Economic policy shifts in post Independence Sri Lanka
- Part II:
1956-1970: Closed economy with interventionist policies
Sajith DE MEL
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.
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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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