About two decades ago Professor Chandra Rodrigo and I were working as Sri Lankan partners on what was called a global research project. This was a global research project explaining half a century of growth experience of developing countries around the world between 1950 and 2000. As the global research project was divided into a number of regional components, we worked with a group of economists from our region on its South Asian component. The results of our research have been published as chapters of a book entitled “Explaining Growth in South Asia” edited by an Indian economist, Kirith Parikh (2006).
At that time, I had a fairly good knowledge of Sri Lanka’s post-independence development experience. However, as the research project above focused exclusively on “economic growth” over 50 years, it provided me with an invaluable opportunity to dig deeper and deeper into Sri Lanka’s growth trajectory.
We spent a few years in the research work exploring facts and figures, meeting often with our counterparts in Delhi and discussing the progress and challenges of the project. This provided another opportunity to compare and contrast the case of Sri Lanka with the growth experience of other countries in our neighborhood – Bangladesh, India, Nepal and Pakistan.
Through this experience, what I realized is that Sri Lanka’s growth experience is unique among our neighboring South Asian countries. While we had better initial conditions for rapid economic growth than any other country in South Asia, Sri Lanka had no poverty and other social problems compared to what others had.
But all that good start with higher socio-economic status seems to have been wasted. After all, in the middle of the 50-year period, Sri Lanka had opened its economy in 1977, while all other South Asian countries only started opening their economies after 1990. This means that all these countries did not have much to write about their growth performance. within the framework of the open economy which was less than 10 years old at that time.
I thought of addressing a crucial question that struck me when I was working in the above research project: as early as the mid-1960s, Sri Lanka had already realized that its economy would not grow without exports and Foreign investments ; the question I was asking myself was “why did it fail” when I knew both the problem and the solution.
Recently, this crucial question has come to my mind from time to time, when I have repeatedly heard the argument that “Sri Lanka must protect our domestic production with import controls” and that “it is the open economy that has destroyed our national production”. . Well, I think now we are tired of import checks to understand all this and we also know its outcome clearly.
This is the same argument that has been promoted since the late 1950s in order to achieve two goals; to save foreign currency and promote national production! The closure of the Sri Lankan economy began in the late 1950s and this movement gained momentum after 1960.
As the country’s trade surpluses turned into deficits resulting in foreign exchange shortages, import controls were aimed at saving foreign exchange.
The same import controls were intended to protect domestic production from competing imports. The new policies received wider political support nationally and internationally as anti-Western and pro-nationalist sentiments swept through developing countries at the time.
The decade of the 1960s began with increased tariffs and quota restrictions on imports and foreign exchange controls, which were designed to respond to the growing foreign exchange crisis. Non-essential imports have been classified in order to apply selective controls.
With import controls and exchange restrictions, import expenditure was reduced from 30 percent of GDP to 18 percent during the first half of the 1960s. The irony is that, however, the political result was far from being a solution to the shortage of foreign exchange which continued to worsen.
New exports and FDI
The new government that came to power in 1965 had a new idea to promote exports and, moreover, even to attract foreign investment (FDI), while allowing careful liberalization under the policy of substitution of effective imports. It is exactly the same argument we still hear today, half a century later: we need import controls to support domestic production; however, without distorting this policy, exports can be encouraged and FDI can be allowed!
The new export strategy since 1965 has been identified as the promotion of ‘non-traditional’ exports – minor export crops, gemstones and jewellery, petroleum products and certain exports of manufactured goods. The government introduced a Bonus Voucher Scheme (BVS) in 1966 as an implicit export subsidy scheme. The exchange rate was devalued by 20 percent against the pound sterling in 1967, while a dual exchange rate system was introduced in 1968 under the Foreign Exchange Right Certificate (CEEF) program in 1968. An attractive incentive package was offered for export-oriented FDI. in 1966 in a white paper on foreign investment.
The government took all the above policy measures to promote exports, but was reluctant to drastically change the existing import substitution policy framework. In a nutshell, the period 1965-1970 was marked by a partial deviation from the previous “closed economy” model, known as a period of “mini-liberalization” program.
Despite all efforts to promote exports, the political outcome of the mini-liberalization period was dismal. Although the rate of economic growth increased temporarily in 1967 and 1968, exports as a percentage of GDP continued to decline from 24% in 1965 to 15% in 1970. This was, in any case, not a strange political result . The question was: even if the government believed in the role of export promotion for development, why was it reluctant to adopt a policy shift towards an export regime?
The UNP government of 1965-70 seemed to have suffered from a lack of strength and confidence for a large scale change from an import substitution policy to an export promotion policy mainly for two reasons.
First, even though liberalization was in line with the government’s ideological position, global development thinking in favor of import substitution at the time was, in fact, against it.
Unlike today, there was not even a single country to set an example of an open economy! Had the government launched a full-scale liberalization program in 1965, it would have been a radical and risky exercise at a time when global development thinking and practice was moving in the opposite direction.
Second, the potential local political resistance it would otherwise have produced weakened political will and the government’s ability to liberalize.
Apparently, the potential political opposition as such would have been entirely supported by political opponents, including left-wing parties whose ideological lines were in favor of a regulated economy. In fact, it was already a weak government formed by a coalition of seven political parties.
It would have been very likely that the government had expected that the positive result of export promotion as well as the agricultural development of the time would have paved the way for a gradual move towards an “open economy” avoiding its cost of short-term adjustment. However, this expectation did not materialize, due to unsatisfactory export growth and a worsening foreign exchange shortage; Why?
From a political point of view, it was a political regime with an “anti-export bias”, so that marginal and sporadic political incentives favoring the promotion of exports would not succeed. Before we talk about import protection and export promotion as a 50/50 policy, we need to remember our own 50-year-old lesson from the 1960s.
(The author is a professor of economics at the University of Colombo and can be reached at [email protected] and follow @SirimalAshoka on Twitter).
Hitad.lk offers you quality new or used cars for sale, economical yet reliable! Now is the time to sell your old car for something more appealing to the demands of today’s modern car market. Browse our selection of affordable options now on Hitad.lk before deciding which is best for you!