1 October, 2020

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Sri Lanka’s Growth Paradox

By W.A Wijewardena –

Dr. W.A. Wijewardena

Dr. W.A. Wijewardena

Sri Lanka’s growth paradox: When poverty yields, income gap holds stubbornly

Obsessive pursuit of economic growth

Economic growth is voted almost unanimously by everyone as ‘good’ for society because it enhances the ‘material goods’ available for people to lead a better living. It increases wealth of people and prosperity in society. High economic growth rates are preferred to low economic growth rates because they bring in higher levels of wealth and prosperity. Hence, all societies today – rich, middle and poor – pursue economic growth as the single-most goal of society to offer a better deal for their members.

In the case of Sri Lanka, growth has become so predominant in its goals that the policy authorities are planning to double the average income per person, known as per capita income or PCI, from $ 2,000 six years ago to $ 4,000 by 2015 and increase the size of the economy from its current size of $ 67 billion to $ 100 billion by 2016.

For a country which had been embroiled in a costly and destructive war for more than three decades and experienced slow economic growth throughout its post-independence history, such high economic growth promises should surely receive applause from everyone. Hence, Sri Lanka is presently following a high economic growth target virtually as an obsession.

For instance, the Central Bank has been announcing every year in its Annual Reports a high economic growth target for the subsequent five years though the actual realisation has been far from these targets. Yet, it continues to follow this practice obsessively. Thus, in its Annual Report for 2013 (p 24), the bank has projected that the annual average economic growth in the next two to four years will be over 8%, a comfortable growth rate compared to the average growth rate of about 6.5% achieved during 2008-13.

Need for ensuring equity in growth

But growth’s good role is considered incomplete if it is not accompanied by equity in the system. Equity in economic growth requires everyone to share the benefits of growth which economists call ‘inclusiveness of growth’. It then leads to two important outcomes in the economy: reduction in poverty and reduction in the income gap. Of these two outcomes, the first outcome relating to the reduction in poverty has been included in the millennium development goals or MDGs introduced by the United Nations for member countries.

Accordingly, member countries are required to reduce by a half the number of people living below the income level of a dollar a day and those who suffer from hunger between 1990 and 2015. According to UN, an income of $1.25 a day is the minimum requirement for a poor man to sustain himself and if he can cross this threshold, he crosses the threshold of poverty as well.

Income gaps being a ‘blind-spot’ in MDGs

However, MDGs have not targeted the reduction in income gaps as an important achievement in global development and this omission has led many critics to name it as ‘MDG’s blind-spot’.

Nobel Laureate Joseph Stiglitz, addressing the 4th OECD World Forum in October 2012 in New Delhi has emphasised the need for addressing the issues relating to inequality since it affects the wellbeing of nations. He has specifically downgraded the initiatives by countries to increase PCI as their development goal since when PCI goes up, many members in society can become worse-off due to unequal distribution of the benefits from growth.

His prescription was that governments should pay equal attention to narrow the inequality in society (available here ). OECD’s Director of Statistics and Chief Statistician Enrico Giovannini has indicated that it is the equitable and sustainable wellbeing that leads to progress and when there is inequality in society a nation cannot attain that wellbeing. Hence, according to him, it is necessary to go beyond GDP and have alternative measures to assess the wellbeing of nations (available here ).

Claire Melamed, Head of Growth, Poverty and Inequality at the UK based think-tank Overseas Development Institute has suggested that in the post MDG arrangements coming into effect in 2015, it is desirable to have a target for the Gini Coefficient of income inequality to address this issue (available here ). Thus, it is the considered view today that poverty reduction and the reduction in income gaps should go hand in hand with GDP if nations desire to have equitable and sustainable wellbeing for their people.

Bad side of worsening income gaps

While economic growth is good, rising inequality is bad for society. Claire Melamed in the paper quoted above has identified three such undesirable features which inequality will bring to a society.

Inequality impedes the growth of the talent pool: First, high levels of inequality harm economic growth because they impede the access of low income groups to education, human capital development, health, skills build up and credit which are necessary for sustainable economic growth. The argument here is clear enough: Modern economies are knowledge based economies and if a large segment of society is deprived of attaining skills due to low income, the economy cannot feed itself with the growing demand for skills. Thus, the episodes of growth attained by such societies become short-lived just like the limitations of natural resources cut the supply of needed nutrients that help economies to maintain the initially attained high economic growth.

Inequality places the poor in permanent poverty: Second, the rising inequality in income slows down the poverty reduction efforts by governments. This is because when a smaller percentage of income goes into the hands of the poor, their status cannot be upgraded at the desired rate. In such societies, poverty becomes a permanent feature. Some inequalities which are based on gender, race, or caste act as a true barrier for alleviating poverty among them because of the deprivation of basic rights such as right to education, health or skills and talent development.

