Colombo Picked The Wrong Plan

The self-inflicted ruin of Sri Lanka provides salutary lesson for other countries including Australia, warns IPA Research Fellow Kevin You.

Sri Lanka became independent, not in the aftermath of a bloody revolutionary war, but after a prolonged period of careful planning. From the British it inherited a mature democratic tradition, well-established Western-style public institutions, a Westminster system of government, and a prosperous economy. The Dominion of Ceylon, as it was then, was one of the richest nations in Asia. In fact, at independence, Ceylon was the second wealthiest country in the whole of Asia after Japan. War-torn Korea and Taiwan lagged far behind.

Moreover, Ceylon was blessed with an abundance of natural resources, with the production of tea, rubber, and coconut leading its flourishing economy. By the time of its independence in 1948, Ceylon had enjoyed 17 years’ worth of constitutionally guaranteed universal adult suffrage and was the first non-white majority colony of the British Empire to extend the vote to all adults. The pre-independence Donoughmore Constitution as well as the role of English as Ceylon’s official language ensured that despite being a multicultural and multi-ethnic society, Ceylon was able to avoid the horrors of ethnic riots—like the series of uprisings that resulted in the expulsion of Singapore from Malaysia.

The people of Ceylon were industrious, hard-working, hospitable, caring, worldly, and intelligent. In addition to abundant natural resources, true and tested institutions, and rich, captivating, and diverse local cultures, Ceylon was also blessed with the best human resources available. At independence, then, its future could not be brighter.

Fast forward to 2022 and the now Democratic Socialist Republic of Sri Lanka is bankrupt. It defaulted on its foreign debt. Twelve-hour power cuts are a fact of life. The government has no money to import fuel and basic necessities from overseas. Food and medicine are scarce. Schools had to be shut down due to a shortage of paper. Annualised inflation is expected to hit 70 per cent. The now former president Gotabaya Rajapaksa fled the country for seven weeks while his prime minister and brother and presidential predecessor, Mahinda, defended his legacy.

Sri Lanka’s economy today is a basket case. How did this happen?

Dismantling the Westminster system worsened division.

The reasons vary. Observers generally agree on the usual set of factors such as corruption, cronyism, the effect of the pandemic on tourism, the government’s pandering to eco-extremists, and general economic mismanagement. Other factors such as its increasing reliance on China and IMF-imposed contractionary economic policies are still being debated. While these explanations all have merit, they do not address the root cause of Sri Lanka’s political and economic malaise. Even prior to the pandemic and the ascent of the Rajapaksa dynasty to the pinnacle of political power, Sri Lanka was an underdeveloped economy.

Sri Lanka did not collapse overnight. While comparable post-war Asian economies such as Singapore, Korea, Taiwan, and Japan developed into giant powerhouses, Sri Lanka languished in much the same way as India and Indonesia following their independence. The key factor distinguishing the latter group from the former is socialist planning.

While the dominant Indian National Congress as well as the Indonesian National Party adopted a neutral stance in foreign affairs—aligning with neither the West nor the Soviet Union throughout the Cold War—they nevertheless embraced socialist-inspired domestic policies such as centralised planning. Moreover, from the late 1950s, Sri Lanka began dismantling the political institutions inherited from the British—the very institutions meant to safeguard its economic development, social harmony, and political integrity. A concerted effort to chip away at these institutions as well as a generation of socialist economic management act as a double whammy on economic growth and political accountability.

It began with the passage of the Official Language Act No. 33 of 1956, commonly known as the ‘Sinhala Only Act’, by populist prime minister Solomon Bandaranaike. The legislation replaced English as the fledgling nation’s official language with Sinhala, the tongue of Ceylon’s majority ethnic group. Prior to this, English enjoyed an official status as the language of business, public administration, and lingua franca among the island’s various ethnic groups. The adoption of Sinhala as the only official language was and still is widely regarded as an act to alienate minority Tamils, Moors, and Burgers, to whom Sinhala was foreign. This stoked ethnic tensions, resulting in a prolonged series of violent riots that culminated in the multi-generational civil war that wrecked not only the nation’s economy but also the previously harmonious relationship between Ceylon’s ethnically diverse population.

Solomon Bandaranaike was assassinated in 1959 and succeeded as prime minister by his widow, Sirimavo. In a move to consolidate her political position, she abolished Ceylon’s upper house in 1971 and with it the Westminster system’s mechanism for checks and balances in politics. The next year, she declared Sri Lanka a parliamentary republic. In 1978, her political opponent Junius Jayawardene instigated yet another constitutional change, turning Sri Lanka into a presidential republic—with himself as the first executive president.

