The document discusses Sri Lanka's economic transition from a plantation economy in the 1950s to a more diversified economy by the 1990s. It provides details on: 1) Sri Lanka's transition from an export-oriented to development-oriented economy in the 1950s, which led to changes in factors of production and a decline in the prominence of the plantation sector. 2) How the plantation sector was affected by land reforms in the 1970s that transferred ownership of estates from foreign companies to the government. 3) How fiscal policy and government expenditures played a role in Sri Lanka's economic development from the 1950s to 1990s, through subsidies, investments in infrastructure, and tax policies. The government pursued different fiscal

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BA Degree in Social Sciences
Tutor Marked Assignment-1
Semester-1, Level – 4
SSU 2204 – ECONOMY OF SRI LANKA, STRUCTURE &
ANALYSIS
REG NO - 30730163
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1. According to Donald Snodgrass the Sri Lankan economy entered a
transitional phase in 1950s.explain in your own words the meaning of the
transitional economy. How did the changes in policy decisions affect the
plantation sector in 1990?
In the 19th and 20th centuries, Sri Lanka became a plantation economy, famous for its
production and export of cinnamon, rubber and Ceylon tea, which remains a
trademark national export. The development of modern ports under British rule raised
the strategic importance of the island as a centre of trade. During World War II, the
island hosted important military installations and Allied forces. However, the
plantation economy aggravated poverty and economic inequality. From 1948 to 1977
socialism strongly influenced the government's economic policies. Colonial
plantations were dismantled, industries were nationalized and a welfare state
established. While the standard of living and literacy improved significantly, the
nation's economy suffered from inefficiency, slow growth and lack of foreign
investment.
In the 1950s the r is a transition in the economy. In this period the ruling government
has changed their policies especially the export oriented economy changed to
development oriented economy. This is the major transition in the 1950 and also there
are major changes in these areas, such as
 Changes in the availability of factors of production, land, labour, capital.
Especially dependency in the Indian labour force.
 Government efforts to made economic development and growth
 The plantation sector was decline in eminence.
These changes were made by the government to establish a strong economic
background in the 1950 to 1960s.This transformation from traditional economy to
industrialized economy, we call this is the transitional economy.

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Around 250,000 families representing a population of 1 million people still live on the
estates in the central parts of Sri Lanka. The plantation community representing 5% of
the total population has the highest percentage of poverty in Sri Lanka. This sector has
also has the lowest level indicators in education, health nutrition than the national
averages.
The plantation community comprises worker and non worker families with a
diversified occupational structure. This community has been living in the plantations
over 150 years mostly depending on the plantation management which has fair
influence in the working and living conditions of this community. This has led to a
dependence culture and low esteem among this community. Being an Estate laborer
carries a stigma, which limits employment and other opportunities outside the
plantations.
Though Sri Lanka has progressively developed to the status of middle income level
country still there remains regional disparity and pockets where poverty level is high.
Plantation regions where tea and rubber are cultivated are considered a poverty driven
area. Between 1990 – 91 and 2002 poverty in the estate sector increased by 50%, and
in 2002 the incidence of income poverty in the estate sector of 7 percent points higher
than the national average (30% versus 23%).This sector is not faring well in other
indicators as well, such as health, education and nutrition, which all have values below
the national averages.
The 1960s were similar to the 1950s.output of the crops increased on the first half of
the decade, but only rubber managed to sustain the growth. The plantation sector
remains the convenience source of government revenue for developing paddy sector
and other non agricultural sectors. Although some subsidy payments were made in the
form of replanting and fertilizer subsidies to the plantation sector.
By the 1970, the new government has emerged and made a big change in making of
the land reform in the country. The land reform introduces the ownership of lands in
two ways,
 Phase 1
In this phase the ownership of lands by individuals under the land reform law no 1
of 1972 all land held by individuals in excess of 25 acres of paddy land and 50
acres of other land taken to the state and vested in the land reform commission.

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 Phase 2
This was implemented in September 1975 under the land reform law no 39 of
1975.under this statement all land and related capita assets held by public
companies participated in agriculture were taken over to the state, this remains all
estates were owned by foreign companies were transferred to the government.
This is a big controversial situation in the 1970s by owning the all lands by the
government.
From 1977 the UNP government began incorporating privatization, deregulation and
promotion of private enterprise. While the production and export of tea, rubber,
coffee, sugar and other agricultural commodities remains important, the nation has
moved steadily towards an industrialized economy with the development of food
processing, textiles, telecommunications and finance. By 1996 plantation crops made
up only 20% of export, and further declined to 16.8% in 2005 (compared with 93% in
1970), while textiles and garments have reached 63%. The GDP grew at an average
annual rate of 5.5% during the early 1990s, until a drought and a deteriorating security
situation lowered growth to 3.8% in 1996. The economy rebounded in 1997-2000,
with average growth of 5.3%.
The UNP government in 1977 chose as the centerpiece of its development strategy the
Mahaweli hydroelectric-irrigation-resettlement program, the largest development
project ever undertaken in Sri Lanka. The project involved diverting the Mahaweli
Ganga in order to irrigate 364,000 hectares (900,000 acres) and generate 2,037 million
kWh of hydroelectricity annually from an installed capacity of 507 Mw. Launched in
1978, construction was largely completed by 1987, at a cost of about $2 billion.
Even as the UNP government launched this massive capital program, it sought to
encourage private investors, limit the scope of government monopolies, and reduce
subsidies on consumer products. Foreign trade, investment, and tourism were all
encouraged by the government authorities. In 1986, foreign aid rose 23% in real terms
over 1985, largely to finance further massive hydroelectric projects.
While government development policies resulted in moderate growth during the late
1970s and early 1980s, the outbreak of civil war in 1983 led to a rapid rise in defense