Inequality leads to social and political instability: Third, inequality creates social tensions leading to social and political instability. A society is unlikely to progress when such instability is present due to the conflicts that persist among different groups in society. Inequality creates fertile ground for low income people to harbour animosity against the high income people making the two groups eternal enemies of each other. It also contributes to high crime rates, political unrest and even mental illness making the lives of people too unstable. They also prevent those in low income groups from climbing the social ladder which sociologists have termed ‘social mobility’. Such people are permanently trapped in poverty.
Thomas Piketty: Contributor par excellence to economics?

The income gap debate was fuelled recently by the French economist Thomas Piketty who after fifteen years of research produced a masterpiece on the growing income inequality in USA and Europe.

His book published in English in March 2014 under the title ‘Capital in the Twenty First Century’ has been widely recognised by mainstream economists as equivalent to the contributions made by Adam Smith and John Maynard Keynes to the science of economics. Two main admirers of the Piketty’s work have been the Nobel Laureates Joseph Stiglitz and Paul Krugman (available below).

Piketty’s finding: Capital owners getting richer than labour owners

In this book, Piketty has argued that the return to capital holders – those who own physical capital and financial assets – has been higher than economic growth in Europe and the US causing an accumulation of income in the hands of capital owners as against labour owners. In the long run, Piketty argues, this accumulation of wealth in the hands of a few in society leads to ‘potential threats to democratic societies and to the values of social justice on which they are based’ (p 516).

Capital which includes the financial assets as well reproduces faster than the increase in output and when capital owners get a higher share in income, labour owners have to be content with having only a smaller share. This has been the experience, according to Piketty, from late 19th to 20th century except during a brief period between 1945 and 1980. However, it will continue to be the main feature in the 21st century as well since no country with high technology can grow faster than 1-1.5% per annum no matter what economic policies are adopted (p 517).

With an average income on capital at around 4-5% per annum, the return on capital will continue to be bigger than the rate of growth in output making the problem more complicated in the current century as well. To prevent this, he has suggested that the private rate of return on capital should be reduced below the output growth by heavily taxing the capital owners. His suggestion has been to introduce an income tax of 80% and a wealth tax of 10% on the high income earning people.

Sri Lanka’s Official Poverty Line

Sri Lanka has a paradox of economic growth. Its poverty levels have declined steadily over the past two decades according to the country’s Statistics Agency, Department of Census and Statistics or DCS. Accordingly, the number of people below poverty in 1995-’96 amounted to 28.8% of the total population. This ratio fell to 22.7% in 2002, 15.2% in 2006-7, 8.9% in 2009-10 and further to 6.5% in 2012.

This Head Count Index of poverty is based on Sri Lanka’s Official Poverty Line or OPL established by DCS in 2002 taking into account a composite basic need of foods accounting for 68% and non-foods accounting for the balance 32%. According to DCS, the total basket containing both these items cost Rs. 1,423 per person per month in terms of the prices that had prevailed in that year. Thus, a poor man in Sri Lanka could meet his basic needs by spending Rs. 47 or 50 US cents a day.

According to DCS’s split of income between foods and non-foods, a poor person could satisfy his food requirements with an income of Rs. 32 or 34 US cents. This was pretty much lower than the threshold fixed by the UN for poverty in the Millennium Development Goals or MDGs that amounted to $ 1.25 a day. Hence, Sri Lanka’s poverty reduction was not compatible with those specified in MDGs.

This was the threshold poverty level in Sri Lanka and for subsequent years, it was updated by inflating the threshold value by using the Colombo Consumers’ Price Index. Since Sri Lanka rupee had not depreciated on par with local price increases, the dollar value of the poverty threshold has increased gradually over the years. Accordingly, in 2010, it was 89 US cents and in 2012, it could be estimated to be at $ 1.32 a day made up of 90 US cents for foods and 42 US cents for non-foods.

Overall poverty numbers distorts true poverty in the country

However, in many districts, according to the DCS’s Household Income and Expenditure Survey or HIES for 2012-13, the poverty levels have been pretty much higher than the national average.

The notable outliers are Mannar with a poverty level of 20.1%, Mullaitivu 28.8%, Kilinochchi 12.7%, Batticaloa 19.4%, Badulla 12.3%, Monaragala 20.8 and Ratnapura 10.4%. Out of the 25 districts, 16 had poverty levels above the national average of 6.5% which had been determined at that level by the extremely low level of poverty in Colombo District at 1.4%. Hence, the national average is misleading about the country’s overall poverty level.

