Economic and Social Development under a Market Economy Regime in Sri Lanka Buddhadasa Hewavitharana Felicitation Volume I Edited by Saman Kelegama & Dileni Gunewardena June 2010 _____ Buddhadasa Hewavitharana ____ CONTENTS List of Abbreviations Acknowledgements Introduction Economic and Social Development under a Market Economy Regime in Sri Lanka 1 Saman Kelegama and Dileni Gunawardena PART I—Issues in Working of the Market Economy Regime 1. Through Eminent Eyes: A Fifty Years Retrospective on the ‘Papers by Visiting Economists’ 29 Sarath Rajapatirana 2. Role of the Market Regime in Transformation from Developing to Middle Income Country: What Next? 62 Dushni Weerakoon 3. The Evolving Role of the State: Privatization, Competition and Regulatory Governance 79 Malathy Knight-John 4. Sustaining More than Seven per cent Rate of Growth in the Next Decade 92 O.G. Dayarathna Banda and Anuruddha Kankanamge 5. Spatial Inequality 115 Thusitha Kumara and Dileni Gunewardena 6. Income Distribution after Economic Reforms 1980 - 2002 138 Ramani Gunatilaka 7. Regional Disparities: Limitations in the Application of New Economic Geography 166 Jayatillake S. Bandara and Sisira Jayasuriya 8. Liberalization of the Economy and its Impact with Special Reference to the Eastern Province 194 M.S. Mookiah 9. Prospects for Economic Revival in the Eastern Province 220 G. Chris Rodrigo 10. Participatory Development: Rationale, Methodology and Limitations 246 W.D. Lakshman PART II—Money and Public Finance 11. Endogenous Money and Monetary Policy 281 S.S. Colombage 12. Behaviour and Determinants of Aggregate Price Level during the Post-1977 Period 307 Danny Atapattu 13. Towards a More Growth Oriented Fiscal Policy 323 Martin Brownbridge and Sudharshan Canagarajah 14. Post-Reform Public Finance Management: Problems and Prospects 341 J.M. Ananda Jayawickrema 15. Fiscal Policy Issues in the Post-Reform Economy Macro Fiscal Prospectives 370 P.B. Jayasundera 16. The Value Added Tax System: Ideal Instrument for a Market Economy but Ill-suited to Administrative Capacity 409 D.D.M. Waidyasekera Bibliographical Sketch of Professor Hewavitharana 426 Notes on Contributors 438 ACKNOWLEDGEMENTS In January 2008 the Institute of Policy Studies of Sri Lanka (IPS) and the Department of Economics & Statistics, University of Peradeniya decided to bring out a Volume in honour of Prof. Buddhadasa Hewavitharana. Several former students, colleagues, friends, and well- wishers of Prof. Hewavitharana were approached for contributions. They all agreed to contribute and the list kept increasing over time, so much so, by end-2008 there were close to 45 contributors. Thus we had to split the book into three volumes for the sake of convenience. The editors are most grateful to all the contributors to the Volume. Most of the contributors were very busy with their day-to-day work and it was with much difficulty that they found spare time to write their essays. The editing was done by D.D.M. Waidyasekera and formatting was done by Sharmini De Silva of the IPS. Anoma Abeyeratne, Head of the Department of Economics & Statistics, University of Peradeniya assisted the editors by making the initial list of contributors. We are most grateful to all three individuals for their assistance. This book would not have come out if not for the generous sponsorship of Bank of Ceylon, People’s Bank and the National Savings Bank. We are most grateful to these three banks for their thoughtful gesture in keeping the economic dialogue alive in Sri Lanka by facilitating publication of this book. Saman Kelegama and Dileni Gunewardena June 2010 INTRODUCTION Saman Kelegama and Dileni Gunewardena This Volume of essays is dedicated to Prof. Buddhadasa Hewavitharana, Emeritus Professor of Economics, University of Peradeniya and the current Chairman of the Institute of Policy Studies of Sri Lanka. Professor Hewavitharana had an illustrious career and distinguished himself as a leading economist in Sri Lanka. This introductory chapter has two parts: first a biographical note on the professor, followed by an overview of the chapters in this Volume. Buddhadasa Hewavitharana Buddhadasa Hewavitharana was born on 9th September 1932 at Beruwala. Both his parents were Sinhala school principals: his father was from Matara and mother from Kalutara. His school education zig-zagged; his primary education at which was then known as Royal College Preparatory School, was interrupted by the bombing of Colombo by the Japanese on 5th April 1942, and his education continued at G/Gonagala Bilingual School and Holy Cross College, Kalutara, and was completed at Ananda College, Colombo. He entered the University of Ceylon in 1951, then in Colombo, and belonged to the historic first batch of arts students who occupied the Halls of Residence at Peradeniya in 1952 under the Vice Chancellor, Sir Ivor Jennings. Admitted to a Special Degree course in Economics, he ended by obtaining a B.A. Econ. (Hons.) degree, specializing in Banking and Currency in 1955. Proceeding to the London School of Economics (LSE), he worked under the supervision of Sir Sydney Caine, who was the then