The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

A thousand Dollars for the few, the very few
Much has been made of the country's per capita income crossing the threshold of one thousand US Dollars. There is no reason to celebrate this.
It is a level of income that the country should have achieved a few decades ago. Several countries in Asia that had lower per capita incomes than ours exceeded the one thousand dollars per capita income many years ago. Singapore, South Korea, Malaysia and Thailand are among these countries.

Some of them are now 10 or more times our per capita income. In the current global context, a thousand dollars per capita income is after all nothing much to talk about. We have not achieved a milestone in economic development.

In 2004 the per capita income reached US Dollars 1031 or Rs. 103,679. Though this is the first time it has happened it is no great economic achievement. In 2000 the per capita income reached nearly US$ 900 and then dipped below that in the next two years to $ 841 and 870 in 2001 and 2002.

In 2003 it reached US$ 948. The per capita income exceeding a thousand dollars lifts the country’s status from that of a low-income country to a middle-income nation. It also means that we are no longer eligible for some kind of concessionary borrowing or soft loans. The fact still remains that we are a poor country in the world and even a poor country in Asia.

Even the long-standing boast that we have a much higher per capita income than our immediate neighbours is also proving a hollow one. The Maldives has overtaken us. The much higher rate of economic growth in India means that it is a matter of time for India’s per capita income to surpass ours. At the current rate of economic growth India would double its per capita income in about 10 years. While India has established a sound foundation and its economy has taken off, we are in a national muddle that is throttling the economy.

Apart from comparisons with other countries, we must be clear about what per capita income means. The per capita income of a country is the value of all goods and services produced by the country in a given year divided by its population. It does not necessarily mean that on average people get a thousand US Dollars. This is because the distribution of incomes could be such that while a small proportion gets several thousands of dollars as income, a significant proportion gets much lower amounts.

Only a small proportion of persons get this income. The Central Bank Consumer Finances and Socio Economic Survey of 2003/2004 revealed that nearly 40 per cent of income goes to 10 per cent of the population, while 40 per cent of the population gets less than 12 per cent of the country's income. In such a situation when the national cake is cut so unevenly, the average income of a thousand dollars per person per year is a hollow achievement.

The series of eight Central Bank surveys dating back to 1953 show clearly that the measures of income inequality have not made any significant improvement in income distribution over the past fifty years.

Besides this, a thousand dollars or Rs. 104,000 means that the average income is less than Rs. 8,700 per month or less than Rs. 300 per day per person. This is not much of an income in relation to today’s cost of living. The World Bank has defined the acute poverty line as one dollar per day and the poverty line as two US Dollars per day per person. On this basis nearly one fifth of the population was below 1 US Dollar and as many as 40 per cent of the population was below the 2 dollar mark. This is the most pertinent problem. Average incomes mask the vast differences in income that exist in the country.

Therefore despite the country crossing the per capita income level to over a thousand dollars only a small proportion get incomes around that level. There are also regional differences of significance. For instance incomes are very much lower in Uva, Eastern and Central Provinces.

Poverty is in fact very much of a rural phenomenon. The urbanised Western province stands out as the one with much higher incomes.

Economic growth is vital to reducing poverty but income distribution could worsen with growth. It is now recognised that the strategy by which growth is attained has an important bearing on who gets the benefit of the growth. A mix of economic policies that includes improvement in rural infrastructure, support for increasing agricultural productivity and development of agro-based industries, are needed to lift rural people from their abject poverty. Some have recommended a rural-biased development strategy.

This may be counter-productive as the urban areas have better infrastructure to develop more productive enterprises. A balanced growth strategy that ensures a fair distribution of the country's income is vital to provide employment opportunities, reduce poverty and avoid social and political tensions. We must ensure that when we achieve a per capita income of US $ 1500, it would be better distributed than it is today.

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