- Historically, absolute power has not been good for Sri Lanka’s economy. Will this time be different?
Gaining a two-thirds majority in a democracy has been the ultimate desire of all Sri Lankan governments as it would virtually put a fullstop to meaningful political competition, enabling governments to make sweeping changes unilaterally, for better or worse, without worrying about consensus.
Nonetheless, achieving a two-thirds majority is a rare occurrence as throughout Sri Lankan history, it has happened only on four occasions so far, with the latest one being the 2020 general election. Unfortunately, during the first three occasions, it could hardly be said that the two-thirds majorities have been used in the best interest of the nation or its economy.
Focusing particularly on the economy, the consequences of actions taken under these respective governments most often had a negative impact on economic growth, whether those effects were felt immediately, as in the early-1970s Government, or belatedly, as in the late-1970s Government. The impact of these decisions still affect the development of the country and have contributed to us remaining a “developing” nation. In contrast, many countries that gained independence around the same time we did have travelled far ahead in terms of economy.
At a time when the present Government is gearing up to enjoy its two-thirds majority, The Sunday Morning Business decided to take a look at the previous three occasions of two-thirds majorities, key economic decisions taken under these Governments, and how the current Government can avoid similar pitfalls in economic policy formulation.
What is a two-thirds majority?
To put it in simple terms, a two-thirds majority means securing 150 or more seats in the Parliament by the ruling party. According to the Sri Lankan Parliament, a particular procedure has to be followed to pass constitutional amendments, bills inconsistent with the Constitution, investment treaties, and agreements. At this stage, a special majority is required, and it should be taken by name to ensure that the votes are specifically recorded for future reference. This special majority vote should be taken not only on the second reading, but also on the third reading. Every committee-stage amendment should receive a two-thirds majority vote. The Speaker or the Presiding Officer is entitled to cast a vote when there is equality in votes. But when the two-thirds majority is required, the Speaker cannot exercise the casting vote.
Historical two-thirds majorities
Sirimavo Bandaranaike and the closed economy
Sirimavo Bandaranaike, the world’s first female Prime Minister, when elected in 1960, served as the Prime Minister of Sri Lanka for 18 years, periodically. Bandaranaike’s second term as Prime Minister was from 1970-1977. In the general rlection of 1970 that re-elected Bandaranaike, she rose to power at the helm of the United Front (UF), which consisted the Lanka Sama Samaja Party (LSSP), Sri Lanka Freedom Party (SLFP), and Communist Party (CP), and collectively secured a two-thirds majority in Parliament. In the House of 151 seats, the SLFP alone won 91 seats while the LSSP secured 19 seats and CP secured six seats. Unitedly, the three parties garnered 115 seats. The United National Party (UNP) suffered a crushing defeat, obtaining only 17 seats. This led Bandaranaike to enjoy a comfortable two-thirds in Parliament.
Radical policies raised their heads, free enterprises were further restricted, and industries and institutions were nationalised. Even though the nationalisation of private companies was initially begun under the late Prime Minister and husband of Sirimavo Bandaranaike S. W. R. D. Bandaranaike’s regime in 1956, these measures were continued with renewed vigour under Sirimavo Bandaranaike’s administration.
Analysts say that this unprecedented nationalisation that took place led to the fall of Bandaranaike’s regime as it did not achieve the desired results. Nationalisation controlled a significant part of the economy, which means the control was with the Government. They dominated international trade and payments, plantation and industrial manufacturing sectors, and even the trade unions.
Due to sluggish bureaucratic processes; lack of professionalism; lack of capital, managerial expertise, and technology; and political interference, by 1977, most of the state-owned companies were running at a loss and continued to make losses. The total output of the plantation economy had fallen because of drought and low reinvestment in new equipment and replanting. Nationalisation deteriorated the condition of the outputs. Making things worse, the oil crisis in 1973, broke the back of the Sri Lankan economy and resulted in large-scale rationing.
In addition to this, Bandaranaike brought in stringent foreign exchange control measures to the Sri Lankan economy to remain as a closed economy. All non-essential and luxury imports were banned, and at a point, even imports of foods and medicines were forbidden. Nevertheless, this led to locals opting to manufacture goods they cannot import. Even though import controls were commended, difficulties in importing the necessary raw materials for local production due to lengthy bureaucratic processes were criticised. However, some of these manufacturers managed to survive bureaucratically and continue to do business even today.
During this time, import substitution was promoted, with food rationing and compulsory savings having been introduced. The year 1973 was declared as the year of manufacturing by Bandaranaike. The Government expanded state control of the distribution of necessities at low prices.
According to a scholarly article written by Ronald J. Herring on “Economic Liberalisation Policies in Sri Lanka”, although the economy was exporting substantially more than the 1960s under Bandaranaike’s regime, those exports had a purchasing power more significant than one-third the smaller volume of exports in the 1960s.
Further, a new Constitution was brought in, creating an executive presidency and also changing the name “Ceylon” to “Sri Lanka”. The Government instituted socialist economic policies, strengthening ties with the Soviet Union and China, while promoting a policy of non-alignment.