Gini Coefficient: A measure of income gap

Despite these weaknesses, the overall reduction in poverty in the recent past has moved in the desired direction. But the inequality in the country’s income distribution has remained stubbornly high all throughout its post independence period. The usual measure of income inequality has been the Gini Coefficient, named after the Italian Statistician Corrado Gini who presented the formula in a paper published in 1912.

The value of Gini Coefficient ranges from zero to one where zero denotes that income is equally distributed among all and one denotes that one family gets all the income. Normally, a country with a low income inequality has a Gini Coefficient of 0.3 or less. Countries with Gini Coefficient between 0.3 and 0.4 have a moderate inequality, between 0.4 and 0.6 high inequality and above 0.6 extremely high inequality.

Sri Lanka’s historical heritage: High income inequality

Sri Lanka’s Gini Coefficient has ranged between 0.48 and 0.52 in the post independence period though in 1973, it had declined to 0.41which it could not sustain at that level thereafter. In 1950, the country’s Gini Coefficient had amounted to 0.5 and it had remained at that level in both 2003-4 and 2006-7.

When it slightly declined to 0.48 in 2012-13 which still denotes a high income inequality, the Central Bank had, ignoring its average at that level throughout the post-independence history, had concluded in its Annual Report for 2013 that the slight reduction had reflected ‘a reduction in the income inequality in the country’ (p 100). Such complacence about the income gap does not augur well for effective economic policy making.

Sri Lanka’s Middle Class getting fatter at expense of poor

While the Gini had been stubbornly high, the rich had been rich and the poor had been poor throughout the post independence period. Throughout this period, the top 20% of income recipients had an income share of slightly over 51% except in 1973 when it had declined to 46%. The average for the period had been 54%. In contrast, the poor consisting of the lowest 20% of income recipients had an income share of only 4% on average. In 1953, this group had an income share of 5.1% but it declined to 4.4% in 2012-13.

What this means is that while the rich had remained rich, the poor had become poorer during this period. Then, who had benefited from the plight of the poor? That is the middle class whose share had increased from 38% in 1953 to 42% in 2012-13. Thus, the redistribution policies adopted by Sri Lanka in the post independence period have fattened the middle class at the expense of the poor, conforming to a celebrated economic law known as Director’s Law – named after the American Economist Aaron Director of Chicago University fame.

Growth pursuits become purposeless if income gaps are high

The stubborn income inequality in Sri Lanka poses a serious question about the ultimate goal of the country’s growth efforts. The country’s rich have been able to maintain their relative position undiminished while the poor have been worse-off. The middle class, on the contrary, has fattened itself.

The high income inequality, as noted by many economists, threatens the social and political instability of the country. Thomas Piketty described it as ‘terrifying’ and urged world nations to take immediate action to reduce the global income gaps. Pursuing a goal of doubling PCI and increasing the size of the economy to $ 100 billion will become purposeless when the income gap stubbornly refuses to yield to be moderated.

It is therefore time for Sri Lanka’s policy authorities to take this message seriously.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at waw1949@gmail.com

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Latest comments

  • 0
    2

    Even a domestic helper in far south gets over s 500 per day on casual basis.

    Domestic servants of the Elite must be paid around Rs 10,000 a month including commission for the agents, unless they are bonded slaves.

    I am from the rural sector and I haven’t seen anyone on Rs 45 a day…

    Where does this Guru get his stats from?….

    New CM of the North is on record sasying youth there don’t want to work because they get so much cash from the Diaspora.

    Can’t understand why, these rich Diasporians don’t send some of this cash to the Rs 45 a day brethren in Mullative as well.

    After all aren’t these Mullathivians who made the Diaspora rich and powerful?…

    • 1
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      Thanks Dr Wije for this excellent article.

      The fact is that the data and statistics of growth and poverty are cooked and there is no quality control re. the generation of data on which the poverty rate, employment rate or growth rate is fixed by the Central Bank.

      All economic data is cooked and manipulated by the lying cheating and corrupt and cheap accountant, Ajith Nivard Cabraal.

      Data and statistics are politicized and cooked. If there was such high employment why are people fleeing by boats from Sri Lanka to every corner of the planet?!

  • 0
    0

    In the Sri Lankan context, economic growth in real terms ‘negative’. The State sector productivity / performance ‘negative’. Government Infrastructure investment returns ‘negative’. Investor confidence in the Island ‘negative’. Fiscal policies ‘negative’. Rule of law ‘mob’ controlled. Trade and finance ‘family’ controlled. So the paradox is negative controls. Too many negatives add up to an impending ‘disaster’.

    • 1
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      The main growth Sri Lanka has seen since independence 66 years ago is the Sinhala Buddhist fundamentalism and Hindu temple/church/mosque destroying yellow robed terrorism.

      While Singapore is an exemplar of economic growth, wealth and prosperity for the people Sinhala Buddhist racist leaders have brought poverty and misery to the Sinhala masses, Tamils and Muslims.

