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Talk ng Econom cs July to December 2011 Digest A Publication by the Institute of Policy Studies of Sri Lanka Research. Inform. Impact.

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Page 1: Jly Dec 2011 TE Digest

Talk ng Econom cs

July to December 2011


A Publication by the Institute of Policy Studies of Sri LankaResearch. Inform. Impact.

Page 2: Jly Dec 2011 TE Digest

IPS | Talking Economics | Jul-Dec 2011 Issue 62


2 Economic Freedom: Involving Stakeholders in improving the Business Regulatory Environment in Sri Lanka

6 Realizing the Post-war Miracle: Challenges, Opportunities & Private Sector Leadership

8 Korea Calling: Results from a Snap Survey of Job Seekers and Issues of Youth Unemployment

12 Pulling Ourselves Up: Taxation, Development & Away from Aid

15 World Economic Health Check: Snapshot of Continuing Concerns

18 Sri Lanka Continues its Rise up Global Competitiveness Index: Jumps 10 Ranks in 2011-12 World Economic Forum Report

21 Is Low Agricultural Productivity Keeping Batticaloa Poor?

23 Dynamic Growth in Sri Lanka: The Innovation aImperative 27 Repositioning South Asia: a Positive look Remains a Challenge

31 Post-conflictGrowth:MakingitInclusive

33 Taking Forward The Climate Change Discussion in Sri Lanka

34 ElectricityConstraints:CanCEBProfitsLightentheBurden on the Industrial Sector?

36 SMEs and Budget 2012: Strong Steps, but Tax Relief is Half the Story

39 Sri Lanka as a Rice Exporting Country: Possibilities and Problems

41 Budget 2012: First Steps Towards Strengthening Sri Lanka’s Logistics Sector

43 Electricity Constraints Are Dampening Growth of Sri Lanka’s Small and Medium Industries

45 Quotable


47 Inside IPS






The Institute of Policy Studies of Sri Lanka (IPS) is an autonomous institution that aims to promote policy-oriented economic research and to strengthen the capacity for medium-term policy analysis in Sri Lanka. Its mission is to contribute to the socio-economic development of the country through informed, independent and high qualityresearchthatseekstoinfluencethepolicyprocess.Withovertwodecadesofsubstantial research expertise, IPS has emerged as a regional centre of excellence and themostinfluentialthinktankinSriLanka.Research. Inform. Impact.

Page 3: Jly Dec 2011 TE Digest

Jul-Dec 2011 Issue | Talking Economics | IPS 1

ExEcutivE DirEctorSaman Kelegama, DPhil (Oxon)

DEputy DirEctorDushni Weerakoon, PhD (Manchester)

talking Economics tEam

Anushka Wijesinha Editor

Charmaine Wijesinghe Head of Publications & Communications

Nalaka LiyanapathiranaAssociate Web Manager


Shafraz Farook – Consultant Designer (Kalambo Active Pvt., Ltd)

Anushka Wijesinha

contributing authors

Ashani AbeysekeraNisha ArunatilakeBuddhika BrahmanageStephanie De Mel Kithmina HewageDilani HirimuthugodageBurhanudheen ThassimPriyanka JayawardenaRoshini JayaweeraMalathy KnightAthula SeneviratneMick MooreNethmini PereraParakrama SamaratungaBurhanndheen ThassimHarini WeerasekeraKanchana WickramasingheAnushka Wijesinha

institute of policy studies of sri lanka 100/20, Independence Avenue Colombo 07, Sri Lanka Tel: +94 11 2143100, +94 11 2665068URL: http://www.ips.lkBlog: ‘Talking Economics’- ips.lk/talkingecoTwitter: www.twitter.com/TalkEconomicsSL

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copyright and DisclaimerAll material published in the Talking Economics Digest are the copyright of the Institute of Policy Studies of Sri Lanka (IPS), unless otherwise speci-fied.Itcannotbequotedwithoutdueacknowl-edgement to the IPS and the author. It cannot be reproduced in whole or in part, without the written permission of the IPS. The content, com-ments and posts of the Talking Economics Digest and the IPS blog represent the views of individual authors and do not necessarily represent the views of the IPS.

Welcome to the 3rd issue of the ‘Talking Economics Digest’, bringing you all the articles posted on our blog (ips.lk/talkingeconomics) from July to December 2011 and a couple of feature articles. The year 2011 was a year of struggle and turmoil for the global economy, but a year of growth and promise for the Sri Lankan economy. As our popular Fast Facts feature (page 45) highlights, tourist arrivals exceeded 850,000 in 2011, GDP growth hit 8% and Sri Lanka jumped 10 places on the Global Competitiveness Rankings.

