Economic_Effects_of_the_Ethnic_Conflict_in_Sri_Lanka

INTRODUCTION Sri Lanka, the beautiful island in the Indian Ocean filled with natural resources is almost a paradise. But with the curse of the ethnic conflict it merely transformed to an agony. Sri Lanka gained independence in 1948, after almost 450 years of colonial rule under the Portuguese, Dutch, and British. This history and the country’s closeness to India helped to produce a poly-ethnic, multireligious population consisting of Buddhists (69%), Hindus (15%), Muslims (8%), and Christians (8%). Britain’s colonial policies and practices created a gap, especially between the majority Sinhala and the minority Tamils. Post-independence Sinhalese elites made use of this division both to track anti-Tamil policies that benefited their community and to build a Sinhalese Buddhist nation-state that marginalized minorities. Tamil elites initially demanded a federal solution whereby mainly northeast, considered part of the Tamil homeland. So they could enjoy independence, from the Sinhalese-dominated south. When such demands were disregarded they uproar for a separate state, in 1970’s. The state’s biased policies led to anti-Tamil riots in 1956, followed by deadlier riots in 1958, 1978, 1981, and 1983. The 1983 riot was especially horrific and caused thousands of Tamils to flee to India and Western countries as refugees, producing a vibrant Sri Lankan Tamil diaspora. This diaspora plays a major role in financing the Tamil separatist struggle now waged by the Liberation Tigers of Tamil Eelam (LTTE). By eradicating other Tamil agents and organizations, the LTTE claims to be the Tamils sole representative. So this ethnic conflict turns in to a civil war since 1983. And it too takes a mode of terrorism since that. This conflict between the Sri Lankan government and the LTTE has killed more than 70,000 people. Most agree that a political solution to the conflict is necessary. The two main parties carry out four attempts to reach a peace agreement. Successive attempts at peace talks (1985, 1994, 2000) failed, but a ceasefire was negotiated in 2002. Most Sinhalese oppose federalism. In November 2005, Mahinda Rajapakse was elected as the president The Rajapakse government has consequently adopted a military strategy of massive retaliation against the LTTE Thus almost the entire territory under the rebels in Eastern Province had been restored to government control by mid-2007. So the government seems more steady and fixed against the LTTE and its terrorism. I presented the above information in order to get an idea about the history of the present ethnic conflict. Since the indefinite Ceasefire Agreement (CFA) between the Government of Sri Lanka and the LTTE was signed in February 2002, several limited studies have been made of the regional economy of Northern and Eastern. So in this discussion I use those indicators and data to build an argument and to compare it with the other provinces as well as the country as a whole. Most of the data about Northern and Eastern provinces are limited to the year 2005. But it is sufficient to get a picture regarding the economic effects of the ethnic conflict in those areas. And present data and situation will be regarded when I discuss about the country as a whole. In the past twenty five years of ethnic conflict in Sri Lanka, the economic and social costs in terms of physical, human, and environmental damage have run into billions of rupees. It’s one of the most callous internal conflicts in the world, almost 70,000 people have died, more than one hundred thousand have been physically injured, nearly a million have been displaced, and more than one hundred thousand homes and thousands of buildings have been partially damaged or destroyed. The conflict in Sri Lanka can be divided into four phases: Eelam War I between 1983 and 1987; Eelam War II between 1990 and 1994; Eelam War III from 1995 to 2001; and Eelam War IV from 2006 onwards. In this assignment firstly I consider the mostly affected conflict regions (Northern and Eastern region) and its economic situation; secondly I will illustrate the economic effects of ethnic conflict in Sri Lanka as a whole. Even the civil war started in 1983, the economy of the conflict region experienced dramatic decline only after 1990, after the failed attempt by India to promote peace in Sri Lanka between 1987 and 1989 through the deployment of an Indian Peace Keeping Force. In terms of income and consumption poverty, the conflict region is worse off than all other Sri Lankan provinces. The northeast region has the lowest per capita income in the country also income inequality measured by the Gini coefficient is highest in Eastern Province, and the region as a whole is more vulnerable to food insecurity than other parts of the country. Numerous direct and indirect causes can be identified for the economic and social decline in the conflict region during the past quarter century of ethnic conflict, and especially from 1990 to 2007. These include: an economic prohibition imposed by the Government of Sri Lanka on the conflict region, illegal taxation by the Liberation Tigers of Tamil Eelam (LTTE), continuous violence against individuals, the establishment of high security zones, restrictions on fishing, land mines set on agricultural lands, closure of