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Sri Lanka - ECONOMY
THE DOMINANT SECTOR of the Sri Lankan economy historically has been wet rice (paddy) cultivation. Its importance in ancient times is demonstrated by the extensive irrigation works constructed in the north-central region of the island in the first millennium A.D. In the thirteenth century, the civilization based on these reservoirs began to decline, and population shifted to the wet zone of the southern and southwestern areas, where irrigation was less necessary to grow rice. Cinnamon and other spices which were valuable in the European market became important export commodities in the sixteenth century, when Europeans, first the Portuguese and then the Dutch, established control over the coastal areas of the island.
Commercial agriculture came to dominate the economy during the British period (1796-1948). Extensive coffee plantations were established in the mid-nineteenth century. Coffee failed when a leaf disease ravaged it in the 1870s and 1880s, but it was quickly replaced by the important commercial crops of tea, rubber, and coconut. Although wet rice cultivation remained important, Sri Lanka had to import more than one-half of the rice it needed during the late nineteenth and early twentieth centuries because of the land and labor devoted to the commercial crops. At independence in 1948, almost all of the islands' foreign exchange earnings were derived from commercial agriculture.
The fundamental economic problem since the 1950s has been the declining terms of trade. The proceeds from the traditional agricultural exports of tea, rubber, and coconut have had less and less value in the international marketplace. Beginning in the early 1960s, governments responded by intervening directly in the largely free-market economy inherited from the colonial period. Imports and exports were tightly regulated, and the state sector was expanded, especially in manufacturing and transportation. This trend accelerated between 1970 and 1977, when a coalition headed by the Sri Lanka Freedom Party nationalized the larger plantations and imposed direct controls over internal trade.
The United National Party (UNP) contested the 1977 general election with a platform calling for less regulation of the economy. After its electoral victory, the new UNP government made some effort to dismantle the state sector in agriculture and manufacturing. At the same time, it encouraged private enterprise, welcomed foreign investment and slackened import controls. It also shifted spending away from subsidies and social welfare to investment in the nation's infrastructure, most notably a massive irrigation project, the Mahaweli Ganga Program, which was expected to make Sri Lanka self-sufficient in rice and generate enough hydroelectric power to fill the nation's requirements. These policies resulted in higher rates of economic growth in the late 1970s and early 1980s, but at the cost of a mounting external debt. Foreign aid from the United States, Western Europe, Japan, and international organizations kept the economy afloat.
Sri Lanka's economy became more diverse in the 1970s and 1980s, and in 1986 textiles surpassed tea for the first time as the country's single largest export. Nonetheless, the performance of the traditional agricultural exports remained essential to the country's economic health. Other important sources of foreign exchange included remittances from Sri Lankans working overseas, foreign aid, and tourism.
<>Nature of the Economy
Sri Lanka's economic prospects in early 1988 were linked at least in part to the political and security situation. If political violence could be brought under control, the government had commitments from foreign investors and donors to finance a reconstruction program that would ensure economic growth in the short term. If the violence were to continue, the diversion of resources into defense and the negative impact on tourism and foreign investment appeared likely to result in economic stagnation.
Agriculture, both subsistence and commercial, has played a dominant role in Sri Lanka's economy for many centuries. The Portuguese and Dutch, who ruled the coastal regions of the island from the sixteenth through the eighteenth centuries, were primarily interested in profiting from cinnamon and other spices. Trade with India, Sri Lanka's nearest neighbor, was also important during this period. Sri Lanka exported pearls, areca nuts, shells, elephants, and coconuts, and in return received rice and textiles.
The island's economy began to assume its modern form in the 1830s and 1840s, when coffee plantations were established in the Central Highlands. Coffee soon became the dominant force in the economy, its proceeds paying for increasingly large imports of food, especially rice. When coffee fell victim to a leaf disease in the 1870s, it was quickly replaced by tea, which soon covered more land than had coffee at its height. Coconut plantations also expanded rapidly in the late nineteenth century, followed by rubber, another cash crop introduced in the 1890s. Stimulated by demand generated by the development of the automobile industry in Western Europe and North America, rubber soon passed coconuts in importance. These three products--tea, coconuts, and rubber-- provided the export earnings that enabled Sri Lanka to import food, textiles, and other consumer goods in the first half of the twentieth century. At independence in 1948, they generated over 90 percent of export proceeds.
Wet rice was grown extensively as a subsistence crop throughout the colonial period. In the nineteenth century, most of it was consumed in the villages where it was grown, but in the final decades of British rule the internal market in rice expanded. Nonetheless, more than half of the rice consumed was imported, and the island depended on the proceeds of plantation crops for its food supply.
The economy gradually became more diverse after the late 1950s, partly as a result of government policies that encouraged this trend. The main reason successive administrations tried to reduce the country's dependence on tea, rubber, and coconuts was the long-term decline in their value relative to the cost of imports. Even when Sri Lanka increased the production of its major cash crops, the amount of imports that could be bought with their proceeds declined.
Much of the diversification of the economy, especially in the 1960s and the early 1970s, took the form of import substitution, producing for the local market goods that the island could no longer afford to import. Sri Lanka also had some success in diversifying exports after 1970. The proportion of exports linked to the three traditional cash crops fell from over 90 percent in the late 1960s to 71 percent in 1974 and 42 percent in 1986. Textiles, which made up only 0.7 percent of exports in 1974, accounted for over 28 percent in 1986.
In 1986 agriculture, forestry, and fishing made up 27.7 percent of the gross national product (GNP), down from 39.4 percent in 1975. In 1956 wholesale and retail trade accounted for 19.9 percent of GNP, and manufacturing for 15.6 percent. Transport, storage, and communications stood at 11.2 percent of GNP, and construction at 7.7 percent. The relative importance of the various sectors of the economy was fairly stable during the 1980s.
The role of government in the economy during the final decades of British colonial rule was considerable. The plantation economy required extensive infrastructure; the colonial state developed and owned railroad, electrical, postal, telegraphic, telephone, and water supply services. Quasi-state financial institutions served the colony's commercial needs, and during World War II the government set up production units for plywood, quinine, drugs, leather, coir, paper, ceramics, acetic acid, glass, and steel. Welfare policies also began during colonial rule, including a network for free and subsidized rice and flour established in 1942. Free education, relief for the poor, and subsidized medical care were introduced in the late British period. Moreover, after 1935 the government took an active role in the planning and subsidizing of colonization schemes. This policy was designed to remove landless peasants from heavily populated areas to newly irrigated tracts in the dry zone.
Economic policy since Independence is divided into two periods. During the first, which lasted from 1948 to 1977, government intervention was often seen as the solution to economic problems. The expansion of government participation in the economy was fairly steady, resulting in a tightly regulated system. This trend was especially marked during the period of S.R.D. Bandaranaike's second government, from 1970 to 1977, when the state came to dominate international trade and payments; the plantation, financial, and industrial manufacturing sectors; and the major trade unions outside the plantation sector. It also played a major role in the domestic wholesale and retail trade.
