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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Wednesday, May 04, 2005

Economic Policy in Sri Lanka: Issues and Debates

A Festschrift in Honour of Gamini Corea, edited by Saman Kelegama; Published by Sage International Publications, India, 2004; 520 pages.

The Island: "30/04/2005 Review by Sunil Chandrasiri

Economic policy’ has been a key topic of debate among economists, social scientists, policy makers, administrators, investors, donors and others interested in growth and development. Over the past two decades, it has become highly controversial and provocative due to the involvement of donor agencies in economic policy issues of developing economies. A detailed analysis of the small open economy of Sri Lanka presents an interesting case study as its policy experience covers both controlled and open economy policy regimes over a period of five decades. Here are 23 well-trained economists and social scientists who have put together an in-depth and timely analysis about the change of policy regimes and its impact on socio-economic development of Sri Lanka. It’s a compendium of articles in honor of Gamini Corea in recognition of his contribution to Sri Lankan economic policy making and international policy making.

The volume is edited by Saman Kelegama, Executive Director of the Institute of Policy Studies and Co-Editor of South Asia Economic Journal, best known for his contribution on policy analysis in Sri Lanka. An innovative aspect of this volume is that it consists of six distinct sections: i) development strategy and ideology, ii) macroeconomic policy, iii) agriculture, industry and technology development, iv) employment and labour, v) institutional and governance issues, and vi) social welfare. The editorintroduction to the volume with a summary of the milestones of Gamini Corea’s career and to each of the parts and chapters put the individual studies into context to provide a comprehensive account of theory, issues and policy.

As far as we are aware, there exists at least five major compendiums of studies dealing with evolution of post-independence economic policy of Sri Lanka. This volume however, is a welcome contribution as it presents a more careful and detailed analysis of economic policy in Sri Lanka using a structured format. Its time coverage and scope are much more encompassing than any other study presently available. The volume contains quite thorough and detailed analysis of policy issues which are of vital importance to the on going policy debate in Sri Lanka.

Chapters covered in Part I deal with growth of manufactured exports and terms of trade, the influence of development ideology in macroeconomic policy reform process, the lessons of national planning, understanding policy reforms (1960-2000) and the importance of the public sector and includes Chapters 1-5. Part II deals with aspects related to fiscal policy, public debt, and exchange rate while Part III encompasses Chapters 9 to 11 focusing on agricultural development, industrial policy, and technology development. Part IV is concerned with employment and labour paying special attention to labour productivity, youth unemployment and migration. Part V examines issues related to economic liberalization and institutional reform, competition policy, privatization and regulation, and banking sector reforms. Part VI consists of four studies on colonial lineages of the welfare state, overview of the health sector, public investment in education, and poverty alleviation.

The volume consists of 22 self-contained chapters and the papers are well structured with sub-headings in the use of themes and fully documented with references to the literature in chosen areas. The economic policy issues discussed in many of the papers are based on sound economic theory and rigorous empirical work. Some of the papers are also rich in inter-country and inter-temporal comparisons. The constraints of space only allow a reviewer to discuss a small sample of papers in the volume without being able to do justice to all the paper writers.

Two papers on growth of manufacturing exports and exchange rates provide an interesting policy debate paying due attention to early contributions by Gamini Corea. More specifically, the Chapter on ‘Manufacturing Sector Exports’ makes an attempt to test the validity of Corea’s allegiance to the new export pessimism and the recent terms of trade debate. Similarly, Chapter on ‘Exchange Rates’ examines the behaviour of exchange rates with special reference to Corea’s contribution in setting up the multiple exchange rate system in the late 1960s. The paper on "the Influence of Development Ideology in Macroeconomic Policy Reform," provides an interesting account on the changing international opinion on ‘development debate’ and policy response to economic shocks in Sri Lanka. The Chapter on ‘Understanding Reforms (1960-2000)’ presents a comparative assessment of reforms and their outcomes. It also examines future perspectives for policy reform and points out that "there is indeed a real opportunity for a deal between Sri Lanka and the donor community at present whereby Sri Lanka commits itself to the policies needed for low inflation and prudent debt management while the donors guarantee aid support adequate to look after market failures comprehensively and sustain rapid growth."

