Colonialism in Ceylon

Economy of Ceylon before Colonization

• Self sufficient Villages (Gama)
• Simple life
• Needs and wants are a few
• Subsistent Production
• Caste based production structure
• Common labor – (Rajakariya system was used in public work)
• Surplus production extracted through taxation
• Economic system based on norms and traditions
• Barter system of exchange
• Use of money is very low
• Trade and business are considered inferior to agriculture
• A very few items were purchased from outside the village – salt, dry fish lace, etc.
 Economy of Ceylon during Colonization
• During the Portuguese and Dutch periods (1505 – 1796) there were quite a few changes
to the coastal regions of Ceylon.
• They could not rule the entire the country; their authority confined within 20 miles
from any point of the sea shore.
• The British captured Kandy in 1815 and the country was unified in 1833.
• There onwards, they introduced many changes to the economy including:
• Plantations
• Introduction of new consumption goods and monetization of the economy
• Abolished rajakariya to increased mobility of people
• Built infrastructure – roads, railways, banks, insurance, storage, postal, telecommunication services
etc
• Expanded English medium education
• Expanded western medicine
• English educated bureaucracy
• Westminster system of government
• Roman Dutch law
 Economy of Ceylon after Colonization
A recent (2016) narrative on the British Period can be found in
 Economy of Ceylon before Colonization
• Use of currency in Sri Lanka see this website:
https://www.cbsl.gov.lk/en/notes-coins/notes-and-coins/history-of-currency-in-sr
i-lanka
 Economy of Ceylon after Colonization
• At the time of independence Ceylon inherited the following:
• A dual economy: a modern sector side by side with the traditional sector
• A dependent economy: depended on export earning of a few commodities to finance import
expenditures of essential consumer, intermediate and capital goods
• Relatively better infrastructure, roads, railways, finance, insurance and telecommunication
• Well established legal system
• Well established democracy
• Skilled and disciplined bureaucracy
• Rule of law and law enforcement
• Presence of a middle class
• Relatively healthy people: better social indicators
• Relatively highly educated people: good education systems in English, Sinhalese and Tamil
• Monetized consumer economy
 Economy of Sri Lanka after Independence
• Open liberal economy (1948 - 1956)
• Closed economy (1956 – 1965)
• Partially opened economy (1965 – 1970)
• Closed economy (1970 – 1977)
• Open economy (1977 – 1994)
• Open economy with human face (1994 – 2005)
• National (closed) economy under Mahinda Chintana I (2005 – 2010)
• National (closed) economy under Mahinda Chintana II (2010 – 2015)
• Relatively open economy with good governance - Vision 2015 (2015 – 2019)
• Vistas of Prosperity and Splendour (2019 - …..)
 Financial System, Financial Institutions and Financial Markets
• The financial system runs to facilitate the conduct of numerous monetary
transactions in an economy.
• It is the financial arm of the economy
• The system creates money and monetary transactions to facilitate economic
activities which generate
• Employment
• Production
• Trade
• income
• Savings
• Investments domestically and internationally
• The core of financial system is money
• Money alone cannot be transacted
• A money transaction requires a large number of arrangements to facilitate it
 Financial System, Financial Institutions and Financial Markets
• The financial system runs to facilitate the conduct of numerous monetary
transactions in an economy.
• It is the financial arm of the economy
• The system creates money and monetary transactions to facilitate economic
activities which generate
• Employment
• Production
• Trade
• income
• Savings
• Investments domestically and internationally
• The core of financial system is money
• Money alone cannot be transacted
• A money transaction requires a large number of arrangements to facilitate it
 Financial System, Financial Institutions and Financial Markets
Role of Money and Types of Money
• Four Functions of Money
• Medium of exchange
• Unit of account
• Liquid store of assets
• Medium of deferred payments
• Currency and other payment instruments
• Currency and coins
• E-wallets
• Digital cash systems: virtual money or crypto-currency
• Checking accounts
• Payment card systems – credit cards and debit cards
 Financial System, Financial Institutions and Financial Markets
Demand and Supply of Money
• Payments and settlement systems
• Cheque clearance
• Payment card switches
• Electronic fund transfer switches
• Mobile money/cash switches
• Demand for Money
• Transaction motive
• Precautionary motive
• Speculative motive
• Money supply
• Narrow money supply: currency and demand deposits
• Broad money supply: time, saving deposits and other types of deposits
 Financial System, Financial Institutions and Financial Markets
Monetary Policy
• Economic impact of money supply:
• Money supply determines the aggregate demand and price level of the economy
• Monetary Policy
• Any action by monetary authority (Central bank) to change supply, cost (interest rate) and
international exchange of money.
• Increasing money supply  expansionary monetary policy
• Reducing money supply  contractionary monetary policy
• Objectives of monetary policy:
• Δ ↑ money supply  Δ↑ investment  ↑ Δ aggregate demand (AD)  ↑ economic
growth
• Δ ↓ money supply  Δ ↓ price level  ↓ inflation
 Financial System, Financial Institutions and Financial Markets
Monetary Policy Instruments
• Monetary Policy Instruments
• Policy interest rate.
• Statutory reserve ratio
• Open market operations
• Credit controls
• Moral suasion
• Financial investments:
• Bank deposits – saving, time deposits
• Government securities – treasury bills and treasury bonds
• Equities/shares/stocks
• Corporate debt - debentures
• Financial derivatives – forward contracts, futures, options, swaps, credits derivatives
 Financial System, Financial Institutions and Financial Markets

Financial Institutions
• Role of financial institutions
• Intermediation
• Payment services
• Investment services
• Risks faced by Financial Institutions:
• Credit risk
• Market risk
• Liquidity risk
• Operational risk
 Financial System, Financial Institutions and Financial Markets

Financial Institutions
• Financial institutions
• Financial intermediaries
• Banks
• Non bank financial institutions
• Brokers
• Dealers
• Investment banks
 Financial System, Financial Institutions and Financial Markets
Financial Markets
• Financial markets are modes of arrangements to trade savings or funds among
investors.
• Financial markets are generally divided into six categories
1. Money market
2. Bond market
3. Stock market
4. Currency market
5. Structured product market
6. Derivatives market

In some analysis bond market and stock market are known as Capital market (long term)
 Financial System, Financial Institutions and Financial Markets
Fiscal Policy
• Government finances: Government budget, and public debt
• Government Expenditures: (G)
1. Recurrent expenditures
2. Capital expenditures
• Government Revenue: (T)
1. Tax revenue
2. Non tax revenue

• G > T deficit budget  expansionary fiscal policy

• G = T balanced budget
• G < T surplus budget  contractionary fiscal policy
 Financial System, Financial Institutions and Financial Markets
Fiscal Policy
• Objectives of Fiscal Policy:
1. Faster and larger economic growth
2. Full employment

• G > T deficit budget  expansionary fiscal policy  increase in Aggregate

Demand  high economic growth & full employment
• G = T balanced budget
• G < T surplus budget  contractionary fiscal policy  decrease in Aggregate
Demand low economic growth & unemployment