Mahoshada

Sri Lanka faces two great national challenges today, both daunting and their solutions seemingly unrelated – finding a lasting peace and eliminating poverty. Leaders and their spokesmen on both sides speak about the resumption of war as though its resolution is entirely a military and political matter. And now that elections and the pursuit of votes are not currently foremost in the minds of the country’s leaders, they rarely speak at all about reducing poverty. Indeed, the government currently seems to want people to believe that on the economic front things could hardly be much better.

Few on either side seem willing to recognize explicitly that the underlying roots of this conflict are to an important extent economic in nature. This is not to say that there are not also major political issues being contested. Clearly there are. But by largely ignoring the economic dimension of the conflict, it becomes far more difficult to find a political basis on which a lasting peace can be achieved.

At the heart of the economic issue at stake is the distribution of the benefits arising from economic growth and development. Political leaders on both sides of the conflict have argued at one time or another that the division of the economic benefits was in some sense unfair. The LTTE’s answer to what they claim to be the inability of the Tamil population to get fair and equitable participation in the political and economic life of the country is separation. The South, including large numbers of Tamil citizens, maintains that this is not the case and that a division of the country would leave all far worse off.

It should be recognized that there are also significant long-standing grievances concerning the distribution of the fruits of economic growth and development within the South. All of the available data demonstrate that disproportionate shares of the increases in income and employment generated by the economy have largely been in the Western Province. As a result, the incidence of poverty remains much higher in areas outside of Colombo and the Western Province.

For a great many Sri Lankans in both the North and South, the promise of a better economic life for them and their families remains an illusion, beyond their reach. They live in a world where the economy is essentially stagnant, going nowhere. Large numbers continue to farm plots of land that are too small to ever provide more than a meager income. When they do produce a good harvest, they see the prices for their crops fall despite the assurances of higher prices by the government of the day. Any hopes for economic advancement generally lie in having their daughters finding employment in free trade zones manufacturing garments or their wives finding menial employment in the Middle East.

The unfortunate reality is that a substantial share of the population has little or no stake in the economic future of the economy. They have no reason to believe that their lives or the lives of their children will substantially improve over time no matter what the government promises. For these people the economic pie is not growing, whatever the Central Bank and government officials might be saying. The most that they can hope for is that their government will provide for them through politically motivated handouts, giving them a slightly larger share of what seems to them to be an unchanging economic pie.

This view of the world amounts to what economists call a zero-sum game. To get ahead, you have to take something away from someone else. With this mindset the government focuses almost exclusively on how to distribute what it sees as a fixed amount of economic benefits – or at least creating the appearance of redistributing benefits because as the data show, there has in fact been little or no actual redistribution of resources taking place. If anything, every indication is that the gap between the more affluent Western Province and the rest of the country has been growing.

Because the government remains largely focused on redistributing what it sees as an essentially unchanging economic pie, it neglects doing what it can to create an environment where the economy as a whole will grow. And there is much that can be done that would effectively remove the constraints that have led to stagnation throughout much of the economy outside of the Western Province. However, this would entail introducing changes, including some far reaching structural changes, which would face significant political resistance in some quarters. Key reforms to strengthen and expand the scope for economic growth would include, for example, land titling and substantial reduction in the restrictions on agricultural activity to greatly enhance the economic opportunities for farmers to increase their incomes; substantially reducing the highly restrictive labour regulations that make it too costly for employers to hire workers and expand employment opportunities; and re-orient the country’s trade policies so that exporters would be better able to compete effectively in foreign markets.

Such changes are never easy, but they are far more difficult when a large proportion of the population has little faith that they would ever reap a fair share of the economic benefits that would result – when they see the economy as a zero-sum game. And it is not just those who are economically dispossessed that have a stake in maintaining the status quo – politicians also fear the prospect of these sorts of changes. Elections are won or lost and political careers based on promises contained in election manifestos of handing out “goodies” to supporters. In an economic environment where farmers, workers and business people were far less restricted in their options and better able to improve their economic conditions, the government would play a more limited role in the economy. And this would mean that there would considerably reduced scope for distributing goodies to friends and supporters.

When most people believe they have a greater stake in the economic progress of the country, they will also have a greater stake in finding a peaceful outcome to the current conflict. A stable, peaceful environment is essential for sustained economic progress. Investing in productive activities, whether it is by small scale enterprises or by large international firms, requires a reasonable degree of confidence concerning future economic conditions. After the ceasefire agreement restored at least a semblance of peace in 2002, we saw large numbers of Tamil people returning to their homes and farms beginning to rebuild their livelihoods. We also saw a surge in investment in the South, as hotels were refurbished and new hotels opened to take advantage of what was expected to be an expansion in tourism. In addition, Sri Lankans who had been living overseas and foreign investors also returned in greater numbers to explore economic opportunities inspired by the prospects of peace.

If peace is essential for economic progress and poverty reduction, the reverse may as well be true; reducing poverty through economic progress is also essential for peace. If this is the case, then what seems to be the prevailing view that the solution to the current conflict will depend almost entirely on military and political means, ignores one of the fundamental preconditions that created and has sustained the conflict. Certainly the fact that more than two decades of attempts to find a military and/or political solution alone suggests that something important is missing from the equation.

The current crisis warrants a thorough reconsideration of the government’s economic strategy, including a willingness to reassess longstanding politically sensitive issues such as agricultural, labour and trade policies. The economic growth and development of the rural economy requires a more market-oriented and less heavily regulated approach. Keep in mind that one of the main drivers of the economy in the Western Province was the introduction of free trade zones and BOI managed incentives that allowed investors to operate in a freer economic environment relative to the rest of the country. It is only by permitting and encouraging major economic restructuring to take place throughout the country that significant advances can be made to reduce poverty and restore a widespread view that everyone has a shared stake in a more prosperous economic future. And it is almost certainly the case that as this is achieved, it will be far more feasible to find resolution of the political issues that underlie this conflict.