THE DOMINANT SECTOR of the Sri Lankan economy historically has been wet rice (paddy) cultivation. Its importance in ancient times is demonstrated by the extensive irrigation works constructed in the north-central region of the island in the first millennium A.D. In the thirteenth century, the civilization based on these reservoirs began to decline, and population shifted to the wet zone of the southern and southwestern areas, where irrigation was less necessary to grow rice. Cinnamon and other spices which were valuable in the European market became important export commodities in the sixteenth century, when Europeans, first the Portuguese and then the Dutch, established control over the coastal areas of the island.
Commercial agriculture came to dominate the economy during the British period (1796-1948). Extensive coffee plantations were established in the mid-nineteenth century. Coffee failed when a leaf disease ravaged it in the 1870s and 1880s, but it was quickly replaced by the important commercial crops of tea, rubber, and coconut. Although wet rice cultivation remained important, Sri Lanka had to import more than one-half of the rice it needed during the late nineteenth and early twentieth centuries because of the land and labor devoted to the commercial crops. At independence in 1948, almost all of the islands' foreign exchange earnings were derived from commercial agriculture.
The fundamental economic problem since the 1950s has been the declining terms of trade. The proceeds from the traditional agricultural exports of tea, rubber, and coconut have had less and less value in the international marketplace. Beginning in the early 1960s, governments responded by intervening directly in the largely free-market economy inherited from the colonial period. Imports and exports were tightly regulated, and the state sector was expanded, especially in manufacturing and transportation. This trend accelerated between 1970 and 1977, when a coalition headed by the Sri Lanka Freedom Party nationalized the larger plantations and imposed direct controls over internal trade.
The United National Party (UNP) contested the 1977 general election with a platform calling for less regulation of the economy. After its electoral victory, the new UNP government made some effort to dismantle the state sector in agriculture and manufacturing. At the same time, it encouraged private enterprise, welcomed foreign investment and slackened import controls. It also shifted spending away from subsidies and social welfare to investment in the nation's infrastructure, most notably a massive irrigation project, the Mahaweli Ganga Program, which was expected to make Sri Lanka self-sufficient in rice and generate enough hydroelectric power to fill the nation's requirements. These policies resulted in higher rates of economic growth in the late 1970s and early 1980s, but at the cost of a mounting external debt. Foreign aid from the United States, Western Europe, Japan, and international organizations kept the economy afloat.
Sri Lanka's economy became more diverse in the 1970s and 1980s, and in 1986 textiles surpassed tea for the first time as the country's single largest export. Nonetheless, the performance of the traditional agricultural exports remained essential to the country's economic health. Other important sources of foreign exchange included remittances from Sri Lankans working overseas, foreign aid, and tourism.
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