As the euphoria of war victory wanes economic problems are emerging to the forefront. The unionized workers are demanding higher wages to offset inflation that itself was partly the result of budget deficits that war spending caused. Unemployed graduates want the government to give them permanent employment. The government swallowed its pride and got a loan from the IMF with a slew of conditions attached to it. Now it is struggling to adhere to those conditions, especially to cut the budget deficit. Although the nation's foreign reserves have risen, a good chunk of it appears to be hot money from US hedge funds in search of quick profit. Such money can go away as fast as it came. Western donors who give grants rather than loans are not yet enthusiastic about putting together a post-war reconstruction aid package. Our new big donor is China but the Chinese give loans repayable with interest. The government is also borrowing from western commercial sources at market rates. As we write this, the news is that the EU is likely to extend GSP plus for six more months but what would happen beyond that is not clear.

The government is pre-occupied with putting out short term economic fires. But there are some long term economic lessons from the war that need to be learned if the country is to be put on a sustainable long terms high growth path. The war reduced the economic growth rate. In the period 1978-82 before the war began the GDP annual average growth rate was 6.2%. During the intermittent ceasefires in 1990, 1995 and 2002-05 the annual growth rate averaged 5.5%. But during the conflict period 1983-89, 1991-94, 1996-2001 and 2006-08 - it was only 4.6%. In the war years some of the growth happened because of inflated defense spending with no significant contribution to long term economic progress. These figures suggest that the country lost at least around 2 to 3 percentage points of growth per year owing to the war. To put this in perspective in 1984 Sri Lanka's per capita income was $360 and that of Malaysia $ 1,980, a difference of $1,620. In 2007 the respective incomes were $1,540 and $6,420 with a difference of $4,880. The absolute gap had risen although the relative gap had narrowed slightly from a ratio of 1 to 5.5 to 1 to 4.2.

The relative failure of Sri Lanka in economic and social progress in the period of the war is also reflected in Sri Lanka's performance in the United Nations Development Programmme (UNDP) Human Development Index (HDI). The Index is based on income, education and health status. A few weeks ago the UNDP released the HDI for 2007. Sri Lanka was placed 102nd out of 182 countries. That means 56% of the countries were better off than Sri Lanka in terms of Human Development. Back in 1987 when the UNDP first computed the HDI Sri Lanka was number 47 among 130 countries implying that only 36% of the countries were better off than us. Clearly Sri Lanka has slipped back in international comparative terms in the last twenty years. We have a lot of catching up to do.

In our view one of the greatest losses from the war stems from a factor that is hidden from the public eye. Between 1953 and 1982, over thirty years, our labour force grew from 3.0 million to 5.2 million by 2.2 million. From 1982 to 2005, over period of a little over twenty years, it almost doubled from 5.2 million to 10.0 million. This reflects the post war baby boom in our country as the mortality rate plummeted. This is a huge increase in labour that could have been used to boost the economy of the country. In demographic terms this will not be repeated. Because of the war we have more or less lost our chance to invest more in education, improve labour productivity and improve living standards using this growth in the labour pool. This is Sri Lanka's” lost generation.” Now we are entering a period of a rapidly aging population and slow growth in the labour force. We do not believe that the rulers in Colombo truly appreciate the significance of this change in the nation's demographics.