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Sri lanka’s peace dividend

Comments / 1325 Views / Thursday, 10 May 2012 00:00

I first visited Sri Lanka in 1997, shortly after a rebel bombing of the central bank headquarters had thrown the financial system into chaos. Military checkpoints made travelling around the capital city of Colombo rather punishing, but the overwhelming impression was of an utterly charming island and talented people trapped inside a seemingly endless civil war.

When I returned in 2011, the civil war had ended with surprising finality, and I took an extra day to go out and see the country, including the huge territory that had been behind the lines of the Tamil rebels on my first trip. This should have been easy enough. For one thing, the Tamil capital at Trincomalee is just 160 miles from Colombo — but the new highways are still being built, and the best hotel in Colombo could not provide a decent car. The helicopter on offer was a single-engine job of the kind that routinely crashes in neighbouring India. My accommodating hosts arranged for the air force to take me up in a twin-engine helicopter.

I’ve taken helicopters in many emerging markets when the road network is inefficient, normally a bad sign for the economy. But the aerial views of the multiple expressways under construction, the lush green plantations of the interior, and the new resorts facing the turquoise waters that drape the island helped convince me that Sri Lanka is no longer a land-in-waiting.

In the 1960s Sri Lanka was billed as the next Asian growth miracle, only to be stymied by a tryst with socialism that played a direct role in igniting the civil war. Following independence in 1948, leaders of the Sinhalese majority set out to correct the injustices of British colonial rule, which had heavily favoured the country’s Tamil minority.

The Tamils had gotten the bulk of top jobs in the British administration, and in the early years after independence Sinhalese nationalists aimed to put them back in a minority role. The Sinhalese leaders soon evicted Tamils from official posts and in the 1960s and 1970s began to lavish more public jobs, subsidies, and social benefits on their own kind, in the name of creating a prosperous and egalitarian Sinhalese nation.

What they got instead was the Tamil rebellion. Launched in 1977, the revolt would coalesce under the “Liberation Tigers” of Tamil Eelam, whose pioneering brutality — in the use of child soldiers and suicide bombers — would derail Sri Lanka’s development for 30 years. During the war the central Government used sanctions to effectively cut off the rebel-held region from the rest of the country and the world.

With both the rebels and the army punishing civilians suspected of aiding the enemy, trust — the basis of any civilised financial system — broke down. Banks fled, and Tamils put their savings in cash or gold. Security checkpoints restricted the flow of goods, which drove up prices and cut off exports. The fields of rice, red onions, green chillies, and tobacco were replaced by battle zones and land mines. Farmers were reduced to growing food for themselves.

Offshore, the rebels deployed a navy known as the Sea Tigers, with three thousand men and women stalking the coast in fibreglass boats mounted with machine guns and grenade launchers. They harassed Sri Lanka’s navy, sinking its smaller ships in suicide-boat attacks, and plundered passing civilian vessels. In 1980 these seas had provided 64 per cent of the national catch of yellow fin tuna, skipjack, and shark, but that share fell to 26 per cent after the Tiger threat grounded local fishermen. Beaches went undeveloped, and so did potential offshore oil fields.

During the war years Sri Lanka grew half as fast as Korea and Taiwan and became another country in the long line of emerging-market disappointments. In the 1960s Singapore’s Lee Kuan Yew had visited Sri Lanka to study it as a leading model of development, but it was not long before Singapore had outpaced Sri Lanka.

Today it seems that Sri Lanka’s time has come. As recently as 2007, the Tigers controlled large swaths of the North and East provinces, fielding men, women, and children in an army cultishly committed to a charismatic founder, Vellupillai Prabhakaran. It is conventional military wisdom that guerrilla armies can be contained or driven off but not destroyed; however, by mid-2009 the Sri Lankan Army had proved that wisdom wrong.

In an all-out offensive the Army cordoned off the Tigers in their stronghold on the northern Jaffna Peninsula, and in a feat rarely repeated in the age of mobile-phone cameras, it managed to seal the entire region from outside view. Then it pulled the cordon tight until Prabhakaran, his family, and most of the senior Tiger leaders were dead, along with untold thousands of civilians. The final stages of the war were highly controversial — charges of human-rights violations still fly against both sides — but the economic impact seems clear.

The civil war is over, the process of healing is under way, and there is every chance that Sri Lanka will again become a breakout nation. Despite slowing sharply during the war years, the economy continued to grow at an average pace of nearly five per cent. The economy was running on one engine — the prosperous Western Province where Colombo is located, and where the well-educated young population was producing strong growth in industries and services. The North and East Provinces, which account for 30 per cent of Sri Lanka’s land and 15 per cent of its population, were largely war zones. With the nation whole again, achieving a seven per cent growth rate over the next decade should be well within reach.

