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Sri Lanka at The Crossroads by2 Razeen Sally

o most outsiders Sri streets are not as filthy; people look better Lanka is a far-away tourist fed, clothed and housed; they have better destination, a tropical para- manners; and they are friendlier. T dise that has fallen into a Yet this is also a country that has de- vicious cycle of ethnic con- scended into an inferno. A gathering of flict. To me it is closer to home. It is where seemingly pacific Sinhalese Buddhists can I grew up; and , the capital city, is sometimes flip into a frenzied mob. Sri Lan- my hometown. I think of as a ka’s hardy Tamil minority has produced heaven-and-hell country, consumed by its one of the most murderous terrorist move- own extremes and contradictions. These ments in the world. Ethnic conflict has con- play out at today’s crossroads, with the sumed 100,000 lives. Two student-peasant seeming end of a 26-year military conflict. uprisings in the Sinhalese south, one in the Sri Lanka is one of the loveliest places early 1970s and the other in the late 1980s, on the planet, full of exuberant multicul- were brutally prosecuted and brutally tural colour and with warm, welcoming crushed. Several governments have used people. It is green and fertile almost be- paramilitaries and vigilantes to achieve yond imagination, and its natural endow- military and other objectives, in flagrant ments support an average standard of disregard of the law. Sri Lanka’s politics are living that has long been the highest in infested with assassinations, thuggery, mob South Asia (the Maldives aside). It has ser- violence and mafia connections. endipitously beguiled visitors from Marco The Sri Lankan government has com- Polo and Ibn Battuta to Arthur C. Clarke. pleted an emphatic military victory over Flying into Colombo airport, the deep- Tamil Tiger rebels. No one with an ounce dark green of , framed by the In- dian Ocean, forms a soft, refreshing n Mr. Sally is director of the European Centre contrast with the harsh, parched land- for International Political Economy in Brussels scapes of much of India. Once on the and is on the faculty of the London School of ground, the contrast is heightened—the Economics.

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of humanity will shed a tear at the death waxed lyrically about Ceylon’s conditions of the Tigers’ monstrous leader, Velupillai in the first decade after independence. Prabhakaran, and his chief lieutenants. Decline ever since has its source in a But victory has come at great cost in terms disastrous Sinhalese political elite pander- of combatant and, above all, civilian casu- ing to the worst instincts of the Sinhalese alties. It has been met by a wave of nation- ethnic majority and egged on by a xeno- alist euphoria in the Sinhalese heartland, phobic Buddhist clergy. The elite came despair in the Tamil diaspora, and criti- from a handful of aristocratic landholding cism of human-rights abuses by Western families. Many of these “brown sahibs” governments. All moderate, sensible com- were educated in Britain and imbued with mentators agree that Sri Lanka’s president, Fabian or Marxist ideals. They had the gift Mahinda Rajapakse, must follow up his of the gab, but little inkling of real life out- military victory with a just settlement for side their charmed circles. Sir Ivor Jen- the Tamil minority. If not, terrorism will nings, distinguished constitutional lawyer, go underground and ethnic conflict will first vice-chancellor of the University of continue to fester. But, as important, Sri Ceylon and key adviser in the run-up to Lanka’s economy needs radical change. independence, worried presciently that Without that there will be no development these “schoolboy politicians” would play take-off and broad-based prosperity. A po- cheap populist politics and ruin the coun- litical initiative to end ethnic conflict and try. So it came to pass. economic-reform initiatives are intimate- Sinhalese politicians appealed of course ly related; peace and development go to- to the Sinhalese majority, an agrarian- gether. But will it happen? Or will Sri based society with great laid-back charm, Lanka miss yet another chance to drag it- but one which had not created Ceylon’s self out of the quagmire? plantation-based wealth. That was mainly the creation of colonial administrators and The Post-Independence Record planters, Tamil laborers, and a wider pen- umbra of Tamil and Muslim traders. Like first some historical background. Malaysia, the Ceylonese economy relied Ceylon (the former name for Sri Lanka) on its productive minorities with a work was a model British colony, well prepared and education ethic, not on its majority for independence in 1948, six months after ethnic group. But the latter inevitably took India. Unlike India, not a drop of blood control of postindependence politics. was shed in the transition to indepen- Successive Sinhalese-dominated gov- dence. Ceylon was at peace, had a stable ernments played the populist ethnic card, parliamentary democracy and was Asia’s especially after 1956 when Sinhalese be- second-wealthiest nation. Per-capita in- came the official language at the expense come was a fifth higher than the South- of Tamil and English. Affirmative-action Asian average. Ceylon had a prospering policies for the Sinhalese were rolled out, plantation economy and, by developing- and discrimination against the Tamil mi- country standards, a well-developed infra- nority increased. Opportunities for ad- structure, an efficient public administration vancement were closed off, petty and judiciary, and significant achieve- discrimination increased and human-rights ments in health and education. Its pros- abuses (especially by the police) prolifer- pects were golden. Visitors, including the ated. This sowed the seeds of the Tamil Ti- economists Joan Robinson and Sir John ger terrorist movement, culminating in an Hicks, as well as the young Lee Kuan Yew, all-out violent conflict in 1983.