The trend toward greater government involvement was largely a response to the deteriorating terms of trade. The plantation economy had financed social programs such as subsidized food in the late colonial period, but when the value of exports declined after 1957, the economy's capacity to support these programs was strained. When the foreign exchange reserves of the early 1950s dwindled, import-substituting industrialization was seen as a solution. Because the private sector viewed industrial development as risky, the government took up the slack. When balance of payment deficits became chronic, some nationalizations were justified by the need to stem the drain of foreign exchange. Similar concerns led to the tighter regulation of private business and the establishment of state-owned trading corporations. When there were shortages of necessities, governments expanded state control over their distribution in order to make them available at low prices.
The 1977 elections were largely a referendum on the perceived failures of the closed economy. The UNP, which supported a deregulated, open economy, won decisively. The new government rejected the economic policies that had evolved over the previous twenty years. Some observers believed that the economy had been shackled by excessive regulation, an excess of consumption expenditure over investment, and wasteful state enterprises. Under the UNP, market forces were to play a greater role in allocating resources, and state enterprises were to compete with the private sector.
The main elements of the new policy were investment incentives for foreign and domestic capital, a shift in the composition of public spending from subsidies to infrastructure investment, and a liberalized international trade policy designed to encourage export-led growth. Employment creation was a central objective, both through encouragement of domestic and foreign capital investment, and through an ambitious public works program, including the Accelerated Mahaweli Program, which aimed to bring new land under irrigation and substantially increase hydroelectric generating capacity. Two other policies that sought to create employment were the establishment of investment promotion zones (free trade zones) and extensive government investment in housing.
The role of government during the decade after 1977 remained significant; the public investment program, for instance, was implemented on a greater scale than anything attempted previously, and in early 1988 the state remained heavily involved in many areas of economic activity. But while the government increased its efforts to develop the nation's infrastructure, it reduced its role in regulation, commerce, and production. Its initiatives received the enthusiastic support of the international development community. As a result, Sri Lanka received generous amounts of foreign aid to finance its post-1977 development program. This foreign assistance was integral to the government's economic strategy. Because budget deficits were large even before 1977, external financial resources were necessary to pay for the increased spending on infrastructure and to make up for the revenue lost as a result of the tax incentives given business. Similarly, relaxing import controls put pressure on the balance of payments, which could be relieved only with the help of foreign aid.
During the early years of independence, successive governments placed little emphasis on development planning, in part because the immediate economic problems appeared to be manageable. The National Planning Council was established in 1956 as part of the Ministry of Finance. Between 1957 and 1959, the council and the Central Bank of Sri Lanka invited a number of foreign economists to visit Sri Lanka and offer the government both their diagnoses of the country's economic problems and their prescriptions for the planning and implementation of recommended remedies. These studies provided many of the rationales for economic policies and planning in the 1960s.
In 1959 the National Planning Council issued a Ten-Year Plan, the most ambitious analysis of the economy and projection of planning that had yet been officially published. This plan sought to increase the role of industry in the economy. Unfortunately, its forecasts were based on faulty projections of population and labor force growth rates. Moreover, attempts to implement it collided with the exchange and price crunch of 1961 and 1962, and the plan became increasingly out of touch with the changing economic situation.
A new Ministry of Planning and Economic Affairs (no longer in existence) was established in 1965. The ministry decided not to draft another single long-term plan involving a five- or ten-year period. Instead, it drew up a number of separate, detailed, well-integrated, five-year plans involving different ministries. The government targeted agriculture, especially wet rice, as the area in which growth could best be achieved.
The UNP government that came to power in 1970 shifted toward a more formal and comprehensive state direction of the economy. The Five-Year Plan for 1972-76 had two principal aspects. First, it sought to remove disparities in incomes and living standards. Second, the plan sought to promote economic growth and to reduce unemployment. It envisioned rapid growth in agriculture, not only in the traditional crops of wet rice, tea, rubber, and coconut, but in such minor crops as sunflower, manioc, cotton, cashew, pineapple, and cocoa. Like the Ten-Year Plan of 1959, this plan proved to be based on overly optimistic assumptions, and it soon ceased to exercise influence on the government's economic policy. In 1975 it was replaced by a Two-Year Plan that placed even greater emphasis on agricultural growth and less on industrial development.
After 1977 the government continued to accept the principle of state direction of economic activity, but in contrast to the 1970-77 period the government encouraged the private sector to participate in the economy. Its first Five-Year Plan (1978-83) included an ambitious public investment program to be financed largely by overseas grants and loans. Its immediate objective was to reduce unemployment, which had risen during the tenure of the previous government.
A series of five-year rolling investment plans was set in motion by the Ministry of Finance and Planning in the 1980s. The plan for the 1986-90 period envisaged investment of Rs268 billion with the emphasis on infrastructure projects such as roads, irrigation, ports, airports, telecommunications, and plantations. Of this total, 50 percent was to be spent by the state sector. Foreign sources were to supply Rs69 billion. The target annual average growth for the gross domestic product (GDP) was 4.5 percent, a decrease from the 5.2 percent envisaged by the plan for the 1985-89 period and the 6 percent actually achieved between 1977 and 1984.
Growth in GDP was estimated at 3 percent in 1987, down from 4.3 percent in 1986, and the lowest level in a decade. By 1987 it was clear that the ongoing civil unrest was causing serious economic difficulties, mainly because rapidly increasing defense outlays forced the government to cut back capital expenditure and to run a large budgetary deficit. Concern over the decline in foreign investment and extensive damage to infrastructure mounted as sectors such as tourism, transportation, and wet rice farming suffered production losses directly related to the decline in security.
By early 1988, the ethnic conflict had resulted in extensive property damage. Infrastructure damage in Northern and Eastern provinces was estimated at Rs7.5 billion in August 1987 and was expected to be revised upwards to include the widespread destruction in the Jaffna Peninsula. In the predominantly Sinhalese areas, riots against the 1987 Indo-Sri Lankan Accord caused damage to government property estimated at Rs4.8 billion.
In early 1988, future economic prospects were closely linked to the security situation. Late the previous year, the government succeeded in obtaining commitments from foreign nations and international organizations to finance an extensive reconstruction program for the 1988-90 period. If there were a pronounced ebb in the political violence plaguing the island nation, it would be probable that the official target of Rs80 billion foreign aid over this three-year period would be reached. Aid on this scale, which would be a substantial increase on the already generous levels received, would not only enable the rebuilding of infrastructure destroyed by the violence but also fuel growth and allow the large trade and budget deficits to continue. Accordingly, the 1988 budget foresaw a sharp decline in defense spending and an increase in capital expenditure. These economic plans, however, depended on a peaceful solution to the country's political problems. If political violence escalated in subsequent years, not only would the government have to shift its spending back to defense, but some of the expected foreign aid probably would be suspended.
