Micro Impacts of Macroeconomic Adjustment Policies (MIMAP)

The Micro Impacts of Macroeconomic Adjustment Policies (MIMAP) Project in Sri Lanka primarily aims at informing policymakers of the possible effects of macroeconomic adjustment policies on vulnerable groups.

About MIMAP-Sri Lanka

The impact of economic reform on the poorer segments of the population is the primary concern of the work sponsored by the International Development and Research Centre (IDRC) under the MIMAP–Sri Lanka project. The work in Sri Lanka links into the MIMAP Research Network, which looks at related issues in a range of Asian and African economies. The research project aims to fill perceived gaps in information and knowledge regarding the impact of macroeconomic and adjustment polices on the welfare of the poor, and also channels of transmission through which macro policy reaches the micro level. The research takes a multi-dimensional, rather than a purely economic, approach as it acknowledges that, although the macro policies considered will be overwhelmingly economic policies, the well-being of a household has to be considered in a more holistic manner.

MIMAP Research Network

MIMAP – Bangladesh
www.panasia.org.sg/MIMAP/bd

MIMAP – Pakistan
www.pide.org.pk/mimap.html

Health Care and Adjustment (MAP Network)
www.unganisha.idrc.ca/maphealth/java/index.html

MIMAP – Phase I

• Objectives
• Research Studies and Publications

Objectives

In its initial phase of the project, the studies undertaken sought to obtain a clear and comprehensive picture of the information already available within Sri Lanka on macroeconomic policy reform and its impacts on welfare. The information surveyed include the literature on policy and welfare, data available for poverty analysis, and macro economic models of the Sri Lankan economy. The Institute’s library was developed as a national repository unit for material on poverty.

Due to Sri Lanka's early efforts and achievements in welfare and the high-profile nature of subsequent economic reforms, considerable attention has been directed towards the relationship between welfare and reform. Further, Sri Lanka has a relatively well developed national data gathering and publication tradition that provides considerable information regarding macroeconomic indicators and aspects of welfare of the population. Macroeconomic modeling, however, is an area that has received less attention. However, the surveys of existing information indicate that despite some crucial gaps, there is a sound base of knowledge that can be consolidated and expanded upon to understand the mechanisms which link macroeconomic policy reform to household welfare in Sri Lanka.

Research Studies and Publications

This paper primarily seeks to broaden the conceptualization of policy impact analysis by questioning the conventional analytical starting points and methodology. Conventionally, the problem is structured along the lines of understanding the impact of macro policy on different segments of the poor, identifying critical causal relationships, and feeding this knowledge back to fine-tuning policy. The methodological constraints of this structure are widely recognized as isolation of impacts, measurement of impacts, effect of policy compliance, direct causation, dis-aggregation of specific effects of policy, etc. However, what of the logic of the overall exercise? If policy impact analysis seeks to have practical relevance to policy making, are the right issues being addressed? And, are they being interpreted in a way that is important to policy makers, mainly politicians?

Three alternative models of policy reform form the base of the argument which seeks to answer these questions. The models highlight the different viewpoints that can exist on both the nature of the reform effort and the kind of technical feedback considered necessary. Within this framework, ways of interpreting the Sri Lankan policy context is explored.

"Policy Impact Analysis in Contemporary Sri Lanka” (2000) by David Dunham, Macroeconomic Policy Series (Formerly listed under MIMAP Sri Lanka Series)

In attempting to cover a rather extensive area of interest, this review works along two main paths: linking literature specific to macro policy reform with that of literature on welfare and poverty, and reviewing literature which itself links policy reform and welfare in a cause and effect relationship. The review of literature on macro policy is considered under the three phases of reform: 1977- 1989, 1990-1994, and 1994 onwards. The review of literature on poverty on social welfare includes both macro and micro level studies. The review concludes that the existing literature does provide—albeit with numerous limitations and gaps—a very sound base for studying the impact of macro economic policy on welfare at the household level.

This bibliography grew primarily out of the realization that although Sri Lanka's macroeconomic reform efforts since 1977 have been extensively documented, researchers frequently overlook existing material due to the lack of knowledge of its existence or the inability to access it. This bibliography was developed by searching specialized libraries, research institutions that generate material, and private collections. Abstracts have been provided to enable users to identify material most relevant to them. In addition to basic reference details, the location of the material also has been listed. References that could not be located have been listed in “Part 2” with the intention of completing it with the assistance of users.

