Saman Kelegama is a prodigious researcher who has published his work extensively both in Sri Lankan and foreign journals. In the fourteen chapters of Development under Stress he brings together 12 papers that have appeared in such journals as World Development, Developing Economies, The Round Table, Economic and Political Weekly, Upanathi (the Journal of the Sri Lanka Association of Economists) and as chapters in books and as studies. These essays are made particularly relevant and valuable by his introduction to the volume and two chapters in the first part of the book that discusses the performance of the economy during the entire post-independent period and the pre-conditions for achieving rapid growth and industrialization. These two chapters give a concise account of the country’s economic policies and performance and the constraints to the country’s development process. The three important constraints Kelegama identifies are the welfare state that led to excessive politicization, an export pessimism and the North/East conflict. He observes that: ‘The Sri Lankan development story since Independence is an uneven one characterized by slow adjustment to internal and external shocks, missed opportunities, and policy errors.
Unlike some East Asian success stories, the Sri Lankan economy progressed over the years under a stressful environment. Three key factors could be identified. First, the environment associated with the welfare state (that) led to a highly politicized electorate. This electorate did not permit Sri Lanka to disassociate itself from the welfare state culture for most of the post-Independence period. The welfare measures were maintained more on the basis of competitive political pressures rather than sustainable economic growth’.
‘Second, Sri Lanka was also stricken by the doctrinaire of export pessimism and delayed moving towards an export-oriented strategy by overstaying as a closed economy for nearly two decades. When economic liberalization began in 1977 it was a late comer to the export-led industrial world and thus could not stage a significant break-through like the East Asian Tigers. Third, concerted effort was not made to address the ethnic animosity between the two major communities that erupted time and again…..and culminated as a war in North/East Sri Lanka during 1983-2001. This conflict substantially disturbed the economic management process’.
Kelegama brings out the stresses arising from the rapid population growth that constrained investment. Perhaps one could add a few other constraints such as the deteriorating terms of trade, social and cultural values and a foreign aid dependency syndrome that are inimical to growth. Kelegama is also mindful of the human development achievements of the country and points out: ‘Despite the stressful environment, there were some achievements about which Sri Lanka is well known internationally. Sri Lanka came to be known as an exception among developing countries in improving the physical quality of life’. He also refers briefly to the international controversy on whether there was a trade–off between human development attainments and economic growth.
The book is divided into five parts. The first part titled Fifty Years of Economic Development and Challenges Ahead places the subsequent parts of the book in perspective and dwells on the theme of the book. In an overview of why Sri Lanka failed to live up to its initial promise based on much more favourable conditions than those prevailing in most other Asian countries, Kelegama points out that at the time when the country regained her Independence in 1948 it had the highest per capita income outside Japan in Asia. However, by 1997, South Korea had a per capita income that was 14 times higher than Sri Lanka and Thailand’s per capita was 4 times higher while Indonesia had marginally overtaken Sri Lanka.
It is essential to underscore Kelegama’s thesis that the country’s development experience demonstrates ‘the limitations of the State-led direct method of enhancing social welfare, and the ability of a liberal trade and investment regime to generate reasonably high growth rates even in a chaotic war situation in a developing economy’. This position is unfortunately still not appreciated by certain shades of political opinion and many sections of the population that are stuck with moribund ideologies. He argues that Sri Lanka’s adoption of a closed economy during the late-1950s to mid-1970s period was not appropriate for a small economy with a limited market and limited natural resources for industrialization.
The second chapter of the book in this part on preconditions for achieving NIC status elaborates the lack of the political will and the range of policies needed to achieve higher levels of industrialization and economic growth. It demonstrates that increased domestic savings as well as increased foreign investment of a significant amount are needed to generate the desired high rates of growth to resolve the country’s economic and social problems that he discusses in part 5 of the book, namely poverty and employment. It provides various scenarios of savings, investments, and capital-output ratios and the required strategy to enhance investment and increase the efficiency of capital to achieve higher economic growth.
Part II of the book consisting of two chapters addresses the debate on economic liberalization. Chapter 3 provides the background on reform while Chapter 4 spells out how unpopular reforms were pushed through by strong political leadership during (1989-1993). It was during this regime that the second wave of liberalization was pursued with a targeted poverty alleviation programme. Key elements of these reforms were FDI liberalization, share market reform, and privatization. He contends that strong political leadership proved crucial in the second wave of reforms during 1989-1993. He is also careful to point out that governance issues were very questionable though economic reforms were implemented by a strong political leadership.
Together these chapters chart the needed policy framework to achieve a doubling of per capita income. Kelegama contends that the state in Sri Lanka is not strong, not well coordinated and is neither cohesive nor disciplined in organizational terms. The third part of the book contains four essays on macro economic management. Three of these deal with the management of the economy in the stressful conditions of a costly war. The other chapter in this part deals with the management of the economy in the turbulent years 2000-2001 and the free float of the currency and the IMF economic package. These chapters demonstrate how the cost of the war resulted in serious consequences to the economy and the government had to grapple with serious macroeconomic instabilities.
