3. CREATING OPPORTUNITIES FOR THE POOR

A high rate and pro-poor pattern of economic growth will create ample opportunities for the poor to improve incomes, living conditions and social status. Growth with poverty reduction is not only possible but also essential if persistent poverty is to be overcome. Raising the economic growth rate, while strengthening institutions that reinforce equity and broad-based participation, can help lift large numbers of poor households out of absolute poverty.

Sri Lanka’s experience over the past decade testifies to the economy’s tremendous capacity for equitable, private sector-led, economic growth and development. Despite two decades of ethnic conflict and the strains imposed by transition to a more market oriented economy, the economy managed to expand by 4.9 percent per annum in real terms in the 1990s. Over that same period, 1.6 million new jobs were created, unemployment fell from 16 to 9 percent, infant mortality fell from 19.3 to 15.9 per thousand live births while steady improvement was registered in a wide range of health and social indicators. While unemployment has fallen during the 1990s from 16 to 9 percent, this should be understood in the context of increasing migration among poor women and increased enlisting of rural youth into the armed forces. While these employment opportunities brought much needed incomes to their impoverished families, they are unlikely to be sustainable sources of employment generation in the future.

In the decades to come, the primary challenge is to facilitate the participation of the poor in a private-sector led process of economic growth and development. Greater reliance on the private sector together with community-based service delivery will be encouraged to ensure that the poor participate fully in seeking appropriate solutions to eradicate poverty.

The government faces severe fiscal constraints. Much more effective use must be made of limited public resources. The private sector will be encouraged to participate in the provision and management of economic infrastructure, a wide range of social services, and in the operation of a number of commercial enterprises now under state control. Government will act as a facilitator and catalyst in helping the poor access competitive markets, augment productivity and participate fully in their own economic advancement.

Government must be especially cautious to avoid poverty-reduction measures that increase the dependency of the poor on the state. Excessive levels of public sector employment and mass welfare schemes are a drag on economic growth. Neither has proved to be a solution to Sri Lanka’s persistent poverty problem. They add to unrealistic expectations and encourage patterns of patronage that dilute the poverty-reduction impact of public expenditures.

In the 1960s and 1970s, the main instrument for poverty reduction was the green revolution in rice production. A major expansion of irrigation systems, combined with the adoption of new, higher-yielding rice varieties raised farm incomes, lowered food prices and enhanced national food security. In the 1980s and 1990s, labor-intensive industrialization and the export of labor services were the two main engines of growth and poverty reduction. Agriculture, by contrast, tended to lag in the growth process, contributing to the persistence of rural poverty and the influx of the poor to urban areas.

New strategic initiatives are needed to harness engines of pro-poor growth to enhance livelihoods, increase incomes and ensure access to essential services among the poor. In this context, the new poverty reduction strategy would lay significant emphasis on seven priority areas:

  1. Building awareness and consensus that peace can make a vital contribution to poverty reduction;
  1. Enhancing confidence by maintaining a stable macro-economic environment;
  1. Improving market access by linking poor regions to dynamic markets;
  1. Fostering productivity improvement and broader market access for small and medium-scale enterprises;
  1. Creating opportunities for the poor to benefit from structural change by fostering broad-based rural development, competitive industrialization, service sector development and sound urban settlement.
  1. Improving access to quality education and healthcare; and
  1. Innovative environmental management to enhance the sustainability of the poverty reduction process.

3.1The poverty-reduction dividend from a lasting peace

The poor bear a disproportionate burden from Sri Lanka’s seventeen-year war. It is primarily the poor who serve in the armed forces and must bear the loss of life, injury, dislocation, trauma and other war-related collateral damage. The resources used by Government for the war effort---some five percent of GDP in recent years---crowd-out public spending on a vast range of pro-poor public services. The long-standing conflict foments ethnic polarization and desensitizes communities to the effects of violence. The poor are forced to bear the brunt of the costs of ethnic discrimination, exclusion and violence[1].

The Government of Sri Lanka has declared its firm commitment to settling the ethnic conflict through a process of peace negotiation. But in a conflict environment exploited by terrorist and extremist organisations, the negotiation process is bound to be difficult. If a lasting peace can be restored, this will make a significant contribution to poverty reduction by:

  • boosting inward investment, tourist arrivals and augmenting domestic consumer confidence in manner that raises economic growth by 2-3 percent per annum. Higher growth will expand employment and incomes of the poor. Compounded, a decade of faster, peace-inspired growth can mean the difference of as much as a third in the real incomes of the poor.
  • public resources released from the war effort can be used to fund reconstruction and finance pro-poor public services. Both will help raise the productivity of the poor, underpinning higher wages, employment and incomes.
  • transition from a socio-cultural environment marked by ethnic conflict to one of national unity and cooperation is an investment in social capital, one of the main institutional determinants of rapid economic growth.

