Inclusive Growth in Sri Lanka

1
Inclusive Growth in Sri Lanka

• Saman Kelegama
• Institute of Policy Studies of Sri Lanka

2
Introduction

• Sri Lanka has been categorized as a middle income
  country by the IMF in January 2010, it grew by
  average 5 during the conflict years (1983 to
  2009)
• With the rapid growth, poverty head count ratio
  estimated by the Department of Census and
  Statistics has been declining with an aberration
  in the mid-1990s poverty increased from 26.1 in
  1991/92 to 28.2 in 1995/96 and thereafter
  declined to 22.7 in 2002 to 15.2 in 2006/07
• The income poverty target of the Millennium
  Development Goals (MDGs) in Sri Lanka is on track
  
• However, poverty based on US 1 a day will become
  more than double if US2 a day is considered
  implying that there are a number of people just
  above the US 1 a day poverty line who are
  vulnerable to external shock or ill health
• Despite poverty reduction, two types of
  inequalities are visible in Sri Lanka income
  inequality between top and bottom income deciles
  and regional disparities
• Besides a new form of social inequality has
  arisen in the conflict affected areas that are
  gradually coming back to normalcy
• The reasons for the existing inequalities,
  post-conflict emerging issues, and the
  constraints for inclusive growth will be examined

3
Economic Growth

• The 5 average growth during the conflict years
  was due to accumulation of physical capital,
  labour, as well as total factor productivity
  growth
• This growth trend is continuing at average 6
  with TFP playing more important role in the
  post-conflict years
• Yet labour (human resources/education) and
  physical capital (infrastructure, etc) still
  plays a key role in the growth process according
  to existing studies on determinants of growth
• Overseas worker remittances, export sector,
  services, and the public investment programme
  played a key role in the overall economic growth
  process
• In order to make the growth inclusive successive
  governments have been introducing various social
  welfare programmes
• Special economic/social programmes for the
  conflict affected region have been put into
  operation since 2008/2009 and the economic/social
  package is seen as a substitute to a political
  package in the short term by some key actors

4
Policy Ingredients of Inclusive Growth
Inclusive Growth
High and Sustainable Growth
Social Inclusion
Expansion of Human Capacity
Good Policies and Sound Institutions
Social Safety Nets
Removing Social Injustice
5
Income Inequality between Top and Bottom Income
Deciles

• Income inequality, as per the Gini coefficient,
  has increased between 1990 and 2006 from 0.43 to
  0.49
• The share of the poorest quintile (20) in
  national consumption has declined from 8.9 in
  1990 to 7.1 in 2006/07
• Average per capita consumption during 1990/91
  -2002 grew by 50 for the richest consumption
  quintile but by only 2 for the poorest quintile

6
Income Inequality and Growth

• Inequality has increased significantly in the
  1990s and has remained rising thereafter
• A decomposition analysis show that income flows
  associated with access to infrastructure,
  education, and the nature of occupation are the
  principle determinants of inequality and the main
  drivers of the change of income distribution
• The contribution from income flows to education
  and infrastructure to the change in inequality
  appears to have increased over the years
• In short, growing inequality is explained mainly
  by growing disparity in households access to
  education and infrastructure
• The same variables were found to be the main
  drivers behind the rightward shift of the entire
  income distribution
• Clearly, the same policy variables that were
  responsible for widespread economic growth were
  also responsible for widespread inequality

7
Poverty Headcount Ratio by Sectors and Provinces
Sector/and Province Population estimate, 000 (2006) Population as a of Total Population Poverty head Count Ratio (1991/92) Poverty Head Count Ratio (1995/96) Poverty head count ratio (2002) Poverty Head count atio (2006/07) Poor as a of total Poor in 2006/07
Sri Lanka 19,886 100.0 26.1 28.8 22.7 15.2 100.0
Urban 24671 14.6 16.3 14.0 7.9 6.7 6.6
Rural 135481 80.0 29.4 30.9 24.7 15.7 82.2
Estate 9141 5.4 20.5 38.4 30 32 11.3
Districts
Western 5648 28.40 19 17 11 8.2 15.19
Central 2567 12.91 30 34 24 22.3 18.82
Southern 2391 12.02 29 32 28 13.8 10.92
Northern 1146 5.75
Eastern 1578 7.94 10.82 4.23
North Western 2256 11.35 26 27 27 14.6 10.93
North Central 1173 5.90 24 25 21 14.2 5.51
Uva 1257 6.32 32 47 37 27.0 11.17
Sabaragam wa 1870 9.41 31 42 33 24.2 15.0
8
Regional Disparities