This paper reviews the data available for poverty and welfare related decision making in Sri Lanka. The lack of consensus in defining the poverty line is discussed as a major constraint facing the measurement of poverty in Sri Lanka. A wide variation in estimates occurs due to the use of different definitions, variables, methodology, and assumptions. However, a profile of the poor is developed using a range of existing data and indicators.

The review of data sources is dominated by the analysis of state sources reflecting the institutional structure of formalized data gathering in Sri Lanka. Weakness of available data is discussed at length and subsequently fed into the recommendations made. The core of the recommendations focuses on making better use of existing data by further refining and analysing them.

This review seeks to provide a comprehensive view of existing macro econometric models of the Sri Lankan economy. The review catalogues and examines macro econometric models and CGE models developed for Sri Lanka, and the macro econometric models developed in selected Asian economies. In relation to Sri Lanka, the conclusions reached are in two areas: the technical and conceptual aspects of modeling, and the human aspect in developing and using models. With regard to the technical aspects, a number of recommendations are made in relation to specifying the model to reflect the specificities of the Sri Lankan economy, the gradual and coherent sophistication of the model, the data base requirements, etc. In terms of the human aspect, the need to popularize the “quantitative culture” among policy makers and the need to create a pool of human resources to undertake the task effectively is discussed.

In view of the important role played by overseas remittance flows in the Sri Lankan economy, this study seeks to explore the channels through which remittances flow to the household and its impact on household welfare. The study presents a summary of the policies implemented and proposed by the Government and other institutions involved in labour migration, and analyses its impact on the decision making of migrants with regard to remittances. The impact of remittances on welfare is examined initially by looking at the impact of remittance flows on key macroeconomic variables, such as balance of payments, savings and investment, labour and output markets etc. Following this, the existing theoretical and empirical literature on the microeconomic and macroeconomic determinants of remittances and their usage is surveyed. A model for Sri Lanka empirically estimating remittance functions using household level (the Sri Lanka Integrated Survey 1999/2000) data is presented thereafter. Initial findings indicate that the altruistic features seem to be most important in determining remittance flows. The estimation of the macroeconomic determinants proved less successful, due to the results not being robust.

MIMAP – Phase II

Principal Projects:

Development of Multi-Dimensional Poverty Indicators

Rationale

Since independence, Sri Lanka has had in place a welfare programme that provided free universal education and health, income transfer assistance, and certain other sectoral subsidies. Although free education and health facilities continue to exist, due to financial constraints the income transfer programme was changed from a universal food ration scheme to a targeted food stamp in 1979, and then to a poverty alleviation programme in 1989. The selection criterion for eligibility was based on household income alone.

However, evaluations of the food stamp and poverty alleviation programmes show that identification of the poor has been less than satisfactory. The inclusion of non-poor and exclusion of poor are noted.

The reason for weak targeting in these programmes is the type of selection criterion used. Sri Lanka does not have a poverty line stipulated by the State; what is available is a cut-off point for household income that has been decided, over time, on a relatively ad hoc basis for each household transfer programme. As the mechanism for identification and monitoring is weak, there is no facility to review the poverty status of programme beneficiaries. As a result, after the initial selection no action is taken to remove those households who shift above the poverty line or include those who fall below the line. Therefore, nearly all households that are initially selected continued to obtain assistance until the programme or project is terminated, which was often with the change of political regime.

Selection criterion limited to household income also posed a second problem—accurate information about household income is difficult to access as well as assess. This is largely due to two factors. Most of the poor are employed as casual employees; their work is seasonal, which leaves these categories economically vulnerable during certain parts of the year. If income assessment takes place in peak labour demand periods, some of the poor will not be captured. Also, some of the non-poor households tend to underestimate their income in order to obtain state assistance due to past experience in obtaining state transfers. As a result of the above, mis-targetting was common; surveys show that the last income decile (65 per cent) and the highest income decile (5 per cent) obtained poverty alleviation assistance, with the in-between deciles also accessing this allowance from the State.

Furthermore, apart from misallocation of household transfers through poverty alleviation programmes, the same occurs even in education and health. Although education is provided free, hidden costs such as transport, purchase of stationary, uniforms etc. discourage the poor from continuing school or obtaining other vocational training. Similarly, health care, although provided free, also has hidden costs like when medical supplies etc. run short at State dispensaries/hospitals, the patients have no choice but to purchase them from private sources.

