The impact of "Mercantilism and "Capitalism" on the

Economy of Sri Lanka

“Mercantilism is economic nationalism for the purpose of building a

wealthy and powerful state. The term “mercantile system” is used to
describe the system of political economy that sought to enrich the
country by restraining imports and encouraging exports”1. This system
dominated Western European economic thought and policies from the
sixteenth to the late eighteenth centuries. The goal of these policies was,
supposedly, to achieve a “favourable” balance of trade that would bring
gold and silver into the country and also to maintain domestic
employment.

With the balance of trade shifting from multinational corporations to large

emerging markets — such as China and India — some nations have been
tempted to turn to unfair practices to gain a trade advantage. These
mercantilist practices are taking over knowledge- and technology-based
industries.

“Capitalism is an economic and social system in which capital, the non-

labour factors of production (also known as the means of production), is
privately controlled; labour, goods and capital are traded in markets; and
profits distributed to owners or invested in technologies and industries.
Capitalist societies encourage competition and personal profit”2.

Historically until Portuguese conquered the maritime areas of the country

in 1505, there had been three Kingdoms, which were the Kotte Kingdom in
the south – west, the Jaffna Kingdom in the north and the Kandyan
Kingdom in the central highlands. The first two fell victims to foreign
conquest by the Portuguese in 1505 and later by the Dutch in 1656 and
the British in 1796.

1. Allen, William R. “Mercantilism.” In John Eatwell, Murray Milgate and Peter

Newman, eds., The New Palgrave: A Dictionary of Economics. Vol. 3. London:
Macmillan, 1987. P. 445-448

2. Bacher, Christian (2007) Capitalism, Ethics and the Paradoxon of Self-exploitation

Grin Verlag. p. 2
It was only with the fall of the Kandyan kingdom to the British in 1815 that
the whole country came under foreign rule for the first time. The political
and administrative unification of the country by the Colebrooke
commission of 1832 may be regarded as the starting point of the modern
national history of Sri Lanka.

In the medieval period, economic activity consisted of the cultivation of

rice by the people for their own consumption and supplying the surplus to
the King’s court and feudal landowners. Sri Lanka, being at the hub of
sea-going traffic in the region, had from very early times established
overseas trading relations, firstly with the Arabs and later with traders
from other countries in spices, elephants and precious stones in exchange
for silk, porcelain and other articles of aesthetic value. But the scale of
this early trade was not extensive.

The Portuguese, and later the Dutch, expanded substantially on these

early trading activities primarily supplying articles of luxury consumption
to the growing commercial centres of Europe. These included pearls,
chank shells, arecanut, cinnamon, cloves and nutmeg.

With the British conquest of the whole country in 1815, Sri Lanka became
one more addition to the far-flung British Empire. From then on, economic
activity in the country came to be geared principally towards satisfying
the consumption appetites and production needs of the rapidly expanding
West European markets.

“Subsistence cultivation of food by the peasants declined and was quickly

eclipsed by a plantation economy producing for export. Classical
Economic theory born of the womb of capitalist production and imperial
expansion, soon imposed its orthodoxy that international trade, based on
what was called theory of comparative, was beneficial to all participating
nations. The complementary political doctrine of laissez-faire, by
advocating that the government is best which governs least, opened the
country to unrestricted commercial exploitation”3.

3. SATCHI PONNAMBALAM, DEPENDENT CAPITALISM IN CRSIS – The Sri Lankan

Economy 1948-1980 (Zed Press 19800 p. 5
“The Colebrooke reforms in 1832, initiated an economic climate opposed
to Mercantilism and state monopolies, but steeped in Laissez faire
doctrines of individual enterprise and free trade, all of which helped the
growth of a prosperous plantation economy”4. The establishment of estate
system of coffee cultivation for export by foreign capital and management
created in Sri Lanka for the first time a new economy vitally dependant on
foreign trade, capitalist production, a permanent labour force and low
wages – a structure which was the contrast of the prevailing self sufficient
rice growing village economy. By the time coffee collapsed in the 1880s,
there a dual economy had emerged in the country. One was highly
developed capitalist plantation economy. The other was a tradition-bound
primitive self sufficing economy producing for domestic consumption. The
former grew under the patronage of the colonial government, while the
latter, being orphaned as it were, continued to decline. This pattern of
dualism which w the coffee era continued to be the central characteristic
of Sri Lanka’s economy up to the time of Independence in 1948. Even the
post-independence governments have continued to work within the
framework of this dualism left by the early British colonial period.