Agriculture - including forestry and fishing - accounted for over 46 percent of exports, over 40 percent of the labor force, and around 28 percent of the GNP in 1986. The dominant crops were paddy, tea, rubber, and coconut. In the late 1980s, the government-sponsored Accelerated Mahaweli Program irrigation project opened a large amount of new land for paddy cultivation in the dry zone of the eastern part of the island. In contrast, the amount of land devoted to tea, coconut, and rubber remained stable in the forty years after independence. Land reforms implemented in the 1970s affected mainly these three crops. Little land was distributed to small farmers; instead it was assumed by various government agencies. As a result, most tea and a substantial proportion of rubber production was placed under direct state control.
Since the beginning of the twentieth century, agriculture has been dominated by the four principal crops: rice, tea, rubber, and coconut. Most tea and rubber were exported, whereas almost all rice was for internal use. The coconut crop was sold on both domestic and international markets. The importance of other crops increased in the 1970s and 1980s, but no single crop emerged to challenge the four traditional mainstays.
Tea, rubber, and to a lesser extent, coconut are grown on plantations established in the nineteenth and early twentieth centuries. Before the plantations existed, villagers carried out three main types of cultivation. The valley bottoms and lowlands were occupied by rice paddies. These paddies were surrounded by a belt of residential gardens permanently cultivated with fruit trees and vegetables. The gardens in turn were surrounded by forests, parts of which were temporarily cleared for slash-and- burn cultivation, known as chena. Various grains and vegetables were grown on chena lands. The forests were also used for hunting, grazing for village cattle, gathering wild fruit, and timber. In some villages, especially in the dry zone, there was little rice cultivation, and people depended on the gardens and forests for their livelihood.
Under legislation passed in 1840, the title of most forestland was vested in the government. In order to stimulate the production of export crops, the colonial administration sold large tracts to persons who wished to develop plantations. At first most buyers were British, but by the end of the nineteenth century many middle-class Sri Lankans had also acquired crown land and converted it to plantation use. The early coffee and tea plantations were often situated at high elevations, some distance from the nearest Sinhalese villages, but as time went on more estates were developed on land contiguous to villages. The precise impact of the plantations on village society remains controversial, but it is widely believed in Sri Lanka that the standard of living of villagers suffered as they lost use of the forestland.
Although the large coffee, tea, and rubber plantations relied mainly on Tamil migrants from southern India for their permanent labor supply, Sinhalese villagers were employed in the initial clearing of the forests, and some performed casual daily labor on the plantations in seasons when there was little work in the villages. The coconut plantations, being spatially closer to villages, employed considerable Sinhalese labor.
By the early twentieth century, there was no longer much land suitable for the expansion of cultivation in the wet zone, and in the 1930s the focus of agricultural development shifted from the wet zone to the dry zone and from plantation crops to rice. There was ample uncultivated land in the dry zone of the north-central region, but three major obstacles had to be overcome--the prevalence of malaria, the lack of a reliable supply of water to carry out rice cultivation, and the absence of farmers to cultivate the soil. The first of these problems was solved by the success of the antimalarial campaigns of the 1940s. The others were tackled by government policies that sought to restore and build irrigation works and resettle peasants from the wet zone in the newly irrigated areas. In the 1980s, the pace of this program was quickened by the Accelerated Mahaweli Program.
The most important change in agriculture in the forty years after independence was the increase in rice production. This increase resulted from better yields and the enlarged amount of land under cultivation. In contrast, with the exception of rubber in the 1950s and 1960s, the principal export crops showed only modest gains in productivity, and the amount of land devoted to tea and rubber fell. After around 1970, there was growth in the production of other crops, including onions, chilies, sugar, soybeans, cinnamon, cardamom, pepper, cloves, and nutmeg.
Fishing, a traditional industry in coastal waters, accounted for 2.1 percent of GNP in 1986. Government efforts to offer incentives for modernization had little impact. The civil disturbances of the 1980s badly affected the industry. Before 1983 the northern region produced nearly 25 percent of the fish catch and around 55 percent of cured fish, but in the mid-1980s fishing was not possible there for long periods. The value of the fish catch off the northern coast fell from Rs495 million in 1981 to Rs52 million in 1986. Production off the southern and western coasts and from inland fisheries grew during this period, but not enough to prevent a decline in the island's total catch. In 1987 the government announced plans to provide funds for investment in fishing in the North and East, but implementation was likely to depend on improved security in these areas.
Although there have been periodic agricultural censuses, they were limited in purpose and did not provide an overall picture of land use. In 1961, however, a survey of the use of the island's physical resources was compiled based on a 1956 aerial photographic survey of the entire country. The survey indicated that, of the country's total area of nearly 66 million hectares, 29 percent was under permanent cultivation, just over 15 percent under chena cultivation, 44 percent under forest cover, and about 6 percent under various types of grasses. Nearly 33,000 hectares consisted of swamp and marshlands, and about 63,000 hectares, or 1 percent, unused land. Just over 3 percent of the island's surface was covered by water. Of the total area, approximately 23 percent was in the wet zone, about 63 percent in the dry zone, and the balance lay in an area that the survey labeled "intermediate," as it had characteristics of both zones.
Of the land under permanent cultivation in 1961, which included cropland, land under plantation, and homestead gardens, the survey indicated that some 75 percent was in the wet and intermediate zones and about 25 percent was in the dry zone. Chena cultivation, on the other hand, was predominantly in the dry zone, as were the grass, scrub, and forestlands. Although forest covered almost half the country, only about 0.2 percent and 3.1 percent of the forests were characterized as of high and intermediate yield, respectively. The study further indicated that approximately 70 percent of the land in the wet zone was under permanent cultivation, whereas in the dry zone under 12 percent was being cultivated on a permanent basis.
Since 1961 irrigation has enabled a much greater proportion of land in the dry zone to be cultivated and in 1978 it was estimated that nearly one-third of the country's dry-zone area was under permanent cultivation. This proportion increased in the 1980s, when lands irrigated by the Accelerated Mahaweli Program were added to the total. As a result, the proportion of forestland declined and was estimated at just under 40 percent in 1987.
Although the forests had few high-yield timber stands, many areas suffered from deforestation because of the heavy demand for firewood in the 1980s. In 1987 it was estimated that 94 percent of households used firewood for cooking. Scarcities of firewood led to price increases well above the general level of inflation in the 1980s.
Government support for farmers takes several forms, including the provision of credit for producers, the setting of minimum prices for agricultural produce, the building of irrigation works, and the encouragement of internal migration to newly irrigated areas. Since the late colonial period, the government has played a growing role in the provision of credit to smallholders on favorable terms. Until 1986 the main instrument of this policy was the subvention of cooperative societies. Agricultural credit took three forms: short-term loans to farmers for the purchase of seeds and fertilizers; medium-term loans, intended for the purchase of machinery; and long-term loans for capital expenditure on storage, transport, and rice-milling apparatus. The long-term loans were not available for individual farmers, but were used by the cooperative societies to acquire infrastructural facilities.
