The Kandy News Online Edition
July / August 2005
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SUPPLEMENT

Open Economy

It is almost three decades since the J R Jayewardene administration introduced the Open Economy. Sri Lanka was ahead of Mrs. Margaret Thatcher's Britain and almost every other country in embarking upon this bold experiment in economic strategy. Now almost everybody declares allegiance to the “free market” albeit mostly with various qualifications and disclaimers. This supplement based on a public seminar that The Kandy News recently conducted with the assistance of the International Center for Ethnic Studies (Kandy) reveals those qualifications, disagreements, and different viewpoints in all its variety.

The broad consensus that the market mechanism is the preferred means to allocate resources and organize production stems from the fact that most countries including Sri Lanka has had disappointing results from state enterprise. International capital is no longer seen as an agent of exploitation to be spurned at every opportunity. Former communist countries of Eastern Europe and nominally communist countries such as China have become the biggest fans of multinationals. In recent years China has attracted as foreign direct investment (FDI) over $50b per year or about 10% of the world total. India is making every effort to compete with China to attract these funds. Sri Lanka has a rather patchy FDI record with considerable funds coming in some years followed by relatively lean years. The local political environment has a lot to do with this.

There is a broad consensus that the state has a very important role to play in economic management. It has to create an adequate regulatory environment. It has to ensure a level playing field for all investors local and foreign and small, medium and big. The state must also fill the gaps arising from market failure in areas such as the environment and ensure a fair deal for the poor. Ensuring equity in development is very much a job for the state.

Although Sri Lanka was a pioneer of the open economy strategy we have failed to develop a definitive framework that clearly defines the role of the state as opposed to the market. The best example is labour laws that make it very difficult for employers to lay off even casual and temporary workers. This inflexibility not only discourages investors, but in the long run is also detrimental to the unemployed poor who loose because investment is below the level that it could have been. More broadly speaking there is an urgent need for a national discourse on the basics of the open economy and the role of the state so that we have an agreed framework to formulate economic policy.