Setting the Stage

Small states face a perennial dilemma. Global economic trends and political events significantly impact their economic and political well being, but state leaders may have little power to alter these trends and events. For more than three decades Kingsley M. de Silva's prolific writings have reminded us that Sri Lanka is a small state in a big world - to be fully understood, its history, economic development and civil conflicts must be viewed from an international economic and political context.

This paper shows how fluctuations in global commodity, currency and financial markets adversely impacted Sri Lanka's economy and contributed to growing domestic political instability. Domestic political instability, especially protracted conflict between the Sinhalese dominated central government and Tamil militants, increased Sri Lanka's vulnerability to meddling from South Asia's dominant power, India. Indian involvement provided Tamil militants with training, resources and a safe sanctuary. Training, resources and a safe sanctuary helped militants create a wasting military stalemate, with uninvolved rural villagers and members of Sri Lanka's once vibrant Jaffna community among its most tragic victims. The wasting stalemate became part of a vicious cycle that further worsened economic conditions.

Detailed analysis focuses on Sri Lanka's first four decades of independence, from 1948 through 1988. Choice of the 1948-88 time frame was partly idiosyncratic - in the process of writing a larger work on Sri Lanka's post independence history, I have compiled an extensive body of data on this period. There is, however, scholarly justification as well. Most problems now facing Sri Lanka's government can be traced to policy initiatives and events that preceded the end of J.R. Jayewardene's presidency. Since 1988, the posture of Sri Lanka's political leaders, even dynamic personalities such as Presidents Ranasinghe Premadasa and Chandrika Kumaratunga, has been more reactive than proactive. Prior to 1988, Sri Lanka's leaders had greater, albeit not unlimited, discretion in coping with the economic and political problems that challenged their nation. Both external events and political choices contributed to the precarious circumstances Sri Lanka now faces.

Sri Lanka's Economy in a Global Context

Since gaining independence in 1948, Sri Lanka's leaders have faced the challenge of managing an export oriented economy, subject to fluctuating international markets, while pressured by demands from rising popular aspirations. Aspirations were fueled by near universal education and democratic political competition. In general election campaigns, politicians of both parties promised to deliver economic development, good jobs for all and broad ranging social benefit packages. After election victories, voters expected those voted into power to keep their promises. Often, defeat in the next election was the penalty for failure. Reconciling ambitious economic development and social welfare goals with the realities of limited export income became - and remains to this day - a major problem.

Sri Lanka's post colonial economic structure complicated the task of economic development. Export production was dominated by the plantation sector, especially the tea plantations. Until the 1970s, plantations were largely foreign owned. Sri Lankans viewed subsidized monthly supplies of rice as an inalienable right, to be tampered with by politicians at their peril, but domestic rice production was insufficient to meet local needs. Government imports had to fill the gap between demand and supply. Government wheat imports and subsidies also kept bread prices artificially low, another benefit that was taken for granted by the public.

Analyses by international experts and successive development plans emphasized the importance of industrialization and diversification, focused on producing high quality, high value-added products to sell in both domestic and export markets. For British colonial rulers, however, creating an economy that would lay the foundation for industrialization and diversification had not been a priority. At the time of independence, Sri Lanka's industrial base was fragmented and undercapitalized. Physical infrastructure, technical expertise and entrepreneurial skills were inadequate to support broad based economic development. Domestic credit markets, dominated by foreign bankers, often spurned local business initiatives. Thus progress in developing non-agricultural export industries and domestic industries that could provide alternatives to expensive imported goods was slow. In 1948, export earnings, almost exclusively from tea, rubber and coconuts, contributed more than 30 per-cent to Sri Lanka's GNP and even more to government revenues. In most years, 50 per-cent of export earnings came from the tea plantations alone.

