In addition to be located on a very convenient naval route, conducive policies adopted by successive rulers have been a booster to international trade, and through it, to wealth creation. The pinnacle of country’s trade performance was recorded during the reign of the King Parakramabahu, the Great, in the late 12th century. The evidence suggests that it was a complete free market economy policy that was followed during this whole period. According to the Great Chronicle of Sri Lanka, Mahavansa, the king is recorded to have set-up the first ever export processing zone called Antharaanga Dhuura, bordering the present Kalu Ganga, Bentara Ganga and Sinharaja forest. In this zone, elephants, ivory, timber, gems, pearls and spices were processed for export to India, China and the Middle East 2 . In order to facilitate trading with many different nations, the King Parakramabahu made it mandatory for state officials to be fluent in foreign languages. During this period, Sri Lanka is reported to have functioned as a vibrant entrepot trade centre, the role played by Singapore in the modern world. According to some authors, Sri Lanka had simultaneously imported and exported the same commodity, such as textiles and fabrics 3 . This is considered as a very advanced form of trading known as intra-industry trade by modern economists. The same high profile of the country in foreign trade was continued unabated in the period afterwards.
If the private sector continues to grow – in line with the latest business survey evidence – and headline inflation remains high, it is hard to see why private sector pay settlements should not return to their pre-recession average of around 3.5% and possibly move higher.9 Issue 4: Inflation expectations and credibility That brings me to my final key issue – the role of expectations and credibility in the framework for monetary policy. Chart 12 shows a diagram which I have used in a number of speeches now and which I believe sums up well the challenge that the MPC faces in trying to stabilise UK inflation in a potentially volatile global economy. The global economy affects inflation in the UK through the cost of imports, the impact of world demand on the UK economy and through the way in which international businesses perceive the pricing climate changing on global markets – which will have an impact on their pricing strategies here in the UK. All these factors can affect UK inflation – but monetary policy has three powerful counter-influences: the influence of monetary conditions on the exchange rate and the level of domestic demand, and the ability of the monetary authorities to anchor price expectations through their commitment to the inflation target or some other monetary anchor.