When a business entity is destroyed, all layers of its supply chain are also affected. The pathetic situation of a Sinhalese farmer, who supplies eggs to a biryani restaurant owned by a Muslim businessman, is only one such example. Such adverse economic impacts trickle down irrespective of the ethnicity or religion of the victim – Pic by Chamila Karunarathne
There had been a time when Sri Lanka was only second to Japan in Asia on just about any socio-economic indicator in Asia. It was at the time of the country’s independence. Above is a remark reiterated by Dr. Indrajit Coomaraswamy, Governor, Central Bank of Sri Lanka frequently in his speeches. Internal conflict is one of the factors which contributed to Sri Lanka slipping from that position drastically while other nations climbed up the ladder of economic development. This article attempts to highlight a few elements pertaining to the adverse economic impacts of internal social conflicts which require heightened attention in order to make Sri Lanka a prosperous nation.
Missing investment opportunities
Sri Lanka has missed investment opportunities due to internal conflicts. A group of over 30 representatives from Japanese companies, including Sony, Sanyo, Marubeni and, Bank of Tokyo had arrived in Sri Lanka, in July 1983 as investment by those companies in Sri Lanka, was under serious consideration. However, while they were in the country, Colombo had been set ablaze by rioters. The Japanese investors went back the following day. If not for that violence, we would have benefitted from very substantial FDI from Japan.
Investment from Motorola Company and Harris Corporation was another lost opportunity. Unfortunately, those investments were attracted by ASEAN countries. Japan was the number one foreign investor in the ASEAN countries with cumulative investment, as of March 1989, of about $ 14.5 billion. Japanese investment was a crucial determinant of the accelerated pace of development, particularly in Malaysia, Thailand and Indonesia in the 1980s.
According to Skaperdas (2008), one of the most important impacts of violent conflicts on the economy seems to be through portfolio substitution effects, namely, shrinkage of investment or capital flight, because firms would refrain from investing in violence-prone areas or relocate assets to peaceful regions.
In the aftermath of violent activities, the political authorities should be able to give confidence to local and foreign investors. In order to do so, there should be political stability in the country. It should be widely underlined that the adverse impact of the diversion of foreign investment will have to be borne by all the communities irrespective of colour, creed or religion.
Lachman (1996) describes riots as a breakdown of the rule of law regime of a country. Terrorist activities have become a global phenomenon which is not an unusual experience for investors. However, riots as a result of the breakdown in law and order make the decision-making process of investors extra cautious as such activities reflect a severe downturn in the conduciveness of the business environment of a country.
A nation left behind
Sri Lanka as a nation, has however continuously lost golden opportunities to become a prosperous country. In 1998, Professor Donald Snodgrass stated that the first 50 years of Sri Lanka’s independence can be considered as one of such lost opportunities. Even after 70 years of independence we keep losing the opportunities.
There is no doubt that the Easter attack was a severe blow to the economy. However, the riots that took place in a couple of places during the second week of May 2019 also affected the sentiments and confidence in an extremely negative manner. It was reported that various meetings scheduled with foreign investors by the Government and public institutions were cancelled. Although it is too early to give evidence of incidents similar to diversion of Japanese investments in 1983, there would have been cancellations and postponements of the foreign investment decisions due to recent conflicts.
Needless to mention that economic growth of the country was derailed due to the internal conflict that prevailed over 30 years. Even 10 years after the war we have not been able to have comprehensive reconciliation between Sinhala and Tamil communities. Now, we have another wound in our society. Tension between Sinhala, Tamil and Muslim communities has become a new socio-economic challenge.
Boycotts cripple the economy
Small businesses will have to manage their businesses on two fronts due to riots, i.e. their primary business that involves trade on daily basis and the second one which is managing physical repairs, replacing stocks and claiming insurance or compensation. They will have to appeal to customers to resume their transactions. This challenge becomes exacerbated when one community boycotts another community’s businesses.
