MAY 1983 - VOLUME 4 - NUMBER 5
Ancient Arab traders called it Serendip, the land of serene pastures. But modern Sri Lanka has found little serenity.by Josh Martin
Like many Third World countries, this Indian Ocean Island republic has been hit hard by the global recession. It has neither oil, wheat, and iron, nor a trade-oriented economy to compensate for their absence.
Recently, Sri Lanka's government turned to free market economic policies as a solution, launching a major public relations campaign to "sell" the country to foreign investors as a Singapore-style trading and manufacturing center. The forces at work here provide lessons for the Third World as well as the industrial nations that sponsor or support these policies.
The shift in economic policy in Sri Lanka dates back to the election of J.R. Jayewardene's United National Party (UNP) over the Sri Lankan Freedom Party (SLFP). Since 1972, the SLFP had been following a state-oriented nationalist economic program that heavily taxed export production - agricultural exports in particular - to finance a free educational system, free medicine and water and subsidized food, transportation and sanitation to the country's population. The SLFP's program had helped reduce infant mortality and extend lifetime expectations.
But the oil crisis and rising prices on the international market cut into these benefits, leading to growing public dissatisfaction with the SLFP. Jayewardene's UNP won the 1977 election by promising to build a market-oriented economy based on the model of Singapore, South Korea and Taiwan.
Upon taking power, the government liberalized trade laws to encourage foreign investment, and readmitted multinational corporations that had been expelled years earlier. Several free trade zones were established, granting companies full tax holidays on income, profit, and capital gains. Like other free trade zones in Asia, investors were offered freedom from labor strikes and exchange controls. State participation in industry was sharply reduced, and capital resources were concentrated on a few major development projects dependent on foreign trade and tourism.
These policies were intended to boost the Sri Lankan economy, one of the poorest in the world. According to the World Bank, only four nations - Burma, Ethiopia, India, and Malawi - have per capita incomes lower than Sri Lanka's $230 per year.
The UNP emphasized the country's assets. Sri Lanka has a healthy, educated population. Its literacy rate (81 percent of its 15 million people) and health care facilities are far above Third World norms. The country has deep sea ports on major shipping lines, and the government encourages companies to make use of the skilled labor force, many of whom speak English. All that is needed now, UNP ministers believe, is the proper political climate for the economy to blossom.
To cultivate that climate, the government has begun to dispatch investment promotion missions to spread the word that Sri Lanka is a good place in which to do business. The response has been promising, although, so far, most of the investors are small companies. For example, a mission was sent to Hong Kong in January, to attract companies manufacturing electronic components, computer hardware and software, light engineering, rubber and plastic-based goods, and food processing equipment. In short, the mission was seeking investors in Hong Kong's traditional industrial base who might be lured by Sri Lanka's business climate. The mission also indirectly played on investor fears about the expiration of Great Britain's lease on the so-called New Territories in 16 years, when China will take possession of Hong Kong.
According to Sri Lankan officials, the trade missions have attracted investors from Hong Kong, Singapore, Japan, England, and the U.S. Unlike India, where strict laws govern investments by large companies, Sri Lanka has courted all investors by offering a wide variety of tax and credit incentives. "We don't differentiate between multinational giants and small or medium size investors," one trade official candidly admitted. "We want investments in Sri Lanka."
Under the new investment policies, 120 projects have been approved, and 50 of these have commenced production. Most of these are located in Sri Lanka's free trade zones, paying minimal taxes, and providing 30,000 jobs.
Several Japanese and American computer giants have made investments here, including Harris Semiconductors, IBM, Motorola, and Japan's Serindo Electronics. To service investments and the tourist industry, new office buildings are being built to house Grindlay's Bank, Bank of America, American Express, Citibank, and Intercontinental Hotels.
The largest investment project is a $400 million joint venture with the U.S. fertilizer giant Agrico Chemical Company, in cooperation with the State Mining and Mineral Development Corporation. The venture will exploit massive rock phosphate deposits, discovered at Eppawala, near the east coast port of Trincomalee, in 1971. When the project becomes fully operational in 1987, it will process some 585,000 tons of phosphates a year, generating over $250 million a year in much-needed foreign exchange earnings.
Despite these investments, some multinational corporations have recently reduced their investment commitment amid the global recession, casting a shadow on Sri Lanka's free enterprise future.
