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MAPPING THE POLITICAL ECONOMY OF SRI LANKA'S ETHNIC CONFLICT (From Paradise Poisoned)

I. DEVELOPMENT GOALS AND ECONOMIC PROGRAMS

The United Front redistributed wealth

and reorgaized the economy, guided by Marxist doctrines,

but could not solve the problems

of economic stagnation and unemployment

Like their predecessors, United Front economic policy-makers faced the challenge of stimulating economic growth while using state power directly to provide benefits and redistribute wealth. Benefits could be provided and wealth redistributed by passing and enforcing laws, which an overwhelming Parliamentary majority, plus Sri Lankan traditions of obedience to authority made easy. Stimulating economic growth, as previous governments had discovered, was not so simple. To achieve this, decision makers needed an accurate theory describing the workings of Sri Lanka's export-oriented, import-dependent developing economy. They needed to devise growth oriented economic policies based upon this theory and then to implement them effectively. Finally, they needed strategies to buffer Sri Lanka's economy against potentially adverse effects of fluctuations in international commodity and financial markets.

As we have seen, economic policies implemented by Sirimavo Bandaranaike's government did not produce promised results. The economy stagnated, few jobs were created and the trade picture worsened. This contributed to ethnic tensions because there were fewer resources to distribute and greater pressures to favor Buddhist-Sinhalese. Moreover, government leaders felt greater pressure to resort to ethnic nationalist appeals as a way of compensating for economic failures. What was United Front's approach to managing the economy and why did it fail?

United Front economic policy makers agreed that Marxist theories which they had advocated for decades provided the strategy needed to accelerate Sri Lanka's economic development. Key elements of this strategy were central planning, state ownership of major industries, services and financial institutions, import substitution and redistribution of wealth. This approach contrasted sharply with Dudley Senanayake's incremental approach which had attempted to find a middle path between free market and Marxist development models.

Commitment to a single development model simplified that task of formulating consistent economic policies, but there was a potential problem. In Marxist economics, recommended policies are not viewed as options to be discarded if they fail to achieve intended goals - such economic growth, full employment and benefits to the poor. Instead, policies and goals are linked ideologically. That state planning best promotes economic growth is an article of faith, not a proposition to be tested against evidence. Economic policies backed by strong ideological commitments are difficult to abandon, even in the face of mounting evidence that they are not working. This became a serious problem for Sirimavo Bandaranaike's government during the latter part of its term.

The Five Year Plan

Early in the term, however, priority could be given to spelling out an ambitious development agenda. Macroeconomic targets and broad strategic guidelines were described in the Government's Five Year Plan, presented to Parliament in October, 1971. The Plan targeted a 6 per-cent average annual rate of growth, which was projected to raise per-capita annual income from 910 rupees to 1,150 rupees (about $US 195) and create 810,000 new jobs. Accelerated growth was to be attained through substantial increases in savings and investment, including surpluses to be generated by public corporations totalling 927 million rupees. Planners acknowledged that public sector corporations had often generated losses in the past, but projected that an expanded public sector, with monopoly control over key industries and services, would now become profitable through efficient management, use of labor intensive technologies and the adoption of appropriate pricing policies. Emphasis on labor intensive technologies would aid in job creation and conserve foreign exchange, by reducing the need for imported capital goods. Success of the plan also depended on the public's willingness to accept reduced consumption in the short run, as outlined by Finance Minister Perera in his budget message, in order to achieve economic growth over a longer term. Through Divisional Development Councils, the Ministry of Planning and Employment had consulted regularly with localities regarding the Five Year plan. Government leaders hoped this would broaden popular support for needed sacrifices.

Shortly after the Five Year Plan was introduced, economist Janice Jiggins, who had lived in Sri Lanka for more than two years, completed an independent analysis of Sri Lanka's macro economy focusing on prospects and strategies for promoting growth. Her report called attention to problems noted in earlier studies, particularly the problem of urban rural imbalance, as well as problems particularly associated with the new government's policies. Jiggins pointed with concern to declining productivity in the rural sector, where farmers appeared to be producing primarily for subsistence and black market sales. She attributed this to disincentives resulting from the government monopoly of food purchases at controlled prices. Her examination of rapidly expanding state corporations raised questions about the government's plans for simultaneously expanding employment, improving efficiency and generating investment from this sector. Government officials appeared to view public sector concerns as providers of jobs and patronage rather than levers for economic growth. As control of commercial activity was increasingly centralized in Colombo government offices, management efficiency appeared to be deteriorating, rather than improving. "Bureaucratic and Government centralization in Colombo, "Jiggins noted, "provides an ever-expanding number of white-collar jobs and increasingly adds to the paralysing administrative bottleneck." She also raised questions about the "foreign exchange crisis" that had been so strongly emphasized by the government leaders as justification for austerity measures. In Colombo, she observed that Wilkenson razor blades, Nescafe, Indian Sarees, Kenwood Mixers, stereo equipment and expensive cars were readily available, despite being banned. Although no foreign exchange was officially available for foreign travel or education, between 1,000 and 2,000 young Sri Lankans were studying in American and European universities, while "anyone who is somebody" seemed able to travel abroad without impediment. Finally Jiggins expressed concern over government deficits and heavy reliance on foreign aid to finance them.

Jiggins' report did not spell out detailed policy recommendations, but urged a strengthening of the rural sector by eliminating the government's compulsory purchase scheme and creating local centers for marketing and the distribution of seeds, fertilizers and tools. She advocated training programs to strengthen the institutional environment for agriculture and decentralized implementation of rural development projects by local authorities. Finally she urged the government to take seriously its commitment to efficiency in the public sector by eliminating political patronage as a primary basis for employment and cutting "hidden subsidies" to senior public officials.

Agricultural Sector Policies and Programs

Our discussion of specific policies and programs implemented by the United Front focuses first on Sri Lanka's critically important agricultural sector. In 1970, agricultural outputs comprised more than 25% of GNP and provided more than 90% of export income. More than half of the nation's work force was employed in Agriculture.

The policy with greatest impact on agriculture, Land Reform, has already been described. Beginning with the Land Reform Law No. 1 of 1972, a series of legislative enactments reduced large holdings of paddy land to a 25 acre maximum and other large holdings to a 50 acre maximum. Larger holdings than this were still possible because family members could pool and jointly manage their individual allocations, but there was a significant increase in smallholdings and shifts in ownership from large private proprietors to state corporations. Nationalization of Foreign owned tea plantations in 1975 largely completed this process. Of course land reform was not really an economic policy. Rather, it was motivated by multiple political concerns: a felt need to respond to the JVP insurrection, the rural populism of Sri Lanka Freedom Party supporters, the class consciousness of their Marxist allies and a hope that land reform would diminish the political power of United National Party supporters who were large landowners. Land reform became a frame of reference within which government planners pursued multiple and sometimes conflicting agricultural policy goals.

Nowhere were these conflicts more perplexing than in the rice producing sector. Improving living standards and increasing the productivity of Sri Lanka's numerous small rice growers had been a top priority of Dudley Senanayake's government. United Front land reforms increased the number of smallholders who were in need of fair prices, accessible markets, agricultural credit and technical assistance. But Sri Lankan politicians, whatever their party, needed to be sure that all Sri Lankans had an adequate supply of their most important staple and that the sacrosanct rice ration was maintained. As we have seen, a combination of international shortages, rising prices and declining domestic production created devastating political problems for the United Front in 1972 and 1973.

Policies of the newly created Paddy Marketing Board, which in 1971 had been given monopoly control over all facets of rice production contributed to the decline in production. The Board was given sole responsibility for operating the Guaranteed Price Scheme, which had been established in the 1950s to provide a government subsidized minimum price for rice. Monopoly control placed Paddy Board managers in a very different position than their predecessors. Faced with budgetary pressures they allowed the government's guaranteed price to fall below market levels and remain stagnant almost until the end of 1973. The inexperience of new Board managers, mostly political appointees, resulted in inefficiencies that created further disincentives for producers. Predictably, producers responded by reducing output and, when opportunities presented themselves, engaging in black market trading. In its first year, the Paddy Board had been able to purchase 32.3 million bushels of rice from Sri Lankan producers. In 1976, total purchases amounted to only 12.8 million bushels. Other government initiatives intended to help smallholders produced mixed results. In response to attempts to promote the "green revolution" farmers modestly increased their use of high yielding rice strains, only to see their productivity plummet when the government was forced to temporarily cut fertilizer subsidies. Political pressure restored the subsidies, but fertilizer use remained far below optimal levels. The new Comprehensive Rural Credit Scheme increased loans by 25%, but defaults also increased due to low income levels and crop failures. To protect against crop failures, the government established an Agricultural Insurance Board to administer a Comprehensive Insurance Scheme for all loan recipients. In fiscal year 1976-77, however, only 22% of eligible acreage was covered and premiums were 80% in arrears.

