Fredrik Sjöholm: This is a well-written and interesting paper. It is highly informative and I would recommend it to anyone who wants to understand Sri Lanka's modern political and economic history. The paper gives a slightly sad aftertaste considering the many opportunities that have been missed and a potential that was never fulfilled.
Having said that, the presented description might be overly gloomy and there is perhaps not enough recognition of the achievements that have taken place in the last few years. I think one has to put Sri Lanka's current situation in perspective. Its development in the last few years is far superior to what Sri Lanka has experienced in a long time. As an example, economic growth averaged around 6.5 percent in the last 10 years and around 7.5 percent in the last 5 years. These figures should be compared to the negligible growth rate that used to be the case for such a long time. As stated by the authors, economic growth in the last five years has been the highest recorded in the post-independent period. High economic growth is crucial for future development. My reading of Sri Lanka's economic history is that poor economic growth has often led to political turmoil, which ruined the achievements in sectors such as education and health.
Other indicators also show a positive development: The poverty rate has decreased from around 30 percent in the mid 1990s to 6.7 percent in 2013 according to World Bank figures. Moreover, according to the authors poverty declined in all provinces, which is important because it presumably means that all ethnic groups have seen improved living standards. Finally, enrollment in primary schools has increased to almost 100 percent.
Again, these figures show different aspects of positive development. There is a discussion in the paper about how much one can trust official statistics from Sri Lanka, however. There have been several cases where statistics have been manipulated, but it is, in my view, unlikely that it will change the overall picture of positive recent economic development.
The authors make the argument that growth is not sustainable because it is based on construction and because it is being fuelled by a budget deficit. I am not convinced. The budget deficit is actually declining according to the figures in Table 2 in the paper: From a peak of almost 10 percent of GDP in 2009, to 8 percent in 2010, 7 percent in 2011, 6.5 percent in 2012, and 5.9 percent in 2013. Hence, the deficits are declining. Moreover, the public debt is also declining and the foreign debt is a manageable 34 percent of GDP.
A more interesting question is if we really would like to see a balanced budget in a country that has come out of a 25-year civil war. The reconstruction needs are overwhelming. It would, in my mind, not make any sense to aim for a balanced budget in this situation even if public policies are less efficient than originally desired. It is certainly true that some of the public expenditures have been wasted, especially the large infrastructure projects in the home region of the former president (aiming at making it a business hub). But other investments have been important, like reconstruction of roads and bridges, access to electricity, availability of health clinics, and schools for children.
The strong contribution of construction to GDP growth is also quite natural and what we would expect considering the needed investments just mentioned. Moreover, it is quite possible that many of the infrastructure projects will have a positive effect on manufacturing production, for instance, and thereby on economic growth.
The recent change of government took many observers by surprise. Sri Lanka managed to vote out a regime that was becoming increasingly authoritarian. The former president gathered more and more power to himself while simultaneously accumulating large personal wealth through corruption and strong ties with the business community. One sign of the concentration of power is that the president and his two brothers controlled the most important ministries and thereby controlled around 75 percent of the national budget.
The core of the complex situation in Sri Lanka is that this corrupt regime was also the one that ended the war and the one in charge during the highest growth period in Sri Lanka's history. It means that the new government needs to be careful and smart. If the new government makes a major political mistake, or if economic growth plummets, the old regime will return to office and maybe change the political situation for the worse and for a long time to come.
Therefore, the new regime needs to be cautious and conservative and avoid large policy reforms that have negative short-term effects on parts of the population. Of course, this does not mean that they should sit back and do nothing. One priority should be rural development, since many poor live in the rural areas. A renewed effort to promote agriculture-based livelihoods and improve access to markets is needed.
Moreover, investment needs to increase from the present level of around 29 percent of GDP. It would be particularly good if part of the investments would come as FDI, considering the positive effects foreign technologies and networks typically have on host countries. Unfortunately, there are reports of recent problems for foreign firms in Sri Lanka—for instance, in issues related to land rights.
The problem is challenging because there could be opposition from both within the majority group and from the minority groups. There is a need for political changes to win the latter groups’ support: Perhaps more institutionalized rights to the minorities, or maybe a more federal system. The previous government did not do anything to include minority groups. On the contrary, radical Buddhist groups, with which the former president's brother was involved, would occasionally attack Muslim groups. The Tamils have also been excluded from the political process. Maybe this explains the sudden and rapid growth of the Tamil National Alliance. Without political inclusion of minorities, there will be future problems. Again, however, political reforms targeting minorities are difficult because such changes might be used to fuel anger within the majority group.
So let me sum up by saying the obvious: The situation is delicate. It is delicate partly because the last decade has been an economic success but at the same time has seen increased tendencies of authoritarianism. There has recently been an unexpected and positive turn of the political situation for the better. But for this positive development to remain, the new government must retain the high economic growth and make this growth sustainable by reforms but without stirring political protests. It is a task that will require the utmost political and economic skills.