Tamil Tiger vs Asian Tiger: the Sri Lankan Civil War and Development

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Tamil Tiger vs Asian Tiger:

the Sri Lankan Civil War and Development
Early this fall representatives of the Sri Lankan government and the Liberation Tigers of Tamil Eelam (LTTE or “Tamil Tigers”) met in Geneva to try to resurrect their failed 2002 peace accord. The civil war began in 1983 when the LTTE launched a separatist insurrection in the North of the island in response to anti-Tamil rioting in the south and has persisted ever since. The conflict has raged for twenty three years and has claimed more than 63,000 lives, displaced over 700,000, and forced over 172,000 into refugee camps.1 The 28-29 October Geneva Talks failed to break any ground and so the conflict continues with no end in sight.2 However, Sri Lanka has managed to show remarkable success in development despite the endemic violence. Conventional wisdom might suggest that civil wars would have a detrimental effect on a country’s development trajectory, but the case of Sri Lanka highlights the ways in which the effects of civil war on development are not always obvious. In fact, Sri Lanka demonstrates that there are complex interactions between economic and social factors and the effects of violent internal conflict. It is certain that Sri Lanka would have been better off without having experienced a long civil war, but an aggressive pursuit of social welfare and sound economic management by the government has enabled the country to persevere in the face of adversity to become one of the more developed countries in South Asia.

The foundations of the conflict and the government response can be best understood after a brief survey of the history of the conflict. The Sri Lankan civil war began ostensibly in 1983 when Sinhala violence prompted a violent response from the militant Sri Lankan Tamil organization known as the LTTE but the roots lie in the post-independence economic and social order. After gaining independence from Great Britain on February 4th, 1948, Sri Lanka was an agrarian society divided along ethnic and religious lines between five groups: the Buddhist Sinhala, the Hindu Sri Lankan Tamils, the Indian Tamils, and the Muslim Moors. Of these the two players in the civil war are the Sinhala and the Sri Lankan Tamils. The Sinhalese represented the majority group on the island and dominated the country’s politics and economy and resided in the south and west. The Sri Lankan Tamils, the largest minority group, resided predominately the north and eastern regions of Sri Lanka. The geographic, religious, linguistic, and political divide between these groups set the island nation up for conflict.

Following independence, the Sri Lankan government pursued inward-oriented, quasi-socialist development strategies under the alternating governments of the two major political parties the center-right United National Party (UNP) and center-left Sri Lankan Freedom Party (SLFP). The UNP represented the vestiges of the colonial elite and ruled in a western-style democracy until the Marxist and Sinhalese-Nationalist coalition, the SLFP was elected in 1956.3 Sri Lanka followed a strategy of import substitution industrialization combined with strong social welfare programs.4 The SLFP was instrumental in fomenting ethnic tensions because it doggedly supported Buddhist-Sinhalese nationalism at the expense of minority groups. Shortly after taking power, the SLFP government declared Sinhalese the only official language of Sri Lanka, which sparked tensions between the Sinhala majority and the minority Sri Lankan Tamils.5 Then, in 1970, the SLFP introduced a new university admissions policy that was seen as giving the Sinhalese an unfair advantage. The SLFP followed up in 1972 with a new constitution that lacked many of the protections of minorities that had been a part of the previous version.6 Throughout the 1970s political turmoil foreshadowed the economic, social, and political strife that would in time lead to the LTTE uprising in 1983. The SLFP employed violence at the polls to discourage UNP supporters from voting but the SLFP efforts proved unsuccessful in preventing UNP electoral success.7

In 1977, the UNP won a major electoral victory and President J.R. Jayawardene attempted to implement sweeping economic liberalization. However, for most citizens, the benefits were marginal at best. The economy grew a modest five percent per year between 1979 and 1981, but declined 16 percent in 1982 because of massive inflation in 1980-82.8 By 1982 it was clear that the UNP had failed to deliver its promises of economic development. Consequently, the parliament voted to extend the terms of MPs by six additional years for fear that voters would respond negatively to the failure of their economic reforms. The UNP MPs felt that their reforms had long-term potential and hoped that by 1989 the economy would rebound and elevate electoral standing.9 Unfortunately, this was not the case. Inflation and economic stagnation sparked widespread anger in 1983 as both the Sinhalese and the Sri Lankan Tamils hurled recriminations at each other over the economic plight and alleged ethnic discrimination in the UNP economic policies. As John Richardson, Jr., pointed out, whether or not the open economy reforms of the UNP government actually privileged certain ethnic groups is highly debatable, but what is more important is that on both sides “potentially disruptive elements believed they had been disadvantaged.” Both sides “viewed members of the ‘other’ ethnic group and J.R. Jayawardene’s government as legitimate targets for their resentments.”10 Those resentments boiled over into violence when riots broke out in 1983. The LTTE rapidly militarized in response and by 1984 the LTTE was engaged in open warfare with government forces.

