1 Economic Imperative for Peace in Sri Lanka Muttukrishna Sarvananthan 1 Chapter 11 in Manas Chatterji and B.M. Jain, (2008), Conflict and Peace in South Asia: Contributions to Conflict Management, Peace Economics and Development, Volume 5, pp171-184, Bingley (UK): Emerald Group Publishing Limited. 1. Introduction The economic effects of ethnic conflict in Sri Lanka are multifarious. A discussion of the economic effects of ethnic conflict could encompass the opportunity cost of the war (that is, the foregone income due to the war at micro and macro levels), the economic impact of the military expenditures (on both sides of the war), financing mechanisms (both national and international) of the rebel movement, the impact of economic sanctions on rebel territory. It should be noted that the economic effects of ethnic conflict in Sri Lanka is a relatively under-researched area (Arunatilake, et al, 2000; Goonetileke, 1998; Grobar and Gnanaselvam, 1993; Gunatilleke, et al, 2001; Kelegama, 1999; O‟Sullivan, 1994, 1997 & 2001; Rankaduwa and Cooray, 1999; Ravano, 2001; Richardson and Samarasinghe, 1991; Ross and Samaranayake, 1986; Seabright, 1986). It is beyond the scope of this paper to discuss the plethora of economic effects of ethnic conflict in Sri Lanka. Therefore, I propose to focus on a few selected important aspects of the economic effects. They are the relationship between economic growth and ethnic conflict, the competition between social expenditures and defence expenditures, the defence expenditures of Sri Lanka in comparison to other South Asian countries and some other internal conflict-ridden countries around the globe, and the economic implications of the labour-intensive military strategy. The aims and objectives of this paper are to: (i) find out the trade-off between ethnic conflict and economic growth in Sri Lanka. (ii) compare and contrast the defence expenditure with the social expenditures of Sri Lanka. (iii) compare and contrast Sri Lanka‟s defence expenditure within the South Asian region and with selected internal conflict-ridden countries in the developing world. (iv) discuss the cost-effectiveness of the labour-intensive military strategy pursued in Sri Lanka. The results are that: (i) the trade-off between ethnic conflict and economic growth in Sri Lanka may be higher than hitherto acknowledged by other researchers. (ii) the defence expenditures have overtaken social expenditures consistently since 1995. (iii) Sri Lanka‟s defence expenditures, as a proportion of the national income, is the highest in the region (bar Pakistan) and among selected internal conflict-ridden countries in the developing 1 Principal Researcher, Point Pedro Institute of Development, Point Pedro, Sri Lanka. sarvi@sltnet.lk