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Über dieses Buch

This book draws lessons from the story of Sri Lanka’s post-conflict development in the context of a struggle for socio-political reconciliation, a turbulent world economy, and difficult internal and external political challenges. Heightened volatility in the global economy and intensifying geopolitical rivalries pose complex policy challenges for small countries embarking on post-conflict daunting challenges. To sustain peace, development needed to be broad based and inclusive. It needed to rapidly reconstruct war-devastated regions, restore macroeconomic stability, while delivering a ‘peace dividend’. The book contains contributions that highlight Sri Lanka’s endeavours of coping with adverse shocks, while exploiting new opportunities. It showcases how the island country had to attract capital and assistance, and support of the international community, including that of the rising Asian giants – China and India. Addressing the post-conflict challenges of sourcing development finance in a new global financial and political landscape, the book would be of interest to researchers working on post-conflict development in the context of a volatile global economy and changing aid architecture, and would also act as an important resource for policy makers.



Introduction: Challenges and Opportunities of Sri Lanka’s Post-conflict Economic Development Overview

In May 2009, Sri Lanka’s nearly three-decade-long separatist war ended when government forces crushed the separatist insurgency and annihilated its leadership. A war weary population hoped and expected that this would usher in a period of peace and national reconciliation, political stability and sustained economic growth.
Sisira Jayasuriya, Dushni Weerakoon

Policies, Regulations, and Governance for Smart Growth


Trade and Competition Policies: Implications for Productivity Growth in Sri Lanka

Trade liberalization is necessary but not sufficient to get the full return to trade reforms in the absence of liberalization of non-tradable goods through competition policy. Even if resources to augment factor growth are readily available, that too could fizzle out because of diminishing returns. Sri Lanka has made only limited progress on trade liberalization in the post-conflict era and at present has no competition policy to speak of. Sustained growth has to be based on total factor productivity (TFP) growth. Otherwise, Sri Lanka will have to keep raising savings to increase capital, assuming that labor growth sees a steady increase. However, as living standard increases, population growth declines, and labor supply does not grow fast. In fact, Sri Lanka is now past the demographic dividend phase and already in a situation where there is a steady decline in population. In this context, low average TFP growth means that the country has to keep on increasing saving and borrowing from abroad to raise GDP growth, based on factor augmentation. This leads to a difficult macroeconomic situation as excessive foreign borrowing is needed to augment domestic savings that Sri Lanka cannot afford to service in view of the fact that access to capital is more costlier than before. The study finds TFP growth in Sri Lanka to be low. It finds that trade and competition policies that would have raised TFP growth were not sustained after their initial introductions.
Sarath Rajapatirana

Regulatory Reforms in Post-conflict Sri Lanka: Breaking the Cycle?

Sri Lanka’s state-owned enterprises (SOEs) play a significant role in the country’s socioeconomic development trajectory. Despite decades of analysis and reform efforts, SOEs continue to have outsized fiscal and political impacts on the country. The analysis suggests that privatization is not a panacea for the problems afflicting SOEs. In the absence of sound regulation, the sale of assets may well maximize rents to politicians and investors at the expense of the public interest. The post-conflict period provided a fresh opportunity to embark on meaningful public enterprise reforms. However, these years have witnessed only halfhearted attempts at reforms aimed at inclusive development, pointing to the embeddedness of and interaction between extractive economic and political institutions. As this chapter discusses, such reforms have not produced meaningful results, primarily due to Sri Lanka’s bipolar political regime and the failure to undertake essential governance changes. This chapter reviews recent developments in SOE reform, analyzes political economy considerations, and proposes limited, and more achievable, institutional reforms to reset the public enterprise reform process.
Malathy Knight

Managing Macroeconomic Stability While Investing in Reconstruction in Post-conflict Sri Lanka

