After Independence
The new state inherited a flourishing financial situation, and until 1955-1956 the balance of payments remained in surplus. The national wealth, however, accrued mainly to a handful of Europeans resident in Sri Lanka and a small native middle class made up of large landowners and planters, businessmen and small industrialists the Compradores of Marxist theory or the brown sahibs as they were known locally.

During this period, as a result of improvements in public health and hygiene, the population began to increase rapidly, after a long period of stagnation. The consumption of foodstuffs increased steadily, and these had still to be imported, while the trade in Lanka's more valuable raw materials remained in the hands of foreigners. The fall in world prices after 1955 unbalanced the budget at the time when a new generation was moving into the modern world and demanding not only freedom to run their own affairs but a measure of increased well-being.

Economic Liberalization
This was the background of the electoral battles which led in 1956 to the first victory of the Sri Lanka Freedom Party, with a programme centred on economic and social reforms which was rather prematurely labelled as "Ceylonese Socialism". The new government sought to establish a welfare society based on a redistribution of the national income through the free distribution of rice and the sale of other goods at reduced prices to the poorest classes of the population and the development of public services (free and compulsory education, public transport, hospitals and dispensaries). There were also some measures of nationalisation (ports, banks, insurance).

These fairly moderate socialist measures caused some alarm, and the budget deficit continued to increase with the flight of capital and the development of a system of social legislation which is one of the most advanced in the Third World. The financial difficulties stemmed from two principal causes: On one hand the prices of cereals and other foodstuffs were increasing rapidly a trend which was aggravated by the increase in consumption resulting from the distribution of free or cheap food at a time when the prices of raw materials were falling, remaining stagnant or increasing only very slowly, thus reducing the inflow of hard currency; and The continuing rise in population was increasing the number of mouths to be fed and, with a time-lag, the number of people looking for work.

The government did what it can to tackle these problems. The five-year plan for 1972-1976 included provision for the following measures:

1. An effort to achieve self-sufficiency in the production of food (rice, vegetables, manioc, meat and milk). This food production war is promoted by vigorous campaigns of education and propaganda and by various forms of assistance to farmers (long-term loans, gifts of seed, guaranteed selling prices, etc.).

2. The beginnings of land reform (limitations on the size of holdings, legislation on rents, protection of tenure, the establishment of cooperative organisations, etc.).

3. Improving the yield of remunerative crops which bring in foreign currency (re-planting, agricultural research, the cultivation of more than one crop on the same land, etc.).

4. Bringing new land under cultivation in the dry zone through the establishment of new villages in irrigated areas and the development of agricultural cooperatives; it is estimated that 15% of the land in this zone could be brought into use promptly.

5. An increase in the production of electric power by the building of hydroelectric dams.

6. The development of medium-scale industry: small iron and steel plants (about 100,000 tons of steel a year), rubber plants, paper-making, textiles, light engineering, cement works, tea conditioning plants, etc.

7. The creation of a merchant shipping fleet (during that time there are 6 ships, totalling 45,000 tons).

8. Obtaining long-term loans from international banks under the aegisof the United Nations.

These various developments and the economic progress they are expected to produce should provide new jobs and reduce unemployment and the underemployment of many educated Sri Lankan.

The increase in cotton production is particularly remarkable. Whereas in 1907 Sri Lanka imported 500,000 worth of cotton goods annually, Sri Lanka now meets all its own requirements. In spite of this undoubted progress there are still problems and difficulties; and immediate action to deal with these is necessary if the aspirations of the rising new generation are to be met. The disturbances of 1971 were a reminder of the urgency of the country's problems. The main difficulties are:

(a) The shortage of land. Many farmers cannot find land to work, as the amount of cultivable land per head of the population continues to fall. In 1911 there were 1,092,000 hectares of land for a population of 4,106,000, or 0.26 hectare per head; in 1962 there were 1,605,000 hectares for 10,443,800 people, or 0.14 per head; in 1995 there are 1,887,000 hectares for 18,100,000 people, or 0.104 per head.

(b) Unemployment. The unemployment rate of the country has declined in recent years and as of 2007 the unemployment rate is 6.3%. However, it is still estimated that more than 40,000 young people who have had a university education are employed as unskilled workers or craftsmen.

(c) The country's economic dependence on foreigners, which is increasingly resented. Many plantations still belong to foreigners, and the prices of raw materials are fixed on foreign exchanges. Moreover, almost 90% of Sri Lanka's foreign currency earnings come from three countries (Britain, the United States and Iraq): the Sri Lankan would like to diversify their trading partners.

Sri Lanka's economic dependence on foreign countries is reflected, for example, in the fall in the price of rubber from an index of 100 in 1955 to 55 in 1965 and 44 in 1971. The amount of rubber produced in 1971 was 60% higher than in 1955, but brought in an income 28% lower. More generally, the fluctuations in the prices of raw materials over the last few years make it impossible to establish a stable economy in Sri Lanka.

The Republic of Sri Lanka has thus a long way to go before it can hope to achieve a real economic take-off, overcome the difficulties which confront it and secure a reasonable standard of living for the whole of its people. But it has the potential to achieve all this, and the will to do so is certainly not lacking.