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Lessons Learnt and Reconciliation Commission The Economic impact of the conflict

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The primary perspective or point of view of the Ceylon Chamber in making this submission is to highlight the negative impact of the conflict on the economy, business, employment and poverty and then focus on what we feel are the necessary remedial measures to prevent any recurrence. So our submission has 3 parts or sections. One is about economic and social infrastructure development followed by measures required for post conflict reconstruction and reconciliation and then finally constitutional provisions to promote good governance and devolution.

Let me start with the economic impact. We note that the conflict resulted in a range of direct and indirect impacts on the economy of Sri Lanka. Now although it is generally understood that conflicts result in loss of economic output and opportunity, the scale and magnitude of such losses are hard to measure and therefore not well known, and this is an area I want to dwell on a little bit. It is particularly so when the economy has been growing in absolute terms at an apparently reasonable rate of growth year on year. We all know that the economy of Sri Lanka grew at an average rate of about 5% per annum over the period concerned and this may have led most people to believe that the cost of war were mostly localized to the war zone and that it had no impact on the entire economy. However, our position is that the cost of the war was economy wide and was of great magnitude.

 

Now, the correct approach to measure the impact of the conflict on the economy is to calculate the destruction of production factors to determine the country’s potential output without war and then compare this with the actual output. So if there was no war what would have been the output and what was the real output while the war was on. Now in reality such an exercise is really an arduous task due to measurement difficulties of certain areas and also data constraints. The easiest to understand of the cost of war is the military cost aspect. In economy wide terms the military expenditure incurred by the insurgents, or in this case the LTTE, is also part of the cost.

Now, as the Commission would appreciate, there are records of military expenditure and the data published by the Central Bank shows what the cost of that in economy wide terms but we have no data on the cost incurred by the LTTE. Then along with that goes the cost of providing the needs of the IDPs – internally displaced persons – and the damage to the capital assets and land. They are also direct costs of the war. Then thereafter we get the cost of rehabilitation of the capital assets – the destroyed assets. Now indirect costs – those are direct costs – the indirect costs are much harder to be understood let alone to measure.

Loss of income due to foregone investment as a result of conflict is a very important area.

Because there is a conflict people do not invest as much as they would have done otherwise. Here the crowding out of both public and private investment due to increased military expenditure is very important. The crowding out of public investment due to military expenditure in the budget is obvious. What happens is you put more money in the budget for military expenditure and less for development purposes. But there is another one; that is when the Government borrows from the financial markets, funds available for the private sector to invest gets reduced. That is another crowding out and that one is hard to measure.

And then the next one of course is the reduction of potential domestic and foreign investment in the economy due to the perceived higher risk in a conflict ridden economy.

Output foregone due to the displacement of people and the resulting disruption of their economic activities is another impact. Now loss of income due to deaths and injuries is another aspect; it is easy to understand but very hard to quantify.

Finally of course the psychological trauma associated with violence and terror also do have economic cost. The people so affected cannot go about their daily tasks in the normal manner and so their economic output will also suffer. If not properly addressed this can cause under performance in the long term and even cause further conflict, that is people who have been traumatized, if that issue has not been addressed, properly treated etc., their future output will also be foregone and there can be future conflict arising out of such areas which have not been properly addressed particularly when the numbers of people are large.

Now we can share with the Commission a few examples easily measurable - examples of the cost of the economy. In 1983 the defense budget of Sri Lanka was only 1.4% of GDP. Thereafter it ranged between a maximum of 6% of GDP in 1996 and a minimum of 1.67% in 2003. The average for the period 1985 to 2009 was 4.32% of GDP compared to 1.4% before. Then in 1984 public investment was 15% of GDP – public investment. During the subsequent period it dropped sharply and in recent years it ranged around 6% of GDP – 6% versus 15%.

When it comes to tourists in 1982 Sri Lanka reached or recorded 400,000 tourist arrivals.

In 2007, the year prior to the global recession – because recession is not a good year to compare – Sri Lanka had only 494,000 tourists. So growth of mere 23% from 1982 to 2007. In contrast the tourist arrivals to Thailand during the same period increased from 2.5 million to 14.5 million – an increase of 580%. That is an indication of the kind of opportunity cost in terms of tourism.

Foreign direct investment in Sri Lanka in 1984 was 1.3% of GDP. The average annual foreign direct investment to Sri Lanka from 2001 to 2009 was only 1.24%. During the same period it was 4.5% in Vietnam and 2.95% in China.

Then finally another example is that the share of GDP from the northern province to the economy. This was 4.4% in 1990 – we don’t have the data for earlier period – and it reduced to 2.9% in 2009. At least if not for the war the percentage would have been maintained at a similar level. A research study published by the Institute of Policy Studies which attempted to quantify the cost of the war during the period 1984 to 1999 showed that the conflict would (would have

costed around the entire annual GDP in the country for 2 years). So in a 15 year period – this study was published in 2000, January 2000.