In the twenty-three years since the start of the conflict, Sri Lanka has faced a myriad of setbacks, among them widespread violence, population displacement, destroyed infrastructure, and reduced foreign investment. In 1994, Chandrika Kumaratunga was elected president from the People’s Alliance (PA) coalition. Her government promised peace through negotiations with the LTTE and prosperity through “globalization with a human face.”11 Unfortunately for Kumaratunga, 1995 marked the bloodiest year of the conflict up to that point and warfare continued unabated until 2002. But, despite the violence, Sri Lanka has surpassed all other South Asian nations in nearly every development indicator listed in table 1 below.

Table 1: Economic and Social Indicators for South Asia


Sri Lanka






Population (Millions)







Population Growth Rate







Infant Mortality

(Per 1000 live births)







Life Expectancy at Birth (Years)







Literacy Rate (total population age 15+)

92.3% (2003)

59.5% (2003)

48.7% (2004)




GDP (Billions)







GDP (PPP) (Billions)







GDP Real Growth Rate







GDP per capita (PPP)







Unemployment Rate






42% (2004)

Population Below Poverty Line

22% (1997)

45% (2004)

32% (2001)



25% (2000)

31% (2004)

Economic Aid Recipient (Millions)





$424 (2001)

Military Expenditures

(% of GDP)*







Note: All data for 2005 unless otherwise indicated

*Official military expenditures; actual percentages probably higher

Compiled by author based on statistics from the CIA World Factbook 2005

As seen in the table, Sri Lanka has the highest GDP per capita, the highest literacy rate, the highest life expectancy, and the lowest infant mortality rate of all the South Asian nations. The remarkable success of Sri Lanka as compared with its neighbors raises two important questions: (1) Would Sri Lanka be even better off today if it could have avoided the civil war? And (2) How did Sri Lanka manage to achieve such high development indicators while simultaneously fighting a violent civil war?

The simple answer to the first question is that yes, it is very likely that Sri Lanka would be better off today had it not suffered from twenty-three years of civil war, sometimes termed “development in reverse,” but it is extremely difficult to estimate the opportunity cost of the civil war as a whole.12 There has been a wealth of literature on the subject of how to calculate the costs of wars generally and in Sri Lanka in particular. Swedish professor Göran Lindgren is particularly helpful in his 2005 review of 14 studies of cost estimates for armed conflict. According to Lindgren, “Recent research on both international and internal conflicts report that the average economic growth in countries that has fought a war is slower than for those that did not” but beyond that there is great variance in the exact estimates proposed by various studies.13

Lindgren identifies two major approaches for assessing the costs of conflict: the accounting method and the modeling method. Accounting methods try to tabulate the opportunity costs of conflict by totaling the direct costs (destruction of infrastructure, military expenditures, loss of life, etc.) and indirect costs (capital flight, inflation, migration, etc.) incurred during the course of a civil war. The advantage of the accounting model is that it is empirically grounded but it struggles to account for indirect costs of intangibles like human capital. The modeling method tries to calculate the opportunity cost of conflict by finding the difference between actual economic growth and extrapolated counterfactual economic growth based on pre-conflict conditions and trends.14 Sri Lanka is the most widely studied case for estimating the costs of internal warfare because the available economic data is more prevalent than for most war-torn countries, but the number of studies has not resulted in greater accuracy. For Sri Lanka, estimates vary between 2.2 percent and 15.8 percent of annual GDP lost due to the civil war. According to Lindgren, the variance is the result of differing assumptions of how to estimate the indirect costs of lost FDI and lost tourism revenues. FDI and tourism are closely related to perceptions of stability within countries bit it is difficult to assess the exact relationship. Lindgren points out that most studies that employ the modeling method estimate very high growth costs from the reduction in FDI. 15

