24 January, 2022


Sri Lanka Can Still Open The Window Of Opportunity: Dr. Amarakoon Bandara

By W.A Wijewardena

Dr. W.A Wijewardena

A dynamic analysis of Sri Lanka’s growth performance

My former colleague at the Central Bank and presently Senior Economic Advisor to UNDP, Dr. Amarakoon Bandara, delivering a public lecture at the Bank on Growth Dynamics, has opined that Sri Lanka can still open its window of opportunities if proper policies are adopted, despite its dismal economic performance since independence. Growth dynamics refers to the area of economics that helps policy makers to understand how an economy has progressed over time – its achievements, failures, constraints and prospects. This is different from the typical static economic analysis in which an analyst will stop the clock and compare the situation in the economy between two time periods, known as comparative statics. It is not often an economy is viewed from a dynamic perspective and Bandara’s attempt was a rare instance.

A risk-reward game involving three players

Bandara commenced his lecture by presenting to his audience a hypothetical ‘risk-reward game’ involving three players. The three players had begun their game with more or less a similar resource endowment and, therefore, neither one was above or below another. The first player had 400, the second 150 and the third, 140 and this could have been anything from rice to rupees to dollars. They were supposed to play the game to reach three levels of rewards, again in the same respective measuring stick, say 53000, 27000 and 4000. This set of final rewards offer them a very high to very low return from where they had started. It was up to them to adopt the most effective and efficient strategy to grab the highest reward possible.

Singapore and Korea bagging the rewards

Ironically, the three players were Singapore, Sri Lanka and South Korea in 1960, in that order. The time span for the game was extended to 2015 but it could have been any other year earlier or later. Though they had begun with a similar endowment, Singapore emerged as the winner with the highest reward, Korea in the second place though less than Singapore but much more than Sri Lanka and Sri Lanka, the lowest and the laggard in the game. This is shown in figure 1. Bandara, then, has dug out the dynamic forces that had contributed to this excessively unequal outcome of rewards. There have been a number of socio-politico-economic factors that have helped both Singapore and Korea to bag the high reward and caused Sri Lanka to fail in its attempt to do so.

Figure 1 –Per capita GDP 1960 – 2017 US $ – Source: World Bank

Sri Lanka  Singapore — Korea — 

Economic ups and downs have to be corrected quickly

The annual real economic growth rates attained by these three players during 1960 to 2015, said Bandara, demonstrated that they all had experienced ups and downs in growth as shown in figure 2. However, the difference had been that both Singapore and Korea had been able to very quickly recover from the downs and place the respective economies back on the long term economic growth path, whereas Sri Lanka had failed to do so. Consequently, the attainment of Sri Lanka had not only been prolonged downs but also been lower by 4 to 5% than the other two players. As a result, though the initial endowment was the same, the end result had presented a massive gap in the final rewards. Thus, Sri Lanka could only savour in the past glory and not in any present day achievement.

Figure 1 – Annual GDP Growth 1961-2017 % – Source: World Bank

Sri Lanka  Singapore — Korea — 

Sri Lanka taking one step forward and two steps backward

Bandara had observed that in the case of Sri Lanka, both the political and economic growth cycles had coincided with each other. Whenever a pro-free market economy ushering political party had been in power, there had been a slight upward movement in economic performance. When the power had been shifted to the opposite camp, which had invariably happened almost alternatively, the initial gain had been reversed. Thus, according to Bandara, Sri Lanka had been in the habit of taking one step forward and taking two steps backward all throughout the period under consideration. This policy inconsistency and reversal had not been noticed in the case of both Singapore and Korea. As a result, both of them had been able to follow the same policy package by taking forward steps continuously. Any backward step had been only when they had been hit by some unavoidable external shocks like the East Asian financial crisis in 1997-8 or global economic downturn in early 2000s.

Promotion of savings through positive real interest rates 

Another stark difference in policy had been the use of monetary policy to promote savings for investment in these three countries. For any economy to grow, it has to invest a sizable proportion of its annual income to replace the worn-out capital on the one hand and expand the production capacity on the other. Those investments have to be funded either through savings generated by citizens by consuming a lesser amount out of incomes or by attracting savings made by foreigners by consuming less than their incomes or by resorting to both. A crucial requirement for promoting domestic savings has been, among others, the need for maintaining market interest rates sufficiently higher than the prevailing inflation rate – a situation known as having a positive real interest rate regime. Bandara had noted that in 1960 in both Singapore and Korea real interest rates had been negative but they were converted to positive soon after through a conscious monetary policy involving an increase in the market interest rates above the inflation rate. It delivered a miracle by increasing domestic savings which were in turn reinvested in the economy.

