999 focused on (i) policy and institutional reforms to promote private sector development and improved public sector management; (ii) human development to address the gap in marketable skills and thereby improve employment and income levels; (iii) enhancement of the country’s infrastructure endowment through public and private investment; (iv) preservation of the country’s natural resource base (v) measures to mitigate the social and environmental impact of the transition to higher growth (ADB, 1999, p. 8). The strategy also assumed that activities pertaining to them would be located way from areas affected by conflict (ADB, 1999). Thus, for the ADB, it was business as usual.

Beside this, especially during the PA regime, the multilaterals more or less agreed with the Sri Lankan government’s political strategy in dealing with the armed conflict. Commenting on the election of the PA government, the World Bank in one of its reports concluded that

112 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

the recent changes in Sri Lanka’s political scene have opened new opportunities for taking a fresh look at Sri Lanka’s development challenges and elaborating a responsive strategy. Most positively, the Government has taken courageous steps to seek to end the war, even if these efforts have been frustrated. While the recent renewal of hostilities is a terrible blow to the peace process, the Government remains committed to a negotiated settlement (World Bank, 1996, p. i). Taking a slightly different tone, the ADB observed that ‘the Government has intensified military operations in recent years, and aims to reach a political solution of the civil conflict from a position of strength’ (ADB, 1998, p. 13).

Thus, during this period, there was a broad agreement between the multilateral donors and ruling elite on an overall strategy. The support of donors was at its highest level through soft loans to facilitate the continuation of the economic reform programme. On the other side, the military effort to regain control of the territory of the Sinhala nationalist state was at its highest intensity. In this context donor support for rehabilitation and reconstruction could have led to undermining LTTE support base among the Tamil population. There was hope that this together with weakening the LTTE militarily would force them to negotiate.

The recognition of the reality of civil war and its social costs resulted in an increase in funding for humanitarian work. Table 4.4 below summarises commitments by various aid agencies to humanitarian projects as at the end of 2000.

113 Table 4.4 Commitments by Donors to Humanitarian Assistance (at the end of 2000) (US$ mln)

Donor Amount in US$ mln. ADB 133.200 World Bank 77.00 UN system 59.698 EU 16.700 Sweden 3.460 UK 15.239 US 3.000 Japan 7.854 Germany 8.520 Australia 4.751 Netherlands 5.343 Norway 9.876 Canada 5.276 Source: Framework for Relief, Rehabilitation and Reconciliation, 2000

Humanitarian assistance began immediately after the Indo-Lanka Accord. The World Bank formulated its reconstruction and rehabilitation programme in September 1987. At a special Aid Group meeting held in December 1987, bilateral and multilateral donors pledged US$493 million for an Emergency Relief and Reconstruction Project (ERRP) to support the government’s reconstruction and rehabilitation efforts. Funds were channelled through the Ministry of Reconstruction, Rehabilitation and Social Welfare, and implementation was to be through line ministries (UNDP, 1994). There were delays in implementation due to the armed conflict. During the ceasefire initiated by the PA regime, the ERRP was revised and an ERRP for the North was prepared (Ofstad, 2002). Finally, towards the latter part of the PA regime, the government requested support for developing a new framework. This was a multi-donor affair, which also included the participation of non-party political actors. Coordination was by the World Bank, and UNDP administered the funds. Funds came from several donors. The outcome came to be known as the triple-R framework (The Framework for Relief, Rehabilitation and Reconciliation, 2000).

114 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Another important development with the expansion of humanitarian assistance was UNHCR’s involvement within the borders of Sri Lanka. UNHCR signed an agreement with the government on 31 August 1987, and opened an office in Sri Lanka. This agreement was renewed in 1997. UNHCR assisted in the transfer of Tamil refugees from India after the Indo-Lanka Accord. The first organised movement of Tamils from India took place in December 1987 (Clarence, 2007). Sri Lanka became one of the first countries where UNHCR could try out its new extended mandate to deal with internally displaced people within the borders of nation states affected by conflict. This new mandate of UNHCR meant that it was getting involved in transferring refugees to areas where there was an on-gong conflict. An interesting comparison to be made through research is between implementation of this new mandate of UNHCR in Sri Lanka, and the effectiveness of its mandate to protect Sri Lankan refugees in developed capitalist countries.

Some of the rehabilitation work included large-scale projects. An example is the World Bank-funded North-East Irrigated Agricultural Project, which aimed to rehabilitate around 400 irrigation schemes. Funds were channelled through the Ministry of Provincial Councils and Local Government to the North East Provincial Council (World Bank, 1999). This type of project followed the government making military gains and clearing an area from LTTE control. Then donor-funded projects came in to support the livelihoods of the population. This contributed to consolidating government control of the area.

The support for humanitarian work came from a range of donors. Even some of the donors who had reduced funding due to their concerns about the conflict were ready to assist humanitarian work. Quite a number of Sri Lankan non-governmental organisations, international non-governmental organisations and UN agencies were involved in implementing this work. An overview published in 2001 gives the names of thirty-two non-state actors, the bulk of whom are international NGOs, and four UN agencies getting funding for humanitarian work (De Silva, 2001).

It was much easier to legitimise humanitarian assistance in the debates that took place in aid agencies. As stated by Ofstad, ‘there was no question about the need

115 for humanitarian support to IDPs and other conflict affected communities’ (Ofstad, 2002, p. 167). Of course, humanitarian assistance had a beneficial impact on the victims of the armed conflict. This assistance was extremely important for the hundreds of thousands of civilians who were caught up in the middle of an armed conflict. But what needs to be considered is the relationship between the agenda for the consolidation of the territory of the Sinhala nationalist state and humanitarian assistance. There was often surprise within donor circles that the Sri Lankan state maintained the administrative structures and continued to pay government servants in war-affected areas. This happened even when the LTTE controlled an area, and sometimes government servants had to take and follow orders from the LTTE. In donor circles this was noted as exceptional compared to other conflict situations. But what should be noted is that nothing else can be expected from a state that was aiming to regain control of the territory where the LTTE held sway. It was necessary for the state to maintain its administrative structure in war-affected areas if the government was to maintain control over this territory.

One of the secret ingredients for sustaining the state structure, despite actual control of the territory by the LTTE at certain times, was the Tamil bureaucracy. This much- maligned bureaucracy has a long history of running the country in difficult times. When it comes to the North and East, this bureaucracy was involved in setting up a totally new administrative structure when the North East Provincial Council was set up. Soon the elected members of the council disappeared, but bureaucrats ran the institutions. It is this Tamil bureaucracy, employed within administrative structures at district and line ministries, that helped to maintain the Sri Lankan state in the war-affected area. Unfortunately, many donor agencies miss these nuances of the country because of the tendency to utilise categories like ‘failed state’, which is a generalisation across widely-different societies. The other contributing factor was use of the term ‘ethnic conflict’. One needs to consider why the Tamil bureaucracy maintained the state if it was a conflict between two homogeneous ethnic groups. In the context of an on-going armed conflict, humanitarian assistance was extremely useful in sustaining the state even in the war-affected area. The main concern the state had was that the LTTE would utilise humanitarian assistance for its own purposes. The Sri Lankan government could always use various formal and informal restrictions to make sure assistance did not benefit the LTTE. 116 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

While helping to sustain a Sinhala nationalist state amid an armed conflict fought at its highest intensity, some donor support tried to tackle policy reforms in critical areas. The most important one was support to projects aimed at promoting a bilingual state and strengthening non-party political activism which was legitimised through a liberal discourse of civil society. These are exceptions to the preoccupation with conflict. However, the primary reason for any kind of relative success in these areas was because donor supported projects were responding to longstanding initiative and struggles within Sri Lankan society.

Before the demand for a separate state became prominent, a key factor in relations between Tamils and the Sri Lankan state was the official language of the country. Prior to independence, there was a consensus among the elite that both Sinhala and Tamil should replace English as the official languages of the country. This signified two aspects: on one hand, the idea that swabasha − languages of the majority of the population – should replace the language of the colonial power as the official language. On the other hand, there should be equal status for both Sinhala and Tamil languages in independent Sri Lanka. This was called parity between Sinhala and Tamil in popular politics. Parity between Sinhala and Tamil has a great degree of symbolic value for Tamil politics. It goes some way to accept that there are two nationalities with equal status in the country. One of the noticeable features of South Asian nationalisms is the important role played by linguistic nationalism. With languages that have lasted for a long time, with their own rich tradition of literature, poetry, films and theatre, it is not surprising that undermining language rights can have a political backlash. There are many such examples in South Asia.

The agreement to give equal status to both languages was broken in 1956 when Sinhala became the only official language in the country. From this point onwards, there was a long-drawn out process by Tamils to win their linguistic rights. At the very beginning, the dominant discourse was what was called ‘reasonable use’ of Tamil. Due to agitation by Tamil politicians, the Tamil Language (Special Provisions) Act No. 28 was passed in 1958. But it took ten years to ensure that Tamil could be used as the language of administration in the Northern and Eastern Provinces. The 1978 Constitution introduced a category called national languages and Tamil

117 was designated as a national language. But it was only in the 13th Amendment to the constitution that Tamil was given the status of an official language. In 1988, the 16th Amendment to the constitution made provisions for Sinhala and Tamil to be languages of administration and legislation. An Official Languages Commission was established by the Official Languages Commission Act of 1991 to implement this policy. But there has been lot of legal wrangling over whether this amounts to equal status for the Tamil language. Anyhow, there is a long way to go before implementation of these provisions reaches a satisfactory level. Some donors supported this critical area, where there has been on-going agitation in Sri Lanka going back to the mid-1950s. In other words, this was an area of support that had a historical and social base within Sri Lankan society. Therefore, donor efforts could find traction within Sri Lankan institutions.

Finally, this period witnessed increased support from bilateral donors for non- party political actors engaged in protecting human rights, strengthening democratic institutions, media freedom and agitation for a political solution to the armed conflict. This is an area where donor support went counter to the interests of the ruling elite, and often there were serious disagreements between donors and the government. Once again, this donor support could find traction in the Sri Lankan society because donor assistance was responding to a longstanding tradition of politics of non-party political actors.

It is extremely difficult to understand the major political events in Sri Lanka if our minds get confined to political parties. There has always been an element of non- party political activism in the Sri Lankan political process. This is true if we look at the independence struggle, or a major political event like changes in 1956. In the struggle for independence, there was a lot of activism located within Sinhala Buddhist organisations, which had a large membership. The temperance movement is such an example. Similarly, the coming into power of the MEP in 1956 was supported by political activism outside political parties. Trade unions are another set of organisations that have been active in Sri Lankan politics for a long time.

118 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The earliest political response by non-party political actors to events relevant to our discussion was linked to the 1971 insurgency. The focus was mainly on human rights. The political outcome of the 1972 Constitution, the Tamil demand for a separate state, the outcome of the 1977 general election and the anti-Tamil violence that followed, intensified the response to questions on minority rights. The bulk of the work focused on four public policy areas: language, state sector employment, land settlement and education; The fraudulent referendum in 1982 by the UNP saw the beginning of work on monitoring elections; the anti-Tamil pogrom of July 1983 shifted the discourse significantly to reform of the centralised state, and many of these organisations supported the establishment of provincial councils; the violence in 1990 and repression by the UNP regime brought into focus human rights; the 1994 election when there was a real chance of defeating the UNP after seventeen long years, saw the coming of age of election monitoring, which has continued up to now; and the continuation of the armed conflict between the Sri Lankan government and the LTTE saw the introduction of a discourse of peace and conflict.

Media freedom has always been an issue for non-party political actors, mainly because of the presence of a Press Council established by the state, state control of the media and state take-over of the media. With the escalation of political violence and armed conflict, protecting media freedom became a main concern. The establishment of the Free Media Movement was one of the first efforts to support media freedom. The adoption of the Colombo Declaration on Media Freedom and Social Responsibility at a symposium on Media Freedom and Social Responsibility held in 1998 was an important event during this period. The Colombo Declaration covered institutional reforms that need to be considered in any discussion of media freedom in Sri Lanka. It critically reviewed constitutional provisions for media freedom, existing newspaper and press laws, how emergency regulations affect media freedom, necessary reforms for public broadcasting services and specific issues that affect the industry such as the high cost of newsprint. Finally, it had a section titled ‘Responsibilities of Media Institutions and Personnel – Voluntary Code of Ethics’, which set out guidelines for journalistic practice’ (www.slpi.lk/colombodeclaration).

119 These various strands of political activism continue even now, with various levels of effectiveness and a varying degree of support from donors. But they mustbe understood within the specific context of Sri Lankan society and politics. These organisations have a specific social base, and have links with various classes and political groups in society. Many of these organisations and individuals have links with regimes in power when they operate. Some of these are due to their class and ethnic background. Some of their achievements are precisely due to these links. This activism cannot be understood using the liberal notion of civil society. It is unlikely that such a civil society can play a significant political role. Whatever has been achieved by these organisations is due to their links with the political class and other influential social groups in society.

The bulk of early funding supporting the politics of non-party political actors came from non-governmental funding sources, especially from Europe. At one time these organisations operated in a coordinated fashion when supporting Sri Lankan organisations. From the 1980s and early 1990s, bilateral donors from Europe, Canada and the US began channelling funds to these activities, and incorporating these as part of their country strategy. This shift in funding led to a greater degree of incorporation of this political activism within the post-Cold War neoliberal political project supported by developed capitalist countries. The discourse within aid agencies began to characterise this as a strategy of strengthening civil society in a liberal sense. This reconstitution of the political agenda of these organisations made them important actors in a liberal peace project with international mediation. This will be the subject of the next chapter.

Economic crisis and negotiations with the LTTE with international support

The end of the rule by the PA regime was marked by several crises, which ultimately precipitated an economic downturn leading to direct negotiations with the LTTE. The first two years of the new millennium witnessed the coming together of several factors that deepened the crisis faced by the fragmented post-colonial Sinhala nationalist state. These factors were the status of the war, the state of economy and the stability of elected regimes. 120 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

There was no end to the armed conflict. The PA strategy of containing the LTTE militarily was not working. Instead of defeating the LTTE, what became prominent were the social and economic costs of the war. The PA government faced fresh general elections in October 2000. The PA was returned to power in an election marred by violence. The new government faced extremely difficult economic conditions from the very beginning. Much of this was due to what happened in 2000, which began to surface at the beginning of 2001. Kelegama (2001) noted that there were two economic shocks in 2000 that were not favourable to the economy: On the domestic front, the on-going war in the north-east of Sri Lanka escalated in April-May 2000 requiring the government to put on ‘war footing’ and jack-up the defence budget (increased from Rs. 48 billion in 1999 to Rs. 80 billion in 2000). On the external front, the oil price escalation since June 2000 (from US$ 19 per barrel in 1999 to US$ 28 per barrel in 2000) made severe inroads into the nation’s foreign exchange reserves (foreign reserves declined by US$ 596 million) (Kelegama, 2001, p. 2665).

The Central Bank was forced to introduce a flexible exchange rate system in January 2001 because it was not able to defend the currency due to dwindling foreign exchange reserves. This step was not adequate to meet the situation. In the following month, the government imposed a 40 per cent surcharge on all imports except a few essential items. This was followed by more measures to enhance revenue and cut expenditure, which were introduced through the first budget of the new government in March 2001. ‘The culmination of all these events was an IMF-led standby package of US$ 530 million which was announced in late-April 2001’ as pointed out by Kelegama (2001, p. 2665). It is interesting to note that in return for this assistance from the IMF, the Sri Lankan government agreed to curtail defence expenditure and finance defence expenditure without recourse to loans. But the IMF also agreed that defence expenditure in Sri Lanka is at a level comparable to other countries at a similar level of development (Daily News, 2001). This is a rare occasion when the Letter of Intent that agreed to IMF loan conditions mentioned defence expenditure in Sri Lanka.

121 However, IMF support could not rescue the economy in 2001 as the war, severe drought and the impact of global recession took a toll on the economy. The year 2000 saw a reversal of fortunes on the battlefront for the Sinhala nationalist state. The most significant event was the LTTE capturing Elephant Pass, a small strip of land that connects the Jaffna peninsula to the mainland, in April 2000. This threatened the lives of thousands of soldiers stationed in the Jaffna peninsula, and led to a panicked response by the government. Indeed, the government was rattled to such an extent that it asked for help from India to evacuate soldiers from the Jaffna peninsula. The economic impact of the war also took a turn for the worse with the LTTE attacking the only international airport at Katunayake on 24 July 2001. This was one operation where the LTTE’s primary objective was to inflict damage on the economy. The assault on the airport was an attack on a nerve centre of the more liberalised economy that linked Sri Lanka with global capitalism. On top of this, the economy was affected by a drought. Thus, three factors - war, global recession and drought - took their toll on the economy in 2001. In 2001, the economy contracted to the tune of 1.5 per cent of GDP (see Table 4.5).

Table 4.5 Selected economic indicators (1999 – 2003)

1999 2000 2001 2002 2003

GDP (% change) 4.3 6.0 -1.5 4.0 5.9 Budget Deficit (% GDP) -7.5 -9.9 -10.8 -8.9 -8.0 Government Debt (% GDP) 95.1 96.9 103.2 105.4 105.9 External assets 5.2 3.5 4.5 4.9 5.8 (months of same year of imports) Debt service ratio 15.2 14.7 13.2 13.2 11.6 (% export of goods and services) Source: Annual Reports of the Central Bank of Sri Lanka, 1999-2003

It was in this context of economic crisis that the PA government accepted an offer by the Norwegian government to play the role of mediator in opening negotiations with the LTTE in February 2000. Subsequent events showed that it was a step that the government took reluctantly. For example, for some time there was a discussion as to whether Norway was a facilitator or mediator. The government regularly insisted

122 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka that Norway’s role was that of a facilitator and nothing more. Looking back now, it was certainly a bizarre, if not humorous, discussion. The status of the economy did not give much choice to the ruling classes in Sri Lanka. It certainly played a role in this somewhat reluctant decision.