Clearly though, Lindgren’s estimates of 2.2-15.8 percent GDP loss non-zero losses in economic growth due to armed conflict. However, some have raised the possibility that armed conflict can stimulate an economy. Before 1983, Sri Lanka had very low defense-related expenditures (approximately one percent of GDP), but after 1984, defense spending rose rapidly to 3.5% in 1985, 4.5% in 1990, and as high as 6% of GDP in 1996. The government rapidly expanded the military from 12,000 troops in 1981 to approximately 210,000 troops in 1997 to counter the LTTE. 16 By some estimates, the war may have created as many as 400,000 new jobs as of 1998, many of which have employed the urban poor and other traditionally marginalized segments of Sri Lankan society. The conflict has caused the migration of over 500,000 Tamils, which although unfortunate, has produced a boom in the transportation sector and results in remittances of almost $500 million a year, a figure that rivals the size of Sri Lanka’s annual foreign aid reciepts.17 Defense spending has clear benefits for many people in society by providing above average salaries to soldiers, by creating numerous jobs for support services and industries for military personnel, and by providing substantial pension benefits to the families of soldiers who lose their lives in combat.18

However, theoretical research on the links between defense spending and economic growth show that there is only limited evidence to support links between the two variables. A broad study by Newman Kusi about the causal links between growth and military spending in 77 nations showed that for the majority of the sixty-two nations studied, Sri Lanka included, there was no clear causal link between the two variables.19 Kusi’s work, combined with that of Lindgren, suggests that while the exact costs of the Sri Lankan civil war are impossible to calculate, they are certainly significant and any gains from military spending have not mitigated the majority of the costs of war. Even by the most conservative estimate, 2.2 percent annual cost for 1983-199320, the civil war has had a profound impact on Sri Lanka. Furthermore, there are costs that go beyond what the macroeconomic statistics can show. According to the 2000 World Bank report, the endemic violence has hardened the ethnic divide on the island between the Sinhala majority and the Sri Lankan Tamils. The report warns that “countries such as Sri Lanka in the midst of protracted conflicts have as much to fear from the longer term impacts on society, the economy, and political health of the country, as from the short-term direct impacts of war.”21 Unfortunately for Sri Lanka, what once seemed to be a glimmer of hope from the 2002 peace agreement, has since faded with the resumption of full-scale hostilities.

Yet, despite the gloomy forecast from the World Bank, there remains the fact that Sri Lanka has had positive growth despite endemic armed conflict. The amazing resilience of the country surely warrants examination because effective strategies for perseverance in the face of intranational conflict are highly relevant to many other developing nations. Studies of the civil war and Sri Lanka’s economic and social performance overwhelmingly cite government policies as the key explanation for the nation’s relative success. The government success is twofold; first, the government invested in human capital early in the nation’s history and second, officials in recent decades have exercised sound economic leadership.

Sri Lanka has been able to maintain high social indicators (compared with the rest of South Asia) because of widespread social welfare programs that provide benefits like “cheap staple foods, free schooling, and free medical services.”22 According to the World Bank, Sri Lanka “was one of the first developing countries to understand the importance of investing in human resources and promoting gender equality.”23 Especially under the early years of the SLFP, the government pursued socialist policies that accrued many benefits to the people of Sri Lanka. The investments have paid off after several generations as can be seen in the high levels of education and health.24

The second factor in Sri Lanka’s successful development has been sound leadership in the most recent period. President Kumaratunga pursued economic strategies similar to her predecessor, UNP president Ranasinghe Premadasa who oversaw strong economic performance under the open economy strategy. President Kumaratunga sought market-oriented solutions and altered the tax structure to be more market-driven by adding a sales tax.25 However, the costs of the civil war repeatedly required the PA government to curtail its economic subsidies in order to pay for military expenditures. Kumaratunga’s government can perhaps be best credited for “careful monetary and fiscal management” and for successfully overseeing the transformation of globalization.26 By 2000 the service sector represented 54.6 percent of the Sri Lankan economy up from 48.3 percent in 1988.27 The service sector, especially in banking and insurance, grew as a result of favorable trends in the international market and as a result of Sri Lanka’s earlier human capital investment.

Though one might expect human capital investment to be difficult to sustain in the midst of civil unrest, the unequal geographic burden of the war has played an important role. Despite the status of civil war, the fighting occurred almost exclusively in north of the island on the Jaffna peninsula, in the nominally Tamil-controlled area. Thus, although one might expect armed conflict to negatively impact social capital formation, social capital was inhibited only in disputed areas whereas in areas firmly under government or LTTE control, there was a great deal of successful social capital formation.28 Growth occurred primarily in the Sinhala heartland of the southwestern part of the island while large areas of the north and east “had been laid waste.”29 This unequal character of development is likely to perpetuate the ethnic and geographic divide that has sustained the civil war.