Since taking office in 2005 President Mahinda Rajapaksa has been consolidating power in ways that critics see as the start of a family dynasty; his three brothers occupy key ministerial posts, and he recently capitalised on his victory over the Tigers to win both a second term and a constitutional amendment allowing the President unlimited terms in office. For now, however, he is deploying his growing powers to ends that suggest he understands the fundamentals of growth, if not of democracy.

Though his country is still known by a name that evokes the bygone influence of the Soviet Union — ‘Democratic Socialist Republic of Sri Lanka’ — Rajapaksa’s regime is working to trim the fat left over from the socialist experiments of the 1970s, including high taxes and Government debts that still equal 80 per cent of GDP. It aims to raise Sri Lanka from 102nd to 30th in the World Bank rankings of nations by business climate before 2014. It is working to bring the vast swaths of formerly rebel-held territory back into play, and to exploit the country’s long-standing strengths, including a highly literate population and an advantageous location along key shipping routes to India and China.

Most economists tend to ignore war because their data sets don’t capture it. The numbers may say a lot about prices and debt, but on the subject of what body counts or no-fly zones can do to growth they are usually silent. Markets are especially bad at foreseeing the financial implications of war — the most famous example, of course, is World War I, which took most investors entirely by surprise, leaving many with heavy losses despite the highly visible build-up of standing armies across Europe. Conversely, markets are also quite weak at recognising the benefits of peace. Well documented by those who study it, mainly at agencies like the World Bank and the UN, the “peace dividend” is real, and Sri Lanka is poised to be a big beneficiary. The models that offer hope for Sri Lanka are the high-growth economies that stalled with the outbreak of conflict but returned to productivity when the fighting came to an end.

Members of this comeback club include Uganda and Mozambique, both of which were growing at more than five per cent a year before the outbreak of vicious postcolonial wars in the 1960s and 1970s. By the 1980s Uganda became synonymous with the sadistic dictatorship of Idi Amin, and Mozambique earned the title of the world’s poorest nation. Yet following decisive rebel victories — Uganda in 1986 and Mozambique in 1994 — both countries have resumed impressively strong growth. Mozambique has been especially successful under the inspired leadership of Joaquim Chissano, who dumped socialism and voluntarily stepped down after his second term in office in 2004. The reforms pushed by Chissano and his successors drove growth to more than seven per cent in the last decade, partly by shifting money from military spending to address key economic priorities.

Another nominee for the comeback club is Iraq, which was the most successful economy in the Middle East from the 1950s through the 1970s, growing at a pace of up to nine per cent. Iraq was widely seen as a model for the region until 1979, when Saddam Hussein came to power and began launching disastrous bids for regional domination. The Iraqi economy collapsed in the 1980s during a war of attrition with Iran and began to recover only after Saddam was ousted by US troops in 2003. Over the past five years, as oil production began to recover, Iraq has posted a growth rate of around five per cent on average, and was growing at an annual rate of more than nine per cent in late 2011.

The examples of Uganda, Mozambique, and Iraq suggest that it’s possible to come back strong from a debilitating war, civil or otherwise, and Sri Lanka has a good chance to do so. A 2009 study by the U.S. Agency for International Development (USAID) of conflicts in sixty-two nations between 1974 and 1997 found that after a conflict ended, growth typically rebounded at a below-average pace in the first two to three years, but took off in years four to seven. Sri Lanka is already ahead of the curve, having posted growth of eight per cent in 2010, the first year after the peace.

To restart the economy in the former war zone, the Government has established vocational training centres and low-interest loan programs, distributed boats and livestock, and begun building roads and bridges. Banks are returning, big retail chains are setting up shop, and domestic airlines are flying to Jaffna and Trincomalee again. The flood of State spending drove growth in North and East provinces up to 14 per cent in 2009 and 2010, and forecasters are expecting the region to grow at above 13 per cent for several more years, making it the fastest-growing area of the country.

The revival of the north and the east has had effects nationwide. On my helicopter trip I visited some of the newly renovated resorts, from the retro-chic Chaaya Blu in Trincomalee to the Cinnamon Lodge in Habarana, which lies in the “Cultural Triangle” formed by Sri Lanka’s three ancient cities. It wasn’t hard to imagine tourists, seduced by the country’s raw appeal, coming in droves. While prices are not as dirt cheap as they were at the height of the war, they are still very low — $ 150 for a high-end hotel room — which means the Sri Lankan currency is still very competitive and attractive to foreign investors.

