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This is an abridged version of a paper presented at the Annual Symposium of the Centre for Poverty Analysis on Post War Development in Africa and Asia in Colombo on 01 September 2014
Both in Nepal and Sri Lanka the transition from war to durable peace has been painful and is ongoing and not devoid of pitfalls as has been the case elsewhere in the World as well. In the case of Nepal underdevelopment of the vast hinterland has been widely acknowledged as the primary cause of the armed conflict. In Sri Lanka land, language, and political rights of the minority Tamil community have been at the forefront of the separatist armed struggle.
However, in the aftermath of the civil war, while Nepal is on a path to Constitutional reforms towards establishing a parliamentary democracy as its priority towards reconciliation and durable peace, Sri Lanka on the other hand has prioritised rapid economic development as the panacea for reconciliation and durable peace. That is, while a country in which economic underdevelopment was the root cause of the civil war has chosen the path of politico institutional reforms in order to lay a sound foundation for rapid economic advancement, a country that had undergone a civil war primarily due to linguistic-based political factors and institutional failures has chosen the path of rapid economic growth. Both these contrasting post civil war recovery strategies are in a sense putting the ‘cart before the horse’ so to speak; therein lays the enduring fragility in both of these South Asian countries.
This article compares and contrasts the post-civil war economic development in Nepal and Sri Lanka using key macroeconomic variables of both countries during the first five years after the end of the respective civil war. The growth of the Gross Domestic Product (GDP) (in current and constant prices), per capita income (in current and constant prices), inflation, unemployment, and poverty in both Nepal and Sri Lanka are compared during 2006-2010 and 2009-2013 respectively. Secondly, this paper compares and contrasts the changes in key macroeconomic indicators (economic growth, per capita income, inflation, unemployment, and poverty) at national and provincial levels during the four years of pause-in-civil war (or ceasefire) in Sri Lanka between 2002 and 2005 and the four years of post-civil war in Sri Lanka between 2009 and 2012.
Nepal had a population of 27.8 million in 2013, while Sri Lanka’s population was 20.5 million in mid-2013. Whereas Nepal is a low income country (GNI per capita income of $730 in 2013) Sri Lanka is a lower middle income country (GNI per capita income of $3,170 in 2013). While Nepal continues to rely on concessionary foreign aid (grants and concessionary loans) to recover from the civil war, Sri Lanka significantly relies on international private capital markets to mobilise financial resources to reconstruct and recover from the protracted civil war. Whereas Nepal continues to pursue a pragmatic development trajectory through small and medium scale development projects, Sri Lanka has embarked on an ambitious mega development drive underpinned by “animal spirits” in order to leapfrog to become a “Wonder of Asia” driven by physical construction boom (airport, seaport, toll highways, tourist hotels, luxury high-rise mixed-development complexes, etc).
Nepal versus Sri Lanka
The GDP between 2006 and 2010 (in current prices) expanded by 87.8% in Nepal, whereas the GDP expanded by only 79.4% between 2009 and 2013 in Sri Lanka. Although in nominal terms (at current prices) GDP growth rate in Nepal was higher than in Sri Lanka, in real terms (at constant prices) Sri Lanka had a higher GDP growth (33.3%) than Nepal (20.2%) during the respective five year periods under consideration.
The per capita income growth rate during the five-year period in both Nepal (78.5%) and Sri Lanka (79.1%) was more or less the same in terms of current prices (nominal per capita income), but at constant prices (real per capita income) Sri Lanka (34.2%) experienced significantly higher growth than Nepal (14.3%) during the respective time periods.
The inflation increased by a significantly higher points in Sri Lanka (+3.4 between 2009 and 2013) than in Nepal (+1.6 between 2006 and 2010). The rate of unemployment declined marginally higher in Nepal (-1.6) than in Sri Lanka (-1.4). The headcount poverty ratio dropped by considerably higher points in Nepal (-5.6) than in Sri Lanka (-2.2). However, the higher drop in poverty in Nepal could be due to the longer time period in Nepal (2003-2010) than in Sri Lanka (2009-2012).
It appears that in spite of massive public capital infusion in Sri Lanka in the aftermath of the civil war resulting in relatively higher real economic growth and relatively higher growth in real per capita income, inflation, unemployment, and poverty indicators are relatively worse than that experienced by Nepal.
In spite of significantly lower economic base than that of Sri Lanka, Nepal appears to have recovered relatively better in the first five-years after the civil war than Sri Lanka in terms of the macroeconomic indicators that matters most to the vast majority of the people (viz. inflation, unemployment, and poverty). Economic growth and per capita income growth can be achieved by a variety of means; some of it could be real growth and some could be phantom growth. Thus, while the per capita income derived from GDP is partly phantom income, the per capita income derived from the Household Income and Expenditure Survey (HIES) is the real disposable income. Unfortunately, comparable HIES data is unavailable for Nepal for comparison with Sri Lanka.
