Sri Lanka’s tragedy: A century of decline

One hundred years ago Sri Lanka was a vision of Asia’s future. How can it reclaim that position?

By Shamindra Kulamannage.

Published on February 24, 2015 with No Comments

Echelon February 2015

Their crumbling edifices are a testament to the dreams of an occupier determined to build an empire on which the sun would never set. Building defiant, giant offices and trading businesses in an alien tropical place was testament to the scale of Britain’s ambition. The century since the British took control of Ceylon in 1815 was a period of unprecedented economic advancement.

csFor all their faults the occupiers did three things. Firstly they made a huge bet on export agriculture, Coffee first and then coconut and tea. They then built internal transport infrastructure and developed a major port in Colombo linking rural plantations to the city and the world. Building the infrastructure for an open market was the occupiers’ second contribution. Thirdly they linked every commercial undertaking here to Britain, then the world’s pre-eminent power.

The British occupation here was distinguished by their focus to methodically exploit the country’s resources. The Dutch were attracted by the island’s spices and the ability to control its trade from Galle and Colombo. The murderous Portuguese before them just plundered everything.

The triple bet on agriculture, infrastructure for an open market efficiency and Britain itself paid off, propelling Ceylon, as Sri Lanka was then known, to the league of Asia’s richest economies together with Japan, Hong Kong and Singapore (then a part of the Federated Malay States). Ceylon was a land of opportunity attracting fortune seeking immigrants and investment. European immigrants arrived here to start trading ventures and employed other Europeans to plant vast acreages of coffee and tea. By the turn of the 20th century much of Colombo’s population was foreign born.

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By the turn of the 20th Century Ceylon was among the wealthiest nations in Asia because of its agricultural success, infrastructure and links with the outside world, particularly Britain, according to the most comprehensive global per head GDP data compiled by Angus Maddison. In the year 1900 Ceylon’s per head GDP, in 1990 US dollars (international dollars), was $ 1,234 compared to Japan’s $1,180, Singapore’s $1,339 and Hong Kong’s $1,279 in 1913 (the first estimates for Hong Kong’s GDP). All other Asian countries and most of the rest of the world were much poorer. People here were twice as rich as the average Asian.

Although there have been periods of relatively fast growth in the last century – and since the nearly 30 year long conflict ended six years ago – and its people remain wealthier than their South Asian neighbours, Sri Lanka’s standing as one of Asia’s most vibrant economies is a distant memory.

cs3Today Sri Lanka’s per person GDP is only a quarter of Japan’s, 18% of Singapore’s and 17% of Hong Kong’s. Meanwhile turn of the 20th century laggards Malaysia, Taiwan, Thailand, South Korea and China have all now far higher per person GDP than Sri Lanka. (illustrated in the graphic ‘A Century of Decline’)
Comparing per person GDP across nations through time is fraught with challenges. To overcome this economists use the ‘international dollar’; a hypothetical unit of currency that had the same purchasing power parity (PPP) that the US dollar had in the United States at a given point in time.

Usually the years 1990 or 2000 are used as benchmark years for the ‘international dollar’. Angus Maddison uses 1990 as the benchmark for the per person GDP data sets he has estimated for most countries through time. It’s Maddison’s data that underlie Echelon’s comparison per person GDP of Sri Lanka against other leading nations in the region.

Sri Lanka only started measuring the nation’s produce systematically in 1959. Its exchange rate policy has switched between being pegged, loosely pegged to market determined over time. Financial transactions at various times relied on the currencies issued by the island’s various kingdoms, those of the occupiers and the Indian Rupee before Ceylon started issuing its own in 1872.

Measuring economic output, to compile GDP and compare it across the years to figure if output is growing is a relatively modern phenomenon. However economists have always had an urge to count a nation’s produce and compare it to other nations.

For periods when output numbers haven’t been estimated by a systematic compilation of statistics economists rely on estimates based on published data like probate inventories, tax records, customs data on international trade and other available information.

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To compare wealth across nations through time economists also need population estimates to produce per person GDP figures. Sri Lanka has census data extending to the 18th Century. A census in 1901, the beginning of the century of decline, showed its population was 3,566,000. Ceylon’s GDP in 1990 dollars that year was US $4.25 billion. In 2014 Sri Lanka’s GDP was $66 billion but this cannot be compared with the 1901 GDP estimate, which uses the 1990 international dollar.

cs4Maddison’s database and its subsequent update can be downloaded from the website of the Maddison Project. Much of its updates on Sri Lankan GDP have been done by Dutch economist Pim De Zwart who has used wage and price data from the Dutch East India Company (VOC) archives. De Zwart’s database and sources can be found at http://socialhistory.org/en/staff/pim-dezwart. The sources of some data cited here extend as far back as the mid 17th Century. The primary sources are in Dutch records from VOC archives in the Hague.