• There is a declining trend in poverty in rural
  and urban sectors while it is increasing in
  estate sector
• Poverty head count ratio has declined in all
  districts except Nuwara Eliya and Monaragala
  where the poverty head count ratio is more than
  double at national level (UNDP/IPS, 2010)
• Inadequate infrastructure facilities, inadequate
  development of the agricultures sector of where
  the most of the labour force participants are
  working, weak targeting in welfare programmes,
  inadequate employment opportunities in less
  developed regions, low level of employment
  growth, high level of employment in informal
  sector, and differences in real wages, can be
  identified as possible reasons for this
  inequality in Sri Lanka

9
Challenges in Post-Conflict in Sri Lanka
10
Challenges in Post-Conflict in Sri Lanka cont.

• The war situation in Sri Lanka more or less
  destroyed such infrastructure of the North and to
  some extent in East. For e.g., the entire road
  transport network and railway lines in Northern
  and Eastern Provinces was severely damaged
  including the A9 road, connecting the Jaffna
  District to southern parts of the country
• Closure of A9 road disconnected war affected
  region from the rest of the country and led to
  negative impacts on livelihood of the war
  affected people through loss of market. In
  addition, destruction of assets, migration, loss
  of family members especially breadwinners,
  destruction of financial market negatively
  impacted on the livelihood of the people in the
  conflict affected areas
• Samurdhi poverty alleviation programme (main
  poverty alleviation programme of the government)
  was not operational in Killinochchi, Mannar, and
  Mullativu districts before the liberation of
  those areas due to the collapse of the
  administrative structure
• Population displacement together with assets
  depletion lead to a new form of social inequality
• Deprivation of entitlements were high

11

• Policies for Inclusive Growth in Sri Lanka

12
Sustainable Growth

• Mahinda Chintana Idiri Dekma (MCID) is the main
  policy plan of the government
• Priority has been given to the regional
  development by MCID
• Education, health, livelihood development, social
  protection, disaster management, and water supply
  are covered by the social development plan of
  MCID
• For achieving these broader objectives, MCID
  focuses on physical infrastructure development
  and promotion of business friendly environment to
  strengthen the market oriented economy and
  specific market interventionist measures to
  achieve the social development objectives
• Growth and social inclusion are basically
  in-built to the MCID

13
Physical Infrastructure

• Randora Programme (National Level Infrastructure
  Development Programme)
• Economic infrastructure ports and aviation,
  irrigation, education and health infrastructure,
  urban development, and development of townships.
• Gama Neguma and Maga Neguma
• Small scale infrastructure facilities in all
  regions
• Road development, energy, water supply and
  sanitation, reconstruction of canals,
  construction of small scale rural buildings,
  small scale infrastructure development, transport
  and rural infrastructure at regional level

14
Business-Friendly Environment through Tax
Measures

• New Tax Measures Implemented in 2010/2011
• Taxes on import of machinery and equipments have
  been reduced
• Income tax for the industries with value addition
  has been reduced from 15 to 10
• Reduced tax on all exports from 15 to 12
• Reduced income tax on profit of the domestic
  industries from 35 to 28
• Machinery and equipment to manufacture textile,
  leather, footwear and bags are exempted from
  import duties and VAT
• A CESS is imposed on all exports of raw and semi
  processed items while, finished products are free
  from CESS
• VAT on financial sector has been reduced from 20
  to 12
• Objectives
• Increase the exports of value added products
• Improve the accessibility to world class
  technology
• Promoting domestic production
• promote the tourism sector
• Promotion of other services