The actual performance of credit provision through cooperatives generally fell short of expectations. Institutional credit did not displace the older sources of credit, such as the village moneylender, friends, and relatives. The inability to repay loans, procedural difficulties, and the existence of unpaid loans already taken from the cooperatives were some reasons given by farmers for preferring noninstitutional credit sources. Another problem with the credit furnished by cooperatives was the high rate of default. This rate may have been attributable partly to real difficulties in repayment, but it also was the result of a widely held impression that government loans were a form of social welfare and that it was not necessary to repay them.
The New Comprehensive Rural Credit Scheme implemented in 1986 sought to increase the flow of credit to smallholders. The Central Bank guaranteed up to 50 percent of each loan in the event of losses incurred by banks lending under the program, and eligible farmers received a line of credit for three years. Loans were automatically rescheduled at concessional rates when crops were damaged by events beyond the farmer's control. In 1986 cultivation loans under this program amounted to nearly Rs257 million, about 74 percent for paddy and the rest for other food crops.
Another important policy was the Guaranteed Price Scheme, which came into effect in 1942. Under this program the government agreed to purchase rice and some other produce at set prices. The intention was to support the farmer's standard of living. For a period in the early 1970s, when the island was threatened by food shortages, the government ordered peasants to market all of their rice through this scheme and at times set the price at a level lower than that of the free market. This policy had the effect of reducing the incentive to grow rice. The program lost some of its impetus in the 1980s. In 1986 the government set the price below the free-market rate for most of the year. As a result of the policy, purchases under the program accounted for only about 6 percent of the rice crop, mostly from districts where private traders were unwilling to operate because of the poor security situation.
Since the 1930s, governments have promoted irrigation works and colonization projects in the dry zone in an attempt to increase rice production and reduce land pressure and unemployment in the more densely settled wet zone. The lack of infrastructure and the prevalence of malaria hampered these programs in the early years. After the near eradication of malaria, increased government investment in infrastructure and enhanced financial support for migrants made the new lands more desirable. Between 1946 and 1971, the proportion of the population living in the dry zone increased from 12 to 19 percent.
At the end of 1968, about 352,000 hectares were under irrigation for rice cultivation; some 178,000 hectares under major storage reservoirs and barrages, and approximately 174,000 hectares in minor irrigation projects. In the 1970s and 1980s, governments pursued major irrigation programs, most notably the Mahaweli Ganga Program, which was lent added impetus and became the Accelerated Mahaweli Program in 1978. The increasing size of the Mahaweli project dwarfed its earlier endeavors. According to the plan, approximately 593,000 hectares of previously arid land would be brought under irrigation by 1992. In 1986 some 76,000 hectares of new land were under cultivation as a result of this project.
Other long-standing government policies designed to help farmers included subsidies for fertilizer, seed paddy, and other inputs. Government efforts also partly contributed to the adoption of improved cultivation practices and high-yielding seed varieties in paddy farming in the 1960s.
Modern land tenure policy dates from the Land Development Ordinance of 1935, which forbade the transfer of crown lands for purposes of cultivation except to enlarge the landholdings of near-landless or landless peasants. The intent of this ordinance was to help small farmers whose livelihood was seen to be at risk from the exploitation of rich peasants and urban landowners.
In 1958 the Paddy Lands Bill was enacted, mainly to benefit the tenant farmers of some 160,000 hectares of paddy land. The bill purported to assist tenants to purchase the land they worked, to protect them against eviction, and to establish a rent ceiling at around 25 percent of the crop. It also established cultivation committees, composed of rice farmers, to assume general responsibility for rice cultivation in their respective areas, including the direction and control of minor irrigation projects. Shortcomings in the law and official indifference in enforcing the act hampered its effectiveness, and many observers termed it a failure. In some regions tenants who tried to pay the lower, official rents were successfully evicted by landlords, and the old rents, often about 50 percent of the produce, remained in force. In the 1980s, however, the rent ceiling of 25 percent was effective in most districts.
The Land Reform Law of 1972 imposed a ceiling of twenty hectares on privately owned land and sought to distribute lands in excess of the ceiling for the benefit of landless peasants. Because both land owned by public companies and paddy lands under ten hectares in extent were exempted from the ceiling, a considerable area that would otherwise have been available for distribution did not come under the purview of the legislation. Between 1972 and 1974, the Land Reform Commission took over nearly 228,000 hectares, one-third of which was forest and most of the rest planted with tea, rubber, or coconut. Few rice paddies were affected because nearly 95 percent of them were below the ceiling limit. Very little of the land acquired by the government was transferred to individuals. Most was turned over to various government agencies or to cooperative organizations, such as the Up-Country Co-operative Estates Development Board.
The Land Reform Law of 1972 applied only to holdings of individuals. It left untouched the plantations owned by joint-stock companies, many of them British. In 1975 the Land Reform (Amendment) Law brought these estates under state control. Over 169,000 hectares comprising 395 estates were taken over under this legislation. Most of this land was planted with tea and rubber. As a result, about two-thirds of land cultivated with tea was placed in the state sector. The respective proportions for rubber and coconut were 32 and 10 percent. The government paid some compensation to the owners of land taken over under both the 1972 and 1975 laws. In early 1988, the state-owned plantations were managed by one of two types of entities, the Janatha Estates Development Board, or the Sri Lanka State Plantation Corporation.
Rice cultivation has increased markedly since Independence, although in the late 1980s yields remained well below those of the major rice-producing countries. Much of the improvement came in the late 1970s and 1980s. Rice remained a smallholder's crop, and production techniques varied according to region. In some villages, it was still sown by hand, with harvesting and threshing often engaging the entire family, plus all available friends and relatives.
Because no completely perennial sources of water exist, there was uncertainty regarding the adequacy of the supply each year. In the wet zone, flooding and waterlogging was experienced in the 1980s, whereas in the dry zone even the irrigated areas were subject to the possibility of insufficient water. In the mid- and up-country wet zone areas, most fields were sown twice a year in the 1980s; in the dry zone most holdings were sown only once; and in the low-country wet zone the amount of flooding or waterlogging determined whether to plant once or twice. The maha (greater monsoon) crops are sown between August and October and harvested five or six months later; the yala (lesser monsoon) crops sown between April and May and harvested about four or five months later.
Despite some increases in productivity, rice output was disappointing in the 1960s and early 1970s. Greater incentives to farmers after 1977 contributed to increases in production. Both the area under cultivation and the yield increased steadily between 1980 and 1985, when annual output reached 2.7 million tons, compared to an annual output of around 1.4 million tons in the early 1970s. In 1986 unfavorable weather and security difficulties led to a slight decline in production. A severe drought affected the crop in 1987, when output was estimated at only 2.1 million tons.