Kelegama argues that, ‘The 17 year war was costly and deterred foreign and local investment, reduced tourist arrivals, caused immense damage to the country’s infrastructure, and above all led to many deaths and brain drain of skilled labour’. Chapter 5 attempts to capture both direct and indirect costs of the war. He suggests that the war may have cost at least the equivalent of twice Sri Lanka’s 1996 GDP.
Kelegama explains the economic consequences of the war thus: ‘The costly war, among others, led to large budget deficits (exceeding 8 per cent of GDP) during the 1990s. Large scale domestic and foreign borrowing to finance the budget deficit accumulated as large public debt over the years, so much so that by the year 2000, public debt to GDP ratio had exceeded 100 per cent. In 2001, the country faced an economic crisis consequent to the war escalating and international oil price hike in the year 2000’.
Analysing the economic crisis and the remedial measures that were implemented in response to this crisis in 2001, he states that ‘the IMF package started falling apart and macroeconomic management had gone haywire by end 2001 (budget deficit was 10.8 per cent of GDP and the rate of inflation was 14.2 per cent) with the economy receding to negative growth (-1.5 per cent) for the first time since Independence’ and contends that although ‘external and internal shocks contributed to the situation, the economy receiving directives according to political imperatives aggravated the situation’.
The rescuing of the economy from this crisis was a staggering task for the new government that came into power in 2002 that could not be accomplished without a cessation in the war and relative peace. Hence the peace package was adopted in the hope of providing an economic dividend through aid mobilization and revival of the economy.
The fourth part contains two chapters on industrialization, a chapter on agricultural policy and another on the much misunderstood subject of food security and provide useful insights on past efforts at industrialization and perspectives on future industrial policy.
This is followed by an overview of Sri Lanka’s agriculture, focussing on the issues of WTO related market reform and agricultural diversification. The food security situation shows that although at the macro-level food security is maintained, it is a serious problem at the micro-level as the average dietary energy intake in Sri Lanka falls below minimum requirements of 2200 calories with 33 per cent of women and 37 per cent of men suffering chronic energy deficiency and 33 per cent of children under 5 years being malnourished. Kelegama points out that food and nutritional inadequacies are concentrated among the poor, children, and the population displaced by the war for nearly two decades and the strategies that are required to address the problems.
The fifth part of the book deals with two of the most important and intractable problems of the economy—Employment and Poverty. Most of the employment generation during the 1977-1988 period was not from liberalization policies but rather from state-led programmes. It examines Sri Lanka’s employment generation under the structural adjustment programme during 1977-1994 in order to highlight the problems of employment generation in the economy. Nonetheless, during 1989-1994, liberalization measures were more effective in generating employment with facilitation measures provided by the state. Unemployment has been an explosive issue in Sri Lanka. Two youth insurrections in 1971 and 1988/89 and the youth uprising in North/East Sri Lanka have their root causes among other factors, on unemployment. Kelegama argues that there are a number of characteristics in the Sri Lankan labour market that act as impediments for employment creation. Among others, three hypotheses are noteworthy. First, the skill mismatch hypothesis which argues that the type of skills produced by the Sri Lankan education system is not suitable for the job market. Second is the job queuing hypothesis which argues that Sri Lanka’s unemployment is voluntary because youth wait for public sector jobs and in the meanwhile depend on family income. Third, it is argued that unemployment is due to the rigidities in the labour market resulting from outdated labour legislation that prevents smooth labour exit. Kelegama asserts that all three explanations, among others, are well-founded and that although Sri Lanka managed to reduce unemployment to a single digit level in the late 1990s, some of the key impediments of the labour market still prevail and until these are addressed, the forces of liberalization will find it difficult to create the required jobs in the market.
The chapter on poverty points out that Sri Lanka’s population below the poverty line has fallen from 29 per cent in 1980 to 23 per cent by late-1990s. However, the level is high compared to South East Asian countries. Besides there are regional variations on poverty and income distribution that is highly skewed in favour of top 2 deciles of the population which are concentrated in the big cities. Poverty which has declined little during the 1990s is characterized by regional and sectoral variation with marginal decline in income inequality. Despite a number of safety nets for the lower income groups, it points out that the poor seem to be highly vulnerable to income fluctuations. The chapter looks at the poverty-related strategies and the political economy factors that are influencing them and concludes that the impediments for the effective operation of poverty-related strategies are both structural and political. He argues that due to the prevailing macroeconomic situation, the government is reluctant to undertake reforms that may be costly in the short-run and advocates the depoliticization of the poverty programme and structural and market reform that he believes will go a long way in making the existing poverty-related programmes more effective and in reducing poverty in Sri Lanka. Development Under Stress is an important contribution to the understanding Sri Lanka’s economic development experience.
Nimal Sanderatne is a critic in Sri Lanka.