Unbalanced export-led growth

The structural changes brought about by liberalisation policies in the 1970s were a turning point in the Sri Lankan economy. While rightly opening up the economy to trade, a step away from the closed mindset of the time, it perhaps did swing too far to the liberal end, unwittingly giving us a slew of other issues. It was clear that the service sector expanded rapidly, often at the expense of the industrial and agricultural sectors, resulting in a growing trade gap. Imports of industrial and even agricultural commodities increased steadily, far exceeding the value of exports. Instead of addressing the economy’s emerging structural inefficiencies, successive administrations encouraged labour and tourism exports as a means of collecting foreign cash to pay for fast-expanding industrial imports.

The increased availability of foreign cash through worker remittances and tourists not only helped bridge the otherwise rising trade imbalance, but also paid for a variety of consumer products sought by the increasingly wealthy segments of the population. The development of this class was aided by successive administrations’ maintenance of low tax regimes. Increasing disposable income of a substantial part of the population raised spending power for private health, transportation, and education services all of which remained mainly funded by the Government. Inequality became obvious in all of these sectors, as this new middle-class segment was able to switch to higher, often imported alternatives, but also while sometimes exploiting state-provided services.  After liberalisation, regimes did nothing fundamental to address not just rising inequities in household income, but also the widening gap between urban and rural/estate sectors.

The education industry has suffered as a result. Relatively low levels of public investment in education were seen following these policies. Well-to-do families began to transfer their children from Government schools to foreign schools, which multiplied alongside well-equipped private schools in metropolitan areas. Poorer families had little choice but to send their children to schools with limited resources. 

When the cost of living did rise, as a result of the aforementioned changes, a growing number of individuals opted to go overseas for prolonged durations of work. This enabled families to generate more money not just to pay their daily expenses, but also to save for their children’s education and the acquisition of land and other assets. Increasing remittances quickly became the country’s largest single foreign exchange earner, typically exceeding $ 7 billion per year.  On the other hand, the increased outflow of labour from rural and estate areas for overseas employment increased agricultural labour costs, making small-scale agriculture unviable, often resulting in farmers abandoning many small parcels of agricultural land, resulting in a decline in agriculture production quality.

Poor quality of these, caused severely uneven life opportunities for society’s lower-income groups. Poor educational facilities in rural and estate regions, for example, led parents to pay for private instruction, which became a lucrative sector throughout the country. Poorly funded and overcrowded public transportation forced even many low-income people to purchase transport equipment such as imported motorcycles and three-wheelers in order to have more convenient modes of local transportation, not to mention hundreds of thousands of cars imported for the use of higher-income groups. A similar type of growth was visible in the health sector when private healthcare providers became an essential element of the health sector in Sri Lanka.

The preceding trends, to an effect, laid the groundwork for the extraordinary economic catastrophe, which resulted in the declaration of bankruptcy in early 2022. Short-sighted policies implemented by successive Governments with callous disdain for the substantial negative impacts on a great majority of people paved the way for the current economic catastrophe. But it’s also worth noting that no political leaders have taken responsibility for the evident policy failures. On the other hand, the country will be unable to move past the current crisis unless a serious national effort is made to not only agree on what went wrong but also to provide alternative policy frameworks, to lead to desirable policy changes and required institutional reforms at all levels.