Less politically significant vegetable and spice producers also attracted the attention of United Front economic planners. A Department of Minor Export Crops was established under the Ministry of Plantation Industries to better promote, develop and organize cultivation. Farmers who wished to rehabilitate their land and plant new crops could, after 1972, seek loans and supplies from the Government's new Minor Crop Assistance Scheme. After 1973, they could call upon officials from the Minor Crops Research Project, which included a new 173 acre research site, for technical assistance. More helpful than these planning efforts were government import restrictions, initiated to conserve foreign exchange. In contrast to rice, officials decided that Sri Lankans could get along without imported vegetables or produce them at home. Importation of potatoes and Bombay Onions was prohibited in 1972 and the ban was extended to chillies, maize (corn), beans and peas in 1973. In contrast to the relatively modest increases in rice harvests, there were very significant increases in the production of all of these vegetables. Onion production more than doubled with an increase in yield per acre of more than 60%. Domestic production of chillies, a staple almost as important to the Sri Lankan diet as rice, increased five-fold, with a doubling of per-acre productivity. Interestingly, the greatest beneficiaries of the domestic vegetable boom were Tamils in Sri Lanka's volatile Northern Province where the production of these crops had traditionally been concentrated.

Exports of coconuts, rubber and especially tea continued as Sri Lanka's major source of foreign exchange and a principal source of capital for other sectors. Heavy dependence on these sectors placed government planners at the mercy of problems that vagaries in international markets and weather could create for a commodity-based export-dependent economy. To these normal problems were added the uncertainties created by fears of nationalization, and inefficiencies created by complex government management schemes. Uncertainty was a greater problem for these three crops because judicious harvesting, careful tending and disciplined replanting of rubber trees, coconut trees and tea bushes was necessary to ensure good harvests of high quality products over the long-term. Plantation maintenance required skill and a willingness to plough back some short-term profits. Even during Dudley Senanayake's term in office, plantation owners had cut back on maintenance in anticipation that a socialist government would come to power eventually. After the 1970 general election, plantation owners tried to recoup their investments as quickly as possible. Rubber trees were "slaughter tapped" to produce unusually high short-term yields. Between 1970 and 1977, rubber replantings dropped by 35% and tea replantings by more than 55%. Fertilization of coconut palms, the principal means of ensuring long-term productivity, dropped by 55%.

To replace market incentives in the export sector, Sirimavo Bandara-naike's gov-ern-ment passed new laws, created new programs and estab-lished new regulato-ry organi-zations. Appointing officials, administering regulations and distributing benefits under these programs provid-ed numerous opportunities for political intervention but most of the government's initiatives failed to achieve their intended goals. By way of illus-trating these points, I will briefly de-scribe pro-grams focus-ing on one limited objec-tive: increasing coconut pro-duc-tion.

More direct government involvement in coconut production was mandated by the Coconut Devel-opment Act of 1971. The act established a Coconut Development Authority with responsibility for strengthening the industry and using land more effectively. In the following year four more specialized organizations -the Coconut Cultivation Board, Coconut Processing Board, Coconut Marketing Board and Coconut Research Board were created, each with their own staffs and programs. The Boards were subsidiary to the Coconut Development Authority, but operated independently of each other. Initially, production continued to grow under this new regime, soaring to an all time high of nearly 3 billion nuts in 1972. The following year, however, a combination of adverse weather conditions and declining fertilizer use resulted in a 35 per-cent (1 billion nut!) drop in production. To meet domestic needs, the government was forced to ban exports of copra and coconut oil, resulting in a loss of critically needed foreign exchange. Reduced harvests placed coconut producers under severe financial pressure and many reduced fertilization still further to cut costs. A Fertilizer Subsidy Program failed to reverse this trend. In the hope of providing additional income to producers, the government then enacted the Pas-ture/Fodder Subsidy Scheme. This offered grants to landowners who wished to plant fodder crops amongst their coconut trees so that grazing livestock could be supported. A final coconut program, which attempted to remedy problems of deteriorating land maintenance and curtailed replanting was implemented in 1974. The Coconut Rehabilitation Subsidy Scheme, allowed producers to apply for a 15 rupee rebate for each contour drain, 10 rupees for each old growth palm removed and 1.50 rupees for each new palm planted. Apart from these national programs pertaining specifically to coconuts, producers were also eligible for more general programs of agricultural support such as the Comprehensive Rural Credit Scheme, that were administered through the Agriculture Ministry and local authorities.

To what degree did these initiatives "succeed"? Assessment of individual programs is difficult, but overall coconut productivity during Sirimavo Bandaranaike's years in power was disappointing. Harvests dropped by more than a third from a high of 2.9 billion nuts in 1972 to a low of 1.8 billion in 1977. Fertilizer use dropped by 55%. Because of higher domestic prices, due in part to shortages, the contribution of coconut production to GNP rose (in real terms) from 535 million rupees in 1970 to 663 million rupees in 1977, however the value of Sri Lanka's coconut exports dropped by nearly 50% in real terms, from $US 50 million in 1970 to $US 26 million in 1977.

In contrast to the Coconut industry, where most production remained in the hands of smallholders, tea continued to be produced on large plantations, which, after nationalization, were managed directly by government officials. Nationalization of privately owned plantations had mostly been completed by 1973 and control of plantations owned by public corporations passed to the government in 1975. Anticipating nationalization, private owners had already cut back on maintenance and replanting. This pattern continued, after nationalization, despite government subsidies that grew to more than 100,000,000 rupees (about $US 11.8 million). By 1977, the government was in charge of 804 plantations, covering more than 230,000 acres and employing nearly 340,000 workers. Managing these enterprises, plus 481 factories producing tea was a challenging task for the newly designated political appointees, although former plantation owners and supervisors were sometimes placed in charge of day-to-day operations. Under government management, the plantations were less well maintained and less profitable, however the volume of production and volume of export sales remained relatively stable.

Chapter 7, devoted considerable attention to the Mahaveli Development project, which Dudley Senanayake had given high priority. The project's cost had became a campaign issue, which may be one reason that a government strongly committed to interventionist policies in other areas chose to put it on hold for two years. Phase one of the project, which newly irrigated about 132,000 acres, brought nearly 29,000 acres of new land under cultivation and resettled nearly 1,700. families, was completed in 1976. Virtually all of these families were Sinhalese. The region in which they were resettled was part of the "Traditional Tamil Homelands" in the Eastern Province.

Investment Promotion and Industrial Development

Non agricultural sectors of the economy were also targeted for policies emphasizing central planning, nationalization and redistribution. A new industrial policy, announced soon after the government assumed power, outlined plans to place all "heavy, basic and essential" industries under government management. Other industries were permitted to remain in the private or cooperative sectors, but they too, could be nationalized if they employed more than 100 persons or were judged by government officials to be managed inefficiently or dishonestly. The five year plan outlined priorities for resource allocation - especially the allocation of scarce foreign exchange - with emphasis given to export promotion, development of underdeveloped areas and job creation. Sectoral Development Committees were established with the responsibility for coordinating production to fulfill plan targets and meet overall national needs.

Planners recognized that growth required investment, including private and foreign investment, but promoting investment from non government sources conflicted with the United Front's Marxist-populist ideology. Foreign investors expected a reasonable return on their funds, a predictable business climate, freedom to take profits out of the country and security against expropriation. Domestic investors needed surplus funds to invest, plus security and the expectation of a reasonable return. These requirements conflicted with Marxist ideology.

