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Economic policy shifts in post Independence Sri Lanka - Part II:

1956-1970: Closed economy with interventionist policies

Sri Lanka’s economic policy had the effect of left-wing socialist politics from time to time with a resolution of maintaining a balance.

The government which assumed power in 1956, a centre left based coalition adopted the Soviet type of central planning system where the State played a major role in the decision making of the economy and thus exhibited a major deviation in the political and economic ideology it held as opposed to the UNP.

The coalition consisted of the SLFP as its principal partner, along with some left-wing socialist parties and a few other groups which represented sectarian interests.

The government believed that the underdeveloped state of the economy which had a structure highly dependent on a few export primary commodities unsustainable on the long run. On one hand the private sector had no investment capacity to undertake huge capital investments that would free the economy of its aggravated position in the face of deteriorating economic indicators.

A major role in fuelling the economy

Thus the State was to play a major role in fuelling the economy. In finding solutions to the problem, the government extended the previous government’s strategy of agricultural import substitution also to industries.

Industrialization

The import substitution industrialization after 1960 started with increased tariffs and quantitative restrictions on imports and controls over foreign exchange payments, designed to meet the growing balance of payment problem. A distinction was made between essential and non essential imports with a view of discouraging the latter.

The placement of import controls had twin objectives. In a way, it reflected the government’s desire in exercising control over the deteriorating foreign exchange position, while on the other hand it was used as an instrument to encourage the local producers and the local industries.

By the beginning of 1960’s, the government was facing a critical problem with respect to its external reserves position. Restriction of imports was crippled as more than sixty percent of the imports represented essential consumer items.

To this it responded in the budget of 1960 by sharply increasing the duties of cars, petrol, liquor and tobacco.

In the following year, a five percent duty surcharge was imposed, and cars, watches, clocks, radios and high priced textiles were banned from importation.

The popular economic formula of the day even in the West was growth fuelled through industrial import substitution.

Yet the private sector in the island was at its infant stages and was not in a position to undertake massive industries.

The government announced several policy packages to attract foreign direct investment. But a restricted and a controlled economic regime never attracted the foreign investors in investing in Sri Lanka.

A highly controlled economy coupled with a feeble private sector created a supply gap in the economy which made the State to take up the role as a producer in the economy.

This made the government directly involve in the industry by expanding the allocation of economic resources to State owned industries and for the setting up of public sector industrial corporations with the assistance of the Soviet bloc.

Enterprises

The government established a large number of State owned enterprises in industry for the production of a wide range of goods such as paper, cement, steel, hardware, petroleum products, fertilizers, tyres and textiles. From 1948 onwards, Sri Lanka produced an array of planning documents. Initially a six year plan was formulated in 1948 and subsequently a six year investment program was prepared. Before much work could be started under this plan, the government changed in 1956.

This government which came into power placed a larger weight age on planning following the centralized planning model.

Objectives

The main objectives of the ten year plan emphasized on the need to expand the output, income and the standards of living, removal of unemployment, alter the structure of the economy and to promote equal distribution of incomes.

A sound warning was given in this plan that Sri Lanka may lose the lead to some East Asian countries, if higher growth rates were not achieved.

plan projected a six percent growth annually, which implied that GDP would double every twelve years or so and by 1997; the GDP would become eight times the GDP of 1959. With the assumption of power by the UNP led coalition during the period 1965-1970, the policy stance of this government saw a partial deviation from the previous regime.

Reluctance

However signs of reluctance to deviate from the policy framework of import substitution instituted by the previous regime were exhibited due to several reasons. At that time, the policy of import substitution was relentlessly fashionable and was even regarded by the western economists as the panacea for the underdeveloped economies in transforming their economies.

Apart from this, a full scale liberalization would nevertheless attract criticism from the political opposition. During this regime, the economy saw partial liberalization in the fields of import trade, foreign exchange payments, initiation of some export promotion policy measures, an attempt to restrict state intervention in economic activities, and a resurgence of policy emphasis on import substitution in agriculture.

To be continued tomorrow

 

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