Coping with a Benign Environment: Sri Lanka and the International Economy, Prior to 1970

It is surprising how little this economic picture changed during Sri Lanka's first twenty-two years of independence. When Dudley Senanayake's "Middle Path" government left office in 1970, tea, rubber and coconuts still accounted for 88 per-cent of export income, with tea comprising more than 50 per-cent of the total. Moreover, Sri Lanka's economy had been unable to curb its appetite for imports. Because imported raw materials and intermediate products comprised 75 per-cent of the inputs to manufacturing, industrial expansion actually increased import costs. Petroleum for industry and motor vehicles accounted for about 10 per-cent of the import bill. Petroleum imports, too, were growing as the economy modernized. More than half of Sri Lanka's foreign exchange was spent on food and drink, with rice and wheat comprising half of that total. Sri Lanka still imported about 20 per-cent of its rice in 1970. Government obligations to provide free and subsidized rice meant that figure could be much higher in years when harvests were poor.

A useful picture of Sri Lanka's position vis-a-vis the international economy can be seen in Figures 1 and 2, which compare indices of Sri Lanka's principal exports and imports for the period from 1948 through 1988. The indices reveal a benign economic environment, from Sri Lanka's perspective, prior to 1970. Price fluctuations in major imports and exports were modest. Tea prices rose by 44 per-cent in 1954 and remained above the 1950 levels for more than a decade. Petroleum prices remained low and stable until creation of the OPEC oil cartel pushed them upward, beginning in 1973. In this benign environment, any hardships resulting from structural vulnerabilities in Sri Lanka's domestic economy were mild and transient. Successive governments could initiate ambitious social programs, shift from one development model to another and postpone tough economic management decisions, with few political costs. The only exceptions were current account deficits in 1952 and 1966 which pressured two UNP governments to save foreign exchange by cutting the politically sacrosanct rice ration.

Benign global economic circumstances meant that Sri Lanka's relationship to the global economy ranked low on political leaders' list of priorities - domestic political and economic agendas, plus international politics ranked higher. Apart from the two current account deficits, there were no significant shocks. However the economy's resiliency for dealing with future shocks steadily eroded. This left Sirimavo Bandaranaike's government only limited and politically unpopular options when it was buffeted by externally imposed economic crises in the early 1970s. Trends in four related indicators - terms of trade, merchandise balance of trade, foreign debt and foreign assets - show how Sri Lanka's capacity to cope with a more hostile international economy weakened between 1948 and 1970.

Stagnant commodity prices, coupled with increased demand for consumer goods and intermediate goods necessary to sustain expanding industrial production contributed to steady deterioration in Sri Lanka's terms of trade (Figure 3). Deterioration was most precipitous during Sirimavo Bandaranaike's first term in office (1960-65). This was primarily due to declining performance in Sri Lanka's industrial sector which was adversely impacted by nationalization and by import substitution industrialization policies. Halfhearted attempts to reinvigorate commerce and industry under Dudley Senanayake failed to reverse the trend. The terms of trade index's forty point decline between 1948 and 1970 reflected an economy that had become far more dependent on imports and far more vulnerable to adverse fluctuations in international commodity prices than at the time of independence.

This growing dependency and vulnerability was also reflected in Sri Lanka's merchandise trade balance (Figure 3). There were trade surpluses in seven of the eleven years after independence (1948-1958) and the overall balance for the period was a $216 million surplus. In the next eleven years (1959-1969), there were only four trade surpluses. The overall balance for this period was a $122 billion deficit. More frequent and larger trade deficits necessitated increased borrowing from international donors and commercial lenders. Between 1948 and 1969, Sri Lanka's foreign debt increased more than eight-fold, from $38 million to $231 million (Figure 4). More ominously, Sri Lanka's economic growth lagged behind its foreign indebtedness. From a low of 2.7 per-cent of GNP in 1951, foreign debt had experienced a fourfold growth to 11.8 per-cent of GNP by 1969.

Needed foreign exchange to cover trade deficits was obtained not only by foreign borrowing but by depleting external assets. Sri Lanka had gained independence in an enviable financial position, internationally. Its external assets of $301 million were sufficient to cover more than a full year of imports and were equivalent to nearly a third of a year's GNP. By 1969, external assets had dropped to $38 million, sufficient to cover only about two months of imports and less than 3.5 per-cent of a year's GNP.