Economic policies during Sirimavo Bandaranaike's early years in power, have been described as creating "a formidable climate of hostility to private enterprise and initiative." The one-time tax on assets exceeding 200,000 rupees has already been described. Beginning on April 1, 1972, a ceiling of 2,000 rupees ($US 325) per month was placed on disposable incomes. Those earning incomes in excess of this amount were required to invest the surplus in government approved enterprises. High denomination currency notes were demonetized. Using authority granted by the Business Acquisitions Act, government officials reorganized virtually all heavy and capital goods industries as public corporations. Businesses that remained in the private sector were subjected to a compulsory capital levy and to graduated tax on profits that was virtually confiscatory at high levels. Marketing and distribution of "essential commodities" and many consumer goods were monopolized by the State Trading Corporation.

It is hardly surprising that voluntary private investments plummeted and private businesses failed to flourish in an environment characterized by ever more stringent government interventions, plus ever more strident political rhetoric intended to divert public attention from economic policy failures. Gross domestic capital formation in the private sector dropped by 50 per-cent in 1971 and did not reach 1970 levels again until 1975. Seizing assets of a small wealthy class, providing the treasury with a one shot infusion of funds, contributed to higher than normal public sector capital investments in 1971, but redistributing assets and imposing high taxes in a stagnant economy could not provide the revenues needed to sustain long-term growth.

When the Five Year Plan was released, it was already clear that combined effects of deteriorating terms of trade, foreign exchange shortages and declining domestic production would cause economic performance to fall short of plan targets. In the face of mounting evidence that massive government intervention would not turn Sri Lanka's economy around, the economic recommendations of moderate cabinet members carried additional weight with the Prime Minister and the climate for private business began to improve. Debate over whether to solve Sri Lanka's economic problems with more vigorous government intervention, or by giving private sector investors and businesses greater scope was a major contributor to tensions that eventually resulted in expulsion of Sri Lankan Equal Society cabinet members from the government. Felix Dias Bandaranaike's appointment as finance minister represented a triumph for the moderates, although international activities and political concerns took priority over economic policy initiatives during the Sirimavo Bandaranaikes final years in power. In a more favorable business climate, local entrepreneurs were able to take advantage of Sri Lanka's protected domestic markets along with special tax breaks and foreign currency allocations intended to stimulate exports. Measured in real terms, private sector investment did not surpass 1970 levels until after the more business friendly UNP government assumed power in 1977. However despite severe setbacks in the early 1970s, it represented almost half (49%) of total investment for the 1971-77 period. Sri Lanka's heavily subsidized government enterprises and public corporations, did much worse, with capital formation in the latter falling to less than half of the peak 1971 level by 1977.

Government attempts to seek foreign investment also brought ideology and economic realities into conflict. Areas where foreign investment would be welcomed were included in the Five Year Plan. These included tourism, some areas of manufacturing (including some public sector corporations) and areas requiring specialized skills. However government planners had little appreciation of the incentives needed to attract foreign investment in a competitive market. Anti-capitalist rhetoric, replacement of foreign import-export agencies with government monopolies and the virtual certainty that plantations would soon be nationalized contributed to a climate that international investors viewed as unwelcoming. The lengthy approval process for foreign investments, often administered by left leaning officials, reinforced this view. At a time when future "Asian Tigers" were beginning to aggressively seek foreign capital , Sri Lanka's stagnant, bureaucratically encumbered socialist economy had little to offer. In 1972 and again in 1974, the government announced policies that were intended to reassure foreign investors, but, like proposals intended to encourage domestic investment these were opposed by Marxist ministers and had little impact. An idea floated by the Prime Minister - establishing two duty free export processing zones - was rejected after cabinet debate. Foreign investment would not become a major contributor to Sri Lanka's economic growth until J.R. Jayewardene's "open economy" policies made it clear that entrepreneurial activity in the private sector was once again welcome.

State Sector Management Problems

The primary commitment of Sirimavo Bandaranaike's government was to a state managed economy. Armed with legislative authority to nationalize existing concerns and with government funds to create new ones, United Front leaders effected a major expansion in Sri Lanka's state sector and corresponding contraction in the private sector. Between 1970 and 1977, 45 new state enterprises were created and the capitalization of public sector industries increased fourfold. By 1976, state controlled enterprises were contributing 30% of GNP and employing 40% of the Sri Lanka's labor force. Among the largest 20% of economic concerns on the Island, all were state owned. State owned concerns were responsible for 62% of Sri Lanka's industrial output and 70% of its industrial exports. By 1976, political leaders were managing the production of such diverse products as milk, distilled liquors, tobacco, textiles, plywood, chemicals, tires, ayurvedic drugs, steel, hardware and processed fish. As already noted, they controlled organizations that monopolized purchases of most staple foodstuffs and all imports. As under previous administrations public officials managed electricity production along with the refining and distribution of petroleum products. They ran the state railroad, bus lines, telephone system and banking system.

Private enterprise was discouraged because of a strong belief that national rather than personal priorities should be served by economic activity. In the view of ministers and planners, only through government management of major economic sectors could this goal be attained. This would permit social goals to be given at least equal weight with profitability. Most important among these goals were redistributing income, providing employment, correcting regional development imbalances, training Sri Lankans in industrial skills and making "essential goods" available at affordable prices. While it was the "duty" of public enterprises to conduct their operations so as to break even over five years and to generate a rate of return specified by the government minister in charge, this "profitability" was rarely attained.

As we have already seen, contributions of Sri Lanka's state managed establishments to the economy, with rare exceptions, did not meet expectations. They did not play their planned role as engines of economic and employment growth. They did not attract private investment, produce goods that could compete on international markets or generate surpluses that could be reinvested or redirected to other public purposes. Many required substantial subsidies to remain viable. Shortcomings in public sector enterprises were not the only cause of economic stagnation and continued high employment during the early 1970s; deteriorating terms of trade and several years of adverse weather conditions also contributed. But management problems in the state sector must bear substantial blame for the United Front's inability to deliver on its campaign promises and thus for the overwhelmingly negative verdict that voters delivered at the polls in 1977. What were these problems, why did they occur and why were their economic consequences so adverse?

Many critics point to political patronage at the principal villain. While political considerations had played a role in appointments before Sirimavo Bandaranaike become Prime Minister, the practice reached a new level after 1970. Political considerations seem to have been weighted more heavily than professional qualifications in filling most positions. Expansion of the state sector meant nearly half a million jobs were subject to some sort of government oversight. As early as 1972, economist Janice Jiggins described the expanding state sector as a "Rs. 4 billion white elephant." The [state] corporations have become providers of jobs, not levers of economic growth," she concluded. "They are areas of political patronage and intervention, not creators of a new managerial class." Ethnicity, too, became a criterion for employment in most state sector corporations as new managers with Sinhalese nationalist leanings implemented hiring practices that discriminated against Tamils. Thus politicization of state employment contributed to ethnic tensions as well as reducing efficiency and productivity. Sri Lanka also began to experience a "brain drain" as talented managers, engineers and technicians who failed to secure domestic employment sought jobs abroad. Many of these were Tamils and this period marked the beginning of a Tamil diaspora that would flood Western and Southeast Asian nations with talented migrants during the 1980s.

The strategy chosen to expand productive capacity also contributed to inefficiency and was a factor in Sri Lanka's inability to expand employment opportunities. Government planners responsible for industrial development faced a conflict between using capital intensive technologies and providing full employment. Since Sri Lanka lacked its own capital goods sector, creating new industrial enterprises required imports of machinery and technical assistance from abroad. Communist countries were the most willing to supply needed capital goods on affordable terms. The USSR provided machinery for manufacturing steel, fertilizer, tires and tubes and for flour milling. Textile looms came from China, the German Democratic Republic and Poland. Machinery for manufacturing hardboard and refining sugar came, respectively, from Rumania and Czechoslovakia. Unfortunately the production scale of these imported technologies was not well suited either to Sri Lanka's need for labor intensive facilities or modest level of domestic demand.

Further problems were created by government regulations that proscribed importation of consumer goods and encouraged development of industries that produced for the domestic consumer goods market, but placed fewer constraints on importation of intermediate factors of production. Indeed, foreign exchange for capital goods and intermediate factors of production was often available at favorable rates under the Foreign Exchange Entitlement Scheme. This meant, for example, that Sri Lankans were forbidden to import finished textile products from China, but the State Textile Corporation could import machinery and raw materials to produce such products, even though the total foreign exchange cost of the domestically produced goods exceeded that of purchasing finished goods from China. Ad hoc priority setting and primitive accounting schemes made it difficult for top level government officials to determine that some inefficient domestic industries were draining foreign exchange reserves more than importing the finished consumer goods they produced would have done. The overall results from Sri Lanka's industrial policy was to create oversized and capital intensive industries in the state sector that contributed little to solving the nations employment problems and produced finished products that might comprise as much as 100 per-cent imported raw materials. Moreover, because of oversized production facilities, low demand and foreign exchange shortages, average capacity utilization during the 1970 -1977 period was only 53%. This level of capacity utilization provided evidence that much of the funding allocated to industrial development had been wasted. Wasting the funds on capital intensive technologies meant the government also failed to benefit politically by using industrial development, as the five year plan had envisioned, to reduce unemployment.