numerous roads, a lack of transport facilities, massive displacement of the population, lack of electricity, lack of teaching and health professionals, and lack of physical security for residents of the region. Northern Province and the Eastern Province almost had the smallest economies out of Sri Lanka’s nine provinces during the fifteen-year period between 1991 and 2005. Eastern Province was the lowest contributor to the national economy in 1990 and second lowest between 1991 and 1995. North Central Province and the adjoining Northern Province contribute less than 6 percent each to the national GDP (Gross Domestic Product). Eastern Province was the lowest contributor to national GDP due to the renewed outbreak of the Eelam .But it averaged around 5 percent from 1990 to 2005 but rose above 5 percent in the cease- fire years of 2003 and 2004. During the war, the economy of Northern Province was transformed from a mainly agrarian economy to a service-oriented economy. By 2001, more than 70 percent of provincial gross domestic product (PGDP) accumulated from the service sector. The single highest contributor to PGDP in Northern Province was the “public administration and defense” sub-sector, which accounted for 38 percent of PGDP in 2003. Although agriculture contributed only around 20 percent to the PGDP of the north in 2001, approximately 56 percent of the employed population in the province worked in this sector. Therefore, in terms of livelihood, agriculture was the dominant sector in the north. Rice, red onions, potatoes, green chili, tobacco, fish, diary products, and eggs are the major agricultural products of the northeast. At the same time in Eastern Province, rice, red onions, and green chili outputs increased between 1980 and 2001, while output of these products declined in Northern Province in absolute as well as relative terms. In 2005, due to the impact of the December 2004 tsunami, production of these crops declined in Eastern Province. In terms of economic infrastructure, the northeast region has had the lowest road density, number of telephones per capita, and households with electricity in the country in recent years. Northern and Eastern Provinces also rank poorly in health and education indicators, which represent causes as well as effects of poverty and deprivation. Although newest data is not available, the previous statistics on infant mortality rates, maternal mortality rates, underweight newborn babies, underweight infants, home births, and access to safe sanitation all show the conflict region to be worse off than the national averages. In terms of educational achievement, students in the northeast region earn the lowest scores in the country on primary school and lower secondary school exams. Although the economy of the region recovered considerably during the ceasefire period of 2002-05, it did not attain pre-conflict levels. But at the present Eastern Province is under government control. Terrorism has been replaced by the democracy. Thus I believe Eastern Province could become an industrial economy and a tourist center in the long run, given the advantages of the Trincomalee harbor, a productive labor force, the availability of natural resources, and some of the best beaches in the country. It is important us to understand the economical fields effected by the ethnic conflict and we can develop the turned down areas to bring out longtime development, Service sector, agriculture, manufacturing-Industries, infrastructure, health, education are the most affected areas in the conflict region and we can discuss broadly about those as follows. The service sector dominates the economies of Sri Lanka’s most prosperous province- Western Province and least prosperous provinces- Northern and North Central. In Western Province, the service sector is dominated by dynamic private enterprises in wholesale and retail trade, communications and transportation, and finance. In Northern Province, public administration and defense dominate the service sector. In Eastern Province, while the shares of agriculture and industry increased marginally between 2001 and 2005, the share of the service sector declined considerably in 2003 but recovered in 2005 due to tsunami rehabilitation and reconstruction work. Statistics from Northern Province indicate severe underemployment and low labor productivity in the agricultural and industrial sectors but high productivity in the service sector. In Northern Province in 2004, 38 percent of the employed population worked in the agriculture sector, yet agriculture accounted for only 28 percent of Provincial Gross Domestic Product. Because of the devastating economic embargo imposed by the state and illegal taxes gathered by the rebels, the warring parties constrict the private sector. This in turn is likely to diminish the role of the private sector in the conflict region. At the same time, the contribution of the construction sub sector was lowest in Northern and Eastern Provinces (1.7 and 1.9 percent, respectively). The structural differences between Northern and Eastern Provinces, with the other seven provinces are mainly a result of the ongoing conflict. In the service sector, the economies of Eastern and Northern Provinces experienced lower contributions from the transportation, storage, and communications sub-sectors (just below 9 percent in each province); wholesale and retail trade; and the banking, insurance and real estate sub-sectors than in other provinces. On the other hand, these two provinces experienced very high contributions from public administration and defense (38 percent in Northern Province and 11 percent in Eastern Province). But in the early period of ceasefire (2002 and 2003) Northern, Eastern, and North central Provinces had the highest provincial growth rates, years prior to the ceasefire (1997-2001). Eastern Province recorded an annual average growth of almost 5 percent during 1997-2001, which doubled to 10 percent in 2002 and 2003. Northeast Sri Lanka has been a significant producer of food and cash crops, livestock, and fish since independence in 1948. Because production was generally far greater than the requirements of their population, Northern and Eastern Provinces became net exporters of many agricultural products to rest of the country. Thus, a vibrant commercial agriculture sector in the region developed during the pre-conflict period. However, due to widespread mining of agricultural lands; restrictions on fertilizer, fuel, and pesticide supplies; restrictions on fishing; transportation bottlenecks; and severe security measures during the war, the previously successful commercial mode of agricultural production transformed into a subsistence or survival mode of production. Before the conflict, rice production in the northeast accounted for almost one-third of the national rice output, yet only 15 percent of the country’s total population live in these two provinces. However, in 1990 and 2000, the two provinces accounted for just 24 percent of national rice output. During the ceasefire, rice production increased and contributed slightly less than 30 percent of national output during 2001-03 and in 2005. Northern and Eastern Provinces were the largest producers of red onions in 1980 and 1990, together accounting for almost two-thirds of national output. Northern Province alone accounted for 56 percent of national production in 1980 and 1990. Production dropped to just 23 percent in 2005. Green chili is another major agricultural product in the northeast. Before the conflict, Northern and Eastern Provinces accounted for one-quarter of the total output of chilies in the country. However, as a share of national output, chili production in the northeastern province was 25 percent in 1980’s but dropped to 11 percent in 2005. The northeast region has had a large livestock sector since independence in 1948. Buffaloes are mainly found in Eastern Province and sheep mainly in Northern Province, and cows and goats are found throughout the region. In Northern Province, the animal population has declined over time, due primarily to the large forced migration during the conflict and mining of grazing lands for cows and goats. In 1980, the two provinces contributed 13 percent of the total egg output in the country. It continued averagely around 13 percent until 2005. Milk and egg production in the conflict region were not affected as much as other food or sectors. The coastal areas of Northern and Eastern Provinces are rich in marine resources. Due to severe security restrictions, which led to a ban on fishing at night and limits on the distance boats, could travel, fish catch dropped severely and it is the sub-sector most affected in the conflict region. In 1980, Northern and Eastern Provinces contributed 64 percent of the total fish catch in the country and it declined to 40 percent in 2004 and to 34 percent in 2005 When it comes to manufacturing-Industries it too shows a decline in Northern and Eastern provinces compared to other provinces. It is mainly due to the constant ethnic conflict. Along with North Central and Uva Provinces, the northeast region has been one of the least industrialized provinces in the country since independence. Prior to the civil war, only a handful of large manufacturing industries operated in the northeast: a paper factory in Valaichchenai, a chemical factory in Paranthan and a cement factory in Kankesanthurai. At present, however, almost no production is occurring at any of these three enterprises. The chemical and cement factories in the north were destroyed during the civil war, and the state-owned paper factory in Valaichchenai has not produced anything for several years. Nevertheless, during the past three decades of economic liberalization, some foreign investment has occurred in industries in Eastern Province, particularly in Trincomalee District. As of 2005, Ampara and Batticaloa Districts each had a garment factory, two cement factories, and one wheat-processing plant was operating in Trincomalee District. All of these projects were established prior to the ceasefire under the Board of Investment; an entity of the Government of Sri Lanka established to promote and facilitate foreign investment. Since the beginning of the ceasefire, only one new Board of Investment project, a diesel power-generation plant established on the Jaffna Peninsula to provide electricity to the peninsula. Although only a handful of large enterprises have existed in the northeast, thousands of micro, small, and medium-sized enterprises were in operation throughout the region. Many of these enterprises were destroyed or deserted during the