Towards the end of 2001, the instability of the regime joined an escalating war and deteriorating economic situation to deepen the crisis facing the Sri Lankan state. The PA government, which was a coalition of parties, was shaky from the beginning. A number of events led to the departure of one of the coalition partners, the Sri Lanka Muslim Congress (SLMC), and some members of the government, led by two senior ministers, crossed over to the opposition. As a result, the PA government collapsed within a year, and faced fresh elections in December 2001.

The election in December 2001 was won by a coalition of parties called the United National Front (UNF) led by the UNP. Both the war and the status of the economy figured prominently in the election campaign. The UNF campaigned for starting direct negotiations with the LTTE. It argued that this was necessary to revive the economy. The results of public opinion polls showed that people had more confidence in the UNF’s capability to manage the economy than the PA. Given what had happened to the economy under the PA, this was not surprising.2 Hence, the UNP’s earlier performance in managing the economy played a significant role in the UNF’s victory in December 2001.

2 The most important poll carried was out by Org-Marg Smart. The results of these polls were regularly published in the Sunday Times. See, for example, Sunday Times, 11 November 2001.

123 Table 4.6 Performance of the UNP in PR elections

% of valid Members elected National Total votes from electoral List districts 1989 47.6 110 15 125 1994 41.9 81 13 94 2000 38.1 77 12 89 2001 43.2 96 13 109 Source: Computed from data from the Department of Elections, Government of Sri Lanka

Table 4.6 shows the UNP’s performance as the UNF in the 2001 election, with 43.2 per cent of the total votes polled. This was the best achievement under a PR system, if the 1989 elections that were held under conditions of extreme violence is left out. What is more, the UNF outperformed the PA in seventeen of the nineteen electoral districts where these two major parties could get a majority. The UNF secured bonus seats in these seventeen electoral districts. This was a complete reversal of the result a year earlier. With this election victory, the UNP was ready for a qualitative new step in securing the Sinhala nationalist state and shifting the task of promoting capitalism to a new level.

124 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Chapter 51

Foreign aid and the collapse of neoliberal peace

This chapter covers the high point of the neoliberal political project in Sri Lanka. Internally it was led by the UNP. UNP strategy included a ceasefire agreement with the LTTE with Norwegian mediation, efforts to push economic reforms for capitalist transition to a qualitatively new level, and mobilisation of the support of Western capitalist countries, EU and Japan, for this purpose. A special term – peace process – was coined by the supporters of this process to denote direct negotiations with the LTTE. All these elements taken together constituted a neoliberal strategy of capitalist development and ensuring stability in Sri Lanka.

Donors and foreign aid were an integral part of these efforts. There has never been an episode in Sri Lankan history where donors played such a pivotal role. They not only funded the whole strategy but were key actors from the time the ceasefire agreement was signed.

The direct negotiations between the regime and the LTTE collapsed within a short period, and the electoral defeat of the UNP in April 2004 effectively ended this strategy. The reasons for the collapse were the internal contradictions of the whole process. The main actors had many objectives in addition to peaceful reform of the Sri Lankan state. Reviving the economy was the key, perhaps most important, objective of the UNP strategy from the beginning. The UNP was also trying to implement three politically difficult tasks at the same time, without even controlling the presidency or having the support of the president. The fundamental concepts underlying the ceasefire agreement signed with the LTTE were a significant shift in the political position of the Sinhalese ruling class. Securing political support for this, the first task, was always going to be difficult. On top of this, the UNP was trying to implement a massive economic reform agenda. Finally, the strategy involved extensive internationalisation, which had a contradictory impact.

1 This chapter draws heavily from the following article; Sunil Bastian, 2011. Politics of market reforms and UNF-led negotiations, in Jonathan Goodhand, Jonathan Spencer and Benedikt Korf (eds.) Conflict and Peacebuilding in Sri Lanka, Caught in a peace trap? London: Routledge. 125 For the LTTE to maintain control over the area where they had a military presence, gaining control over aid money and achieving international recognition was crucial. There were also contradictions among international actors. While some supported the idea of treating the LTTE and the Sri Lankan government on a par with each other, as reflected in the CFA, for others the LTTE was a terrorist group challenging the Sri Lankan state. While the latter opinion agreed that there had to be a political solution to Sri Lanka’s conflict, at the end of the day, the LTTE was expected to disarm and enter mainstream politics.

Finally, it is also necessary to explain the defeat of the UNP in the April 2004 general election, which almost reversed their 2001 performance. This reflected a failure on the part of the UNP to maintain the support of the Sinhala electorate. Getting the support of the Sinhala electorate to the CFA and extensive internationalisation was difficult enough. This was compounded by the negative backlash of the economic reform programme. What is more, unlike previous UNP regimes, this regime did not have any credible social policies that could secure the support of the Sinhala electorate. This certainly contributed to the defeat of the UNP.

The collapse of negotiations was a setback to the process of state reform begun with the 13th Amendment, and efforts to improve the provisions of the 13th Amendment. This was replaced with direct negotiations with the LTTE. The collapse of these negotiations left little chance focus on the 13th Amendment and its improvements. But it also had another outcome – it paved the way for the election of Mahinda Rajapakse, supported by an extreme version of Sinhala nationalism. The ultimate outcome of neoliberal peace was the coming into power of a regime with a Sinhala hegemonic ideology, which successfully embarked on a military strategy to consolidate control over the territory of Sri Lanka.

126 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

UNP strategy

The UNP, which led the coalition called the United National Front (UNF)2 that won the 2001 general election, was headed by a new generation of leaders, whose ideas differed significantly from those of the earlier UNP leaders. Perhaps the most important factor was the greater degree of hope the new leaders placed on the structures of global governance, dominated by neoliberalism and Western countries, solving Sri Lanka’s problems. The UNP strategy was spelt out by the prime minister in his first policy statement to parliament in January 2002, even before the ceasefire agreement with the LTTE had been signed. The key elements of this were responding positively to the ceasefire announced by the LTTE in December 2001, carrying out an extensive economic reform programme, and mobilising international support for both these objectives (Daily News, 2002).

However, it needs to be kept in mind that the UNP was embarking on this new strategy without even controlling the presidency. Although the UNP won the general election in 2001, the president was still Chandrika Kumaratunga − who was from the PA. Although the Sri Lankan political system allows the possibility of the president being from one party, and the prime minister and cabinet from another, up until that time this had happened only very briefly. But the presidential election was three years away when the UNP launched its strategy. Hence the relationship between the president and prime minister was bound to become a key factor in the success of the UNP strategy.

Soon after winning the election, with the help of Norwegian mediation, the UNP government signed a ceasefire agreement with the LTTE on22 February 2002.3 Although the head of the state was the president, the prime minister was the signatory on behalf of the Sri Lankan government. The agreement had some elements that were a radical departure from political opinions hitherto held by Sri Lanka’s political

2 The UNF consisted of the UNP, Ceylon Workers Congress, Sri Lanka Muslim Congress, Up- Country People’s Front and Democratic People’s Front. The UNP, being the key actor in the coalition, determined most of the policies. The rest of this chapter uses UNP to denote the ruling regime. 3 See Sunday Observer, 24 February 2002, for the full text of the agreement.

127 leadership. It accepted that the LTTE was in control of certain areas of the country, and acknowledged the presence of two armies controlling different parts of the territory. Sri Lankan armed forces were expected to ‘perform their legitimate task of safeguarding the sovereignty and territorial integrity of Sri Lanka without engaging in offensive operations against the LTTE’ (Sunday Observer, 2002). As stated by one of the supporters of the ceasefire agreement, ‘The Cease Fire Agreement signed in February 2002 is framed in such a way that the parity of status between the two parties is acknowledged’ (Rupesinghe, 2006, p. xvii; emphasis in the original text). The empirical argument for this position was based on the idea that that there were already two armies in the country, and that the LTTE was in control of certain parts of the country. Some writers have extended this analysis to assert that there was already a state in the making in the areas controlled by the LTTE (Stokke, 2006). The agreement was seen as accepting a ‘reality’ that was out there. The supporters of this agreement also ‘assumed that through a process of constructive engagement … the LTTE will change its character and will transform itself into a democratic entity’ (Rupesinghe, 2006, p. xvii). Hence it was believed that treating the LTTE on equal terms with the Sri Lankan state would not only ensure the stability needed for economic reforms, but that the LTTE itself would get transformed into something more desirable.

On the other side the LTTE believed that they had reached status of parity in the battlefield, and they were entering into negotiations as a party that controlled part of the territory of Sri Lanka. This is confirmed by some statements of the LTTE leadership. For example, when there were attempts to check the activities of the LTTE in the sea, Tamilchelvam, who was in charge of political aspects of the LTTE, asserted ‘[we] entered into the Peace Process based on the status quo achieved in the battlefield in our country (viz. Tamil Eelam). Nobody has the right to pass judgement on the sovereign rights of our access to the adjacent seas and airspace of our homeland’ (Tamil Times, 2006).

Never had a government of Sri Lanka accepted that a rebel group controlled parts of the country, or conferred legitimacy to it by signing such an agreement. Not only that, the rebel group had the freedom to hold territory, keep their arms and

128 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka engage in political activities in the areas under army control. Several clauses defined what each army could and could not do to maintain the status quo while the talks continued. Other clauses stipulated that each side must give notice of 14 days if they wanted to withdraw from the agreement (Sunday Observer, 2002). Finally, a ceasefire monitoring mission was established, composed largely of representatives from Scandinavian countries. Hence the agreement had many features of an inter- state agreement.

One interesting aspect that came to light after the collapse of negotiations with the LTTE was how the CFA was drafted. In a speech made in Washington on 4 December 2005, the person who headed the government peace secretariat at that time remarked that the haste with which the CFA was signed was a major reason for its failure. This haste resulted in excluding any consultation with key actors, such as the president and commanders of the armed forces. Elaborating on what happened while drafting the CFA, he revealed that ‘the Norwegian side insisted that their text, which had the benefit of inputs from the LTTE, had the best chances of being accepted by that organisation, meaning that they did not wish to see any tinkering with the text’ (Goonetilleke, 2006, p. 305). In other words, the CFA was very much a Norwegian creation, and they were in a hurry to get signatures on their text. Therefore, it is no surprise that it had elements that undermined the structure of the Sinhala nationalist state.

A principal reason for the UNP leadership agreeing to sign an agreement with the LTTE that gave the LTTE a status on par with the government of Sri Lanka was the fate of the economy. The economic crisis of 2001 prompted the ruling class to take unprecedented measures to put the economy back on track. Clearly, the armed conflict was undermining the new period of capitalist development. As stated by a leading economist, who seems to have been an adviser or had intimate knowledge of the UNP strategy, the new leadership of the UNP was convinced ‘that peace with the LTTE was the only way to revive the economy and to attract foreign direct investment (FDI) again’ (Kelegama, 2005, p. 431). The UNP also hoped that the revival of the economy would place them at an advantage in dealing with the LTTE. This was based on the idea that the so-called economic dividend generated by the

129 revival of the economy would undermine the Tamil people’s support for the LTTE, and thereby place the UNP in a better position to negotiate (Kelegama, 2005). As argued by a keen observer of the negotiation process, the ultimate expectation of the UNP government ‘was to make the armed struggle for secession irrelevant through economic and social consequences of integrating Tamil society in the North and East to the rest of the national economy through extending free-market reforms’ (Uyangoda, 2011, p. 24). This pious hope of dealing with issues around politics of identity with material goods was widespread among policymakers, economists, and those who had an apolitical notion of development.

The UNP’s economic reform that accompanied direct negotiations with the LTTE was spelt out in a document titled Regaining Sri Lanka. The basic ideology of the strategy was spelt out very early, when it stated, ‘Sri Lanka began to liberalize its economy in 1977. Since then, it has made considerable progress. However, in recent years that progress has slowed, if not come to a virtual halt compared to many other countries’ (Government of Sri Lanka, 2003, p. 1). Therefore, the strategy was to accelerate the process of privatisation, introduce legal reforms to liberalise labour markets and land markets, and reform of the civil service. This was expected to: increase employment – a target of two million jobs was mentioned, overcome the public debt crisis, mobilise resources for construction, and increase income levels through high productivity and investment. It was a continuation of the standard formula of structural adjustment, but with much more determination, while at the same time embarking on a difficult political process of negotiations with the LTTE.

Regaining Sri Lanka had all the hallmarks of a document written by a group of technocrats. There is a lot of evidence to show it was drawn up by a group of confidants of the prime minister housed in the newly created Ministry of Policy Development and Implementation. This ministry was under the prime minister. It spelt out the direction of economic reform in a 221-page document. Its annex was 110 pages long, and gave details of implementation. It went into great detail about various steps that must be undertaken to reform the economy. The immediate objective was to rescue the IMF standby agreement (SBA), which had been suspended. The bigger aim was to secure a Poverty Reduction and Growth Facility (PRGF). At that

130 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka time, securing a PRGF reflected overall approval by multilaterals that the country’s economic policies were sound. In order to secure a PRGF, the government had to submit a Poverty Reduction Strategy Paper (PRSP). From 1999, this became a ploy of multilateral aid agencies to legitimise liberal economic reforms. The PRSP was supposed to be documents generated through discussion and participation with various actors in society. The trick was to use the new orthodoxy of aid agencies, participation, to legitimise these reforms. But the government submitted its Regaining Sri Lanka document as the PRSP (Venugopal, 2008). The government managed to secure a Poverty Reduction Credit Support (PRSC) with the World Bank, and an agreement was signed with the IMF for the much sought-after Poverty Reduction Growth Facility (PRGF). As stated in the Central Bank’s Annual Report (2003), these approvals were an endorsement of the country’s economic policies, and helped to secure concessionary assistance from other donors and to encourage foreign investors (Central Bank of Sri Lanka, 2003).

Unlike the Premadasa or Chandrika regime, Wickremasinghe’s UNP did not put forward any new ideas targeting the socially marginalised. The ruling classes had earlier used these programmes to manage the relationship with the general population while they carried out the many other reforms needed for capitalist development. However, despite the very contentious political strategy of dealing with the LTTE, and extensive economic reforms planned, the UNP leadership did not think it was necessary to win over the majority Sinhala population with such programmes.

With the objective of achieving 10 per cent growth, the UNP embarked on a series of policy measures to stabilise the economy and bring about major structural reform. On the stabilisation side, measures were undertaken to improve the revenue position, as well as curtail expenditure. Measures to curtail expenditure consisted of suspending recruitment to the public sector, avoiding general wage and pension increases, reducing the provisions for defence expenditure, better targeting of welfare programmes, limiting resource allocation for unforeseen and unclassified expenses and controlling provision of funds for rupee funded non-priority capital expenditure (Central Bank of Sri Lanka, 2003, p. 28). 131 In addition, there was an increase in utility charges, and reduced fertiliser and petroleum subsidies (Kelegama, 2005). The revenue side included expanding the number of goods brought under VAT, the introduction of a single VAT rate, and a tax amnesty to expand the revenue base. The intention of new laws, such as the Fiscal Management (Responsibility) Act (FMRA) and Welfare Benefit Law, were to give a legal basis to some of these reforms. The government fast-tracked thirty-six items of legislation to fulfil conditions for securing PRGF within six months (Venugopal, 2008).

The government also had plans for extensive privatisation. This included 100 petrol stations belonging to the Ceylon Petroleum Corporation, the trading venture Co- operative Wholesale Establishment, and leases of an oil tank farm. Plans were also drawn up to totally privatise Regional Transport Boards. According to the 2003 Central Bank Report, the government had plans to merge four enterprises, restructure and reform 51 more and liquidate 15 (Central Bank of Sri Lanka, 2003). In addition, the government took steps to restructure major state-owned institutions like the Ceylon Electricity Board, railways, and to establish a Revenue Authority. Through these measures, the UNP, with support of the multilateral agencies, was intending to implement reforms that had been initiated in the early 1990s .

Steps were taken to go ahead with the much-delayed retrenchment of state employees. A civil service reform programme was announced in the 2004 Budget, under which public sector employment would be reduced by 30 per cent during the 2004-2006 period. The target for 2004 was 10 per cent. A voluntary retirement scheme was to be introduced to reduce the number of employees in several state-owned enterprises. Plans also included stopping renewal of contracts of public servants between the ages of 55 and 57. During the brief period that the UNP was in power, the public- sector workforce shrank by 10.5 per cent (Venugopal, 2008).

Another important area of reform was in labour law – a major demand of the private sector. Labour laws in operation at the time made it difficult for the private sector to hire and fire workers as they wished, or to reorganise the labour process when necessary. As stated in the 2003 Central Bank Report, major steps were initiated in 2003 to address the long overdue labour market 132 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

reforms. Accordingly, amendments to the Termination of Employment and Workmen Act (TEWA), Industrial Dispute Act (IDA), Industrial Dispute - Hearing and Determination Proceedings Act (IDA-Hearing) and Employment of Women, Young Persons and Children Act (EWYPCA) were passed in 2003, enhancing flexibility and predictability in the labour market (Central Bank of Sri Lanka, 2003, p. 26). Finally, the government undertook several measures to further liberalise the financial sector.

The third element of the UNP strategy was a conscious effort to bring in a wider network of international actors to supplement the Norwegian role in negotiations. The fact that the prime minister considered international opinion a key factor in guaranteeing peace in Sri Lanka was clear from the policy statement to parliament cited above. He repeated his belief in the so-called international community so often that one gets the impression he expected a solution to come from external actors. Speaking on the conflict, he said, The concern of India as well as donor countries has been drawn towards this problem more than ever before. They steadfastly advocate a political solution to the war. In this context, the centre of attention is international opinion. A solution to the North-East problem will be through international opinion. We must focus our attention accordingly. In this backdrop, if international opinion is with us we could protect the territorial integrity and unity of our nation (Daily News, 2002). The same belief in the international community was repeated when he addressed the nation after the donor conference held in Tokyo in June 2003 (Daily News, 2003a).