In the aftermath of an exogenous shock such as resolving the prolonged conflict in Sri Lanka, it is expected that markets begin to revive, domestic and foreign investment increases, and the government and donor communities begin to extend substantial rebuilding efforts. The major impact of such events and efforts is the expansion of the economy which may also exert inflationary pressures, create exchange rate upheavals, and expand external and internal imbalances. Addressing and managing the forces of such instability on the economy to ensure a sustainable growth path require well-designed policy measures. However, policy design becomes complicated if the external economic environment becomes unhealthy, while it is facilitated by some external help such as assistance from international organizations such as the International Monetary Fund (IMF). 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 liberalization shock of 1977. The paper concludes that after the end of the conflict, Sri Lanka’s economic stability was better maintained with a tighter monetary policy, and it was facilitated by the lesser impact of a shock, a gradual global recovery from the great global recession of 2007, and the effects of assistance from the IMF.
H. N. Thenuwara

Ensuring Sustainable Development in Post-conflict Sri Lanka

When liberal economic reforms were first introduced to Sri Lanka in the late 1970s, the approach was forward looking, introducing appropriate policies to tackle possible adverse environmental impacts too. Legislative enactments such as the National Environment Act of 1980 and the Marine Pollution Prevention Act and the Coast Conservation Act of 1981 covered terrestrial and marine coastal environments. However, the path toward sustainable development has since been marred by numerous shortcomings and failures, reflected in the erratic progress on economic reforms. Sri Lanka’s environmental challenges are closely connected to the economic policies pursued by successive governments. While many of the current environmental issues can be traced to liberal economic policies adopted in the late 1970s, an accumulated burden carried over from the early period of colonial rule has also contributed its share of damage even today. Adverse environment conditions are intensified by key underlying drivers of population growth, urbanization, industrialization, agricultural modernization, commercialization of rural economies, and rising uncertainty of climate change in post-conflict Sri Lanka. Prospects of accelerated economic growth call for greater attention to issues of sustainability. Its success depends largely on identifying and implementing innovative policies for effective management of a country’s natural capital stock. This chapter charts Sri Lanka’s path to achieve sustainable development in the post-conflict era, and argues that achieving that objective remains an elusive goal as ever in the country.
Athula Senaratne

Post-conflict Development in a Transforming Global Economy


Debt Financing for Development: The Sri Lankan Experience

Throughout the first six decades of the post-independence era, Sri Lanka relied on traditional forms of foreign financial assistance, albeit at fairly modest volumes, from multilateral and bilateral donors. But, beginning with its debut issue of a five-year USD 500 million international sovereign bond (ISB) in 2007, the composition of Sri Lanka’s outstanding external debt stock has transformed swiftly from concessionary to non-concessionary loans obtained on commercial terms, with maturity periods of 5–10 years. This is the result of both demand and supply factors for international borrowings. On the demand side, external financing needs rose sharply post-war, for both economic and political reasons to fund a huge infrastructure development programme and provide a peace dividend. On the supply side, the adoption of unconventional monetary policy in advanced economies as a response to the global financial crisis resulted in an unprecedented lowering of interest rates, prompting private and institutional investors to search for higher yields in emerging economies. Second, China emerged as a major source of development finance, with Sri Lanka seen as a particularly attractive destination due to its strategic position at the tip of South Asia. This chapter examines the drivers of this dramatic transformation of Sri Lanka’s debt financing strategy and discusses the implications for macroeconomic management in a global context where there are rising concerns about the vulnerability of emerging economies to financial and economic shocks, particularly interest rate increases in developed economies that can reverse capital flows into developing countries. We argue that as some of these favourable conditions begin to change and the global context becomes more challenging, the resilience of the Sri Lankan economy will be severely tested as it prepares to amortise a dramatic spike in external debt settlements during 2019–2022.
Dushni Weerakoon, Sisira Jayasuriya

Using RCEP as a Stepping Stone to East Asia: Case Studies of Sri Lanka and India

This paper explores the economic implications of the globally important Regional Comprehensive Economic Partnership (RCEP)  for South Asia through case studies of post-conflict Sri Lanka and India. The results of model-based studies suggest that, as a member, India is the only country in South Asia to potentially gain, but its gains depend on the depth of the RCEP agreement. Excluded Sri Lanka, however, will likely see losses from trade diversion and erosion of preferences from the RCEP. Sri Lanka is attempting to use the recent free trade agreement (FTA) with Singapore as a stepping stone to East Asia. But both Singapore and Sri Lanka need to do more to ensure that the benefits flow to Sri Lanka. Further afield, Sri Lanka could learn useful lessons from India’s long experience of the RCEP negotiations including liberalizing goods and services trade and adopting new intellectual property rules. A renewed partnership between Indian businesses and government will help prepare for market opening under the RCEP.
Ganeshan Wignaraja

