Potential for economic prosperity, reforms and poverty reduction

By Sunil Karunanayake

The rapid growth and poverty reduction in the western province over the past 20 years shows that Sri Lanka has the potential to sharply reduce if not eliminate poverty.

Agriculture poverty is around 40 percent, but that could all change if practices put in motion in the western province, where economic growth has been the country's highest, are exported to the rest of the island.

The reasons for this region’s rapid growth, namely the trade and industrial reforms undertaken in the 80’s and 90’s indicate that Sri Lanka is a country where reform works.

These reasons also suggest how to get the rest of the country growing by reforming agriculture so that the same market forces that propelled the industrial Sri Lanka can propel the rural sector. However, the politics of reform are such that it is very difficult to build a winning coalition that will support the reforms.

Nevertheless, the recent experience with education sector reforms show that it is possible to make progress with seemingly intractable problems.

One can only hope that the forces behind trade, industrial and now education reforms will rally behind the remaining reforms, thereby enabling Sri Lanka to achieve its true potential. These comments were made by Shantayanan Devarajan, the Sri Lankan-born Chief Economist of the South Asia Region of the World Bank and co-author of the recent report on “Economic Growth in South Asia” when he addressed the Central Bank’s monthly lecture recently.

He said following substantial market oriented reforms the Sri Lankan economy has grown at over 5 per cent a year for over two decades, Since 1990 per capita GDP grew at 3 per-cent, yet during this same period the share of people living in poverty fell by only 3 per cent age points. This was due to the over concentration of economic activity in the resource rich western province.
From 1997 to 2003, the western province has grown by 6.2 per cent annually while the rest of the country grew by 2.3 per cent.

According to research Sri Lankan reforms in trade liberalisation, deregulation and promoting investment was instrumental in the success of the western province. Meanwhile the rest of the country has seen very little reform.

In agriculture the common pursuit of the rural farmers, reforms in land markets and paddy cultivation as well as policies to improve the marketability of the agricultural products have been elusive resulting in stagnation of rural incomes. Dr Devaranjan cites the Sri Lankan case as a good textbook example how market oriented policies can unleash economic growth and prosperity and the absence of such policies can lead to stagnation and persistent poverty.

Need for agricultural reforms

The provincial stagnation has or may give an indication that reforms have made rich richer while poor incomes have stagnated, however Dr Devarajan does not believe so, on the contrary he attributes rural poverty to contentious politics in Sri Lanka and state intervention of the economy.

In agriculture dominant rural areas reforms have not taken place in particularly paddy cultivation, reforms in land markets and policies to improve the marketability of the agricultural products have been elusive.

Agriculture poverty is around 40 percent. Sri Lanka has also inherited and maintained policies in land provisioning, fertilizer subsidies, protective import tariffs perhaps at attaining self-sufficiency in rice.

Dr Devarajan believes self-sufficiency is being achieved at a high cost and mostly the victims have been the poor adding to the increase on poverty.

Forcing farmers to continue paddy farming at subsidised costs through the regulation of paddy lands provisioning and undiversified leaves them at the mercy of the weather. It is also argued that laws restrict the farmers from using productive irrigated land to cultivate alternate crops with higher economic returns.

Land Development Ordinance (LDO) restricts the land used by the farmers to be used as collateral neither for credit nor for lease or purchase. Dr Devarajan argues reforms to these constraints would benefit the farmers.

Education reforms progressive

Sri Lanka’s education system has been celebrated around the world as one that has achieved universal primary education and high levels of literacy at very low per-capita incomes.

Towards the end of 1990’s however it was becoming clear that Sri Lanka’s education system was facing serious “Second generation challenges”. The abandonment of English and introduction of Sinhala and Tamil as the medium of instruction in the late fifties decade contributed to the universal access to primary and secondary education in the country but this same policy has meant gradual erosion of English language skills among students to the point where only 10 per cent of 4th grade students have a mastery of the language.
To compete in the global market place Sri Lankans are finding that English Language skills are essential and there is a need to teach the subject from Grade 1 including re-introduction of English as a medium of instruction. Dr Devarajan noted that Sri Lanka has of late embarked on a programme, the Education Sector Development Framework and program (ESDFP) which involves many bold and far reaching initiatives devolving managerial authority to schools, forge links with communities, strengthening teaching of English from Grade 1 and introducing English as a medium of instruction etc.

What is noteworthy is these reforms were initiated by the UNP-led coalition and continued by SLFP led coalition (with JVP as a partner) in 2004.