conflict war. Also increase in illegal taxation by the LTTE has become a vital problem. Comparatively; Eastern Province has been more industrialized than the north. Infrastructure is another area that is affected due to the ethnic conflict. In Northern Province, households with electricity increased from over 13,000 in 1983 to about 95,000 in 2005. However, undependable evidence suggests that there are huge numbers of unofficial or illegal power connections throughout the country. These unofficial power connections are greater in number in the conflict region, especially in LTTE-controlled areas and it is a bad strike for the economy. Northern and Eastern Provinces has the lowest shares of households with electricity in the country. Both in 1983 and 2005.Road density in Sri Lanka has marginally improved between 1982 and 2005, from 0.37 km of road per square km of area to 0.44 km of road per square km. However, in 2005, Eastern Province (0.28 km of road per square km of area) and Northern Province (0.29 km of road per square km) had the lowest road density in the country. Low road density in these areas reduces labor and commodity mobility and market access. In 2005 Sri Lanka as a whole there were almost 7 land-line phones per 100 persons. Northern Province has the lowest telephone density in the country, with just 2 phones per 100 persons, followed by Eastern Province with just under 3 phones per 100 persons. The health of the population determines people’s physical ability to engage in productive activity. Moreover, a person’s health could be a cause as well as an effect of economic well-being, so it can also determine the social status of a person or a household. The infant mortality rate in Sri Lanka as a whole was 11 per 1,000 live births in 2003 but was almost 15 in the northeast region in 2000. The national maternal mortality rate was 14 in 2002. However, in Northern and Eastern Provinces it was very high, at 81 in 2000. The percentage of children under 5 years of age who were underweight nationally, was 29 percent in 2001, but was 46 percent in Northern and Eastern Provinces in the same year. These are the side effects of the ethnic conflict and it too infects the economy of the country. Education is important not only for social mobility but also for economic well being. A person’s level of education also determines his or her ability to engage in productive activity and contribute to cultural and social emancipation. According to an assessment of fourth grade cognitive achievement conducted in 2003, nationally only 37 percent of primary school children achieved mastery in their mother tongue. In Northern and Eastern Provinces, only 23 percent, the lowest in the country had achieved mastery in their mother tongue. During the civil war, several schools and hospitals/primary health centers were damaged or forced to move due to fighting. Moreover, schools and hospitals experienced a shortage of equipment, including books, laboratory equipment, hospital equipment, medicines, and so forth. In addition the region experienced an acute shortage of teaching and healthcare professionals Although the physical infrastructure of the social sector (hospitals, schools, etc.) in the conflict-affected region has been partially rehabilitated or reconstructed during the ceasefire, a severe shortage of health and education professionals has continued to bother the region until now. And this situation will impact the directly or indirectly to the social well-being and the economic well-being. Sri Lanka has one of the highest human and social development indicators in the developing world. Although at the national level Sri Lanka’s human development and social indicators look impressive, certain regions like Eastern and Northern provinces within the country holdup far behind the national average for many indicators. Naturally, the provinces that are sheathing in human development and social indicators are the ones with poor economic development as well. Because of the above factors poverty and inequality preside over Northern and Eastern provinces. A two-way relationship exists between conflict and poverty. Thus, poverty can be a cause and an effect of conflict. Poverty can provide the “objective conditions” for conflict, and conflict can lead to poverty and in extreme cases to starvation. According to this Census Department data (2002-2003), Eastern Province had the lowest per capita income in the country of LKR1, 777 per month, followed by Northern Province with LKR1, 852 per month. Sabaragamuwa had the third lowest per capita income of LKR2, 036 per month. Furthermore, the per capita income of Eastern and Northern Provinces were, respectively, 42 percent and 40 percent less than the per capita income of the country as a whole. Income inequality is measured by the Gini ratio (a Gini ratio of 0 means perfectly equal income, and a Gini ratio of 1 means perfectly unequal income). According to the CFS (consumer finances and socioeconomic survey) 2003-04, Eastern Province, with a Gini ratio of 0.51, had the greatest income inequality, followed by North Central (0.47), Northern (0.44), and Western (0.44) Provinces. The Gini ratio in the country had negligibly increased from 0.45 in 1981-82 to 0.46 in 2003-04. In addition to income inequality, inequalities in employment