Little sympathy should be left for the remnants of the Tamil independence movement after its routing by the Sri Lankan government forces to conclude a 26-year conflict.

Western media, UN agencies and aid groups have been surprisingly indulgent toward the Tamil Tigers. News reports have largely discounted the official version of events, preferring to believe a humanitarian disaster has occurred.

My one visit to Sri Lanka, in 1984, occurred only months after the tension between the minority Tamils – who had been groomed as the elite ruling class after decolonisation – first broke into armed conflict.

Colombo and other communities were dotted with burnt out buildings as the majority Sinhalese set fire to Tamil homes and businesses. The conflict that ensued was paralleled in places such as Rwanda, Bosnia, Spain (Basques) and even Northern Ireland.

But the Tamil case for an independent homeland, carved out of an area in the northeast, was always fanciful. At one stage the Tamils had heavy backing and support from India and the wider Tamil Diaspora, particularly in Canada and Britain.

The Tamil cause commanded the moral high ground as an oppressed minority when successive Sinhalese-dominated governments promoted discriminatory measures to give the Buddhist majority (85% of the population) a bigger role in government jobs.

At their peak as recently as 2006, the Tigers held sway over a large chunk of Sri Lanka, from the Jaffna Peninsular down past Trincomalee on the eastern coast. But their guerilla leader, Prabhakaran, who modelled himself on the likes of Che Guevara, Fidel Castro, Pol Pot and Peru’s Shining Path, descended into terrorist tactics, including widespread use of child soldiers and suicide bombers.

Voices of moderation or non-violence among Tamils were eliminated by assassination and other forms of terrorism.

Despite their often precarious position in running a war against well-armed and motivated insurgents, Sinhalese governments eventually got the upper hand after appealing to a breakaway group of moderate Tiger supporters and stepping up its counter-insurgency campaign.

The cost was high – up to 100,000 lives, many of them in the armed forces – and Sri Lanka also lost international support as it pursued the military option.

The gamble has paid off for President Mahinda Rajapaksa, who rewarded moderate Tamils with honest elections and a degree of self-government. He now has the difficult task of integrating a demoralised and defeated Tamil community back into mainstream life.

President Rajapakse must also build on some earlier initiatives to restore Sri Lanka’s economy. As Ceylon, the country began independence in 1948 as the second richest nation in Asia, thanks to its rich cash-crop exports to Britain, sound infrastructure and institutions, and relatively high standard of living.

Independence also brought the anti-colonialist scourge of socialism and ethnic populism. By the 1970s, government intervention and trade protectionism had sent living standards plummeting.

Some attempts were made to reverse this decline with economic reforms and liberalisation. This succeeded in creating more industry and investment in a country that has rich natural resources, is attractive to tourism and has a well educated population.

But the stop-go nature of these policies, plus the cost of the war, took its toll as the large bureaucracy and high government deficits fuelled inflation, which reached 30% in 2008. Despite this, foreign investment has continued, including Fonterra’s decision to lift its involvement in the dairy industry.

The future depends on whether President Rajapaqksa can win over world opinion with a peace that improves the lot of the Tamils as well as lift the country’s poor rankings on virtually every benchmark. (Sri Lanka is 25th in Foreign Policy magazine’s Failed States Index, 92 out of 180 on the Corruption Perceptions Index, 104 out of 180 in the Human Development Index (2006 figures) and 102 out of 181 on the World Bank’s Doing Business ladder.

Without the Tamil insurgency, and a commitment to open economic policies, free market economist Razeen Sally reckons Sri Lanka could have been where Malaysia is now.

But he is pessimistic change will occur fast enough, if this conclusion is any guide:

A widely shared sentiment in Sri Lanka is that military victory will translate into peace and fast development. This is wishful thinking. Without a policy overhaul, Sri Lanka faces either slow material decline or something worse, especially with a bleak global economic outlook…

There needs to be deep public-sector reform; a move to market pricing for oil and electricity; and, not least, big cuts in the defence budget. Drastic domestic deregulation is also imperative to cut the high cost of doing business. In the longer-term, Sri Lanka needs to revamp its rotten political culture and public institutions.