Managing domestic and international challenges and opportunities in post-conflict development

• Lessons from Sri Lanka

By Dr. H. M. Gunatilake

Mismanagement of the Sri Lankan economy is clearly evident by the current economic indicators. Very low economic growth, huge external debt burden, declining share of exports to GDP, declining tax revenue as percentage of GDP, declining exports to GDP ratio and rapidly devaluing currency, all point out to an enormous macroeconomic stress. These issues are compounded by policy inconsistency and unpredictability together with prevailing national security concerns and political instability. 

What causes these economic problems and what need to be done to come out this economic dip are the most pressing questions in the minds of economists, policy makers as well as the general public. The most recent book is a contribution from economists based in Sri Lanka and overseas compiled by the Institute of Policy Studies of Sri Lanka (IPS) in honour of its former Executive Director, the late Dr. Saman Kelegama. 

The book, titled ‘Managing Domestic and International Challenges and Opportunities in Post-conflict Development: Lessons from Sri Lanka,’ published by Springer, analyses many of the above and other important development issues, is a timely contribution to the development discourse of Sri Lanka. Understanding the causes of these issues and formulating the remedial policy measures to address these urgent economic issues is the need of the day and I must congratulate IPS for publishing this edited volume, which provides a comprehensive analysis of the current development issues faced by Sri Lanka. 

The book is organised in three parts: Part I focuses on Policies, Regulations, and Governance for Smart Growth; Part II on Post-conflict Development in a Transforming Global Economy; and Part III on Smarter Development for Sustaining Peace. 

The introductory chapter nicely sets the ground for the forthcoming chapters. It highlights that the country, despite the initial high hopes after the end of the war, is once again a struggling economy and faces political instability while ethnic tensions are worsening. This chapter provides a comprehensive account as to why the post-conflict expectation of economic growth and development did not materialise in a highly professional and politically unbiased manner. Particularly, its analyses as to why the temporary boom, soon after the war, which was not grounded on strong underlying economic fundamentals draw valuable lessons for the future management of the economy. The chapter reminds the importance of adhering to sound basic economic principles in managing the economy; 

“The dismal level of economy-wide productivity growth, poor state enterprise performance, weak environmental management and the deterioration of its external sector performance all attested to fundamental policy and institutional failures.  The (unofficial) policy of a pegged exchange rate masked the underlying problems of debt accumulation by lowering the ratio of measured external debt to GDP. But the overvalued exchange rate eroded international competitiveness: exports fell from over 21% of GDP in 2006-2009 to only 14% in 2013-2014. Easy access to foreign funds masked these structural problems and policy failures, but only temporarily”. Page 6.

Part I – Policies, Regulations, and Governance for Smart Growth 

Part I – Policies, Regulations, and Governance for Smart Growth – consists of four chapters. The first addresses the issue of impacts of trade and competition policies on productivity growth. It shows that despite the widespread claims of existence of a free market economy in Sri Lanka, trade liberalisation is incomplete and there is no sound competition policy to complement (limited) trade liberalisation. 

As widely known, competition is the key to eliminate inefficiencies and improve productivity in an economy that eventually increases the welfare of people. It is surprising that this type of fundamental economic policies are overlooked while calming a free market economy for about four decades. Increasing total factor productivity, which measures the quality of economic institutions, is fundamental to sustain economic growth in any economy. 

Stagnant total factor productivity (TFP) in Sri Lanka highlights deeply entrenched institutional issues which prevent domestic and foreign direct investments (FDI), industrial expansion and associated export growth which are necessary to sustain economic growth. The discussion in the chapter on TFP is particularly relevant in searching for solutions to the current economic crisis. The second chapter discusses the regulatory reforms in post-conflict Sri Lanka focusing on the state-owned enterprises (SOE). It highlights the half-hearted efforts of the governments to reform SOEs and assert that in the presence of extensive governance failures, and lack of pro-competitive regulations there are high possibilities for rent seeking in privatising SOEs. The chapter asserts that there are low probabilities for inclusive economic growth and welfare gains for consumers through privatisation of SOEs with the existing economic institutions. 

The chapter suggests Public Private Partnership (PPP) modalities such as performance contracts, management contracts and government holding companies as alternatives for privatisation of SOEs, given the quality of current economic institutions. Proper management of SOEs to reduce enormous losses is a must in managing the Sri Lankan economy and this chapter’s contribution toward this end is noteworthy. 

It is well known that macroeconomic stability is a precondition for growth and development. The third chapter addresses the issue of macroeconomic stability. To evaluate the stability of the Sri Lankan economy after the end of the conflict in 2009, this chapter compares it with Sri Lanka’s liberalisation shock of 1977. This chapter asserts that post-conflict economic management has been sound for maintaining economic stability except for the efforts to maintain an overvalued nominal exchange rate. 

The final chapter discusses the environmental sustainability issues and highlights the gravity of the challenges of sustainable development in the post-conflict era, and argues that achieving sustainability objectives remains an elusive goal. The trend has been, globally, to focus on economic growth and employment creation at the cost to the environment and the natural resource base that underpin economic development. This chapter provides clear evidence that development gains can be severely eroded if policy makers continue to fail to account for the environmental impacts of development.  

