(Text of Sangarapillai Memorial address, “Reviving the Northern Economy in Sri Lanka” by Dr. Indrajit Coomarasamy, delivered on January 21, 2023 at the Colombo Tamil Sangham, Wellawatte, Sri Lanka)

Good evening I think Naga has made I think excuses for my lack of ability to speak in Tamil.

Let me say that it’s a great privilege to deliver the Memorial lecture this year and I thank Dr Nage for inviting me to deliver these remarks.

Clearly Mr Sangarapillai was a giant as far as particularly as far as the Colombo Tamil Community was concerned. This building and there’s a very Lively and very rich activities of the sangam is testimony to what he would have started amongst the community in this area so it’s a privilege, a particular privilege to be able to come and deliver this lecture now. I suspect that most of you in this audience probably know more about the subject I’m going to speak about than I do. And that is the Revival and the development of the northern economy, it is not an area that I’m particularly knowledgeable about. But I will try to share some thoughts from a broader perspective. I’m going to start by talking about the need to have very sound macroeconomic policies in this country. Having a Central Banking background you won’t be surprised that that is where I’m going to start. Because unless one has macroeconomic stability you can’t have development in any part of the country; it becomes much more difficult.

Second thing I want to do, is talk about is the European experience.

Europe was racked by War for over a century and in that period it had two world wars, tremendous destruction; and at the end of it the way they’ve created peace and sustainable peace is by having greater integration on the European continent. So I think we need to see, were there any lessons for us there.

The third thing – area I’d like to focus on is integration with India. India is booming. It is expected to be the fastest growing large economy in this decade and see whether that opens up opportunities for Sri Lanka as a whole; but particularly for the North which is very well positioned to take advantage of the particular dynamism that is currently being experienced in the five southern states of India.

And finally I want to share some thoughts about specific things that could be done in the Northern province.

So what about the sound macroeconomic policies; you know at the time of Independence Sri Lanka was second to Japan on most socio-economic indicators. The regression we’ve experienced since then in my view is to a significant extent caused by macroeconomic stress. And the main cause of that macroeconomic stress has been the governments. By the three policies the government’s budgetary policies have been afflicted by a toxic combination of populist politics and an entrenched entitlement culture amongst all of us as the people of Sri Lanka. And those two phenomena have fed off each other in a kind of negative feedback loop and have dragged this down. So we need to break that cycle in order to progress.

So unless one breaks that cycle unless one has more sound fiscal management of the economy and if also in the over the last 40-50 years the fiscal indiscipline and the effects of that fiscal indiscipline have been compounded by fiscal forbearance in monetary policy. The central bank was too ready to print money to finance the government’s deficit. It was too ready to have what you call Financial repression. That is to force interest rates down to find cheap money for the government. That is not really the business of the Central Bank. It was dominated by the politicization that has taken place of the central bank over the last many years. But that is what is now the hope is that this will be changed by the new Central Bank Act. So we have to break out of this kind of rather constraining compulsions that come from this macroeconomic stress that the country has experienced over almost from the time of Independence.

In fact a famous British Economist professor John Robinson from Cambridge came to Sri Lanka in 1959. She said you should learn if it was alone then you Ceylonese have eaten the fruit before you planted the tree. That is what had happened really. We you know had all these welfare responses and we’ve consumed. But we didn’t have increased productivity and produce and have sufficient real growth in the economy; that the people of the country could sustain so what do we do about this?

There are two measures that I think are going to be part of the government’s policies going forward.

One is that there’s a fiscal management responsibility act which was actually enacted about 2002 or 2003. It sets certain targets for the government’s debt and the government’s deficit and the timeline within which these targets have to be reached. But every time we come close to the end of the timeline, parliament extends the deadline. So it’s utterly ineffective. The Lord relax teeth. So I hope that the responsible fiscal management responsibility act will be given more teeth by making sure that any amendment to it any extension of the deadline and requires a special majority in parliament; that you can’t do it with a simple morality; but you have to do it with the two-thirds or maybe even a (75 percent) majority. Because otherwise this continuous fiscal profligacy is likely to continue.

I don’t see our politicians learning any lessons even in this crisis. One sees that their behavior hasn’t really changed very much which is very concerning. So I think one needs to tie our hands by having clear frameworks for making fiscal policy and monetary policy; and embedding it in the law. So one thing to do is to strengthen the physical management responsibility act by one embedding the primary surplus as a clear target; that is the government’s total revenue must exceed total expenditure minus interest payments. If you achieve that you do not add to the debt stock; you are able to meet the current year’s expenditure out of the current Year’s revenue. If you do not do that you’re constantly going to get into this problem. So that one should be part of the targets in the physical management responsibility act.