Lost Opportunities

In the twenty-two years following independence Sri Lanka's political leaders were given a window of opportunity to remedy structural problems of the commodity based export dependent economy that had been bequeathed to them by the British. As we have seen, they failed to take advantage of this window. Lack of information does not appear to have been the problem. While the economic philosophies of successive governments differed, both sought advice from outside experts, strengthened analysis capabilities, and gave major planning roles to talented professionals. Internal and external studies pointed to dependence on a few commodities for foreign exchange, chronic balance of payments deficits, a weak industrial base and government deficit spending as problems. Planning documents enacted in 1954, 1959, and 1966 set targets which, if met, would have left Sri Lanka in a far stronger economic position than it found itself in 1970. Increasingly sophisticated Central Bank reports on the state of the economy documented the failure to meet those targets. Policies of successive governments provided examples of short-term political and economic concerns being given priority over longer term development goals to which those governments had committed themselves in principle. Beginning in 1971, Sri Lankans began paying the price for this ordering of priorities. Shortly after a landslide general election victory swept Sirimavo Bandaranaike's left leaning United Front government into power, the international economic environment became more volatile and hostile. Now, the unresolved structural economic problems of twenty-two years began to have a serious, adverse impact on the well being of many Sri Lankan citizens. United Front Leaders were forced to implement draconian measures that threatened their popularity. The opportunity to address long standing structural problems in Sri Lanka's economy, without major dislocations, had been lost.

Coping with a Hostile Environment: Sri Lanka and the International Economy from 1970-1977

What does it mean to label Sri Lanka's international economic environment "more hostile" during the 1970-1988 period. Characteristics of the new international economic topology can be seen by comparing pre 1970 and post 1970 periods in Figures 1-4, above. After 1970, commodity price trends were more volatile and unpredictable. Beginning in 1971, international prices for rice, wheat, and especially petroleum rose rapidly while tea and rubber prices lagged (Figure 1). Among Sri Lanka's major exports, only coconut prices kept pace with increases in the price of rice and wheat. By 1974, due primarily to formation of the OPEC cartel, petroleum prices had soared to more than six times their 1970 levels, dwarfing all other increases (Figure 2). Crude petroleum price increases, along with higher prices for derivative products such as chemicals, diesel and petrol, hurt Sri Lanka's nascent industries, but produced few immediate hardships for the nation's largely rural population. However steep increases in the prices for imported rice and wheat, which the government distributed free or at heavily subsidized prices, were an entirely different matter.

The dilemma that out-of-phase price fluctuations created for Sri Lanka's leaders shows up clearly in Figure 5, which compares rice and tea prices on international markets during the period between 1965 and 1988. Rice prices inched steadily upward after 1965 and rose by nearly 300 per-cent between 1971 and 1974. Increases of this magnitude in Sri Lanka's most vital staple food were unprecedented. Tea prices, on the other hand, remained below 1965 levels until 1975. Eventually, tea prices more than doubled, while those of rice fell. This temporarily relieved the pressure on Sri Lanka's economy, but too late to rescue Sirimavo Bandaranaike's weakened government from a devastating 1977 General Election defeat.

Details of how these price fluctuations impacted domestic politics are well known to students of Sri Lankan history. Sirimavo Bandaranaike's United Front Coalition had won office on a platform which promised that government managed distribution would make "goods in everyday use" widely available to all Sri Lankans at cheap prices. The amount of rice distributed free was to be restored to 1966 levels. Better wages and full employment were targeted as high priority goals in the government's five year plan. Plan goals were to be achieved by nationalizing all heavy industry and by state controlled management that would diversify the economy and catalyze rapid growth.