Government emphasis on using state sector enterprises to achieve social goals created further problems. Often prices charged for goods were lower than costs of production. This could be due to decisions by inexperienced managers or poor cost accounting, but political considerations also entered in. Pricing decisions for many goods were made at the ministerial level. For items designated as "essential commodities" or deemed to significantly impact the cost of living, price changes required cabinet approval. Since most goods priced in this way were produced by government monopolies, there was no domestic competition to provide checks efficiency or quality checks. High tariffs protected inefficient domestic producers from external competitors. Many state enterprises sustained high losses. The five year plan had anticipated that these enterprises would return profits to "the people" (i.e. to the government), but instead the government had to provide operating subsidies to keep them afloat and investment subsidies to help them expand. Subsidies added to government deficits and, when deficits had to be covered by Central Bank "loans", to high levels of inflation.

Two Partial Success Stories: Gemstone Exports and Tourism

Not all state enterprises were failures. The success of Sri Lanka's State Gem Corporation, newly established in 1971, illustrates effectiveness of an incentive scheme that reduced smuggling nearly to zero and virtually monopolized gemstone exports under government control. In 1970 the value of Sri Lanka's "official" gem exports was only 4.3 million rupees ($US .722 million) . By 1973, there had been a twenty-five fold increase (in real terms) to 110.6 million rupees ($US 17.2 million). The increase more reflected a movement of existing exports from unofficial to official channels than an increase in production. Two policies that capitalized on Sri Lanka's strict currency and export controls made it profitable for gem producers to sell to the government . Unfortunately these policies were not readily transferable to most other state managed sectors. First, gemstones were classified as "non traditional exports". This made those involved in gem production eligible for Foreign Exchange Entitlement Certificates that provided foreign currency at favorable prices. Second, producers could convert foreign currency earnings to rupees under the Convertible Rupee Account Scheme at a favorable rate which tripled their profits. They were also allowed to use foreign currency earnings to buy imported goods, travel abroad and educate their children in foreign Universities. As a result of these policies, receipts from gem exports remained stable for the remainder of Sirimavo Bandaranaike's term in office and provided the government with substantial revenues. When J.R. Jayewardene's government relaxed currency controls in 1977, smuggling again became more attractive than selling to the government and State Gem Corporation Revenues fell.

Tourism, a collaborative effort between the government and private investors, also provided a modest success story, while further highlighting problems with government policies. Investors in tourist hotels and travel agents received the same preferential treatment as gem producers in foreign exchange transactions. Between 1970 and 1974 the government plowed more than 220 million rupees ($US 33 million) into promoting and supporting tourism. In 1975 alone, 11 new hotels opened, one in Colombo and 10 in seaside resort areas. Between 1970 and 1977, the number of hotel rooms suitable for tourists increased from 1,408 to 4,581. "Tourist nights" increased from 489 thousand to 1.6 million. "Official" receipts from tourism grew (in real terms) from 21.5 million rupees ($US 3.6 million) to 170 million rupees ($US 19.2 million). During the same period tourism added more than 20,000 new jobs to the labor force.

Low hotel occupancy, heavy foreign exchange costs and the modest contribution of tourism to Sri Lanka's economy were the negative sides of the story. Despite government promotions, new hotels and natural beauty, Sri Lanka was not an effective competitor for high-volume or up-scale tourist revenues. In contrast to more open economies, there was insufficient foreign exchange to mount professional promotions and advertising campaigns. Even with foreign exchange preferences, local entrepreneurs lacked resources to hire or train staff that met international standards or to provide facilities such as air conditioned motor coaches, trains and taxis. Some government officials, steeped in Marxist or nationalist dogma, were unreceptive to the needs of the international tourist trade. Others were simply unaware of what vacationers wanted. In the best tourist years between 1970 and 1977, hotel occupancy reached only 42 per-cent. In 1971, the worst year for occupancy, it dipped to 31 per-cent. Low occupancy rates kept prices down. In 1977, tourists visiting Sri Lanka spent, on average, less than $US 25 per day. After seven years of investment and government promotions, revenues from tourism were less than 1 per-cent of Sri Lanka's GNP. Tourism's contribution to export revenues had increased more than five-fold, but was still less than 6 per-cent of the total.

International Trade and Finance

Whatever their economic philosophy, policy makers knew they must better insulate Sri Lanka's agriculture-based export-dependent economy against fluctuations in international commodity prices and adverse weather conditions. Building export oriented industries and tourism, along with strict import and currency controls, were not only intended to expand and diversify the domestic economy, but to improve international trade performance and reduce economic vulnerability. How successful was Sirimavo Bandaranaike's government in achieving these latter goals?

1

Balance of Trade, Terms of Trade, and External Assets (Figure 8-4)

From 1970 through 1975, Sri Lanka experienced progressive deterioration in its terms of trade caused by rising energy and imported food prices, along with stagnant or declining prices for tea, rubber and coconuts. Price increases in imported goods needed to keep Sri Lanka's industries functioning further added to import costs. Attempts to expand sales of the major export crops failed. This combination of factors, plus limited foreign assets, declining foreign investment and declining foreign aid created severe pressure to reduce imports.

Government control over an increasingly centralized economy, plus the Prime Minister's support

for draconian measures, produced success on this front, although with adverse long-term political consequences that have already been described. In 1971, 1972, and 1973, sharp cuts in imports, especially consumer goods imports, kept Sri Lanka's trade deficit below five per-cent and enabled Central Bank managers to substantially increase the nation's external financial assets (Figure 8-4) . Even food imports were kept below 1970 levels except in 1972, when the government responded to bad harvests with emergency imports of grain. In 1974 and 1975, when the deterioration in terms of trade was most severe, Sri Lanka ran trade deficits of more than 30 per-cent and was forced to draw down its foreign assets, but strict import controls kept the reductions within manageable proportions. In 1974, when controls were most stringent, the Central Bank's volume index of imports had fallen to 55 per-cent of 1970 levels and the value of Sri Lanka's external financial assets was still more than 25 per-cent higher than in 1970.

This successful response to adversity placed Sirimavo Bandaranaike's government in a strong financial position, internationally, when prices of its major export crops rose strongly in 1976 and 1977. The price of tea, which still provided more than half of foreign exchange revenues, rose by more than 100 per-cent. Strong export revenues permitted the government to relax import controls in the months preceding the general election and still run a positive trade balance in both 1976 and 1977.When J.R. Jayewardene assumed power, the value of Sri Lanka's foreign assets had increased to more than twice its 1970 level. However its foreign debt had also increased - to more than 80 per-cent of GNP, nearly twice that of 1970.

Conservative trade policies produced a relatively strong financial balance sheet that made the nation less vulnerable to economic intervention from foreign powers or international lending agencies. However it failed in two important respects, one political, one economic. The adverse political consequences of restrictive import policies have already been described. Import restrictions and rationing were a precipitous retreat from glowing promises made during the 1970 campaign. High prices and limited availability of wheat and rice impacted all but the most wealthy Sri Lankans, leaving the Sri Lanka Freedom party and its allies with a legacy of public mistrust that would take more than a decade to overcome. Economic stagnation produced a broad range of negative impacts, to which conservative trade policies contributed. Central Bank import volume indices for "intermediate goods" and "investment goods" are revealing. In 1974, the nadir year in terms of imports, the respective indices stood at 53 per-cent and 43 per-cent of their 1970 values. Given state sector management problems, starving Sri Lanka's industries of raw materials and investment capital may have been a rational, albeit unintended policy. However these shortages imposed further strictures on an already stagnant economy, making it even less probable that economic expansion would occur.