Tea is Sri Lanka's largest export crop. Only China and India produce more tea. The plants, originally imported from Assam in India, are grown in the wet zone at low, middle, and high altitudes, and produce a high-grade black tea. The higher altitudes produce the best tea, and terracing is used to eke out the limited area of upper altitude land. Tea cultivation is meticulous and time consuming, requiring the constant and skilled attention of two or three workers per hectare. Because of this requirement, tea is most efficiently grown on estates, based on large capital investment and having a highly organized and disciplined management and labor supply.
Because working and living on estates was not attractive to Sinhalese peasants, the labor supply for the tea industry from its inception was provided by Indian Tamil immigrants who lived on the estates. Since independence the number of Sinhalese workers has increased, but in the late 1980s Tamils still dominated this sector.
The performance of the tea industry was disappointing in the 1970s and early 1980s, because of poor producer prices and low productivity. Tea production was 211 million kilograms in 1986, down from 220 million kilograms in 1969. The fundamental problem of the tea estates was the advanced age of the tea bushes. In 1987 their average age was around sixty years and only 15 percent of the total area under tea had been replanted with high-yielding varieties. Replanting had been neglected in the 1960s and 1970s partly because low tea prices and high export duties meant that profit margins were not high enough to make it a profitable enterprise. Between 1972 and 1974, the growing risk of nationalization also discouraged investment.
Rubber continues to be an important export crop in the late 1980s. It thrives under plantation conditions in the wet zone, although a significant proportion of the crop is produced by smallholders. Although rubber yields improved greatly in the first twenty years after independence, both the output and area planted with rubber declined in the 1980s. Output fell from 156 million kilograms in 1978 to 125 million kilograms in 1982. Improved prices caused production levels to recover to about 138 million kilograms in 1986.
Despite the importance of rubber, a large number of rubber plantations suffer from old age and neglect. The government offered incentives to encourage replanting and improve maintenance procedures. Nevertheless, the area replanted in 1986 was 12 percent less than in 1985. This drop in replanting resulted from a shortage of seeds and the reluctance of farmers to retire land from production at a time of relatively attractive prices. In early 1988, however, the short- and medium-term outlook for world rubber prices was considered good.
Most of the coconut production was sold in the domestic market, which consumed about 1.4 billion nuts in the mid-1980s. Most of the rest of the crop, usually between 2 billion and 3 billion nuts, was exported as copra, coconut oil, and desiccated coconut. Local uses for coconut include timber for construction, leaves for thatch and siding, coir for rope and rough textiles, and toddy and arrack for alcoholic beverages.
Coconut output fluctuates depending on weather conditions, fertilizer application, and producer prices. In the 1980s, smallholders dominated its production, which was concentrated in Colombo and Kurunegala districts and around the city of Chilaw in Puttalam District. Because of a drought in 1983, production suffered a setback during 1984 and fell to 1.9 billion nuts, its lowest level since 1977. The recovery during 1985 was impressive, leading to the record production of almost 3 billion nuts. This level was itself surpassed in 1986, when production rose a further 3 percent. But the average export price fell by 45 percent in 1985 and by 56 percent in 1986. In 1986 the farm gate price probably fell below the cost of production, and in early 1988 it appeared that fluctuations in the world price of coconut products would remain a problem for the foreseeable future. The 1987 drought was expected to reduce coconut production by at least 20 percent in both 1987 and 1988. Like tea and rubber, the coconut sector suffered from inadequate replanting. Consequently, a large proportion of the trees were old and past optimum productivity levels.
The importance of crops other than tea, rubber, and coconut increased after 1970, and in 1986 they accounted for around 51 percent of agricultural output. There was a substantial increase in of minor food crops, including soybeans, chilies, and onions, all of which are grown as subsidiary crops on land irrigated by the Mahaweli project. In the 1960s and earlier, vegetables were imported from India in large quantities, but in the 1980s the island's import requirements were much smaller. Spices, including cloves, nutmeg, cardamom, and pepper, also registered large gains in the 1970s and 1980s. A large proportion of the spice output was being exported in the 1980s. Other crops of importance included corn, millet, sweet potatoes, cassava, dry beans, sesame seed, and tobacco. A wide variety of tropical fruits, including mangoes, pineapples, plantains, and papayas, also were grown; most were consumed in the domestic market. Sugar output increased in the early 1980s, although in 1986 it still accounted for only 11 percent of the domestic consumption. The expansion in sugar took place despite the problems of the state-run sugar mills and their associated sugar lands in Eastern Province, which have been disrupted by civil strife. Two new mills in Western Province accounted for the increase in production, and in early 1988 the outlook for further expansion was good.
Industry, including manufacturing, mining, energy, transportation, and construction, accounted for around 38 percent of GNP in 1986. The most important products included refined oil, textiles, gems, and processed agricultural products. Construction and tourism both grew rapidly in the late 1970s and early 1980s, but contracted after the onset of ethnic violence in 1983. State-owned corporations accounted for over 50 percent of total industrial output. An investment promotion zone was established in 1979 with the goal of attracting foreign capital; textile factories accounted for a large proportion of investment there in its early years. The island's electricity supply was mainly fueled by hydropower.
Sri Lanka developed little industry under British rule, relying instead on the proceeds from agricultural exports to buy manufactured goods from other countries. Most industry during the colonial period involved processing the principal export commodities: tea, rubber, and coconut. Although these sectors remained important, in the 1980s there was a much greater variety of industrial establishments, including a steel mill, an oil refinery, and textile factories.
Industrial diversification began in the 1960s with the production of consumer goods for the domestic market. This trend was a consequence of government measures aimed at saving foreign exchange, which made it difficult to import many items that had previously been obtained from overseas. Heavy industries were established in the late 1960s, mostly in the state sector. During the 1970-77 period the state assumed an even greater role in manufacturing, but after the economic reforms of 1977 the government attempted to improve prospects for the private sector. The fastest growing individual sector in the 1980s was textiles, which made up approximately 29 percent of industrial production in 1986. The textiles, clothing, and leather products sector became the largest foreign exchange earner in 1986. Over 80 percent of the manufacturing capacity was concentrated in Western Province, particularly in and around Colombo.
The enactment of the State Industrial Corporations Act of 1957 provided for the reconstitution of existing state enterprises as well as the establishment of new corporations to promote the development of large-scale and basic industries. The period 1958 to 1963 witnessed the first phase in the rapid growth of state industrial corporations. By 1963 fourteen such corporations were engaged in such fields as textiles, cement, sugar, paper, chemicals, edible oils and fats, ceramics, mineral sands, plywood, and leather. By 1974 there were twenty-five state corporations, including such major undertakings as a steel mill and an oil refinery.
Despite the 1977 policy shift in favor of the private sector, in early 1988 government-controlled enterprises continued to play a major role in industry. State-owned corporations accounted for nearly 60 percent of total industrial output. The most important public company was the Ceylon Petroleum Corporation, which accounted for about 55 percent of all public-sector production.