A big Indian conglomerate, Reliance, has purchased rights to explore for oil off the country’s west coast. War-zone insurance rates that had made it too expensive to dock in Sri Lanka have disappeared, leading to a large increase in cargo traffic at the main port in Colombo. Meanwhile the Government is pouring money into new terminals there, as well as new ports and harbours in formerly rebel-held regions. The reintegration of the marginalised Tamils — with their high levels of educational achievement and English fluency — should provide a huge boost to a nation that multiple consulting firms already rank highly as a potential destination for multinationals looking to outsource customer service, IT, and other back-office operations.

It would be a mistake to sugar-coat the post-war mood. There is evidence that Tamils, embittered by the bloody endgame of the war and suspicious of Rajapaksa, continue to leave the country. But many of those who remain seem determined to put the war memories behind them.

I was surprised to see Tamils in Trincomalee working to attract Indian tourists to the “Ravana trail,” named after a mythical king with a disputed legacy. In Tamil legend Ravana was one of the most powerful and inspired of ancient kings, while to Indians he was a devil incarnate, vanquished by an even greater Indian god. This difference of interpretation is of no small magnitude in Sri Lanka, which has long feared domination by its much larger neighbour. But in Trincomalee locals say that as long as the “Ravana trail” is drawing tourists, subjective spins on the myth don’t matter.

It’s only natural for nations to trade most heavily with their neighbors, and for most of East Asia, trade within the region has been growing faster than trade with the rest of the world. Indeed the success of East Asia has been driven in no small measure by the willingness of China, Japan, Taiwan, and South Korea to leave old wars in the past, at least when they are cutting business deals. In contrast there is no region in the world with weaker trade among immediate neighbours than South Asia — including India, Pakistan, Bangladesh, and Sri Lanka — where isolation, lawlessness, and old grudges have made it difficult to move across borders, and trade within the region has stagnated at five per cent of total trade with the world.

Sri Lanka could be the country to move the region toward a new trade regime. Ignoring the lingering fears of Indian domination, the Government is proposing a grand deal that could unlock trade with India and provide a huge boost to the economy. The opposition comes from Sri Lankan businessmen fearful of Indian competition. But India welcomes the deal, in part as an opportunity to balance China’s growing interest in Sri Lanka as a linchpin on its supply routes through the Indian Ocean.

Many small nations in Europe and Asia have benefited from geographic good fortune, and Sri Lanka is only too happy to exploit its felicitous location in return for even a small share of China’s gargantuan outbound investment. As part of its vision of a “string of pearls” — a series of ports along its preferred sea routes — China is investing heavily in the Sri Lankan port at Hambantota, the home base of the Rajapaksa family.

At peace, Sri Lanka finds itself in a very strong position, courted by both of Asia’s emerging giants. There is some risk that the peace dividend could prove fleeting: the USAID study found that 40 per cent of nations that end a civil war will revert to violence within a decade. There is a strong case to be made, however, that Sri Lanka’s peace will hold.

First there is the decisive end to the war. It left no rebel army to disarm, much less to revive the threat five to 10 years down the road. Even if some rebels had managed to melt back into the woods, it’s not likely they would command much support, for by the end their brutality had alienated even many fellow Tamils. In the Tamil provinces no more than a third of the adult population has bothered to vote in recent elections, and no more than a third of those voters have cast ballots for proxy parties representing the Tigers.

There is also a fundamental national consensus that the future should be decided based on what works, not on the ideological debates that retarded Sri Lanka’s development for so long. Indian socialist ideals heavily influenced the founders of independent Sri Lanka, and State spending came to be seen as a tool to deliver economic justice to Sinhalese.

At its peak in the 1970s, State spending accounted for 59 per cent of GDP, and four in 10 Sri Lankans worked for the Government, an extraordinarily high number. But by the late 1990s even the main left-leaning party, the SLFP, was moving toward a more modern development model built on an open economy and trade liberalisation. State spending has fallen to about 30 per cent of GDP today, and most parties agree this is movement in the right direction.

Ultimately, the economic impact of Sri Lanka’s civil war was relatively mild despite the personal suffering of the people it swept up. According to USAID research, a typical civil war of 15-year duration reduces national GDP by around 30 per cent, and it typically takes a decade just to recover the pre-war levels of income. Over the course of its war Sri Lanka grew its economy slowly but positively, by a total of 206 per cent. The country has economic and administrative momentum. In the comparable cases of Mozambique and Uganda, the fundamental task was much more complex because the rebels won the decisive victory and had to learn how to govern. In Sri Lanka the Government won and it can now build prosperity without interruption by suicide bombers.

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