Rising trade deficits, coupled with limited foreign assets and questionable international credit worthiness forced a precipitous retreat from these promises. In the span of three years, Sirimavo Bandaranaike's government was forced to cut subsidies and raise prices for staple foods. Wheat, milk and sugar were rationed and the distribution of free rice was eliminated. Shortages and distribution bottlenecks meant hours of waiting in long lines for food, an experience that many Sri Lankans still remember. Ambitious industrialization plans were slowed by shortages of foreign exchange for capital equipment purchases. When new factories were completed they often operated far below capacity because the foreign exchange necessary to purchase raw materials and intermediate goods was unavailable.

Another consequence of Sri Lanka's economic vulnerability, in the face of a more hostile economic environment, was high inflation. When the world's developed nations unilaterally abandoned fixed exchange rates in 1971, currency values on international financial markets became, especially for small nations, a barometer of national economic health. Currency was valued by international traders like any other commodity, according to the laws of supply and demand. Chronic trade deficits and lack of confidence in Sri Lanka's economy helped to drive the international value of the rupee downward, contributing to domestic inflation (Figure 6).

Inflation estimates for a nation such as Sri Lanka must be interpreted with caution, but the unprecedented price increases in basic goods during this period are well documented. Between 1970 and 1977, the International Monetary Fund's inflation index shows that price increases averaged an unprecedented 11 per-cent annually, with rates exceeding 20 per-cent in 1973 and 1974. High inflation discouraged private saving and nullified improvements that wage increases would have provided. Official indices of real wages showed little growth, with government employees faring worse than those in the private sector. Purchasing power of government sector wages declined in every employment category, with teachers experiencing the most severe decline - more than 10 per-cent.

In combination, the economic ills that have been described - trade deficits, rising debt, failures in economic management and inflation - produced stagnation. This shown in Figure 7, which compares GNP in current prices with GNP in deflated prices ("real" GNP). While there are disputes about precise rates of inflation, most observers agree that Sri Lanka's economy was stagnant or nearly so throughout Sirimavo Bandaranaike's term in office.

A severe and politically destabilizing consequence of economic stagnation was high unemployment. Like estimates of inflation, estimates of employment are impossible to calculate precisely, however, there appears to be some consensus that the number of "unemployed" grew from around 12 per-cent to around 20 per-cent between 1970 and 1977. By 1977, probably more than one million men and women, many under twenty-five years of age, were seeking jobs and unable to find them.

Critics point to shortcomings in the United Front's Marxist inspired policies as principal causes of Sri Lanka's economic problems during the 1970-77 period. The analysis presented above suggests a need to qualify this widely held point of view. Economic policy and management shortcomings, to be sure, cannot be ignored. The enlarged central planning bureaucracy was cumbersome, stifling, suffused with politics and deficient in needed analytical competence. The state controlled purchasing/distribution system that was supposed to cope with food shortages in an efficient, equitable manner created bottlenecks and disincentives that made things worse. By and large, state management of major industrial concerns and plantations compounded scarcity problems by using resources inefficiently. Under politically appointed managers, employment rolls in the expanding state sector grew but, with all too few exceptions, quality and productivity did not. Moreover, when it must have been apparent to all but the most ideologically blinded that dirigiste industrial, agricultural and trade policies were not working, the Prime Minister acceded to additional doses of the same medicine, prescribed by her Marxist political allies. This made an already ailing patient sicker.

Having acknowledged these shortcomings it is not clear that Sri Lanka would have fared much better economically under a government headed by Dudley Senanayake. The shocks of rising import prices and stagnating tea prices were caused by factors over which Sirimavo Bandaranaike had little control - international commodity market fluctuations and bad weather. The vulnerability of Sri Lanka's economy to those shocks resulted from twenty two years of economic policies that were expedient rather than foresighted. Probably United Front's 1970 electoral landslide was a blessing in disguise for the UNP and its leader to be, J.R. Jayewardene. If Dudley Senanayake had won in 1970, his government would have borne the brunt of popular resentment that Sirimavo Bandaranaike faced. There would have been no overwhelming mandate for J.R. Jayewardene's open economy program in 1977.