15
Conflict Affected Areas and Infrastructure
Development

• Negenahira Navodaya (implemented in 2007 with the
  aim of developing the Eastern province)
• Short run objectives - de-mining, livelihood
  recovery, and reconstruction of damaged
  infrastructure
• The focus of the economic infrastructure is on
  electricity supply, roads, transport, port water
  and sanitation, and rural infrastructure
• Most of the infrastructure development programmes
  operating at the national level have been fully
  extended to the Eastern province.
• Uthuru Wasanthaya (initiated in 2009 for
  developing Northern province)
• Two stages a 180-day programme and Medium term
  plan for 2010-2011
• The focus of the first phase is on de-mining,
  resettlement of IDPs, reconstruction of damaged
  economic and social infrastructure, livelihood
  recovery, and employment generation
• The second phase covers the areas of
  infrastructure development, electricity, water
  supply and sanitation, health, solid waste
  disposal, education, sports, cultural affairs,
  transportation together with livelihood
  development programmes

16

• Social Inclusion

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Expanding Human Capacity

• Education
• According the Education Act of 1945, education in
  Sri Lanka is free from Grade 1 to degree level
  and it is universal
• The government expanded the school network to
  fulfill the demand for education
• With the purpose of overcoming regional
  imbalances, increasing educational opportunities
  for the poor and increasing the quality of
  education, successive governments have introduced
  various policies over the years
• establishment of central colleges in 1940s,
• implementation of the common-curriculum in the
  1970s,
• introduction of intervention strategies to
  compensate for socio-economic differences, for
  e.g., introduction of Grade 05 scholarship
  programme,
• district based university enrolment system in
  1979,
• free school text book programme initiated in
  1980,
• free midday meal programme,
• free uniform material programme introduced in
  1993,
• subsidized transport facilities

18
Expanding Human Capacity

• Public expenditure on education increased with
  the introduction of free education in early 1950s
  till the mid 1960s
• Government was able to spend more than 4 of the
  GDP on education mainly by taxing the plantation
  exports
• With the gradual decline of terms-of-trade for
  plantation exports and ideological shift to
  neo-liberal economic policies in 1977, the
  expenditure on education declined below 3 of GDP

19
Challenges in Education in the Post Conflict
situation

• Due to the conflict, education of the most of the
  students of the conflict-affected areas was
  disrupted due to displacement, loss of family
  members, psychological impact, loss of school
  materials, and the destruction of school
  buildings and infrastructure
• There are several issues which need to be
  considered in providing basic educational
  services for the conflict affected groups
• reintegrating to school curriculum,
• dealing with ex-child-combatants,
• providing educational infrastructure (essential
  materials such as furniture, teaching and
  learning aids),
• ensuring adequate human resources,
• psycho social support

20
Expanding Human Capacity

• Health
• The pattern of the public expenditure on health
  is somewhat similar to public expenditure on
  education
• Public health expenditure was relatively high
  during 1950s and it recorded a peak in 1971
  reaching 2.5 of GDP
• Thereafter it has fluctuated around 1.5 of GDP
  reaching about 1.8 lately

21
Challenges in Post Conflict Situation

• Sri Lanka has bee able to maintain overall health
  indicators at satisfactory level despite of its
  economic downturns over time
• There are regional disparities in health
  indicators and they are compounded in the
  conflict-affected districts
• Maternal mortality rate is five times higher than
  those of at national level
• Returned refugees are making a greater demand for
  health services
• Current government has taken many steps to
  overcome these issues related to the conflict
  affected areas
• the Ministry of Health has taken several steps in
  recent months to develop the main hospitals in
  Jaffna district
• Government has allocated more funds ( 3.2
  million) to uplift health care facilities in the
  Jaffna district
• Government has allocated special funds ( 4.4
  million) under the Uthuru Wasanthaya programme
  to improve health felicities in Jaffna peninsula

