New Direction of Japanese ODA

Hideki Esho
Professor, Faculty of Economics, Hosei University, Tokyo, Japan

Japan has been by far the top donor to Sri Lanka. However, for long-time Japanese aid to Sri Lanka practically disregarded the war and provided development assistance as if the war did not exist.

But, after the Cease-fire Agreement between Sri Lanka Government and LTTE in February 2002, Japanese aid policy started a historical step forward to actively promote peace building under the slogan of securing human security.

There should be two pillars of Japanese assistance to Sri Lanka:

(a) assistance to support the peace-building and rehabilitation process, and

(b) assistance that is in line with the country’s long-term vision for development.

If peace does not take root, long-term development cannot evolve. Proactive approach of Japanese Overseas Development Assistance (ODA) is really a welcome movement, but how to realise promptly this idea in Sri Lanka is still a serious concern.

With the mediation of Norway Government, the Sri Lanka Government and the Liberation Tigers of Tamil Eelam (LTTE) signed a Ceasefire Agreement in February 2002 and peace negotiations were started in September of the same year. The cost of the war that has spanned more than twenty years is tremendous.

Not only the political stability has been threatened but the healthy economic growth has also damaged. More than 70,000 lives were lost and more than one million people were displaced until the Ceasefire Agreement (Ofstad 2002).

Economic costs of the war are also tremendous. Defense expenditure of the government budget jumped up from less than half per cent of GDP until early 1970s to 6.0 per cent in 1996. The total costs of the war for 1983-2000 is estimated at least equivalent to double figures of 1996 GDP (Arunatilake, Jayasuriya, and Kelegama 2001).

With the sudden changes in the world situation since ‘the September 11’, the expectations for achievement of peace and the rehabilitation within and outside of Sri Lanka had never been as high as they were at that time. Japan as the biggest donor to Sri Lanka also started a historical step forward to actively promote peace-building.

Some characteristics

Within the milieu of South Asia, Sri Lanka possesses many striking characteristics. One is that Sri Lanka stands as an interesting point of contact between South Asia and Southeast Asia.

Even though it is located in South Asia, Sri Lanka has some cultural elements of Southeast Asia, such as a large number of Buddhist population, a rice-based diet, a geographical location as an island country surrounded by the sea, and so on. Its GDP per capita surpassed US$1300 in 2006 and definitely ‘highest income country’ in South Asia.

Moreover, it is obvious that its human development indicators such as long life expectancy at birth, high literacy rate, low infant mortality rate, low population growth rate, prevalent social welfare and so on rise well above those in not only the South Asian region but also developing countries throughout the world.

Particularly in relation to per capita income levels, the standard of human development in Sri Lanka is remarkable, even reaching the standard in industrially advanced countries.

These development pattern and strategy has long been highly evaluated as well as debated as “the Sri Lanka model” of development (Jayawardena 1974; Isenman 1980, Sen 1981; Bhalla 1988. Anand and Kanbur 1991).

On the other hand, Sri Lanka has long been characterised as a typical ‘plantation economy’ (Burton et.al. 1992). The formation of plantation economy of Sri Lanka traces back to the middle of the nineteenth century.

Snodgrass, in his classical work, described the colonial Sri Lanka as ‘a classical export economy’ and ‘an enclave economic system of primary products’ (Snodgrass 1966). Main export products were plantation crops such as tea, rubber, and coconuts.

The budgetary resources that supported development of Sri Lanka as welfare State were overwhelmingly dependent on plantation sector (Thorbeck and Svejnar 1987).

The main economic function of the plantation sector was continually to get foreign exchange before the independence as well as after the independence. Especially after the independence, the plantation sector functioned as resource transfer sector to the rice-producing sector.

The Government imposed heavy export duty and special duties on the plantation sector and thus collected tax resources were allocated as subsidies to irrigation construction (Mahaweli project), rice distribution, and social sector development. Burton called such type of mechanism as ‘transfer state’ (Burton et. al. 1992, p.29).

Thirdly, among the countries in South Asia, Sri Lanka has made the most progress with the liberalisation of economy and the structural adjustment reform. Despite various twists and turns, since 1977 Sri Lanka has basically been unremitting in its efforts to open up and liberalise economy.

In 1977, Sri Lanka launched a dramatic economic liberalisation program. The economic performance since 1977 was remarkable. Average annual GDP growth rate increased from 2.9 per cent in 1970-77 to 6.0 per cent in 1978-82 (Rajapatirana 1988).

However, since 1983 when ethnic conflict between Sinhalese and Tamils broke out, the growth rate was substantially declined and the liberalisation efforts could not come to fruition.

In 1990, Sri Lankan Government launched the economic reform that could be called the second phase of economic liberalisation. Today, Sri Lanka is the most liberalised and open economy among South Asian region.