Promoting growth and reducing vulnerability: The UNP's "Open Economy" Program

Open economy reforms were guided by a "free market" philosophy that emphasized structural adjustment and export lead growth. Broad goals included improving economic efficiency, stimulating growth, diversifying industry and linking Sri Lanka more closely to the international economy. Specific initiatives included establishment of export processing zones, reduction of the government's role in industry, elimination of some public sector monopolies (but not total privatization), investment incentives, lowered trade barriers and floating the rupee on international currency markets. An overwhelming parliamentary majority and, soon, enhanced powers as Executive President, enabled Jayewardene to implement many of his proposed reforms within less that two years.

How effectively did the open economy program attain its goals? The question cannot be answered unambiguously because after 1984, violent conflicts involving Tamil militants and later, Sinhalese militants increasingly distorted economic performance. In the next section of this paper, the relationship between these conflicts and economic performance will be examined more closely.

Viewing the Jayewardene years, from 1977 through 1988, through the prism of indicators used to evaluate economic performance during Sirimavo Bandaranaike's term in office, reveals a mixed and discontinuous picture. Turbulence in the international economy continued as the norm. By 1980 petroleum prices had increased threefold. Rice prices remained high, rising again to 1974 levels in 1980. Government policies that limited distribution of subsidized rice to those in need, coupled with significant increases in paddy production made this less of a problem, however. Another negative factor was the rise in interest rates, internationally, which had an increasing impact on Sri Lanka as the size of its foreign debt rose. On the other hand strong, albeit volatile markets for tea, rubber and coconuts benefitted Sri Lanka, though government efforts to improve plantation sector productivity made little headway.

Four-hundred per-cent growth in garment and textile production was a major success story of the open economy program. This was the major contributor to an increase manufacturing exports from 24 per-cent of total exports (in 1979) to 48 per-cent (in 1988). Another open economy priority, tourism, grew rapidly between 1977 and 1982, aided by aggressive promotion and a boom in tourist hotel construction. But tourism is highly sensitive to political instability. Sri Lanka's tourist industry was hard hit by the escalation of ethnic conflict that began in 1983 and by intensification of Sinhalese militant (JVP) attacks against the government, beginning in 1987 (see below). By 1988, most tourist hotels stood nearly empty and the costs of defaulted loans for hotel construction added to the government's financial burdens.

Figure 7 (above) provides a revealing overall picture of economic performance during the Jayewardene years although the impact of inflation on economic well being between 1981 and 1982 was certainly less precipitous than the deflated GNP index shows. The first open economy years were boom years by any standard as the release of pent up demand, infusions of investment and relaxation of import controls fueled economic expansion. Beginning 1980, the overheated economy was simultaneously hit by rising petroleum and rice prices, and declining tea, rubber and coconut prices. This resulted in a precipitous drop in the balance of trade, creating pressures for foreign borrowing at a time when international interest rates had risen to their highest level since World War II. Borrowing to fund the highly touted Accelerated Mahaveli Development [irrigation] Project, President Jayewardene's top development priority, further added to the foreign debt burden.

Sri Lanka's international financial position in 1980 and 1981 resembled the position that had lead Sirimavo Bandaranaike to impose austerity measures in 1972 and 1973. With a general election looming on the horizon, however, such measures were out of the question for the politically astute Jayewardene. Instead his government's policy was to maintain high levels of government spending, covering domestic deficits with Central Bank "loans" which expanded the money supply and further fueled inflation. Sympathetic foreign donors, who supported Jayewardene's pro-Western political tilt and free market rhetoric, were receptive to government requests for larger infusions funds to tide it over the balance of payments crisis.

Prospects for a quick recovery, followed by a second period of rapid growth, seemed promising in the Spring of 1983. Commodity price fluctuations had shifted in Sri Lanka's direction, improving the balance of payments picture. Interest rates fell and international financial markets became more stable as developed nations began putting their economic houses in order. Victory in a snap election guaranteed Jayewardene six more years as Executive President. He further solidified his position by orchestrating a much-criticized referendum in which Sri Lankans voted to keep the 1977 Parliament, with its four-fifths pro-government majority, in power for another six years. With a free hand to shape economic policy for six more years, Jayewardene believed he could set Sri Lanka on an irreversible trajectory to become one of next "Asian tigers."