In addition to Norway, this strategy brought in the USA, Japan and EU as co- chairs of the negotiations. In doing so, the UNP managed to secure involvement in the negotiations of the only superpower, the largest bilateral donor to Sri Lanka, and one of its major trading partners. The UNP leadership managed to secure the support of the US government at a level never achieved before. Richard Armitage, the Deputy Secretary of State, was actively involved, and took almost a personal

133 interest in the success of the negotiations.4 Japan’s decision to become a co-chair of the negotiations, to appoint a high ranking Japanese diplomat like Ambassador Yasushi Akashi as the Japanese representative to the co-chairs and to host the Tokyo donor conference, demonstrated Japan’s readiness to support the UNP strategy. The third international actor, the European Union, had been playing a role in Sri Lanka’s political issues for some time. Apart from regular statements demanding the conflict be settled through negotiations, the EU had regularly sent election monitoring teams to Sri Lanka. Moreover, EU countries were not only important trading partners, but also brought together a significant collection of donors. The UNP’s internationalisation strategy also included India – doing otherwise would have been foolish. The path that the UNP embarked upon differed from the position held by India, which was for strengthening the process of devolution through the 13th Amendment and dealing with the LTTE militarily. In this context, it was necessary not to antagonise India, and to keep India regularly informed of the negotiations. India was also seen as an important economic partner.

Hegemony of liberal peace

The period of direct negotiations between the UNP-led regime and the LTTE with Norwegian mediation was the high point of liberal peace in Sri Lanka. The term ‘peace process’ distinguished this round of negotiations from what went on before. The foundation of liberal peace was economic reform that would strengthen capitalist development. The other aspects involved governance reform, strengthening the rule of law, security sector reform, and a prominent role for non-state actors identified in the liberal discourse as civil society. There was the tantalising possibility of Sri Lanka becoming a success story for the new direction in aid policies, which was trying to promote capitalism and resolve conflicts through mediation of Western powers. This is also the period in contemporary Sri Lankan history in which we see the dream of donor agencies becoming a key player in transforming the entire Sri Lankan society based on liberal principles. What happened was another matter.

4 During negotiations, the author participated in a video conference held at the USIS with the participation of the former US ambassador to Sri Lanka, Teresita Schaffer. Currently she works for the Centre for Strategic and International Studies in Washington. At this meeting, Schaffer confirmed that the April meeting held in the US was a tremendous success for Sri Lanka. Although there were only about 70 participants from various US agencies attending the meeting, she said their interest in the negotiations134 was serious. Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The meeting of minds between the government and aid agencies on the economic agenda was such that the Country Strategy Paper of the World Bank openly praised the regime in power. For example, the opening page of the executive summary of Sri Lanka. Country Assistance Strategy of the World Bank Group for 2003-2006 stated that on the political front a private sector-oriented government led by Prime Minister Ranil Wickremasinghe had ‘assumed control and has moved forward decisively in starting to implement a comprehensive reform program’ (World Bank, 2003, p. 1). Therefore, it was another opportunity for multilaterals to promote the stalled economic reforms.

The overall country strategy of the World Bank focused on peace, growth and equity (World Bank, 2003). Under the umbrella of peace, the focus was on rehabilitation and reconstruction in the North-East. The World Bank strategy also touched on issues relating to ethnic relations. The strategy hoped to use an on-going education project to (i) develop English as a way of eliminating language based segregation, while encouraging Sinhalese and Tamil as second language – i.e. native Sinhalese speakers to learn Tamil and native Tamil speakers to learn Sinhalese; and (ii) formulate curricula, textbooks and pedagogic approaches that foster pluralism, tolerance and social cohesion (World Bank, 2003, p. 18). These ideas once again reflected the World Bank notion that the problem was in society, and had nothing to do with the state that they were supporting. Second, there is the elitist idea that learning English can be the answer. These beliefs show a lack of understanding of nationalism in general, and linguistic nationalism in particular. It also forgets that the country was led into armed conflict by an elite that was educated in English and communicated with each other in English.

The ADB was still very conservative and mainly development-oriented, as shown by ADB country strategies (ADB, 2000; ADB, 2003). There was very little effort to look seriously at the impact of its interventions on conflict. These two agencies, together with the UN, carried out what was called a Needs Assessment of the war-affected areas. The World Bank became a custodian of a North-East Reconstruction Fund. But it never became operational. Basically, the ideas were no different from what

135 had gone before when it came to conflict-affected areas, except in this situation, the multilaterals expected to invest in these areas more in the absence of armed conflict. The strategy that was already in place to ensure the presence of the Sinhala nationalist state in the war-affected areas was further strengthened.

The new departure for both the World Bank and the ADB was engaging with the LTTE. The World Bank was the preferred organisation to be in charge of the North- East Reconstruction fund for the LTTE. The ADB, which hitherto had been a donor reluctant to deal with conflicts and had very few engagements in the North, was ready to fund reconstruction and rehabilitation. In a dramatic gesture of ADB support for the negotiations, the ADB president travelled to Killinochchi and met members of the LTTE political wing, pledging support and more assistance for rehabilitation of the North-East.

In the case of Japan, the Country Assistance Program published in April 2004 included peace as a major objective. Japan became a co-chair of the peace process and hosted the Tokyo donors conference. It is interesting to note that in a speech spelling out the objectives of Japanese Overseas Development Assistance (ODA) in the context of a new foreign policy, the Japanese prime minister mentioned Sri Lanka along with Aceh as places where Japan will contribute to peace and nation building (Japan Times, 2003). The 2004 Country Assistance Programme was critical of the basic assumptions of Japanese aid policies in the past. It pointed out that ‘Japan has basically maintained a politically neutral stance regarding the domestic political affairs in recipient countries’ (Japan’s Country Assistance Program for Sri Lanka, 2004, p.3). It went on to say that in designing aid programmes, issues such as the settlement of the civil war and the resolution of ethnic and social problems were separated from development issues and treated as internal political problems that should be handled by the recipient government itself. These problems were not considered as development issues that should come under purview of Japan’s economic cooperation (Japan’s Country Assistance Program for Sri Lanka, 2004, p.3).

136 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

This fundamental conceptual framework made it extremely difficult for Japan to adjust its programme when the recipient state became a party to a conflict or violated rights of its own citizens. These stayed outside the purview of the ODA discourse.

Pointing to the ceasefire agreement that had been signed, the 2004 Country Assistance Program considered ‘the consolidation of peace to be an indispensable part of the assistance program for Sri Lanka, and this recognition turns a new page in the history of Japan’s assistance to Sri Lanka’ (Japan Country Assistance Program for Sri Lanka, 2004. p.4). The main outcome was the addition of peace and conflict as a new area of assistance, while maintaining traditional areas of development assistance. Under the peace heading, the principal assistance was to the North-East for immediate humanitarian and rehabilitation assistance, and assistance for nation building – which had the objective of long-term reconciliation.

The other bilateral donors, who had been more concerned with the impact of conflict in Sri Lanka before the multilaterals and Japan, were enthusiastic supporters of negotiations, hoping it would lead to a resolution of the conflict. All their programmes included some elements of liberal peace, such as democracy, human rights, security sector reform, conflict resolution and peacebuilding. Depending on the prevalent policy discourse within their organisation, each donor adapted these ideas to fit into the work plan. Keeping with the ideology of neoliberal peace, funding non-state sectors − either local or foreign − was popular. They became key actors in implementing donor policies. Assistance to rehabilitate the North-East was also an attractive area. This support included some element of peace, which really meant trying to secure the support of victims of war in ensuring stability. Some donors had a wait-and-see attitude, to see how negotiations progressed before reorganising their programmes.

Although some efforts to make foreign aid conflict sensitive began in the 1990s, its heyday was during negotiations with the LTTE with Norwegian mediation. Together with neo-liberal economic reforms, the hegemony of conflict discourse formed the twin pillars of continuing with capitalist transition begun in 1977 and ensuring the security of the Sri Lankan state. As will be seen in the discussion that follows, this

137 round of negotiations with the LTTE did not make any dent in the most important question of reforms of the centralised state and issue of the hegemony of Sinhala nationalism.

The initial step was to make donor-supported projects conflict sensitive. Captured under the phrase ‘do no harm’, a whole industry developed mapping conflicts, incorporating these into project planning, training on conflict sensitivity, and improving the ability of implementing organisations to deal with conflicts. But there were also efforts to make the entire aid programme of a donor conflict sensitive. An example is the Peace and Conflict Impact Assessment of the Swedish Development Corporation, published in 2001 (Bush, 2001). This exercise is closely linked to peacebuilding, defined ‘in its broadest sense to refer to those initiatives which foster and support sustainable structures and processes which strengthen the prospect for peaceful coexistence and decrease the likelihood of the outbreak, reoccurrence or continuation of violence conflict’ (Bush, 2001, p. 6).

There were a number of reports trying to change the entire aid industry operating in Sri Lanka to be conflict sensitive, or to make it contribute to resolving the conflict. For example, Sri Lanka was a case study of an exercise carried out by the Development Assistance Committee of OECD (Bush, 1999). The central point of this study was to query the incentives and disincentives that development assistance could generate in conflict situations to promote peace. Another example are the exercises in Strategic Conflict Assessment (SCA). There were several SCAs on Sri Lanka. The firstone was carried out in April 2000 (Goodhand, 2000). In the conclusions of this report, donors were classified into three categories as those working ‘around conflict', 'in conflict' and 'on conflict'. According to this categorisation, the first group ignores the conflict, the second regards conflict as an issue and takes it into account in their planning, and the third group tries to do something actively to reduce or manage conflict. The final recommendations of the study had the objective of moving donors towards a strategy of 'working on' conflict. Recommendations covered several areas under the following headings: 'integrating conflict sensitivity, a politically informed approach, comprehensive and co-ordinated strategy and long term strategic engagement' (Goodhand, 2000, p. 65). In the approach adopted in the report,

138 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka multilaterals engaged in strengthening a state continuing with capitalist transition while engaging in an armed conflict were classified as working around the conflict. In other words, a key player that supported the centralised Sinhala nationalist state while it was continuing with the armed conflict was considered to be working around conflict.

A new Strategic Conflict Assessment, supported by DFID, the government of Netherlands, Swedish Sida and the World Bank, was launched during negotiations with the LTTE with Norwegian mediation. This was a much bigger exercise, and was coordinated by The Asia Foundation (Goodhand and Klem, 2005). It came out with a range of recommendations on how foreign aid could contribute to the success of negotiations. It also had reports on specific issues that had a relevance to the conflict (Goodhand and Klem, 2005). As stated by two of the insiders in aid agencies, ‘generally donor collaboration and information sharing in Sri Lanka improved hugely between 2000 and 2005’ (Burke and Mulakala, 2011, p. 166).

A general picture that emerges from these efforts is how much more had to be done by aid agencies to respond to Sri Lanka’s conflict. For example, a dominant message that comes out from the synthesis of findings of seven studies published in 2002 is the ineffectiveness of foreign aid as a means of resolving the conflict. Various reasons are given, such as a weak knowledge base, non-inclusion of a wide range of actors in formulating policies, which in turn demands a high degree of coordination, and lack of policy coherence (Klem, 2002). Whether aid agencies with their own political agendas focusing on their specific mandates in Sri Lanka could overcome all these limitations is another question.

Another key idea prevalent during this period was the expectation that a set of organisations that liberal peace identified as civil society would become a main actor in the success of negotiations and reform towards a peaceful Sri Lanka. Many of these organisations received external funding for this purpose. Analysis within the liberal peace tradition has identified the limitations of these organisations as an effective force in delivering peace (Orujela, 2004). However, if one looks at these organisations within a framework of non-party political activism of Sri Lanka, the

139 role of these organisations has been much more complex and cannot be understood within the discourse of liberal peace. Their politics was contradictory. Sometimes the very fact that they were ready to accommodate the murderous politics of the LTTE in their enthusiasm to become peacemakers discredited them. It is also clear they could not become a significant political force on their own, as expected by the civil society thesis of liberal peace. But one thing that was clear during this period was the emergence of organisations and individuals both in Sri Lanka and abroad that understood working for peace merely to be implementing donor-supported projects, rather than being part of a Sri Lankan political movement working towards a transformation of the state. Many of these initiatives lasted only while the funding was available.

The flipside of the entry of the discourse of conflict sensitivity and conflict resolution was discouragement of conditionality, or even complete withdrawal of donor funding to states involved in conflicts. This conditionality approach underwent a significant transformation when conflict resolution became a major preoccupation of foreign aid. From then onwards, it was not a simple case of making foreign aid conditional on conflict or peace, but looking for ways and means through which aid agencies themselves could contribute to conflict resolution. At least in the case of Sri Lanka, this also contributed to masking fundamental ways through which donors were engaged in supporting capitalist transition and promoting security of the state.

A high point of donor support to the negotiations was the donor conference held in Tokyo in June 2003, with the participation of fifty-one countries and twenty- two international organisations. Among the participants were the prime minister of Japan, the US deputy secretary of state, representatives of the president of the European Union and European Commission, and the foreign minister of Norway. The conference concluded with a ‘Joint Declaration on the Reconstruction and Development of Sri Lanka’. Donors gave an indication of the support that they were ready to provide. The donor agencies and international organisations participating in the conference agreed ‘to cumulative estimated amount in excess of US$ 4.5 billion over the four-year period 2003-2006’ (Joint Declaration on Reconstruction and Development of Sri Lanka, Tokyo, 2003, p. 3). The bulk of the commitment

140 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka came from donors who had been already prominent in providing aid to Sri Lanka. As pointed out by the country director of the World Bank, ‘out of US$ 4.5 billion that was committed, US$ 3 billion came from three agencies, that is the World Bank, the Asian Development Bank and the Japan Bank for International Corporation, and if you add US$ ½ billion that was committed by the IMF, you have US$ 3 ½ billion out of US$ 4 ½ billion that was committed by four international organisations’ (Financial Times 2004)

The Tokyo donor conference spelt out what came to be called a transition strategy for Sri Lanka.5 The broad philosophy was that this transition strategy should include elements of liberal peace, such as governance reform, security sector reform and rule of law, in addition to traditional areas of economic reform and reconstruction. The purpose of economic reform was, of course, to strengthen the process of capitalist transition led by the private sector. The rest shows all the aspects of liberal peace that hoped to transform Sri Lanka.

Given this political commitment of all the donors to the UNP strategy and liberal peace, the flow of foreign aid increased (Figure 5.1.). The increase after 2004is partly due to assistance that came to Sri Lanka because of the tsunami in December 2004. As shown in Table 5.1, the total amount of aid increased from Rs.17.2 billion in 2002 to Rs.61.2 billion in 2003 − an increase of nearly 350 per cent. This aid flow supported the UNP government in its management of the economy, especially in deficit financing. The utilisation of foreign sources of finance to cover the budget deficit increased from 0.5 per cent GDP in 2002 to 2.9 per cent GDP in 2003 − an amount larger than estimated in the 2003 budget (Central Bank of Sri Lanka, 2003).

5 This information is taken from a note prepared by a bilateral donor during a discussion to develop a common donor strategy. Personal communication.

141 Table 5.1 Selected indicators of foreign aid 2000-2003 (in LKR mln)

2000 % 2001 % 2002 % 2003 % Loans 10,070 66.2 19,396 77.9 10,113 58.8 53,213 87.0 Grants 5,145 33.8 5,500 22.1 7,079 41.2 7,956 13.0 Total 15,215 100.0 24,896 100.0 17,192 100.0 61,169 100.0 Foreign debt 43.1 45.3 45.6 47.9 (% GDP) Deficit financing 0.4 1.4 0.5 2.9 foreign sources (% GDP) Source: Annual Reports of the Central Bank of Sri Lanka, 2000-2003.

Figure 5.1 Net receipts of development assistance 2002-2005 (in US$ mln)

Source: Annual Reports of the Central Bank of Sri Lanka, 2002-2005

The utilisation ratio of foreign assistance also improved. It increased to 21 per cent in 2003, compared to 13 per cent in 2001 and 15 per cent in 2002. This was partly because the prime minister took a personal interest in improving aid utilisation by bringing the External Resources Department, responsible for aid agreements and negotiations with donors, under the jurisdiction of his office. He also created a special

142 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka committee to oversee the mobilisation and utilisation of aid. The increased flow of aid also helped to adjust the balance between loans and grants. The proportion of grants in aid flows increased from 33.8 per cent in 2000 to 41.2 per cent in 2002. Correspondingly, the proportion of loans decreased from 66.2 per cent to 58.8 per cent for the same period.

Collapse of negotiations

The UNF’s negotiation strategy was quite different from what had gone before. It was what conflict resolution experts describe as a step-by-step approach. The defining characteristic was the decision not to tackle difficult political issues that could undermine the negotiation process at the outset, as there was a fear this could lead to a breakdown in talks. Rather, the focus at the initial stages was on meeting the immediate needs of the population in the North-East. It is interesting to note that this was an approach shared by both the UNP and the LTTE, but for their own political reasons. As already mentioned, for the UNP, reviving the economy and channelling money to the areas affected by the war was a ploy to undermine LTTE support from the population. The LTTE was, of course, hoping to control how this money was spent, and to have a say in how rehabilitation would be done. Through this they were hoping to consolidate their control over the North and East.

The government opened the Secretariat for Coordinating the Peace Process in January 2002, and the LTTE version opened in December 2002. At the beginning, a Joint Task Force was set up to deal with relief, resettlement and development, where the LTTE was treated as an equal partner. Later this transformed into three sub committees: the Sub-Committee on Immediate Humanitarian Relief (SIHRIN), the Sub-Committee on Military De-escalation (SMD) and the Sub-Committee on Political Issues. The rehabilitation activities coordinated through SIHRIN were to be funded by a North-East Reconstruction Fund vested with the World Bank. This never got off the ground as negotiations collapsed.

Direct negotiations between the LTTE and the Sri Lankan government lasted from September 2002 to March 2003. A total of six rounds of negotiations were held.