Regardless of these policies, Bandaranaike’s Government failed miserably as closed economic policies were an utter failure. Bandaranaike was sent home in the 1977 election due to this. People elected J.R. Jayawardena as the President of Sri Lanka in 1977, and he held a five-sixths majority in Parliament.
J.R. Jayawardena; overly open
Junius Richard Jayawardena, commonly abbreviated as J.R. Jayawardena, was elected as the first Executive President of Sri Lanka in 1978. It was a landslide victory for Jayawardena as his Government secured five-sixths of the majority. The UNP swept off 140 seats out of 168.
Jayawardena’s manifesto promised to reverse the nationalisation of the country’s tea, rubber, and coconut estates; to make changes to foreign exchange policies; and to open the Sri Lankan economy. He proceeded with his promises once he was elected into power. Jayawardena’s regime initiated an open economy, the first in South Asia. The Government mostly withdrew from its direct role in the Sri Lankan economy, making a clear departure from policies implemented by the previous administration. Market mechanisms were given greater autonomy and were considered as the engine of growth, and steps were taken to instil features to the political system.
The policy since the early-1960s that restricted foreign banks from opening branches in Sri Lanka were changed in 1977 and 10 new foreign banks opened offices in 1979 and 1980 alone. Generous tax incentives were announced to encourage foreign direct investment (FDI). Powerful investment incentives for foreign and domestic capital and liberalisation in international trade policies were announced.
The Greater Colombo Economic Commission was established by statute in 1978, with powers necessary for the development and resurgence of the economy. Further, imports and payments were liberalised, and price controls and other administrative controls were removed with a view to enable the market mechanism to operate. The concept of privatisation of state assets was introduced with economic liberalisation, recognising it as an alternative strategy to boost private sector activities in the economy.
However, the five-sixths of the Parliament was often used to manipulate and amend constitutions. Since 1978, the Constitution was amended 16 times in 10 years, which led to a democratic deficit.
In addition to this, as a result of removing import controls, the market was filled with imported goods, and as the Sri Lankan mentality always preferred imported goods, demand for local items dropped and it took very little for many local industries to vanish permanently. Industries such as fertiliser, ceramics, and plywood, that began to nourish with the support of foreign loans and aids, had to go out of business. Foreign reserves gradually deteriorated. This was attributed to opening the economy in an extreme way instead of opting for a middle path.
Ronald J. Harring’s research paper states that in pursuit of news strategies on external investment capital and foreign loans, the Finance Minister visited groups of investors and officials of aid-giving nations and agencies across the world. In the first full year of the new regime, official loan commitments more than doubled, in the marked contrast to the experience of other South Asian nations at the same time. The net flow from all lenders increased to $ 175.9 million in 1979 compared to $ 49 million in 1977.
The increase in the level of international grants created an unprecedented balance of trade deficits in the economy. The tax revenues foregone through the incentives for capital had to be made up from other sources. Taxes on individual and corporate income and profits fell from 17.5% of total revenues in 1976 to 9.8% in 1978. Similar decreases occurred in the share of taxes on property, net wealth, and estates. The rate of growth in real national income had been significantly less. The import liberalisation policy, by removing constraints on imported intermediate goods, certainly contributed to growth in the manufacturing sector, but simultaneously contributed to wiping out the current account surplus very quickly. In 1978, the balance of trade deficit was one of the largest in Sri Lanka's history, and that deficit was dwarfed by the 1979 deficit, which in turn doubled in 1980 and increased further in 1982.
Current account deficits were covered by dependence on foreign funding. The 1980 budget deficit amounted to more than 26% of GDP. Sri Lanka lost 7% of its real national income in 1982 and 8% in 1983. Unfortunately, the economy was more vulnerable to exogenous shocks under the liberalised regime than under the closed economy of Bandaranaike.
Public sector firms varied in profitability, with no clear trend since the new policies took form. The rate of growth in production in public sector enterprises was considerably lower than in the private sector.
“One irony is that import liberalisation – a key component in the strategy – has hurt the National Textile Corporation and the National Paper Corporation, adding to the troublesome budget deficit,” Herring adds in his research paper.
In 1989, Jayawardena’s term ended, and Ranasinghe Premadasa was elected as the President of Sri Lanka, the same year.
Mahinda Rajapaksa: Infrastructure and borrowing
Even though incumbent President Mahinda Rajapaksa’s presidential term was to expire in 2011, he announced the presidential election in November 2009, to be held in January 2010. While the main Opposition party nearly collapsed, Mahinda Rajapaksa rallied an impressive two-thirds victory, in little less than a year in 2010 since the end of the Civil War in 2009; mainly due to successfully ending the war under his Government. Ruling party United People’s Freedom Alliance (UPFA) secured a large majority in the House as it obtained 144 seats while the Opposition, UNP, won 60 seats.