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But disastrous economic policies played better off than they were a generation ago. their part as well. Benign postindepen- Key to this success has been industrialisa- dence conditions bred a redistributive tion and a more diversified services econ- rather than growth-maximizing mentali- omy. Employment in the formal ty, directed to expanding the welfare state manufacturing sector has more than dou- for the Sinhalese majority. Especially after bled since 1980 and the share of manufac- 1956, Ceylon followed the Indian path of turing in total merchandise trade has rampant government intervention and increased from 5% to close to 70% of GDP. trade protectionism, in addition to chron- The in the firmament is a strong, la- ic macroeconomic profligacy. This became bor-intensive garments industry—a direct extreme after 1970, when Sri Lanka had its product of liberalization. The industry version of India’s “license raj.” emerged in the early 1980s, now accounts By the mid-1970s, the economy was for about 50% of total export earnings and close to ruin. Growth had come to a halt, employs about one million people. real incomes were stagnant, public-sector Still, Sri Lanka is a sad tale of what- subsidies were out of control, welfare ex- might-have-been. As of 1960, Ceylon’s liv- penditures were still increasing, unem- ing standards were higher than those of ployment rose to 25% of the labor force, South Korea and Thailand. As of 1970, there were balance-of-payments crises Ceylon and Malaysia had similar living and acute shortages and rationing of con- standards. With peace and East-Asian- sumer goods. Crucially, welfarist policies style policies of macroeconomic prudence, churned out educated youth from a fast- openness to the world economy and better increasing population, but they had no job government at home, Sri Lanka would be prospects in a stagnant economy. Disaffec- where Malaysia is today (with an average tion led many to extremism and violence, real income of over $15,000 at purchasing not just in the Tamil north but also in the power parity). Absolute poverty would Sinhalese south. have been eradicated, average living stan- The one bright spot was the major lib- dards would be four times what they are eralization of the economy in the late now, clusters of multinational enterprises 1970s, followed by liberalization bursts in would link the economy to global supply later decades. Sri Lanka led the way in chains, tourism would be flourishing, ser- South Asia in switching from “import sub- vices would be hitched to the Indian out- stitution” to “export-orientation,” and sourcing juggernaut, and infrastructure more generally in market reforms that would be much better, as would education (re)opened the economy to the world. But and health care. Above all, Sri Lankans reform has proceeded in stop-go fashion. outside the elites would have life-chances Its glaring weakness has been macroeco- they can only dream about today. nomic incontinence. Public spending, bud- get deficits and inflation have not been The State of Play brought under control. Nevertheless, de- spite civil war, macroeconomic instability fast- to the present. Start and misgovernment, Sri Lanka has grown with politics. Power has been centralized at about 6% annually. Average real incomes in the presidency since 1978. The present ($1,540 at market prices and $4,200 at incumbent, Mahinda Rajapakse, is riding purchasing power parity) are 50% higher the crest of popular support for his single- than they are in India. Outside the fighting minded prosecution of the war in the zones, ordinary people are significantly north. He and his three brothers—one is

