Economic Policy Shifts in Post Independent Sri Lanka - Part I:

The liberal economic regime - 1948-1956

Sajith de Mel

It would rather be an interesting academic and an intellectual exercise to probe into the economic policies of governments that had been in power since independence. One may confess a strong relationship of one’s economic policy with that of the philosophical thought, the ideology and the dogma to which a political party is attached to.

A vigilant observer and an analyst may confirm that the mode of thinking and the policy stance of the political parties which had been in authority from time to time, had nevertheless been influenced by their ideological attachments.

Since independence, the United National Party (UNP) and the Sri Lanka Freedom Party (SLFP) led coalitions had been the only parties that had been able to rule and govern the island of Ceylon.

The UNP, the right of centre of Sri Lankan politics adopted basically a libertarian ideology in combination with an element of social democracy, while the SLFP was basically social democratic in its orientation from the radical left.

In theory, irrespective of the fact that both confessed to be Non-aligned in its foreign policy, pragmatically symptoms of pro-western orientation were evidenced with the UNP, while the other was more oriented to the socialist bloc. In its fundamentals, the UNP, market oriented and pro-free trade party is a true believer of the market mechanism in the allocation of economic resources in the economy driven by the private sector.

In contrast the SLFP at the birth of independence preached and practised the theology of State intervention in activities of the market forces and followed a more socialist oriented model which encouraged the system of centralised planning; later to have been convinced by the efficiency and the power of the market model, was baptised and converted and now a follower of the market mechanism with a human face.

UNP that came to power in 1948 represented largely the interests of the colonial bourgeois and elite groups. From the early 19th century the so-called Sri Lankan bourgeois class emerged through the accumulation of wealth through engaging themselves in the retail of arrack, plantation agriculture and land ownership. Later, these bourgeois branched out into the trades of transport, labour contracts, graphite mining, commerce as well as serving the colonial bureaucracy at its middle and higher levels, while some made their mark by entering into “learned professions”.

Given these circumstances, the elites who were now enthroned to govern were more eager to sustain and maintain the export economy. Probing into the foreign policy of the newly independent government of Ceylon would add an insight of its pro-Western economic policies. The defence agreement and the agreement on external affairs entered into on the November 11 by the Government of Ceylon and the British Government confesses the pro-western economic outlook of the then government.

The rational for entering into a defence agreement was explained by the then government as they saw it was of high importance of protecting the sea and air communications of the island which inherited highly an import-export economy.

The external affairs agreement was regarded as a reflection of Sri Lanka’s pro-British foreign policy.

During this era, Britain was the island’s main trading partner and as the trading with the West was very favourable, the government did not require seeking new markets for her imports and exports. At Independence, Ceylon inherited a dualistic export economy. It comprised a plantation sector linked to international markets and a backward subsistence agrarian economy.

Tea, rubber and coconut brought over 90 per cent of the foreign exchange earnings, while tea accounted for 60 per cent. Other agriculture, particularly rice production, drew the attention of the government as rice was the staple food and a large proportion of the electorate were in paddy cultivation. During this era, the industrial sector received less attention, particularly since the economy could be still sustained on the production of few primary products.

At Independence, the contribution of the export production to GNP was 31.6 per cent.

More than 64 per cent of the government revenue was derived through the taxation of foreign trade and much of this was used for the importation of food as part of the food subsidy scheme exercised by the State.

Given the government’s commitment to social welfare, the UNP maintained a skeletal welfare system comprising the food subsidy, free education and free health. This served as a basic measure for sustaining political popularity.

The economy during this regime was more or less “open”, in the sense that quantitative restrictions on imports and foreign exchange transactions were almost absent.

With the open economy and the free flow of imports, Sri Lankans enjoying high levels of consumption; the ratio of consumption expenditure to disposable income averaged 95 per cent during this period.

The economic growth rates recorded for the period 1951-1956 averaged at a low 3.6 percent, while the terms of trade deteriorated from 374 in 1950 to 275 in 1952 and then improved to 340 by 1956. Most of the first post-independence decade turned out to be a time of a liberal trade regime with few taxes on imports and exports for the purpose of revenue generation.

During this decade much foreign policy advice received from international agencies encouraged the government for the gradual elimination of subsidies, curtailment of government participation in public welfare and so on.

However, reluctance on the part of the government was exhibited due to political reasons. Soon after independence the development strategy had a strong commitment to maintain an open economy driven by the private sector and the market mechanism in the allocation of resources.

However factors such as export pessimism at that time and the possible criticisms by the opposition retarded the pace of the government in moving in that direction. In this context, import substitution in agriculture and industry was considered a policy alternative, while industrialisation was postponed for a later stage. The import substitution strategy on agriculture was taken as a measure to attain self-sufficiency in rice and thereby to reduce the import bill of rice.

Moreover from a macro-economic point of view, it was essential to reduce the dualistic nature of the economy. Due to several weaknesses, these goals never materialised.

To be continued