Part II – Post-conflict Development in a Transforming Global Economy 

Part II – Post-conflict Development in a Transforming Global Economy – consists of four chapters. The first discusses the Sri Lankan experience of debt financing for development. Sri Lanka seem to be already in a debt trap – given the very low growth and low tax revenues, external borrowing might be needed to repay loans.  

Avoiding this vicious cycle is an urgent need and this chapter draws important lessons for future debt management. It clearly explains how the shift from concessionary loans to non-concessionary loans and investing them in slow return infrastructure projects as a major reason for the debt repayment challenges. It predicts the debt repayment challenge may be aggravated in the near future as favourable external conditions such as lower interest rates may not prevail anymore. 

Once again, this chapter implies that the merit of sticking to basic economic principles and undertaking rigorous cost benefit analysis to identify high and quick return projects in allocating borrowed resources should not be overlooked. 

The second chapter in Part II discusses the potential of the regional comprehensive economic partnership (RCEP) to enhance trade with East Asia. The chapter asserts that, recent free trade agreement with Singapore has potential to benefit Sri Lanka but both countries need to do more to ensure such benefits. It further suggests that Sri Lanka can benefit by drawing from the lessons India learnt through its long experience on RCEP negotiations. 

The third chapter addresses the geo-political issue of balancing the relationships with India and China. The chapter argues for a more strategic approach considering the competition between the two emerging economic powers as an opportunity for implementing Sri Lanka’s own development agenda. 

The final chapter in Part II, discusses the export expansion challenges in changing global order. The chapter describes the industrial expansion and export diversification benefits of the first wave of trade liberalisation and makes a strong case for continuing with marker-oriented reforms that enable export oriented economic growth in Sri Lanka. The current economic problems are partly due to Sri Lanka’s half-hearted approach to free trade and intermittent backsliding from market-oriented reforms.

Given that trade liberalisation is incomplete and there is no competition policy or regulatory measures, a set of major reforms are urgently needed to put the economy in the right track for fast growth and development. This chapter makes a compelling case for such reforms.

Part III – Smarter Development for Sustaining Peace 

Part III of the book – Smarter Development for Sustaining Peace – also consists of four chapters. The first chapter in this section discusses the economic opportunities in the tourism sector. While highlighting the potential of the tourism sector for contributing to inclusive economic growth, this chapter asserts that efforts on promoting tourism should be complemented with improvements in transport infrastructure, sound macroeconomic management, better governance, improving the efficiency of government institutes and reducing barriers to trade and foreign direct investment. 

The next chapter examines the performance of different strategies adopted by Sri Lanka to improve labour markets in the aftermath of war in conflict affected areas. Labour force participation and job creation is low in these areas and economies in these areas are not matured enough to create professional and semi-professional jobs. The slow growth in the national economy and unstable macroeconomic conditions may have contributed to the poor performances of labor markets in conflict affected areas. 

The third chapter in Part III addresses the issues related to agricultural modernisation in post-conflict Sri Lanka. The chapter shows that despite some improvements in agriculture sector in conflict affected areas, long-standing agricultural development issues such as stagnated productivity, small holding sizes, inefficient water and other resource management, inadequate public spending on agriculture research and technology, climate change, and poor market integration remain largely unaddressed. 

The fourth chapter addresses poverty and equity issues in post -conflict development in Sri Lanka. It shows that poverty levels have continued to decline, while access to basic services and utilities like electricity, safe drinking water and sanitation facilities as well as basic health and education indicators have shown improvements since the end of the conflict. Access to finance is a constraint in conflict affected areas and sustaining livelihood improvement initiatives remains a challenge. This chapter reminds us that while focusing on policies for growth, it is also necessary to pay special attention to the vulnerable groups in conflict affected areas. 

The final chapter of the book discusses the urbanisation challenges. The chapter asserts that while the two post conflict governments have failed to provide sustainable solutions to urban problems such as unauthorised urban development and settlement, flooding, solid waste disposal, public transportation and congestion despite using somewhat different approaches to implement urban development projects. The chapter emphasises the importance of better planning in urban development.

I am not intending to provide a comprehensive critique for this book. I however feel that its development impact could have been strengthened had there been a synthesis at the end of the book summarising the major challenges and broad approaches to address these challenges. If there is an update or another edition of the book, abstracts and chapter titles cold be more representative of the contents of some chapters. A set of user-friendly policy briefs that are accessible to the general public will also enhance the development effectiveness of the book.

In terms of intellectual approach to the book, I have two comments. First, had the introductory discussion been framed around the current context of a lower middle-income country that faces the imminent threat of a middle-income trap, it would have given sharper messages on the urgency of correcting prevailing institutional and policy failures. Second, deep rooted deficiencies in economic institutions that prevent FDI, domestic investments, industrial expansion and export promotion could have been given a bit more explicit treatment.  

Overall, the book is written in an accessible language for professionals. The intellectual breadth of the book is impressive, and it will certainly spark sound and thoughtful debate on Sri Lanka’s economic  development challenges amongst academics, economists and policy makers. I enjoyed reading it and updated myself on many fronts of economic development challenges in Sri Lanka. I recommend this as an essential reading for those who are interested about Sri Lanka’s development challenges. Many of the chapters in this book are good supplementary reading materials for Master’s degree courses in development economics.

The book is dedicated to late Dr. Saman Kelegama. It is truly a tribute to the eminent economist. 

(The writer is former Professor at University of Peradeniya and former Director at Asian Development Bank.)