opportunities, infrastructure, health, and educational facilities exist in the conflict region. Also Northern Province was more vulnerable to food insecurity (World Food Programme 2003). Hence, this food security analysis is another indicator of the poorest nature of Northern and Eastern Provinces compared to the other provinces in the country. However, the single most important cause behind the destruction of the economy in the conflict region is the economic embargo imposed by successive governments since 1990. The embargo negatively affected the economy directly by disrupting wholesale and retail supplies and indirectly by allowing the LTTE to take control of the livelihoods of the people. The taxing of commercial goods and passenger traffic traveling in the A9 highway was a gold mine for the LTTE. It is said that, daily tax collection on the A9 was a minimum of LKR 1O million. Historically, the Northern economy has been a remittance economy; however, the past twenty years as a foreign remittance economy, it is quantitatively much bigger than the traditional remittance economy The Tamil diaspora living in Europe and North America has significantly increased portfolio and direct investment since the beginning of the ceasefire in the city of Colombo and the suburbs. Notable investors from the Tamil diaspora during the ceasefire have been Raj Rajaratnam from the United States, who has acquired billions in shares of blue chip companies such as the John Keels Holdings Ltd, and Phelix Selvadorai from the United Kingdom, who has built a timeshare apartment-style hotel. Numerous other investments have been made by the Tamil diaspora in and around Colombo, In Northern and Eastern Provinces; some Tamils from the diaspora have made small- scale investments. For example, a Swiss Tamil has set up a small mineral water bottle plant in Nallur, and a British Tamil has built a hotel in the city center. In Vavuniya, another Swiss Tamil has built a three-star hotel. But most investors from the diaspora are supporters of the LTTE. At the time of the ceasefire agreement in February 2002, about 65,000 people had died. However, during the ceasefire as well as after the resumption of the civil war in December 2005, over 5,000 people have died through early-2007. However, nearly 400,000 internally displaced people returned to their places of origin and thousands of houses were rebuilt during the four years of the ceasefire. Unfortunately, since early 2006, internal displacement has been taking place again, particularly in Trincomalee and Batticaloa Districts of Eastern Province and Mannar and Jaffna. But after the complete capturing of the Eastern province by the government forces, all the above features and potentials are changing. Especially after the election huge development projects have been commenced. The improvement of infrastructure, electricity, industries, agriculture, waterways can be seen in this little period of time. More than that the peaceful mind in which people now live will contribute to the economy in near future. As the second part of the discussion I will illustrate the economic effects of ethnic conflict in Sri Lanka as a whole. Mainly I will focus on some selected important aspects of the economic effects. They are (A) The relationship between economic growth and ethnic conflict. (B) The competition between social expenditures and defence expenditures. (C) The defence expenditures of Sri Lanka in comparison to other South Asian countries and some other internal conflict-ridden countries around the globe. (D) The economic implications of the labor-intensive military strategy. Ethnic Conflict and Economic Growth. The growth of the economy in our country would have been greater if not for the war. Nevertheless our country carried the average growth of about 5% during the 20 years between 1981 and 2000. For the first time in the post-independence history it recorded negative growth during 2001. The average annual growth of the real Gross Domestic Product (GDP) during the 19-year period of ethnic conflict (1983-2001) was 4.35%, whereas in the 19-year period prior to the ethnic conflict (1964-1982) it was 4.55%. The total public debt of Sri Lanka in 2001 was greater than the Gross Domestic Product of the country. But these numbers and bad consequences changed radically after 2006. After the present government and the present president were elected war and economy both have positive changes. Sri Lanka's healthy economic growth continued since 2006 and provisional figures indicate that gross domestic product (GDP) grew by 6.5% for the year 2007. And at present it shows more than 7 percent in the last quarter. This is somewhat amazing at a time where military expenditures were increased by 70 Billion Rupees. Several important factors explain this performance, despite the renewed and escalating conflict. First, the economy has proved more elastic than anticipated by most local and international observers. Hostilities remain largely confined to the north, and the private sector has gained advanced survival mechanisms over the 24 years of the conflict. Also post-tsunami reconstruction, credit expansion, and public sector investment continue to fuel the construction sector which now makes up almost 7.4% of GDP. In addition, expansionary fiscal policies, still left real interest