From the beginning, many industrial corporations in the state sector were troubled by such problems as management inefficiency, technical deficiencies in planning, overstaffing, and defective pricing policies. These difficulties contributed in many undertakings to poor economic results. Moreover, public sector enterprises were associated with objectives that reflected both growth and welfare considerations for the economy as a whole. They became the chief instruments furthering state ownership and social control in the economy, and they were expected to promote capital formation and long-term development. At times they were also looked upon chiefly as major sources of employment and enterprises providing goods and services to the public at relatively low prices. As a result, a number of the state industrial corporations have lost money. In 1987 the debts of state-owned corporations were Rs19 billion, of which Rs15 billion were owed to foreign sources and Rs4 billion to the two state-owned banks.
The liberalization of the economy in 1977 was largely prompted by the perceived inefficiency of the public sector, not by any ideological commitment to free enterprise. As a result, the government let private enterprise compete with the state corporations but took few steps to dismantle the state sector. Instead, it attempted to improve its efficiency. One major state venture, the National Milk Board, was dissolved in 1986, however. It had been established in 1953, but had never succeeded in developing the milk industry. In 1987 it was reported that consideration was being given to transferring to private control several state-run industrial enterprises. These included the four government textile mills, the State Distilleries Corporation, the National Paper Corporation, the Mineral Sands Corporation, Paranthan Chemicals, Sri Lanka Tyre, and Union Motors. In early 1988, however, doubts remained about the extent of the government's commitment to this program. Although the plan to sell the textile mills was expected to be implemented within two years, some of the government's economic advisers reportedly were urging the government to proceed cautiously in its privatization policy, in view of the limited capital markets, the concentration of private wealth, and the weak regulatory framework.
The share of manufacturing in the economy declined from 21 to 15 percent of GDP between 1977 and 1986. This fall is somewhat misleading because it resulted in large part from the rapid growth in the service sector and the decline in output of the state-owned Ceylon Petroleum Corporation. The latter accounted for as much as one-third of the value of manufactured goods in some years and thus strongly affected aggregate manufacturing statistics. These statistics fluctuated along with changes in the value of the output of the oil refinery, which in turn varied with oil price levels and the extent of plant closings for maintenance. Some manufacturing sectors grew rapidly during this period.
Manufacturing was dominated for most of the twentieth century by the processing of agricultural produce for both the export and domestic markets. The most important industries were engaged in preparing and packaging for outside markets the principal export commodities--tea, rubber, and coconuts--for which Sri Lanka is noted. Such preparation generally involved low technology, comparatively modest capital investment on machinery, and uncomplicated, sequential procedures. Tea leaves, for example, follow a four-part process of withering, rolling (to extract bitter juices), fermentation, and heating (or roasting), before being packed in chests for export.
The processing of coconut and of rubber also were important industries, although their ratio in proportion to all manufacturing fell in the 1970s and early 1980s. The processing of the latter two commercial crops generally involved refining the basic commodities into a range of semi-finished products to be used in manufacturing finished goods at home or abroad. Coconuts, for example, are transformed into copra, desiccated coconut, coconut oil, fiber, poonac (a meal extract), and toddy. Copra and desiccated coconut are used as oils or as ingredients in food such as margarine; coconut oil is used to make soap; coconut fibers such as coir are used to make yarn, rope, or fishnets, while poonac is used as food for livestock. The coconut palm flower is also used in the production of alcoholic beverages.
Rubber is also processed in various ways, including latex or scrap crepe and ribbed or smoked sheet, which together account for much of Sri Lanka's export of this commodity. Processing methods for rubber are outdated, however, and Western consumer countries have protested against the hardness, high moisture content, and inconsistent quality of the Sri Lankan product.
Manufacturing received a boost in the early 1960s when import controls, which were the result of shortages in foreign exchange, made it difficult for consumers to obtain or afford foreign products. The result was a protected and profitable ready-made home market. This situation led to an expansion of both privateand public-sector manufacturing, with the private sector concentrating on consumer goods. These new enterprises, however, depended heavily on imported raw materials, and when the country's balance of payments difficulties became even more serious in the early 1970s, industry suffered from the lack of foreign exchange. In 1974 it was estimated that only 40 percent of the capacity of the industrial sector was used. After the 1977 liberalization, raw materials were more freely available, and in 1986 capacity utilization was estimated at 78 percent.
In 1978 the government established the Greater Colombo Economic Commission primarily to serve as the authority for the free trade zones to be set up near the capital. The first investment promotion zone consisted of a large tract that was established in 1979 at Katunayaka, near the Bandaranaike International Airport. A second zone was inaugurated in 1986 at Biyagama, in Colombo District. Foreign companies that built factories in the zones received generous tax concessions. The commission succeeded in attracting some foreign investment, especially from Hong Kong and other Asian countries. At the end of 1985, a total of 119 enterprises had signed agreements with the commission, but only 7 were signed in 1986, when there were 72 units in production. The total number of people employed was nearly 42,000. Gross export earnings from the investment promotion zones in 1986 were around Rs5.5 billion, up 43 percent from 1985. Foreign investments outside the free trade zones were coordinated by the Foreign Investment Advisory Committee.
The principal change in manufacturing in the 1980s was the rapid growth of the textile sector, from 10.5 percent of output in 1980 to 29.2 percent in 1986. In the mid-1980s, the government was attempting to diversify foreign investment away from textiles. Most textile factories were located in the investment promotion zones.
During the July 1983 riots, 152 factories were destroyed, but there was little long-term effect. Some observers expressed the view that the equipment destroyed was inefficient, and that modernization was long overdue.
Total expenditure for construction was estimated at 7.7 percent of GDP in 1986. The sector was given a boost by the ambitious public investment program of the government that came to power in 1977. Between 1977 and 1980, construction expanded at an annual rate of 20 percent in real terms. It stagnated in the 1980s as the number of new projects dwindled and the early ones were completed.
The largest construction project of the post-1977 period was the Mahaweli irrigation program. Conceived in the 1960s as the Mahaweli Ganga Program, the project originally was expected to bring approximately 364,000 additional hectares of land under irrigation and to provide an extra 540 megawatts of hydroelectric power to the national grid. Completion of the program was to require thirty years. Construction of the first two dams was completed in 1977 and opened about 53,000 hectares of new land to irrigation in a general area south of the old capital of Anuradhapura in the dry zone. When the United National Party swept into power in 1977, the project was given renewed impetus and renamed the Accelerated Mahaweli Program. Construction work was undertaken at five new sites between 1979 and 1982, with the intent of increasing the hectares under irrigation and generating an extra 450 megawatts of hydroelectric power for the national grid. By the end of 1987, new dams and reservoirs had been completed at Kotmale, Randenigala, Maduru Oya, and Victoria. The operational power stations at Randenigala and Victoria together generated 330 megawatts of power, with an additional 147 megawatts expected when the Kotmale station came on line. All construction related to the Accelerated Mahaweli Program was scheduled for completion by 1989. The total cost of the entire project was estimated at US$1.4 to 2 billion.
