Post-conflict Growth: Making it Inclusive

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The IPS launched its ‘Sri Lanka: State of the Economy 2011’ report yesterday (19th October 2011) at its first Annual National Conference at the IPS Auditorium, in the presence of two Senior Ministers of the Cabinet. This year’s report has as its theme ‘Post-conflict Growth: Making it Inclusive’. In this post, we bring you some extracts of the ‘Policy Perspectives’ section, the introductory chapter in the report. The full version of it is available in PDF format at the end of the post. But first, here is a ‘wordle’ (using the online tool available at www.wordle.net) which captures key words and highlights them according to the frequency with which they feature in the ‘Policy Perspectives’ section.

 

For Sri Lanka, emerging from a costly era of a long drawn conflict, rising socio-economic aspirations must be met to help restore and cement social harmony in its post-conflict development efforts. Besides the desirability of inclusive growth from a purely ethical standpoint, from a more practical perspective, inclusiveness is needed for sustaining economic growth, as exclusion leads to underemployment of productive resources that restricts growth. Access to productive employment is a critical element to drive inclusive growth. It requires improving employability of workers on the one hand and improving access to productive employment opportunities, on the other. On the supply side, improving employability involves access to good quality health, education and other productive assets. On the demand side, improving access to employment requires opening up opportunities in various sectors of the economy in different geographic regions and for diverse types of workers.
Overall growth performance…
“As the global economy begins the arduous road to recovery, ‘growth’ has become the cornerstone for the world’s policy makers, be it the US policy on ‘foundations for long term growth’, UK’s ‘strategy for economic growth’ or Japan’s ‘new growth strategy’.  In this, Sri Lanka is no exception, setting itself an ambitious medium term growth target in excess of 8 per cent per annum in the country’s new post-conflict environment. Indeed, Sri Lanka achieved it in 2010 with a strong economic rebound, amidst a steadily improving macroeconomic environment. This was in stark contrast to the experience a mere two years ago, when economic performance was at best erratic, with unacceptably high inflation and dwindling foreign exchange reserves.”

Some issues remain…
“Amidst the strong recovery and seemingly bright medium term prospects for the Sri Lankan economy, there are, nevertheless, some concerns about specific aspects of the country’s recent economic performance. The relatively weak recovery of private investment to take advantage of the country’s new stability has been one such area. Growth in private sector credit disbursement was slow to pick up, as has been inflows of foreign direct investment (FDI) to the country. Private sector credit growth was sluggish for much of 2010, picking up only towards the latter months of the year, while net FDI inflows saw only a mild recovery at US$ 435 million as against US$ 385 in the crisis-ridden year of 2009. As in the previous year, it was buoyant public investment that kept Sri Lanka’s growth momentum moving to allow the country to reach a GDP growth of 8 per cent.”

Investment drive…
“In this respect, Sri Lanka’s public investment drive that is heavily tilted towards improving physical infrastructure capital in the country will no doubt provide a useful initial boost to growth. But, the longer term sustainability of that growth momentum can only be ensured with appropriate investment in technology, knowledge transfer, etc. Here, private sector investment, and FDI especially, has a particularly important role to play.”

Financing development…
“[…] the government’s stance on deficit financing – i.e., limiting reliance on domestic sources of finance – in its attempt to retain a relaxed monetary policy stance to spur growth can prove to be double-edged. It necessarily raises Sri Lanka’s reliance on foreign financing to meet the country’s growing public investment needs. The repeated calls for fiscal consolidation efforts stem from a recognition of the potential medium to long term risks that arise from rising exposure to external debt.”

Foreign debt…
“Notwithstanding the overall figures, the composition of the debt matters. Here, Sri Lanka has seen a rapid change in its external debt structure with non-concessional and commercial sources raising their share from 7.3 per cent in 2006 to 37.5 per cent in 2010. These are costlier sources of foreign finance, and not surprisingly, the country’s overall external debt service ratio has crept up over the period from an annual average of 12 per cent during 2002-04 to 16.4 per cent over 2008-10. To make certain that future external debt service payments can be met comfortably and limit the country’s exposure to unanticipated external shocks, Sri Lanka must ensure that its foreign exchange earnings remain strong. As a first step, a prudent course is to limit foreign currency borrowing to projects that will, either directly or indirectly, enhance the foreign exchange needed to service future payments.” 

Striking a balance…
“Ongoing developments in the industrialized economies offer a salutary lesson and a necessary reminder of the choices available to governments. Economic growth can be given a short term boost by fiscal and/or monetary policy stimulus, but at the risk of worsening long term debt problems. Alternatively, a more cautious approach on fiscal austerity can damage growth in the short term, and indeed incur electoral unpopularity along the way. For Sri Lanka, the current Stand-by Arrangement (SBA) with the International Monetary Fund (IMF) has provided an external anchor, underscoring the government’s fiscal and monetary framework. As the IMF programme ends in 2012, Sri Lanka will have not only a healthier economy and stronger public finances, but also the necessary ‘political space’ to consolidate public finances in the absence of major electoral imperatives.”

