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Sri Lanka Chapter 3. The Economy
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Economic activity in Sri Lanka: rubber tapper, teapicker, rice
cultivator, and handicraft worker
THE DOMINANT SECTOR of the Sri Lankan economy historically has
been wet rice (paddy) cultivation. Its importance in ancient
times is demonstrated by the extensive irrigation works
constructed in the north-central region of the island in the
first millennium A.D. In the thirteenth century, the civilization
based on these reservoirs began to decline, and population
shifted to the wet zone of the southern and southwestern areas,
where irrigation was less necessary to grow rice. Cinnamon and
other spices which were valuable in the European market became
important export commodities in the sixteenth century, when
Europeans, first the Portuguese and then the Dutch, established
control over the coastal areas of the island.
Commercial agriculture came to dominate the economy during
the British period (1796-1948). Extensive coffee plantations were
established in the mid-nineteenth century. Coffee failed when a
leaf disease ravaged it in the 1870s and 1880s, but it was
quickly replaced by the important commercial crops of tea,
rubber, and coconut. Although wet rice cultivation remained
important, Sri Lanka had to import more than one-half of the rice
it needed during the late nineteenth and early twentieth
centuries because of the land and labor devoted to the commercial
crops. At independence in 1948, almost all of the islands'
foreign exchange earnings were derived from commercial
agriculture.
The fundamental economic problem since the 1950s has been the
declining terms of trade. The proceeds from the traditional
agricultural exports of tea, rubber, and coconut have had less
and less value in the international marketplace. Beginning in the
early 1960s, governments responded by intervening directly in the
largely free-market economy inherited from the colonial period.
Imports and exports were tightly regulated, and the state sector
was expanded, especially in manufacturing and transportation.
This trend accelerated between 1970 and 1977, when a coalition
headed by the Sri Lanka Freedom Party nationalized the larger
plantations and imposed direct controls over internal trade.
The United National Party (UNP) contested the 1977 general
election with a platform calling for less regulation of the
economy. After its electoral victory, the new UNP government made
some effort to dismantle the state sector in agriculture and
manufacturing. At the same time, it encouraged private
enterprise, welcomed foreign investment and slackened import
controls. It also shifted spending away from subsidies and social
welfare to investment in the nation's infrastructure, most
notably a massive irrigation project, the Mahaweli Ganga Program,
which was expected to make Sri Lanka self-sufficient in rice and
generate enough hydroelectric power to fill the nation's
requirements. These policies resulted in higher rates of economic
growth in the late 1970s and early 1980s, but at the cost of a
mounting external debt. Foreign aid from the United States,
Western Europe, Japan, and international organizations kept the
economy afloat.
Sri Lanka's economy became more diverse in the 1970s and
1980s, and in 1986 textiles surpassed tea for the first time as
the country's single largest export. Nonetheless, the performance
of the traditional agricultural exports remained essential to the
country's economic health. Other important sources of foreign
exchange included remittances from Sri Lankans working overseas,
foreign aid, and tourism.
Data as of October 1988
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