143 The biggest achievement in terms of state reform was a statement to find a solution to Sri Lanka’s conflict within a federal framework, which was announced bythe Norwegians after the meeting in Oslo from 2 to 5 December 2002. As stated in this communiqué, ‘the parties agreed to explore a solution founded on the principle of internal self-determination in areas of historical habitation of Tamil-speaking peoples, based on a federal structure within a united Sri Lanka’ (Statement by the Royal Norwegian Government, 2002, p.1 ).

The LTTE walked out of negotiations because the organisation was not invited to a meeting held in Washington in April 2003 in preparation for the Tokyo donor conference. The LTTE was designated as a foreign terrorist organisation by the US government in 1997, and therefore it was a banned organisation in the US. Although the US was a co-chair of the negotiation process, it was impossible for LTTE representatives to travel to the US to participate in the conference. The LTTE considered this as a deliberate attempt by the Sri Lankan government and Norwegian mediator to keep the LTTE out of the preparatory process for the June Tokyo conference. The LTTE issued a statement stating that ‘an appropriate venue could have been selected to facilitate the LTTE, to participate in this important preparatory aid conference’ (LTTE, 2003, p.2 ), because the Sri Lankan government and the Norwegian mediator knew fully well that LTTE representatives could not travel to the US. The LTTE interpreted being left out of the Washington meeting as a break in the principle of treating both parties on equal terms (Tamil Net, 2003). The meeting went ahead without LTTE participation.

As revealed by the reply of the prime minister to the LTTE’s protest (Letter from the Prime Minister, 2003), the real reason for the UNP holding this meeting in the US at that time was the need to secure foreign aid to revive the economy. The meeting was planned to coincide with the Spring meetings of the World Bank and the IMF, and many donors would be in Washington. The Sri Lankan government wanted to make use of this opportunity to obtain commitments from donors. In other words, for the regime, the reviving the economy and securing aid money was paramount. Maintaining the political process begun by signing the ceasefire agreement became secondary. The LTTE withdrew from the negotiations in April 2003. From this

144 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka point, until the dissolution of the UNF government in February 2004, discussions between the government and the LTTE were held through the Norwegian mediator.

However, the process could not go much further because of the rapid deterioration of relations between the president and the prime minister. The president took over three critical ministries in November 2003, citing security reasons. In February 2004, just after Independence Day celebrations, the president dissolved parliament and called fresh elections. The UNP was defeated in the general election held on April 2004 by a coalition of political parties that came together as the United People’s Freedom Alliance (UPFA).6 This electoral defeat effectively ended the UNP strategy of consolidating the Sinhala nationalist state while reviving the economy with international support.

Finally, there was a naïve hope of reviving negotiations due to the social impact of the December 2004 tsunami. The tsunami happened when the UPFA was in power. This was one of the worst natural disasters that Sri Lanka had ever seen. It affected thirteen of the twenty-five districts of the country, with 35,322 people dead, 21,411 injured and 558,287 people displaced. Forty-three per cent of the affected population was in the Eastern Province (Frerks and Klem, 2011). Some expected that this joint suffering would create a better environment to begin negotiations. In fact, a Post-Tsunami Operations Management (P-TOM) was created to administer funds with the participation of the LTTE and other actors. But this led to divisions within the UPFA. The JVP, a constituent member of the UPFA, successfully challenged the constitutionality of the P-TOM mechanism in the Supreme Court. Their basic objection was to the possibility of the LTTE controlling funds for rehabilitation in areas under their control. The battle to control foreign aid that came to the country because of the tsunami became another factor that undermined negotiations.

Several studies, including an evaluation of negotiations carried out through the initiative of the Norwegian government (Goodhand et al., 2011; Stokke and Uyangoda, 2011; Gunnar Sorbo et al., 2011), have tried to learn lessons from the

6 The UPFA included the Sri Lanka Freedom Party, Janatha Vimukthi Perramuna, Communist Party, Desha Vimukthi Janatha Party, Lanka Sama Samaja Party, Mahajana Eksath Peramuna, National Muslim Congress, National Unity Alliance and Sri Lankan Mahajana Paksaya.

145 failed liberal peace of Sri Lanka. Many of these would have liked the neoliberal peace to succeed, and their analysis is done to find out what went wrong. The analysis is carried out within the desirability of liberal peace led by Western powers. On the other hand, the reasons for the collapse of the short-lived liberal peace were internal contradictions of the formula through which a section of the political class, together with a range of international actors, tried to bring about stability and continue with the phase of capitalist development begun in 1977.

First, the collapse of the negotiations exposed one of the biggest flaws in the strategy – a lack of efforts to include, and sometimes virtual isolation of, President Kumaranatunge from such an important political process, although she was holding the office of the presidency. Anybody with a basic knowledge of Sri Lankan post-colonial history knows that political rivalry between the two main political formations of the Sinhalese has been a key reason for the failure of past efforts to finding an answer to the Tamil demand for autonomy. The beginning of negotiations with the LTTE coincided with a situation where the president was from one party, and the prime minister and cabinet from another. It was a context that demanded bringing these political formations together while negotiating with the LTTE. Given the rivalry and antagonism between the SLFP (leading party of PA) and the UNP, which goes back almost to the beginning of the post-colonial period, this would have been an essential step for success of the negotiations.

Instead, the person who was head of the armed forces and head of state was kept out of the process of formulating the ceasefire agreement. As revealed by the evaluation of Norwegian efforts to bring peace to Sri Lanka, ‘both Norway and the UNP government checked with India for concurrence, but on Wickremesinghe’s insistence, they isolated President Kumaratunga (who is also the Commander-in- Chief) and the Sri Lankan military from substantive negotiations’ (Sorbo et al., 2011, p. 35). This was certainly not popular with the president. Therefore, the way the agreement was finalised meant the politics of the Norwegian mediator became a factor in the relationship between the two main political formations of the Sinhalese. It certainly made two-party consensus when negotiating with the LTTE unlikely. A discourse of cohabitation concocted by supporters of the negotiations, which tried to

146 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka fill the lacunae left by this serious structural flaw, was not successful. Cohabitation between the president and the UNP-led government lasted barely two years. When the relationship between the president and the prime minister was deteriorating, there was a proposal by the president to form a Joint Peace Council (Daily News, 2003b) chaired by the president and prime minister to maintain relations. This did not result in any positive outcomes.

There are other instances when the actions of international actors worsened relations between the president and the prime minister, in addition to this basic structural flaw in the framework of negotiations. For example, the US, a key player, not only expressed support for Wickremasinghe, but also demonstrated this symbolically − tilting towards the prime minster and isolating the president. As stated by a former US ambassador to Sri Lanka, ‘prime minister met twice with President Bush in the White House in July 2002 and November 2003. It is quite remarkable that a leader from a small country where the US had minimal strategic interests would be invited to the Oval Office twice within sixteen months’ (Lunstead, 2011, p. 62).

There are examples of projects that contributed to the deterioration in the relationship between the president and the prime minister. The most glaring example is the review of structures of defence undertaken with the support of DFID. The DFID peacebuilding strategy for Sri Lanka included ‘a governance reform agenda in key institutions, particularly the security services, to strengthen underlying conditions for lasting peace’ (DFID, 2007, p. 1). The ministries of defence and finance, which were under the UNP, were the partners from the Sri Lankan side for this grand objective, for which political conditions never existed. The project set up a Defence Review Committee (DRC).7 As pointed out by Uyangoda and Bastian, ‘DRCs mandate covered almost all critical aspects dealing with the armed forces. This was the first time since independence that such an exercise has been undertaken in Sri Lanka’ (2008, p. 54). More than the review of the defence structure, it was the politics surrounding this project that had an important bearing on the relationship between the president and the UNP-led cabinet. A review of this exercise shows ‘that

7 This section is from a study conducted by the Conflict, Security and Development Group of Kings College, University of London and funded by DFID. The case study on the Defence Review Committee was carried out by Sundarie Jayasuriya.

147 right from the beginning it was a move to limit the powers of president, the then prime minister’s rival, over the security forces’ (Uyangoda and Bastian, 2008, p. 54). There was no consultation with the president when inaugurating the DRC. There was no representative of the president in this body, although constitutionally she was commander-in-chief of the armed forces. A representative of the president was included later at the insistence of the president, by which time the DRC had been in operation for some time. There is no doubt this exercise worsened the relationship between the president and the UNP. This is an example of a project undertaken because it fitted with the global formula of liberal peace, in a context where there was no political space for it. But, in the end, this contributed heavily to undermining the success of negotiations.

Second, the experience of the negotiations showed the huge gulf between the political agendas of the two parties in the negotiations. It was very clear from the beginning that the UNP gave prominence to the revival of the economy. Even when funds were sought from donors during the negotiation process, the UNP focus was to get funds for projects covering the entire country. For example, in its white paper titled ‘Meeting Immediate Needs’, presented to the Oslo meeting on 25 November 2003, the government stated that ‘the entire country of Sri Lanka has been seriously damaged by this war’ and ‘it would be a mistake to focus only on those districts in the North and East where significant military engagements took place’ when allocating donor funds (GOSL, 2002, p. 2).

The LTTE always viewed the UNP’s focus on economic reforms with suspicion. The LTTE saw the UNF economic strategy for what it was − a strategy to revive an economy affected by war and strengthen the position of the state. The UNPand some of its advisers had a naïve belief in the possibility of undermining the support the LTTE had among Tamil people by extending markets to the war-affected area, and ensuring the so-called economic dividend.

The immediate objectives of the LTTE when coming into negotiations included extending its control over the North-East and the sea, gaining access to government controlled areas (especially in the Jaffna peninsula), gaining recognition

148 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka internationally, and controlling the resources that could flow into the North-East for rehabilitation purposes (Liyanage, 2003). The LTTE was always wary of the international support that the government was mobilising. The LTTE saw this as part and parcel of the UNP’s ‘international safety network’, which was starting to encircle them. The LTTE leader clearly articulated this position in his last Heroes Day speech, delivered on 27 November 2006 (Tamil Times, December 2006).

The gulf between the thinking of the UNP and the LTTE on state reform became clear when discussions on an interim arrangement that could take care of rehabilitation and replace SIHRIN became the focus. The UNP’s proposals for an interim structure amounted to decentralisation of rehabilitation activities under the control of the central government. The LTTE’s ideas about state reform were articulated in a proposal to set up an Interim Self-Governing Authority – ISGA. Details of the ISGA can be seen in a letter written on 31 October 2003 to the Norwegian ambassador in Sri Lanka (LTTE, 2003). The substance of the ISGA raised many doubts about how far the LTTE was committed to federalism. The proposal was more in line with a confederate arrangement, which dovetails with the two nation/two state theory that underpinned LTTE politics. Therefore, the two parties represented widely different state-building projects. While the LTTE was thinking in terms of the Sri Lankan state and a state in the making in areas controlled by the LTTE coming together in a new arrangement, the vision of the UNP did not go beyond mere decentralisation (Uyangoda, 2011).

Finally, there were contradictory trends within the politics of the international actors. Broadly, one can identify two principal trends that prevailed during the negotiations. The first was totally committed to the ideas behind the CFA. As mentioned before, it was based on political notions hitherto never accepted by the Sri Lankan elite. It accepted that there were two armies in the country, controlling different parts of it. The agreement also accepted the principle of treating an armed counter-state movement, the LTTE, and the Sri Lankan state on a par with one another. Some analysts, who focused primarily on the negotiation process and were convinced of this need to treat the LTTE and the Sri Lankan state on a par with each other, were critical of the outcome of the Tokyo donors’ conference, arguing that it was

149 more in favour of the Sri Lankan government (Hopp, 2003; Bergohf Foundation, 2003). The statement was seen as imposing conditions. According to this analysis, ‘the government accepted the conditional overtones, realising that they put more pressure on the LTTE than themselves’ (Burke and Mulakala, 2011, p. 161).

The second perspective that informed international actors was much more concerned with the security of the Sri Lankan state and the economy. This position agreed that Sri Lanka had a serious problem regarding the rights of the minorities, and it had to be solved politically. They also agreed that resolving the problem involved reforming the centralised Sri Lankan state and devolving power while maintaining its territorial integrity. This position did not ignore the need for negotiations with the LTTE. But it did not treat the Sri Lankan state on a par with the LTTE. The notion of symmetry between the two parties was not accepted by this position. The LTTE was a product of the political problem faced by Sri Lanka. But the LTTE had to agree to a settlement within the Sri Lankan state, and disarm itself once the conflict is resolved. If the behaviour of the LTTE threatened the security of the Sri Lankan state, it was seen as a threat to global security as well. The ‘War on Terror’ in the aftermath of 9/11 formed the background to this position. Therefore, this position gave prominence to the security of the Sri Lankan state.

However, this support for Sri Lanka’s stability and security was conditional. The Sri Lankan state had to behave in a particular way for this support to continue. If Sri Lanka deviated significantly from the basic principles of liberal capitalism, if the conflict aggravated to the extent of creating a significant human rights and humanitarian crisis and began to affect the economy in a significant way, or if Sri Lankan foreign policy shifted in a direction hostile to the countries who are major donors, this support was likely to suffer.

The United States is the prime example of a country whose involvement in the negotiations was principally from the point of view of supporting the security and stability of an existing state and promoting capitalist development, rather than from being an impartial mediator between the Sri Lankan government and the LTTE. The US accepted the legitimacy of Tamil grievances, and the centralised Sri Lankan

150 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka state had to be reformed to meet these grievances. The US even accepted that Sri Lanka has to negotiate with the LTTE. At least part of the reason was because the US had doubts about the ability of the Sri Lankan armed forces to defeat the LTTE. But the fundamental reason underlining these positions was the need for security of the Sri Lankan state as well as stability of the entire South Asian region, including the Indian Ocean. The other objective was supporting the deepening of capitalist transition in Sri Lanka.

As far as allocation of foreign aid is concerned, the US interest in Sri Lanka was at a comparatively low level by the late 1990s. In fact, ‘at the end of the 1990s Washington proposed closing the Sri Lankan AID program entirely’ (Lunstead, 2011, p. 56). The ‘gradual resumption of military cooperation between the United States and Sri Lanka in the mid-1990s and beyond’ (Schaffer, 2005, p. 3) happened because of the Sri Lankan government’s efforts to begin negotiations. Similarly, the foreign aid commitment of the US, as well as military corporation with Sri Lanka, expanded in the aftermath of the UNP signing the agreement with the LTTE in 2002 (Lunstead, 2011). The US played a prominent part while there were negotiations. A former ambassador in his writing gave three reasons for this – the personal interest of the deputy secretary of state Richard Armitage, the pro-market and pro-Western ideology of the Wickremasinghe-led UNP, and the post 9/11 desire to tackle the terrorist threat globally (Lunstead, 2011).

For the US, the need for stability and security in Sri Lanka was part and parcel of its strategic interests in South Asia. In a paper presented at a seminar organised by the Centre for Policy Alternatives, a former US ambassador to Sri Lanka, who at that time was at the Centre for Strategic and International Studies in Washington DC, placed US policies towards Sri Lanka in the overall context of US policies towards South Asia. As stated by her, the principal US interest was because of the possibility of Sri Lanka’s conflict posing a threat to South Asia and the Indian Ocean region (Schaffer, 2005). This wider interest within which Sri Lanka figures is certainly influenced by the dramatic changes that have taken place in Indo-US relations. In her paper, she asserted that ‘In the past fifteen years there has been a revolution in US-India relations. India’s economic growth, the increasing size and prominence

151 of the Indian-American community, and India’s reassessment of its interest in the wake of the end of the Cold War have made the United States into India’s most important extra-regional power’ (Schaffer, 2005, p. 2). Unlike in the past, India also did not have any concerns about US involvement in Sri Lankan issues. The US believed that the negotiations were going to achieve something (Schaffer, 2005). The last sentiment was confirmed by Armitage in a speech to the Centre for Strategic and International Studies in Washington, when he stated that ‘the parties to the conflict appear to be ready to reach a resolution, more so than any other time in the past twenty years’ (Daily News, 2003c).

However, it was clear from the beginning that the US idea of successful negotiations envisaged disarmament, and the entry of the LTTE into the democratic process. In the same speech that gave the reasons for US interest in the negotiations, Armitage said the following regarding what was expected from the LTTE: The Tigers need to honour the restrictions and conditions that the ceasefire – and future negotiations – set on their arms supply. Logically, down the road, this is going to include disarmament issued (sic) themselves. Internal self-determination, within the framework of one Sri Lanka, is not going to be consistent with separate armies and navies for different parts of the country (Daily News, 2003c).

The US focus on the stability and security of the Sri Lankan state was reiterated by various US officials throughout the period when negotiations were taking place. For example, when the LTTE walked out of negotiations because they were not invited to the April 2003 conference in Washington, the US ambassador at that time, Ashley Wills, in an interview after the walkout, regretted the LTTE did not attend the Tokyo donor conference, but emphasised that the US official position was that the conference should go ahead despite the LTTE boycott (Daily News, 2003d). Richard Armitage reiterated this in an interview after the conference, when he said that it was ‘the position of United States government that this Tokyo conference should absolutely be held – notwithstanding the fact that the LTTE chose not to participate. The international community cannot be blackmailed by a group who refuses to take part in the negotiations’ (The Island, 2003).

152 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The US government was also a strong supporter of the declaration that came after the Tokyo conference. The final part of the declaration, entitled ‘Linkage between Donor Support and Progress in the Negotiations’, had several clauses aimed specifically at the LTTE. Among them were ones that related to the participation of a Muslim delegation in negotiations, progress towards a final settlement on the principles of the Oslo declaration, adherence to human rights norms, the issue of child soldiers and demilitarisation. US representatives always emphasised the need to adhere to these principles in their statements.

Generally, the impact of the deliberate strategy of internationalisation pursued by the UNP regime was contradictory. Whether it helped Sri Lanka to come any closer to finding a solution to the conflict is questionable. But it did achieve the objective of reviving the economy. Perhaps this was the main reason behind the UNP strategy in the first place.

