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Sri Lanka: Poverty Assessment

Sri Lanka FY95 PA

Full Report (10.85Mb PDF)

Poverty Profile

In the post-Independence period, Sri Lanka has made good progress in reducing consumption poverty. Real per capita GDP grew at an average annual rate of 2.5 percent in the 1950-93 period. The distribution of household income by decile towards the end of the period was similar to that in the early 1950s, although there were fluctuations in between. Thus, consumption poverty at the end of this period must have been much lower than at the beginning, regardless of the particular poverty line chosen. Based on an analysis of household data using a poverty line close to the "one-dollar-a-day" poverty line (per person at 1985 purchasing power parity), the study found that the proportion of individuals with consumption expenditures below the poverty line was about 22 percent in 1990/91 (24 percent in rural areas and 18 percent in urban areas). The study also found that individuals are more likely to be poor if working members of the household are employed in agriculture; that households where poor individuals live are larger; that the poor are less educated than the nonpoor through the differences are not very pronounced; that the poor have somewhat lower labor force participation rates, which is partly explained by age composition; that there is a positive correlation between poverty and unemployment; that the poor devote a very large proportion of their consumption expenditure to food, with rice alone accounting for 25 percent of their total consumption; and that the incidence of poverty for female-headed households is about the same as for male-headed households.

Progress in reducing consumption poverty has been accompanied by excellent progress in increasing literacy and other basic education indicators, and mortality and fertility have both declined to the point where the country has almost completed its demographic transition. There are, however, some areas of Sri Lanka's human development performance that need attention. Data on morbidity suggest that the incidence of malaria has increased sharply in recent times, and evidence from a number of surveys indicates substantial undernutrition in young children. Unlike in other developing countries, however, undernutrition does not result in high levels of infant and child mortality, possibly because of a combination of good basic health services and the fact that most mothers have had a basic education.

Incentive and Regulatory Framework

While Sri Lanka's long-term growth rate in per capita terms compares favorably with most of the developing world, it falls well short of the growth achieved in the last three decades by the high-performing East Asian economies. This is because its policies were less supportive of economic growth. Problems with macroeconomic management have constrained domestic saving and investment and fueled inflation. Export growth was constrained by inward-looking trade policies, interventions in the labor market, and, at times in the past, exchange rate overvaluation. In the agriculture sector, performance has been constrained by pervasive controls on land ownership and use, on marketing, and on pricing. Starting in 1977, a new economic strategy has been pursued that aims to increase the role of markets and the private sector by reducing restrictions on pricing, investment, and external trade and payments. A program for privatizing government enterprises is also being pursued. The economic reform effort slowed down during the 1980s, but has been pursued with greater determination since 1989. Success in implementing the economic reform program would increase the prospects for long-term economic growth and poverty alleviation.

In the short term, the post-1989 economic reforms do not appear to have had a negative effect on a majority of the poor, although some specific groups may have been affected. In particular, government spending on the social services (including spending on education, health, welfare, housing, and community services) did not decline after 1988 as a share of GDP, in spite of a decline in the budget deficit from 15.7 percent of GDP in 1988 to 8.1 percent of GDP in 1993. The retrenchment of employees from privatized government enterprises has been voluntary in most cases, with employees receiving a compensation package. The reduction of protection to import-substituting manufacturing and some agricultural products has probably caused short-term hardship for certain groups of producers, although poor consumers benefit from the reduction in domestic prices induced by reduced protection (especially in the case of foodstuffs).

