|
Sri Lanka Role of Government
The role of government in the economy during the final
decades of British colonial rule was considerable. The plantation
economy required extensive infrastructure; the colonial state
developed and owned railroad, electrical, postal, telegraphic,
telephone, and water supply services. Quasi-state financial
institutions served the colony's commercial needs, and during
World War II the government set up production units for plywood,
quinine, drugs, leather, coir, paper, ceramics, acetic acid,
glass, and steel. Welfare policies also began during colonial
rule, including a network for free and subsidized rice and flour
established in 1942. Free education, relief for the poor, and
subsidized medical care were introduced in the late British
period. Moreover, after 1935 the government took an active role
in the planning and subsidizing of colonization schemes. This
policy was designed to remove landless peasants from heavily
populated areas to newly irrigated tracts in the dry zone.
Economic policy since Independence is divided into two
periods. During the first, which lasted from 1948 to 1977,
government intervention was often seen as the solution to
economic problems. The expansion of government participation in
the economy was fairly steady, resulting in a tightly regulated
system. This trend was especially marked during the period of
S.R.D. Bandaranaike's second government, from 1970 to 1977, when
the state came to dominate international trade and payments; the
plantation, financial, and industrial manufacturing sectors; and
the major trade unions outside the plantation sector. It also
played a major role in the domestic wholesale and retail trade.
The trend toward greater government involvement was largely a
response to the deteriorating terms of trade. The plantation
economy had financed social programs such as subsidized food in
the late colonial period, but when the value of exports declined
after 1957, the economy's capacity to support these programs was
strained. When the foreign exchange reserves of the early 1950s
dwindled, import-substituting industrialization was seen as a
solution. Because the private sector viewed industrial
development as risky, the government took up the slack. When
balance of payment deficits became chronic, some nationalizations
were justified by the need to stem the drain of foreign exchange.
Similar concerns led to the tighter regulation of private
business and the establishment of state-owned trading
corporations. When there were shortages of necessities,
governments expanded state control over their distribution in
order to make them available at low prices.
The 1977 elections were largely a referendum on the perceived
failures of the closed economy. The UNP, which supported a
deregulated, open economy, won decisively. The new government
rejected the economic policies that had evolved over the previous
twenty years. Some observers believed that the economy had been
shackled by excessive regulation, an excess of consumption
expenditure over investment, and wasteful state enterprises.
Under the UNP, market forces were to play a greater role in
allocating resources, and state enterprises were to compete with
the private sector
(see Sri Lanka - The United National Party Returns to Power
, ch. 1).
The main elements of the new policy were investment
incentives for foreign and domestic capital, a shift in the
composition of public spending from subsidies to infrastructure
investment, and a liberalized international trade policy designed
to encourage export-led growth. Employment creation was a central
objective, both through encouragement of domestic and foreign
capital investment, and through an ambitious public works
program, including the Accelerated Mahaweli Program, which aimed
to bring new land under irrigation and substantially increase
hydroelectric generating capacity
(see Sri Lanka - Government Policies
, this
ch.). Two other policies that sought to create employment were
the establishment of investment promotion zones (free trade
zones) and extensive government investment in housing.
The role of government during the decade after 1977 remained
significant; the public investment program, for instance, was
implemented on a greater scale than anything attempted
previously, and in early 1988 the state remained heavily involved
in many areas of economic activity. But while the government
increased its efforts to develop the nation's infrastructure, it
reduced its role in regulation, commerce, and production. Its
initiatives received the enthusiastic support of the
international development community. As a result, Sri Lanka
received generous amounts of foreign aid to finance its post-1977
development program. This foreign assistance was integral to the
government's economic strategy. Because budget deficits were
large even before 1977, external financial resources were
necessary to pay for the increased spending on infrastructure and
to make up for the revenue lost as a result of the tax incentives
given business. Similarly, relaxing import controls put pressure
on the balance of payments, which could be relieved only with the
help of foreign aid.
Data as of October 1988
|
