Sri Lanka’s first 10 years: The economy

The first Cabinet of Ministers, 1948

The period from 1947 to 1956 in Sri Lanka’s history is, more often than not, presented as an Eden before its Fall. Part of the reason for this was the way in which independence was, and was not, secured. If there was no equivalent here for the mass scale pogroms which greeted India when it secured freedom, it’s because freedom was largely granted, and not won, in Sri Lanka. Independence was a top-to-bottom affair, unlike the multi-class movement that had preceded it in India, and for that reason the ethnic fissures which rented the rest of the subcontinent would not erupt here until a decade later. But this Eden, as with all such Edens, couldn’t last, and the disappointment at that was probably what compelled writers to look back nostalgically at what once had been. Like Edmund Burke reflecting on pre-revolutionary France, though, they were wrong.

Given this, the hostility of the Left towards the UNP was justified. The LSSP had obtained 10 seats at the 1947 elections. To say the UNP was caught off-guard is an understatement: for some time, the possibility of an agreement between Left parties to form an alternative government, in the so-called Yamuna Talks, seemed all too real. Unfortunately for the Left, however, various divisions led to the breakdown of those talks.

With the entry of the Tamil Congress Party under G. G. Ponnambalam and the Sinhala Maha Sabha under S. W. R. D. Bandaranaike, the fate of the UNP was sealed for a good 10 years. This, together with the prevalence of favourable economic conditions at the time of independence, continued to move writers to gloss over the many problems which were to crop up later on, which is why today, commentators like Victor Ivan can without as much as quoting a single statistic claim that Ceylon “was second only to Japan in terms of per capita income”, and that it “had the best road network”, “the best railway service”, and “the best harbour” in Asia. Implicit in these is the assumption that the British bequeathed to us a highly developed economy, which was squandered only after 1956.

However, the problem, and the reality, was more complex. Rampant poverty, inflationary pressures, balance of trade and budget deficits, and overall diminishing terms of trade, all of them symptoms of an undiversified economy catered to the extraction and partial refinement of primary products (the prices of which fluctuated severely in the post-war era) underpinned the first five years of independence. In 1950, the Indian economist B. Das Gupta pointed out that with an aggregate national income of Rs. 30 per head per month, the development of the tea and rubber industries “has not necessarily meant general economic development of the country”, which was “extremely underdeveloped.” There was a savings deficit as well, since poverty was widespread: a report in 1951, to give just one example, noted that “only some 10% of the population” were earning an income of over Rs. 200 a month.

If income and savings levels were less than favourable, trade prospects were in many respects worse. The balance of payments fell dramatically from a handsome surplus of around Rs. 314 million in 1945 to a heavy deficit of around Rs. 196 million two years later. This was largely because of a recession in the US (from where 44% of the country’s imports came in 1948), but that was more an indictment on than an excuse for the fragile economic structure. In any case, the terms of trade, which had risen from 103 to 138 between 1938 and 1947, had deteriorated to 131 by 1949. Prices of commodities being what they are, tea, rubber, and coconut were the biggest contributors to these changes: for instance, a decrease in the price of rubber from 60 cents a pound in 1948 to 54 cents a pound a year later contributed to decreases in the terms of trade of more than 5% and the balance of trade of more than Rs. 52 million.

The population was largely locked into consumption patterns that favoured imports. One economist estimated the country’s propensity to consume in 1956 to be roughly 0.8493, with a constant (i.e. how much a person would consume with no income) of Rs. 20.03. Marginal propensity to import, on the other hand, was estimated to be 0.2516, with a constant of Rs. 11.74; six years earlier, H. A. de S. Gunasekara had conjectured that at least 75% of ordinary expenditure was being spent on imports. With an average of 7% of national income left for gross capital formation in developing countries (Das Gupta estimated the figure for Sri Lanka in 1948 to be about 3% or 4%), this meant there was no real room for investment.

It was a vicious cycle: on the one hand, high poverty led to low savings and low savings perpetuated poverty, and on the other, demand-centred policies led to increased consumption and diminishing trade balances, which stoked inflation even more. Population growth during this period was unsustainable, moreover: it was underpinned by what one witty commentator observed as an Asian birth rate and a European death rate. The most feasible solution was to increase savings and investments. For that, State intervention was necessary.

All three UNP regimes from 1947 to 1956 disfavoured the idea of greater State intervention. On the other hand, State welfare schemes were generous by the standards of any postcolonial economy: in 1947 total expenditure on welfare absorbed more than 56% of the government’s resources, compared with a paltry 16% it had absorbed in the 1920s. (Between these decades, of course, two major changes necessitating a bigger welfare state had been enacted: universal franchise and free education.)

But if such schemes seemed to be generous, macroeconomic policies did not; G. V. S. de Silva, in a critique of the 1950 Budget, accused the UNP of transferring wealth to the rich by way of relief schemes, monetary policies, and tax structures. The situation was no different when it came to the government’s promotion of local industry: import tariffs in 1950 and 1951, according to one perceptive observer, privileged filling up the government coffers “at the cost of irrational treatment for home industries.” If that indictment seems a tad too harsh, consider that while tariffs on arecanuts, breakfast and dinner wagons, jewellery boxes, and baskets and basket-ware all amounted to 100%, tariffs on brushes, rat traps, and boots never exceeded 50%, though the latter could be manufactured locally.

From 1947 to 1951, the government had as its main objective full employment, which primarily meant schemes that could increase aggregate demand; that in turn necessitated long running budget deficits. This was achieved on one hand through land resettlement policies, condemned unfairly as having unduly favoured Sinhala Buddhist peasants, and projects like the Gal Oya scheme on the other. The Left was justifiably critical and sceptical of both: S. A. Wickramasinghe contended that the latter, hailed as the most monumental of its kind since the Polonnaruwa era, was a failure. “When the history of the Gal Oya is finally written,” he observed, “it will be found that it is not the people of Ceylon but the American experts and contractors who have benefited from it.”

Indeed, the government’s focus on Keynesian policies distracted it from a consideration of the ground reality. As H. A. de S. Gunasekara aptly observed at the time, the attainment of full employment was an objective that was feasible and also valid for war torn economies where large reserves of capital and labour needed to be remobilised. In Sri Lanka the problem was more nuanced: land and labour were not underused, but exploited almost fully to sustain otherwise unproductive primary sector industries, particularly the plantations. These were not driven by industry, science, or technology, but instead by continued exploitation of labour, repatriation of profits, and absentee landlordism: problems that George Beckford explored in his classic study of plantation economies, Persistent Poverty, and S. B. D. de Silva dissected in The Political Economy of Underdevelopment.

The prospect of independence frightened the planters: Das Gupta, noting that investments in joint stock companies were Rs. 860 million in 1939 and that this remained roughly the same in 1948, pointed out that estate owners, afraid that the government (no matter how friendly it was to their interests) would “lessen their prospect of profit”, repatriated their assets. We do not have exact figures, but we know the repatriation had to be substantial: it explains, in part at least, why an economy touted as having been promising by the likes of Victor Ivan could suffer quickly from every issue attendant on a country that depended so much on plantations: high inflation, rampant poverty, persistent unemployment, long running budget and trade deficits, deteriorating terms of trade, fluctuating commodity prices, and no proper industry. If many of these look like issues we are grappling with even today, well, it’s because they are.

Figures and statistics quoted from issues of the “Ceylon Economist

The writer can be reached at udakdev1@gmail.com

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