The paper on importance of the Public Sector in Economic and Social Development’ examines yet another controversial issue - the role of the public sector in Sri Lanka - paying particular attention to the Report of the South Commission which included Corea. In its conclusions the author states that "the crux of the matter is that both the public and private sector are the engines of growth; one alone is inadequate. In a growing economy there is room for both to co-exist." The Chapter on `D4Fiscal Policy’ provides an important contribution to current policy debate on fiscal and taxation system in Sri Lanka paying special attention to declining trend of government revenue, relationship of taxation to savings, capital formation and investment, the elasticity buoyancy of the fiscal system, tax evasion, the black economy and tax amnesties and fiscal devolution. Similarly, the policy analysis covered by two papers on ‘Competition Policy’ and ‘Privatization and Regulation’ is relevant and important in the present context of economic policy debate in Sri Lanka.

The paper on ‘Youth Unemployment’ is an interesting exploration of the causal factors affecting unemployment and the author argues that "what Sri Lanka’s experience over the last five decades or so shows is that the most fundamental factor behind the phenomenon of heavy unemployment in the economy is inadequacy of accumulation and consequent sluggishness in economic growth." At the end of the analysis, the paper provides several policy insights including selective state interventions and appropriate institutional arrangements. The Chapter on ‘Poverty Alleviation’ looks at the poor in their micro-meso-macro framework and examines the complex linkage between the poor and the environment that controls their economic and social well-being. It is an interesting piece of work on pro-poor growth focusing on both theoretical and implementation issues. At the end the author rightly points out that "the agenda of the National Poverty Reduction Strategy, which is the implementation plan for the pro-poor growth concept, has to be decentralized down to the divisional level with time-bond targets. This has not happened as yet. Debates can go on and on in these two arenas."

Three papers dealing with agriculture, health and education raise some important issues and provide additional stimulus to on-going policy debate at sectoral level. For example, the paper on agriculture, discusses the controversies surrounding post-independence period. In its conclusions the author states that "it is interesting to note that current controversies in agricultural policies have been generated by policies recommended by, and often insisted upon by international institutions." The paper on health sector examines emerging demand and supply conditions and its implications for growth and expansion of the health sector. Similarly, the paper on education presents a comparative assessment of education sector and policy directions vital for future development.

It will be obvious to any reader that this volume makes contributions on a wide range of relevant and important aspects of Sri Lankan economic policy debate. The contributions offer multiple perspectives on evolution of economic policy in Sri Lanka. All in all, they are a refreshing collection of well researched papers that provide us with a much needed alternative views on current Sri Lankan policy debate.

The primary limitation of this book is the lack of cohesion typically found in a collection of articles written by a diverse set of researchers. The link between formal underlying theory and empirical support is also weak in some chapters. For example, Chapter 11 on ‘Technology Development: Key Issues in Productivity’ states nothing about productivity. It has also failed to capture some of the key arguments relating to R&D, productivity and competitiveness of Sri Lanka. Similarly, the paper on ‘the Lessons of National Planning’ is rather descriptive and the coverage is of less relevance to on-going economic policy debate in Sri Lanka. Reader should not, therefore, expect this volume to provide conclusive evidence on some of the issues currently debated among policy circles. Instead what they will find in some chapters is that the authors have identified and highlighted a set of interesting issues and debates. Another major limitation of this volume centres on the selection of topics. Indeed, the volume has failed to cover some of the key sectors seriously threatening the socio-economic development of Sri Lanka i.e. energy and transport.

Despite these observations, most of the individual chapters are lucid and informative, based on careful revision of literature and an assessment of competing views. The balance between reviews and original work is about right for a mainly policy-oriented document. The real value of this volume is that it provides a good coverage of policy regimes over the past five decades with a clear focus on its socio-economic impact and future directions. This volume covers much ground, and the clear and careful presentation will make it useful to policy makers, academics, researchers and students and a rich source for further research.

(Dr. Sunil Chandrasiri is a Senior Lecturer at the Department of Economics, University of Colombo)

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