Sri Lanka: Pause in Civil War versus Post Civil war
We also compare key development indicators during the time of the ceasefire in Sri Lanka (2002-2005 four year period) with that of the development indicators in the aftermath of the civil war (2009-2012 four year period) both at the national and provincial levels in order to compare and contrast the pause-in-civil war and post-civil war development outcomes nationally as well as in the conflict-affected provinces.
While economic growth (in current prices) at both the national and provincial levels has been significantly higher during the post civil war period in comparison to the ceasefire period, the per capita income rise has been phenomenally higher (at both national and provincial levels) during the ceasefire period. The Provincial GDP (PGDP) is available only in current prices because there are no provincial consumer price indices in Sri Lanka. The per capita income here is based on the Household Income and Expenditure Survey (HIES) rather than the P/GDP.
The inflation in the country increased by a considerably greater margin during the post-2009 period in comparison to post-2002 period. Whereas the inflation increased by 3.4 points between 2009 and 2012 (3.5%-6.9%), it increased by only 2.0 points between 2002 and 2005 (9.6%-11.6%). As noted before provincial inflation rates are unavailable.
However, the unemployment rate dropped at a marginally higher rate during the post civil war period as opposed to the ceasefire period. The unemployment rate dropped by (-) 1.6 between 2002 and 2005 (8.8%-7.2%) as opposed to (-) 1.8 drop between 2009 and 2012 (5.8%-4.0%). The unemployment rates at provincial level are unavailable for the periods under consideration.
On the other hand, the headcount poverty ratio of Sri Lanka declined by a much greater scale during the ceasefire than in the aftermath of the civil war; while poverty declined by (-) 7.5 points during the ceasefire period (22.7%-15.2%) between 2002 and 2006-7, it declined by only (-) 2.2 points during the post civil war period (8.9%-6.7%) between 2009-10 and 2012-13. This could be partly due to the higher duration of the time period during the ceasefire (four years 2002-2006) as opposed to post civil war (three years 2009-2012). The comparative data for the provinces are unavailable. However, in the Eastern Province the headcount poverty ratio declined by (-) 3.5 points between 2009 and 2012 (14.8%-11.3%). In the North, we have data for only 2012-13 incorporating all five districts.
What Ails Sri Lanka?
The average real economic growth in Sri Lanka in the four year period 2010-2013 has recorded 7.5% (annual growth rates of 8.0%, 8.2%, 6.3%, and 7.3% respectively between 2010 and 2013). According to the official statistics, inflation has remained at single-digit level continuously for nearly six years now (2009-2014). The unemployment rate of 4.0% at the national level in 2012 was the lowest ever since independence, though it has marginally increased to 4.4% in 2013. The headcount poverty ratio has declined by more than half to 6.7% in 2012-13 from 15.2% in 2006-07. However, some of the official statistics on the economy of Sri Lanka have been contested in recent times.
In spite of the populist propaganda and massive hype in Sri Lanka about the post civil war development thrust throughout the country and especially in the former conflict-affected provinces, this article has highlighted the not so glittering reality by comparing selected key economic indicators of post-civil war period in Sri Lanka (2009-2013) with that of post-civil war period in Nepal (2006-2010) and with that of the previous pause-in-conflict period in Sri Lanka (2002-2005) as well.
To the best of our knowledge two critical factors have negatively impacted on the outcomes of the development process in Sri Lanka under the incumbent President and the Government since 2006 which have wider implications to countries emerging out of civil war. As mentioned at the outset, the present Government since 2006 has been increasingly relying on international private capital market borrowings and bilateral commercial borrowings from new development partners such as China and India as opposed to erstwhile reliance on traditional concessionary finance from international financial institutions (such as the Asian Development Bank and the Work Bank Group) and Western bilateral development partners (including Japan). Almost 42% of the total outstanding foreign debt of Sri Lanka as of end-2013 is owed to international private financial markets, which was just 6.6% in 2005; the year the incumbent President came to power. Of course, since the graduation of Sri Lanka into a lower middle-income country in the recent past, eligibility for the erstwhile concessionary development finance has shrunk considerably.
Secondly, severe restrictions on international, national, and local Non-Governmental Organisations have had a debilitating impact on the general population, and vulnerable groups of people and regions (former conflict-affected provinces for instance) in particular. Although official statistics is unavailable, the International Non Governmental Organisations (INGOs) contribute over US$100 million annually to marginalised and vulnerable populations throughout the country.
The lower middle-income country status of Sri Lanka has become a ruse for both mal-development and mal-economic governance in the country underpinned by mass appropriation of public finance by bureaucrats, politicians, and crony businesses. Although the traditional concessionary finance usually comes forth with strings attached (such as on economic policy, governance, etc) that may be politically unfavourable, it undergoes stringent scrutiny in terms of economic and financial feasibility and probity of the projects and potential benefits to the people of the country. Whereas in the case of commercial borrowings from Sri Lanka’s new development partners such as China and India, political imperatives override economic imperatives for the lender. On the other hand, the borrowings from international private capital markets are non-project based and do not undergo any needs assessment at all by the lender/s.