A boycott is defined as an act of voluntarily abstaining from using, buying or dealing with a person, organisation or country as an expression of protest, usually for social or political reasons. The boycott described in ‘Lysistrata’ (an ancient Greek Comedy) is considered as perhaps the world’s oldest boycott. In the said Play, women of Athens barricaded themselves in the Acropolis thereby denying their husbands sex until they negotiated peace with Sparta.
However, the boycotts we heard in Sri Lanka in the recent past were not to make peace. They were aiming to cripple businesses of one community in our society. When the businesses collapse the immediate victims would be employees. It is unknown whether the people who promoted these boycotts considered the fate of the many people of other communities employed by Muslim businesses. When the businesses of a country are crippled they create ripple effects across the entire economy.
When a business entity is destroyed, all layers of its supply chain are also affected. The pathetic situation of a Sinhalese farmer, who supplies eggs to a biryani restaurant owned by a Muslim businessman, is only one such example. Such adverse economic impacts trickle down irrespective of the ethnicity or religion of the victim. The small businesses, in particular, contribute a great deal to move the wheels of an economy by providing employment opportunities and innovations. Providing moral support also along with financial assistance to affected parties will be important to prevent their failure.
Deteriorating efficiency of labour
According to D. Indrajit Coomaraswamy, we are on the cusp of being an ageing population at a much earlier stage of our development process. In other words, we are going to be old before we become rich. Therefore, we can’t drive growth through labour augmentation and measures need to be taken to increase productivity of labour. Takahiro Sato (2016) states that ethnic and religious violent conflicts exert negative effects on gross value added per worker and the capital/labour ratio. When there is mistrust among the workers, efficiency of an organisation goes down. The psychological impact of violent activities cannot be healed quickly. It affects the productivity of labour adversely.
Riots and other violent activities not only have a short-term impact on labour productivity but also create a long-term impact on the labour force. Children who experience violence will be the future labour force of the country. Those traumatic experiences can impact their future behaviour. According to Sharkey (2014) personally experienced violence has long lasting, beyond-monetary impacts on the individual such as on the educational performance of students. Therefore, the non-financial costs citizens experience living through times of heightened social tension is a matter that requires serious attention.
Dwindling sense of ‘US’
Professor Ricardo Hausman (2018) states countries that have more person bytes should be more diversified and able to make ‘less ubiquitous’ products. He says when the counties bring different skills they can make more things. Although the said theory is emphasised in relation to immigration policies, it can be used to promote the feeling of ‘togetherness’ of a society as well. The theme of ‘sense of us’ can be applied to enhance the competitiveness of Sri Lanka’s tourism. Being a multi-ethnic, multi-religious society, Sri Lanka can leverage that cultural variety and diversity to be an attraction for tourists. However, ethnic/religious riots will be a big stumbling block for such a development strategy. Ethnic tourism is a product. It can be promoted easily while enabling the ethnic groups to showcase their rich cultures and heritages and to revive their traditions, languages and cultural pride.
It is observed that a key element of ethnic tourism is the ‘quest for cultural otherness’. Sri Lanka should be able to expand this tourism product to capture the cultures of all social groups in our society and showcase that beautiful diversity. However, prior to selling our diversity as a tourism commodity, internal peace and harmony needs to be restored. Tourism Malaysia is an example. They are proudly selling the delightful multi-cultural fabric of Malaysia to the world.
The Sri Lanka tourism industry was affected by Easter Sunday bombing. In this hour of preparing to help the industry to bounce back, it is vital to reiterate the adverse impact of ethnic/religious riots. Members of all communities would be privileged through cultural tourism. Priority should be attached to expand Sri Lanka’s tourism portfolio by promoting cultural tourism. However, the authorities alone will not be able to do this. All the communities have a role to play in removing suspicion and mistrust first in order to integrate into above-mentioned economic programs.