The Sri Lankan economy grew by an impressive 8% in 2011 but dropped to 6.4% the following year. The slowdown was primarily due to weaker external demand and tightening of fiscal policies. In the last three years of Rajapaksa’s regime, growth shot up and was ranging between 7-8.5%, driven mainly by a boost in infrastructure growth.
In September 2014, the International Monetary Fund (IMF) stated that Sri Lanka had made notable advances in recent years, and appears to be on its way to joining the ranks of upper middle-income countries.
“Per capita GDP has increased from $ 869 in 2000 to $3,256 in 2013, and there appears to be an ongoing shift toward higher value-added industrial production, as well as the rapid expansion of services,” the IMF added.
However, infrastructure projects such as roads, highways, and ports were mainly funded by China and interest rates of these loans were 5% and above. Highways were in fact a priority of the Government. Borrowing was high during Rajapaksa’s period. At one point, private banks were directed to borrow from international lenders and re-lend it to the Government to keep interest rates low.
Moreover, most of these infrastructure projects failed to provide a return. According to a local media article, as of 2013, the Southern Highway cost Sri Lanka an annual loss of Rs. 5.5 billion, as Prof. Amal Kumarage of the Transport and Logistics Management Department of the Moratuwa University stated. The annual revenue collected from the toll collected from vehicles was just Rs. 1 billion in 2013, while the maintenance cost, together with debt servicing, was Rs. 6.5 million. Therefore, the Government had to borrow more to service its external debt repayments. Nevertheless, government expenditure remained high as infrastructure developments continued to take place during Rajapaksa’s regime.
Massive infrastructure projects that were completed under Rajapaksa’s era include the Mattala Rajapaksa International Airport, known internationally as “the world’s emptiest airport”. The project was more of a want than a national need. The project cost $ 209 million, of which $ 190 million was obtained from China as a loan. Even though Sri Lanka needed a second international airport, due to being located in the midst of a migratory birds’ route, neither aircraft nor passengers flock to Mattala.
Nevertheless, Mattala was chosen as the location of the new airport, mainly because it was situated in the home region of the President, and he had bigger plans to develop the Southern Region.
In September 2010, Parliament passed a proposal to remove presidential term limits from the Constitution. The amendments also included the removal of an independent advisory council that the President had to consult before appointing people to crucial nonpartisan positions. As analysts say, Rajapaksa’s rule was increasingly authoritarian during this period. The legal system was increasingly politicised.
Rajapaksa failed to secure his third term as the President of Sri Lanka as he lost in the presidential election held in January 2015. Maithripala Sirisena was elected as the new President.
What would this two-thirds Government do?
Ruling party Sri Lanka Podujana Peramuna (SLPP) secured 145 seats out of 225 seats in the 2020 general election, while SLPP’s allies secured five seats. It is still unpredictable what this Government would do with its impressive two-thirds majority achievement. Nevertheless, on Wednesday (19), the Cabinet of Ministers of the newly appointed Government granted approval to introduce the 20th Amendment to the Constitution. The Cabinet had granted approval to abolish the 19th Amendment and to draft the 20th Amendment to the Constitution.
Accordingly, the 20th Amendment to the Constitution will be drafted and presented to the Cabinet of Ministers before tabling it in Parliament for approval. Senior members of the Government have said earlier that the proposed amendment will include clauses from the 18th and 19th Amendments as well as several fresh clauses.
Speaking to The Sunday Morning Business, former Central Bank of Sri Lanka (CBSL) Deputy Governor Dr. W.A. Wijewardena stated that a Government can do whatever they would like to do, when there is a two-thirds majority. Nevertheless, he emphasised that it should be used for the betterment of the country’s economy.
“Governments should use their two-thirds majority power to undertake the necessary reforms, such as reforms in the labour market, capital market, and land market,” Dr. Wijewardena added.
Analysts are of the view that during the previous three occasions, the two-thirds majority was used for personal needs and to take revenge from political rivals of heads of the Sri Lankan Government.
Dr. Wijewardena added that if Sri Lanka chooses to use its majority power wisely, the country could get rid of the debt burden; otherwise, we would end up like the previous three occasions of a two-thirds majority.
“In none of the occasions were they used for the betterment of the country. We would have introduced massive amounts of reforms. In the capital market, we have to introduce the new legislation to investors rather than the borrowers. We will have to introduce new taxes as no Government can function merely by printing money,” he added.
Meanwhile, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando stated that a two-thirds majority is “like a knife” and one can either harm themselves or do the necessary thing.
“It is a big power and a lot of changes can be made economically and constitutionally. It should be utilised for economic reform plans, to ensure the competitiveness of the economy, and to make the state sector more efficient and transparent,” he added.
It is difficult to rule that a two-thirds majority can always be counter-productive for an economy merely based on Sri Lanka’s previous experiences or based on other similar international experiences. As economists say, it is the Government that should decide how effectively they are going to utilise the comfortable two-thirds majority they have secured, while making sure that the Sri Lankan economy will not face the same fate as it did during the previous three occasions. Here’s hoping the Government has the same idea.