After the chaotic civil war coming to an abrupt and seemingly decisive end, Sri Lanka is preparing itself for the future and could very well be the next growth engine world is so desperately looking for.Currently this charming country which is full of talented people is a place under construction with so numerous highways being constructed running across its dense forests. Inefficient road network is a bad sign for any emerging market economy and hence construction of this scale tells that Sri Lanka is no longer a land in waiting, which it has been for the last 50 years.

With both civil war and socialism behind it, President Mahinda Rajpaksa since assuming office in 2005 has led the country in a forward looking and determined manner. Although some critics find his ways authoritative but he sure understands the fundamentals of growth better than those of democracy. His government has cut taxes and improved on the deplorable govt. debt situation which is remnant of the country’s leftist past. There have also been sincere efforts to integrate the rebel held north and eastern provinces to the main stream economy by extensive civil construction in the area, opening up of new schools and colleges and providing low cost loans to the residents to start life afresh.

And the changes are now evident with banks and MNCs returning and setting up shops in the affected cities of Jaffna and Trincomalee which is the biggest city of the area. The North and Eastern provinces have clocked 13% and 14% growth in the last 2 years. The effects are reverberating across the country. It has started to attract tourists in large numbers, specially from India, who are enjoying reliving the myth of king Ravana. While not dirt cheap, Sri Lankan currency is competitive and attractive to foreign investors, another reason for tourists’ inflow.

With peace back, because of its strategic location Sri Lanka is witnessing significant increase in its cargo traffic on Colombo port. Also govt. is making huge investments in port terminals of the rebel occupied region. So cargo traffic is only expected to increase in years to come. Another path breaking impact of the peace would be reintegration of marginalized Tamil community. With their high levels of educational achievements and fluency in English, they can propel the customer service and IT industry of the county to high growth trajectory.

Lets now see why all this is important to us. Its only natural for neighbors to trade with each other and success of East Asia was driven by symbiotic trade links between China, South Korea, Taiwan and Japan in spite of their embittered past. Currently trade among South Asian countries is a paltry 5% of their trade with rest of the world. This is a huge opportunity for India to encourage bilateral trade with Sri Lanka. This will not only have economic incentives but will also balance the growing geo-political aspirations of China in the Indian Ocean region. And Sri Lanka will only be too happy to have whatever synergies it can build with both the nations. It’s up to the policy makers of both the countries as to who will get a lion’s share of the Sri Lanka opportunity.

Although everything seems fine but the picture isn’t as rosy as it appears, a 2009 report by US agency for international development suggests that 40% countries revert back to war with in a decade of the end of civil war. However efforts of leadership of Sri Lanka seem convincing that things would be different for them. Also scarred by the brutal past there is a broad consensus in the country that decision making should be governed by what works not by the ideological baggage that has left Sri Lanka stagnating in the past. Even the main left leaning party of the country, SLFP is starting to accept a developmental model based on open economy and international trade. If the country is successfully able to build on the political and economic momentum it sure has a long way to go!

The article is an adaptation of an excerpt of the book ‘Breakout Nations’ written by Ruchir Gupta, head of emerging markets equities at Morgan Stanley.

– Shreyank Jamar