The fact that growth may serve to sustain the civil war is emblematic of the complex interaction between economic and social factors and the effects of violent internal conflict. Although sound policies on the part of the Sri Lankan government have resulted in many significant strides, the civil war persists as the number one stumbling block for Sri Lanka’s future. The roots of the war lie in the complicated web of ethnic politics and economic inequality that still serve to fuel it today. Sri Lanka has been an example of a nation that has fought against adversity, but its relative success is fragile. As Wilson and Woost acknowledge, the civil war has become institutionalized after a generation of fighting and the regularization of the conflict has created incentives for leaders and ordinary citizens alike to sustain the conflict.30 The government will be challenged to find ways to sustain economic growth while trying to reconcile the divisions within Sri Lankan society. The policies of the PA government can serve as a useful example of how to manage growth in dangerous conditions, but until the government and the LTTE can come to a lasting accord, be it a truce or a partition, the relative successes must be taken with a grain of salt.

 World Bank. Sri Lanka Recapturing Missed Opportunities. World Bank Report no. 20430-CE. Poverty Reduction and Economic Management Unit, South Asia Region. 16 June 2000, 13.

2 Ethirajan Anbarasan. “Analysis: Sri Lanka talks failure.” BBC News. 30 October 2006. http://news.bbc.co.uk/2/hi/south_asia/6099514.stm, accessed 19 November 2006.,

3 K.M. de Silva. “Sri Lanka: Surviving Ethnic Strife.” Journal of Democracy. Vol. 8 No. 1 (1997), 99.

4 Nalani Hennayake. Culture, Politics, and Development in Postcolonial Sri Lanka. (New York: Lexington, 2006), 10-14.

5 Ibid., 14.

6 de Silva, “Surviving Ethnic Conflict,” 100-101.

7 Ibid., 102.

8 John M. Richardson Jr. “Violent Conflict and the First Half Decade of Open Economy Policies in Sri Lanka: A Revisionist View.” In Deborah Winslow, Michael D. Woost, eds. Economy, Culture, and Civil War in Sri Lanka. (Indianapolis: Indiana University Press, 2004), 55.

9 Ibid., 66.

10 Ibid., 60-61. (His italics)

11 Amita Shastri. “An Open Economy in a Time of Intense Civil War: Sri Lanka, 1994-2000.” In Deborah Winslow, Michael D. Woost, eds. Economy, Culture, and Civil War in Sri Lanka. (Indianapolis: Indiana University Press, 2004), 73.

12 Paul Collier, et. al. Breaking the conflict trap: civil war and development policy. (New York: World Bank; New York: Oxford University Press, 2003), 13.

13 Göran Lindgren. “The Economic Costs of Civil Wars.” Working Paper for the Ninth Annual International Conference on Economics and Security 23 to 25 June 2005, Burwalls Centre, Clifton, Bristol., 3.

14 Ibid., 4-8.

15 Ibid., 13. See Charts on Lindgren p 10-13 for more details.

16 Nisha Arunatilake, Sisira Jayasuriya, Saman Kelegama. “The Economic Costs of the War in Sri Lanka.” World Development. Vol. 29, No. 9 (2001), 1485.

17 “Sri Lanka. Blood and Money.” The Economist. August 8, 1998, p. 38

18 Deborah Winslow, Michael D. Woost. “Articulation of Economy and Ethnic Conflict in Sri Lanka.” In Deborah Winslow, Michael D. Woost, eds. Economy, Culture, and Civil War in Sri Lanka. (Indianapolis: Indiana University Press, 2004), 8.

19 Newman Kwadwo Kusi. “Economic Growth and Defense Spending in Developing Countries: A Causal Analysis.” The Journal of Conflict Resolution, Vol. 38, No. 1. (March 1994), 157.

20 Lisa Morris Grobar, Shiranti Gnanaselvam.”The Economic-Effects of the Sri-Lankan Civil-War.” Economic Development and Cultural Change. Vol. 41 No. 2 (1993): 395-405.

21 World Bank. Sri Lanka Recapturing Missed Opportunities, 13.

22 Pradhan, Gyan. "Economic Cost of Sri Lanka's Ethnic Conflict.(Statistical Data Included)." Journal of Contemporary Asia Vol. 31 No.3 (August 2001). InfoTrac OneFile. Thomson Gale. COLLEGE OF WILLIAM & MARY. 16 Nov. 2006.

23 World Bank. Sri Lanka Recapturing Missed Opportunities, 21.

24 See Table 1.

25 Shastri, “An Open Economy in a Time of Intense Civil War,” 74-78.

26 Ibid., 90.

27 Ibid., 84.

28 Winslow and Woost, “Articulation of Economy and Ethnic Conflict in Sri Lanka.” 10-14.

29 Shastri, “An Open Economy in a Time of Intense Civil War,” 89.

30 Winslow and Woost, “Articulation of Economy and Ethnic Conflict in Sri Lanka.” 11.

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