Economic Policy Shifts in Post Independent Sri Lanka
- Part I:
The liberal economic regime - 1948-1956
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.
At Independence, Ceylon inherited a dualistic export economy. It
comprised a plantation sector linked to international markets
and a backward subsistence agrarian economy.
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
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
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
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
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
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
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
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