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the defense secretary and another is a of dissent and a culture of fear backed by presidential adviser on the economy—con- violence, are, at the very least, not discour- trol the levers of power. Mr. Rajapkse leads aged. The armed forces are more powerful a governing coalition of leftist parties, cen- than ever. Journalists have been intimidat- tred on his own Sri Lanka Freedom Party. ed and several assassinated. Businesspeo- He has proved a brilliantly successful pol- ple and activists from nongovernmental itician. The war effort has dominated his organizations are scared of criticizing the agenda—more so than under any previous government—on economic and social is- government. His strengths lie in his abil- sues as well as military issues. Self-censor- ity to connect with the Sinhalese small- ship abounds. Rumors swirl of town bourgeoisie, of which he is a product, government-sanctioned vigilante opera- as well as the rural electorate. On the oth- tions against opponents (“white vans in the er hand, he is not a policy thinker—least of middle of the night”). all on the economy—and has scant knowl- What passes for political debate is black- edge of the world out- or-white, hectoring and side Sri Lanka. puerile. Journalistic The opposition, on Sri Lanka is a sad tale standards are low and the other hand, led by of what might have shoddy. Ceylon was re- the previously-govern- nowned throughout ing United National been. With better gov- Asia for its liberal cul- Party, is weak, divided ernance, it would be ture and high standards and demoralized. Its of journalism, with leadership comes from where Malaysia is now. space enough for rea- the Colombo upper- soned, nuanced and class elite, which seems utterly cut off critical debate. That has been almost extin- from, and unable to communicate with, or- guished—a symptom of extreme degenera- dinary Sri Lankans, especially outside Co- tion in public life and an emasculated civil lombo and the Western Province. Most society. Liberal institutions and the rule of likely, Mr. Rajapkse will call parliamenta- law are the inevitable losers. Not least, Sri ry and presidential elections later this Lanka has become a balkanized society, year, with every prospect of winning hand- with deep splits, usually boiling down to somely. The danger is that Sri Lanka, shorn poisonous personality clashes, at every lev- of institutional checks and balances, will el of politics, business and society. veer—not for the first time—in the direc- Economic policy has also deteriorated. tion of a Caesarist elective dictatorship. The government has spent like there was Other political features, visible period- no tomorrow. Defense spending has more ically in previous decades, have also be- than tripled in the last four years. Other come more pronounced. Sinhalese subsidies have also increased, especially to chauvinism finds expression at the heart of agriculture to shore up vote banks in the government. It reinforces the worst as- countryside. A bloated public sector, em- pects of Sinhalese pseudointellectualism— ploying around one million people in a la- a highly mythologized historiography that bor force of under seven million, has emphasizes Sinhala superiority and xeno- swelled even further. It is dominated by phobia toward minorities and near-neigh- patronage politics and packed full of ill- bors; a stark politicization of Buddhism; qualified or unqualified political appoin- and a parochial, inward-looking attitude tees. Monetary policy has resorted to the toward the present and future. Intolerance printing press to plug the yawning gap in

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government revenues, predictably stoking 102nd in the World Bank’s Doing Business inflation, which peaked at close to 30% last 2009 report. It scores particularly badly in year. Official reserves were blown away dealing with construction permits (which defending an untenable rupee exchange involve an average of 21 procedures, take rate. Yet again, Sri Lanka faces a home- 214 days to process and cost 1,500% of in- brewed balance-of-payments crisis. Bor- come per capita); employing workers (fir- rowing on international capital markets ing costs are equivalent to 169 weeks of has dried up in the wake of the global fi- salary); registering property (with 8 pro- nancial crisis, forcing the government to cedures taking 83 days and costing 5% of negotiate a $1.9 billion loan from the Inter- property value); paying taxes (with 62 pay- national Monetary Fund. Debt-servicing ments per year taking 256 hours to process and unsustainable current expenditure and with a tax rate equivalent to 64% of have driven up real interest rates and profits); and enforcing contracts (with 40 crowded out private investment, as well as procedures taking 1,318 days and costing long-term investments in education. 23% of the claim). Sri Lanka is ranked not State intervention in the banking sec- that much better than India (ranked tor has gone deeper. State-owned monop- 122nd) and is light-years behind Malaysia olies in oil and electricity have been (ranked 20th). Sri Lanka does better in the reinforced. Hence energy and power costs rankings for trade procedures, but that is remain artificially high, with inefficient still nothing to write home about. It ranks delivery. Trade protectionism has in- 66th in the Doing Business “trading across creased, with a paraphernalia of addition- borders” category (India being in 71st and al import taxes. Discretionary powers Malaysia in 29th place). have also been used more frequently and Policy regression has occurred in a selectively to restrict imports, e.g., through worsening policy-making climate. Aca- customs delays and extra charges. The do- demics and other government advisers ad- mestic private sector has been repressed vocate a state-directed economy, with additional taxes and regulatory bur- infant-industry promotion and agricultur- dens. The government has even set up its al self-sufficiency—all old ideologies that own—predictably loss-making—low-cost are back in fashion. Policy making is more airline. And oil, arms and infrastructure populist, opaque and unpredictable, favor- deals with China, Pakistan, Iran and Libya ing the politically-connected and sidelin- lack transparency, to say the least. The ing technocratic advice. This makes for government’s enthusiasm for these “new knee-jerk microeconomic intervention- friends” has increased commensurately ism. Corruption and institutional rot set in with its cooling of relations with Western long ago, but they have sunk to new depths. governments—“old friends” who have crit- Today they pervade and poison all aspects icized alleged human-rights abuses by the of public life. armed forces. But new friends cannot sub- stitute for old friends: Sri Lanka trades What Next? overwhelmingly with the West; the U.S. and the European Union alone account for a widely-shared sentiment in Sri Lanka over 60% of its exports. is that military victory will translate into Over-regulation, regulatory opacity, peace and fast development. This fits a pat- frequent and unpredictable regulatory tern: too many Sri Lankans, and certainly changes, and corruption keep the costs of their governing elite, perennially expect a doing business high. Sri Lanka is ranked quick fix or manna from heaven. The real-