Sri Lanka’s anti-savings interest rate policy

But Sri Lanka had maintained nominal interest rates at constant levels resulting in the real interest rates fluctuating from positive to negative all the time. Hence, Sri Lanka had a wide savings investment gap which had to be filled by relying on foreign savings which were attracted basically to the country via external borrowings. According to Bandara, when a country uses domestic savings for investment, the return on capital remains within the country, enabling it to benefit from such investments on the one hand and reinvest the same for further economic growth, on the other. But when a country uses foreign savings, that country will experience an outflow of the return on capital and therefore for further investment, it has to continuously rely on foreign savings. It would then trap that country in a vicious circle of foreign borrowings which in later years would be reflected in an undue growth of its external debt stock. This is exactly what has happened to Sri Lanka today.

High total factor productivity through high investment in R&D

Because there was no burden on the budget in the form of extreme external debt repayment commitment, both Singapore and Korea were able to invest heavily in research and development or R&D and create a facilitating environment to convert the fruits of such R&D into commercially viable and exportable products. This was responsible in building up a huge technology base in both countries. But, Sri Lanka on the other hand, due to budgetary constraints, lagged behind in R&D and therefore had to depend on cheap labour concept for investment as well as attracting foreign investments. This has two implications on the growth of the three countries under consideration. First, in both Singapore and Korea, the incremental contribution to economic growth arising from the use of technology and the combined outcome of engaging both capital and labour, known as total factor productivity, was significantly higher than that in Sri Lanka. The corollary of this development is that a smaller addition of both capital and labour in Singapore and Korea would bring in a higher economic growth. To attain the same growth, Sri Lanka had to use more and more capital and labour in varying combinations.

Sri Lanka’s low technology base and getting snared in middle income trap

The second implication of low R&D was that Sri Lanka had to depend on cheap labour for its economic growth. But, Sri Lanka’s growth is constrained because the golden era of cheap labour has now disappeared. On one side, its labour is not cheap anymore and it cannot compete with other cheap labour countries such as Bangladesh and Myanmar. On the other, without technology, it cannot move up in the ladder from a lower middle income country to an upper middle income country and finally to a high income country. Sri Lanka is now trapped in what is known as the ‘middle income trap’ in which it cannot neither move forward nor remain competitive among its peers. This was the breakout point of departure for the three players who had started the game with the same endowment set. Both Singapore and Korea made a quantum leap to the rich world, while Sri Lanka was left behind as an emerging economy forever.

Sri Lanka’s missed opportunity in 1966 

This is in fact a sad story of missed opportunities. I have traced back this missed opportunity to 1966 when the Sri Lanka Government refused to follow a set of policy recommendations made by Gujarati economist B R Shenoy. I have discussed this missed opportunity in a previous article in this series under the title ‘The Ignored B R Shenoy Report: An instance of missed opportunity for Sri Lanka?’. Shenoy who was hired by the then Minister of State and Deputy Prime Minister J R Jayewardene to report on the economic reforms needed to lift the economy from the depth to which it had fallen had submitted a rebellious report containing recommendations which had even outrivaled those that had been adopted by Singapore and Korea at that time.

Shenoy’s rebellious recommendations

In summary, his recommendations had been the following:

Balance the budget not by raising taxes which would further reduce the national savings but by halting the expenditure leakages in the form of unproductive subsidies, expansion of the state sector and non-rationalisation of the capital expenditure programs;

Denationalise the selected state corporations in fisheries, manufactures and trading areas so that they would not be a drain on the limited resources in the budget;

Generate surplus in the current account and use that surplus to finance increased capital expenditure programs thereby having a zero budget deficit;

Bring market discipline to other state enterprises by listing them in the stock exchange;

Give cash subsidies instead of commodity subsidies to the deserving;

Reduce the marginal tax rates since taxation destroys potential national savings into a bon-fire of public consumption;

Totally abolish import and export controls and float the Sri Lanka rupee. This was a totally rebellious recommendation since in 1966 even the developed countries had not gone for floating exchange rates;

Liberalise external trade fully to generate an assured inflow of raw materials for domestic industries which would in turn export quality goods to the market.