The Urban Development Authority was established in 1978 to promote integrated planning and development of important urban locations. Its responsibilities have included the new parliamentary buildings and the reconstruction of St. John's fish market in Colombo. Total expenditure of the Urban Development Authority was Rs529 million in 1986, well under its annual budget in the early 1980s. The Million Houses Program was established in 1984 to coordinate both public and private housing construction. In early 1988 the government's policy was to subsidize private housing rather than undertake extensive public housing programs.
Mining is carried out in both the public and private sectors. The most valuable products are precious and semiprecious stones, including sapphires, rubies, cats' eyes, topaz, garnets, and moonstones. Official exchange earnings from gems were negligible in the first two decades after independence because most of the output was smuggled out of the country. The setting up of a publicly owned State Gem Corporation in 1971 and export incentives for those exporting through legal channels brought a marked improvement. In 1986 legal exports were valued at Rs755 million, but many observers believed that a considerable quantity was still being exported illegally. In the late 1980s, Japan remained the most important market for Sri Lanka's gems. The Moors traditionally have played an important role in the industry.
Graphite also is of commercial significance. Almost the entire output is exported as crude graphite (plumbago). Ilmenite, a mineral sand used in the manufacture of paint and the fortification of metals, also is exported. Salt is produced by evaporation for the domestic market. Thorium deposits have been reported in Sabaragamuwa Province and in the beach sands of the northeast and southwest coasts. Exploration also has disclosed the presence of apatite (source of phosphate), dolomite (fertilizer component) and small pockets of economically extractable iron ore.
Over 70 percent of the island's total energy consumption was satisfied by firewood, agricultural residues, and animal waste, mostly for household use. The country had no coal or petroleum deposits, and the only other indigenous energy source was hydropower.
In 1927 the Department of Government Electrical Undertakings, now called the Ceylon Electricity Board, took over the transmission of electricity throughout the country. Hydroelectric power came into use in 1951 with the commissioning of the Laksapana project in Central Province. Demand for power increased from approximately 20 megawatts in 1951 to nearly 73 megawatts in 1963, about 90 percent of which was met from hydroelectric sources. In the 1970s, the island increasingly came to rely on imported oil for the generation of electricity, but new hydroelectric capacity from the Mahaweli project in the 1980s reduced the importance of oil. In 1986 total installed capacity was 1,010 megawatts, of which 74 percent was from hydropower.
In early 1988, it appeared that the Mahaweli project would solve Sri Lanka's electricity supply problem for the foreseeable future. This integrated power generation and irrigation project started contributing to power supplies in 1984 when the first two phases of the Victoria Dam were completed, adding 140 megawatts to installed power capacity. In April 1985, the final stage of the Victoria Dam increased capacity by 70 megawatts. A slightly greater capacity was expected to result in the late 1980s.
United States and British-owned oil companies in Sri Lanka were nationalized in 1963, and since then the importing, refining, and distributing of all oil products has been the responsibility of the Ceylon Petroleum Corporation, the state oil company. Its oil refinery started production in 1969. The main products in 1986 were fuel oil (559,497 tons), heavy diesel (60,995 tons), auto diesel (406,569 tons), kerosene (153,692 tons), and gasoline (123,089 tons).
The formally employed population of Sri Lanka in the late 1980s was shifting gradually from agriculture to manufacturing, trade, and service employment. Nevertheless, over 40 percent of the work force remained agricultural in early 1988; most of these workers were smallholders, tenants, and plantation workers. The labor force growing most rapidly in the early and mid-1980s was in the service sector.
A precise breakdown of the labor force and movement within it was not possible in the late 1980s because the official statistics were not reliable. Early censuses, taken when the island was a British colony, compiled long lists of occupations with little comparability from one census to the next. The postindependence censuses also suffer from inconsistencies. They show a decline in the proportion of the work force engaged in agriculture, hunting, forestry, and fishing from 52 percent in 1953 to just over 45 percent in 1981. The proportion of the work force engaged in manufacturing remained steady over the same period, at 10 percent. The largest increase was in services, including commerce, banking, and finance. The proportion of workers in this category rose from 11.2 percent in 1953 to 15.7 percent in 1981. There was also an increase in construction, from 1.9 percent to just over 3 percent. Transport, storage, and communications increased from 3.5 percent to 4.8 percent over the same period. All such figures should be regarded as tentative and subject to revision.
Demographic and educational changes after independence altered the composition of the work force as much as economic development. Rapid population growth brought additional workers into the job market every year and lowered the average worker's age. The growth of the economy was too limited to provide opportunities for the new workers. Similarly, the extension of education qualified many thousands of youths for jobs that did not exist. This fact has been particularly true for women, who in the 1980s made up about 25 percent of the labor force despite equal access to education.
During the nineteenth century, labor legislation dealt with the large plantations, and more general labor laws were passed only in the closing years of colonial rule. In 1941 the government enacted the Wages Boards Ordinance, the first comprehensive piece of legislation regarding the payment of wages, the regulation of working hours, and sick and annual leave; the ordinance also empowered the government to establish wages boards for any trade. The boards are composed of an equal number of representatives of workers and employers and three appointees proposed by the commissioner of labor.
Ordinances of 1942 and 1946 required all factories to be registered and established minimum standards for health and safety. The laws also gave the commissioner the right to send inspectors to the factories and to judge whether a plant was meeting minimum standards. The Shops and Offices Employees Act of 1954 extended the provisions of the factories legislation to small shops.
The Maternity Benefits Ordinance, as amended in 1957, entitled a woman who worked in a factory, mine, or estate to full compensation for a period of two weeks before her confinement and for six weeks afterward. The employee must have worked for the employer 150 days before her confinement to be eligible to receive the benefits.
The Employees Provident Fund, established in 1958, provided a national retirement program for the private sector. The Provident Fund required an employer to contribute 6 percent of total earnings and an employee to contribute 4 percent of earnings exclusive of overtime pay. Participation in this plan grew quickly, and in the 1980s most salaried workers in the formal sectors of the economy were members. Government employees had their own pension plans.
Although legislation protecting the health and welfare of workers was extensive, enforcement was inconsistent. The government departments charged with enforcement were chronically underfunded in the late 1980s. Moreover, many labor regulations were suspended in the investment promotion zones. Most labor legislation also did not apply to rice farming and other economic activities carried out informally.
Working conditions varied greatly according to the type and size of employment activity in the 1980s. The Factories Ordinance of 1942 established guidelines for industrial safety and sanitation and made each factory liable to government inspection. Because this ordinance and other similar legislation has not been enforced consistently, workers frequently protested their working conditions. In the 1980s, strikes and boycotts often took place because of inadequate meals at factories that had their own lunchrooms or because of the lack of other facilities.