In less than a decade, Sri Lanka entirely disposed of the Westminster system of responsible government that limited the extent of political powers as well as the monarchy, which had served as a non-political institution unifying the entire nation. Political dynasties had always featured in Ceylonese politics; but the dismantling of the Westminster system worsened division, exacerbated transactional politics, and diminished socio-political inclusivity. The political narrative around the concentration of power revolved around the need to suppress riots and insurrections. Some were instigated by ethnic tensions between the Tamils and Sinhalese; the rest were the result of economic hardship brought on by a socialist-inspired command-and-control method of economic management.

The devastation inflicted on Sri Lanka must not be repeated here.

The nationalisation of privately-held assets, import-substitution-led attempts at industrialisation, unsustainably generous welfare programs, and the restrictive control over the Sri Lankan Rupee and the financial sector—among other heavy-handed government measures—created a hostile environment for private investment, innovation, and entrepreneurship. Growth in real GDP throughout the years leading to the 1983 civil war was approximately 1.7 per cent per annum, and the civil war brought even further devastation to the island.

Throughout Sri Lanka’s history, there have been several attempts at market liberalisation and deregulation. But none managed to bear fruit since business confidence was continually devastated by post-election policy reversals, repeated re-introductions of centralised planning and asset nationalisation, civil unrests, and the outbreak of the civil war. Consequently, human capital development lagged behind many other post-colonial societies in Asia, which had the effect of tying the Sri Lankan economy tightly to its primary industry, stymying productivity growth, and rendering it vulnerable to natural and man-made disasters such as the 2004 Indian Ocean tsunami and, subsequently, the food crisis perpetrated by the government’s environmental, social, and governance commitment to organic farming. Gotabaya Rajapaksa’s chemical fertiliser ban—which devastated the nation’s agricultural industry and contributed to the draining of its foreign reserves and economic collapse—was the end result of the concentration of power in the hands of the executive, and generations of poor public policy choices. In turn, they were the direct result of the dismantling of British-inherited institutions and subsequent socialist economic management.

By the time socialism gave way to market-led economic development under the presidencies of Junius Jayawardene; Bandaranaike’s daughter, Chandrika Kumaratunga; and her subsequent successor, Mahinda Rajapaksa, corruption and dynastic politics had become entrenched and institutionalised. The Sri Lankan economy turned into something more akin to a crony-capitalist economy than one built on a truly free market. Furthermore, the prospect of heavy-handed State interventions always loomed large, casting a shadow of uncertainty in the country’s economic landscape.

The ban on all fertiliser imports and use of chemical fertilisers was a case in point. So was the government’s aim to generate 70 per cent of electricity from renewables by 2030—and 100 per cent by 2050. As late as January 2022, two months after the government was forced to reverse its chemical fertiliser ban, then President Rajapaksa doubled down on his commitment to radical green policies, noting in his policy statement to parliament:

We have rivers [and] seas surrounding the country, plenty of wind and sunshine all year round. This is why renewable energy sources were prioritised under our Vistas of Prosperity and Splendour Policy Statement … Our goal is to achieve the carbon neutral target by 2050. Sri Lanka is already a co-leader in the Global Compact for No New Coal Energy. We will not approve the construction of coal power plants in the future for any reason.

All of this sounds eerily similar to what is going on in Australia: from the push for a ban on coal projects, the commitment to net zero, to the layers of green tape imposed on our farmers—such as the Queensland Government’s ‘Reef Regs’. The difference, fortunately, is that Australia’s political institutions are still robust enough to resist the ill-informed policy decisions of the political elites. Australia did so in the 2013 election on the carbon tax and, subsequently, the 2019 climate change election.

Unlike Sri Lanka, we still have an upper house—with senators who are staunchly fighting for the interest of Australians, for instance, by opposing the Climate Change Bill, rejecting the policy of net zero by 2050, and casting doubt on the extravagant claims of eco-extremists and the renewables lobby. In addition, while our economy is far from perfect, we still have the ability to reverse course and recover from the havoc that poorly considered environmental laws have wreaked on the lives of Australian farmers, families, and regional communities … for now.

This is why resistance is so critical. The devastation that eco-extremism, economic mismanagement, government overreach, and cronyism has inflicted on Sri Lanka and its wonderful people must not be repeated here in Australia. Our task is to avoid the same outcome and, to the best of our abilities, assist the people of Sri Lanka get back on their feet.

What we should not do is follow them down the path to ruin.

Dr Kevin You’s postgraduate thesis examined the contributions of business interest associations to the political and economic development of Sri Lanka and Indonesia.

This article from the Spring 2022 edition of the IPA Review is written by IPA Research Fellow Kevin You.