The poor are well aware of the terrible cost of the civil conflict. But not all segments of society are equally aware of the degree to which the civil conflict adds to the poverty burden. As part of its commitment to a lasting peace, the Government will continue to build public awareness and understanding of the importance of peace to poverty reduction. Fostering ethnic reconciliation will help to encourage greater awareness and support for a just and lasting peace.

3.2 Enhancing confidence by maintaining a stable macro-environment

A set of stable, consistent and predictable macro-economic policies underpin private sector led growth and development. If the private sector has full confidence in the nation’s macro-economic management, they will make the investments necessary to boost productivity and expand output.

The medium-term macro-economic framework calls for the economy to break away from past trends (4-5% growth) and move towards a high-growth trajectory (7-8% growth) by the year 2004. A high level of domestic and foreign private investment (24-25% of GDP) will be needed to sustain an increase in the aggregate growth rate. International experience shows that this should be financed, as much as possible, by raising the domestic savings rate.

Severe macro-economic instability acts like a regressive tax on the poor. Instability erodes confidence, which then reduces the amount of investment. Lower investment reduces employment growth and leaves many poor households trapped in low-productivity self-employment. High rates of inflation erode the value of the wages received and savings held by the poor. When fiscal deficits crowd the private sector out of the domestic financial markets, it is often the poor who bear the costs.

The quality of Sri Lanka’s macro-economic management is judged by yardsticks set in the global financial markets. Sri Lanka’s economy is highly open, with total trade equivalent to more than 70 percent of GDP. The economy is bound to become even more exposed to international markets as regional and multilateral trade accords broaden Sri Lanka’s market access. The Government is committed to reducing trade protection and establishing a two-band tariff system. Efforts are being made to establish a range of bilateral and multilateral trade accords to expand international market access, with the Free Trade Agreement with India being the first of several efforts to expand market access. Ultimately, Sri Lanka’s integration into international product and financial markets hinges on the credibility of the nation’s macro-economic management. The international financial markets expect that Sri Lanka will maintain a combination of a liberal trade and investment regime with a reasonable measure of fiscal and monetary discipline.

The Government has declared its commitment to a set of fiscal, monetary, trade, sectoral and structural policies to support economic growth and poverty reduction. Public policies must be designed in consultation with stakeholders to promote ownership and social cohesion. The main policies are summarised in Box 3.1 below.

In the near and medium-term, there is very little scope for expansionary fiscal policy to support poverty reduction efforts. Fiscal consolidation will be needed to ensure macro-economic stability. Reigning in the fiscal deficit, from 8-9 percent of GDP to a level that imposes less severe strains on the financial markets is an important medium-term macro-economic management challenge. With debt service requirements accounting for just under 30 percent of current spending, lowering the deficit will also ease the large domestic debt-service requirement. While consolidating public expenditures, Government will make every effort to protect public spending that primarily benefits the poor. Opportunities appear to exist to rationalise public spending without eroding services provided to low-income households.

More effective financial management and better public procurement practices and procedures can help to ensure that existing resources are used effectively. This will reduce the cost and raise the contribution of public investment to the poverty-reduction oriented public investment effort. Efforts are underway in Government to rationalize and accelerate the public procurement process for capital investment projects. This is to be complemented by Ministry of Finance institutional reforms aimed at introducing program budgeting, upgrading the quality and capacity of Ministry of Finance staff, developing a medium-term budget framework, automating public accounts and audit practices, and introducing a public expenditure information system to track implementation and cadre. As public expenditure management reform proceeds, a combination of better priority setting, results-oriented expenditure management and careful monitoring and evaluation will help identify those areas that merit budget restraint.

Box 3.1: Macroeconomic Policies for Economic Growth & Poverty Reduction

The rural development and urban improvement strategies need to be underpinned by stable, consistent and predictable macroeconomic policies, consisting of:

  • sound fiscal management
  • expansion of the monetary base consistent with low inflation and stable prices
  • a competitive exchange rate
  • a foreign trade and tax regime that is non-discriminatory across sectors and activities
  • structural policies to promote private sector development such as continued divestiture of government commercial enterprises, establishment of a corporate governance framework for state-owned enterprises, use of BOO and BOT or similar arrangements to attract private investment in infrastructure projects, introduction of a Consumer Protection Authority bill, introducing performance contracting and professional management into the state banks and providing support for the development of the insurance industry and capital markets
  • labour market reforms to bring public sector remuneration levels for various occupational groups into line with private sector remuneration levels; promote participatory processes aimed at fostering harmonious labor relations by establishing three member arbitration boards; introduce an Employment and Industrial Relations Act to ease the labor dispute settlement process; and establish a social safety net fund for placement and retraining of redundant workers.