Sri Lanka's foreign debt was both positively and negatively impacted by trade policies. The increase in debt, denominated in U.S. dollars was modest, however effects of economic stagnation plus a 60 per-cent loss in the rupee's value on international currency markets weakened the ability of the government to repay. Foreign debt increased from 14 per-cent of gross national product in 1970 to 41 per-cent in 1977. As a per-centage of exports, it increased from 87 to 160 per-cent. As in other developing nations, increased debt, relative to exports and productivity contributed to a vicious cycle causing further losses in the rupee's value.

Foreign Aid: An Unheralded Success Story

Prime Minister Bandaranaike's success in maintaining flows of foreign aid from capitalist nations, while increasing foreign from the Communist world is one of the unheralded success stories of this period. Foreign aid provided desperately needed jobs in the domestic economy and helped to maintain Sri Lanka's international financial position. Among major donors were China, Canada, Australia, and the World Bank. The United States, which terminated grant assistance with great political fanfare in 1973, continued to be Sri Lanka's largest provider of foreign loans. Deterioration in terms of trade during the mid 1970s lead the government to give particular priority to commodity assistance which, in total dollar value, exceeded the amount of project assistance. China continued to be a major supplier of rice. Denmark shipped critically needed supplies of wheat flour and fertilizer. Canada provided asbestos fiber, newsprint, wood pulp and telecommunication. Both Denmark and Hungary provided capital equipment for the government's industrialization program. The spacious Bandaranaike Memorial International Conference hall, which served as venue for the 5th Conference of Nonaligned Nations stands in Colombo today not only as a memorial to S.W.R.D. Bandaranaike but as a reminder of Sirimavo Bandaranaike's success in soliciting foreign aid.

Describing Sri Lanka's relations with foreign donors as a success story contradicts "conventional wisdom" perpetuated by some scholars that Marxist participation in the government, along with socialist economic policies caused major reductions in aid. In fact, receipts of both foreign loans and grants during Sirimavo Bandaranaike's regime were greater that under Dudley Senanayake, who has always received high marks for his management of relations with foreign donors. Annual receipts of foreign aid grants (which did not require repayment) under Sirimavo Bandaranaike were more than three times the amount received by Dudley Senanayake's government. Without foreign aid, the United Front government's economic and political problems might have been far worse, especially during the early 1970s.

Government Finance: Not a Success Story

Despite increased foreign aid and reduced trade deficits, Sri Lanka's overall financial position worsened during Sirimavo Bandaranaike's term. Interventionist economic policies resulted in rising government spending levels that exceeded the economic growth rate. Growth in revenues was less than the overall growth in the economy (Figure 8-5) Deficits averaged 27% of expenditures, more that 5% higher than under Dudley Senanayake. In 1972, when the 5 year plan was introduced, the deficit was nearly 40% of expenditures. One result of government economic policies was a dwindling stock of privately held funds that could be loaned to cover deficits. Increasingly, Central Bank "loans" were called upon to bridge the revenue-expenditure gap. Use of the Central Bank to monetize government deficits was, as already noted, highly inflationary. Between 1970 and 1975, the Sri Lankan rupee lost 40% of its value. By 1977, the rupee's purchasing power had dropped by more than 50%. Measured in current rupee values, Sri Lanka's public debt grew by more than 200% between 1970 and 1977. (The comparable figure for 1965-70 was 40%). However, inflation did reduce the real value of public debt. Taking inflation into account, the increase in public debt was 50%, compared with 23% under Dudley Senanayake.

2

GNP and Government Expenditures Indices, Adjusted for Inflation;

Per-Cent Annual Government Deficit (Figure 8-5)

Both direct declines in government income sources and indirect consequences of economic stagnation contributed to revenue shortfalls. Deterioration in Sri Lanka's terms of trade and management problems in the export oriented export sector have already been described. Both resulted in declining revenues from export taxes, one major government funding source. Declining import volumes, a product of foreign exchange shortages plus preferential treatment given to many state sector concerns, produced a drop in revenues from import taxes. Increases in sales and income taxes, along with the foreign exchange entitlement scheme produced revenue increases, but also slowed economic growth. When adjusted for inflation, even the gross receipts of state owned trading enterprises, recipients of generous subsidies and investments, contributed less to government revenues in 1977 than in 1970.

Tax increases and spending cuts intended to shrink deficits contributed to a vicious cycle that slowed economic growth, resulting in greater deficits, generating additional pressures for tax increases and cost cutting that slowed economic growth still further. Growth in revenues that did occur was produced by increased income from sales taxes, value added taxes, income taxes and the Foreign Exchange Entitlement Scheme. New taxes and tax increases extracted additional wealth from an already stagnant domestic economy and fueled inflation by raising prices. Incentives offered by the Entitlement Scheme improved economic performance in some sectors, as in the case of the gem industry, but used dubious criteria to allocate scarce foreign exchange, often to unproductive enterprises. Attempts to cut spending, often implemented with political fanfare, were sporadic and inconsistent. As figure 8-6 shows clearly, the result was volatile government expenditure patterns, in an economy increasingly dominated by the government. This further contributed to an uncertain economic climate, adding to the concerns of investors already frightened by redistributive tax schemes, nationalizations and Marxist rhetoric. Declining foreign and private investment, as already noted, also slowed economic growth.

3

Cumulative Expenditures on Administration and Defense,

Short-Term Benefits and Investment (Figure 8-6)

We have seen that despite nearly stagnant revenues, the government was able to increase spending by running large deficits that pushed up inflation and increased public debt. Adjusted for inflation, Sirimavo Bandaranaike's government spent about 25% more, per year, than Dudley Senanayake's. How were these additional funds allocated and according to what priorities?

The breakdown of spending between short-term and long term priorities, shown in Figure 8-6, exhibited no marked change from the 1965-70 period, however within these broad categories, there were larger year-to-year fluctuations and some reordering of priorities.. The greatest increase was in expenditures for administration and defense, which rose by nearly 50 per-cent. A buildup of the security forces, following the JVP rebellion contributed to this growth as did the creation of additional bureaucratic posts need to regulate and manage a state controlled economy. Overall capital expenditures increased 23%, thanks to large increases in 1975, 1976, and 1977, but were below 1970 levels in 1971, 1973 and 1974. Subsidies and other short-term benefits still accounted for most government spending, but the growth rate in this category slowed. Primarily this was due to success in limiting food subsidy costs, which grew by only 3 per-cent and expenditures on education, which grew by only 12%.

United Front Economic Policies: An Appraisal

In the opening paragraphs of this section, I noted that Marxist economics, goals and policies are irrevocably linked by ideology. The truth of this can be seen in how Sirimavo Bandaranaike's government responded to economic adversity. By 1974, the shortcomings of state ownership, central planning, and redistributive taxation could not be ignored. The economy was stagnant. State owned industries were losing money. Goods were scarce. Many Sri Lankans were suffering. Mrs. Bandaranaike and her close advisors could foresee that public dissatisfaction with unkept promises and economic failures would produce a UNP victory, perhaps a UNP landslide, in the 1977 general election. Something needed to be done, but the government was no position to propose a new economic game plan. Marxist economic doctrines united the United Front and were enshrined in the Republican Constitution. Moreover, there was no assurance that hastily crafted alternatives would produce better results within the time remaining before the general election. Faced with this dilemma it is hardly surprising that Sri Lanka's leaders stepped up ethnically divisive rhetoric, attempted to repress dissent, pinned unrealistic hopes on the Nonaligned Summit extravaganza and initiated desperate negotiations to further postpone the 1977 electoral reckoning. In the end, none of these stratagems succeeded in distracting voters from economic realities or denying them the opportunity to pass judgement on the United Front's years in power.

In appraising Dudley Senanayake's 1970 election defeat, I observed that longer term consequences of Marxist economic policies initiated in the 1970s were not yet apparent to Sri Lanka's voters. While Senanayake's government implemented modest reforms, especially in agriculture, its economic policies had much in common with those of its predecessor. Preexistence of a strong state sector and central planning apparatus, along with their overwhelming parliamentary majority, made it easy for United Front economic managers to reestablish and accelerate Sri Lanka's movement toward a state controlled economy. Thus the economic stagnation, chronic deficits, and goods shortages of the 1970s were products of a decade or more of Marxist economics, not only the United Front's radical reforms. By 1977, however, costs these policies were unequivocally clear to Sri Lankan voters. This provided a political climate in which the "open economy" strategy proposed by J.R. Jayewardene had broad appeal.