      What an sorry state independence has brought on the island!

      • 0
        0

        One cannot understand the psyche of the Buddhists electing a destructive force to govern them.

        “Democracy will soon degenerate into an anarchy; such an anarchy that every man will do what is right in his own eyes and no man’s life or property or reputation or liberty will be secure, and every one of these will soon mould itself into a system of subordination of all the moral virtues and intellectual abilities, all the powers of wealth, beauty, wit, and science, to the wanton pleasures, the capricious will, and the execrable [abominable] cruelty of one or a very few.”

        — John Adams (1797-1801) Second President of the United States and Patriot

  • 2
    0

    Dr. Wijewardene’s articles are always interesting and educative, particularly to the non economist. Whilst it is agreed that economic growth must go hand in hand with reduction in poverty and the gap between the rich and poor, he does not give his own recommendation on what needs to be done with regard to the latter. Thomas Pickety advocates higher taxes for the rich, but is this the only answer?

    What happens in Sri Lanka? The rich pay less or no taxes at all due to political influence. In many cases the Department of Inland Revenue is even unaware who is really getting rich, or do not care. There is a view that higher taxes discourage capital investment. This may be because it is an enforced deduction from profit. Is there another way?

    My life’s experience is that there is a beneficial return when investment is tied to the heart. What is given with loving kindness generates an abundant response in happiness. Since economics is inexorably tied to wellbeing ( Here I am equating well being to a state of happiness) then the acts of giving, or lets call it charity, is an aspect that must be studied further. Instead of taxation, the rich must be encouraged to give voluntarily, perhaps by funding self help enterprises, or via greater investment in CSR. These ‘investments’ may be tax deductible. How can this type of activity be explained in economics? I think the act of free giving will balance the lopsided economics that is driving the world today. I am a firm believer in the axiom everything is possible with a charitable heart.

  • 0
    0

    Wages like everything else is governed by supply and demand. With an unemployment rate of 4.5% and opportunities to earn high salaries abroad, the salaries of all segments of the population will increase at a rate consistent with the growth rate.

    The expected growth rates can be achieved only through the effective implementation of the hub strategy, led by tourism. As in Singapore and Malaysia, casinos with restrictions of use by the residents of Sri Lanka is a vital pillar!

  • 0
    0

    The author does not mention (or I missed) whether the government’s stated goals of per capita GDP of $4000 by 2015, and total GDP of $100 billion by 2016, are just harebrained rantings or can it by done. [100% expansion of per capita GDP in one year ???? And about 25% growth in total GDP for each of the next two years ????]

  • 0
    0

    The Quest of Our economy development and Growth has been long misdigonaist by economist elites and politicians of Ceylon/Sri lanka. In fact that unable address IATROGENIC ills of Our National Economy.
    The survey, researches and an investigation last 66 years has revealed by Leaders of Main political parties, Economics policy makes of MOF( Ministry of Fiancé) Central Bank Governors and Economy Planning Ministry, as well as IMF, World Bank, Asian Development Bank that had been unattended, that Given All solutions to be re-oriented and reorder National economy shifted correct path of National Economic of Development of BALACE GROWTH.
    What is the meaning of Balance growth? Who are the key players of Balance development?
    Both factors are the indeed that play key role and crux of Problem of National Economy.
    Needless to say that was mainly Political class in power of UNP and SLFP has not play key role are related to re-order national economic planning by State and Private sector of Investment, Trading and Enterprising of Capitalism.
    Still policy makers has NOT discussed of not yet address many features of Public Fiancé and an Investment and Common aspiration of People equitable and efficient taxation system of Capitalism.
    The key insight of development of Capitalism is an Investment of priority sectors.
    Likewise the system of Capitalist financial flows and investment of Industries, Agriculture, Trading and Servicers are the management of CREDIT in general can also be linked to kind of essential resources required for full participation of contemporary development, its growth of Capitalism in Sri lanka. That has not been address by Ruling class in power in the helm.
    Even modern capitalist economies are largely composed on the basis of CREDIT CREATION and thus although financial markets and institutions in locally or oversees. Our national not yet policy domains well represent collectively shared domains that tie diverse mainly rural population in the interest that concern whole economy of Island.
    The vital problem is distribution of Wealth and Income as well as cost and benefits since 1977 becomes highly politicize by an OPEN ECONOMY POLICY under the UNP-JRJ regime. That has NOT drastically and practically change by CBK and MR political class and its power grid since 1994.
    Such move of indeed served of politicize these sectors an undermine democratic politics of our nation and all classes in the Island.
    While have to encourage a rethinking of HOW existing governance and economic management to arrangements might be improved of ongoing path and growth and development of capitalism in Sri lanka.

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