And any changes to it in extending deadlines etc should require a special majority in Parliament ideally 75 percent. I think not even more than two-thirds because this has been such a problem for us. We need to make it very difficult for our political Masters to be as indisciplined as they have been over the last many years. On the Central Bank side the bank has been put under enormous pressure to print money to keep interest rates down for the government to get cheap money. And of course if you keep interest rates lower than they should be in terms of the overall macroeconomic dynamics then you have too much credit too – much money creation and inflation. So one, stop the Central Bank from investing in the primary market for treasury bills and two, move away from this financial repression by setting interest rates through market determination.

So that’s you know I mean in a nutshell what I feel should be done.

In terms of strengthening macroeconomic policy making and attacking what has been the main cause in my view for our regression from the lofty position that we enjoyed in Asia at the time of Independence, now the second theme I mentioned was the EU project – the formation of the European Union. Now of course things that work in one part of the world will not necessarily work in another part of the world. And things that work at a particular time in history will not work necessarily in another time in history. But still I think we need to have an open mind; and examine things that have happened elsewhere to see whether there are any lessons there for us to learn.

Now as I said Europe went through more than A century of work, almost continuous war in Europe. The main theater of War was between France and Germany. There were two world wars and the terrible destruction that they brought in the European continent and globally. At the end of the second World War Charles de Gaulle the president of France and Conrad adona the president of Germany got together and decided one way to avoid war. To put an end to war on the European continent was to find ways and means of integrating the European economies more and more. That thesis was that if economies are integrated people will not go to war against each other. This is something we need to think about; as well are there ways and means of integrating the northern economy with the rest of the rest of the Sri Lankan economy, will that help. You can have supply chains in, agriculture supply chains in fisheries, supply chains in terms of Information Technology, IT; and BPO, so there are various ways in which you can link the northern and southern economies. If those linkages are are strong and sustainable then I suspect the prospects of having lasting peace and Reconciliation would be greater in my view. So that’s something we need to think about. That doesn’t mean that one gives up some of the issues that are still live. Issues in terms of the implementation of the 13th Amendment, the missing persons reparations, these are all things that should continue to be talked about. But I think there’s a bigger picture one should have, one’s eyes on and that is to see how one integrates the various parts of Sri Lanka North and South, East and West etc. Greater integration will give great in my view, a sustained basis for peaceful development of the whole country.

In Europe they started with the European coal and steel agreement in 1952 and then went all the way to the euro as a single currency. For the whole European area, that’s the kind of thing that one can think about to see how whether we can learn lessons in terms of our own circumstances.

Then the other point that I wanted to turn to, is the integration with India. Greater integration with India and this is not just for the Northern Province, it’s for the whole of Sri Lanka.

I think if we want to get out of the situation we are in now, if one option that is there for us, to take as a country and the North has a
particular advantage because of proximity through India. But for the whole country there is the prospect of really latching on to what is happening in India. What is happening in India many professional economists say, India is going to be the fastest growing large economy in the next decade; and Prime Minister Modi has said that he wants to make India a global supply chain hub. A lot of the supply chains that are moving out of China, because of the fracturing of the global economy and the concerns that have emerged in terms of globalization. And the need that many countries now fail to take greater care in terms of their dependence on China is playing into India’s hands which is benefiting India. Billions of dollars of investment are going into India and if India does take off; it has been going quite fast but if it has real takeoff in the way that China took off or Japan took off then Sri Lanka should be able to benefit from that. Because if you study what happened when first Japan and then China took off, all the countries in that region benefited by hooking into this Japanese and Chinese supply chains; so we can replicate that here as well; and earlier though we had proximated to India; and we’ve had proximity forever of course. But it was very difficult to do cross-border business; particularly have cross-border supply chains because infrastructure in both countries was so weak. The roads were bad, the ports were bad, the airports were bad – so the transaction costs of doing business across the borders was very high. Therefore it didn’t make much sense to have this cross-border supply chains but now infrastructure in both countries is improving and therefore the basis for having a cross-border supply chains has got much much more proficient.

So that is another opportunity and the North of the country given its proximity to particularly the five Southern states of India that is Tamil Nadu, Kerala, Telangana, Karnataka, Andhra Pradesh all of them are booming. We are here 20 miles across the Palk Straits and if now there’s an International Airport, hopefully KKS port will also be restored and revitalized. Rameswaram -Thalaimanar very hopefully will be revived and therefore those transport links will also be stronger. Which will give a further boost to a possible economic activity across the two countries. If you take all that together I think that is another opportunity that the North End of the
country, not just the North, the whole country in fact needs to grasp in the years going forward.

