Sri Lanka's Rebirth, blog by Joseph E Stiglitz

By Joseph E. Stiglitz

COLOMBO – Sri Lanka has been deservedly praised for the progress it has made since the end of the war against the separatist Tamil Tigers in 2009. The economy has grown at an average annual rate of 6.7%, and education and health statistics are impressive.

All developing countries face myriad challenges, but this is especially the case for a country that has suffered an intense 30-year civil war. The government will need to set priorities; but success will require a comprehensive approach.

Underlying wars such as the fight with the Tamil Tigers are, typically, social and economic grievances such as real or perceived discrimination, and the failure of government to address wealth and income disparities adequately. Thus, more than transitional justice is required in Sri Lanka (or, to take another example, in Colombia, where peace with the FARC guerillas seems increasingly likely). What is required is full integration of the Tamils, Sri Lanka’s embittered minority, into the country’s economic life.

Markets on their own won’t solve this problem. Sri Lanka will need balanced affirmative-action programs that address the various dimensions of economic disparity and are attuned to the inequalities within the Tamil population. It will do no good to give a leg up to Sri Lanka’s many rich Tamils, while leaving poor, lower-caste Tamils further behind.

Economic integration of the northern Tamil region will require heavy public investment in infrastructure, education, technology, and much else. Indeed, such investments are needed for the entire country. And yet tax revenue as a share of GDP is only 11.6%, about one-third that of Brazil.

Like many other developing countries, Sri Lanka simply enjoyed the fruits of high commodity prices in recent years (tea and rubber account for 22% of exports). Sri Lanka should have used the commodity boom to diversify its export base; the previous government of Mahinda Rajapaksa did not. With export prices down, and with tourism likely to suffer from the global economic downturn, a balance-of-payments crisis looms.

Some suggest that Sri Lanka turn to the International Monetary Fund, promising belt tightening. That would be hugely unpopular. Too many countries have lost their economic sovereignty in IMF programs. Besides, the IMF would almost surely tell Sri Lankan officials not that they’re spending too much, but that they’re taxing too little.

Fortunately, there are many taxes that the authorities can impose that would increase efficiency, growth, and equity. Sri Lanka has abundant sunshine and wind; a carbon tax would raise considerable revenue, increase aggregate demand, move the country toward a green economy, and improve the balance of payments. A progressive property tax would encourage more resources to go into productive investments, while reducing inequality and, again, boosting revenues substantially. A tax on luxury goods, most of which are imported, would serve similar goals.

(- Joseph E. Stiglitz is the recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979. He is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute -)