Research Highlights

The Institute's research programme over time has addressed many of the key socio-economic issues that have an impact on the country's development process. While many of the research findings have been brought out as IPS publications, research highlights below give key insights from more recently completed and/or on-going research studies.

How Can Sri Lanka’s Integration with its Neighbours and the Wider Regional Economies be Improved?

Although the extent of Sri Lanka’s trade and investment relations links with South Asia and East Asia are still rather limited, they indicate both the potential and the manner in which future developments will occur in a rapidly integrating trading and investment environment in Asia. East Asia is a significant source of FDI to Sri Lanka – both in the early stages of concentration in the garments industry, and latterly diversifying into services related activities such as telecommunications. More recently, Sri Lanka’s economic relations with India have been transformed on the back of improved bilateral political relations between the two countries. Supporting such developments, Sri Lanka has already entered into several bilateral and regional trade agreements across South Asia whilst being a party to on-going negotiations on agreements that include countries of the East Asian region.

The most significant change in Sri Lanka’s trade and investment relations recently has been the emergence of India as a major trade and investment partner for Sri Lanka. It opens up a strong possibility whereby the expansion of the Indian economy can be viewed as a potential link to strengthen Sri Lanka’s trade and investment relations with the rest of Asia. India with its ‘Look East’ policy is already well on the way to cementing stronger engagement with the economies of East Asia, particularly China. In view of such developments, this study reports on an initial exploration of these and related issues, documenting the nature of Sri Lanka’s trade and investment relations with East and South Asia, and emerging trade and investment linkages within regional groupings with particular attention to India-Sri Lanka links.

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Improving School Performance through Educational Decentralization

The education sector in Sri Lanka has recognized the importance of decentralized decision making as a means of effectively responding to local needs and improving the performance of schools. The Education Quality Inputs (EQI) scheme in Sri Lanka was one of the first schemes launched to improve school performance through decentralized financial decision making. In the EQI scheme schools are allocated a budget based on a formula for purchasing educational resources. Is this scheme an improvement on the earlier funding and management models? Is resource allocation under this scheme equitable? A study using the school census and other primary and secondary data seeks to find answers to the above questions.

The study finds that the distribution of EQI allocation and expenditure is progressive at the primary and lower secondary levels and it is equitable at the senior secondary level. However, at the collegiate level, especially science stream, it is regressive.

Descriptive analysis of EQI expenditure shows that as intended smaller schools, rural schools and more disadvantaged schools receive and spend a higher per capita allocation per student. However, around 20 per cent of these funds are left unspent. This shows that allocating funds equitably is not sufficient, in improving school resources, the funds need to be properly utilized. Some of the same factors that affected uneven distribution of funds under the earlier funding models results in uneven utilization of funds under formula based funding. This shows that fundamental management resources are a necessary condition to improve resources at the school level, under any funding model. The findings show that state level monitoring and support, effective local management capacity and adequate and competent human and physical resources is needed for the success of education management at the school level.

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Is Sri Lanka Ready for further Liberalization of the Services Sector?

While Sri Lanka has not been active in services negotiations under the Doha Round of Trade talks, it has engaged in negotiations on a bilateral basis in Geneva largely on the account of interests of other countries. So far, Sri Lanka has received requests from other countries in telecommunications, financial, educational and logistical services. There has not been any overt pressure to open up the services sector in the country and services negotiations seem to have been sidelined by negotiations in agriculture and NAMA. Nevertheless, when the round is finalized, it is likely that there will be requests for further liberalization of the services sector in countries like Sri Lanka. Thus it would be crucial for the country to be prepared to undertake and implement any liberalization commitments made at the multilateral level.

In this context, this study examines the issue of domestic preparedness to face the liberalization of trade in services. The study focuses on the telecommunication sector as this sector has already been committed under GATS and there have been requests for Sri Lanka to further liberalize the sector under the current round of trade talks.

Publication:

De Mel, D and J. Wijayasiri (2008), “Domestic Preparedness of Sri Lanka with respect to Services Trade Liberalization: A Case Study of the Telecom Sector”, in S. Raihan (ed.), Domestic Preparedness for Services Trade Liberalization: Are South Asian Countries Prepared for further Liberalization?, CUTS International, Jaipur.http://www.cuts-citee.org/research-reports08.htm

Prospects and Challenges of Japan Joining the BIMSTEC for Trade and Investment: A Sri Lankan Perspective