Sri Lanka has been struggling to become an export-led economy since independence. However, the country has not been able to diversify its export basket and increase its complexity sufficiently even after 70 years of independence. In order to grow our economy by adding new products and services to the production portfolio, we need new knowledge and know-how. Professor Ricardo Hausman states that the key to such diversification is access to know-how, but know-how often has to come from people. India, Singapore, Vietnam and other dynamic economies have accessed to know-how through FDI, flexible immigration policies and diaspora networks.
When the country’s security situation is under threat having flexible immigration policies, would be difficult. Sri Lanka was about to launch an on-arrival visa scheme prior to the Easter attack. When the communities act responsibly and with a genuine patriotism, it would be difficult to abuse open immigration policies which have been identified as a key measure to promote our economic growth through export diversification.
However, ethnic/religious riots lead to a reversal of the desired results. The riots occurred in 1983 known as ‘black July’ is an example. These conflicts between communities compel our fellow Sri Lankans to leave the country. It has exacerbated the problem of brain drain as well. People who left their motherland with bitter sorrowful memories and pain will find it difficult to come back and help the country to be developed. Obtaining the support from the diaspora will be difficult in such a context.
Not only the people from affected communities but other citizens also leave the country when they see that the country’s development agenda is going nowhere. Such migration will add further distance to the achieving of a Knowledge Economy, for which Sri Lanka has enormous potential.
Undermining the country’s competitiveness
According to the Governor, Central Bank of Sri Lanka, Dr. Coomaraswamy, Sri Lanka has now in many senses handed away our economic sovereignty due to its external debt burden and its resulting reliance on international Credit Rating Agencies (CRA), international creditors and the support of agencies like the IMF. Therefore, the country has to operate within a pretty tight policy framework. Since Sri Lanka as a lower-middle-income country is no longer entitled to receive concessional funding, the country needs to play by the rules of capital markets.
The rating assigned by CRA plays a significant role in determining a country’s borrowing cost. Sri Lanka has no escape. The main CRA namely Fitch, Moody’s and Standard & Poor use various qualitative and quantitative variables as determinants of the rating provided by them. Analysis of methodologies of CRA reveals that qualitative factors have also grabbed the attention of those entities in a similar way to quantitative macro-economic variables. The qualitative political and social indicators, represented by the rule of law, political stability, corruption control, regulatory quality and government’s effectiveness, significantly affect the rating [Butter and Fauve (2006)].
Although the key macro-economic fundamentals of Sri Lanka were not in a bad shape in October 2018, as reflected in the Staff level agreement reached with the IMF on the EFF review on the 26 of the month the country was downgraded a few weeks later due to political upheaval. Riots influence the CRAs when assessing the robustness of the rule of law and efficiency of the government of a country.
If Sri Lanka is to avoid a Greece type crash, improving the country’s competitiveness is a must in order to attract FDI and improve exports. Peace and stability is an important determinant of the competitiveness of an economy. We climbed up the Global Peace Index (GPI) in 2018 as a result of Sri Lanka being one of the safest countries in the world. One thematic domain of GPI is the extent of ongoing domestic and international conflict.
We can learn lessons from the steps taken by the UK to establish the ‘Riots, Communities and Victims Panel’ after riots, in 2011, to explore the cause of riots and how communities can be more socially and economically resilient, in order to prevent future disorder. Failure to bring perpetrators of internal conflicts to justice will undermine the trust in the rule of law. Impunity is a key obstacle for promoting the rule of law. According to Dr. W.A. Wijewardena, violating property rights causes a long-term output loss via non-investment or inadequate investment in physical property and human capital. It will feed into macro-economic stress which leads to the downgrading of a country’s prospects over the long term.
Discouraging digital economy
In the aftermath of the Easter Sunday bombing and when subsequent riots were staged, social media was banned in Sri Lanka. This happened after violent activities in Digana, in 2018, as well. The social media platforms, such as Facebook, are catalysts for economic activity in an ecosystem composed of marketers, app developers, and providers of connectivity. High mobile penetration and access to the internet have created a conducive environment for digital economic opportunities to thrive in Sri Lanka.