Public Expenditure

The poverty assessment's analysis of public expenditure was limited to education, health, water supply and sanitation, and transfer programs. In the education sector, the study notes that, while the country has achieved high levels of enrollment in primary and secondary education, there is ample room to improve the quality of the education provided to all children, as well as to increase the equity with which resources are allocated. Improving quality would require reducing expenditures on salaries by reducing teacher numbers, many of whom are in the cities where there is a surplus of teachers, and providing more resources for essential school supplies and materials. Additional measures to improve the quality of general education would include emphasizing science and language training, especially English as a second language, making a greater effort in teacher training, and revising the curriculum with the aim of making general education more relevant to the needs of the economy and society. Increasing equity in the access to good quality general education, which would be strongly pro-poor, would require reducing the existing disparities in resources among schools, both within and across provinces. In the health sector, the government's health services are faced with the challenge of a changing population structure (fewer children and more older people) and, consequently, a changing disease pattern. There are also several critical problems concerning the composition of government health expenditures. These include insufficient attention to preventive services, unbalanced functional distribution of current expenditure (with too much being absorbed by higher-level health facilities), declining ratio of current expenditure to capital stock, and insufficient expenditure on the repair and maintenance of health facilities. In the water and sanitation sector, substantial progress was made in the 1980s towards the goal of achieving universal coverage of safe water and adequate sanitation facilities. By 1990, about two-thirds of the population had access to some type of formal water supply source, and close to 60 percent had access to satisfactory sanitation facilities. There are, however, significant disparities in coverage among provinces and between urban and rural areas, and the current public investment program would reinforce these disparities rather than reduce them. Income transfer programs are discussed in the section below.

Safety Net

In Sri Lanka, as in many other developing countries, a private safety net in the form of private transfers exists and is an important mechanism for alleviating the effects of economic misfortune. Another important component of the safety net is comprised of the activities of a large number of non-governmental organizations (NGOs). NGOs are involved in a rich variety of activities with an emphasis on providing social welfare services. In addition, the government operates an array of income transfer programs to assist certain groups of the population with cash or food coupons. Spending on transfer programs was equivalent to 2.5 percent of GDP in 1992. Transfer programs suffer from several weaknesses. The government appears to be meeting reasonably well the needs of the population displaced by the long-standing civil conflict, although some improvements may be possible in terms of targeting and the provision of water and sanitation facilities in the camps. Programs addressing the needs of the destitute poor defined as poor households with heads who are disabled, elderly, or widows; destitute orphans; the destitute elderly; and the destitute disabled appear to be severely underfunded. Other transfer programs (such as food stamps) target too broad a segment of the population, and the real value of individual benefits has been allowed to deteriorate over time with inflation.

Poverty Strategy

Since poverty in Sri Lanka is not a phenomenon restricted to a small group in society but rather affects more than one-fifth of the total population, broad-based growth at a high and sustained pace will be necessary in order to achieve a rapid decline in poverty. The chief focus of Sri Lanka's future poverty alleviation strategy needs to be the acceleration of growth, with emphasis on agriculture and labor-intensive manufacturing, while protecting public spending for human development and increasing its efficiency and equity. These tasks constitute a major challenge, especially in view of the civil conflict and the persisting resource constraint in the public sector. The civil conflict has resulted in a severe disruption of economic activity in the conflict areas and a large diversion of resources away from high-priority spending in order to finance military and police activities. In addition, the indirect negative effects in terms of the adverse impact on incentives for private investment and, therefore, growth could be substantial. Hence, a peaceful resolution of the civil conflict is of critical importance for poverty alleviation. Along with this resolution, Sri Lanka needs to continue to implement its economic reform program. Greater efforts have to be made to reduce the fiscal deficit. Structural reforms also need to be deepened. This includes completing the rationalization of the trade regime to eliminate the anti-export bias, introducing tax reforms, deepening the privatization of public enterprises, deregulating foreign direct investment, pursuing reforms leading to a more flexible labor market, and tackling land market rigidities and other high-priority areas of reform in agriculture. At the same time, reforms of government programs in education, health and water supply and sanitation are necessary to increase the efficiency of resource allocation and to ensure a fair distribution of the benefits from these programs. Finally, income transfer programs need to be rationalized and better targeted to the poorest segments of society.

Statistical System

The government should start to monitor poverty indicators on a regular basis. This could be done on an annual basis now, since, starting in 1993, the Department of Census and Statistics has added a household income and expenditure module to its quarterly labor force survey for the last quarter of the year. Thus, the government could define an official poverty line and proceed to monitor poverty indicators (incidence and other indicators) at the end of each calendar year. The Department of Census and Statistics has also been conducting a larger household income and expenditure survey every five years since 1980/81. These larger surveys should be used by the government and academic researchers to carry out a more disaggregated analysis of poverty indicators every five years to complement the annual monitoring exercise.

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