Score One for Capitalism

Its tea off, Sri Lanka gets teed off at socialist controls

Around the world, the siren song of socialism appears to be losing its lure. Countries as diverse as Britain and France, Peru and Algeria are moving away from the creed of nationalization and toward freer market economics. None has shifted quite so far, so quickly, as Sri Lanka, the verdant island nation off the coast of India that the world still knows as Ceylon. Reports TIME Correspondent Ross H. Munro:

Sri Lanka is awakening from a long socialist slumber. The severe shortages of such necessities as cloth, soap and matches that bedeviled consumers just two years ago have disappeared. Sarong-clad peasants fire bricks in newly made kilns alongside their coconut groves and paddyfields. The hotels are overbooked with foreign businessmen eager to add to the growing flood of investment from overseas. Since it overwhelmed the leftist regime of Mrs. Srimavo Bandaranaike in the 1977 national elections, the government of President Junius Jayawardene has been chipping away at one of the most complicated and burdensome combinations of restrictive regulation and high taxation ever concocted by 20th century socialists.

The new government has eliminated a multitude of licenses and permits, cut back price controls, reduced import duties and trimmed taxes on business profits and agricultural exports. Private managers have been put in charge of money-losing state corporations, and the government has reduced the free and subsidized rice and flour distributions that ate up more than 30% of the previous regime's annual budget. Foreign investment is now running at about $40 million a year, 13 times the level seen in the last year of the former government. Sri Lanka, in short, is experiencing creeping capitalism. Says Jayawardene, a lawyer: "The developing world is now giving up controls. Not only us. They've found it does not pay."

It has taken more than 30 years for Sri Lanka to find that out. After gaining independence from Britain in 1948, the country set up a welfare state that paid tangible dividends. Because of its free medical and educational programs, Sri Lanka today has one of the highest life ex pectancy and adult literacy rates in the developing world. But from the 1950s onward, socialist governments imposed increasingly stiff taxes on business to finance a maze of nationalized enterprises and a complex web of regulations that controlled everything from trade to foreign exchange.

In the early 1970s, the government seized the tea plantations that long generated about half the nation's export earnings. The result was a disaster. The plantations became run down as reinvestment was cut back, periodic replanting was stopped, and fertilizers were not applied. Production of Sri Lanka's three major exports (tea, rubber and coconut) plunged. Foreign investment dropped, and price and import controls created such shortages that city dwellers lined up to buy the simplest necessities.

At the same time, private companies were paying as much as 90% of their profits in direct and indirect taxes. A bloated civil service, 420,000 strong, was required for an island population of 14.5 million. Recalls Rajah Maharaja, a leading businessman: "Many civil servants indulged in vindictive interference."

The then socialist government of the Sri Lanka Freedom Party (in coalition with the Communists and Trotskyists) was so discredited by 1977 that Jayawardene entered the election campaign daring to say nice things about foreign investment. When opponents condemned him as the "high priest of capitalism," Jayawardene blithely replied: "Let the robber barons come." Though his United National Party won that election by a landslide and last month again sent his political opponents down to defeat in local elections, he must still tread cautiously. The lifting of controls and the doubling of economic growth to 6%, together with higher oil prices, have sent inflation soaring to 17% or more. In a country where the per capita income remains below $200, rising prices particularly hurt those who have yet to benefit fully from the economic surge. While the high level of education will help future industrial growth, it creates problems at a time when adult unemployment is substantial.

The government's success will be determined largely by two key undertakings: >As part of an assault on unemployment, Sri Lanka plans to build five major dams and reservoirs over the next six years. The $1.2 billion project, more than half financed by foreign aid, will employ 225,000 workers and add greatly to electricity generation and farm irrigation.

>As part of its open-door policy toward foreign investment, Sri Lanka has established a free-trade zone north of Colombo, where investors can be granted exemption from import duties and taxes.

Despite problems over lack of paved roads, running water and communications, six factories have already been set up and more are abuilding. Some will make work gloves, tea bags and latex rubber threads, but most will produce garments for the U.S. market. Indeed, many companies have been attracted because the U.S. does not yet impose import quotas on Sri Lankan garments. Typically, Jeffrey Bogatin, owner of a New York-based garment business, was attracted by wage costs of 73-c- an hour and a five-year tax holiday. Says he: "I'm shocked that there is not more of a rush by industry to this place. The people are educated and eager to work. This country is on the way up."

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