Compromising reforms through fear of losing power

It would be apparent that Shenoy’s recommendations were well ahead of the time, surpassing even those adopted by Singapore and Korea at that time. According to biographers of J R Jayewardene – K M de Silva and Howard Wriggins – JR had been impressed by these policy recommendations. However, when they were submitted to the Cabinet, according to JR’s biographers, Prime Minister Dudley Senanayake had chosen to kill them, believing that it was yet another ploy by JR to oust him from leadership.  Hence, the policy package was dismissed and it remained a dusty document with JR till it was transferred to J R Jayewardene Centre in Colombo as a vital document.

Regaining missed window of opportunity

This was a window of missed opportunity for Sri Lanka. Bandara thinks that Sri Lanka need not live with a series of missed opportunities. His prognosis has been that the country can regain what has been lost by adopting a proper set of economic reforms and consistent economic policies. In my view, the present Coalition Government is the best for introducing such a reform program. It was the Coalition Government of David Cameron that rescued the UK from imminent bankruptcy in 2010. They did so by having one voice on policy reforms. Hence, there is no choice for the two constituent parties in the government – UNP and SLFP – but to speak in one voice rather than expressing in a multitude of diverse voices.

*W A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 2

    Wait for some turmoil in western financial market; to see how our value of our rupees goes down ..
    It is international impact that we feel ..
    It’s something to do with dollors…western countries can gamble; twist and manipulate financial markets ..
    Poor third world countries have to pay the price ..
    Now; sorry .in any in
    Interest based economy; always rich get more rich ; poor pay the price ..
    It mean some are drinking blood of poor; 1% vs 99% nothing but this ..

    • 2

      Wije, this is outdated Market Fundamentalism of the now dead IMF-WB- Washington Consensus that has destroyed so many countries in Latin America and Greece.

      Bondscam Ranil’s Neoiberal experiment on advice of US Economic Hit men – financialization and deregulation without proper oversight institutions or a development plan and without investment in R & D, is dead in the water! The Lankan rupee has crashed, there is no growth or FDI to Sri Lanka because of Corruption, corruption, corruption that neoliberal reforms have magnified to the nth degree.

      • 2


        Will you please enlighten us with what exactly you meant by

        1. Market Fundamentalism
        2. dead IMF-WB- Washington Consensus
        3. Neoiberal experiment
        4. financialization and deregulation
        5. neoliberal reforms
        6. FDI
        How do you propose to increase FDI without a free market economic framework in this island?

      • 1

        According to the Island newspaper, another wizard who is a master of everything had said the following at a seminar on last Monday:

        “The current government’s needlessly self-destructive overemphasis of corruption and the oft-repeated ‘debt mountain’ scared away foreign investors who lost faith in the country’s administrative and financial system” Dr Nalaka Godahewa, former chairman of the Securities Exchange Commission (SEC) told the media at the Patriotic Professionals’ press briefing held on Monday. That is totally opposite to your ‘brilliant, assessment.
        We the non economic men in the street are getting confused. Is it simply ‘party politics’?

  • 3

    “Dr. Amarakoon Bandara, delivering a public lecture at the Bank on Growth Dynamics, has opined that Sri Lanka can still open its window of opportunities if proper policies are adopted”


    Sri Lanka has too many PhDs and economists who pop up at every corner now but no one was there to predict the situation for decades and advise the masses or political gang before the situation got worse. Just like how the experts popped up in every corner to talk about tsunami after it had and destroyed the nation

    • 1

      Tsunami had come, destroyed and gone. MaRa looted Tsunami money of 800 millions US dollars, survived and is persisting to loot further.

      These unrealistic economic theories won’t work in the Blessed Island, only politics of MaRa, GoTa, Ranil, and Maru Sira works.

  • 1

    Lankan laypersons (aka the persons on the street) will say that our predicament lie in the Lankan culture of corruption/nepotism/impunity.
    Dr W A Wijewardena never talks about this! .
    Without graphs the said laypersons will confidently suggest that performance-wise, Singapore is probably ahead of South Korea but both are far far ahead of us.
    Singapore did not allow the race-divide to dominate. Meritocracy was the rule. ‘Law and order’ was not used for personal gains. Singapore started with a level playing field.
    S. Korea went through a war, the allies helped and preached meritocracy (of course for political reasons), S. Korea did not have a race/ethnic divide but did have a class-divide. They prospered. Corruption was in check because the ‘Law and order’ was enforced.
    We created this language-divide. We created our own ethnicity based on language. This led to unchecked breakdown in ‘Law and order’. The culture of corruption/nepotism/impunity grew grew grew.
    The Dr. Amarakoon Bandara’s ‘Window of Opportunity’ if and when they arise cannot be exploited if ‘Law and order’ is not there.
    By the way, is Amarakoon Bandara standing there muttering “Knock Knock”. Has he ever actually knocked?