rates largely negative and high remittances (8% of GDP) boosted aggregate demand. On the supply side, the services sector remains strong (particularly telecommunications, finance, ports, and logistics) and contributes 68% of GDP growth, despite the slow-down in tourism. However, growth has come at a cost, as expansionary fiscal policy financed by domestic and external borrowing has increased inflationary pressures, with inflation running at an estimated annual average of 20.2% in 2007. The immediate economic concerns at present are the impact of ongoing hostilities on the fiscal deficit, high inflation, and pressures on the balance of payments because of sustained high global oil prices. Overall government expenditure is likely to be lower than budgeted, because ambitious public investment plans have not proceeded as quickly as anticipated. In addition, the Government largely maintained its policy of scrapping fuel subsidies. Sri Lanka is the only country in South Asia to have done this, a decision that has been taken at a considerable political cost. Also purchasing of military equipments has done a great impact. Thus it is clear that ethnic conflict impacts all the areas of the economy but fortunately we have been able to gain both economic growth as well as military accomplishments. The competition between social expenditures and defence expenditures. The defence expenditure, which was tiny in the pre-conflict period, has shot up enormously since early 1980’s. Sri Lanka’s military expenditure increased from 0.75 billion Sri Lanka rupees in 1977 to a budgeted 139.6 billion for the year 2007 - an almost two hundred fold increase. In the past few years, defence expenditures have become the single largest public expenditure (barring public debt repayment) of the government. Despite the extended civil conflict the total social expenditures exceeded the defence expenditure until about the early-1990s. However, since 1995 the defence expenditures, as a proportion of the total public expenditure, have consistently far exceeded the total social expenditures. Since 1995 the gap between defence expenditures and social expenditures widened considerably. But present government’s policies on social development seem attractive. Even though they have increased the military expenditure, at the same time they have increased social expenditures too. The huge developments projects on process in areas like Hambanthota, Trincomalee and all over the country confirm the above argument. Defence Expenditure in Comparative Perspective On average Sri Lanka has spent almost 4% of its Gross Domestic Product on defence from 1991-2007. Defense expenditure allocated in the 2007 Sri Lankan budget is 139.66 billion Rupees, which is 1.4 billion US dollars. This is a 46% increase on the 2006 defense spending. The government has said that this is mostly due to increases in salary. At present government spend 18,000 rupees per minute as defence expenditure. The 2007 defense allocation is 23.28% of the total government income. Of the total government expenditure for 2007, this is 16.72%. The budget shortfall for 2007 is estimated to be 235 billion Rupees. The table below shows how the Rajapakse government has made a three-fold increase in the estimated expenditure for purchasing military hardware for 2007. Estimated capital expenditure for purchasing military equipment for 2007 in US dollars By the regime previous to the Rajapakse regime 14.962 By Rajapakse regime 44.896 The table below is a comparison of the defense expenditure of several countries. Country* Defense expenditure as a percentage of the nations GDP Defense expenditure per year per person in US dollars ** Number of citizens for each soldier India 2.6 14.00 820 China 3.9 43.00 580 Sri Lanka 4.3 71.00 130 Pakistan 4.5 20.00 251 Bangladesh 1.2 4.60 1109 This set of data further confirms the priority given to military development in Sri Lanka in the past two decades, which is a serious concern to peace-loving citizens. Besides, no matter how sensitive the internal conflict is, a country cannot spend on defence beyond its means. But the government seems steady and immovable. However the problem is will the government be able to continue these expenditures. In terms of military expenditure as percentage of GDP also, Sri Lanka spent a lot. The figure was 4.3% in the case of Sri Lanka; 4.5% in the case of Pakistan; 2.6% in the case of India and Nepal; and 1.2% in the case of Bangladesh. Also Sri Lanka's defence expenditure is also higher than other comparable conflict-ridden countries such as Colombia, Myanmar, Sierra Leone, Sudan, the Philippines and Uganda. Not only has the government but also L.T.T.E too spends a lot. Being a military group essentially, expenditure on weapons and the maintenance of war gets topmost. The LTTE's annual expenditure on its cadres and military-oriented networks, both in the island and abroad, is estimated to be in the range of $8 million annually. It is believed that out of the total income, $100 to 250 million comes from drug trafficking, though there is yet no direct evidence of the LTTE's involvement in this trade. The cost of the LTTE’s own military expenditure can also be considered a direct cost to the Sri Lankan economy. This is because funds spent on the LTTE’s own military could have also been spent on