Balancing Economic Partnership for Growth in the Post-conflict Sri Lanka

Sri Lanka sits at the centre of the Indian Ocean straddling major shipping routes. Its geostrategic position has led to courting by players in the region including China and India. For decades, India was Sri Lanka’s principal economic partner, in terms of trade and investment, development cooperation or defence. Over the past decade, there has been a significant change, with warming of ties between Colombo and Beijing, especially during the height of Sri Lanka’s war years (2006–2009) and thereafter. Even with the change of government in 2015, Sri Lanka has shown no hesitation in making an adjustment to pro-China policy, despite early claims to ‘rebalance’ the country’s strategic relations. In the post-conflict period therefore, Sri Lanka is on a precarious course: seeking economic assistance from China while maintaining relations with India. In examining Sri Lanka’s political and economic relationship with India and China in the post-conflict period, and how Sri Lanka is attempting to balance the interests of these rising two economic powers in Asia, the chapter argues for a more strategic approach by Sri Lanka to take advantage of the opportunities to meet its own development agenda and vision to become an economic hub in the Indian Ocean.
Janaka Wijayasiri

Export Expansion in a Changing Global Order: Challenging Times for Post-conflict Sri Lanka

This chapter examines Sri Lanka’s experience with manufacturing exports expansion, placing emphasis on opportunities and policy priorities in a rapidly changing global context in which global production sharing has become the prime mover of cross-border production and trade. There is compelling evidence that liberalization reforms initiated in 1977 helped transform the classical export economy of Sri Lanka inherited from the colonial era into a one in which manufacturing plays a significant role. Had not political instability that adversely affected the investment climate during Sri Lanka’s long conflict taken place, export performance would have been much more impressive. In a context in which factors of production—capital, technology and marketing and managerial know-how—are increasingly mobile across national boundaries within production networks, the nature of the existing manufacturing base is not a prerequisite for export diversification. Trade-cum-investment policy reforms can set the stage for the emergence of exporting firms de novo. In sum, the findings make a strong case for redressing policy backsliding and continue with the market-oriented reforms agenda that was left incomplete in the late 1990s and set up institutional safeguards to avert further backsliding.
Prema-chandra Athukorala

Smarter Development for Sustaining Peace


Tourism in Post-conflict Development: Making Use of New Opportunities in Sri Lanka

Developing countries emerging from protracted civil wars and conflicts very often experience post-conflict tourism booms. Sri Lanka is no exception. The end of conflict has offered new opportunities, particularly in the tourism sector. In order to make use of these new opportunities, the previous government launched the “Tourism Development Strategy 2011–2016” by recognizing the key role of tourism that tourism can play in post-conflict development. It has been followed up by the current government of Sri Lanka by launching its own “Sri Lanka Tourism Strategic Plan 2017–2020”. The purpose of this chapter is to examine the nature of the post-conflict tourism boom and explore new opportunities that have emerged in terms of creating employment opportunities and reducing regional disparities. Furthermore, the chapter attempts to examine the impact of the tourism boom on the overall economy and to highlight how Sri Lanka has given priority to developing the tourism sector and positioning it as a key growth pillar in the economy. This chapter also demonstrates that tourism is not a “silver bullet” in addressing all economic ills in the Sri Lankan economy, despite the optimism about the development of the tourism sector to create further opportunities. The use of tourism as a tool to stimulate the economy should be synchronized with a raft of other policies such as improved transport infrastructure facilities, sound macroeconomic management, eliminating corruption and inefficiencies in government institutions, and reducing barriers to trade and FDI.
Jayatilleke S. Bandara