During the period of World War II, the war conditions that made the
traditional sector become really dependant on imports. With the war,
exports and exports and their prices came under government control. All
export products had to be sold under bulk purchase contracts to the
British government at pre war prices, which were considerably below the
market prices of the time. In contrast, prices of import goods trebled and
for the most part became unobtainable. Because the country was geared
to the war effort, local production of rice and other food crops slumped.

The dependant economy which colonialism created for extraction of

surplus value, the stagnation which is caused in the traditional sector and
the dependence on the imports which the war imposed were not corrected
in the post-war years or even after independence. The neo-colonial state
political decolonization created was tied hand and foot to its colonial
origins. The country’s role on the periphery of the world capitalist system,
as an exporter of raw materials and importer of consumer and luxury
goods, was accepted as natural order of things.

4. Saman Kelegama, Gamani Corea, Economic policy in Sri Lanka: issues and
debates (SAGE 2004) p. 55
Since export earnings remained stagnant, increased imports were
financed by running down the accumulated foreign reserves. Internally,
the government’s budgets were in deficit from the beginning, even during
the period of the 1950-51Korean War boom. With the depletion of foreign
reserves and the collapse of the boom, continuing trade deficits caused a
severe foreign exchange crisis. Resource was had at first to drawings from
the IMF. This being inadequate, import controls were introduced and
import substitution adopted. But, import substitution was not aimed at
satisfying the real needs of the people and import substitution industries
were dependent on imported raw materials and imported technology.
Therefore it was found to be no answer to the foreign exchange crisis.

The strategy came eventually to be one of continuing imports financed by

accelerating dependence on aid – a policy of short term relief with long
term burden. The UNP government 1977, bowed to IMF and devalued the
Rupee by 100%, liberalized the imports and abolished all exchange
controls, drastically cut down the subsidized food and open the country to
foreign private capital both within and out side newly established ‘Free
Trade Zone’. “As quid pro quo (something for something), the IMF offered
large amounts in stand-by loans, and via the Trust Fund and Extended
Fund Facility, and the world bank organised massive aids through it’s Aid
Ceylon Consortium. The external payments crises had this way been
temporarily swept under the carpet by subjecting the country to IMF
discipline and rendering it a client state”5.

Despite the effects of 1983 ethnic riots and 1988-1989 JVP uprising, in
welfare sector, Micro credit for farmers, completion of Mahaweli project,
SAARC multilateral economic cooperation had been achieved in J.R.
Jeyawardena government period.

5. SATCHI PONNAMBALAM, DEPENDENT CAPITALISM IN CRSIS – The Sri Lankan

Economy 1948-1980 (Zed Press 19800

From 1989 to 1993, despite the unsettled domestic situation in the

country, President Premadasa went ahead with the implementation of his
schemes and programs for economic and social reconstruction. The main
thrust of his approach in this respect was the launching of the village
awakening movement (known in Sinhalese as gam udawa) as well as the
Janasaviya, which literally means extending a "helping hand to the
people."

Gam udawa envisages a civic society of self-governing village republics.

Janasaviya aims at providing those families living under the poverty line
(nearly half of the country's population) not only with a dole in the form of
food stamps but also with an investment allowance. Under this scheme of
poverty alleviation to be implemented in a phased manner throughout the
island, the poor families would be provided with a sum of 25, 000 rupees
(about $6, 250) over a period of two years as a modest capital
requirement for the acquisition of the means of production. The object of
this scheme, as stated by the president in his address to the Parliament
on April 4, 1990, was "to transform a population that subsisted on food
stamps into persons engaged in productive livelihood and enterprises."

When President Chndrika Bandaranayak was in power Build Operate

transfer system setup, economic policy was towards privatisation. The
capitalist policy resulted in 5.5% of GDP growth in 1990s and it’s lowered
to 3.8% in 1996. And it’s rebounded in 1997-2000, with average growth of
5.3%.

2001 period was the first recession in the countries history, in which
power shortages, budgetary problems were emerged.

From 2005 during the period of President Mahinda’s period the war
successfully ended. And right now government has a policy which is going
through the mid way as it claims, neither mercantilist nor capitalist policy
which resulted in considerable amount of Economic growth as Sri Lanka
has been placed in the List of Middle income countries.