development or investment in the North and East of the country. However, others have suggested the money spent on defence might be better directed to building peace. Some economists have stated the economic costs of working towards a peaceful solution are less than the economic costs of war. However, decisions about war are not merely based on decisions about the economy. Historical, political, and cultural factors also come into play. In a democratic country such as Sri Lanka, the issue of military expenditure, with all of its attached complexities, is a decision that the people will need to resolve. Labour-Intensive Military Strategy A prominent characteristic of the ethnic conflict in Sri Lanka is that the military strategy adopted by the Sri Lankan government has been one of labour-intensive. This strategy has overburdened the economy. Accordingly, 80% of the defence budget during 1991-2001 had gone into recurrent expenditures and only 20% into capital expenditures. This is a suggestion of the labour-intensive military strategy of successive governments. Only during peak years of military activity, such as in 1995, 1996 and 2000, did the capital expenditures increase a bit in comparison to the recurrent expenditures. The most public sector employees in Sri Lanka do not pay income tax and do not make any contribution to state pension. The average life expectancy of a person in Sri Lanka is presently around 70years. Suppose a person joins the armed forces at the age of 20years, the state has to pay salary, various allowances, pension, and widow/widower pension on account of that person for more than 50years. Here I’m not trying to devalue the service of the soldiers or others, there service to the country is priceless but economically it is a big burden. Despite the high economic cost of the labour-intensive military strategy adopted in Sri Lanka the outcome of the civil war has been disappointing. The labour-intensive military strategy has resulted in a high defence budget trap, because even at a time of peace the government is unable to make substantial cuts in defence spending as salaries, overtime payments, and various allowances (such as ‘risk allowance’) have to be paid. But on the other hand the war has been a source of employment. Large numbers of rural youth have enlisted in the military. And their remittances have brought prosperity in the villages. Forty percent of the defence bill goes to salaries and wages and one can argue that, with the bulk of recruitment coming from rural areas, these areas get large inflows of funds. But it is said that labour-intensive military strategy followed in Sri Lanka is economically costly. So the economic effects of ethnic conflict in Sri Lanka are diverse. From the above discussion we saw that: there is an enormous relationship between economic growth and ethnic conflict also the defence expenditures have overtaken social expenditures consistently since 1995 but the gap narrowed after 2006. At the same time Sri Lanka’s defence expenditures, as a proportion of the national income, is one of the highest in the region and among selected internal conflict-ridden countries in the developing world. And the labour-intensive military strategy pursue in Sri Lanka is economically costly. Recently released figures show that the inflation continuing to rise to record levels. Government budget deficit widened as the cost of defence, oil and food rose sharply whilst share holders pulled out of the stock market and tourists cancelled trips to the island. Consumer prices in Sri Lanka hit 26.2% in May (2008), it was 25 percent in April. In addition to the sky high commodity prices, the spiraling defence expenses have also taken a charge on the Sri Lankan economy. The government increased the military spending while quitting the internationally brokered ceasefire and pledging to destroy the LTTE. The government's external debt totaled $15.3 billion at the end of May, a $180 million increase from end 2007 and its total debt rose to 3,328.8 billion rupees by the end of April. At the same time there is a tendency of falling of Sri Lankan share markets due to long-running conflict with Tamil Tigers. It keeps the investors out of the market. Meanwhile, many investors have either cancelled or held back investments in Sri Lanka, especially since late July when the military launched a major onslaught against the LTTE. Even though there is no big tendency of the fall, there is a curiosity and uncertainty among share holders and investors. This situation makes a bad impact on the country in economy wise. In an economy of a country tourism play a crucial part in it. Thus tourism is too important to our country. Especially as an island having plenty of natural resources, it contributes a lot to the national income. In Sri Lanka tourism is the fourth biggest revenue generator. Because of the ongoing ethnic conflict there is a drop in the number of visitors coming to the country. Arrivals in June 2008 fell 9.3 percent (27,960 from 30,810). Sri Lanka Tourism board says the number of visitors from Britain and Germany - both key markets fell five percent each in June, to 5,304 and 1,317. The number of leisure travelers from neighboring India declined 28.8 percent in June, to 5,664. It's the conflict that is keeping tourists away. There are frequent