The presidential election in Sri Lanka this January resulted in an easy win for the incumbent Mahinda Rajapakse. The end of the long lasting civil conflict with Tamil separatists, strong remittances and an IMF agreement boosted investors’ confidence. Foreign exchange reserves recovered from about one month of imports in the first half of 2009 to six months of imports by January 2010.
Now that the war is over and the global economy recovering, the government needs to grasp the opportunity to do the right things and avoid hurting confidence in the country’s stability, which is key to the rise in foreign investment and tourism.
The bad news is that the withdrawal of GSP Plus by the European Union countries can hurt industrial exports. The EU decision is worrisome. Thanks to the increase in manufacture exports from 6 percent of total exports in 1975 to 60 percent in 2005, firms began to lead Sri Lanka‘s connectivity with the rest of the world.
The increase in manufacture exports has reshaped the country’s geography. A World Bank report, Connecting all Sri Lankans to Prosperity, prepared by a team led by Somik V. Lall and Claus Astrup, observes that industrial firms benefit from concentrating production close to Colombo. As a consequence, Colombo and its neighboring areas have prospered. The Western Province now contributes more than 50 percent to the national GDP and is home to 37,000 industrial production units that employ 540,000 people.
By concentrating production, the Western Province has productivity and wages twice those of other provinces. Now it is time to physically link lagging and leading areas by transport and communication improvements.
Transport costs within Sri Lanka are high by international standards. It costs $2.90 per kilometer to move products, more than twice the $1.25 in the United States. Bumpy roads add to the cost of transport, and these costs are most pernicious along routes with high demand for transport services. From a national efficiency perspective, the challenge is to identify transport improvements that generate the highest aggregate reductions in transport costs. From a spatial equity perspective, the challenge is to improve connectivity in remote areas.
The aggregate cost of bumpy roads is felt the most along the national arteries where traffic volumes close to the boundary of Colombo city are as high as 60,000 to 80,000 vehicles per day. In contrast, typical traffic volumes on national roads in Uva Province are only between 1,500 and 2,500 vehicles per day. Improving transport quality along corridors with demonstrated potential is likely to improve the efficiency of the entire transport system and reduce island-wide transport costs. Not only does the corridor linking Kandy (and the Central Province) to Colombo carry the highest traffic volumes, it also physically connects a large mass of poor people with prosperity.
Somik V. Lall and Claus Astrup say that in addition to improving network efficiency, transport improvements may be needed for accessing basic services such as schools, health facilities, and local markets. While access to these services is important for people to improve welfare and make the most of local opportunities, the cost of providing, maintaining, and sustaining traditional transport services is higher in isolated areas. As low demand will discourage entry of formal transport providers whose services involve high fixed costs, the operational challenge will be to encourage Intermediate Modes of Transport that can be operated and maintained by local residents. Vehicles such as bicycles, hand carts, motorcycles, power tillers and trailers, ox carts, and tractors are commonly used to increase mobility in rural areas. Encouraging community involvement in providing and managing these services is a promising option that can enhance rural mobility.
The end of the war and the elimination of terrorism is a great opportunity for the country to connect all Sri Lankans to economic progress.
How can politics help recovery? Or put stability at risk?