The trade-off between economic growth and social welfare has been a much debated issue. Last week’s column made reference to this in the discussion on poverty issues raised at the Centre for Poverty Analysis (CEPA) Colloquium. The pertinent issue in the context of the current higher economic growth trajectory is whether it would enable the country’s social indicators to improve.
There are some concerns that the path, process and priorities of economic growth may be neglectful of the social welfare of the country. These concerns are not without a basis. The expenditure on education and health, as a percentage of GDP, is declining and woefully inadequate to sustain the achievements in these areas. Besides, there are new concerns in the post war era. The rehabilitation of the people whose livelihoods have been shattered by the war and the large number of orphans and displaced persons and persons physically maimed and in traumatic mental conditions that require medical attention and welfare measures pose serious challenges. And then there are the emerging problems of a rapidly ageing population.
If these problems are to be addressed there has to be much higher expenditure on these. Resources are always scarce. In the current background of huge expenditures needed for reconstruction and rehabilitation, as well as improvements in social welfare, the question at issue is whether the current economic policies have the correct priorities in the context of these needs. In recent years expenditure on health and education have been inadequate and declining. The need to increase expenditure on social infrastructure is indeed imperative, if economic growth were to improve the living conditions of the poor and those affected by the war. Furthermore such investments in human capital are needed for long term economic development.
Economic growth and social development
In contrast to the country’s modest economic growth in the past, social attainments have been impressive. This was especially so during the first three decades after independence (1948-1977), when economic growth was slow but improvements in social indicators were outstanding. Since then human development indicators have improved steadily, but at a lesser momentum than the expectations generated by the initial successes. Nevertheless in the first five decades after independence when the economy grew on average by only 4.2 per cent per annum, the social attainments were good owing to the impressive early improvements. Sri Lanka’s social indicators in the entire post independent period when the economy grew by 4.9 per cent per year (1950-2010) are commendable.
The significance of the Sri Lankan experience has been succinctly captured by Nobel Prize winner Amartya Sen and his colleague Jean Dreeze, who observed that “Sri Lanka’s strategic experience as a pioneer in overcoming the major penalties of low income remains one of great significance for understanding the prospects for support-led security in poor countries.” Sri Lanka’s social development experience has been of much interest and controversy among social scientists.
Prominent among economists who have argued that the Sri Lankan experience illustrates how a poor country could achieve a high level of human development is Amartya Sen, who observed that Sri Lanka was able to achieve levels of life expectancy and mortality that are much better than even countries with higher levels of per capita income.
Sen argued that the goal of economic growth and increases in per capita incomes is to achieve human development. Therefore, if a country has achieved that objective, even before attaining high levels of per capita income, as was the case of Sri Lanka, then it had achieved the ultimate objective of economic growth. Sen cites the Sri Lankan experience as illustrative of the possibility of achieving human development even at relatively low levels of per capita incomes.
Other economists have challenged this view and asserted that the country has had low rates of economic growth owing to its social welfare policies. They have pointed out that the high achievements in human development came at a cost to economic growth and contend that economic growth was retarded owing to the emphasis on welfare and ascribe the relatively slow economic growth, the persistence of poverty and unemployment to the country’s high welfare expenditure. One of Sri Lanka’s eminent economists, Lal Jayawardena put across the view that the country lost about 1 per cent of growth each year owing to welfare expenditure, particularly owing to the high cost of the rice subsidy. Jayawardena’s argument was that if the country did not expend as much on the food subsidy, the investment of such funds would have resulted in substantial compounding of economic growth.
Another perspective is that a number of factors have affected economic growth, besides welfare policies. These other factors, inter alia, include the high population growth till the 1970s, civil conflict and poor governance. Saman Kelegama contends that several reasons including the welfare-oriented policies accounted for retarding economic growth. He argues that economic growth was adversely affected by the welfare state that led to excessive politicisation, export pessimism and the ethnic conflict. He also identifies three important constraints apart from welfare policies as having retarded economic development: the ethnic conflict, security situation and the war.
Furthermore Kelegama contends that “Sri Lanka was also stricken by the doctrinaire of export pessimism and delayed moving towards an export-oriented strategy by overstaying as a closed economy for nearly two decades. When economic liberalization began in 1977 it was a latecomer to the export-led industrial world and thus could not stage a significant breakthrough like the East Asian Tigers. Third, concerted effort was not made to address the ethnic animosity between the two major communities that erupted time and again…..and culminated as a civil war in North/East Sri Lanka during 1983-2001. This conflict substantially disturbed the economic management process.
However Kelegama is also mindful of the human development achievements of the country and points out “Despite the stressful environment, there were some achievements about which Sri Lanka is well known internationally. Sri Lanka came to be known as an exception among developing countries in improving the physical quality of life.
There have been others who have argued that Sri Lanka achieved a satisfactory rate of economic growth with equity. They contend that the country’s economic growth was good and do not contribute to the view of a trade off between economic growth and social attainments. A few have argued that the country’s economic growth performance was good and in fact much better than many other countries and was one of the best performers in economic growth in Asia, in the developing world and in fact the entire globe. Has the country obtained a dividend on the social investment it has made in the past? Has social development expenditure contributed to social capital formation that has in turn contributed to economic growth, if not immediately, in the fullness of time?
Sri Lanka’s social development indicators have shown slow progress in recent decades and failed to keep to the promise generated by early progress. This can be closely co-related to the inadequate investment in education, health and other welfare measures. Besides this, some of the welfare measures do not reach the intended beneficiaries. Expenditure on caring for the elderly and otherwise able is woefully inadequate.
Three policy thrusts are needed to improve the country’s social conditions. First, the strategy and process of economic development should be more pro-poor oriented and focussed on areas of development, such as in agriculture that would benefit the poor. Second there must be much higher expenditure on social infrastructure and recurrent social expenditure and emerging needs. Third, funds expended on social welfare must be better targeted to reach the deserving.
The prioritisation of social expenditure in tandem with economic infrastructure development is imperative.Many social expenditures are more important than some economic infrastructure investments with doubtful returns. Since resources available to the state are limited, the extra expenditure on social development must come from increased revenue collection and curtailment of excessive and wasteful government expenditure. There are real concerns that public expenditure is not prioritised to meet significant goals of economic or social development.