Accelerating reforms

Dr Devarajan’s presentation was clear and the message is loud. Reform is nothing new, man has matured in civilization by reacting to changes around him and adapting to changes, a stagnant thought process or a society couldn’t progress. Change is inevitable. As reiterated by the World Bank economist the western province model has demonstrated that Sri Lanka has immense potential to grow and improve the living standards of people and eradicate poverty. Poverty is the mother of all conflicts.

Conflict leads to mistrust, civil war and loss of property and lives.

Today Sri Lanka is playing a heavy price for inconsistency in policies and stalled reforms, CEB’s daily loss of Rs 50 million a day is said to be equivalent to one rural hospital.

The railway once a model government entity is in economic ruins and is unable to serve the public efficiently. Universities have become too radical and are unable to produce graduates who could meet the global challenges. The provincial council system has become a miserable failure giving poor returns and adding to fiscal constraints. How long should the poor in this country suffer to satisfy the politicians and few trade unionists and continue to stall reforms?

Thoughts for the week

The magnificent five-nil whitewash over the English in their home soil inflicted by our cricketers amply demonstrated Sri Lankan’s potential for success.

On the other hand in Germany, England also made an unceremonial exit from the prestigious FIFA world cup, no doubt these two events may have shocked the old empire; the only silver lining was the prompt resignation of celebrated England skipper David Beckham, perhaps a lesson for Sri Lankan leaders.

(The writer could be reached at suvink@eureka.lk)

Investment opportunities for the future:
Coconut Products for the 21st Century - Part I

By Nilooka Dissanayake

Usually when you think of the coconut industry, it does not conjure up exciting images as an area of business opportunity. After all, it has been there for ages and it’s the forte of large or long established companies. Isn’t it? And the pictures that come to mind show huge coconut estates, rows and rows of puny coconut palms, dessicated coconut and oil mills, mountains of coconut fibre (kohu-buth) and mounds of coconut husks dotting the land. No, not an exciting area at all!

But that is set to change. In fact, the change has already begun -- and happily on several fronts.

All these concerted efforts open up vast opportunities for those who are thinking of investing for the long term. Just like the tea industry changed significantly when a few entrepreneurial companies like Mlesna and Dilmah started offering value added products to local and international consumers, the Sri Lankan coconut industry is also showing signs of re-emerging a dynamic force in the international markets.

But this path is paved with challenges. The status quo is explained in the following paragraphs:

Sri Lanka consumes around 70% of the nuts produced.

Only the balance is left for export purposes. And it becomes a sadder fact when you consider that next to the Philippines and Malaysia, Sri Lanka exports the largest amount of coconut products to the world. Just to quote the dessicated coconut as an example, our market share dropped from 20% to the current 10%. Winners were the Philippines and Malaysia.

In terms of coconut produced (nuts) Sri Lanka is in the fourth place with India in third, but India consumes most of the coconuts and is not as yet a significant player in the international markets except in fibre and other products. That is not to say that, that might not change.

In terms of local consumption, coconut contributes approximately 20% of the energy requirements of the typical Sri Lankan. And that means, through coconut oil, coconut milk and scraped coconut in dishes like mallum and sambol. As you know, most of us eat more curries than oil or the raw coconut. However, the way we extract coconut milk, we throw away most of the nutrients and value. Meaning, we are wasting export potential, and of course, our own money.

Our coconut oil industry is in a pathetic state because the imported palm oil is available cheaper than the local coconut oil. The story gets worse, and as the Minister of Coconut Development Salinda Dissanayake said in a recent interview, most of the so called coconut oil you get locally is not coconut oil at all, but 90% substandard palm oil mixed with coconut oil to get the smell and taste.

There is more bad news. Sri Lanka is losing valuable coconut land to infrastructure and housing development projects daily. You would notice that most of the housing schemes that crop up along roads you travel are coconut lands, despite regulations to restrict this practice.

While the global demand is certainly not a big problem, the cost of producing a coconut is soaring higher and higher and in case of small coconut land owners, coming dangerously close to the market selling prices.

To add to that, according to Dr. Jayantha Gunathilake, Chairman of the Coconut Cultivation Board, most of the coconut lands are in lots smaller than 10 acres. The viable economic coconut land should be at least 20 acres. Only 20% or so coconut lands in Sri Lanka fall into this category.

And Sri Lanka’s coconut lands are growing older and older. Most coconut land owners fall to the temptation of carrying on another year, rather than investing more on new plants.

You can hardly blame them, because coconut planting certainly is not a short term investment. You need to wait a decade to reap the full benefits of the sapling you plant today. And the people today are aligning themselves, consciously or unconsciously, with the consumer society, seeking immediate gains rather than wait for the bountiful harvests in the future. (To be continued next week)

Please share with us your ideas on this topic. Send your comments and questions to ft@sundaytimes.wnl.lk.

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