Fiscal frugality…
“In view of the above concerns, it is encouraging that the overall fiscal outcomes in 2010 are positive. The deficit was reduced from 9.9 per cent of GDP in 2009 to 7.9 per cent in 2010 and looks set to be reduced further to under 7 per cent in 2011.  This is, of course, not to imply that low fiscal targets per se are always desirable or appropriate. Arguably, Sri Lanka’s expansionary fiscal policy stance of 2009 in the midst of a sharp economic downturn and domestic socio-political imperatives stemming from immediate rehabilitation needs of a war weary population could be justified. Without such a fiscal stimulus to the economy, the private sector’s reluctance to undertake investment would have depressed economic activity even further than the 3.5 per cent growth recorded in 2009. Rather than adopt a dogmatic approach to fiscal targets, what is needed is a clear understanding that sound public finances allows a country the necessary leeway to respond appropriately to emerging domestic and/or external shocks.”

 “Fiscal policy has clear implications not only for sustained high growth, but also in relation to the distributional impacts of such growth. For instance, Sri Lanka’s current focus on public infrastructure is found to be concentrated heavily on the construction of roads, ports, airports, etc. By contrast, capital investment in education and health which stood at 1.1 per cent of GDP in 2006 had declined to 0.6 per cent by 2010. The tight fiscal constraints within which the government is attempting to achieve a host of complex objectives are clear. Perhaps, most importantly it also serves to underline the necessity for placing Sri Lanka’s public finances on a sounder footing as an immediate priority.”

Inflationary pressure…
“Sri Lanka’s rate of inflation has been rising incrementally from the last quarter of 2010, primarily on account of rising food prices following inclement weather conditions.  Political turmoil in some key oil exporting countries has also mounted rising pressures on international oil prices. Such supply-side price shocks will have inevitable one-off impacts on inflation. Standard monetary policy responses to contain supply-side induced inflation are not effective and alternative interventions through administered price controls and tax measures were adopted. There is, however, the threat that food and fuel price increases will be absorbed into the general inflationary pressures via wage increases, even as a recovery in credit growth to the private sector is anticipated to quicken and add to inflationary pressure on the demand-side.”

Export earnings…
“[…]However, in the midst of a significant drop in the ratio of exports to GDP in recent years – from 28 per cent in 2004 to 16.7 per cent in 2010 – Sri Lanka cannot be complacent about the need to push for higher foreign exchange earnings in the midst of a heavier exposure to external debt repayments in the long term. The drop in the exports-to-GDP ratio despite an increase in absolute dollar terms suggests that the higher growth momentum Sri Lanka has been seeing more recently is driven less by an export-push and more by other factors, such as the higher public investment drive in infrastructure, etc. However, given the very limited domestic market, sustained high growth can only be achieved if Sri Lanka raises foreign demand for the country’s goods and services.”

Poverty…
“[…]sustained growth can help poverty alleviation by not only pulling the poor up into gainful employment, but also by providing larger volumes of revenue to finance targeted social programmes. On the face of it, Sri Lanka appears to have made significant strides in tackling overall poverty in the country and reducing emerging gaps between sectors of the economy. The Household and Income Expenditure Survey (HIES) carried out by the Department of Census and Statistics (DCS) appears to suggest that the poverty headcount index has dropped from 15.2 per cent in 2006/07 to around 8.9 per cent by 2009/10. The most promising is the suggestion that the gap between urban, rural and estate sectors have narrowed in the interim.”

“Despite the overall narrowing of imbalances, inequities in access to gainful economic opportunities – across different dimensions such as gender, geographic location, sector, ethnicity, etc. – continue to persist. Policies to address these become all the more important in the context of post-conflict reconciliation efforts.”

Skills for growth…
“If, as anticipated, Sri Lanka’s economic growth becomes increasingly driven by a higher skilled services sector in the coming years, widening wage gaps can emerge. Additionally, as more and more employment is created in the contractual/informal sectors – where limited incentives are present for employers or the self-employed to invest in training – the lack of skills development can exacerbate structural rigidities in the labour market. Often the most vulnerable segments will be unskilled, female labour.”

The inclusiveness imperative…
“While there is broad consensus that economic growth is vital for development, it is also recognized that growth alone is not the be-all and end-all of development. In this context, the notion of economic growth that is both sustainable and inclusive becomes an important policy imperative for governments. While these are often fashionable lexicons in policy documents, country-specific contexts demand that they are not ignored. For Sri Lanka, emerging from a costly era of a long drawn conflict, rising socio-economic aspirations must be met to help restore and cement social harmony in its post-conflict development efforts. That calls for economic policies that will not only deliver broad-based rapid growth, but policies that are also sensitive to issues of equity in the distribution of, and access to, resources.”

The IPS State of the Economy 2011 report – ‘Post-Conflict Growth: Making it Inclusive’ – is now available for purchase at the IPS.