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ization has never dawned that the world cedures of the central bank and the trea- does not owe Sri Lanka a living. An East- sury. Beyond that, trade protection should Asian-type culture of working hard, plan- be reversed, with accompanying simplifi- ning for the future and earning one’s cation of trade and foreign-investment success has never taken root. That is why measures. (The latter are caught in a dense Sri Lanka’s blessings—its breathtaking thicket of laws, regulations and govern- beauty and bountiful natural endow- ment agencies.) Property rights to farm- ments—are overwhelmed by its curse of land need to be clarified and strict controls lackadaisicalness and complacency. That on land ownership lifted in order to raise is true of the world of everyday work, as agricultural productivity. Labor laws need well as the world of policy thinking and to be more flexible. There needs to be deep execution. A Sri Lankan acquaintance public-sector reform; a move to market calls it the “broken window-pane society.” pricing for oil and electricity; and, not The general attitude is that if a window- least, big cuts in the defense budget. Dras- pane is broken, just tic domestic deregula- leave it; don’t bother to tion is also imperative fix it. Military victory gives to cut the high cost of Without a serious the government the doing business. In the attempt to address the longer term, Sri Lanka grievances of the Tamil chance to engineer the needs a revamp of its minority—from real de- turnaround necessary rotten political culture volution of power to the and public institutions. northern and eastern for economic take-off. Sri Lanka’s basic prob- provinces to enforcing lem is that it has far too legal rights and removing petty discrimi- much politics at all levels of society. This nation—there will be no peace. The pre- cramps individual freedom, particularly ferred alternative in some government for the poor citizen without good political circles—co-opting ex-rebels in the north connections and it stymies wealth-creat- and east and giving them Chechenya-style ing enterprise. warlord operations to run—is clearly not Military victory gives the government viable in the long-term. a historic opportunity to engineer the po- On the economic front, the danger is of litical and economic turnaround neces- creeping Russification. A parastatal net- sary for economic take-off. Given the work of politicians, Mafiosi and the mili- government’s record, the chances of an tary could extend its tentacles into business enduring political settlement are not life. That is not yet the widespread reality, great. The odds are also against an eco- but it is a risk. In any event, without an nomic-policy overhaul. But the political economic-policy overhaul, Sri Lanka faces opposition does not provide a credible al- either slow material decline or something ternative. It is safe to say that without a worse, especially with a bleak medium- change of political and economic direc- term global economic outlook. tion, Sri Lanka will continue to be the bro- The short-term imperative is to clean ken window-pane society, and will fail to up macroeconomic policy: allow the ex- achieve its golden potential. Heaven will change rate to devalue to a market-deter- always be promised and just around the mined level, cut public subsidies, and corner, but hell more often the reality—at impose order and transparency to the pro- least for some.

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