Economic Transformations for Better Lives Through Better Jobs

Until May 2009, Sri Lanka was troubled by a violent separatist conflict, which resulted in widespread damage to human lives, communities, and property. Soon after the ending of the conflict, the government spearheaded a development program in the conflict-affected regions to revive its war-ravaged economies. The development programs aimed to rebuild and modernize damaged or destroyed social and economic infrastructure and facilitate livelihood activities and employment creation to uplift the living standards of people. This chapter examines the success of different strategies adopted by Sri Lanka to improve the labor markets in the aftermath of the war in the conflict-affected provinces. The analysis shows that the development programs have stimulated growth and reduced poverty. However, this was mainly done through the improvement of livelihood activities in the two selected provinces, namely Northern Province (NP) and the Eastern Province (EP). But, labor force participation rates (LFPRs) and employment-to-population ratios remain low in the conflict-affected regions, indicating low job creation and possible labor market imbalances. Further, the analysis shows that the economies of the conflict-affected provinces are not mature enough for the creation of professional and semi-professional jobs. The slow growth of the overall economy, muted attention given to the social sector developments, and unstable macro- and political developments in the country would have contributed to the slow recovery.
Nisha Arunatilake

Post-conflict Agricultural Modernization in Sri Lanka

Sri Lanka’s former conflict-affected regions have traditionally been high-potential agricultural areas providing livelihood to a group of hard-working and resilient farmers. During the conflict, a large number of civilians were displaced, and agricultural livelihoods were disrupted affecting agricultural activity in the Northern Province (NP) and Eastern Province (EP) as well as the rest of the country. The cessation of the conflict therefore provided an opening to a large agricultural resource base for production. The government too was keen to revive the rural economy as a means of developing lagging regions, in particular the conflict-affected regions. It placed a high priority on agricultural modernization with a view to improve productivity and competitiveness, enhancing value addition, product diversification, and creating employment opportunities. These efforts delivered some beneficial impacts to rural farm incomes as well as food security. However, this chapter argues despite the post-conflict agricultural developments that the country experienced in general, and the NP and EP in particular, long-standing agricultural development issues remain unaddressed, affecting overall agricultural development in the country. Therefore, a long-term strategy to address these issues, including those of stagnating productivity, land use, inefficient water management, in adequate public spending on agriculture research and technology, climate change, and poor market integration—which collectively result in agrarian poverty and food insecurity in the country—needs to be adopted and implemented.
Manoj Thibbotuwawa

Achieving Equity in Post-conflict Sri Lanka

Sri Lanka’s three-decade-long conflict had a devastating impact on poverty and inequality in the country, resulting in daunting challenges to be faced in its aftermath.
Ganga Tilakaratna

Transitioning to Middle Income and Beyond: The Urbanization Challenge in Post-conflict Sri Lanka

Under-urbanization and inadequate urban planning are by-products of suppressed growth and development during the conflict years in Sri Lanka. The end of the conflict in 2009 opened up many opportunities for urban development. Despite a significant contribution to infrastructure development and city beautification, there was growing discontent towards the government that ended the 30-year conflict, due to reasons such as alleged corruption, utilization of armed forces for urban development and over emphasis on rapid beautification of the Colombo city. Learning from the mistakes of the previous government, the new government elected in 2015 proposed a new chapter in urbanization in Sri Lanka with a private investment-led model with public–private partnerships. Nevertheless, both post-conflict governments failed to provide sustainable solutions to long-term urban issues such as unauthorized urban development and settlement, flooding, solid waste disposal, public transportation and congestion. Such unresolved urban issues and socio-economic marginalization and exclusion have the potential to breed future conflicts. As such, well-managed urbanization and efforts to avoid rural–urban disparities are needed to ensure the absence of new forms of conflicts. Lessons from Sri Lanka’s post-conflict urban experience show that rapid urban development efforts could have been replaced with well-planned and inclusive urban development that included an appropriately developed institutional framework. Similarly, post-conflict excess military strength would have been better handled with a comprehensive re-integration plan, to adjust into a non-combatant military force that engages in performing civil duties.
Bilesha Weeraratne
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