  • 1

    Dr. Wijewardane: The annual GDP for Sri lanka is higher than that of Singapore or as the same as to Korea. Yet Sri lanka is bankrupt. It went to Recession in 2013. Now it is in Depression. why ? As our only product is Tourism, I would like to know how much Sex related diseases, Alcoholism, prostitution has increased. What is the contribution of baned narcotic subtances to the GDP.

  • 0

    The point is, the Central Bank may be filled with PhDs and so are many (PhDs) who have retired from the CBSL
    Despite all this wealth of academic knowledge @ our disposal, The SLR is depreciating at an alarming rate.
    You do not need to be a Economic Wizard to understand the gravity of the current state-of-affairs. In fact every Siripala or Siriyawathie from the farthest of places feels this, thus this is not a secular issue.

    The ultimate question is: “how can be reverse this trend, and bring the SLR to a fair trading value”, or are we to accept the present ( and possibly more decrement future) scenarios and face life as we simply don’t care!

  • 3

    I have heard about a few Korean and Singaporean Companies which are listed on the London Stock Exchange…
    But Dr Ranil has brought the London Stock Exchange to Colombo.
    And rang the Bell at the first day of Trading in Lankawe…
    Wonder whether I can buy Billiton , Singapore Investment Corporation and Samsung shares in Dr Ranil’s LSC, and pay in Yahapalana Ruppiahs,,,
    These impressive Charts do not reflect that Giant Killer Economic Achievement of Dr Ranil.. Does it.?.

    Seriously, I am glad to see our Inhabitants in a same chart of Economic Achievements of the Modern day developed Nations in the World.
    People who understand Economics, and Economic Development certainly are aware why we are lagging in progress…No need to digress..

    Can Dr Ranil lift it..Up……
    The Form doesn’t say do..
    Biggest rorts of Public Money, Biggest Bull Shit about bringing in big end Manufacturing.
    Killing the local Industries by allowing Hindians free access to everything as that Samson Son told DR Ranil’s demolition Brigade .
    8% post Nanthikadal growth is now 3.1%..

    Our great majority of Inhabitants will be slaves to Hindian Industrialists and Hakka Chinese Enterprises ..
    Will that bring our inhabitants USD 30-60 k Plus per Capita Income League.
    I don’t think that will ever happen with these Morons in Power..,
    Except the few in Dr Ranil’s Inner Circle and their mates, Friends and Extended Families…

    Finally an interesting observation.
    People who can read graphs will realize that at least little bit of increase there , happened from 2009 to 2015…..

  • 0

    Lankawe politicians use two tools to climb to the power. The main one is racism. Minor one is pleasing Modayas with Budgetary Biryani and Arrack at election or other crucial times. Both are destructive on the economy, but extremely efficient in delivering the results sought- the power. Burning the Tamils’ property and starving the Tamils to please Sinhalese is the first one. 2nd is Loot the state Treasury to bribe the Modayas with state’s Biryani and Arrack. These are destroying the country’s economy, international standing, country’s security in regional or at as whole world wide. These are beyond the war, unprotected situation to natural disasters and corruption……….During the 2nd World War only Japan bombed, if one comes now minimum Japan, Russia, India, China, America, Iran, Israel will do that.

    There is no explanation why Ranil, all of a sudden, gave a 10,000 Rs increment to state workers. When November 2014 the Old Royals presented their budget, Handunnetti said in Parliament that even his wife went home from school and praised the budget as “ Their budget is very good for people.”. What a merciless crime to cheat the innocent people like this with that increment and budgetary goodies on their own destruction?

    There are three modern well known and better in their category elements has been the worst to Lankawe.
    1. Universal Franchise and democracy :It is hard to believe still for majority that Ramanathan was right when he said that allowing all the Lankaweyans to vote is disastrous.
    2. Market Economy: Only way to run Lankawe economy is not with left or right policies. But like Mussolini or Hitler, put all in the 22 million in Chicken Pens and deliver the Biryani on the conveyor belt. If you leave them out, with their extreme corruption, they will continue to damage the world economy & peace.
    3. Buddhism: For that, nothing can be done until Buddha sends down to earth the Sinhala Thirunavukkarasar.

  • 0


    You are the biggest racist and bigot

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