Objectives

A more focused welfare programme for the poor will assist in upgrading the quality of life, until benefits from economic growth are accrued to them. However, in order to do so one needs to be able to identify the poor more accurately. This requires a poverty line, which is not confined to household income alone to be identified. A development of a poverty line that captures different aspects/characteristics of poverty is required. This study is in the process of developing a single or set of indicators to identify the poor more accurately.

Community Based Monitoring as an Input for Planning and Resource Allocation

Rationale

The Department of Census and Statistics’ five-yearly national survey and the Central Bank of Sri Lanka’s ten-yearly survey are the only sources of data that are available for analysing levels of poverty. Up to now, only the Department of Census and Statistics has analysed their data for consumption poverty incidence since 1990. Even then, since this exercise in only performed every five years (but take up to between 6-7 years since data entry and analysis after the survey takes another 1-2 years), changes in poverty in the interim period and impact of policy on poverty cannot be known for policy/programme re-direction or re-formulation. Although the State’s current emphasis is poverty alleviation, the present system of information on poverty incidence and changes in poverty within population groups is inadequate to meet the information demand of the policy-makers for necessary interventions. More frequent conduct of national surveys is not feasible due to cost constraints, but an alternative needs to be developed to fill the information gap, which in turn will affect timely programme/policy planning and interventions. One low cost mechanism to fill the gap is to develop a community based monitoring system with several small samples of poor population located in different parts of the country. This would serve to cover both spatial and temporal differences in poverty issues of selected population.

Objectives

This pilot study will be conducted in one Divisional Secretaries Division (DSD) to establish a low-cost community participatory monitoring system of poverty related indices. The baseline information of these indicators will form the first set of information into DSD level planning and resource allocation for the following year. An annual monitoring of indicators is envisaged so that it can feed in to planning and re-allocation of resources within the DSD.

Microfinance for Poverty Alleviation in Sri Lanka: Current Status and Future Options

Rationale

Since the inception of the first poverty alleviation programme in Sri Lanka—Janasaviya—in 1989, micro-finance has been a central tool used to alleviate poverty. Apart from the poverty alleviation programme of the State, the Government also encouraged state and non-state banking institutions as well as micro-finance institutions to provide credit for employment generation activities such as small and medium enterprises (SMEs). Further, a large number of NGO/CBO based micro-finance institutions have also erupted to assist in providing finance to the poor. A forward marketing system is being introduced by the state through banks to assist farmers to obtain a better price for their produce.

However, over a decade after such intervention, the impact of micro-finance on reducing poverty and sustaining employment created through institutions such as SMEs is not clear. Evaluations available on micro finance provided under poverty alleviation programmes show little impact on poverty reduction itself since enterprises started under the poverty alleviation programmes have not been sustained. Many have been closed after a short while for financial non-feasiblity. Lack of non-financial support and lack of markets have been identified as factors for less than expected outcome.

Information on evaluations on performance of other institutions in providing micro credit for poverty alleviation is limited. This is partly because many formal financial institutions do not separate credit given for micro-finance from other finance/credit. Further, definitions used for identifying micro finance from non-micro finance also vary between institutions.

Central Bank survey data show that over 40 per cent of financing is still provided by the informal financial sector where the interest rates are much higher than the formal sector. It is likely that those who obtain credit from the informal sector are those with low collateral, hence they are likely to be among the poor. However, the advantage of informal sector finance to the poor is the very short time gap between request for a loan and supply of loan, where nearly all NGO/CBO take a minimum period of a week and banks take longer.

Although through poverty alleviation programmes, the savings rate of the poor have increased (through compulsory savings of part of the allowance given to the poor), the demand for credit by the rural sector is limited (as credit is encouraged for entrepreneurial development and not for consumption). It also appears that a majority of savings mobilized via the rural sector is invested in the urban sector; however, data on this issue needs further investigation.

There is also the current debate on concessionary credit (by the state) where it is provided at lower interest rates than banks. The impact of such measures on other financial institutions is of much concern. State policy of waiving loans taken by farmers on an ad hoc basis also negatively affects loan recovery rates of all financial institutions, and undermines credit availability to those defaulters by these institutions.

Objectives

The study is conducted to: understand the reasons as to why micro-finance is less successful than anticipated; develop a research methodology, based on findings from the review; to assess current constraints and strengths of micro-finance both at formal and informal sectors; and formulate policy/programme guidelines to re-direct present programmes that provide micro finance for poverty alleviation activities.

Ganga Tilakaratna, Upali Wickremasinghe