The new international finance model pursued by the Government of Sri Lanka since 2006 has resulted in uneconomical and financially unviable mega projects around the country. The creation of the second national airline Mihin Air, Mattala Rajapaksa International Airport, Magam Ruhunupura Mahinda Rajapaksa Port are few loss-making from inception mega projects those have not undergone market-based economic and financial feasibility studies. Hence the migration of international finance of Sri Lanka to private capital market borrowings and borrowings from new international development partners has obliterated the necessary checks and balances in international finance and has opened the door to mass appropriation by bureaucrats, politicians, and crony businesses. The mass appropriation of public finance by a coterie is reflected in the fact that over seventy-five percent of the Annual Budget of the Government is allocated to the Ministries and Departments under the purview of the President and his two brothers. The current situation in Sri Lanka is resemblance of that of Indonesia during the 1990s under the late President Suharto.
Moreover, the capacity of the central, provincial, and local public administrative system has been severely depleted since the early-1970s which has led the successive governments to promote few mega development projects since late-1977 (The Accelerated Mahaweli Development Project for example) instead of number of small and medium scale development projects undertaken in the 1950s and 1960s. The mega development projects are also means of appropriation of huge rents for bureaucrats and politicians. Hence, development projects in Sri Lanka in recent times are chosen not on the basis of the needs of the people of the country, but on the basis of the extent of rents that could be amassed by a coterie.
Another primary reason for the very limited improvements in the livelihoods of the people in the North and East is the severe limitations imposed on the operations of the Non-Governmental Organisations (local, national, and international NGOs) as a result of the security phobia of the state. Traditionally it is the non-governmental organisations that fund small and micro scale development initiatives by local communities throughout the country. Few International Non Governmental Organisations (INGOs) have completely withdrawn from Sri Lanka and many have scaled-back their operations, especially in the former conflict-affected regions. Moreover, as Sri Lanka has graduated into a lower middle-income country grants from bilateral and multilateral development partners are drying and therefore INGOs are valuable source of external financial resources which are entirely outright grants. It is high time the Government stops shooting the geese that lay the golden eggs.
Further, reparations to the victims of the long drawn-out civil war in Sri Lanka by way of compensation for the loss of life and property could have had a positive impact on improving the livelihoods of the Eastern and Northern people. Unfortunately, the Government of Sri Lanka has not undertaken any measures of reparations to date (five years after the end of the civil war). Reparations to victims of armed conflict are an integral part of almost all the post-civil war rehabilitation and reconstruction efforts by the national governments and international organisations as reflected in the case of Nepal in the aftermath of the civil war that resulted in a comprehensive peace agreement signed in 2006 and in the ongoing peace negotiations between the Government of Colombia and the FARC (Revolutionary Armed Forces of Colombia) rebels. There is no logical reason why Sri Lanka could not be accommodative of the livelihood needs of the vanquished population by way of reparations.
On the one hand, Nepal is on a slow but steady path of economic, political, and social recovery from its decade long civil war underpinned by Constitutional reforms and setting-up of the Ministry of Peace and Reconstruction and the Truth and Reconciliation Committee. However, Nepal’s post-civil war economic growth is inadequate to emerge out of underdevelopment.
On the other hand, while Sri Lanka has been on a rapid economic recovery at the national level, the economic recovery in the peripheries (in terms of per capita income, employment, and poverty), especially in the former conflict-affected provinces, have been slow. Moreover, not only that there is no political process at all in Sri Lanka to find a solution to the root causes of the armed conflict, there are new conflicts instigated by religious bigots suspected to be closer to the regime. The ongoing anti-Muslim hate campaign in the past few years after the end of the civil war by a small but powerful group of religious bigots is capable of having severe macroeconomic repercussions by negatively impacting on the largest foreign exchange earning sub-sector of the country, namely labour exports to Middle-Eastern countries, and the third largest foreign exchange earning sub-sector, viz. tourism. The second largest foreign exchange earning sub-sector to the Sri Lankan economy, viz. apparel exports, could also be hit by the outcome of the ongoing international probe on violation of the international humanitarian laws and war crimes suspected to be perpetrated by the armed forces during the final stages of the civil war.
In the case of both the countries fragilities still remain in spite of progress in certain spheres of the post-civil war economic recovery. While Nepal needs to accelerate its economic growth, per capita income, and various other human development indicators, Sri Lanka needs to ensure real tangible economic benefits filters down to the peripheries, especially to the former conflict-affected provinces.
Principal Researcher, Point Pedro Institute of Development, Point Pedro, Northern Province. [email protected]