Sri Lankan Trade Case
Sri Lanka, an island country of nearly 20 million people off the southeast coast of India,
received its independence from the United Kingdom in 1948.
Known as Ceylon from the early
sixteenth century until 1972, Sri Lanka is typical of most emerging economies.
It has a low per
capita income (estimated at $2,068 for 2009 by the World Bank), high dependence on primary
products (minerals and agricultural products) and manufactured products that use high inputs of
low-cost labor for its foreign-exchange earnings, and insufficient foreign-exchange earnings to
purchase all desired consumer and industrial imports.
In many other ways, however, Sri Lanka
is atypical. On various measurements comparing the quality of life among countries, Sri Lanka
ranks fairly high.
It literacy rate, standards of nutrition, health care, equality of income
distribution, and life expectancy are some of the highest among developing countries.
population growth rate is one of the lowest.
Sri Lanka has a long history of international trade.
For example, Ionian merchants set up
shop in the middle of the third century B.C., and myth says that King Solomon purchased Sri
Lankan gems, elephants, and peacocks, which he used to woo the Queen of Sheba.
One by one,
European powers came to dominate the island in order to acquire products unavailable at home.
The Portuguese, for example, sought such products as cinnamon, cloves, and cardamom.
English developed the island’s economy with tea, rubber, and coconuts, all of which replaced
rice as the major agricultural crops.
Since gaining its independence, Sri Lanka has looked to international trade to help it
solve such problems as (1) shortage of foreign exchange, (2) overdependence on tea exports, (3)
overdependence on the British market, and (4) insufficient growth of output and employment.
First, foreign exchange is needed to buy imports, and the Sri Lankan desire for foreign products
or foreign machinery has grown more rapidly than the foreign-exchange earnings needed to buy
Second, until 1975, more than half of the country’s export earnings were from tea.
Wholesale tea prices fluctuate by as much as 90 percent from one year to the next because of a