Bay of Bengal Initiative for Mulit-sectoral Technical and Economic Cooperation (BIMSTEC) is one of many regional trade agreements that Sri Lanka has membership. Current membership of the BIMSTEC includes seven countries from South and South East Asia - Bangladesh, Bhutan, India, Myanmar, Nepal, Thailand, and Sri Lanka. At present, the potential for benefits from the BIMSTEC agreement for Sri Lanka are limited to increased access to markets of Thailand and Myanmar since Sri Lanka already has access to India, Bangladesh, Bhutan, and Nepal through the Indo-Lanka Free Trade Agreement and South Asian Free Trade Agreement (SAFTA). In this context, the addition of a new country, Japan to BIMSTEC would increase the potential benefits for Sri Lanka. However, considerable amount of work needs to be done to get BIMSTEC’s own house in order before countries like Japan would even be interested in getting involved in such an agreement. This paper looks at the opportunities and challenges to BIMSTEC-Japan cooperation in trade and investment from the perspective of Sri Lanka.

Publications:

Wijayasiri, J. and D. de Mel (2008), “BIMSTEC-Japan Cooperation in Trade and Investment:    A Sri Lankan Perspective” (PDF format 324Kb), CSIRD Discussion Paper #38, May, http://www.csird.org.in/

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Does Trade Lead to Innovation? The Case of Textile and Clothing Industry in Sri Lanka

This study looks at how intensified competition in light of the Multi-Fibre Arrangement (MFA) phase-out has led to a number of innovative measures being undertaken in the textile and clothing industry in Sri Lanka, in particular, among some of the leading companies, to face the challenges of a quota free environment. Despite stiff competition from low cost producers from other countries, Sri Lanka has managed to survive due to a number of innovative initiatives undertaken by the industry with support from the Sri Lankan government. These included innovations in products, production processes, marketing, and even organization structure as a means of remaining competitive.

The key lessons that can be learnt from the case study are that: (1) competition in the export market can act as a catalyst to innovate, (2) a liberal investment and trade environment facilitates flows of FDI and technology transfer to the country and provides the right incentives for technology adoption and innovation, (3) efforts on an industry basis can be important drivers of innovation, and (4) government does have a role to play in supporting the industry’s innovation efforts.

Wijayasiri, Janaka and Jagath Dissanayake (2008), “Trade, Innovation and Growth: The Case of Sri Lanka’s Textile and Clothing Industry”, IPS Working Paper Series No. 12. Available for sale from Publications and Communications Unit of the IPS and leading bookshops

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Fishery Sector Development in a Conflict Environment: The Findings of a Value Chain Analysis

Reports: Arunatilake, Nisha, Asha Gunawardena, Dilhani Marawila, Parakrama Samaratunga, Athula Senaratne and Manoj Thibbotuwawa (2008), “Analysis of the Fisheries Sector in Sri Lanka: Guided Case Studies for Value Chain Development in Conflict-Affected Environments” (PDF Format 547 KB), USAID, Micro-Report #100,
http://www.microlinks.org/ev_en.php?ID=23635_201&ID2=DO_TOPIC

The sluggish pace of multilateral trade liberalization convinced many countries to undertake regional trade agreements. ASEAN, NAFTA and MERCOSUR have made substantial progress in dismantling intra-regional barriers to trade and other economic activities, but South Asia Free Trade Agreement (SAFTA), has failed thus far to make similar progress. In the context of the upcoming SAARC summit due to be held in July 2008 in Colombo, it is prudent to examine the measures that could be taken to enhance economic cooperation in South Asia. This briefing paper deals with internal concerns within SAFTA that have prevented it from reaching its full potential. These include the extensive sensitive lists, non-tariff barriers, high transaction costs and protracted tariff liberalization programmes. The paper makes suggestions as to how these issues can best be dealt within the interest of expediting progress in SAFTA. Furthermore, it examines how SAFTA needs to go beyond trade in goods, particularly with regard to trade in services, where there is tremendous potential for gains through trade within the region.

How Will Population Ageing Affect Development? – A Labour Market Perspective

The fact that Sri Lanka’s population is ageing is well known, but its economic consequences are less well known. Labour market is one of the key channels through which ageing affects the economy. The structure of the labour market institutions can influence how ageing affects the economy. A recent IPS study funded by the World Bank examined how present demographic changes can influence economic growth and welfare in the country through its effects on the labour market institutions. The study finds that the labour market duality continues past retirement age. A large proportion of informal sector workers are not covered by any retirement scheme. These individuals are either forced to work to make ends meet or are totally dependent on families or the government. Globalization has distanced families, breaking traditional family support systems. The study concludes that if these trends are allowed to persist, the elderly poverty rates could increase, putting increasing pressure on government welfare systems and reducing growth

Conference Presentations:

Vodopivec M. and Nisha Arunatilake (2007), “Population Ageing and the Labour Market: The Case of Sri Lanka” (Paper presented at the Economist Forum, World Bank, Washington D.C. 2007).

Publications:

Vodopivec M. and Nisha Arunatilake (2008), “The Impact of Population Ageing on the Labour Market: The Case of Sri Lanka”, IZA Discussion Paper No. 3456 (Web publication)

Southern Perspectives on Reform of the International Development Architecture: Case Study of Sri Lanka

This study is a part of an overall study on “Southern Perspectives on Reform of the International Development Architecture”. In Sri Lanka, the present Government is pressing for increased policy space from donor imposed conditions in the backdrop of the country’s present circumstances as a conflict country with substantial aid reliance given the urgent requirement for investment in public infrastructure. These conflicting needs of increased funding and greater policy space have pushed the government towards alternative sources of finance, moving beyond the concessional lending of international financial institutions, towards commercial borrowing and emerging bilateral donors. The study explores the opportunities and challenges offered by this new path. It provides some background information on Sri Lanka’s recent relationship with international donors including the roles played by the Bretton Woods institutions, the UN system, bilateral donors, and NGOs.

Two key thematic issues in the relationship between Sri Lanka and the international aid architecture are highlighted – leadership and legitimacy. The study examines the extent to which donors drive the development agenda in the country. It finds that whilst in theory aid projects are very much government driven, in practice donors exert significant influence through project proposals, donor research, and consultancy. The extent of donor influence is very much contingent on the capacity of line ministries, and in many cases the lack of capacity at this level has resulted in a donor driven agenda. This paper outlines issues emerging from the political conditionality of aid, questioning the use of “development assistance” as a political tool. Sri Lanka’s unsatisfactory experience with general budgetary support during the PRSP implementation is touched upon, as well as the relatively lower levels of macroeconomic conditionality associated with project-based lending that is preferred today. The study also looks at emerging issues in project-based lending, in particular the impact of loan covenants and safeguards, and debates the role played by donors in such matters.

Sri Lanka’s perspectives on donor reform initiatives including the Paris Declaration are reflected upon in the paper. A key finding is the very low level of awareness of the Paris Declaration in Sri Lanka – resulting in a failure to take advantage of opportunities provided to recipient governments through this agreement. However, it was also found that many of the initiatives have been implemented unilaterally in Sri Lanka, particularly donor coordination and harmonization efforts. Other key aid reform issues such as the scaling up of aid, the use of performance-based allocations, and technical assistance are discussed from a Sri Lankan perspective in the paper. To conclude, the study provides recommendations for reform – both from a donor perspective and recipient country perspective.

Publications:

Education Participation in Sri Lanka – Why all are not in School

Despite being a signatory to the “World Declaration on Education for All” in 1990, Sri Lanka has not achieved universal functional education. The need for functional literacy requires 10-11 years of general education. This means, starting at five years a child should be in school at least till 14 years. However, only 93 per cent of the children in the 5-14 year-old age group were in school by the year 2000 in Sri Lanka. This study examines the reasons for school non-participation, using household, community and school-level information obtained from an island-wide survey.

The study finds that poverty, direct and indirect costs of schooling, and cultural factors as well as poor quality of schools keep children away from school. Policies facilitating compulsory education at present give prominence to awareness building, monitoring and improvements in education delivery. The results show that these efforts need to be complemented by other supply side improvements and income transfer measures, especially for the poorest, to achieve universal school attendance.

Publications:

Regoverning Markets initiative: Small scale producers in modern Agri- Food Markets

As a response to this weak competitiveness of smallholders MA'S Tropical Food Company has introduced an innovative business model that assists smallholders. According to this model the growers are helped in organizing themselves (alone and in farmers' organizations); company's procurement system is shifted from decentralized to centralized purchasing; extension officers are provided with training to support farmers; private standards are set and premium prices are paid for higher quality and logistics and inspection are improved. This model has mutually benefited the parties involved in the supply chain. For the company, it has improved corporate income, volume of trade and turnover. For smallholders, it has improved farm income, created more jobs and enabled other non-monetary benefits.

This model has been in existence for about a decade. The company has not yet reached its potential capacity. Some limitations of this "business model" can already be identified: 1) high transport cost; 2) high labour cost; 3) delayed payments. The company has a low production capacity and therefore is unable to absorb the production of all the farmers. However on the whole, this business innovation has enabled the smallholders to actively participate in dynamic markets.

Publications:

Samaratunga, A. Parakrama (2006), “Innovative Practice in integrating small farmers into dynamic Supply Chains: A Case Study of MA’s Tropical Food Company”, (PDF Format 557kb) www.regoverningmarkets.org (download)