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spending (from 1% of GDP in 1980 to over 4% in 1996), exacerbating structural
weaknesses in the Sri Lankan economy. By 1989, rapidly declining economic growth
and worsening fiscal and balance of payment problems reached crisis proportions,
prompting renewed stabilization and adjustment efforts.
After 1977, taxation of plantation crop exports has reduced. Although prices in the
world market began to rise including in the rupee terms, cost of production, especially
in tea increased greatly.
Corrective policies involved stimulating savings through new banking regulations and
other monetary-tightening measures, reduction of subsidies on wheat and fertilizers,
government expenditure reductions, currency devaluation, privatization of many state
enterprises, and other incentives for private investment. These measures resulted in
greatly improved economic performance in the early 1990s, despite unfavorable
weather and the on-going insurgency.
In contrast the plantation sector in Sri Lanka in 1990s witnessed a significant growth
and change.
2. Fiscal policy measurements followed by the government underwent rapid
developments during the past decade. Discuss this statement in relation to the
economic development taking place in Sri Lanka.
During the past 10 years Sri Lankas economic history has already passed through
three distinct stages under which fiscal policy played a prominent role with different
emphasis owing to the changes in development strategies pursued in each period.
The first period extended from 1948 to the late 1950s when there was a deep
commitment to the existing laissez faire and open economy framework. Economic
activities were largely private, with government mainly focused to provide social
services and general administration. Consequently fiscal policy aimed at maintaining
price stability and achieving sound financial management in the country.
Fiscal policy in general is expected to serve main three interrelated objectives. It is
used to mobilize resources and allocate them so as to promote economic development
and for managing the aggregate demand in the economy. Fiscal policy also plays an

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integral part in overall economic policies in developing countries not only because of
the government transactions in the total economic activities.
At the time Sri Lanka gained independence the government expenditure in the gross
domestic product was around 20% and about three fourth of the government revenue
was collected by the various forms of taxes.sri lanka has one of the largest public
sectors among all developing countries today.
The ratio of government expenditure to gross domestic product in 1985 was over
40%of which nearly a half went to capital investment. The mobilization resources
through taxation which accounts for nearly 20% of the GDP is also relatively high
compared to the per capita income level.
Almost since independence Sri Lanka witnessed sizeable budget deficit with an
upward trend. In 1957, the deficit was equal to 4% of the GDP but by the 1970 it
almost doubled. It increased rapidly since then, reached a level of nearly 25% of the
GDP in 1980s during which a massive capital investments were undertaken.
In contrast the conduct of the fiscal operations during the first nine months of 2009
faced several challenges in the domestic and external fronts. in the domestic fronts
major challenges were the higher expenditure on intensifies military activities,
providing urgent needs of internally displaced persons in the northern province,
continuing resettlement, reconstruction and rehabilitation activities in the eastern
province, slowing down in domestic economic activities, the decline in foreign
reserves and high interest payments in respect of domestic borrowings, particularly
during the first half of 2009.
In the external fronts the major challenges were the decline in imports and the
difficulty in raising funds in the world capital market. The fiscal operations during the
first 9 months reflected a lower performance in revenue collection, an overrun in
recurrent expenditure and lower the expected performance in public investment.
The balance of payments which recorded a significant deficit in 2008, improved
substantially to record a surplus by end of the September 2009 and foreign reserves
increased to record level.
The Sri Lankan economy grew, in real terms; by 1.8% during the first half of
2009.this is an encouraging development as it was achieved despite the adverse
impact of the global economic crisis, which resulted in a negative growth in many
countries. the gradual recovery of the global economy as well as the increase in
domestic economic activity, along with the reintegration of the northern and the

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eastern provinces with the rest of the country, are expected to provide the necessary
impetus to the growth momentum during the latter part of the year.benifiting from
these positive developments, the economy is projected to grow at around 3.5% in
2009, compared to 6.0% in 2008
The government introduced several measures to broaden the tax base, while providing
necessary incentives as development measures for specific sectors, and improving tax
administration.
There are some special attentions to mega infrastructure development projects while
also paying attention to rural infrastructure development projects. These projects
including
 Power projects such as kerawalpitiya combined cycle power plant (phase 2),
norochcholai coal power plant and upper kotmale hydro power plant.
 Road development projects such as southern high way project Colombo-
Katunayake express way.
 Port development project such as the Colombo port expansion project and
Hambantota port development project.
 Water supply project, such as Jaffna Peninsula water and sanitation project and
Ruhunupura water supply development project.
 Riral infrastructure development project, such as Gama Neguma , Maga
Neguma and small irrigation project.
 Comments and suggestions of the tutor