bomb attacks and it is natural they would be cautious to travel to our country. Many countries in the west have cautioned their citizens against traveling to Sri Lanka, where fighting between government troops and Tamil Tigers has escalated since the start of the year. Another bad impact of the ethnic conflict is that the increasing of refugees. Millions of people have been forced to leave their homes because of conflict between Tamils and Sinhalese in Sri Lanka. The data indicates that in the year 1997 there were 200,000 people were displaced by the conflict, whereas in 1998 the number was increased to 603,025, in 1999 there were 612,518 displaced population from Sri Lanka. However, nearly 400,000 internally displaced people returned to their places of origin and thousands of houses were rebuilt during the four years of the ceasefire. Unfortunately, since early 2006, internal displacement has been taking place again,. As I mentioned earlier at the time of the ceasefire agreement in February 2002, about 65,000 people had died. However, during the ceasefire as well as after the resumption of the civil war in December 2005, over 5,000 people have died through early-2007. This is a real bad situation for a country. The economic cost and the social cost of this problem are really high. The government has to spend a lot on food and health on behalf of the refugees. And at the same time they have to give funds to dead peoples families. So it’s evident that effects of ethnic conflict are enormous. However, one clear thing is that increasing defence expenditure has become a permanent feature of our economy. Over the past several decades our economy has almost been transformed into some form of a war economy. It’s because war issues have been blocking rapid economic expansion. Asian Development Bank also warns that uncontrolled defence expenditure in Sri Lanka will potentially crowd out the private sector and make fiscal management more difficult. High cost of electricity, insufficiency of transport infrastructure, lack of a proper public transport system and recent kidnappings and threat to personal security of country’s businessmen have worsen the awful situation in the country. The clearest sign of Sri Lanka’s macroeconomic problems is inflation, which climbed to double digits in 2005, and reached 17.2 percent in October 2006. Also it hit 26.2% in May 2008, this is widely blamed on military expenditures, fuel and power price adjustments. The central bank has been leaning against the inflationary wind by raising interest rates. Nonetheless, the fundamental problem is that the money supply has been increasing by nearly 20 percent per year for the past two years, far too fast for price stability. The great danger is that the elevated inflation rate may set off a wage-price spiral that would greatly increase the economic cost of bringing inflation back under control. Meanwhile, inflation is pushing up nominal interest rates, which worsens the budget outlook, while simultaneously reducing real interest rates, which encourages inefficient investment. High inflation is also causing an appreciation of the real (price adjusted) exchange rate, undermining the competitiveness of domestic products in both international and local markets. If not corrected quickly, these fiscal and monetary imbalances may risk the prospects for continued growth, possibly. At the same time, the conflict makes it more difficult to tighten the fiscal belt, not only because defense expenses are rising, but also because populist expenditure policies are a measure tool for maintaining political support in the face of heightened security risks. So in my view our country is having a real hard time with the ethnic conflict. So to conclude this discussion I can say that the effects of ethnic conflict on the economy are substantial and appalling. Even though we are having a good economic growth and continuous victories in military arena at present, it is important to find an everlasting solution for this problem. Because this economic boom during the war period does not take into account the social costs of the war and the utterly backward conditions of the north and east, which is low on electricity, health and education. Even though I only mentioned about the economic effects there are plenty of social effects which are created through the ethnic conflict. As I mentioned earlier there is a big need to develop the Northern and Eastern areas. If we give equal rights and development to those people it too will solve the ethnic conflict. But at the same time we need to defeat the terrorism in order to have undying peace. We know that the business community also tends to look at the war years as a bleak economic period. There may have been growth, but many important sections of the economy continued to suffer during the war. Thus it is important to carry a reliable national security throughout the country. So it too will help the tourism. Since the Sri Lankan ethnic conflict has imposed substantial costs on the Sri Lankan people. All ethnic groups are either directly or indirectly affected by the conflict. Hence, if we need to end this crisis we must find solutions, in my view it is not a total military solution. So let us hope that we will have a peaceful, prosperous and a united country in the near future.