The Best Reform(s) for Sri Lanka

Abstract

The IMF’s insistence on government spending cuts and tax increases will help achieve financial sustainability goals, on the hand, it threatens to alienate the regime from society and thus create the sustainability issues of the government itself. Sri Lanka’s livelihood subsidy policy can be traced back to the colonial period, when the colonial government offered subsidy to peasants who were deprived of paddy estate. This compensation arrangement later became one of the main sources of legitimacy for the regime. After independence, the dynamics of party politics and ethnic competition reinforced the government’s adherence to subsidy policy instruments. The current government has neither political authority or financial resources to initiate meaningful structural reforms on subsidy dependence. It is also futile for the government to attempt to reverse the constitutional amendments for presidential system or coerce the IMF to cede on its additional terms in the short term. Instead, it should focus on economic development, and try to foster incremental reforms by relaxing government control and granting certain autonomy to ethnic minorities and impoverished farmers. In this way, the government can be relieved of much of its burdens on defense and subsidy, and accrue market vigor to attract foreign investments. In the mean time, the government should also adjust higher education for future industrial development, so as to enhance the competitiveness of its labor force and generate more tax revenues for the government.