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Inclusive Growth in Sri Lanka

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Title: 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

17
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

22
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
23
  • 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

28
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

29
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

30
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

36
  • Thank You
  • www.ips.lk
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