Jayewardene's economic policies have already resulted in severe problems for Sri Lanka in several areas. The UNP's free trade policy, meant to encourage increased investment, has also allowed Sri Lanka to live beyond its means - importing Japanese cars, Arabian oil, European technology and American bread and soft drinks - without having enough goods to sell in return. Last year, the bill for imports was $2 billion, while exports totalled only $1 billion. A billion dollar trade deficit is a disaster in a country whose gross domestic product is only $3.5 billion.
Finance Minister Ronnie De Mel defends the pro-West UNP economic policies as "an industrial and agricultural revolution," which will soon "afford all people an equal place in society." But SLFP leader Sirimaro Bandaranaike counters, "The free trade policy only helps other countries sell their junk to Sri Lanka. All our foreign exchange and borrowing is going into this. The country is in an economic mess. It is now bankrupt."
The agricultural sector has been ruined by the sharp drop in international prices paid for its two chief exports: lumber products and tea. Moreover, projects to develop farm land have been cancelled in favor of industrial projects, forcing this once self-sufficient country to import vast amounts of food.
Liberalized trade and industrial development projects have also failed to improve living standards, except for a small clique of merchants and their political allies. Corruption is reported to have reached record levels, according to one member of parliament.
In the wake of its economic problems, Sri Lanka also suffers from civil unrest, as the island's ethnic and religious groups compete for political and economic power. Clashes between ruling party Sinhalese and Tamil separatists erupted into full scale riots in 1978 and 1980. The Sinhalese have ignored Tamil demands for political and economic equality, leading the Tamils of Sri Lanka to make overtures to Tamil leaders in southern India, who want to create a separate Tamil state incorporating northern Sri Lanka and southeastern India. As a result, many Tamil provinces are under martial law, ruled by emergency decree.
Another casualty has been the nation's political freedom. The ruling UNP undermined the nation's democratic institutions in order to continue its new economic policies. The 1982 presidential election was marked by irregularities and civil violence, in which many provinces were placed under martial law, newspapers were closed down, the SLFP leader Bandaranaike was banned from participating, and the final vote was counted b\ the president's political cronies after the declaration of a "state of emergency." Despite these affronts to democracy, the election last October was widely seen as a referendum on the conservative policies of President J.R. Jayewardene and the U.N.P.
Jayewardene has also initiated a radical shift in foreign policy. The UNP has abandoned the concept of Indian Ocean neutrality, affecting regional security and the strategic balance of power between the Soviet Union and the United States. For the first time since World War II, American naval units can now use Sri Lanka's strategic position to control major shipping routes connecting Japan, Southeast Asia, the Middle East and Europe. To anchor Sri Lanka firmly in the pro-West camp, the UNP is now trying to join ASEAN (the Association of South East Asian Nations), an American--supported alliance of five countries: Indonesia, Singapore, Thailand, Malaysia, and the Philippines.
These policies are in part designed to win approval in Washington. Sri Lanka, like many Third World countries, needs American aid to finance economic development projects. Despite cuts in the American foreign aid budget, the $7 billion of aid in 1982 was a major source for development funds available to Third World nations even though a large portion of the aid goes to countries like Israel. However, the Reagan Administration has set new conditions for those countries seeking American aid. Historically, such aid was given to needy states with pro-U.S. foreign policies. Now countries that want American foreign aid dollars must also use that aid to promote private sector domestic economies. The result is that some poor countries like Thailand, Indonesia, and Zaire have given Washington effective control over their domestic economic policies - at bargain prices.
Sri Lanka is no exception. U.S. Treasury Secretary Donald Regan bluntly told Sri Lanka Finance Minister Ronnie De Mel last year that foreign aid funds would be made available only "if they are channeled for assisting investment in the private sector." Finance Minister De Mel accepted the condition in exchange for $55 million in foreign aid.
If Sri Lanka's economic policies do fail, its citizens may find that their troubles are not only economic. As the conservative government closes off avenues of dialogue with other political groups and tightens the country's ties to the U.S., Sri Lanka may end up without an opposition force able to offer alternative economic or political policies. Like South Korea or Chile, Sri Lanka's export-oriented economic structure may be leading to deeper and more serious political problems.
Josh Martin is Multinational Monitor's United Nations Correspondent. He visited Sri Lanka in August 1982.