I am grateful to the organizers for inviting me to pay homage to a great Leader of Sri Lanka Dr Lakshman Kadirgamar. I would like to thank Mrs. Suganthie Kadirgamar for inviting me to deliver the 4th L.K Memorial lecture. I shall speak on "Economics as driving force of International Relations", which is topical.

Indeed, the vision which Lakshman Kadirgamar had, both for close fraternal relations between India and Sri Lanka and for the future of Sri Lanka itself continues to inspire our thinking. It was he who dreamt of a world in which India and Sri Lanka would work together to build on our shared geography, history and culture in a relationship defined in his eloquent words by "irreversible excellence". It was also Lakshman who believed that Sri Lanka should remain united, and that its people should live together in an atmosphere of confidence and trust.

As Lakshman Kadirgamar himself said in September 2004 and I take the liberty of quoting him at some length and I quote, "I believe that all our peoples can live together, they did live together. I think they must learn to live together after this trauma is over. I see no reason why the major races in this country, the Tamils and Sinhalese cannot again build a relationship of confidence and trust. That is my belief. That is what I wished for and in working for that; I will not be deterred …" (Unquote). It is indeed a matter of irony that when such a dawn finally arrives in Sri Lanka this year, after nearly three decades of conflict and pain, Lakshman is no more in our midst. It is now for– the people of Sri Lanka – to prove him right and to realize his vision by building mutual trust and confidence between all people on this island and live together as brothers and sisters within the framework of a united Sri Lanka.

The effective elimination of terrorism and secessionism from Sri Lanka offers you such an opportunity; an opportunity to shape history; an opportunity to permanently change the complexion of the relationship between the majority community and the minorities; an opportunity to address the legitimate grievances of all communities; and an opportunity to bring permanent peace and stability to this great nation. These are sine qua non for building the Sri Lanka of the future – a future in which all communities will live side by side and enjoy the same rights and privileges and get the same opportunities.

After freeing the Tamils from terrorist forces, it is natural that the first and primary focus of the Government of Sri Lanka has been to ensure the immediate welfare and safety of its citizens. Thousands of Tamils have come out of the conflict zone traumatized by the conflict and harbouring deep concern and fear of what the future holds for them. These citizens need reassurance. They yearn to return to their homes and resume their livelihood. Several thousand Internally Displaced Persons have indeed been resettled recently and we welcome this development. However, many more await their turn for resettlement in camps. We are confident that their speedy return is receiving the highest consideration of the Government.

India has not hesitated to come to Sri Lanka’s assistance at this crucial juncture. This is only natural. We have announced an assistance of Rs.500 crores for the rehabilitation and resettlement in the North and are willing to do more. We are moving from purely relief efforts to a broader rehabilitation and reconstruction phase. Our assistance had so far covered humanitarian supplies such as food, medicines and other essential supplies. We set up an emergency field hospital that treated over 50,000 people in the past six months. Four Indian de-mining teams are presently working in Northern Sri Lanka and three more are on their way. We are sending additional shelter material. We are also providing assistance to revive agriculture and livelihood in the North. Both sides are also discussing assistance in reconstruction of critical civil infrastructure in Sri Lanka, including railways. We are now discussing larger projects for the population in key cities who stand traumatized by the conflict. At the same time, we have not lost sight of the urgent requirements in the Eastern Province as well as of the Indian Origin Tamils in up-country areas. India is doing and will continue to do whatever it can to assist Sri Lanka in this critical phase of its history.

But the vision of Lakshman Kadirgamar went far beyond the immediate. He believed that durable peace should be based on a constitutional arrangement acceptable to all communities in Sri Lanka based on democracy, human rights and the rule of law. As he himself said and I quote "There are several minorities in the country and their geographical spread is such that we need to ensure a full measure of human rights and safeguards and their participation at all levels of government from periphery to the centre." (Unquote). While a military victory has been achieved, there is also a great victory to be achieved in the political arena when every stakeholder owns the process and gains something from it. A political settlement can only mean one thing – a victory for all people of Sri Lanka irrespective of their religion, ethnicity, numbers or race. It is important for all communities of Sri Lanka to realize that a political settlement is not a zero-sum game. It need not and should not come at the cost of another.

Lakshman Kadirgamar’s vision also drew upon the experience of the working of the Indian model. He believed that the Indian experiment with democracy was relevant in that India had chosen a democratic system which was designed to preserve the unity and integrity of the country without allowing for its disintegration. Democracy has indeed served India well since our independence. Democracy is the protective sheath that preserves and protects our extraordinary diversity. Through effective devolution of powers, equal status before the Constitution and equal access to opportunities, we have ensured that divisive tendencies are contained and addressed in an open and democratic fashion. Clear separation of powers, rule of law, social justice, secularism, free press and vigilant citizens and civil groups have ensured that threats to your sovereignty from within and without are tackled with an inner strength that can come only through the ballot.