If more evidence was needed that doctrinaire Marxists were prepared to ignore both economic and political realities, the campaign strategy Sirimavo Bandaranaike's former coalition partners provided it. The Sri Lanka Equal Society Party and Communist Party (Moscow Wing) along with some left- leaning Sri Lanka Freedom Party defectors joined together as the United Left Front. The Front nominated nearly a full slate of candidates for parliament who contested against nominees of the United National Party and Sri Lanka Freedom Party. Their platform promised that if elected, they would further strengthen economic policies of the 1970s. Thus, voters were given a clear opportunity to pass judgement on those policies. United Left Front candidates failed to win a single seat in the new Parliament.

II. DELIVERING BENEFITS TO THE PEOPLE

***

How anticipated "benefits"

from United Front plans and reforms

fell short of expectations

***

How effectively did Sirimavo Bandaranaike's government meet constituents' expectations for good wages, employment opportunities, health care and education? Political and economic problems that made it difficult to fulfill optimistic campaign promises have already been described. Here, we look more closely at how these problems impacted the "benefits" that Sri Lankans expected to receive from the United Front.

Trends in Population, GNP, and GNP Per Capita (Figure 8-7)

Economic Growth, Wages and Income Distribution

Adjusted for inflation, Sri Lanka's gross national product only grew by an average of 2.2 per-cent per-year, compared with 7.5 per-cent under Dudley Senanayake. Sri Lanka's annual population growth rate of 1.6 per cent was the lowest of any developing nation, however population growth reduced average increases in per-capita gross national product to less than one per-cent (Figure 10-7). The comparable figure for Dudley Senanayake's government was 4.5 per-cent. Slower economic growth meant there were fewer resources and jobs to go around.

Rates of inflation averaging more than 11 per-cent per year eroded the value of savings and wages. For 1973 and 1974, inflation averaged more than 20 per-cent, by far the highest in modern Sri Lankan history (Table 8-3). Under Dudley Senanayake, the average inflation rate was 3.5 per-cent and a single year of double digit inflation - in 1968 - had been a political crisis. Many workers, especially in the large government sector, found themselves on a treadmill of declining purchasing power, followed by belated raises that at best recouped their losses. Declines in the Rupee's international value caused especially steep price increases for imported goods and for manufactured goods that depended on imports. Rampant inflation in 1973 and 1974 discouraged private saving plus adding to the uncertain economic climate created by nationalizations and redistributive taxes.

High inflation nullified improvements in well being that wage increases would have provided in a more stable economy. Official indices of real wages showed little growth between 1971 and 1977. The minimum day rate in agriculture declined in four of Sirimavo Bandaranaike's seven years in office, and showed a positive annual increase over the term only because of large rise in 1977. The minimum day rate in non agricultural occupations decreased in five of the seven United Front years and declined by 12 per-cent, overall. Government employees fared worse than those in the private sector. Purchasing power of wages declined in every employment category with teachers experiencing the most severe decline - more than 10 per-cent. Reductions in food subsidies and rationing of essential commodities described earlier in this chapter eroded living standards still further. On the other hand continued distribution of free rice which could not only be consumed, but sold at market prices, provided at least some "income" to poor Sri Lankans.

Comparison of GNP (Current Prices), Real GNP and Inflation (Table 8-3)

GNP

Current

Prices

Rs Mil REAL GNP

1970

Prices

Rs Mil REAL GNP

INDEX

1970=100 INFLA-TION

Per-Cent

Per-Year

1970 12,746 12,746 1.00 0.8%

1971 12,798 12,419 0.97 3.1%

1972 14,042 12,954 1.02 5.2%

1973 16,784 13,245 1.04 16.9%

1974 21,482 13,661 1.07 24.1%

1975 23,619 14,064 1.10 6.8%

1976 25,704 14,030 1.10 9.1%

1977 31,256 14,729 1.16 15.8%

As economic conditions worsened, government leaders hoped to mute popular dissatisfaction by imposing sacrifices disproportionately on the rich. Redistributive legislation - the one time levy on assets, a steeply graduated income tax, ceilings on housing and land reform - has already been described. How successful was this legislation in shifting wealth from upper to lower income groups? Because periodic Consumer Finances and Socio Economic Surveys were only completed in 1963 and 1973, overlapping three administrations, this question can not be precisely answered. However since redistributive measures were not implemented prior to 1970, it is probable that leveling of incomes taking place between the 1963 and 1973 surveys was due more to United Front policies than other factors. All but the top twenty per-cent of income earners improved their position between 1963 and 1973, with the greatest improvement occurring among members of the "middle class." On the other hand, Sri Lanka's wealthiest decile experienced a precipitous income share decline of nearly 25 per-cent. This redistribution of income in favor of middle and poorer classes, proved to be transient, however. The 1978/79 surveys show that top income earners had regained their position, while the poor and middle classes had lost most of their gains.

Unemployment and Job Creation

Despite the Five Year Plan's ambitious job creation targets unemployment continued to worsen during the United Front's years in power. Sri Lanka's population age structure was still skewed toward the young which meant that the labor force continued to grow more rapidly than the population as a whole. Between 1963 and 1971, it grew by more than 40 per-cent, adding about 1,300,000 job seekers to the population. Between 1971 and 1978 1,300,000 more men and women joined the labor force. This 30 per-cent increment was nearly three times the rate of population growth and nearly twice the growth rate of Sri Lanka's stagnant economy.

While job creation plans predicated on industrialization and economic growth fell short of the mark, United Front leaders were able to create new government and state sector jobs directly. This increased the cost of government but did provide employment, especially for political supporters (virtually all Sinhalese). More than 100,000 new government jobs were added during Sirimavo Bandaranaike's first year in office (a 50 per-cent increase) and by 1977 the size of the government work force had almost doubled. Employment in "semi government institutions" (public corporations, universities, boards and banks) grew from 170,000 in 1970 to 617,000 in 1977. In contrast to government employment, however, much of this growth resulted from nationalization of existing jobs rather than the creation of new ones. Many newly created jobs were make-work positions that added little to productivity.

Moreover, new government and state sector jobs could make only a small dent in the unemployment problem. For reasons already discussed, determining the exact level of "unemployment" in Sri Lanka is impossible. However there appears to be some consensus that the number of "unemployed" grew from around 12 per-cent to around 20 per-cent between 1970 and 1977 By 1977, more than 1 million men and women were seeking jobs and unable to find them. Unemploy-ment was higher among men than among women; higher in urban than in rural areas and highest of all among young people. Unemployment was lowest for those with university degrees. Many who did have jobs were classified as "underemployed," adding another 1 million or more to the ranks of those who may have been dissatisfied with their work situation. The presence of more than 2 million unemployed or underemployed, out of a 5 million member work force, was a matter of great concern to leaders who had nearly been overthrown by a rebellion of dissatisfied youth at the beginning of their term in office.

Ethnic Disparities in Income and Employment

To what degree do significant income and employment disparities show up between Sri Lanka's two largest ethnic groups, the Sinhalese and Tamils, during this period? This is an important question because Sirimavo Bandaranaike's government used the claim that Sinhalese were systematically disadvantaged to justify policies that gave them preferential treatment in employment and education. Tamil leaders, on the other hand, used economic discrimination as one justification for their secessionist platform and later, for armed rebellion. In an unpublished study, "Ethnic Conflict and Economic Development in Sri Lanka" (1988), economist S.W.R.D. Samarasinghe has tried to sort out these contending claims. With regard to income, he concludes that Tamils were neither systematically advantaged prior to the 1970s nor systematically disadvantaged during the United Front's years in power. The picture was more complex than strident advocates on either side of the ethnic divide would have us believe. The greatest disparity was between low country and Kandyan Sinhalese, with Tamils doing somewhat worse than the low country Sinhalese but better than the Kandyans. However given the strong Kandyan influence in Sirimavo Bandaranaike's government, one can see how the disadvantaged position of Kandyans contributed to a perception, reinforced by Sri Lanka Freedom party Politicians, that all Sinhalese were worse off than Tamils.

