This volume is the product of a World Bank project on macroeconomic policy that reviewed the recent experience of eighteen countries as they attempted to maintain economic stability in the face of international price, interest rate, and demand shocks or domestic crises in the forms of investment booms and related budgetary problems. The objective of the project was to glean instructive lessons by analyzing the stabilization and adjustment policies pursued by these countries and assessing the outcomes. This report offers an overview of the postindependent economic and political developments in Sri Lanka and a new perspective on the interaction between macroeconomic policies, political and social stability, and long-term growth. It challenges widely held views on the relationship between welfare expenditures and growth. The study focuses on the policy experience of two periods (1973-1975 and 1978-1982), periods when the economy was subjected to major domestic and external stresses. Between these two periods there was a dramatic shift in government policies. A long period of extensive state intervention and inward orientation was followed by a commitment to economic liberalization. The analysis is of broader interest as a study of the reaction of a small open economy to major shocks under sharply contrasting policy regimes and external circumstances.