Introduction

Sri Lanka is at a cross roads in respect of peace and development. The peace process is characterized by a ‘hurting’ stalemate, which must be resolved through peaceful methods if the country is to prosper in the long run. Evidence from other parts of the world suggests that the transition from a temporary to a permanent cessation of hostilities depends critically on how fast the conflict-affected areas can be economically transformed. Rapid economic development (evenly distributed) leads to a rise in the standard of living (widely shared), which in turn leads to a consolidation of the peace process. Economic stagnation, on the other hand, is likely to lead to mounting anger and frustration and to the eventual collapse or demise of the peace process. Policy makers therefore have to pay close attention to the economic dimensions of peace and to take the necessary steps for promoting rapid and broad-based economic development in the affected areas during the transition period. The creation of an enabling environment for peace and development is a critical factor in this regard.

Benefits of the Ceasefire Agreement

The Ceasefire Agreement (CFA) signed between the Government of Sri Lanka (GOSL) and the Liberation Tigers of Tamil Eelam (LTTE) on February 22, 2002 resulted in many positive developments, including (a) the temporary cessation of hostilities between the GOSL and the LTTE; (b) the re-opening of the A9 highway connecting the North and the South; and (c) the lifting of the trade embargo on the North and East in respect of a wide range of finished goods and raw materials. There is considerable debate, however, as to whether this transition from war to peace has realized a significant economic dividend in the northern and eastern regions, i.e., the conflict-affected areas. In other words, some argue that the economic impact of the CFA in the North and East has been negligible while others assert that it has been highly significant.

What is lacking in this debate, however, is a quantitative analysis without which it is not possible to determine how the economies of the North and East have been performing during the post-CFA period compared to the pre-CFA period. Hard numbers are needed to answer the question: Is economic growth in the North and East significantly higher in the post-CFA than in the pre-CFA period? A positive finding would suggest that the CFA has stimulated economic growth in the North and East, whereas a negative result would suggest the contrary.

This paper seeks to answer the above question through presentation and analysis of the hard numbers, thereby filling a gap in the ongoing debate on the economics dividends of peace. At the same time, we hasten to add that this analysis is by and large in the nature of an overview and that further research would be required to deepen our knowledge and understanding of the economic impact of the CFA in the conflict-affected areas, relative to the other areas.

Regional Growth of Gross Domestic Growth (GDP)

Time-series data on regional GDP disaggregated by three broad sectors (agriculture, industry and services) have been published by the Central Bank for the period 1996-2003. To facilitate a “before” and “after” analysis, the timeline has been divided into two segments: 1997-2001 (pre-CFA) and 2002-2003 (post CFA). Since the regional GDP data are presented in the Central Bank Annual Reports in nominal terms (see Annex 1), the first step was to convert them into real terms using the GDP deflator index with 1996 serving as the base year (as shown in Table 1).