Coping with a Hostile Political Environment: How Sri Lanka's Ethnic Conflict Became Internationalized

Why did a man widely regarded as one of Sri Lanka's most sophisticated and astute political leaders fail to achieve the goals he that he had envisioned for decades? Since the 1950s, J.R. Jayewardene had advocated policies that acknowledged his nation's economic vulnerability as a small state in a big world. But the policies he pursued as Executive President failed to fully take into account Sri Lanka's international political vulnerability. The process by which Sri Lankan domestic politics, especially the politics of communal relations, became more vulnerable to outside political forces bears striking similarities to the process of escalating economic vulnerability described above.

A topology of how violent conflict escalated in Sri Lanka, shown in Figure 8, is a useful starting point for this comparison. Depicted is an index that measures monthly intensities of violent political conflict. While violent political conflict, including ethnic conflict, has never been absent from Sri Lankan society, violence did not begin to escalate out of control until the 1980s. What factors contributed most to this escalation and what role did external forces play?

Outbreaks of violent conflict occur spontaneously, but protracted conflict is an organized phenomenon in which militant groups are key actors. Intolerance of compromise and commitment to attaining millenarian goals by using violent force distinguish such groups. Young men - and sometimes women - of military age comprise their core membership. Charismatic - even mythical figures lead them and maintain group cohesion through rigorous, military-style discipline and propaganda that reinforces xenophobic ethnic stereotypes. When militant groups become strong, the task of managing - let alone resolving - protracted violent conflict is greatly complicated. Redress of grievances that motivated militant groups to coalesce in the first place is no longer sufficient to move toward a non-violent political order. Political polarization and destruction of any middle ground where compromise might be sought typify militant group tactics.

Two militant groups, the Janata Vimukti Peramuna (JVP) and the Liberation Tigers of Tamil Eelam (LTTE) were pivotal in organizing and sustaining armed conflict against Sri Lanka's government. Both external political forces and domestic political decisions contributed to a climate that helped mobilize support for these groups and shaped the roles they played.

Prior to 1970, Sri Lanka had no organized militant groups capable of mounting a serious threat. Like the economic circumstances examined above, her political circumstances, while not without turbulence, could be described as "relatively benign." Thus, in the realm of political and social order, too, there was 20 or more year window of opportunity when political leaders might have remedied problems that subsequently contributed to militancy. By the late 1960s, however, many young men and women had become alienated from a government that seemed distant, unresponsive and self-serving. For many Sinhalese, youth, especially those living in the densely populated south, the promises of S.W.R.D. Bandaranaike's populist revolution were unfulfilled. They faced class discrimination, high unemployment and limited economic opportunities. The climate was ripe for a messianic leader, Rohana Wijeweera, who promised that supporting his new political movement, the JVP, would make a difference in their lives.

The JVP's 1971 insurrection was defeated by a combination of poor organization, timely government action and intervention by foreign powers, especially India. Later, young Tamil militants who faced similar economic problems plus ethnic-based discrimination, studied the defeat of their Sinhalese counterparts carefully. The JVP's insurrection made revolutionary violence against Sri Lanka's government a concrete possibility, but young Tamil militants viewed Bangladesh's successful independence struggle as a more useful model. Mujibur Rahman's Awami league would almost certainly have been defeated, they knew, but for India's intervention. Tamil militant leaders concluded that gaining foreign sanctuaries would be an essential component of their revolution and, further, that Indian military forces might intervene in an armed independence struggle under some circumstances. Provoking Indian intervention became a major strategic goal.

Sri Lanka's political leaders also drew lessons from the JVP insurrection. Attending to the concerns of Sinhalese youth, they concluded, was essential to Sri Lanka's future political stability. Consequently, they accelerated reform programs that included land redistribution and wealth taxes along with discriminatory practices in employment and higher education favoring Sinhalese youth. As we have seen, however, the government's options were severely limited by a more hostile international economic environment The austerity program that accompanied reforms made almost everyone worse off and the subsequent economic stagnation impacted young men, both Tamil and Sinhalese, most severely.