Although negotiations with the LTTE collapsed, it created a better environment for the revival of the economy. The economy grew by 4 per cent in 2002 and by 5.9 per cent in 2003. Kelegama points out that ‘Net FDI flow increased from US$82 million in 2001 to $300 million by 2003 and a large inflow of portfolio investment pushed the stock market beyond its 1994 peak’ (2005, p. 432). Donor support for the mainstream economic agenda also continued. As mentioned, the $4.5 billion committed at the Tokyo donor conference included funds for the economic reform programme, funds for development of the South, and new money for the North- East. The bulk of the project support came from the three most important donors for Sri Lanka – the World Bank, ADB and Japan. These were long-term commitments. These commitments remained in place to be used to revive the economy even after negotiations collapsed.

A perusal of specific agreements signed in 2003 shows that the bulk of projects for which aid was committed dealt with the mainstream economic agenda. Only fifteen of the sixty-two projects were directly related to peace, or had provisions for work in the North-East.8 The other forty-seven covered subjects related to the normal

8 Data from the External Resources Department, Ministry of Finance.

153 process of development. The signing of the ceasefire, and conditions of normalcy and stability created by it, enabled donors to increase support for the mainstream economic agenda and development activities in the South. This did not have to wait for the success or failure of the negotiations. On the other hand, expanding activities in the North-East depended on the politics of negotiations.

Electoral defeat of the UNP

The defeat of the UNP in the general election held in April 2004 was the end of the UNP strategy for the revival of the economy and consolidation of the territory of the Sinhala nationalist state through negotiations with the LTTE with international support. The April 2004 election was a complete reversal of fortunes for the UNP. From their best performance under the proportional representation system in 2001, they slumped to their worst performance – getting only 35.8 per cent of the total valid vote. This was even worse than their 1994 defeat, when they secured 41.9 per cent. The UNP lost their absolute majority in 14 electoral districts. There was a reduction in the percentage of total votes for the UNP in all electoral districts, compared to what happened in the 2001 election. After only two years at the helm, Ranil Wickremasinghe led the UNP to a worse electoral defeat than after seventeen years of repressive UNP rule.

154 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Table 5.2 UNP/UNF electoral performance (% of valid votes)

2001 2004 +/- Colombo 49.7 40.3 -9.4 Gampaha 42.3 35.7 -6.7 Kalutara 43.4 35.8 -7.6 Galle 42.2 36.6 -5.6 Matara 40.4 33.0 -7.4 Hambantota 38.2 33.3 -4.9 Matale 47.1 45.2 -1.9 Kandy 49.3 46.6 -2.7 N'Eliya 62.6 50.3 -12.4 Kurunegala 46.3 40.9 -5.5 Puttalam 48.2 43.4 -4.7 Polonnaruwa 44.9 38.2 -6.7 Anuradhapua 43.5 37.8 -5.8 Moneragala 39.7 34.7 -5.0 Badulla 50.2 45.4 -4.8 Ratnapura 43.7 39.5 -4.2 Kegalle 46.8 41.8 -5.1 Jaffna 8.2 0.0 -8.2 Vanni 26.0 22.3 -3.7 Batticaloa 11.8 2.4 -9.3 Amparai 19.7 13.6 -6.0 Trincomalee 37.1 8.2 -28.9 Total 43.2 35.8 -7.4 Source: computed from data from the Election Commissioner’s Department, Government of Sri Lanka

The April 2004 election results shows the inability of the UNP to sustain the support of the Southern electorate, consisting predominantly of the Sinhalese, while implementing its strategy. A study that looked at forty-three polling divisions, where Buddhists formed more than 90 per cent of registered voters, concluded that there was a shift in the vote against the UNP (Venugopal, 2008). Since the Sinhalese

155 constitute more than 70 per cent of the population, their support was essential for any negotiation strategy to succeed. In a context where there is a highly competitive multi-party electoral system, this was critical to the success of the UNF strategy. If the UNP had managed to maintain support from the Sinhala electorate in the 2004 elections, its strategy could have been back on track.

There are many indicators to show that a large section of the majority Sinhala population had moved away due to their opposition to negotiations with the LTTE. The 1994 election was a turning point in this regard. In 1994, President Kumaratunga, from the PA, campaigned for the first time on a platform of negotiations and won the election. This was repeated in 2001, this time by the leader of the main opposition party, Ranil Wickremasinghe. Support for negotiations continued throughout the period of the UNF government.

Support was high when the UNF and LTTE conducted several rounds of face-to-face negotiations, and there was a sense that something was being achieved. As shown by data generated by the Social Indicator project of the Centre for Policy Alternatives, during negotiations, close to 80 per cent of the Sinhala population was in support of a negotiated settlement (Social Indicator, 2003). In a national sample, it would have been difficult to demonstrate such a high percentage of support without agreement from a large percentage of Sinhalese. This does not mean there was no opposition from the Sinhalese to the UNP strategy of direct negotiations with the LTTE, after signing a ceasefire agreement that gave parity of status to the LTTE. But there was a sizeable shift in opinion among the majority community away from supporting a military solution, to agreeing with a negotiated settlement. Nevertheless, there was a dramatic reduction in electoral support to the UNP in the April 2004 elections.

At least one of the key reasons for alienation of the Sinhala electorate was the economic strategy of the UNP. It was essentially a strategy to revive the economy in general, and to move in the direction of greater liberalisation. Trying to adhere to demands of the IMF on fiscal targets forced the government cut down expenditure that could have generated what supporters of negotiations called an economic dividend (Kelegama, 2005). Its plans for structural reform antagonised politically powerful intermediate classes who depended on state employment. 156 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The UNP’s plan for these extensive reforms was introduced in a society showing the social contradictions of more than two decades of liberal capitalism. In addition, the situation was made more difficult by the social impact of the 2001 economic recession. The high cost of living, loss of employment due to the closure of enterprises, and absence of hope about the economic environment had a widespread effect. Economic issues remained a high priority for the population throughout the period when negotiations were going on. When the Social Indicator survey mentioned above asked its sample to prioritise issues of concern in January 2003, 48.2 per cent chose cost of living, 16.5 per cent unemployment and 18.8 per cent ethnic conflict. Put another way, 64.7 per cent placed economic issues as the first priority, while 18.8 per cent picked the conflict. However, the basic assumptions of the economic vision precluded any critical look at the post-1977 period. Therefore, the UNF leadership either did not understand, or did not want to understand, the negative impact of the previous twenty years of liberal capitalism. Rather, they believed what was needed was more of the same, but with greater intensity. This was carried out in a context where support from the Sinhala population was essential to continue with negotiations.

The UNP did not have a credible social programme that could sustain the support of the Southern electorate. The Poverty Reduction Strategy (PRSP), planned with donors and presented to the Development Forum in 2002, could never play this political role. The PRSP was a requirement to receive funding from the World Bank’s PRGF. One of its requirements was an exercise in consultation with various groups before a plan is presented for funding. In most cases, these exercises allow limited groups of people in the country to respond to the plan presented to the donors. The bulk of participants come from groups identified as civil society by donors and the private sector. The PRSP presented by the government together with donors was a plan prepared under the previous government. This was added to the Regaining Sri Lanka document (Venugopal, 2008). Some non-party political actors criticised it for what it was – an adjunct to the politically controversial reforms that donors were trying to push through. The PRSP could not even begin to generate the political support that the UNF needed.9 Therefore, the defeat of the UNP at the April 2004

9 For a critique of Sri Lanka’s PRSP, see Kar (2003). For a critique by a civil society network representing more than 125 trade unions, NGOs, and religious organisations, see a statement by the Alliance for Protection of Natural Resources and Human Rights, http://www.geosites.com/monlarslk/Statements3. htm. 157 general election was not simply a vote against negotiations with the LTTE begun in 2002. It was also a reaction against the economic reform programme of the UNP, which alienated a significant section of the Sinhala electorate, but failed to present any new ideas to tackle the social contradictions of more than two decades of liberal economic policies.

158 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Chapter 6

The hegemony of Sinhala nationalism, capitalism and foreign aid

The Rajapakse regime gave political leadership to the military defeat of the LTTE and consolidation of territory of the Sinhala nationalist state. As was argued in previous chapters, a major stumbling block for the period of capitalism begun in 1977 was the separatist demand of Tamils, and the threat it posed to the territorial integrity of the Sinhala nationalist state. By 2009 the Sinhala ruling elite overcame this barrier. This established better conditions for capitalist growth and strengthening the period of capitalist development begun in 1977. In addition, the war-affected North and East were incorporated into the process of capitalist development.

All this was backed by a state with a well-developed security apparatus, which had grown during the war. A significant section of this security apparatus was stationed in the war-affected area to stabilise the region. This is also a period where we see a greater degree of accommodation between Sinhala nationalism and capitalist development. In specific policy terms, this was reflected in a refusal to privatise state enterprises, and a greater role to the state within a neoliberal framework. However, the fundamental issue of building a state that could accommodate the Tamil minority remained unresolved. In this sense, it was a weak state that could face contradictions in the future.

After consolidation of the territory of the Sinhala nationalist state, the politics of foreign aid were characterised by the following: There was continued support to develop capitalism and incorporate the North and East into this process. Second, a set of policies were directed towards stabilising society based on categories such as social cohesion, social inclusion and reconciliation. Peacebuilding was part of this agenda. The main target of this was the war-affected area. Finally, there were attempts to discipline the Sinhala nationalist state using international human rights mechanisms and economic sanctions. The US and EU – co-chairs of the neoliberal peace – were the main drivers of this last agenda. While these efforts were motivated

159 by civilian costs during the last stages of the war, donor countries of the West and Japan were also concerned about the shift in Rajapakse’s foreign policy – taking the country closer to China. This was the first time since 1977 that Sri Lankan foreign policy went against the interests of these countries. This was one of the factors behind efforts to discipline the Rajapakse regime through human rights mechanisms.

From the entire period covered in this study, it was during the last five years of Rajapakse’s rule that we see the contradictions of two aspects of the politics of foreign aid coming into sharp focus. On the one hand, aid agencies, especially the multilaterals, continued to support the strengthening of capitalist development under Rajapakse. This included support from the IMF. In addition to this, aid policies focused on stabilising society, making use of concepts such as reconciliation, social cohesion and social harmony.

On the other hand, Rajapakse’s approach to dealing with the post-war situation, especially during the last stages of the war, and his foreign policy tilt towards China, did not agree with liberal ideas of how to bring about peace and stability, and the interest of Western powers under the hegemony of the US. These aspects led to the withdrawal of the GSP+1 facilities by the EU, and the regime being taken to task under UN mechanisms for war crimes and human rights violations.

The end of the Rajapakse regime did not come about because of these politics of external actors, but because of the Sri Lankan electorate. In the 2015 presidential election, Rajapakse, who gave political leadership to re-establishing control over the Sinhala nationalist state, was defeated. The bulk of the minority vote went against Rajapakse. However, it must be noted that a section of the Sinhala voter also shifted their voting allegiance away from Rajapakse.

1 The GSP is a concession provided by the EU to poor countries. This allows the possibility of exporting with less or sometimes no duty to EU countries. In order to secure GSP benefits, countries have to adhere to certain human rights standards. GSP+ provides additional benefits to countries who are already part of the GSP scheme.

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Consolidation of the territory of the Sinhala nationalist state

The electoral defeat of the UNP in April 2004 was repeated in the presidential election held on 17 November 2005. This election was keenly fought. The UNP candidate was none other than . His principal electoral platform was what had been achieved during the short-lived negotiations. He argued that the path of peace was disrupted by the abrupt dissolution of parliament by President Kumaratunga, and asked for a new mandate. He was opposed by Mahinda Rajapakse. In addition to the constituent members of the PA, Rajapakse secured support from two political parties that have opposed devolution of power to provincial councils - Janatha Vimukthi Peramuna (JVP) and Jathika Hela Urumaya (JHU). Rajapakse argued that he was for peace and negotiations. He also promised to uphold the ceasefire. Rajapakse was doing a balancing act − trying to project himself as a man of peace, while building an alliance with Sinhala nationalist parties for electoral purposes.

Rajapakse won the presidential election with a narrow margin. He polled 4,887,152 votes, or 50.29 per cent of the total polled. Wickremasinghe totalled 4,706,366 votes, or 48.43 per cent of the total polled. This meant that Rajapakse had a majority of only 180,786 votes. However, the biggest eye-opener of the election results was not the defeat of Wickremasinghe himself, but how he got defeated. Wickremasinghe certainly expected significant support from the Northern and Eastern Provinces, due to opening negotiations with the LTTE. The Northern Province consists of two electoral districts − Jaffna and Vanni. In Vanni the voting rate was 34.35 per cent, while in Jaffna it was a mere 1.21 per cent. Even in the Tamil-dominated Batticaloa District in the Eastern Province, the voting rate was 48.51 per cent − below the normal.

The low turnout in Tamil-dominated areas of the North and East was directly and indirectly engineered by the LTTE. Most available surveys showed that the negotiations, for all their faults, had brought a sense of normality for the war-torn areas, and was popular with the Tamil population. But this positive attitude was not strong enough to resist LTTE intimidation. The election result was a defeat for the

161 neoliberal peace of the UNP by Sinhala nationalism, combined with discontent due to socio-economic problems, working in parallel with Tamil nationalism of the LTTE variety.

President Rajapakse came into power with the support of political parties that opposed reform of the centralised state to meet Tamil grievances. This led to a new phase in military efforts to consolidate the territory of the centralised Sinhala nationalist state in the new period of capitalist development. Compared to earlier attempts, this ended with the military defeat of the LTTE and complete destruction of the LTTE infrastructure within a comparatively short period. This surprised many. The Rajapakse regime gave leadership to the completion of a task that many had hoped for due to different reasons. The obvious admirers of this development were Sinhala nationalists, and the most important beneficiaries of this success were the capitalist class, for whom the prevailing civil war was a barrier to capital accumulation. Although there were many business people talking about peace during negotiations with the LTTE, they were really looking for stability to continue with profit-making. There were also many international players who were happy with the outcome − the LTTE posed a potential threat to maritime security in the Indian Ocean, which was fast becoming important for global trade. Obviously, India had its own reasons for welcoming the defeat of the LTTE.

It was clear by mid-2006 that both sides, the Sri Lankan government and LTTE, were gearing towards a military battle rather than for political engagement. By closing the sluice gates of the Mavil Aru reservoir in July 2006, and cutting off the water supply to villages in government-controlled areas, the LTTE provided the Sri Lankan government with legitimisation for an all-out military assault. Claiming that it was engaged in a ‘humanitarian operation’, the armed forces launched a military operation to capture LTTE-controlled areas. This is an example of how the Rajapakse regime made use of the rhetoric of humanitarian intervention used by Western powers.

While the fighting was going on, a Supreme Court judgement in October 2006 demerged the Northern and Eastern Provinces. These provinces had been merged

162 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka temporarily under the Indo-Lanka Accord. The referendum that was promised to decide between merging the Northern and Eastern Provinces or having two separate provinces was never held. The Sri Lankan government formally withdrew from the ceasefire agreement in January 2008. In September 2008, the government ordered all international humanitarian and UN staff, except those from the International Committee of the Red Cross (ICRC), out of the area where fighting was taking place. Close to 300,000 people were trapped in the ever-shrinking area under LTTE control. A report of the Norwegian Refugee Council records: In early 2009 the government unilaterally declared “no fire zones” or “safe zones” in LTTE-held areas north and east of Puthukkudiyiruppu in the Mullaitivu district to which people had fled. However, there were reports about both sides attacking, killing and wounding civilians. As the fighting continued the concerns about the population caught up in the fighting became a concern both internally and internationally (Norwegian Refugee Council, 2014, p. 3). The UN High Commissioner for Human Rights, Navi Pillay, issued a statement in March 2009 voicing concern about mounting civilian casualties, and the possibility of war crimes being committed by the Sri Lankan armed forces and LTTE (UN News Centre, 2009).

The international donors who had been enthusiastic supporters of the failed neoliberal peace were obviously getting worried about the possibility of renewal and escalation of the armed conflict between the Sri Lankan armed forces and the LTTE, especially after the UNP-led coalition was defeated in April 2004. During the Sri Lanka Development Forum held in January 2007, a number of speakers referred to the possible negative impacts of renewed violence. For example, Praful Patel, Vice President, South Asia region of the World Bank, warned that the renewed and deepening conflict in Sri Lanka over the past six months or so looms over everything else that we might say here. There is no way to politely skirt this issue. As a major development partner to Sri Lanka, the World Bank would be failing if we did not place the conflict front and centre in our deliberations, for it is this that constrains the country’s development and stands in the way of its tremendous potential (Patel, 2007).

163 The US position diverted slightly by pointing out the possible negative impact of the renewed conflict, but at the same time supported the government’s battle against terrorism (Blake, 2007).

When the armed conflict escalated, the role of the co-chairs of the neoliberal peace process was reduced to issuing statements on the need to adhere to the terms of the agreement, and to return to negotiations. The co-chairs, and sometimes individual members of this group, issued statements to this effect from the time the UNP- led government was defeated in 2004. In May 2006, three years after the Tokyo donor conference, the co-chairs, together with Norway, met in Tokyo and released a lengthy statement reiterating almost all elements of the neoliberal peace package initiated by the 2002 agreement, urging the LTTE and the government of Sri Lanka to adhered to these (Tamilnet, 2006). There were attempts to restart negotiations in June and October 2006. Both these efforts ended without success.

While these efforts were focused on resuming negotiations, it was also clear by this time that some of the key international actors involved as co-chairs of the negotiations were leaning towards a position of ensuring the security of the Sinhala nationalist state, rather than treating the LTTE and the Sri Lankan state on a par with one another. The LTTE was already banned in several countries. This ban expanded. After the foreign minister of Sri Lanka was assassinated by the LTTE in August 2005, the EU took a decisive step detrimental to the LTTE by issuing a travel ban on LTTE members. Further escalation of violence resulted in listing the LTTE as a terrorist organisation on 31 May 2006. In a statement, the European Parliament emphasised that the LTTE did not represent all Tamils, and called on the organisation to ‘allow for political pluralism and alternate democratic voices in the northern and eastern parts of Sri Lanka’ (European Union, 2006).

