Sri Lanka’s government declared it “free from terror” on May 18 after its army killed Velupillai Prabhakaran, the long-time leader of the rebel Tamil Tigers. The best way to quiet remaining dissent is through rapid economic growth. In recent years Sri Lanka has achieved reasonable economic results in spite of its civil war. If peace has now arrived, a more rapid surge towards prosperity is possible, perhaps by becoming India’s low-tax, high-skill neighbour — like Taiwan’s relationship with China.
With GDP of $4,300 a head in purchasing power parity terms, Sri Lanka is more prosperous than its neighbours India, Pakistan and Bangladesh, although its inequality is close to Latin American levels. It has remained a democracy, and economic growth averaged more than 7 per cent annually in 2006-08. The country’s main problems are substantial budget and trade deficits, together with relatively high foreign debt. All of these have been substantially worsened by the conflict.
A lasting peace would probably do more than any stimulus could for Sri Lanka's economy. With a literacy rate of 91 per cent — much higher than India’s 61 per cent — and only moderate corruption, it should be able to attract a high level of foreign investment. That would enable it to increase government revenues without raising taxes and to address its balance of payments and foreign debt problems through rapid export growth.
Sri Lanka could potentially offer investors a more skilled workforce than its neighbour India, at only modestly higher cost, with lower government corruption, lower taxes and greater fiscal stability. That’s an attractive package.
Taiwan — close to Sri Lanka in population although only about half the land area — prospered in the latter part of the 20th Century by giving businesses the opportunity to locate highly-skilled research and management operations in Taiwan, with tight supply-chain connections to lower-cost manufacturing operations in China. As well as potential of its own, including tourism, a peaceful Sri Lanka has a somewhat similar economic opportunity with respect to its own billion-strong neighbour, India. Of course, the two countries’ links aren’t quite analogous to Taiwan’s with China. But as a role model, Taiwan’s rapid growth to a GDP per capita above $30,000 should show Sri Lanka the way.