Consumer Finance surveys do show that Tamils had somewhat lower unemployment levels than Sinhalese. However Samarasinghe questions the significance of these differences, pointing to factors that lead Tamil employment to be overstated and Sinhalese employment to be understated in the surveys. With regard to the contentious issue of state employment, he notes that Tamils never dominated the state sector as some Sinhalese claimed. Even in 1950, Tamils held only 22 per-cent of government jobs. Tamil employment had dropped to 11 per-cent by 1980 and few Tamils benefitted from Sirimavo Bandaranaike's expansion of the state sector. On the other hand even in 1980, Tamils held 29 per-cent of the administrative, professional and technical positions in the central government and 18 per-cent of similar positions in the state corporations.

Studies of Island-wide data, such as Samarasinghe's, question both Sinhalese and Tamil claims of discrimination but also show why many Kandyan Sinhalese and Jaffna Tamils felt they had been treated unfairly. In is not surprising that Kandyan and Jaffna politicians became the strongest proponents of communal nationalism or found the most receptive audiences for communal-nationalist appeals within their regions. Earlier in this chapter, we saw how strong Kandyan influence in Sirimavo Bandaranaike's government shaped provisions of the Republican Constitution that Tamils found most objectionable and how Jaffna Tamil leaders were pushed to respond with calls for an independent Eelam. How was the economic position of the Jaffna community affected by United Front economic policies and with what consequences for the Tamil secessionist movement?

Political scientist Amita Shastri, who has sought answers to this question, concludes that economic development and employment policies contributed to secessionist sentiment, but import controls provided a countervailing pressure. Historically, Jaffna had never provided sufficient employment for its youth, forcing them to seek employment elsewhere on the island. Because of out-migration, population growth in Jaffna had been less than in other districts. In the 1970s, this changed and Jaffna District experienced greater population growth rates than the rest of the island. Shastri attributes this to discriminatory government and state sector employment policies that kept many Jaffna youth at home. In-migration by Tamils who feared discrimination and violence in the south also contributed. The combination of new migrants and shutting down the out-migration safety valve escalated demand for nonagricultural jobs in Jaffna.

Jobs were not plentiful anywhere on the island, as we have seen, and less available in Jaffna than the more developed Western province where Tamils had previously found employment. Job shortages reminded Tamils of the long-standing economic development pattern that had concentrated industry close to Colombo. This pattern became more pronounced as Sinhalese dominated governments became the principal source of capital investment. Shastri notes that only five among forty government sponsored industrial units were located in Tamil areas and no new concerns had been established since the 1960s. When the government did fund an oil prospecting project in the North and a new flour mill near Trincomalee, Tamils were angered by "island wide" employment quotas that favored Sinhalese. The Mahaveli irrigation project, which began to come on line in the early 1970s, also impacted Tamil majority areas, but was viewed by Tamils as a "colonization" scheme intended to attract Sinhalese migrants.

Probably the only Tamil community members improving their lot under the United Front were Jaffna vegetable farmers, who became unintended beneficiaries of stringent import controls. Earlier, we saw that one government response to dwindling foreign exchange reserves was outright bans on "minor vegetable" imports. These bans, especially bans on onion and chile imports were a bonanza for entrepreneurial Tamil smallholders who saw demand for their products skyrocket. Taking full advantage of rural credit schemes, hiring additional labor, and intensifying land use, they spearheaded a five-fold increase in domestic chili production and nearly a doubling of onion production. The United Front gained little political support from Jaffna farmers, but the windfall prosperity may have kept Tamil alienation from becoming even more severe. When vegetable imports from India resumed, under J.R. Jayewardene's "open economy" policy, agricultural income quickly dropped back to near 1970 levels.

Heath Care Services

In contrast with economic policy-making, health care was an arena where the connection between government programs and results was demonstrable. The high priority given to public health and nutrition since before independence had been reflected in steadily improving public health indicators and this improving trend continued under Sirimavo Bandaranaike's government (Figure 8-4). Both maternal and infant mortality continued to decline. Mortality rates rose throughout much of the term, but had fallen to below 1970 levels by 1977.

The priority given to health care, however, was less than under most previous governments. During a period when overall government spending increased by more than 20 per-cent and spending on administration and defense by more than 50 per-cent, health care spending in 1977, adjusted for inflation, had dropped nearly 3 per-cent below the 1971 level. While the total government work force grew by nearly 100 per-cent, the number of non-physician personnel employed by the government health service dropped by more than 10 per-cent. To reduce health care costs, modest fees were levied for visits to medical facilities and for drugs. The only major health care initiative appears to have been construction and staffing of a number of small hospitals in rural areas.

Why did health care spending decline? It seems unlikely that budget and personnel cuts were a high level government policy. More probably, they emerged from budget negotiations where the views of Health Minister W.P.G. Ariyadasa, an old SLFP stalwart representing a rural constituency in distant Uva Province, carried little weight. At a time when Sri Lanka was being lauded by international development specialists as a model of the "basic human needs" approach, the heavily burdened Prime Minister and her advisors may simply have been unaware that heath care had dropped to near the bottom of the government's priority list. Or they may have felt that successful programs for which Sri Lanka had been internationally recognized in the past could withstand cuts that would be more burdensome and politically costly if made elsewhere.

Health Performance Indicators (Table 8-4)

MORTALITY MATERNAL INFANT

PER 1,000 MORTALITY MORTALITY

POPULATION PER 1,000 PER 1,000

BIRTHS BIRTHS

1970 7.5 1.2 48

1971 7.7 1.4 45

1972 8.1 1.3 46

1973 7.7 1.2 46

1974 9.0 1.0 51

1975 8.5 1.0 45

1976 7.8 0.9 44

1977 7.4 1.0 42

Sources:

1. Mortality Per: Deaths 1,000 Population: From Ministry of Statistics, Economic & Social Indicators Table 2.5 Vital Statistics. Data from Registrar General's Department.

2. Maternal Mortality: Deaths Per 1,000 Births. 1970-1976 from Peebles, 1982, Table III.1. 1977 from Economic & Social Indicators.

3. Infant mortality: Deaths Per 1,000 Live Births. Peebles, 1982, Table III.1.

Primary and Secondary Education

Education, too, ranked relatively low among spending priorities. Average annual funding was 12 per-cent higher than during 1966-70 but, as in the case of health care, failed to keep up with inflation. Taking inflation into account, the education budget for 1977 was 7 per-cent less than in 1977. After years of growth, primary and secondary enrollments declined by about 5 per-cent (Table 8-5). This drop resulted from reforms that raised the age of eligibility from five to six years. It also marked a transition from expansion to consolidation and reform in primary education. Though Sri Lanka's pre-university education system was now superior to most developing nations and vernacular (swabasha) education was widely available, this transition by no means meant that every eligible child was in school. Educational opportunities for children in rural areas and especially for children of estate workers were still limited. Drop out rates among poorer families were high. Some urban schools were overcrowded and access to elite secondary schools - especially Colombo's Royal College, Mt. Lavinia's St. Thomas College and Kandy's Trinity College - was mostly restricted to upper class children. Apart from the poor schooling available on the tea plantations, there appears have been little discrimination by ethnic group at the primary and secondary level. Neither is there evidence to support assertions that Sri Lanka Tamils, as a group, had better schools available to them. Educational opportunities in Jaffna, Sri Lanka's second largest urban area, were superior those in the Kandyan region, but inferior to those in Colombo. Of course many Tamil families lived in Colombo and their children attended Colombo schools, including the elite schools.

While expanding pre-university education was no longer a priority, the government did attempt major changes in curricula and teaching philosophy. These were intended "to create an education system geared to the needs of an independent sovereign nation." "Core" curricula, to be taken by all students were introduced at the primary and secondary levels, replacing courses of study that dated back to the colonial era. Planners hoped these curricula would reduce wide disparities between schools and provide students with better vocational preparation. Teachers were encouraged to transform themselves from authority figures into "helpers" and to replace rote memorization with an emphasis on "learning." Unfortunately these ambitious plans had relatively little impact on Sri Lanka's classrooms. They were prepared by Education Ministry bureaucrats, with scant input from school administrators. Little attention was given to preparing new curricular materials. Although fundamental changes in an educational system hallowed by tradition were being proposed, few resources were allocated to teacher training. Changing educational institutions is always a slow process and it is possible the reforms might have taken hold had Sirimavo Bandaranaike's government been reelected to a second term. When it was defeated, the decision of the United Front government to reinstitute the traditional curriculum and examination system, with minor changes, was widely supported. They remain in force to this day.

