ECONOMY-SRI LANKA: Study Adds Up Economic Cost Of Ethnic Conflict

By Feizal Samath Reprint | | Print |

Feizal Samath

COLOMBO, Feb 12 1999 (IPS) - Sri Lanka’s protracted ethnic conflict has, so far, cost the equivalent of 18 months of gross domestic product (GDP), according to a new study due to be published by a semi-government think tank here.

“The approximate cost of the war amounts to 160 percent of the GDP at 1996 levels. That means we have lost one whole year and a half of GDP,” said economist Dr Saman Kelegama, executive director of the Institute of Policy Studies (IPS).

The war in Sri Lanka’s north and east, where Tamil rebels who claim they represent the island’s minority Tamil community are battling government troops, has dragged on since 1983 at the cost of up to 75,000 lives.

As punishing has been the economic price of the war. Sri Lanka’s economy, which in 1979 former Singapore prime minister Lee Kuan Yew had predicted would match Singapore’s per capita income level of 4,000 dollars by 1990, has instead risen by only 360 dollars to 760 dollars in 1996, according to Kelegama.

“That in essence shows how much we have fallen,” he observed at a seminar last week of the Sri Lankan Association of Economists. Spiralling defence costs, which average 50 billion rupees a year now, has created a large deficit and curbed foreign investment. (The rupee is pegged at 68 to one dollar now.)

The budget deficit, as a percentage of GDP, rose to a high of 18.3 percent in 1980 but fell to around 7.0 percent in 1998, largely because of lower government spending in non-defence sectors, and the sale of the government’s assets like the national carrier, Air Lanka, and plantations.

Independent experts have been urging Colombo to devalue the Sri Lankan rupee, but the government has been resisting it because of its impact on military expenditure. “Defence spending would rise because most (equipment) is imported,” said Kelegama.

Economist Dr Lloyd Fernando, a former director of the Manila- based Asian Development Bank (AsDB) said the inability of fiscal authorities to adjust the rupee against international currency fluctuations, has priced Sri Lanka out of some competitive export markets.

But Central Bank Governor Amarasena Jayawardene has ruled out sweeping devaluation. In an interview with the ‘Sunday Times’ newspaper in December last year he said “a lower rupee value would increase the cost of living, since the bulk of staple food and other items like wheat, sugar or fuel, are imported.”

More than anything else the government’s financial policy is driven by military concerns. Kelegama said Sri Lanka by 1996 had a bigger army than countries like Malaysia, the Philippines and Australia, whose populations are much larger.

Had defence spending not increased, this money could have been used more productively to raise consumption levels, Kelegama said. “It (the war years) is a case of lost earnings and missed opportunities,” he said.

The war has drained the country of tourism dollars, for instance. Kelegama said Kenya, Maldives and Mauritius which had much lower tourist arrivals in 1982, have raced ahead of Sri Lanka which struggles to attract 45,000 tourists annually.

In January last year, the Marga Institute, a private research institute had totted up the economic losses of war from 1983 to 1996, and estimated it had cost 2,260 billion rupees.

The Marga study had calculated the costs of government and rebel expenditures, helping displaced people, economic output losses, falling tourism levels, easing foreign investment, damage to infrastructure, among other factors.

“The human cost cannot be priced,” it had stated, while pointing out that had the money been put to more productive use, the economy would have been stronger and there would be less poor people around.

It estimated that economic growth would have risen by 7 percent instead of 4.3 percent (the average for the 1983-1996 period); average household incomes would have gone up by 40 percent; about 50 percent of people living below the poverty line would have had better incomes and unemployment would have fallen to three or four percent from a current 12 percent.

However, a lecturer at the military’s Kotalawala Defence Academy argued that high defence expenditure has had a positive effect on the economy and was not just a drain on the government exchequer.

“Defence becomes paramount when there is a threat, internally or externally. When defence plays such a vital role in society, the social contract has to be adjusted,” M.M. Jayawardene said

at the seminar.

He pointed out that the war has been a source of employment — large numbers of rural youth have enlisted in the military. And their remittances have brought “prosperity” in villages.

“Forty percent of the defence bill goes to salaries and wages and one can argue that, with the bulk of recruitment coming from rural areas, these areas get large inflows of funds,” Jayawardene said.

He said there were other benefits like education and training that filtered into the village, and “when one takes this positive aspect of defence spending, the cost or the burden on the exchequer would be moderated”.

He however acknowledged that the high defence spending has led to large budget deficits and cuts in social welfare measures. “In the short term, defence spending has a sound positive impact while in the long term there is a negative impact on economic growth,” Jayawardene said.