International evidence would suggest that scope exists to reduce public employment. Sixteen percent of the workforce is in the public sector (12 percent excluding semi-government institutions). With 800,000 persons employed in Government and 300,000 in semi-government institutions, Sri Lanka has the largest bureaucracy in Asia in comparison to its population.

3.3Improving market access by linking poor regions to dynamic markets

Sharp regional variation in poverty levels continues to persist. The Western Province and the greater Colombo municipal region exhibit much lower levels of income and human poverty than does Uva, Sabaragamuwa, North Western and North Central Provinces. In districts such as Moneragala, Matale, Kurunegala, Anuradhapura and Ratnapura, the poverty incidence is close to four times that reported in Colombo. One of the reasons for the great disparity in regional poverty levels is that the poorer regions tend to have a greater share of the population engaged in small-scale, rain-fed agriculture. Another reason is that many regions are relatively isolated from rapidly growing domestic and international markets. Even in areas in which heavy investment has been made to enhance agricultural productivity (ie. Mahaweli), the links between production centers and the major urban and international markets are very weak indeed. Considerable investment has been made in roads over the past four decades, but the vast majority of this has been concentrated on small, rural access roads rather than roadways that provide adequate access to major urban markets (see table 3.1).

Table 3.1 Road Density by Province (KM of roadway per 10,000 population)

Province / Major Urban Access Roads / Rural Access Roads
Western / 8 / 260
Central / 17 / 478
Southern / 15 / 337
North-Eastern / 53 / 614
North-Western / 17 / 687
North-Central / 45 / 1055
Uva / 41 / 600
Sabaragamuwa / 25 / 430

Source: Kumarage, A, 1998, Formulation of Policy Framework for Poverty Alleviation: Transport, Technical Report prepared for a Policy Framework for Poverty Reduction in Sri Lanka.

One of the Government’s main challenges is to effectively link poor regions to rapidly growing domestic and international markets. During the 1990s, infrastructure investment was less than 2 to 3 percent of GDP per annum, with actual investment barely sufficient to keep pace with the normal wear-and-tear on already existing structures[2]. To increase infrastructure investment, Government strengthened its public procurement management system and introduced several programs aimed at encouraging private sector participation through BOO and BOOT type projects. A significant increase in infrastructure investment will be needed to meet the demand-backlog and to forge a well-integrated, competitive national marketplace. Linking poor regions to dynamic national markets will be accomplished by a spatial integration strategy that focuses on six main pro-poor transport and communication initiatives:

  • upgrading the port network
  • building a national highway and integrated road network
  • enhancing the performance of the bus system
  • modernizing the railways
  • improving access to telecommunications facilities
  • upgrading the commercial agricultural marketing infrastructure

Ports. Inefficient or badly managed ports raise costs that are eventually born by the poor in terms of low product prices and a lack of access to global markets. In port development, the overall aim is to enhance port access with the Colombo port serving as a major Asia-regional hub port complemented by a set of upgraded local ports. Major investments have already been made to deepen and expand the container capacity of the Colombo port. With private sector participation, a program aimed at upgrading port management in the new north quay, together with widening the Queen Elizabeth Quay, has been launched. A feasibility study is examining the viability of developing a second, southern breakwater and with it a southern harbour, a particularly major public sector investment. In the near future, the Galle port is to be developed for break bulk cargo and to relieve pressure on the Colombo port. To strengthen the regional ports, over the longer-term, the Hambantota port is to be modernized and, when peace is secure, the Trincomalee port will be upgraded. Participation of the private sector in port upgrading and management is actively encouraged, both to ease the Government’s budgetary burden and to inspire high standards of management and efficiency in port operations.

Building a National Highway Network. Although Sri Lanka has a very high roadway density, these are primarily secondary or tertiary roadways that were not built to accommodate heavy inter-regional traffic flow. The main trunk road system is badly congested, and as a result, does not provide high-speed access for goods and passengers between major urban settlements. A Southern highway from Colombo to Matara and an alternative highway from Colombo to Kandy is to be constructed in the first stage of developing a modern inter-regional highway network. In the near-term, the Government plans to construct an expressway between Colombo and Katunayaka to ease access between the capital and the international airport, and over the medium-term this highway will be extended through the Northwestern Province to reach Anuradhapura. When peace is achieved, plans exist to fully extend the highway system to the north and the eastern parts of the country. An outer circular highway is also to be built around Colombo to ease congestion in the capital and to facilitate access to the port.