Economic policy shifts in post independent Sri Lanka - Part III:

1970-1977: Regulated economic policies

SAJITH DE MEL

A coalition of SLFP and left-wing parties known as United Front formed a new Government in the general elections of 1970. This regime saw a complete reversal of the liberal economic policy stances initiated by the previous Government. The State was to play a major role in the rejuvenating the deteriorating economic circumstances.

Boost local industrial sector

The State assuming the role of a producer in the economy, a radical import substitution industrial policy was implemented. Under the Business Acquisition Bill, several industrial undertakings were taken over, while under the State Industrial Corporation Act, new industrial corporations were established.

The role of the State in the economy saw an expansion, while discouraging and crowding out the private sector investments.

The size of the public sector increased from ten per cent in 1950 to 30 per cent in 1977 and the number of State enterprises increased from a handful in 1960 to more than one hundred by 1970. A five year plan (1972-1976) was introduced by the Government that was to guide the development policy of the country.

However the aspects such as the food subsidy, administered pricing policies by the State corporations and the worsening external payment situation, crippled the Government in mobilising resources in the economy as per the plan.

High levels of tariffs and quantitative restrictions over imports, quantitative controls over foreign exchange payments, individual licensing system and monopoly by the Government over the importation of essential commodities were the order of the day.

Along with the policy of nationalisation of the industries, the Government also exhibited an interest in attracting foreign investments.

A White paper issued in 1972, reiterated the Government’s interest in foreign capital. However, attraction by the part of the foreign investors was dismal due to contradictory economic policies. One of the major reasons that led to the defeat of the previous regime was the cut in the rice subsidy.

This came under the attack of the SLFP led coalition in facing the elections. With the coming into power, one of the first steps undertaken by the Government was to respect its promises and to thereby to reinstal the rice subsidy.

With the cut in the rice subsidy and the installation of the administrative controls, the UNP led regime was capable of improving the rice cultivation up to two thirds of the country’s requirements.

However the massive welfare economics practised by the regime of the 1970’s, almost paralysed the rice cultivation in the island.

Confronted by the same combination of factors that led to the defeat of the previous regime; grave unemployment, rising prices and scarcities in essential consumption items, the United Front Government faced a deadly threat from the JVP, an ultra left organisation dominated by the educated unemployed youth in 1971.

The rebels although defeated played a significant part in shaping the future economy of Sri Lanka. Sri Lanka was pushed more rapidly towards being a socialist society.

The liberalisation of the local economy initiated by the UNP regime being completely abandoned, the State established control and dominance over the economy.

The Land Reforms Law of 1972 and the nationalisation of the plantations in 1975, State control in trade and industry were some momentous measures taken.

One may confess a strong correlation between the UF Government’s foreign policy and the economic policy. On the ideological front it was anti-capitalist, anti western.

The external economic policy aims expressed by the UF regime were to enable the Government to rely on more trade than aid, avoid making extensive borrowings from international lending institutions, putting forward Sri Lanka’s own conditions in external borrowing that ensures Sri Lanka’s self respect, independence and sovereignty.

Such a policy would nevertheless confess a commitment to liberate the economy from Western economic domination. Naturally the response of the West to the economic approach of the UF Government was negative, and thus this was experienced by way of sharp decline in trade and aid.

To be continued