Now turn to not in particular and some ideas about what one can do specifically about the North. I think around 2017 the late Mangala Samaraweera became concerned about what was happening in North. That was the time when there were these suicides of particularly of women in the North because of indebtedness. Now the strategy after the war ended was to one to restore major infrastructure the railroad, the roads etc. And two to provide micro credit for the people for self-employment opportunities. Now the restoration of the infrastructure was obviously useful though the infrastructure that particularly benefited small producers were not really focused upon. It was the main trunk roads and the railroad etc. But that in itself was beneficial, but using micro credit to provide financing for a population that had been caught up in a conflict for 30 years and when there was enormous pent-up consumption
putting money into the hands of those people and expecting them to then use it productively was not really very realistic. Clearly they were going to spend on things they hadn’t spent for 30 years. The consumption items they have been deprived of for 30 years equally.

The 30-year war also deprived some of the most dynamic people who had left those areas. And the people who were there, some of them did not have the wherewithal to take opportunities in terms of self-employment. It was asking too much of them of a population that had been caught up in a thirty year conflict to find the wherewithal to have successful self-employment projects. So people got into trouble. They took the debt and spent it on consumption and didn’t have the capability to have successful self-employment opportunities. They were indebted and could not get out of the death trap. There were as I said sometimes even suicides of a number of women in that area, that attracted Mangala Samaraweera’s attention. Also in the central bank we were very concerned because the central bank is the regulator of these finance companies and we wanted to see what we could do to do things better; so that that kind of problem did not persist.

With that there was an interest that was particularly focused upon the North and also at that time Dr Ahilan Kadirgamar came and spoke to us at the central bank and with the minister. He put together a team of five eminent Jaffna based academics, really thinkers
they were some of the professionals I would put them as five eminent professionals; and they developed a framework for development for the Northern province. This framework was then presented by Mangala Samaraweera to the donor community. This was in 2019 and the donor Community was very interested. They wanted the framework fleshed out into projects and programs which they could support. But of course the government changed and sadly Mangala Samaraweera is no more. So that work is still in abeyance.

But that framework is still available if you go into the central bank or the treasury websites you will see it and it’s still a framework. It needs to be translated into projects, programs, activities etc. But it’s an extremely useful framework in my view in terms of
pointing the direction in which one can have a holistic approach. You know there is tremendous amount of good work being done particularly by diaspora Tamils who have come back and have done a tremendous amount of social work to uplift. Particularly those who are in need and that work is extremely helpful and it needs to be lauded. But you also need an overall framework and a holistic approach to develop the whole of the Northern province. In order to do that it’s important to have a development agency talked about; having a coordinating entity in the Ministry of Finance to do that, it could be in the Ministry of Finance but in my view it’d be better to
have a development agency which is chaired by the district secretary and meaning which includes all the divisional secretaries. But also people from the private sector, from civil society and from the diaspora to have representation from all those stakeholders and to develop a holistic program for the development of the Northern Province.

Now the areas of with promise are well known right there’s agriculture, there is fisheries and there’s I.T. Those are the three most obvious areas, there could be others. Now when it comes to agriculture we need to be very careful. You know agriculture in Sri Lanka employees 25-27 percent of the labor force and gives us only about seven or eight percent of GDP. What that means is that productivity in agriculture is exceedingly low. We trap a large segment of our population in low productivity low income economic activity. We get their noses above the water and we do that in a very expensive way. There is free water, there is a fertilizer subsidy, there is a guaranteed price all these things have to come from. The government’s fiscal outlays and in the foreseeable future the government’s capacity to make those outlets is going to be severely constrained. We need to find another way of doing this. We need to modernize agriculture so that productivity is higher and people are able to stand on their own feet. It’s not that they don’t know this, it is not rocket science. People in agriculture know what to do but it’s the politics that has to be put right. Because politicians are scared to take away subsidies. They’re scared you know to take some tough decisions. It’s tough love but in the long run it’s good for the country and the people but in the short run there will be disruption. One has to get through that.

In fact there was a team from Harvard that did some work in Sri Lanka. They said at our level of development only 15 percent of the population should be in agriculture, not 27. So we have this surplus in agriculture and at the same time we say we don’t have enough labor, we don’t have enough labor for the apparel sector, we don’t have enough labor for the tourism sector; that’s simply because we are, as I said, trapping people in low productivity, low-income agriculture. We need to basically make these changes. Very difficult, it’s very easy to stand here and talk about these things but politically tough decisions have to be made. But these are the kind of decisions we have to make, if we are to put the country on a new course which takes us away from this repeating cycles of instability that has taken us to where we are today. You know the framework that I talked about looks at three interdependent pillars to develop this holistic strategy.

One is production land, labor, capital the other is the enabling environment and the third is the social foundations of development.