Faced with loss of political support due to unfulfilled promises and economic hardships, it is not surprising that Sirimavo Bandaranaike's government, already elected on a Buddhist-Sinhalese nationalist platform chose to "play the ethnic card" even more strongly. Policies that equated Sinhalese nationalism with Sri Lankan nationalism, legally enshrined in a new "Republican Constitution," catalyzed an escalating spiral of Tamil protests and repressive government responses. In 1976, the Sri Lanka Tamils' two mainstream political parties constituted themselves as the Tamil United Liberation front. Their party manifesto pledged to establish an independent nation of Tamil Eelam in Sri Lanka's Northern and Eastern Provinces. The Jaffna peninsula's 700,000 strong Tamil community became a breeding ground for more than a dozen militant groups whose leaders believed that only violent revolution could attain this goal.

The story of how Sirimavo Bandaranaike's policies contributed to deteriorating relations between Sinhalese and Tamil communities has been told often and well documented. But assessments that Sri Lanka's protracted ethnic civil war was caused by these policies need to be weighed carefully. When J.R. Jayewardene assumed power in 1977, militant domination of Tamil politics was a possible, but far from inevitable scenario. The Tamil United Liberation Front, still Jaffna's most influential political movement, was open to conciliatory moves on sensitive issues. Jayewardene's overwhelming Parliamentary majority and tight control over his own party provided him ample political capital to make concessions. Though militant groups had grown in stature on the Jaffna Peninsula and gained modest international visibility, their total number of hard core supporters was still minuscule, probably less than 200. They lacked the popular support, the recruits, the international funding and the foreign sanctuaries that were critical ingredients of their strength in the 1980s.

Examining Figure 9, which tracks the intensity of violent conflict in Sri Lanka's Tamil and Sinhalese majority areas is revealing. Prior to 1983, there were sporadic and well publicized outbreaks of violence, but the overall picture is one of relative stability. The ethnic rioting that began in late July 1983, catalyzed a qualitative change. By early 1984 a pattern of escalating ethnic violence in Tamil majority regions appeared to be irreversible.

The story of the riots is well known. On July 23, a hit squad lead by LTTE leader Velupillai Prabakharan ambushed a patrol of thirteen Sinhalese soldiers and killed them all. An ill-advised decision was made to move the bodies to Colombo, before returning them to their villages for burial. Arrival of the bodies at Colombo's main cemetery triggered violent attacks against neighboring Tamil residents and businesses that soon spread to other parts of the city. Soon, many regions of the country were engulfed in anti Tamil rioting and the disturbances continued for more than a week. During the period when violence was most intense, members of the security forces, virtually all Sinhalese, either stood by or abetted the rioters. By the time order was restored, more than 600 Tamils had lost their lives, untold numbers had been injured and nearly 100,000 had become refugees. Whether leading UNP politicians helped to organize the riots is still debated. However even J.R. Jayewardene's admirers agree that the President's indecisiveness, and, subsequently, his failure to publicly sympathize with Tamil victims made things worse.

The combined impact of the riots, government ineffectiveness in responding and the widespread perception that UNP politicians were complicit, convinced many Tamils they had no future in Sri Lanka and swelled militant ranks. Descriptions of the rioting by international news media evoked widespread sympathy for Sri Lanka's Tamils, which was adroitly exploited by Tamils living abroad, including propagandists for militant groups. Militant groups benefitted from donations by members of the large and growing Sri Lanka Tamil diaspora. International hostility toward Sri Lanka's Sinhalese dominated government and sympathy for Tamils created a climate in which leaders of South Asia's regional hegemon, India, saw a long awaited opportunity to clip the wings of Jayewardene's government and bring Sri Lanka more closely within its sphere of influence by supporting Tamil militants. Prime Minister Indira Gandhi also had personal reasons for making the life of Sri Lanka's President more difficult. Mrs. Gandhi believed Jayewardene had personally insulted her during his 1977 election campaign and in a subsequent speech at the Commonwealth Minister's Conference. He had stripped her close personal friend, Sirimavo Bandaranaike, of her civic rights. Indira Gandhi was not one to ignore such slights. In sum, the 1983 riots internationalized Sri Lanka's ethnic conflict, making the island nation far more vulnerable to political pressure from India. Internationalization of the conflict provided militant groups with the resources, training and foreign sanctuaries necessary to wage a protracted civil war. It also made foreign governments, without direct strategic interests on the Indian sub-continent, less willing to intervene on Sri Lanka's behalf.

