International Investing

Bloomberg speculates that the booming economy has hidden the cracks in society and may be preventing citizens for pushing for a real end to fighting.

After being at each other’s throats for half a century, Sri Lanka’s two main political parties joined forces this week to bring peace to the war-torn island. It may be too early for investors to uncork the champagne.

Solid growth and falling unemployment are creating a false sense of security, though the status quo is as dangerously close to a full-blown war as Sri Lanka has ever been since the February 2002 cease-fire.

However further in the aricle the real story comes out. Citizens on the dole don’t want to upset the status quo. When the economy is growing quickly the State maintains its power through expansion. The inevitiable slowdown will be painful.

The government’s largess is pushing people further into complacency. For a decade, the Sri Lankan government has run annual budget deficits amounting to about 9 percent of gross domestic product; this has helped a good deal in keeping the economy growing in excess of 5 percent a year on average.

A relentless expansion of an already bloated civil service offers wage indexation — a shelter from deficit-spending-induced inflation, which was as high as 15.4 percent in September — to an ever-increasing circle of people.