Ideas: Make Sri Lanka’s North and the East special economic zones

June 29, 2009 (LBO) – Massive investment is needed in the North and the East to allow these war-torn regions to catch up with the progress they missed because of the LTTE.

The likelihood of obtaining these funds from Sri Lankan tax-payers or from foreign donors is not very good.
The former because we spend all government revenues on salaries and debt repayments and the latter because the success of Eelam War IV on the ground was not matched by success in the external propaganda war.

So what remains is private investment, domestic or foreign, beyond a few loans like the 24 million US dollars the government recently obtained from the World Bank for healthcare in the North.

Just to give a sense of proportion, the healthcare loan is less than one percent of the 4.5 billion US dollars pledged at the 2003 Tokyo Donors’ Meeting.

The keys to attracting private investment are showing high profit potential and/or reducing risk as much as possible.

Private investors go into lawless places like Somalia and the Congo. It is not that they do not go into high-risk places; it is that they demand very high and very rapid returns for doing so.

It is better to reduce risk than to guarantee profits. When NTT invested in Sri Lanka Telecom in 1997 at the peak of the LTTE’s economic war (Central Bank blasted in 1996; World Trade Centre attacked in 1997, etc.), the government sought to guarantee profits by giving it a form of exclusivity over international telephonic services.

This caused significant harm and delayed the emergence, for example, of the business process outsourcing industry. With the LTTE decapitated, it may be possible to attract investment in less harmful ways. We can make it easier to do business in the North and East by reducing different kinds of risk.

Headless though the LTTE may be, law and order has not completely returned as evidenced by recurrent instances of kidnapping. The infrastructure leaves much to be desired.

Getting supplies into factories and getting product to market will continue to be difficult for some time. Checkpoints and road closures will continue, making everything less certain and more expensive. These risks are difficult to reduce.

But there are other kinds of risks. What if the government were to reduce governance-related risks by declaring the Northern and Eastern Provinces Special Economic Zones? Where taxes are not arbitrarily raised for a number of years, say five or ten. Where one will not be solicited for donations at the drop of a hat and asked to sponsor this or that activity of the Presidential progeny.

Where one can hire workers when there is work, and let people go when there is not. Where one does not have to beg for approval to bring in needed specialists from abroad. Nothing really difficult to grasp; just a replication of what was offered to investors in the free trade zones under the Greater Colombo Economic Commission in the late 1970s.

Should this only be for factories? No. In the North and the East, there should be no prohibitions against anyone establishing private universities or healthcare facilities, other than minimal quality safeguards.

But should that mean that people in the North and East will have to pay for services that their fellow citizens in the other provinces get for free? That would be utterly unfair. Instead, they should be given vouchers to the value of what citizens receive in the rest of the country. They will be free to pay any education supplier in the North and the East with education vouchers and any healthcare supplier with healthcare vouchers.

Why would this be allowed? Because there are no vested interests left in the North and the East, unlike in the South where we have iron triangles upon triangles preventing reforms.

Why should this be allowed? Because we need to provide incentives for private investment in the region. Because, even more, we need to work out effective models to improve the supply of infrastructure services and create employment and wealth not only in the post-conflict regions, but in the entire country.

Because sustained double-digit economic growth and the essential enabling governance structures are needed by all of us, irrespective of whether we live in erstwhile border villages or places that were under the authority of the LTTE or in the economic centers that were the targets of the LTTE bombers.