The LTTE was a terrorist organisation for the US government even before the negotiations began. After the collapse of negotiations, and with the escalation of violence, the US government made it very clear where they stood. Ambassador Jeffery Lunstead, in a speech to the American Chamber of Commerce in Sri Lanka on 9 January 2006, had a clear message for the LTTE when he spoke of military

164 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka assistance given to Sri Lanka. In one part of his speech, he bluntly stated: through our military training and assistance programs, including efforts to help with counterterrorism initiatives and block illegal financial transactions, we are helping to shape the ability of the Sri Lankan Government to protect its people and defend its interests. Let me be clear, our military assistance is not given because we anticipate hostilities ... We want peace. We support peace. And we will stand with the people of Sri Lanka who desire peace. If the LTTE chooses to abandon peace, however, we want to be clear, they will face a stronger, more capable and more determined Sri Lankan military. We want the cost of a return to war to be high (Lunstead, 2006). This was followed by several statements that emphasised support to a Sinhala nationalist state opposed by a terrorist group. For example, at the press conference after the donor co-chairs meeting held in Washington in November 2006, Under Secretary of State Nicholas Burns, answering a question from a journalist who was still not sure how the US government treated the Sri Lankan government and the LTTE, stated the Sri Lankan people and government are good friends to the United States. We support the government … We believe the government has a right to try to protect the territorial integrity and sovereignty of the country. The government has a right to protect the stability and security in the country ... We also believe that the Tamil Tigers, the LTTE, is a terrorist group responsible for massive bloodshed in the country and we hold the Tamil Tigers responsible for much of what has gone wrong in the country. We are not neutral in this respect (, 2006). Similar sentiments on the importance of the security and stability of the Sinhala nationalist state were expressed in a speech by the US ambassador in Sri Lanka at that time. The title of the speech ‘Mutual Strategies in Development and Security’ (Daily News 2006), aptly sums up how the United States government viewed its policies towards Sri Lanka. It is a policy to support the security and stability of a state that had increasingly integrated into global capitalism. In addition, due to its location, Sri Lanka is important for the maritime security of the Indian Ocean, which has become crucial for global trade. This has been repeatedly asserted by US Navy personnel, most recently by US Admiral Harry Harris, the commander of the US

165 Pacific Command at the Galle Dialogue, an initiative on maritime security begun by the Rajapakse regime in 2011, after the defeat of the LTTE (Daily Mirror, 2016).

These hardening positions towards the LTTE reflected the politics of the global war on terror that dominated the attitudes of Western powers in general, and the US in particular, since 9/11. Some sections of the international actors believed that once the LTTE was destroyed, there would be a better environment for state reforms. As revealed in an interview with one of the leaders of a minority party, ‘sections of the international community played a role in urging the leaders of ethnic minorities, namely Tamils, to support the Rajapakse government’s military drive against the Sri Lankan Tamil rebel group on the basis that political state reform would follow a military defeat of the LTTE’ (Marcelline, 2014, p. 54) This is also the view expressed in a report from the Feinstein International Centre at Tufts University, which regularly focuses on humanitarian issues in conflict situations. The report states that there was broad consensus among key UN member states to give war a chance in Sri Lanka. Colombo authorities were also encouraged to push for the rapid demise of the Tigers. This meant that there was little political interest in curbing a known pattern of unrestricted warfare notwithstanding its catastrophic consequences for civilians (Niland, 2014, p. 2). The Rajapakse regime, in its effort to destroy the LTTE and consolidate the territory of the Sinhala nationalist state, effectively utilised this international atmosphere created by the politics of the global war on terror. Therefore, it was not just a case of Rajapakse politics or support from countries such as China − there were many other international actors who were happy to see the end of the LTTE for their own reasons.

It is really puzzling how, despite such a significant presence of so many international actors bent on aiding people affected by the armed conflict and protecting them, nothing could be done to avoid such heavy social costs due to military operations. There have been very few critical reflections by humanitarian organisations on this experience. Many have just moved on and now engage in an activity called reconciliation. At least the UN undertook an internal review of its behaviour, and its responsibility in an event that led to so many civilian casualties. It produced a

166 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka report, written within the UN institutional framework, accepting significant failure of the UN system. Analysing the behaviour of the UN system in the last critical stages of the war, it says, There was a continued reluctance among UNCT (UN Country Team) institutions to stand up for the rights of the people they were mandated to assist. In Colombo, some senior staff did not perceive the prevention of killing of civilians as their responsibility – and agency and department heads at UNHQ were not instructing them otherwise. Seen together, the failure of the UN to adequately counter the Government’s under-estimation of population numbers in the Wanni, the failure to adequately confront the Government on its obstructions to humanitarian assistance, the unwillingness of the UN in UNHQ and Colombo to address Government responsibility for attacks that were killing civilians, and the tone and content of UN communications with the Government on these issues, collectively amounted to a failure by the UN to act within the scope of institutional mandates to meet protection responsibilities (United Nations, 2012, p. 26).

What surprised many was how quickly and effectively the government troops managed to destroy the LTTE. In January 2007, after months of heavy fighting, government troops took control of Vakarai, the LTTE's eastern stronghold. In July 2007, the Eastern Province was in the hands of government troops. In May 2008 elections were held to the newly established Eastern Provincial Council, which by now had been separated from the North. By January 2009 the government cleared Killinochchi, the so-called administrative capital of the LTTE and Mullativu district. On 17 May 2009, the government declared that the Tamil Tigers had been defeated and the LTTE leader, Velupillai Prabhakaran, killed in the fighting.

A number of factors can explain why the Sri Lankan government managed to destroy the LTTE so quickly. Most importantly, there was no external force preventing the government from achieving its military objective. The only country with such a strategic interest was India. But unlike in the past, when India had intervened when the Sri Lankan government tried to deal with the Tamil question militarily, this time India did not have such an interest. None of the countries that played a key role in

167 the negotiation process with the LTTE had any such strategic interest. There were no barriers to the Sri Lankan government expanding and improving the capacity of the armed forces, providing equipment to the forces and using its own resources for this purpose.2 From 2006 to 2008, the defence budget increased from 2.8 per cent of the GDP to 3.7 per cent (SIPRI database). When there were attempts to bring the Sri Lankan situation in for discussions at the Security Council, they were blocked by two permanent members – Russia and China. In short, the Sinhala nationalist state had the necessary support for its consolidation.

On the other side, the LTTE’s attempt to defend the state that they were trying to build faced numerous problems. The LTTE had lost its ability to revert to a guerrilla mode of action by this time. It had become an organisation trying to build a state, and was therefore trapped spatially and was less mobile. Its disastrous politics towards India had alienated a key external power. Available evidence indicates that many other countries, including those from the West, were not averse to seeing the end of the LTTE. It had suffered due to the defection of a faction led by Karuna in the Eastern Province in March 2004, which caused a significant split. Given these factors, a government that was determined to make use of the opportunity despite civilian costs was able to destroy the LTTE.

Disregard for civilian causalities was so important for the outcome that the University Teachers for Human Rights (Jaffna) (UTHR(J)), one of the organisations that regularly monitored the war-affected area, concluded this to be the main factor for the outcome of the war. In a report issued after the defeat of the LTTE, after talking to survivors of the last stages of the conflict, a UTHR(J) report concluded that ‘what these survivors’ stories make clear is that for both parties, the key to military dominance lay not in brilliant strategies, but in an utter disregard for the lives of civilians and combatants alike, driven by their leaders’ single-minded pursuit of personal power’ (UTHR, 2009, p. 1). Civilian costs in the last stages of the war became a concern for the UN in general, and United Nations Human Rights Commissioner in particular. Issuing a statement on 13 March 2009, High Commissioner for Human Rights Navi Pillay said that ‘certain actions undertaken

2 See Smith (2011) for an account of the improvements that took place in the Sri Lankan armed forces.

168 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka by the Sri Lankan military and by the separatist Liberation Tigers of Tamil Eelam (LTTE) could constitute violations of international human rights and humanitarian law’(UN News Centre, 13 March 2009). Immediately after the armed violence ended, the Secretary-General of the UN visited Sri Lanka. At the end of the visit, in a joint statement with the Secretary-General, Rajapakse promised to address the violations of humanitarian and human rights laws that took place during the last stages of the war (United Nations, 2009).

The military defeat of the LTTE in May 2009 is certainly a critical point in the history of the formation of the Sinhala nationalist state in the context of global capitalism. The Sri Lankan ruling elite, dominated by the Sinhala ruling classes, consolidated the territorial unity of the Sinhala nationalist state with the defeat of the LTTE. Not only that, the armed challenges to the state that had begun in the early 1970s came to an end − at least for the immediate future.

As seen below, the consolidation of territory, and what one of Sri Lanka’s historians has termed ‘oppressive stability’ under the Rajapakse regime,3 created better conditions for capital accumulation and for strengthening the phase of capitalist development begun in 1977. However, at the end of the period covered by this study, the fundamental issue of building a legitimate state in a society where there are several identity groups has not been addressed. Therefore, capitalist development is taking place in a society where the contradictions generated by the logic of the state have not been resolved.

Rajapakse’s rule - capitalism, nationalism and oppressive stability

Rajapakse called an early presidential election in November 2009 to make use of the prevailing political climate. The election was held in January 2010, and Rajapakse was returned as president for the second time − winning 57.9 per cent of valid votes.

3 Nira Wickremasinghe’s term oppressive stability gives a better sense of what happened under Rajapakse, rather than the often-used term authoritarianism. Sri Lankan regimes always had an authoritarian streak. The term oppressive stability helps us to distinguish the Rajapakse period. See Wickramasinghe (2014).

169 A general election followed in April 2010. The Rajapakse-led UPFA secured 144 seats in a parliament of 225 members. This was an increase of 39 compared to the position after the April 2004 general election and was just six seats short of a two-thirds majority. However, it was very easy for Rajapakse to secure this majority because the politics of many politicians had been reduced to seeking office for the sake of power and benefits it brings, rather than for any serious ideological or political reason. Thus, a common phenomenon in Sri Lankan politics has been MPs gravitating towards the prevailing centre of power. A significant event within this phenomenon was the crossover of eighteen UNP members to the government side in early 2007. Most of them received ministerial posts.

This political culture helped Rajapakse secure a two-thirds majority in order to consolidate power. The key focus in this political agenda was the presidency. As was argued before, the 1978 constitution introduced a powerful presidency. This powerful presidency exists in a society where checks and balances on the executive are weak. In addition, factors such as patronage politics, which have seeped into all spheres of Sri Lankan society, and a traditional attitude of looking towards powerful leaders for solutions, make this office even more powerful. As soon as such a powerful centre of power is created, these factors generate a political culture based on loyalty towards this centre and the person who becomes president. This happened under every regime, and reached new heights under Rajapakse.

A limit of two terms was imposed on the number of times the same person can hold the office of president when Sri Lanka introduced the presidential system. Two former presidents adhered to this provision and retired. In addition, the 17th Amendment to the Constitution sought to limit the powers of the president. Under Rajapakse, the enactment of the 18th Amendment to the Constitution removed both the term limit and limits to presidential power brought in under the 17th Amendment. This created the possibility of indefinite rule by one person. The entire process of constitutional amendment was conducted without giving much chance for public consultation, and the Supreme Court did not find any fault with the process or the amendment (Edirisinha and Jayakody, 2011). It is also important to note that all small minority parties and remnants of the ‘old Left’ supported this amendment in parliament.

170 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Another new development was that members of the Rajapakse family controlled key positions in the state. Here again, it is important to have a historical perspective. Sri Lanka has a long history of political families. This phenomenon has received the attention of political scientists for a long time.4 But there has not been a situation where members of the same family controlled the presidency (the president is also the minister of defence and finance), ministry of economic development, post of secretary to the ministry of defence and speaker of the parliament. In a situation of a political crisis (such as a move to impeach the president), the speaker plays the critical role.

How a family cabal was beginning to control the country became evident in an episode that ultimately led to the impeachment and removal of the Chief Justice by President Rajapakse in January 2013. The background was a ruling given by the Supreme Court about the constitutionality of two bills on subjects under government institutions controlled by two Rajapakse brothers. First was an amendment to the Town and Country Planning Bill by the Urban Development Authority, which was under one brother. The second bill was to establish a totally new department called Divineguma under the Ministry of Economic Development, which was controlled by another brother. The constitutionality of both bills was challenged because they impinged on subjects that come under provincial councils, and therefore needed the approval of provincial councils. Due to opposition, the government had abandoned the amendment to the Town and Country Planning Bill, but managed to get the Divineguma bill passed. More than the specifics of these bills, the most important political outcome was the impeachment and removal of the Chief Justice, sending a clear message to the highest court about where political power of the country is located.5

An element of oppressive stability was the prominent role that the armed forces began to play in social and economic life. A by-product of three decades of armed conflict was the expansion of the security sector. Hence the character of the state at the end of the armed conflict was quite different to what prevailed before. By the end

4 See Jiggins (1979) for an analysis of caste and family in the politics of the Sinhalese. 5 See International Bar Association’s Human Rights Institute (2013) for an analysis of this event.

171 of the war, the Sinhala nationalist state was backed by a well-developed armed force. A largely ceremonial army had expanded to a much more powerful institution. By the time the war ended, the armed forces absorbed around 3 per cent of GDP, and close to 20 per cent of national expenditure. Budget allocations for the armed forces are routinely approved in parliament. This is in a country where there is not even the beginning of a serious discussion on civil-military relations, a significant aspect of governance in a democracy.

Public opinion about the defence forces underwent a significant change because of the victory over the LTTE. When the Sri Lankan armed forces were on the defensive, there was criticism of the armed forces and allegations of corruption, even in the newspapers. These disappeared after the defeat of the LTTE. There was more acceptance of the military, and military logic began creeping into civilian life. Making use of their new-found legitimacy, the armed forces expanded their role into many social and economic spheres. The armed forces initiated their own economic ventures. The Urban Development Authority was brought under the Ministry of Defence. This meant many urban development programmes in the capital city of Colombo, which were essentially part and parcel of strengthening the new period of capitalist development, came under the Ministry of Defence. This made it easier to take care of any opposition to these projects. A so-called leadership training programme that was conducted by the armed forces for new entrants to university is another example of this. Such a role for the military was unthinkable in the past.

The period of the post-war Rajapakse regime was characterised by the emergence of extremist currents of Sinhala-Buddhist nationalism, which resembled an ideology of Sinhala-Buddhist supremacy. The Rajapakse regime projected the military campaign against the LTTE as a patriotic war. Rajapakse mobilised support from parties holding extreme Sinhala nationalist views. The defeat of the LTTE consolidated the centralised state and strengthened the hegemony of Sinhala-Buddhist nationalism. Within this environment, new articulations of Sinhala-Buddhist nationalism came into prominence. Several organisations espousing a more virulent form of Sinhala Buddhism began to be active in politics − the main ones being Bodu Bala Sena, Sinhala Ravaya and Ravana Balaya.6

6 See Verite Research (unpublished) for an analysis of the politics of these groups. 172 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

These groups were characterised by their efforts to propagate and enforce their ideology through violent means. In a very short period, they became politically powerful. There was tacit support to these groups from some sections of the regime. Their attacks especially targeted Muslims and evangelical Christian groups. In addition to campaigns against Muslim religious practices, such as wearing of the Hijab by women or the need for a Halal certificate on certain foods, there were violent incidents attacking mosques and churches across the country.

A significant event reflecting this new form of Sinhala-Buddhist extremism was the violence that took place on 15 June 2014 at Aluthgama, an area with a significant Muslim population. It followed a rally organised by Bodu Bala Sena. Although there were requests even from ministers in the government not to allow the rally because of tension in the area arising from a dispute following an accident, it was allowed to go ahead. Violence resulted in damage to property, businesses and mosques and four deaths. The main victims were Muslims.7

The violence at Aluthgama had all the characteristics of the violent events in 1977, 1981 and 1983 in the southern part of the country, which preceded the armed conflict around the Tamil issue. The attack on Muslims in Aluthgama was organised violence for political purposes. It was not a riot. The use of the term riot gives the impression of unorganised violence between ethnic groups. It had tacit support from the regime, indicated by the fact that the law and order machinery did not act the way it should have during the violence. It was legitimised using the need to protect Sinhala-Buddhism from Muslims.

The Rajapakse regime was a combination of the hegemony of Sinhala nationalism, a highly-centralised state with authoritarian tendencies, a prominent role for the security establishment and a continuation of the new period of capitalist development - but with the state having a more directive role in the economy. As had happened

7 There are numerous reports giving details about these incidents. See e.g. Muslim Secretariat (2014) and Sri Lanka Muslim Congress (2014).

173 in the past, this was another case of a specific ideological orientation of the regime influencing how the new period of capitalist development evolved. This also shows, contrary to the beliefs of neoliberals, how capitalism and nationalism can co-exist, as has happened in the history of capitalist development.

The economic vision of the Rajapakse regime was spelt out in their manifestos, as well as technical documents produced by the Ministry of Finance. The 2005 United People’s Freedom Alliance (UPFA) manifesto articulated the broad ideology of the economic policies in the following manner: ‘A national economic policy will be formulated with positive attributes of free market economy with domestic aspirations in order to ensure a modern balanced approach where domestic enterprises can be supported while encouraging foreign investments’ (Mahinda Chintana, 2005). This formulation is found at the very beginning of a 239-page document titled ‘Mahinda Chintana: Vision for a New Sri Lanka - A Ten Year Horizon Development Framework 2006-2016’ (Ministry of Finance and Planning, 2006). This document was quoted widely by organisations engaged in development during the Rajapakse regime.