Social commerce i.e. marketing through social media has also become popular in Sri Lanka. Those new online start-ups are affected when social media is suspended due to unrest. Such decisions adversely affect the country’s competitiveness as well. Sri Lanka has to attach priority to the digitisation in the country’s economic agenda. At a time Sri Lanka is being promoted as an IT business process outsourcing (BPO) destination, banning social media and other similar platforms will impede such booming business activities.
However, there should be strategic measures to curb disinformation. Malaysia, France and Germany have adopted legislation to fight fake news and hate speech. Australia has proposed a similar bill to regulate social media after the live streamed New Zealand massacre. Singapore has also proposed a bill named ‘Protection from online Falsehood and Manipulation Bill’ aiming to prevent the communication of false statements of fact.
However, these legislations should be considered for Sri Lanka in a very cautious manner, while striking a delicate balance between freedom of expression and curbing fake news and hate speech. Telecommunication regulators can, however, negotiate with social media companies to take necessary action to discourage fake news and other materials which create an adverse impact on social harmony. The action plan against disinformation, introduced by the EU, is an example of an effective strategy. This action plan enabled the EU to build up capabilities to proactively address disinformation. People have a responsibility to understand that disinformation damages democracy. Each and every one of us in our society needs to do a fact check of information prior to clicking the ‘share’ button.
Slowing down the growth process
According to social science scholars there is a lower incidence of riots in a growing economy. They argue that in a booming economy the pie is growing and people have much to gain by living in harmony as everyone potentially gets a bigger slice of the growing pie that could be threatened by communal violence. On the other hand, when the businesses are destroyed by ethnic/religious riots, Government is compelled to grant relief packages to affected parties.
In a country like Sri Lanka where the Government’s revenue is extremely constrained and severe pressure is emanating for fiscal consolidation, allocating money for such relief packages is a challenging task. Government will be pushed to switch expenditures and reprioritise development programs to find the fiscal space. This will derail the country’s development agenda and the consequences will have to be borne by all communities.
If the financial institutions are required to give a moratorium and other concessionary loans to affected businesses and industries, it will impact on the resilience of the financial system as well. Hampering financial intermediation also contributes to slowing growth. All the communities will be victims of this vicious cycle. One can, however, argue that if communal harmony is strong, irrespective of the speed of growth, people can get along.
Increasing communal disharmony
We have not yet been able to create a true genuine ‘Sri Lankan’ identity. According to Ericson (1999), identity is not only individual, but also collective and social. Identity is the difference, character and sense of belonging found in interpersonal interactions and interactions between groups. People are considered the greatest asset of a nation. Our inability to have ‘Unity in diversity’ has made it difficult for Sri Lanka to make its people a winning force for the country.
Singapore has introduced the Maintenance of Religious Harmony Act to take action against those sowing religious discord and ensure that religion is not exploited for political or subversive purposes. Canada too has introduced similar legislation. If the true spirit of all the religions is followed, these kinds of statutes would not be required. In the absence of a unique identity as a nation, branding the country’s image in a competitive world is also an arduous task.
It is observed that social disharmony costs the economy in various ways. Fostering good inter faith relations is, therefore, a responsibility of religious leaders, politicians and all stakeholders of our society. Diffusing tensions among communities should be a long-term genuine plan which needs to be commenced at schools. Citizens living in a diverse society, like Sri Lanka, need to work towards a common goal. Whatever race or faith, the common goal of protecting and developing the country should be able to transcend all such religious, racial and cultural boundaries.
An eye for an eye makes the whole world blind (Mahatma Gandhi)
(The writer, a Deputy Director, CBSL, Attorney-at-Law, can be reached at email@example.com. The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official policy or position of any institution.)