In terms of the factors of production, we need to have affordable investment capital. Affordable working capital and Jaffna of all the areas in the country has had a very successful co-operative movement over the years and I think Ahilan Kadirgamar and his team are working very hard to revive The cooperative banks and the cooperative htrift societies, who are able to provide credit in a much more targeted way to the small producers; who have difficulty in getting finance. And the labor as well, to try to increase female labor force participation. There are of course child care, safe transport etc. are things that need to be attended to.

And then land is an intractable problem. The state owns 80 of the land in the country. It’s very difficult for anybody to get land to do business. I know lots of people who’ve come from abroad, who’ve tried to get land to invest in and create employment for the people of the area. Extremely difficult to get land because of the state’s control of land. We need to find more business friendly ways of handling land.

Water, again clearly that’s crucial in the North. That’s a major constraint. The minor irrigation tanks we need to rehabilitate them. Then the Iranaimadu tank; for years we’ve talked about how to harness that water for the Northern Province. We need to take firm decisions and move ahead on that front.

Land fragmentation, particularly in the peninsula the land is highly fragmented. It’s very difficult to have economically viable units. We need to find the ways and means of making, develop having critical mass in the land. In Thailand they have farmer organizations somewhat similar to our cooperatives, so we’ve got to look at ways and means of overcoming this problem of land fragmentation. Whereby the size distribution of holdings are so small that they’re really unviable without massive subsidy from the government and the government no longer has the money to provide those subsidies. And then the enabling environment, technology research and development infrastructure, particularly infrastructure which supports the small producers; regulations which protects the natural resource base but without being a hindrance and a burden on business. You need to facilitate business through these regulations which are necessary to protect the natural resource base and to have health and safety standards. But there shouldn’t be a burden in terms of adding costs and one should strengthen state institutions to provide effective support particularly through building a producer organization and networks and markets to develop local regional and international supply chains.

You know when it comes to SMEs there are four areas where you need to intervene and look after. One is training at the beginning so that the people have the wherewithal and the knowledge to undertake economic activity through their SMEs. The second is inputs if they need to be able to obtain the inputs for their economic activity. Third is financing if you’re not in affordable financing and the fourth and affordable financing not by financial repression and forcing interest rates down artificially, but by having sound macroeconomic framework. Which actually gives you a low interest rate naturally by having the kind of stability in the system. The most intractable problem is marketing.

If you clear the marketing channel everything else falls into place, if you have a way of marketing your product you’ll get the financing you need, you can go and buy the inputs, you can get training etc. You need to clear marketing, you need to create supply chains, for that you need these various kind of centers, at first you could, I think there’s been talk of having an economic center in Kilinochi and that should move ahead and then some satellite. I think they’ve talked about 10 satellite centers – economic centers in the rest of the Northern province. So all these things I think should be put in place so that you have as I said a holistic approach to tackling the marketing problem.

For instance in Fisheries you know we need the cold chain; we need maybe trawlers whatever, you need investment to take the activity into a higher level.

Housing you know we think the government has to do anything do everything. That if there are houses to be built that the government has to build houses; well the government no longer has money to build anything really. So again we need to see the diaspora community which is doing so much work. To see whether the diaspora Community can get together and provide affordable housing for those in need.

These are I think new ways of helping and I think also providing grants and low-cost loans through the co-operative rural bank and the thrift and credit committees. Those members of the diaspora who want to help can see whether they can channel money through these financial institutions because Ahilan Kadirgamar is the person you should get in touch with. He’s doing an enormous amount of work in strengthening the systems in these institutions. So that you can have greater confidence in terms of giving them money so that’s something to be considered.

Those are some thoughts that I thought I would share with you.

Let me conclude basically by saying that while we should not forget the past and the issues that still remain unresolved it is extremely important to look forward. And to grasp the opportunities that are out there not to wait for the government to do things but for the community, the entrepreneurial community in the Northern Province, the diaspora all can get together and scan the landscape to see
what the opportunities are. I try to identify some of them and then really to grasp them and move forward.

I must finish by sharing an anecdote by an extremely senior official of the Asian development Bank told me; he said you know when I attend various meetings when I go to East Asia and have representatives of those countries had a meeting.

Now as you know Japan and Korea have had a very troubled history. Japan and China have had a very troubled history. Yet he said when these countries get together they are very pragmatic. They’re trying to work out how to make money and what are to focus on the commercial opportunities that are out there. In South Asia he said, whenever big countries of the region got together they moaned about what has happened over the last 75 years. They accused each other of this happened that happened; you did this, you did that
and that’s what that is all they focus upon he says. The meeting finishes and the agenda of the day is largely ignored.

I think we mustn’t fall into that trap because there are opportunities that can be grasped and we should focus on that and go ahead and look to the future with confidence, and I think in a very pragmatic and open-minded way.

Thank you all very much for your time.