The Factories Ordinance prohibited work for women between 9:00 P.M. and 6:00 A.M. In the years after independence, a further series of laws restricted the employment of women and children to designated time periods and places. A 1957 law, for example limited working time for women to nine hours. Other laws prohibited women and children from working time underground, in mines, for example.
Unemployment has been a problem since the 1960s, especially for young people, but the statistics available in 1988 were not very reliable. Observers estimated that unemployment increased from around 12 percent of the labor force in the early 1960s to 24 percent in the mid-1970s. Unemployment fell back to around 12 percent in the first few years after the economic liberalization that began in November 1977, but it was again on the increase in the mid-1980s. According to official data, in 1987 the labor force consisted of around 6.2 million persons, of whom 5.4 million, or 87 percent, were gainfully employed, but these figures understated unemployment, which the Ministry of Finance estimated at 18 percent in late 1987. All of these figures excluded persons said to be underemployed or partially employed, conditions that were prevalent in the rice-farming sector and in some of the urban-based service activities. The extent of labor underutilization, was believed to be much greater than indicated by the statistics for unemployment.
In the mid-1980s, sectors, such as tourism, that were sensitive to the security situation suffered job losses. Migration to the Middle East, which also provided jobs in the early 1980s, was also on the decline, although still of substantial importance. In 1987 observers estimated that 100,000 Sri Lankans worked and lived in the Middle East--particularly in the small oil-rich states of the Arabian Peninsula, where wages for comparable work were much higher than in Sri Lanka.
A representative index showing changes in the general level of wages was not available in the late 1980s. Wages were low compared with those paid in developed countries, even in the unionized sectors, and incomes were unevenly distributed. Some indication of wage movements can be gained from the indices of minimum wage rates. These more than doubled between 1978 and 1986, but inflation probably kept their value little changed in real terms. The only price index, the Colombo Consumer Price Index, was based on data gathered in Colombo and was widely believed to understate inflationary increases, especially for the lower wage earners. It recorded an increase of 8 percent in 1986. Although this rate was considerably higher than the 1.5 percent increase recorded in 1985, it was low compared to the two-digit rates that prevailed during the 1978-84 period.
Low wages in the formal sector were partially offset by overtime payments, increments, bonuses, and other incentive programs, which often added considerable supplements to salaries. A five-day work week was standard in the 1980s. Sri Lanka had a large number of public holidays; twenty-four were celebrated in 1985. These included twelve full moon days, which are of religious significance to Buddhists.
The labor movement was large and politically active in the 1980s, although it suffered a loss of influence after 1977. Urban strikes began in the 1890s and increased in number after World War I. The first major labor organization, the Ceylon Labour Union, was formed in 1922. In the 1930s, the legislature passed a series of laws, including the Trade Union Ordinance of 1935, to regulate the unions. This law made it mandatory for trade unions to register with the government and to keep political and labor funds separate. After World War II, the unions represented a large proportion of the labor force, especially in Colombo and on the large plantations. The leadership of nearly all trade unions has come from the English-educated elite.
Union membership in 1988 was subject to fluctuations because of competition among unions affiliated with different political parties and because of personal rivalries among union leaders, as well as a fairly rapid turnover of unions. The unions have traditionally been strong in the state sector, especially rail and road transport, the ports, and the government clerical service. In 1983 observers estimated that about 1.8 million workers, or just under one-third of the gainfully employed labor force, were union members. Membership was fragmented into over 1,000 unions. Many of the unorganized workers were small farmers and rural laborers.
Before 1977 many unions were affiliated with the Marxist parties, especially the Trotskyite Lanka Sama Samaja (Ceylon Equal Society Party), but in the late 1970s and early 1980s the influence of the Jatika Sevaka Sangamaya (National Employees' Union), which was affiliated with the ruling UNP, increased greatly, and it became the single largest trade union. This organization was especially strong in the state sector, and it had a reputation for intimidation, violence, and discrimination against Tamils. Another important trade union was the Ceylon Workers' Congress, which represented a large proportion of the Indian Tamil estate workers. After 1977 it was politically allied with the government, but it nonetheless used the political turmoil after 1983 to bargain for better working conditions.
Labor disputes were arbitrated through a variety of state agencies, but these agencies have not prevented frequent and costly strikes. Plantation strikes have been most common, involving as many as 477,000 workers (in 1949) and as many as 1.12 million lost workdays (in 1966). In the remainder of the private sector, the most turbulent period was in 1962 and 1963, when over 1.28 million workdays were lost by strikes. In 1970 new highs were reached, with 143 strikes and the loss of 1.31 million workdays. In the mid-1970s, when many trade unions pledged not to strike in return for substantial concessions, the number of nonplantation strikes fell dramatically, although plantation strikes increased. Since 1977 the unions in the nonplantation sectors have been in apparent decline, in part because of changes in the nature of the work force. Most employees of the new textile factories in the free trade zone were young, unmarried women doing shift work, who did not expect to be employed there for more than a few years and who were little interested in joining a union. Similarly, employees in the import and tourist industries, sectors that grew in the years after 1977, had not been successfully organized.
In 1966 the government established the Ceylon Tourist Board, vesting in it the responsibility for invigorating the tourist industry. The board, operating as an autonomous corporation, was charged with promotional as well as organizational responsibilities. Most provisions for tourists were in the private sector, but the board had facilities in areas where private ones were considered inadequate.
Tourism expanded rapidly after 1966. The main attractions are the beach resorts of the southwestern coastal region, but many tourists also visit the ancient cities of the dry zone, the historic city of Kandy, and the mountainous region dominated by tea plantations. Between 1976 and 1982, the number of tourist arrivals increased at an annual rate of almost 24 percent, reaching a peak of 407,230 before declining to 337,342 arrivals in 1983 as a result of the Tamil insurgency. More than half the arrivals were from Western Europe.
Serious civil disturbances starting in July 1983 and the subsequent violence badly affected tourism. Total arrivals were 230,106 in 1986, down 43 percent from 1982. To ease the plight of the industry, the government provided various concessions to hotels, such as the rescheduling of loans and the reduction of the turnover tax from 10 percent to 5 percent. The Ceylon Tourist Board also undertook a crash promotion program in an attempt to restore the island's image in world tourist markets. Tourist arrivals in the first six months of 1987, however, showed a decline of 23 percent compared with the same period the previous year. In early 1988, the outlook was for further contraction.
In 1988 it remained unclear whether the policies of economic liberalization Sri Lanka has pursued since 1977 would succeed in their principal goals of employment, wealth creation, and economic diversification. Although increased rice production, the growth of textile manufacturing, and an improved infrastructure were successes that could be attributed to the post-1977 policies, these gains came at the cost of a mounting foreign and domestic debt and declining living standards for the poor. In the mid-1980s, the declining security situation began to have an increasingly negative impact on the economy, and in early 1988 economic prospects for the 1990s appeared to be linked at least in part to a resolution of the ethnic conflict.
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