It’s a fact that data hundreds of years old lead economists to rely more on clues and conjecture to apply them to output and population estimates, which are the numerator and denominator in per person GDP estimates. However the overall findings are consistent: that Ceylon’s economic fortunes reversed dramatically in the last century. Ceylon’s relative economic decline is marked. It ranked as one of Asia’s most important countries; a position gained during its British occupation. The earliest per person GDP data the Maddison Project has for Ceylon date back from five years after the British took control of the entire island’s administration, in 1820. Comparative data is far more sparse for the 19th century but even then Ceylon ranks a regional leader and prosperous by global standards too.

That Asia accounted for more than half the world’s output during 17 of the last 20 centuries is undisputed. European growth started accelerating after the 1500s when its citizens imposed limits on monarchial powers, which strengthened property rights. They also honed maritime technology responsible for the commodities and slave trade boom.

cs5Their colonies benefitted from property rights that some European settlers imposed on them and the more predictable governance systems based on laws and regulations. Over the long run trade and commerce in most occupied territories flourished because of wholesale transplantation of European commercial values and their work ethic. Earliest available estimates of Ceylon’s per head GDP show wealth more than doubled in the 80 years to 1900. Wealth creation was driven by industrial agriculture; coffee, followed by coconut and tea plantations. Extent of coffee plantations exceeded 110,000 hectares by 1872, which is more than half the land area cultivated with tea, now. International coffee prices rose during these years encouraging more investment.

Because property rights were well entrenched by this time risks of investing in large-scale farming were low. Crown land sales facilitated large-scale coconut growing in the North Western Province. By mid 19th century estates growing coconut exceeded 101,000 hectares, which put as much land under coconut as there was growing coffee.

It never got better than this.

Towards the end of the 19th century, leaf disease – Hemileia vastratrix – afflicted coffee, leading to a prolonged decline. However, Ceylon had successfully experimented with tea and this new crop soon replaced disease ridden acres of coffee. Tea and coconut accounted for almost 80% of the island’s Rs90 million export earnings at the turn of the 20th century. The prosperity lasted for another decade until the outbreak of the First World War. Sri Lanka’s relative decline during the last century commenced in 1910 and happened in three stages each of which was more debilitating than the preceding one.

The First World War and the chain of impacts it triggered including a three decade long tropical commodities downturn was the first major reversal. It included the Great Depression and the Second World War that followed.

Ceylon’s plantations were larger in relation to the rest of the economy than in most other tropical colonies.
While British settlers mostly controlled tea plantations, many indigenous people owned and worked in rubber, coconut and coffee plantations. The reversal was specially harsh in these sectors. Ceylon’s relative reversal was pronounced due to its high agricultural dependence and the crushing effect the Depression had on the open trading system on which Ceylon so depended.

At the Second World War’s end it was evident the British couldn’t conceivably hold on to occupied countries. This was the second reason for a reversal. Once the realization they had to soon leave set in, the well-off colonies suffered from British intentions to suck them dry. New investment stalled putting a lasting dent on business innovation. While the global commodities bust and the British sucking the country dry ahead of their being kicked out were beyond Ceylon’s capability to control, the third calamity was entirely of its own making.

After its 1948 freedom from occupation its rulers embedded short-termism in the system. Repeated post occupation Sri Lankan rulers chose populist measures from price controls, subsidies and commercial freedom sapping regulations. Autarkic polices – those supporting the condition of self-sufficiency–were widespread in the decades following independence. When Sri Lanka broke with these polices in the late 1970s’ the rest of Asia had caught up and overtaken it. For example Japan, which also stalled following the Second World War – its per person GDP halved in 1945 compared to a year earlier – was no richer than Ceylon then. But by 1977 when Sri Lanka abandoned its stifling economic control Japan’s per person GDP was eight fold higher.

It would be misleading to assume that Ceylon at the turn of the 20th century was perfectly set. An examination of these weaknesses is also indicative of the opportunity ahead of the country.

Firstly Ceylon’s advantageous economic position a century ago does not also imply the economy was modern. It was highly reliant on low value added commodity exports and when external shocks hit they extracted a high price. Its inability to transform its 18th century economic model to the 20th century extracted a high price from its citizens.

cs6Landowners – who acquired vast swathes from departing British and from the frequent crown land sales – controlled commerce but had little interest in advancing innovation. The labour in their estates also remained uneducated, in marked contrast to countries like Japan and East Asian countries where industrialization took hold. Without resources to build a good education system Sri Lanka muddled through a phase when it could have created globally competitive industries. Secondly its transformation from being one of the most open economies in Asia to one that was reclusive happened in the space of a few decades. Liberalization in the 1980s reversed some of the worst effects of isolation but the damage had already been done by then. Even India, hardly a paragon of free trade, is pressing Sri Lanka to free up markets for services and investments though a proposed economic partnership agreement, which Sri Lanka has been resisting for over a decade.

Thirdly – despite democracy – Sri Lanka’s institutional framework to formulate and implement economic policy has been weak. Its remarkable economic success during the 19th century should offer plenty of clues on the need to integrate the Sri Lankan market with the rest of the world because 21 million people here are just too few.

However Sri Lankans don’t confront this decline because they have no appreciation for their relative standing. In absolute terms life here has improved but those changes pale in comparison to the achievements of others. They first have to start questioning their predicament. Perhaps then they can start to discover the lessons from their own past.

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