For example, domestic prices of manufactured goods against world prices of manufacturers goods showed a considerable convergence since 1977 and the wedge between them has virtually disappeared in 1990s (Athukorala and Rajapatirana 2000).

The main factor that forced the second phase of economic liberalisation was official reserves went down to the equivalent of only three weeks of imports in June 1989 (Dunham and Jayasuriya 1998).

The then President Premadasa of the United National Party (UNP), depending on loans from the IMF and the World Bank, started stabilisation cum liberalisation program.

Role of development aid

Despite a number of factors beneficial to the economic growth such as the establishment of a democratic system, the progress of economic liberalisation, the flexibility of both the society and the culture, and the achievement of the exceptionally high standard of human development, the economic growth in Sri Lanka has not reached even the satisfactory level, compared with its latent potentiality.

For the thirty years after its dependence, the income gap between Sri Lanka and the Southeast Asian countries such as Singapore, Malaysia, and Thailand, has widened greatly.

In short, the reason for this has been the failure of the development strategy of Sri Lanka. The development strategy of Sri Lanka has been successful in raising the standard of its social indicators, but has not been successful in achieving the growth and has failed especially from the viewpoint of the equitable distribution of the outcome of the growth. The ethnic conflicts for nearly twenty years since 1983 are an expression of this failure.

It is obvious from a long-term perspective that what Japan is positively committing to the peace and rehabilitation process in Sri Lanka and is contributing the Sri Lanka’s ‘peace dividends’, is a precondition for the effective and efficient implementation of the development assistance, but it is also true that these commitments and contributions, in themselves, turn out to be the effective development assistance.

As by far the top donor to Sri Lanka, Japan can and must contribute to Sri Lanka’s ‘peace dividends’ through the framework of the development assistance. The attainment of peace will enable the Sri Lanka Government to reduce its military expenditure and clear the country’s chronic budget deficits.

In this peace and rehabilitation process, there is a plethora of tasks that must be done, including the removal of landmines and unexploded bombs in the battle fields in the Northern and Eastern parts of Sri Lanka, the daily life assistance and the vocational training for refugees from India, internally displaced persons, wounded soldiers, and the socially vulnerable, and the rehabilitation of infrastructures such as roads and telecommunications facilities, the provision of micro-credit to the impoverished classes, the improvement of social infrastructure (such as water supply, public sanitation, medical services, nutrition, health), food assistance, and so on. It is vital that systems which can quickly and flexibly deal with these various problems be promptly set up, with the careful attention to the progress of the peace process.

Role of economic cooperation

The positive commitment to the peace and rehabilitation process in Sri Lanka through the framework of the development assistance is strongly characterised by the emergency humanitarian considerations or human security. But if how Sri Lanka should emerge in the future is considered, a vision for development from a long-term perspective should be clarified.

The future of Sri Lanka’s economy depends on the improvement of this capacity to attract and acquire the foreign currency. The best way for heightening Sri Lanka’s capacity to attract and acquire the foreign currency is to establish ‘the Sri Lankan branch’ as one in an export-oriented and tourism cum environmental-oriented state (ETES).

What is needed at first is the formulation of a bold and systematic ‘export-led employment-generating development strategy (EEDS)’. It is necessary to draw up an EEDS that improves the added value and the level of technology while keeping pace with world market.

In conjunction with this EEDS, the development in the tourism and environment sector also leads to the improvement of Sri Lanka’s capacity to attract and acquire the foreign currency.

Sri Lanka truly abounds with rich tourism resources. As the “Pearl of the Indian Ocean,” Sri Lanka is surrounded by beautiful coastal waters. It has mountains teeming with nature, lush tea plantations, numerous historical Buddhist sites, and an abundance of flora and fauna.

By taking advantage of Sri Lanka’s natural environment and historical legacies, the standard of the development of tourism can reach world-class one. The Sri Lankan Government has so far focused on the development of tourism, but because of the long period of conflict, Sri Lanka’s tourism industry has been critically damaged over the past twenty years.

To realise this transition to an export-oriented, and tourism cum environment-oriented State, peace and the rehabilitation of the country must be achieved.

However, only the promotion of measures for relaxing regulations and liberalising the economy will not be enough; the results of this deregulation and liberalisation must also be made visible to the nation’s people. For this, action in at least the following five areas are necessary.

First, human resource development will be indispensable for training people to develop a Sri Lankan brand that can be compete on world markets. Educational reform that clearly sets this goal is essential.

Sri Lanka has a relatively cheap and good quality labour force, but has not been adequately utilised up to now due to lack of sufficient employment opportunities. As a result, dissatisfaction toward society and politics, particularly among the young, has been rising.

To be Continued