Sri Lanka can wipe out poverty in a generation with practical policies: development economist

from Lanka Business Online

If market reforms and globalization that brought prosperity to Sri Lanka's Western Province could be replicated countrywide, extreme poverty could be eliminated in a generation, a development economist said.

Sri Lanka's Western Province which had seen the most market oriented reforms since 1977 and was most open to the world, had grown the fastest and had reduced poverty to 9 percent while the national poverty headcount was 23 percent.

"If the rest of the country can mimic the Western Province’s performance Sri Lanka can eliminate extreme poverty in one generation," Naoko Ishii, World Bank's country chief, told the annual sessions of the Sri Lanka Economic Association.

"The rising inequality within the country has severely limited the extent the growth could have reduced poverty."

Despite an internal conflict consuming massive resources Sri Lanka had grown by 4.5 percent a year on average with the Western Province growing by an average of 6.2 percent between 1996 and 2005.

Ishii said the war which had worsened regional iniquities could itself undermine peace prospects and little data was available about the ground situation in the northern and eastern areas.

Bang for Buck

Sri Lanka's poverty head count had fallen to 22.7 percent in 2002 from 26.1 percent in 1990, indicating that poverty headcount had eased by 1.1 percent a year. Real economic growth measured by Gross Domestic Product (GDP) had increased by 3.1 percent a year.

"The implicit growth elasticity of poverty reduction was therefore about one third," Ishii said.

"This is exceptionally little “bang for the buck” in terms of poverty reduction per unit of economic growth."

She says most East Asian countries had reduced poverty much faster per unit of economic growth with even China - which many critics accused of increasing inequalities – doing much better than Sri Lanka.

Despite suffering deep economic crisis in the 1990 East Asian nations such as China, Korea, Malaysia, Thailand and Vietnam has per capita GDP that was higher than Sri Lanka's 3.1 percent.

"As you would expect, China is the front runner growing by almost 9 percent per annum during the 1990s," Ishii said.

"Korea, Malaysia and Vietnam grew about 5 percent per annum, while Thailand grew at 3.5 percent, only a bit faster than Sri Lanka."

In all the comparator countries poverty reduction per unit of growth (a measure of growth elasticity of poverty reduction) was higher than Sri Lanka.

Compared to Sri Lanka's 0.35 growth elasticity, Thailand had 2.6 percent, Vietnam 1.4 and China 1.

"In other words, China is not efficient in reducing poverty, but with its high growth rate and modest growth elasticity, it reduced poverty headcount by 8 percent annually during 1990-2001," Ishii pointed out.

Compared with East Asian nations excluding China, Sri Lanka's Gini coefficient, a measure of income disparities across income groups, had gone up faster.

Western Province

The Western province grew at double the rate of the rest of the country's 3.1 percent since 1996.

In the Western Province poverty had fallen faster and inequality had increased slowly, indicating pro-poor growth while inequality had increased faster in the other provinces.

"In Uva, Sabaragamuwa, and North- Western, poverty has even increased," Ishii said.

"The growth pattern of the Western Province is very pro-poor. The problem is not that the Western Province has grown too fast, but that other provinces have grown too slow."

The rural farm and non-farm economy was stagnant, though 80 percent of the population were contained there.

There was not even data to get an accurate idea about the North and the East.

"Nevertheless, there is little doubt that the population in the North and East in many respects is disadvantaged: not only have they borne the brunt of violence resulting in several hundred thousand internally displaced people over the years, they have also seen their opportunities for economic growth severely curtailed," Ishii said.

Unemployment was clearly higher and infrastructure such as power and roads as well as health and education were poor.

Forty six percent of the children below the age of five were underweight in the North and East compared with 29 percent for the rest of the country.

Infrastructure

Ishii said market access was strongly co-related to poverty. Though Sri Lanka had a dense road network, maintenance was poor making it difficult for poor farmers to get products to the market.

"Here comes an issue of “inequality traps” of budget allocation where the voices of the poor may not be well heard," she said.

Numerous critics have charged that Sri Lanka's fiscal policy beggars belief. In 2005 alone, 33 billion rupees had been spent on fuel and fertilizer subsidies.

This year 18 billion is to be spent on fertilizer subsidies, while there was no money to improve the safety of crumbling dams.

They point that the wealth of the nation is squandered on subsidies on the whims of politicians which leave their recipients just as poor or just as rich in the case of fuel subsidies.

Meanwhile roads, power and irrigation infrastructure is built with loans from the Asian Development Bank, World Bank or Japan.

Infrastructure

However Ishii says infrastructure and accessibility do not fully explain regional poverty. She said an accessibility index shows that the Western Province is only 25 percent higher than the Uva Province which scores worst.

"This may suggest there is more than infrastructure which explains the regional difference in growth," Ishii said.

"The Western Province was able to take advantage of the opportunities from market oriented policies adopted since the late 1970s and was better integrated with global markets.

"By contrast, market oriented policies have been much more limited outside the Western Province, which has remained predominantly rural."

She says research and extension services in agriculture are not up to the market needs. Private investment in commercial agriculture and agro-business are yet to come in full.

"Inadequate infrastructure, together with those policy shortcomings, has constrained the development of high-value agricultural industry," she said.

Agricultural productivity growth in Sri Lanka during 1990's was only 0.65 percent a year compared with 2.8 percent for Vietnam and 3.51 percent for China.

"Policies aiming at higher value added in agriculture sector, which is envisaged in the government’s ten year vision framework, needs to be implemented as soon as possible," Ishii said.

Inflation

Meanwhile other speakers at the SLEA sessions pointed to inflation and economic instability as a major cause of poverty as well as poor governance, corruption, weak institutions, badly targeted welfare measures and a poor tax system.

SLEA President ADV de S Indraratna said a per capita real economic growth of more than 3 percent suggests that money incomes were growing faster than inflation but that it was focussed on the rich.

"The money incomes of the poor on the other hand have been lagging behind inflation," Indraratna said.

"Is it then surprising that the poor have been telling our policy maker that while 'you are trumpeting so much of a 6 – 7 percent growth rate, we are suffering from sky rocketing prices?'"

High inflation suggests economic instability as well as a reduction of real wages and incomes. While richer sections of society can hedge themselves against inflation, the poor who are largely assetless are hardest hit by inflation.

Except for a half a dozen years Sri Lanka has had high inflation, balance of payment problems and economic instability for most of the last five decades.

Many economists had pointed out that Sri Lanka is held back by policy errors, despite being rich in human, natural resources and an unmatched geographical location, which time and again has allowed the economy to recover from policy shocks.