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Selected Health Indicators for North and East
  Infant Mortality Rate 1000 live births in 2000 Maternal Mortality Rate per 1000 live births in 2000 Low Birth Weight in 2001 Underweight in 2002 Home deliveries in 2001 Safe sanitation in 2001
Sri Lanka 11.2 14 16.7 29.4 4.0 72.6
North and East 14.7 81 25.7 46.2 19.4 48.2
Ampara 10.3 24 22.7 44.1 19.8 52.7
Batticaloa 15.8 117 24.3 53.2 31.4 28.4
Trincomalee 4.6 57 30.5 44.7 13.6 25.6
Jaffna 22.3 62 30.5 43.1 4.4 79.0
Killinochchi 27.8 158 NA NA NA NA
Mannar 22.3 97 12.7 38.3 39.4 70.9
Multhivu 20.3 123 NA NA NA NA
Vavuniya 8.8 76 38.8 50.6 12.3 71.0
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• Social Safety Nets

24
Social Assistance, Welfare and Insurance Schemes

• Samurdhi Programme
• Introduced in 1995 it provides social assistance
  and social insurance for the poor
• 1.6 million households covered by the programme
• The objectives to integrate youth, women and
  disadvantaged groups into economic and social
  development activities and to promote social
  stability and alleviate poverty
• Overall budget for Samurdhi programme has been
  increased over time. In 2002, the maximum budget
  has been allocated for the Samurdhi programme and
  gradually it declined due to targeting
  adjustments. Year 2006 again records an increase
  in the allocation as Samurdhi benefits were
  increased by 50 for all the beneficiary groups

25
Social Assistance, Welfare and Insurance Schemes
26
Other Social Welfare Programmes

• Public Assistance Programme
• Targets groups
• poor among the elderly and disabled,
• families without breadwinners,
• destitute women and orphans.
• It provides average monthly grant of Rs 135 (
  1.3)
• Thriposha Nutrition Supplement Programme
• Objective enhancing the nutritional level of
  children less than 5 years and pregnant and
  lactating mothers
• There were 580,000 beneficiary families in 2005
• Microinsurance programmes
• In Sri Lanka, microinsurance programmes are
  mainly coming with the microfinance institutions
  and still they are in the initial stage
• In addition to the microfinance institutions,
  commercial insurance such as Ceylinco Insurance
  Company also are involving in microisurance field

27
Labour Market Policies

• Employees Provident Fund (EPF)
• The largest retirement scheme in Sri Lanka
• Formal private sector workers are eligible for
  this scheme and the employers and the workers
  have to make joint contributions at the rates of
  12 and 8 of earnings respectively
• The worker can withdraw the accumulated amount as
  a lump sum at the age of retirement
• By the end of 2001, the EPF had coverage of about
  65 of the eligible population
• Public Service Pension Scheme (PSPS)
• All the public sector workers are eligible for
  this retirement scheme
• This is mandatory and non contributory scheme

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Labour Market Policies

• Voluntary Schemes (Farmers, Fishermen and
  Self-Employed Scheme)
• Sri Lanka has introduced pension schemes by Acts
  of Parliament in 1987, 1990 and 1996 for the
  workers out side the formal sector
• Two types of benefits income component and
  social security benefits such as disability,
  disablement gratuity and death gratuity
• The eligibility for these pension schemes depends
  on age and non-entitlement to other retirement
  schemes and in the case of farmers, for example,
  on the type of the crops cultivated
• Self-Employed Pension Scheme
• This is under the purview of Sri Lanka Social
  Security Board
• Only certain types of workers are eligible for
  the scheme depending on the age, income,
  non-entitlement to other similar pension schemes,
  etc.
• Two types of benefits income component and
  social security benefits

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Proposed Pension Schemes (2011 Budget)

• Pension scheme for the workers in private sector
  and cooperate sector
• a 2 contribution from employees and a 2
  contribution from employers go to this scheme.
• Overseas Employees Pension Fund (OEPF)
• Migrant workers
• A migrant worker has to contribute at least Rs
  12,000 ( 110) per annum for minimum two years
•  Citizens Pension and Insurance Fund (CPIF)
• Senior citizens have to contribute a minimum of
  Rs 5,000 per year as and when they have money

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Challenges

• Inadequate development of the agricultures sector
• Close to 30 of total employment is in
  agriculture sector and majority of people depend
  on the agriculture sector directly or indirectly
• Productivity of this sector is very low and the
  cost of production is very high
• Reasons for poor performance
• the small size of average land holding size
• less developed irrigation system and poor
  technology
• poor institutional and market conditions
• less developed infrastructure
•  