Director of LSE, on his thesis, “Factors in the Planning and Implementation of the Economic Development of Ceylon,” to gain a Ph.D. in Economic Development in 1967. Dating from his initial recruitment to the staff in 1955, until his retirement in 1998, his service of teaching Economics in the Department of Economics at the University of Peradeniya was a continuous one, spanning over 43 years, mainly in Economic Development and Planning, and Applied Economics. He has been the recipient of a number of Academic Honours and Fellowships: was conferred the title of Emeritus Professor of Economics by the Senate of the University of Peradeniya on his retirement in 1998; was Commonwealth Academic Staff Fellow at Cambridge University, 1978-1980; was South Asian Studies Visiting Fellow at Oxford University attached to Queen Elizabeth House and its International Development Centre, 1994-1995; Was conferred the title, Honorary Fellow of the Sri Lanka Economic Association, 2005. Saman Kelegama and Dileni Gunewardena Highlights of Career as a Teacher, Researcher and Role Player in Economic Development, Social and Public Affairs As a Teacher – A service of 43 years as a teacher including 20 years in administering as Head, the academic programmes of the largest department of study in the university system of the country, containing as it did, the three full subjects of Economics, Commerce and Statistics. Teaching was mainly in Applied Economics, a course re-designed by him, and Economic Development and Planning, a course designed and newly introduced by him. Many in the successive generations taught by him have excelled in gaining eminent positions in academic and other professional services here and abroad and also in the private sector. Whenever these former students meet him, the one thing they unfailingly come out with gratitude and admiration is how the professor would walk into the lecture theatre, on the dot of time, without even a scrap of paper in his hand to deliver his lectures, often lasting two hours, and how the lectures so delivered had registered so clearly in their minds that their contents had helped them over the years, and are helping them even at present, to gain insights into many issues in development. To these expressions, the usual response of the professor is – “listening to these sentiments even decades later is my own personal happiness dividend in not having gone out seeking greener pastures, but in having hanged around here doing my own thing.” As he himself has disclosed in two of his recent publications, the professor got to be known at one time in the Universities of the island as “Raoul Prebisch,” the name that his students at Peradeniya conferred on him as a tribute to him for introducing to the country the brand new and fascinating Prebischian thesis of centre-periphery exploitation through trade. The logic in it illustrated with some statistics went down very well with them and eventually it was taken across the country under the auspices of the LSSP. Soon the inevitable happened when the professor amalgamated Prebisch’s centre-periphery economic exploitation thesis with Pierre Jallee’s Imperialist Country-Colonial Territories political exploitation thesis to evolve the new concept of “Neo-economic Colonialism” which found a ready place in the vocabulary of local left-wing politics. Joint editor of this Volume, Dileni Gunewardena can recall how the professor lectures without the aid of a note and how he could exactly recollect where he stopped at the previous lecture. She can also recall how the professor gave her a fair hearing when she was overburdened with lectures, and assisting her with an excellent recommendation for higher studies. Dileni found the training she received under the professor very useful in her graduate studies. Premachandra Athukorala in his essay recollects the professor as one who never smiles but was very serious of his duties and an excellent teacher. 2 Introduction As a Researcher – Having researched into “Factors in the Planning and Implementation of the Economic Development of Ceylon” for his Ph.D., the professor was well equipped to study almost any kind of development issue of the country. How such capabilities could get applied productively in practice in a widely diversified manner comes out clearly when juxtaposed with the wide range of development issues that cropped up over time which demanded the attention of the professor as a researcher. Analyzing the 68 publications listed, 59 in English and 9 in Sinhala, one sees that they can be classified into four categories – IN THE FIRST CATEGORY ARE – RESEARCHES FITTING IN WITH THE PATTERN OF WAVES OF INTELLECTUAL CONCERNS AND DIALOGUES OVER DEVELOPMENT ISSUES THAT AROSE NATIONALLY AND INTERNATIONALLY. Beginning in the 1960s and increasing in frequency and intensity in the last two decades of the 20th century, topical issues in development came up in a wave after wave fashion resulting from rapidly changing socio-politico-economic circumstances, nationally and/or globally, and a crystallization of ideas around a topic once mooted to build up its momentum into a wave.