 There are many things in common between the two nations in terms of its history, culture, and philosophy and customs .You elected the first woman Head of Government in the world in 1960. Mrs. Indira Gandhi became Prime Minister in 1966. It was also with Sri Lanka that India signed its first Free Trade Agreement in 1998. It is, therefore, clear that Sri Lanka and India have the leadership and the determination to strengthen the process of engagement and to shape decisively our shared destinies in South Asia and beyond.

Our ties are rooted in the past and nourished over centuries. As Mahatma Gandhi said "It is, at least it should be, impossible for India and Sri Lanka to quarrel. We are the nearest neighbours. We are inheritors of a common culture." (Unquote). Prime Minister Rajiv Gandhi said with great foresight and I quote "It is not mere geographical proximity which binds us. Ours is a relationship of heart and mind, finding expression in history and philosophy, literature and art, and in our contemporary concerns and daily lives." (unquote) While contemporary history may have had its ups and downs, over the last decade or more, our relations have reached a considerable degree of maturity and closeness shorn of mutual suspicion. We have realized that our commonalities bind us stronger than ever before.

As you know, economics and international relations have a two-way relationship. The economic strength of a country furthers international relations and vice-versa, creating a virtuous circle of growth and empowerment. The relationship has not changed though the crisis has brought in lessons that are likely to redefine the link in the interest of promoting global stability.

As students of economics would understand, economic theory is an evolutionary process and undergoes change with every major crisis. The classical theory gave way to Keynesian economics after the Great Depression of 1930s. Thereafter, there were post-Keynesian and monetarist approaches to economic problems during 1960s to 90s. The present crisis, which has also been called Great Recession, would be another watershed in the evolution of economics and is expected to bring about radical retooling of the theory.

The crisis has, in the first place, conclusively established that the pursuit of individual goals do not necessarily lead to public good. Adam Smith’s ‘invisible hand’ cannot guarantee allocation of resources efficiently. 

At the economy level, there is similar conflict between short and long-term economic goals that countries pursue. A key element that sustained the era of ‘great moderation’ (4-5 year period before the crisis) of high growth, low inflation and low unemployment, were ‘global imbalances’ characterized by high current account  deficit  in some countries and surplus in others. The flow of capital uphill, i.e. from developing to developed countries, which is against the conventional wisdom, led to lowering of interest rates in USA and fuelled the housing boom. The accompanying search for yield and the under-pricing of risk, together with financial innovations that allowed transforming sub-prime mortgages into highly rated asset classes, acted as the triggers for the crisis that soon engulfed the entire world. 

There is therefore need for the ‘visible hand’ of oversight and regulation, without compromising market efficiency. Macro-prudential norms that aim at avoiding systemic risk through a watchful eye on asset price bubbles and imbalances, together with early warning indicators would be the key to this effort.  The IMF together with Financial Stability Board has taken up this cause at the global level. 

Developing countries are more vulnerable to crisis, as they have fewer cushions against shocks. The immediate effect is increase in poverty and worsening of social indicators. The fact that the growth of emerging and developing countries as a group will fall to 1.7 per cent in 2009 from 6.0 per cent in 2008 (IMF, WEO Oct 09) indicates the extent of the impact. An estimated 90 million people in the developing world are likely to be pushed below the poverty line due to the fallout of the crisis. Lower revenues will lead to reduced levels of expenditure on rural infrastructure, health and education, which will hurt future growth and delay achievement of the Millennium Development Goals. Social and political tensions could increase, undermining the national consensus in support of the much needed structural reforms and adjustment.

The depressed state of the global economy also translates into considerable loss of export demand for the developing countries. Exports of non-oil developing countries are expected to decline by about $900 billion in 2009, compared to the previous year. They will remain well below the earlier projected trajectory for several years. This is bound to reduce production, incomes and employment in the developing countries.

          To resuscitate growth in the developing countries, we have to replace lost export demand by expanding other components of domestic demand. The best option is to expand investment. An obvious area where additional investment is required is infrastructure, including energy, transport and other public services. These investments can be made ahead of requirements and therefore are an ideal form of countercyclical activity. 

At the global level, G-20 has taken up the cause of global stability, policy co-ordination and growth. The Pittsburgh Summit, held on September 24, 25, 2009, has agreed that the G-20 would be the premier forum for international economic issues. A new framework for discussing global macro-balances, and the contributions that individual countries can make through their own policies, with a new process of peer review, was also agreed.