When one compares the 2005 and 2010 manifestos of the UPFA, one sees the emphasis shifting to the idea of ‘openness to the world’ and making Sri Lanka a ‘hub’ within global capitalism. The 2010 manifesto promises to make the country a naval, aviation, commercial, energy and knowledge hub (Mahinda Chintana, 2010; Central Bank, 2009). The second important element was the idea of improving connectivity to distribute the prosperity generated through markets. These ideas were spelt out in detail in the second technical document, with a catchy slogan ‘Sri Lanka: Emerging wonder of Asia’, published during the second Rajapakse regime (Ministry of Finance and Planning, 2010). The regime continued to take steps in areas such as foreign investment, trade, migrant labour, tourism and foreign aid, which are important for the further development of the more liberal phase of capitalism. The regime secured financial support from the IMF.

In other words, economic policies were in line with the new period of capitalism begun in 1977. Of course, as in the case of other regimes in the past, there were aspects peculiar to the regime. The most important aspect of this peculiarity was

174 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka the refusal to continue with privatisation, reminiscent of the JR regime. But when compared to the historical experience of Sri Lanka, and there is no other way to analyse this question, this was nothing like what prevailed before 1977. Therefore, the economic policies of the Rajapakse regime were a continuation of the broad framework of the new period of capitalist development begun by J.R. Jayawardene in 1977.

The greatest achievement of the political leadership of Rajapakse for the new period of capitalist development was the destruction of the LTTE, and the central government regaining control over the entire territory of Sri Lanka. Overall, the end of the war made it easier for all sections of capital to expand their accumulation. Many in the private sector came to an understanding with the Rajapakse regime through various means. It is also possible that Rajapakse opened the door to new sections of capital to establish themselves.

Although the war had an impact on the Sri Lankan economy, the economy did not collapse in the manner usually depicted in situations of conflict in other countries. On the contrary, Sri Lanka managed to show an average of 5.1 per cent growth from 1978 to 2009.8 Almost 50 per cent of the economy was concentrated in the Western Province. This was the area endowed with the infrastructure, labour force and connectivity to benefit most from opening up the economy. However, the armed conflict excluded a significant part of the country from the process of capitalist exploitation. This part included vast tracts of unexploited land, beaches that were attractive to investors in tourism, and the strategically important Trincomalee harbour. With the consolidation of the territory of Sri Lanka through military means, the Northern and Eastern Provinces were now open for capitalist exploitation.

The war ended with a significant presence of the armed forces especially inthe North, the heartland of Tamil politics. These forces were under the control of one of the Rajapakse brothers. There are various estimates of the number of security forces in these areas in literature open to the public. One estimate published in 2012 put the total number of security personnel in the North as 198,000, which

8 Calculated from the Special Statistical Appendix, Central Bank (2011).

175 worked out to ‘1 security personnel for every 5.04 civilians in the Northern Province or a force density of around 198.4 security personnel per 1,000 civilian population’ (, 2012). A more recent estimate carried out in 2016 put the figure at 160,000 in the North and East (PEARL, 2016). This is bound to be a regular feature in the Northern Province for at least the immediate future. Neither Sinhala nationalists nor those who want the area stabilised for capitalist expansion will want the presence of the security forces reduced.

While maintaining the armed forces in the war-affected area, the Rajapakse regime took several steps to enhance capitalist expansion to these areas. One of the main projects under Rajapakse was the focus on infrastructure, which included restoring the road and rail network. This strengthened connectivity between the war-affected areas and the rest of the country. This was necessary both for economic and security purposes. The government launched two special projects with catchy titles Neganahira Udanaya (Eastern Revival) and Uthuru Vasanthaya (Northern Spring). Such terms with symbolic values have been regularly used by various governments of Sri Lanka to push their own economic agenda. The primary objective was developing mainly economic infrastructure. For the Northern Province, a Presidential Task Force, based in the Ministry of Economic Development under a Rajapakse, was set up to coordinate activities on resettlement, development and security.

An important factor in these efforts was the ability of the central government to maintain control over land in these areas. Hence, there was little chance for devolution of power over land as stipulated in the 13th Amendment. On the other hand, the North-East presented an excellent opportunity for distribution of land to both the small- and large-scale business sector. Several factors contributed to this. First, this was an area where there was state land available for distribution. Second, many people who were living on and cultivating state land given on permits had lost their documents. Therefore, the situation presented a great opportunity for all kinds of land distribution. It was noticeable that in a country where there had been significant distribution of state land to landless people, and a system of regularising so-called encroachments through a permit system, there was no such effort after an event that resulted in the highest level of social costs in the post-colonial history of Sri Lanka. 176 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

In contrast to the effort given to maintaining a significant presence of armed forces, especially in the Northern Province, and building infrastructure and strengthening connectivity between the war-affected area and the rest of the country, the Rajapakse regime dealt with the civilian population caught in the war very differently. Initially it involved an effort to maintain control over the population and weed out possible LTTE cadres. Close to 300,000 people were displaced by the time the armed conflict ended, and they were kept in military-run camps in the districts of Vavuniya, Mannar, Jaffna and Trincomalee (Norwegian Refugee Council, 2014). By the end of September 2009, around 15,000 internally displaced persons (IDPs), including the elderly, ill, university students and pregnant women, had been allowed to leave (Norwegian Refugee Council, 2014). Three months later, the government introduced a pass system for IDPs still detained in the camps. The government relaxed security measures imposed at the time of the war in preparation for the January 2010 election. This included allowing people to return to their homes. However, some were unable to go back because of the threat of landmines, or because the military had not authorised return to their home areas. They went instead to live with host communities or in transit sites (Norwegian Refugee Council, 2014).

Until the end of 2012, systematic data on IDPs was available from UNHCR. But UNHCR stopped releasing this data at the end of 2012, citing the difficulty of collecting data. This was largely due to interventions by the Presidential Task Force for Resettlement, Development and Security. Given this situation, more recent figures that are available tend to underestimate the extent of internal displacement after the war. In February 2014, nearly five years after the defeat of the LTTE, it was estimated that there were 90,000 persons internally displaced because of the war, the bulk of them living with families or friends. Seven thousand persons were estimated to still be living in camps in September 2013 (Norwegian Refugee Council, 2014). Numerous reports by local and international organisations have documented a wide variety of problems faced by this population. In July and October 2011, M. Sumathiran, an MP from the Tamil National Alliance (TNA), tabled reports in parliament describing various problems faced by the population in the war-affected area (Sumathiran, 2011). The issues highlighted included security issues faced by the Tamil population due to the heavy presence of security forces, land grabbing, illegal

177 settlement of Sinhalese in the area, livelihood issues, and threats to the cultural and religious identity of Tamils.

When the Tamil population gradually moved out of the camps, the government claimed that they had been resettled. But this so-called resettlement was something very different to how resettlement had been carried out by the Sri Lankan government on other occasions. Good examples to compare are the settlement processes under the Accelerated Mahaweli Programme and tsunami rehabilitation carried out during the period covered by this study. Given the scale of devastation and the fact that the government was dealing with social costs of the biggest tragedy in the post-colonial history of Sri Lanka, one would have expected to see a much greater effort. What happened in the North comes nowhere near to settlement processes for Mahaweli and tsunami rehabilitation. In most instances, people were provided with minimal basic support at the initial stages. Any additional support came from donor- supported projects. Therefore, these civilians were of secondary importance to the regime. The fundamental objectives of government policy were maintaining control of the area and incorporating it into the growing capitalist economy.

As mentioned before, the 13th Amendment to the Constitution enacted in November 1987 established a provincial council system in Sri Lanka, giving limited devolution to provinces. This has been the only reform of the centralised Sinhala nationalist state, which has been a principle reason for the armed violence that devastated the country for more than three decades. Even this has not been implemented properly. Provisions in areas such as land and police have never been implemented. There was no hope of any progress in this area under the Rajapakse regime. In the case of the Northern Province, it was even worse. Since the first elected North East Provincial Council was dissolved in July 1990, there has been no elected body for the now separated Northern Province.

The bureaucracy, under the watchful eye of the army, ran the Northern Province for four years after the defeat of the LTTE. After much pressure, both from India and other international actors, the Rajapakse regime agreed to hold elections for the Northern Province on 21 September 2013. The election results showed the fallacy

178 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka of trying to destroy Tamil nationalism through military means, or by appealing to something called development. The Tamil TNA won the election, securing 30 members in a council of 38. The voting rate was 67 per cent, which is high for a provincial council election. The result is comparable to the results of the 1977 general election, when the Tamil United Liberation Front (TULF) contested the general election asking for a mandate for a separate state and won the Northern Province in a similar fashion. The TNA, in its manifesto, reiterated the position it held during the 1977 general election, with the caveat it now called for power-sharing arrangements to ‘be established in a unit of a merged Northern and Eastern Provinces based on a Federal structure, in a manner also acceptable to the Tamil Speaking Muslim people’ (Colombo Telegraph, 2013). The allies of the Rajapakse regime campaigned on a platform of development. The fact that the TNA secured such a victory shows that Tamil nationalist politics have not ended because of the destruction of the LTTE. The election also showed the importance of considering the Tamil diaspora in analysing contemporary Tamil politics. The Tamil diaspora was an important factor in the election campaign and on election day.

In the meantime, the regime established yet another parliamentary select committee to begin a further round of discussions to find a political solution to the conflict. The TNA did not participate in this committee, but held several rounds of discussion with the president separately. But this did not go anywhere. Before getting involved in another round of discussions, Tamil representatives wanted the government to first tackle numerous problems faced by the Tamil population, and fulfil the promises made at various rounds of discussions and recommendations by commissions set up at different points. These demands included a full implementation of the13th Amendment. Tamil representatives made this position clear on numerous occasions.9

However, the politics of finding a solution to the Tamil demand for autonomy became complicated by the demand for accountability for human rights violations during the last stages of the armed conflict. As discussed below, this is an issue that has been internationalised, and it is difficult for Sri Lanka to deal with it purely through an internal political process. It led to a resolution by the UNHRC on human

9 See e.g. Sumathiran (2012).

179 rights violations and war crimes. The newly-elected Northern Provincial Council not only passed a resolution supporting an international inquiry, but some members travelled to Geneva to lobby for the resolution against the Sri Lankan government.

The politics of foreign aid under Rajapakse

Once the territory of the centralised Sinhala nationalist state had been consolidated through military means, the Rajapakse regime secured enough foreign aid to pursue its agenda of strengthening the links between war-affected areas and the rest of economy, and continue with the agenda of capitalist development. Figure 6.1 below gives a picture of the aid flows during the Rajapakse regime, based on Central Bank data on net receipts of development assistance. There is a significant increase in aid flows, especially after 2008, because of an increase in loans. Despite all talk of civilian casualties during the last stages of the armed conflict that consolidated the territory of the Sinhala nationalist state, the regime could secure assistance from the three donors (ADB, WB and Japan) that at one time provided 80 per cent of foreign aid to Sri Lanka (De Mel and De Silva 2012). On top of this, there was assistance from new centres of capitalist development, such as China and India. The regime also pursued a strategy of raising commercial loans at a significant level.

Graph 6.1 Net receipts of development assistance 2006-2015 (in US$ mln)

180 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Table 6.1 Total loans and grants 2006 - 2015 (US$ mln)

Loans Grants ADB 1362.9 195.2 World Bank Group 747.3 0.0 European countries and 127.2 260.4 Canada USA -331.0 140.0 Japan 537.8 204.2 China 2192.7 0.0 India 765.8 0.0 EEC 0.0 71.1 United Nations 0.0 221.3 Other 8510.5 620.1 Source: Computed from data on net receipts of development assistance, Central Bank Reports

As far as the IMF was concerned, it was business as usual. It was there to help the Sinhala nationalist state whenever the economy faced difficulties − especially in its external account. As happened so many times during the post-1977 period, the Rajapakse regime received assistance from the IMF when foreign reserves fell significantly. This was an outcome of the economic crisis that hit global capitalism in 2008. One interesting fact is that approval of this loan was delayed. This was due to US efforts to put pressure on the Rajapakse regime in relation to problems faced by civilians during the last stages of the war (Reuters, 2009). As seen below, this was the beginning of a process where the US government tried to use human rights to discipline the Rajapakse regime. Of course, as was the case before, there were demands for reforms attached to these loan arrangements. But, as pointed out by some, the new loan agreements with the IMF did not demand very specific reforms, as happened in the past. As seen in Chapter 4, during the period of the Premadasa and Kumaranatunge regimes, IMF conditionality not only specified reforms that had to be carried out, but also stated the period within which these had to be done. But these new loans ‘provide a suitable degree of flexibility that creates a broad agreed

181 upon policy framework, whilst enabling the government to identify economically and politically feasible mechanisms to implement these’ (De Mel and De Silva, 2012, p. 176).

Most available estimates indicate that the bulk of assistance went to various infrastructure projects. An estimate for foreign aid disbursements for 2009 shows that around 60 per cent of disbursements were for infrastructure that would generally rehabilitate the war-affected area, which had now come under total control of the Sinhala nationalist state (De Mel and De Silva, 2012). The two key multilaterals, the World Bank and ADB, which were important for Sri Lanka’s capitalist development, were very quick to come to the assistance of the Rajapakse regime once the LTTE had been defeated and the territory of the Sinhala nationalist state had been consolidated. These politics are clearly seen in the country strategies developed after the defeat of the LTTE. For example, the World Bank country strategy published in April 2012 begins its analysis of the political context with strong support for the regime. It states the current Government has strong political support. President Rajapaksa was first elected in 2005. Following a concerted military campaign, the Government defeated the separatist Liberation Tigers of Tamil Eelam in May 2009. Mr. Rajapaksa was re-elected in 2010 with a strong majority. Subsequent parliamentary, provincial and local elections have also brought strong support for the President’s United People’s Freedom Alliance. At the national level, the opposition now holds less than one third of Parliamentary seats (World Bank, 2012, p. 2). So, it does not matter for the World Bank how the war ended, how Tamil people voted or the political manoeuvring of Rajapakse to obtain the two-thirds majority in parliament. This endorsement of Rajapakse’s rule was after the 18th Amendment had been passed. Therefore, the agenda of the Bank was to support the Sinhala nationalist state to strengthen capitalist development at any cost. The ADB welcomed the end of the war and the resultant political stability, and the possibility of capitalist growth at a higher level. At the request of the government, the ADB allocated resources to reconstruct the North and East (ADB, 2011).

182 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

With this endorsement of the regime, both multilaterals developed their own focus areas. For the World Bank, it was ‘(i) facilitating sustained private and public investment; (ii) support structural shifts in the economy; and (iii) improve living standards and social inclusion’ (World Bank, 2012, p. ii). The ADB defined it as ‘(i) inclusive and sustainable economic growth, (ii) catalysing private investment and enhancing the effectiveness of public investment, and (iii) human resource and knowledge development’ (ADB, 2011, p. 6). In developing these strategies, these agencies always emphasised how they fit in well with the government’s own development strategy or Mahinda Chintana.

All the above are traditional goals of economic development expressed in the jargon peculiar to aid agencies. But the appearance of terms like social inclusion in the case of the World Bank strategy takes us back to the already familiar analysis of thinking about Sri Lanka’s conflict as a problem in society, rather than a problem of the state and state-society relations. As seen below, terms such as social inclusion, social cohesion or reconciliation became common currency among many donors once the territory of the Sinhala nationalist state had been consolidated. The overall objective was to stabilise society in the context of what Nira Wickremasinghe calls the oppressive stability of the Rajapakse period.

While for the multilaterals and the IMF it was business as usual under the Rajapakse regime, the situation was different with the bilaterals. These countries had been strong supporters of the liberal peace that dominated under the Wickremasinghe government. Its collapse, and the massive civilian costs during the last stages of the war, alienated these donors from the Rajapakse regime. In addition, the fact that Sri Lanka was now categorised as a middle-income country disqualified it for grant assistance from these countries. Several countries terminated their bilateral programmes with Sri Lanka. The reduction in grant components during the Rajapakse regime can be accounted for by these shifts. However, some European countries extended loan facilities to Sri Lanka during this period. The Performance Report of the External Resources Department for 2011 summed up the situation as follows:

183 The composition of foreign financing received from the Western countries and lending agencies has been substantially changed with the graduation of Sri Lanka to middle income level economy in 2010. Due to reduction in concessional financing or soft loans with low interest rates, the development assistance from these countries and agencies has been deviated towards a mix of non-concessional and concessional funds and export credit facilities (Department of External Resources, 2011, p. 30).

These shifts in the pattern of foreign aid from European countries and the US refer to assistance that goes through the External Resources Department. But this does not mean that these countries or even others like the US did not assist various projects in Sri Lanka during the Rajapakse regime. Given difficulties with the regime, they resorted to other ways of assisting by channelling funds. The principle strategy was to channel funds directly to international organisations. This pattern became prominent from the time the conflict became a major concern of donors. These trends were strengthened under the Rajapakse regime.

For a long time, Japan was the largest bilateral donor to Sri Lanka, although during the Rajapakse regime China replaced Japan as the biggest bilateral donor. In addition, Japan played an important role as a co-chair of the failed negotiations with the LTTE. It sponsored the donor conference in Tokyo. Unlike some Western donors, Japan did not close its aid programme. Instead, as stated in a newspaper supplement published during an official visit of the Japanese prime minister to Sri Lanka, Japan’s Country Assistance Strategy continued with three priority areas: ‘Promotion of Economic Growth, Development of Emerging Regions and Mitigating Vulnerability’ (Sunday Times, 2014). This means that while Japan continued with its traditional focus of funding infrastructure development for capitalist growth, it was also concerned with rehabilitation of war-affected areas.

The big departure during the Rajapakse regime from what prevailed since 1977 was that China became the largest provider of loans compared to all other bilateral donors. If we go by data on net receipts of development assistance, for the years that Rajapakse was in power, loan assistance from China was highest for all years except

184 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

2006 and 2011. In these two years, Japan and India figured as important sources of loans from bilateral donors.