Education Performance Indicators (Table 8-5)

PRIMARY & TOTAL NON- ENGINEERING POST

SECONDARY UNIVERSITY ENGINEERING SCIENCE GRADUATE

SCHOOL GRADUATES SCIENCE GRADUATES DEGREES

STUDENTS GRADUATES LAW

1970 2,716,000 3,765 348 206 87

1971 2,828,000 3,989 305 165 98

1972 2,625,000 3,941 695 223 110

1973 2,699,000 4,087 716 237 99

1974 2,622,000 3,325 721 267 94

1975 2,544,000 3,146 854 246 82

1976 2,572,000 3,279 600 123 36

1977 2,566,000 2,965 573 135 43

SOURCES

All data compiled from Peebles 1982, Tables V.3 and V.7 for 1970-71. Data from 1972 through 1977 compiled from Economic & Social Statistics of Sri Lanka (Vol 1 No 2 Dec 1978), and cross-checked with Peebles.

1. Number of primary and secondary school students. Peebles Table V.2, pp. 90.

2. Number of university graduates. Peebles, Table V.7., pp. 92. 1972-1977 data from Table 10.3 "Higher Education" in Economic & Social Statistics vol 1. no 2 (December 1978).

3. Number of graduate degrees. 1970-71 data calculated from Peebles, Table V.7., pp. 92. 1972-1977 data from Table 10.3

4. Non engineering science degrees (B.Sc. and B. Sc. Ag.).

Calculated from same sources.

5. Engineering science (B.Sc. Engr.) degrees. Calculated from same sources.

6. Post-graduate degrees. From same sources.

Higher Education

The pattern of reduced funding and ambitious, aborted reforms was repeated in higher education, but in this always volatile arena, challenges facing the government were far greater. University faculty and students had been one of the new government's important constituencies. They had been promised a relaxation of centralized controls imposed by Dudley Senanayake's Education Minister, expansion of the university system and greater faculty and student involvement in university administration. Proposed legislation that would have kept these promises was introduced in Parliament but passage was delayed by the People's Liberation Front (JVP) insurrection. When order was restored, the belief (subsequently proved wrong) that the rebel vanguard was dominated by university students, lead Education Minister Badiuddin Mahmud to supplant initial government proposals with a reorganization plan making university administration even more centralized than under Dudley Senanayake.

The government's new Higher Education Act abolished Sri Lanka's independent universities and united them as a single "University of Ceylon" with five campuses. Later the system was expanded to include the Jaffna Campus, established in 1974, plus three undergraduate and four graduate institutes. A Colombo-based Vice Chancellor, appointed by the Minister of Education was given "transitory authority", to manage the entire structure, with faculty and students acting only in an advisory capacity". This authority was retained for the entire seven year life of the experiment and the Vice Chancellor's office, working in conjunction with Ministry officials became yet another centralized bureaucracy drafting unworkable schemes, with only minimal consultation, for implementation by resistant officials in the field. Considerable amounts of time and resources were devoted to imposing administrative "rationalizations" and new experimental curricula on increasingly hostile constituencies.

Bertram Bastianpillai's description of attempts to implement "job oriented" curricula in Sri Lanka's universities shows why well intentioned programs mandated by Colombo officials so often angered faculty, and disillusioned students. These curricula were proposed in the Five Year Plan as multidisciplinary courses, integrating academic study with practical training, that would "combine disciplines relevant to the needs of a developing country." With jobs almost impossible to find, students welcomed the new courses of study, which appeared to promise almost certain employment after graduation, with considerable enthusiasm. When few graduates found jobs, and most employers seemed to prefer graduates of more traditional programs, enthusiasm turned to disillusionment. Bastianpillai's study concluded that planners had based the program on a false premise - that unemployment among graduates was based upon lack of training, when in fact the problem was simply lack of jobs. Setting up the new programs had not been preceded by manpower studies to determine what skills were needed or plans to hire or retrain faculty qualified to teach the new courses. Faculty were highly resistant to "practical training" as a component of academic study, a concept almost entirely foreign to Sri Lanka's British-influenced university traditions. Moreover too many students were admitted to the programs for practical training to have been effective, even if supervised by enthusiastic faculty. Complaints by students, including some meetings with Education Ministry officials were followed by government attempts to interest employers in the program's graduates and some modifications in the curricula, but to little avail. Though vocationally oriented practical training was widely acknowledged as a need in Sri Lanka, the shortcomings of the job oriented curricula caused them to be added to the long list of United Front educational innovations that were scrapped in 1977.

The process of reforming Sri Lanka's universities was not helped by declining staff morale, produced by the 1972 budget crisis. Austerity measures required Ministry officials to impose spending cuts that curtailed library acquisitions and purchases of laboratory equipment, shrunk research funds (funds for foreign research were virtually eliminated), and canceled subscriptions for scores of foreign academic journals. During intermittent periods faculty and students even faced writing paper shortages. At a time of overwhelming pressure to expand university education, the combination of administrative turbulence and scarcity motivated an exodus of many talented faculty to foreign universities. This exodus, to which civil strife in the 1980s gave additional impetus, would seriously erode the quality of Sri Lanka's strongest academic programs, which had been among the finest in the developing world.

Reviewing plans devised by Sirimavo Bandaranaike's Ministries of Education and Plan Implementation, one cannot fail to be impressed by the awareness of issues facing Sri Lankan higher education and the seeming promise proposed reforms. However attempts at reform made little headway in solving fundamental problems: pressure on admissions, faculty resistance to change, an excess of unemployable "arts" graduates and a shortage of graduates in science and engineering. Between 1970 and 1977, the number of students receiving marks high enough to be eligible for university admission nearly doubled, while the number admitted grew by only 20 per-cent.

The corrosive effects of discriminatory admissions policies based on ethnic quotas, which were one government response to the growing demand for scarce university places have already been described. What the government did not do - perhaps could not do - was provide the funds need to expand higher education. The total number of university graduates in 1977 was more than 20 per-cent less that the number that had received degrees in 1970 (Figure 8-5). While the output of science graduates had nearly doubled, there had been a drop of one third in the number of engineering graduates. Overall, higher education was yet another area where benefits delivered fell short of ambitious promises and plans.

Delivering Benefits to the People: An Appraisal

An overall appraisal of the United Front's success in delivering benefits to Sri Lanka needs to do little more that reiterate this oft-repeated theme: benefits delivered fell short of promises and plans. Ideology had played some role in the United Front's 1970 general election victory, but it was dissatisfaction with high unemployment, stagnant wages and access to higher education that brought Sirimavo Bandaranaike and her Marxist allies to power. Populist and ethnic nationalist rhetoric could not obscure the fact that in all of these areas, most Sri Lankans were worse off in 1977 than they had been in 1970. Some improvement in the international trade picture, beginning in 1975, could not reverse the impact of unfavorable economic trends on Sri Lanka's standard of living. As we have seen, even the equalizing effect of redistributive policies had mostly worn off by 1977.

It would be wrong to lay all of the blame for Sri Lanka's economic decline on the United Front government. As early as the mid 1960s, Donald Snodgrass' meticulous dissection of Sri Lanka's export dependent economy had made it clear that problems were looming on the horizon. Given Sri Lankan's democratic institutions and an electorate habituated to generous benefits, every Prime Minister from D.S. Senanayake on, faced the challenge of effecting structural reforms while retaining sufficient political support avoid reversal in the next general election. The United Front Government, which assumed power with such high hopes, also faced an incredible run of bad luck during its first years in office - the JVP rebellion, deteriorating terms of trade and unusually low yields of staple food crops.

Under any economic strategy there would have been problems in the early 1970s, but the United Front's interventionist strategy made things worse. Moreover, when it must have been apparent to all but the most ideologically blinded that dirigiste industrial, agricultural and trade policies were not working, the Prime Minister acceded to additional doses of the same medicine, prescribed by her Marxist political allies. This made an already ailing patient sicker. Finally, she became convinced that a change in direction was needed, but it was too late for political losses from five years of failed policies and broken promises to be recouped. Preoccupied with other matters, Sirimavo Bandaranaike's rump government had nothing to offer to a skeptical electorate that could counter J.R. Jayewardene's "open economy" proposals. Postponing the July 1977 electoral reckoning or forming improbable coalition with the Tamil United Liberation Front offered the only hope of retaining power. When these stratagems failed, Sri Lanka's voters responded to seven years of United Front economic leadership with an unequivocal "no confidence" vote.