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

Post 1977: Opening up of the economy

Sajith de MEL

Economic policies adopted by the regimes after 1977 were a major function that represented their ideology philosophies. It played a vital role in modelling the present society.

The development model in the post 1977 period is basically a liberalized trade regime in which export promotion received priority and in which the private sector was assigned to play a major role in economic development.

The restrictions placed on the smooth functioning of the market forces by the previous regime was removed to fuel the economy by paving way for the private sector to play a dominant role in the economy as a producer.

The State only assumed a role of facilitating the economic functioning of the private sector by embarking on huge capital investments beyond the capacity of the private sector and in the provisioning of public goods.

In its policy statement, the UNP government-elected promised a path of economic growth and economic development by transforming free economy through economic rehabilitation and transformation.

It was also committed to reform the exchange system accompanied by substantial liberalization of external trade through the assistance of international agencies and financial institutions. It also explicitly expressed their interest in getting substantial assistance from the West, from the Socialist and other friendly nations.

Liberalization was at the centre of the UNP government’s election platform. A series of liberalization initiatives were taken by the government subsequent to sweeping into power. The prospective targets all had a strong liberal competitive flavour with an open economy particularly in capital, services, and labour markets.

Measures were taken to improve foreign investments, including tax incentives. Import controls were abolished and tariffs were rationalized.

The tariffs were mainly as nominal measures to protect the domestic import substitution industries. Many quantitative restrictions that were in place were abolished. Apart from the above, the dual exchange rate system introduced in 1968 was abolished and the exchange rate unified.

The exchange rate was tied to a basket of currencies and allowed to float as the basket floated. Export expansion was to play a major role in the free economic structure. As a result the export licensing was gradually phased out and export duty structure reformed. The establishment of the Export Development Board by the government played a major role in the promotion of exports of the country.

The policy reforms of 1977 were fundamental and far-reaching as they facilitated the country’s integration into the global economy. The main thrust of the economic reforms initiated in 1977 has been to stimulate the private sector economic activities by setting up a liberalized economic environment and providing infrastructure public investments.

Thus in the global environment the new government emphasized less on planning models. In spite of anti-planning attitudes, major developmental projects were undertaken by the government.

The Accelerated Mahaweli Development Program, the Housing and Urban Development Program, and the Free Trade Zone were some of them. The 17 long years of UNP regime came to an end when again the political pendulum swung in the direction of the SLFP led coalition, the Peoples Alliance.

Ideologically, this political party was from the left based school of thought. Pragmatically, they saw moving against the direction of globalization, which was the renewed form of the open economy, and liberalization ideology would fail to guarantee them victory.

Accepting the reality, the party was bold enough to promise its electorate that it will never revert to the era of 1970-1977.