As described in Chapter 2, assistance from China is nothing new to Sri Lanka. In the early 1960s, when the US cut off aid to Sri Lanka because of the state takeover of petroleum distribution dominated by US multinationals, China became the largest bilateral donor to Sri Lanka. In the twenty-first century, China was back as a source of finance to Sri Lanka. By this time China had become one of the new centres of capital accumulation. This is a product of post-Cold War global capitalism dominated by neoliberalism. China benefitted from this economic regime. This obviously had an impact on the balance of power in the region. In Asia, this has led to the emergence of India and China as new regional powers within a global political order still dominated by the US. These two new powers have joined the US and Japan in a regional matrix of power relations. The relationships between these centres of power will be a major factor affecting Sri Lanka in future.

Among many other reasons, two factors were important in the Rajapakse regime developing a close relationship with China. First, China gave consistent material and political support in the military campaign against the LTTE. Second, given the surplus of capital available in China for investment abroad, and China’s own search for such opportunities, China became a major source of investment − especially in infrastructure projects. Of course, Chinese assistance, as in the case of any other country, is linked to China’s foreign policy and strategic ambitions in the region.10

Once the LTTE was defeated and the North and East incorporated into capitalist exploitation, the next task of the regime was stabilising society, especially the war- affected North and East. Of course, the regime had a well-developed armed force deployed in the area to ensure the coercive aspect of stabilisation. But there was also a need for a strategy directed towards Tamil society. For the regime, the twin slogans of development and reconciliation provided the framework.

10 See Miller (2017) for an account of China’s investments and her strategic interests in Asia.

185 Although the Rajapakse regime did very little in terms of finding a political answer to the Tamil issue, nor did it cooperate with any international efforts dealing with what happened during the final stages of the war, reconciliation was a term that the regime could live with. It established a Lessons Learnt and Reconciliation Commission (LLRC), with a mandate to inquire into the failure of the ceasefire agreement and lessons that could be learnt. The emphasis was on learning lessons and identifying what needs to be done for ‘reconciliation among communities’. This was an attempt to counter the discourse on accountability.

The second strand of donor policies fitted well with this regime’s strategy of stabilising society in war-affected areas through a notion of reconciliation. The conceptual basis for this was provided by the discourse of conflict that dominated during negotiations with the LTTE under the UNP. This vision now looked at Sri Lanka being stabilised through military means as a post-conflict country, and now facing the task of stabilising society. The more relevant framework was to look at the defeat of the LTTE and the consolidation of the territory of the Sinhala nationalist state in a context of a new period of capitalist development as a critical turning point. This turning point creates its own conflict and contradictions, some of them arising out of the politics of economic reforms.

These notions of stabilising society after the military defeat of the LTTE go back to the assumption that what we had in Sri Lanka was an ethnic conflict. This idea is based on what can be termed as the ‘primordialist’ understanding of Sri Lanka’s conflict. This understanding assumes that the conflict in Sri Lanka is one of homogeneous identity groups clashing with each other. It also assumes that these identities have a continuous unchanging history, and the conflict was because of a lack of trust and the existence of animosity between these identity groups. Therefore, the post- conflict period should be utilised to bring about an understanding between identity groups at various levels.

Donor-supported projects used a variety of categories, such as social cohesion, social harmony, social integration, reconciliation and even nation-building, to support this idea of reconciliation. Most exercises in peacebuilding are informed by these ideas.

186 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Even donors who undertook infrastructure projects wanted to do this in a way in which it did not create new conflicts in society. Another peculiar feature of these efforts was the predominant focus on the war-affected North and East, or the theatre of war, to implement such policies. This approach assumes that the main reasons for the war that had such a devastating impact on Sri Lanka were in these areas. The main culprit behind the conflict − political forces controlling the central state − was ignored. Even in the war-affected area, the focus was on poorer sections of society who were victims of war. Most donors incorporated these ideas of stabilising society into rehabilitation projects in war-affected areas.

Although there are subtle differences, there are also similarities in the way many of these ideas are implemented at field level. First, many of these interventions construct a term called ‘community’. Or the section of the population that the projects work with in the field is identified as a community. The use of the notion of community generally gives the idea that before the civil war these social groups were cohesive. The civil war has divided them. The objective of the project is to bring them together. A great deal of emphasis is given to promoting a dialogue between beneficiaries in the project. Its political objectives are pretty clear − stability of society after the defeat of the LTTE.

Some of these ideas were seen in national-level efforts as well. For example, the main slogan of the National Policy Framework for Social Integration implemented by the Ministry of National Languages and Social Integration, produced with donor support, was ‘diversity demands social integration’. According to this framework, social integration demands access to education, economic activities and employment, justice and legal resources, a safe and secure physical environment and political participation (Ministry of National Languages and Social Integration, no date). This is the usual exercise of trying to run away from identity politics and nationalism in the context of the new period of capitalism. Perhaps a better framework would have been to accept diversity in the country in terms of identity groups, and discuss the issue of social justice. Then the notion of access could be incorporated into this.

187 Finally, it is also important to remember that many donor activities in the North and East involved objectives other than peace-related efforts. These covered rebuilding both economic and social infrastructure, improving economic and social conditions of war-affected people, and supporting government structures in war-affected areas. These were what can be called traditional development activities. Given the lack of focus of the Rajapakse regime in these areas, these traditional development efforts were much more meaningful for people who were coming out of a war than the idea of trying to build peace with victims of the war. Of course, these efforts faced difficulties like many development activities. The post-war context and the power that the centre had over these areas created their own difficulties. Nevertheless, these were more relevant, provided donors did not believe they would be an answer to political problems.

The third strand of policies of developed capitalist countries of the West reflects a clash between liberal dimensions of the post-Cold War neoliberal project and the Sinhala nationalist agenda of the Rajapakse regime. These amounted to efforts to discipline the Sinhala nationalist state, making use of international human rights mechanisms and withdrawing GSP+ facilities. The principle drivers of these policies were the US and EU, both co-chairs of the collapsed liberal peace.

In understanding these policy developments among these key donors, it is important to recognise that there is a difference between states beginning to be concerned about human rights and social movements championing human rights. There were two main reasons for these deviations for the policies that Western capitalist countries followed since 1977. The first reason relates to the Rajapakse regime’s total disregard for civilian costs during the last stages of the war, its negative response to the efforts by the US government to broker a surrender, its refusal to take any steps to address human rights issues arising from this event, and the lack of any positive response to various efforts by international actors to address this question. The second factor is the regime’s shift in foreign policy from a totally pro-Western bias, to including China as an important ally. In the matrix of regional power relations, where there are many players, this significant departure in Sri Lanka’s foreign policy from what prevailed since 1977 was not to the liking of other powers. This shift in Sri Lankan’s

188 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka foreign policy certainly played a role in the West taking measures to discipline the Rajapakse regime.

One of the immediate outcomes of these efforts to discipline the Rajapakse regime using human rights was the removal of EU Generalised Scheme of Preferences (GSP) that Sri Lanka enjoyed. The GSP facility of the EU is a concession provided by the EU to poor countries. This allows the possibility of exporting with less or sometimes no duty to EU countries. GSP+ is a special component of GSP that provides additional benefits to countries who are already part of the GSP scheme. To benefit from this scheme, countries must ratify and implement key international instruments on human rights. This means GSP is another element in global governance strengthening the post-Cold War neoliberal political project. Sri Lanka began to benefit from GSP+ from July 2005.

The benefits of GSP+ for Sri Lanka did not last long. In August 2010, the EU suspended Sri Lanka’s GSP+ status. The reason given was that there were shortcomings in the implementation of three UN human rights covenants: the International Covenant on Civil and Political Rights (ICCPR), Convention Against Torture (CAT), and Convention on the Rights of the Child (CRC) (Democracy Reporting International, 2016). This was an EU reaction against the post-war Rajapakse regime, which had violated global liberal norms, and shifted the country’s foreign policy from a totally pro-Western bias. In a world where economic sanctions are widely used for political purposes, this was a significant development for a country that has benefitted from the support of developed capitalist countries.

The role of the US government was crucial to understand how UN human rights mechanisms were used against the Rajapakse regime after the end of the armed conflict. Although the US was not unhappy with the military destruction ofthe LTTE, and in fact supported the Sri Lankan government’s military efforts, the US has always been mindful of a need for a political solution to Sri Lanka’s Tamil problem. While negotiations with the LTTE were progressing, the US accepted that bringing the LTTE into negotiations would be beneficial to a political solution. The US also did not believe that the Sri Lankan state could defeat the LTTE militarily. On top of

189 all this, the US was concerned about civilian costs even during the very early stages when there were signs of conflict escalating after Rajapakse came to power. For example, during one of the first Development Forums bringing donors together after Rajapakse assumed power, the US ambassador, in his speech, while supporting the Sri Lankan government’s efforts at defeating terrorism, voiced concern about civilian casualties (Blake, 2007). The US country strategy at this time remained committed to supporting what was called transition in the Eastern Province after the end of the war, finalising some of the remaining tsunami reconstruction and following up on the 2003-2008 strategy that included democracy, governance, economic growth, humanitarian assistance and peacebuilding (US Aid Country Strategy, 2008).

However, on the war-front, the US last minute efforts to negotiate a surrender of the LTTE leadership and evacuate civilians did not receive a positive response from the Rajapakse regime.11 The Rajapakse regime was not ready to listen to any effort to halt the war when it was clear that the LTTE could be defeated militarily. This contributed to the US government utilising UN human rights mechanisms to discipline the Rajapakse regime.

The opening for this was provided by the already-mentioned joint statement issued by President Rajapakse and the UN Secretary-General at the end of the latter’s visit to the war-affected immediately after the armed violence ended. As stated in the joint statement, Sri Lanka reiterated its strongest commitment to the promotion and protection of human rights, in keeping with international human rights standards and Sri Lanka’s international obligations. The Secretary-General underlined the importance of an accountability process for addressing violations of international humanitarian and human rights law. The Government will take measures to address those grievances (United Nations, 2009).

11 There are debates about whether the US was only concerned with the rescue of civilians, or if the plan included surrender of the LTTE leadership as well. See the speech of the former US ambassador to Sri Lanka to the Serendipity Group, which consists of US diplomatic personnel who have served in Sri Lanka. Sri Lankan Brief: 02/07/17. http://srilankabrief.org/2017/07/ amb-robert-blake-on-sri-lanka-our-secret-plan-was-not-to-save-ltte-but-to-rescue-idp.

190 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

The Rajapakse regime’s refusal to follow up on these commitments resulted in the Secretary-General of the UN appointing what was called a panel of experts to investigate what happened during the last stages of the war. The panel of experts published a report on 31 March 2011, which concluded that there had been war crimes by the LTTE as well as government forces. This was followed by US-sponsored resolutions at the UNHCR in 2012 and 2013.

As an outcome of the resolution passed at the March 2013 UNHRC sessions, the UN High Commissioner for Human Rights Navi Pillay visited Sri Lanka in August 2013. This was a fact-finding mission focusing on how Sri Lanka had implemented the recommendations of the March 2013 resolution. She visited the North and met people affected by the war, as well as got a first-hand account of human rights violations from the end of the war. This was followed by a resolution passed in March 2014. It called on the Office of the UN High Commissioner for Human Rights (OHCHR) to undertake a comprehensive investigation into alleged violations and abuses of human rights and related crimes by both parties, and to establish the facts and circumstances of such alleged violations with a view to avoiding impunity and ensuring accountability. A three-member UN panel was appointed to play a supportive role, provide advice and guidance as well as independent verification during the investigation.

The final result was the US sponsored a resolution in March 2014. It calledfor investigations into human rights violations and war crimes. It also called for the establishment of an ‘international inquiry mechanism to further investigate the alleged violations of international human rights law and international humanitarian law and monitor any domestic accountability processes’ (Annual Report of the United Nations High Commissioner for Human Rights and reports of the Office of the High Commissioner and the Secretary-General, 2014). In the history of state formation in Sri Lanka, this was a major intervention by international human rights institutions. How these efforts will be played out in future will depend very much on Sri Lanka’s international relations, especially with the US − the hegemonic power that led the process of adopting this resolution.

191 Defeat of the Rajapakse regime in January 2015

The outcome of the presidential election held on 8 January 2015, which saw the defeat of Mahinda Rajapakse, surprised many. Five years earlier, the former president had won an election with 57.9 per cent of the valid vote. In 2015, he was defeated by , who received 51.3 per cent of valid votes, compared to Rajapakse, who got 47.6 per cent. The very fact that Rajapakse was thrown out of power after ten years and the peaceful nature of the regime change showed the resilience of the electoral institutions in Sri Lanka. Apart from the electorate, who came out to vote in large numbers, the most important factor behind the peaceful transition was the behaviour of the bureaucracy and the police who conducted the election and provided security. Despite political pressure, these officials carried out their duties.

Comparison of voting patterns in the 2010 and 2015 presidential elections show that Mahinda Rajapakse lost his share of the vote in all electoral districts. Politically, an interesting dynamic is the shift in Sinhala-majority electoral districts. In five electoral districts (Polonaruwa, Ratnapura, Anuradhapura, Gampaha and Kalutara) the drop in Mahinda Rajapakse’s vote between 2010 and 2015 is more than 10 per cent. In nine other electoral districts it is 5-10 per cent. The Tamil voters from the war- affected areas voted in large numbers. For example, the voting rate in the Northern Province increased from 30 per cent in 2010 to 54 per cent in 2015. A significant proportion of this vote went to Maithipala Sirisena, and it was a major factor in his electoral victory. However, it should not be forgotten that a certain section of the Sinhalese turned against Mahinda Rajapakse despite his leadership to destroy the LTTE and his Sinhala-Buddhist nationalism. Therefore, it was both support from a section of Sinhala voters, together with the votes of numerically smaller ethnic groups, that defeated Rajapakse.

A novel feature of this election was the fact that a leading member of the governing SLFP left the party and became a common candidate, supported by a range of political parties. Maithripala Sirisena contested the election under the banner of a new party, the National Democratic Front (NDF). The leading opposition party, the

192 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

UNP, agreed to this formula and did not put forward its own candidate. Although the crossing-over of Maithripala Sirisena from the governing party to the opposition took many by surprise, this is nothing new in Sri Lankan politics. There have been several occasions when a powerful regime in power was brought down by defection of senior members from its ranks. What is new is the coalition that brought Maithripala Sirisena into power, and the political slogans on the basis of which the opposition fought the elections. The latter included constitutional reform, good governance and anti-corruption.

Although the political parties that supported Maithripala Sirisena are aware of issues around the political solution to the Tamil demand for autonomy, this was downplayed during the election campaign. This was a conscious electoral strategy. It is interesting to note that there was an agreement on this strategy with the main Tamil political party, TNA. Obviously, the main reason for this electoral strategy was the possibility of the ethnic issue becoming a major question in the campaign, with possible implications for support from the Sinhala electorate. The electoral strategy paid off, and Maithipala Sirisena won with support from a section of the Sinhala community, and overwhelming support from the Tamil and Muslim communities.

The general election held on 17 August 2015 consolidated the political trends seen in January 2015. The political formation led by former president Rajapakse, the UPFA, was defeated. A coalition that came under the name United Front for Good Governance (UNFGG) won the elections. They contested under the UNP symbol. In a parliament of 225, UNFGG secured 106 seats and UPFA 95. This meant that the UNP-led coalition only had a majority of 11 members. It was essential to continue with the coalition if the government was going to tackle substantial issues such as constitutional reform.

The coalition that came into being after the defeat of Rajapakse is unusual for Sri Lanka’s politics. The president, who crossed over from the SLFP and is now back as president of the SLFP, has been elected for six years. The cabinet is led by a prime minister from the UNP. The UNP is holding many key positions in the cabinet, such as defence and finance. Coalition partners that supported Maithripala Sirisena

193 also have cabinet positions. Several politicians who crossed over with Maithripala Sirisena are in the cabinet. To continue any serious constitutional reform, the Sirisena regime needs the support of the SLFP.

The most hopeful scenario is a consensus between the UNP and the SLFP, the two main parties in parliament, in bringing about the constitutional reform necessary to meet the Tamil demand for self-governance. Many of Sri Lanka’s political problems in finding an answer to the Tamil demand for autonomy are rooted in the rivalry between the two main political formations that have ruled the country since independence. A two-party consensus on key issues would not only reverse the excesses committed under Rajapakse, but would also be a step in the right direction to achieve this critical reform, and ensure the foundation of a legitimate state in a plural society. A worse scenario is the unravelling of the coalition, and relations between the two main political parties taking us back to a situation of political instability. This would pave the way for the return of Rajapakse, who is now supported by a section of the United People’s Freedom Alliance (UPFA) that governed the country under the leadership of Rajapakse. Any unravelling of the coalition will pave the way for Rajapakse to come back to power.

194 Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

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Sustaining a state in conflict: Politics of foreign aid in Sri Lanka

Sunil Bastian

This study focuses on the politics of foreign aid to Sri Lanka from developed capitalist countries of the West, Japan and multilateral agencies during the period Making Ends Meet: Women’s 1977 to the end of the armed conflict between Sri Lankan security forces and the Sustaining a state in conflict: Liberation Tigers of Tamil Eelam. This period is characterised by economic policies Livelihoods in Post-War Sri Lanka that emphasised openness to global capitalism, markets and the private sector, Politics of foreign aid in Sri Lanka and an armed conflict resulting from the demand by the Tamil minority for a separate state.

The study seeks to unpack the role played by foreign aid within this political economy. The approach taken by the study looks at foreign aid as a political factor within Sri Lanka having a complex relationship with the state and the ruling elite.

The study shows that foreign aid was an essential element in sustaining the Sri Lankan state while it engaged in an expensive war. It provided resources and legitimacy within the structures of global governance. The primary reasons for this were the liberal economic policies followed by the country. But, at the same time, it was also a force that sought a political solution to the conflict, highlighted violations of human rights, and supported various initiatives in finding a solution. In short, it was neither the do-gooder that many liberals believe in, nor the foreign devil that Sinhala nationalists like to see.

ISBN 978-955-580-219-2

9 789555 802192 VasukiSunil BastianJeyasankar Printed by Horizon Printing (Pvt) Ltd. Savini Ganhewa