Sir there is an error, typo, in the written submission we made. The years covered in the study – the period covered was 1984 to 1999 not 2004 to 1999.

Now on this basis and considering the cost of the subsequent period which were much higher it can be safely assumed that the total cost of the conflict from 1984 to 2009 would have been at least the entire GDP of the nation for 4 years.

Now if you do a simple calculation dividing 400, that is 4 years GDP by 25 years you get 16% as the answer and the indication is in the absence of conflict Sri Lanka would have been at least as prosperous as Malaysia where the present GDP per capita is 3-1/2 times that of Sri Lanka, that is

7000 US$ per capita versus 2000 and the incidents of poverty – this is very important – is one fourth of that of Sri Lanka. In Sri Lanka it is 15% and in the case of Malaysia it is 3.8%.

So we believe that the cost of the war was enormous and action needs to be taken very quickly to make sure that it won’t … anything of that nature will not happen again. Now the type of remedial action we would like to see sir are: first to create a conducive environment for business, particularly without political patronage – it has to be open and transparent. We need simplification of procedures in businesses and civil affairs for speedy transactions. It is well known that it takes a long time in Sri Lanka for various transactions, various approvals to be obtained for business purposes.

We need public/private partnerships in infrastructure. At the moment it is primarily – infra structure is primarily by the public sector. However, with the high budget deficit etc. the gap in infra structure cannot be entirely filled with public investment; so partnerships have to be encouraged.

The major part of business in Sri Lanka is small and medium enterprises – at least in terms of numbers perhaps over 90% of the businesses are small and medium enterprises – it is very difficult for them to obtain access finance – formal sector finance; and the other sector is the youth entrepreneurs; they are also small generally. We need to improve access to them.

We have to remove legal impediments for pledging land as collateral for finance. This is particularly relevant again for small and medium businesses. For various reasons, which I can elaborate if necessary later, it is difficult to use land as collateral in Sri Lanka.

We need improved rail and road connectivity for business and social inter-actions between provinces, districts and the metropolis; and then of course we need reforms in the educational system to ensure availability of appropriate skills. Moving on to the second area – post conflict reconciliation – here I will be very brief, but the whole idea here is we need to heal the wounds experienced during the period of conflict and mobilize the entire nation towards a common Sri Lankan vision. And we need to ensure that the benefits of the end of the war must be felt equally by all sections of the community. To do so, to ensure that, we need speedy resettlement of persons affected by the conflict in their previous areas of residence with infra structure and livelihood support.

We need reintegration of the ex-combatants, including child soldiers, into the main stream society; support is required to the next of kin and dependents of members of the armed services, police and civil defense force personnel killed in action; we need speedy releasing of land from the high security zones to the original occupants as the security situation improves.

Early lifting of emergency regulations is also necessary to signal a speedy move towards normalcy. Programs for war widows and their economic independence are also essential because there are large numbers of them.

Then finally we need to accelerate civil administration vis-à-vis military administration in the north and the east supported by a transparent political process to establish local government.

Now all this needs Sir to be achieved with due attention to religious and other cultural sensitivities which prevailed in these areas.

And finally moving on to constitutional provisions, we of the Ceylon Chamber of Commerce, have always held that the lack of good governance, inadequate rule of law and insufficient devolution causes not only tension between communities but negatively affects economic development.

Therefore we have been consistently urging the authorities the early implementation of the 17th Amendment with necessary amendments. So we believe that the establishment of the

Constitutional Council as per the 17th Amendment can be viewed as a positive development to address this issue locally and also it will help the management of perception outside Sri Lanka as well about Sri Lanka, and also about investment and business possibilities without any hindrance in Sri Lanka.

Independence of judiciary and a transparency of the legal system are also essential ingredients.

Legal system needs to be efficient and speedier. It should be noted that justice delayed is justice denied. We are also concerned about public interest litigation which may adversely impact the investment climate in Sri Lanka, particularly because a great part of Sri Lanka’s land is owned by the State and any significant investment in Sri Lanka’s economy will require entering into agreements with the Government one way or the other. This is very important. We also see the need for reactivation of the Bribery Commission. Recent reports have indicated that over 500 cases are pending without a mechanism to investigate and which we don’t think gives the right signal to the business community here and overseas.

With regard to devolution, which again we are coming from the point of view of creating a conducive climate for business and economic affairs so that there will be job creation we believe that the beginning made via the 13th Amendment perhaps can be expanded, improved upon and speedily implemented; of course following consultation with all stakeholders.

Dr. Anura Ekanayake, Chairman of the Ceylon Chamber of Commerce, in his submissions before the Lessons Learnt and Reconciliation Commission (LLRC) on September 6, 2010 highlighted the economic impact of the thirty-year-old conflict. He pointed out that the lack of good governance, inadequate rule of law and insufficient devolution leads to inequitable economic development. The following are excerpts of Dr. Ekanayake’s submissions before the LLRC.

 

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