India's pivotal role in training Tamil militants has been detailed in two recent works by Rohan Gunaratna and Narayan Swamy. As thousands of young men joined militant groups, India's Central Intelligence Agency (RAW), in a sometimes uneasy collaboration with the Tamil Nadu State Government, established a network of training camps in Tamil Nadu. India provided not only training, but arms, ammunition and other military equipment. Leading militant groups established offices in Madras, where organizers orchestrated recruitment, fund raising, propaganda and smuggling operations. India's foreign service establishment shielded these operations under a diplomatic umbrella, while discouraging potential allies from coming to Sri Lanka's assistance. By early 1984, hundreds of trained fighters were recrossing the Palk straits, joining the guerilla struggle against an increasingly beleaguered Sri Lankan army. The pattern of intensifying violence this produced shows up clearly in the top half of Figure 9.

India's involvement in Sri Lanka reached its apex in the summer and fall of 1987. Threatened with direct military intervention President Jayewardene's weakened government was forced to halt a promising military offensive against the LTTE, accept the introduction of an Indian expeditionary force into Sri Lanka and sign a peace accord that, in essence, acknowledged Indian hegemony in international security matters. The arrival of Indian troops in the North catalyzed a new rebellion in the South by a resurgent JVP. Thus India's role was pivotal in escalating both of Sri Lanka's civil wars.

In December of 1988, Sri Lanka faced a precarious future. Protracted civil wars in the North and South had devastated its economy. The Indian "Peace Keeping Force" occupied a third of the island, but had failed to make peace. Security threats had halted train service throughout the island. On some days, the writ J.R. Jayewardene's government extended only to the Colombo suburbs.

This Paper's Message

Sri Lanka's position as a small state in a big world produced challenges that adversely impacted economic performance, sovereignty and political stability. Changes in the international economy vitiated Sirimavo Bandaranaike's radical program of economic reform and social transformation. Indian hegemonic meddling laid waste to J.R. Jayewardene's plans for transforming his island nation into the Singapore of South Asia.

But pressures imposed on a small state by a big world, that is by a volatile global economy and great power interests, are only part of the story. Sri Lanka was adversely impacted by external forces because it had become vulnerable to such forces. Decisions by Sri Lanka's leaders were instrumental in creating that vulnerability. Draconian measures were required, in 1971, because of unsustainable subsidy programs, unresolved structural economic problems, chronic trade deficits and a dwindling stock of foreign assets. The June 1983 riots were spawned by a climate of hostility, resulting from failures of a generation of political leaders, both Sinhalese and Tamil, to deal effectively with communal differences. Those riots created a climate that made India's aggressive involvement in Sri Lanka affairs possible. Both J.R. Jayewardene's pro-Western foreign policy and his abrasive personal relations with Prime Minister Indira Gandhi motivated Indian involvement.

This paper's message is straightforward, though not easily translated into specific policy recommendations. Small states in a big world face economic and political challenges that big nations do not. The greater a small state's vulnerability, the more likely it will be adversely impacted by those challenges. When the international environment is benign, this should be viewed by leaders as a time for building economic and political resiliency.

In sum, leaders of small states do have options, especially in good times; they should be held accountable for exercising their options responsibly. Small states in a big world often face challenging circumstances, but need not be victimized by them.
 
 

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