Poverty decrease in Sri Lanka, 2002 to 2012/13-World Bank
Posted on September 8th, 2016

By Umesh Moramudali and Rathindra Kuruwita Courtesy Ceylon Today

Poverty has been one of the major issues faced by many developing nations and Sri Lanka is no exception. Recently, World Bank released a poverty assessment report on Sri Lanka, which attempted to identify causes for poverty and solutions to the issue.

The report states that overall, Sri Lanka’s record of poverty reduction has been encouraging, mainly due to increased labour earnings as demand for labour rising across a broad range of sectors excluding Northern and Eastern Provinces.
The report further noted that in the Eastern Province, the poverty headcount rate fell from about 22.7 per cent in 2002 to 6.1 per cent in 2012/13. Per capita incomes also rose for the poor, corroborated by increases in the share of consumption devoted to non-food items, ownership of durable goods, and school attendance. Wages and employment grew as well, particularly in the manufacturing, construction, commerce, transport, and communication sectors. Sizeable increases in agriculture minimum wages led to higher earnings for agricultural workers.

While it is difficult to identify the underlying causes of this poverty reduction, the report focuses on four potential factors including the economy’s gradual structural transformation out of agriculture into more productive sectors, urbanization and agglomeration around key urban areas, rising international prices for food and tea that raised earnings in agriculture, and strong domestic aggregate demand that has boosted economic growth. Of these potential factors, a more rapid structural transformation and increased agglomeration have the most potential to sustain poverty reduction in the future.

Growth in the agricultural sector during this period largely reflected rising prices and an expansion in arable land, neither of which are likely to be sustained. Domestic aggregate demand, meanwhile, has been led by the construction and transport sectors, spurred in part by public investment in the aftermath of the conflict. These sectors, however, cannot be relied upon to produce sustained growth. This suggests that efforts to further improve living standards of the poor should focus on promoting further structural transformation and urbanization.

Despite this recent progress, living standards remain low and pockets of severe poverty persist. Around 40 per cent of the population subsists on less than twice the poverty line, which was $2.75 per capita per day in 2005 PPP terms, or Rs 225 per day. Furthermore, living standards of the near-poor – those above the national poverty line but below the 40th percentile – are similar to those of the poor. Moreover, low-income households’ ability to access basic services and public facilities has barely improved since 2002. The population in Northern and Eastern Provinces is particularly disadvantaged in terms of consumption, labour market outcomes, educational attainment, and housing conditions. Finally, inequality increased sharply from 2009/10 to 2012/13.

Ceylon Today interviewed David Newhouse, who is one of the authors of the report. Newhouse joined the World Bank’s Poverty Practice as a Senior Economist in 2013 and has led or contributed to the Bank’s analysis of poverty in Sri Lanka, Pakistan, as well as at a global level. In Sri Lanka, he led the production of the 2016 poverty assessment and the updated poverty map. Prior to joining the poverty practice, he was a labour economist in the Social Protection and Labour Practice, where he helped lead efforts to monitor labour markets in developing countries and analyze the policy response to the 2008 financial crisis. He first joined the Bank in August 2007, and worked in the Jakarta office as a co-task team leader of the Indonesian Jobs Report. Before joining the Bank, he worked for three years as a consultant in the IMF’s Fiscal Affairs Department providing policy advice on energy and food subsidies, and two years in the Bureau of Economics at the Federal Trade Commission. David holds a PhD in economics from Cornell University, and has published several journal articles on a wide range of issues relating to labour, health, and education in developing countries. Following are the excerpts of the interview:
?During last decade the poverty headcount ratio in Sri Lanka has drastically reduced. What are the challenges the country would face in reducing it further?

A: Many of the forces that helped reduce poverty between 2002 and 2012/13 may not be sustainable. For example, the post-war era saw a major expansion in the construction and transport sectors, spurred in part by public investment. But it is not clear that the government can continue to afford these kinds of investments given its current revenue challenges. Also, there was a significant run-up in world agricultural prices between 2006 and 2009. In Sri Lanka, the price of rice rose 30 per cent and the export price of tea rose over 50 per cent in real terms during this period. This led to strong reductions in poverty among agricultural workers and in the Estates during this time, potentially in part because of a large increase in the minimum wage. But both rice and tea prices have already fallen significantly since then, so further large increases in minimum wages may not be practical.

Overall, 40 per cent of the population lives on less than about Rs 225 per day, so there is an urgent need to continue to create a climate conducive to good jobs and increased productivity. The related phenomena of increasing urbanization and movement out of agricultural employment also contributed to poverty reduction, and this may be more sustainable. Continuing to facilitate this, in part by ensuring youth are well-equipped to work outside of agriculture, will help increase productivity and continue to reduce poverty. One challenge the country faces is that there are severe pockets of poverty, in selected DS divisions in Mullaitivu, Batticaloa, and Moneragala (see table). Ensuring that youth are healthy, well-educated and aware of better earning opportunities elsewhere will help them take advantage of higher-productivity jobs elsewhere in Sri Lanka, or abroad. At the same time, most of the poor now live in or around cities, so ensuring that they benefit from public services is also crucial.

Although the poverty had reduced, the inequality remains high. How to overcome this issue?
A: Increased inequality is not necessarily bad, since it could reflect an improvement in all segments’ standard of living. However, it appears that inequality increased sharply between 2009/10 and 2012/13 in Sri Lanka, after slowly falling since 2002. If this trend continues, it would strengthen the argument for reforms that make policies, including tax policy, more pro-poor.

The recent report claims that nearly 40% of the people are in near poverty. If the commodity prices go up in near future, is there a risk of increasing the poverty headcount ratio ?

A: The report defines near poverty as those not in poverty but in the bottom 40 per cent. Note that 40 per cent of the population live on less than Rs 225 per day, so their standard of living is quite low. Furthermore, in many cases the near-poor look more like the poor than the non-poor, in terms of the assets they own and the places they borrow from.

In terms of commodity prices, it really depends on the commodity. Is this a commodity for which Sri Lanka is a net importer or exporter, and are poor Sri Lankans net consumers or producers? In addition, institutional factors, such as the pass-through from commodity price increases to inflation, and the responsiveness of minimum wages to inflation, also play a role. So the effect of changing prices on the poor should be analyzed on a case-by-case basis.

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