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Sri Lanka Table of Contents

Sri Lanka

Structure of the Economy

Agriculture, both subsistence and commercial, has played a dominant role in Sri Lanka's economy for many centuries. The Portuguese and Dutch, who ruled the coastal regions of the island from the sixteenth through the eighteenth centuries, were primarily interested in profiting from cinnamon and other spices (see European Encroachment and Dominance, 1500-1948; The Dutch , ch. 1). Trade with India, Sri Lanka's nearest neighbor, was also important during this period. Sri Lanka exported pearls, areca nuts, shells, elephants, and coconuts, and in return received rice and textiles.

The island's economy began to assume its modern form in the 1830s and 1840s, when coffee plantations were established in the Central Highlands. Coffee soon became the dominant force in the economy, its proceeds paying for increasingly large imports of food, especially rice. When coffee fell victim to a leaf disease in the 1870s, it was quickly replaced by tea, which soon covered more land than had coffee at its height. Coconut plantations also expanded rapidly in the late nineteenth century, followed by rubber, another cash crop introduced in the 1890s. Stimulated by demand generated by the development of the automobile industry in Western Europe and North America, rubber soon passed coconuts in importance. These three products--tea, coconuts, and rubber-- provided the export earnings that enabled Sri Lanka to import food, textiles, and other consumer goods in the first half of the twentieth century. At independence in 1948, they generated over 90 percent of export proceeds.

Wet rice was grown extensively as a subsistence crop throughout the colonial period. In the nineteenth century, most of it was consumed in the villages where it was grown, but in the final decades of British rule the internal market in rice expanded. Nonetheless, more than half of the rice consumed was imported, and the island depended on the proceeds of plantation crops for its food supply.

The economy gradually became more diverse after the late 1950s, partly as a result of government policies that encouraged this trend. The main reason successive administrations tried to reduce the country's dependence on tea, rubber, and coconuts was the long-term decline in their value relative to the cost of imports. Even when Sri Lanka increased the production of its major cash crops, the amount of imports that could be bought with their proceeds declined.

Much of the diversification of the economy, especially in the 1960s and the early 1970s, took the form of import substitution, producing for the local market goods that the island could no longer afford to import. Sri Lanka also had some success in diversifying exports after 1970. The proportion of exports linked to the three traditional cash crops fell from over 90 percent in the late 1960s to 71 percent in 1974 and 42 percent in 1986. Textiles, which made up only 0.7 percent of exports in 1974, accounted for over 28 percent in 1986 (see table 5, Appendix A).

In 1986 agriculture, forestry, and fishing made up 27.7 percent of the gross national product (GNP--see Glossary), down from 39.4 percent in 1975 (see table 6, Appendix A). In 1956 wholesale and retail trade accounted for 19.9 percent of GNP, and manufacturing for 15.6 percent. Transport, storage, and communications stood at 11.2 percent of GNP, and construction at 7.7 percent. The relative importance of the various sectors of the economy was fairly stable during the 1980s.

Data as of October 1988