31
Challenges

• Weak targeting in welfare programmes
• Samurdhi Programme
• targeting errors
• the number of Samurdhi beneficiaries is greater
  than the number of poor households in each
  district
• there is a decline, around 9, in the number of
  Samurdhi beneficiaries, however, this decline is
  same for both richest and poorest deciles
• simply reducing the number of Samurdhi
  beneficiaries is not a comprehensive solution to
  the targeting errors
• Political bias of grassroots level officers --
  Samurdhi Development Officers (SDOs) -- is the
  major reason for targeting errors in Samurdhi
  programmes. Beneficiary selection was not
  successful due to political and other personal
  interventions though the selection criteria
  itself was sound
• Government has introduced new participatory
  methodology named family Classification
  Methodology (FCM) to the beneficiary selection
  procedure in ----- but its effectiveness is yet
  to be seen
•  

32
Challenges

• Fertilizer Subsidy
• In 2009, the fertilizer subsidy accounted for 3
  of total government expenditure and 0.6 of GDP
• This is a blanket programme, it incurs targeting
  errors
• Inadequate employment opportunities in less
  developed regions
• Total employed people in the informal sector
  remains high -- 61.3 of total employed
• The high informal sector employment leads to
  inequality in Sri Lanka as there is a high wage
  gap between formal and informal sectors
• Looking at the mean monthly salary distribution
  of monthly earners and the daily earners by major
  industry groups, it is evident that, in the
  services sector there is a high gap between those
  who are paid on monthly basis and those who are
  paid daily wages

33
Challeneges

• Asset ownership of the poor the case of land
• In Sri Lanka the state distributed land under the
  Land Development Ordinance of 1933, to farmers on
  equal terms
• Land reforms enacted in 1953-58 were meant to
  ensure tenure security to tenants and to regulate
  the rents paid to landlords
• Identify land for redistribution by the states
• Develop land and distribute
• E.g. Mahaweli development programme in Sri Lanka
  
• Introduce land ceilings
• E.g. Sri Lanka - land ceilings were imposed on
  private ownership of land under reforms in 1976
  and 1977
• The experience of closer to 60 years now shows
  that inequity among these households have widened
• This highlights that land alone is not
  sufficient to bring in equity

34
Challenges

• A large proportion of households , with access to
  microcredit, progress in poverty reduction has
  been rather modest.
• Corporate asset ownership has not gone far enough
  in Sri Lanka
• Significant disparity still prevail in the
  quality of education available to the urban
  elites compared to those who come from less
  privileged backgrounds or live in less developed
  areas
• Little attempt appears to have been made by Sri
  Lankan policy makers to integrate unique
  interventions in land, credit, and education in
  order to address the problem of poverty within a
  holistic framework. Nor have these programmes
  taken into account of structural sources of
  poverty related to unequal access to land,
  knowledge, and capital
• Large budget deficits and low revenue (14 of
  GDP) do not permit the government to allocate
  more resources to social welfare programmes. Any
  improvement thus needs to come from better
  targeting and identifying the key areas where
  existing funds should be allocated

35
Concluding Remarks

• Sri Lanka has been experiencing a high growth
  during last few years
• Poverty has declined but there are two types of
  inequalities in Sri Lanka income inequality and
  regional disparity
• The conflict which was in the Northern and
  Eastern provinces has created a new form of
  inequality and it has become a more pressing
  issue
• The story that emerges is that the same forces
  that contributed to increasing growth and
  reduction of poverty are responsible for widening
  economic inequality. This is because people had
  different access to endowments that would enable
  them to integrate them into more dynamic sectors.
  Growth was not inclusive enough, poverty declined
  but inequality increased. It will be a challenge
  for policy makers to find alternative forms of
  growth that reduces both poverty and inequality
• The governments policy framework has many
  programmes to address inequalities and regional
  disparities but there are many loose ends and
  there is no integrated strategy to address the
  key areas to generate more inclusive growth

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