INCLUSIvE GROWTHAs Sri Lanka moves towards an era of faster growth, a key consideration needs to be that this growth is inclusive.Infact,thelatest(2011)editionoftheIPSflagshipannualpublication,theStateoftheEconomy(SOE), has this as its central theme. In this issue of the Digest, we bring you extracts from the theme chapter of this latest SOE, and many of the articles are very much in line with this theme.Although service sector is the dominant element of our GDP, a large proportion of the country’s workforcedependsonagriculture.Twoarticlesinthisissuefocusonagriculture;thefirstontheissueoflow productivity in agriculture and how it contributes to poverty, taking Batticaloa as a case study, and the second on the Budget 2012 proposal of making Sri Lanka a rice exporting country in the midst of severe domestic rice market constraints. Covering the social sector, we bring you an article discussing the statusofmalnutritioninthecountry.Despitesignificanthealthachievementsoverdecades,malnutritionis re-emerging as a key social issue, with important implications for poverty. Driving growth to create jobs inclusively is also important. In a special feature, we bring you the results of a snap survey that we conducted among Korean job seekers, and a discussion of the pressing issue of youth unemployment in Sri Lanka. Fostering enterprise growth across Sri Lanka can help create more jobs. This issue features two articles that discuss a key ongoing challenge to enterprise growth – electricity. The Budget 2012 was

largely a continuation of the policy framework outlined in Budget 2011. However,thefocusonSMEswassignificant,andthisissuehighlightswhat Budget 2012 has in store for SMEs and discusses if it would be enough to grow this important sector. Overseas foreign workers’ remittances are a key source of foreign exchange for Sri Lanka, but these incomes are rarely channeled to productive sources and are often used up just for consumption. This Digest looks at this important nexus between migration and development, particularly in the context of new proposals aimed at this sector contained in Budget 2012.

Forthefirsttime,thisissuefeaturesaGuestArticlebyProf.MickMoore of the Institute of Development Studies (IDS) UK, on the emerging global debate on the link between taxation and state-building. This 2nd issue introduces a new feature ‘Quotable’ where we bring you key quotes from movers and shakers in the domestic and international economic landscape from 2011.

NUMBERS GAMEEconomistshavealwaysbeenobsessedwithnumbers.Researchersareconstantlychallengedtofindwaysin which numbers can be made more ‘real’ to the consumers of research - providing the story behind the numbers and trying to explain “how these numbers matter to you”. The Occupy Wall Street (OWS) movement was quite intriguing in this regard, and may hold valuable, albeit indirect, lessons for social science researchers. While the issue of income inequality and widening wealth gaps in the US, and indeed much of the developed world, had been an issue of contention for years now, it never really hit the headlines. But the OWS movement managed to change that completely. The simple message “We Are the 99%” grabbed headlines worldwide. It focused on a complex issue, backed by a lot of rigorous empiri-cal analysis by various academics, but the message was clear and impactful. People could relate to it. The movement’s main argument was that economic policies in America over the last decade or so had dispro-portionately favoured the richest 1% of the population, while leaving behind the rest of the 99%. While there was some contention as to what degree this was accurate, the very fact that a debate was started on this vital issue of our times – income inequality – as a result of a global movement with a simple, yet powerfully packaged, message, is an achievement in itself. Policy makers sat up and took notice. It is time forustoreflect–howcanweraisethelevelofdebateonkeyeconomicdevelopmentchallengesinSriLanka and indeed South Asia? What can we learn from campaigns like the OWS’s “We Are the 99%”, as researchers interested in reaching out to broader audiences and striving for greater policy impact? Policy researchinstitutescontinuouslyproducewell-researchedanalysisandcrediblefindings,butoftenstruggletogarnerinterestamongamoregeneralaudience.Animportantfirststepistryingtomakenumbersmore impacting to them. In this issue of the Digest, we have taken a small step towards this by visualizing ourdataincreativewaysonseveralarticles.Wehopeyoufinditinterestingandinteractive,andlookforward to your feedback.

Here’s to an impactful year 2012 with lots to talk about the economy!

Anushka WijesinhaEditor – ‘Talking Economics’(Research Economist, IPS)[email protected]

Inclusiveness ImperativesEditor’s Desk

talking Economics



Page 4: Jly Dec 2011 TE Digest

IPS | Talking Economics | Jul-Dec 2011 Issue 2

The concept of economic freedom is not a novel one in economic theory. Since the time of Adam Smith, if not before, economists have believed that the freedom to choose and supply resources, compete in business, trade with others, and secure property rights are central ingredients of economic progress1. With the recent global financial crisis being primarily attributed to perverse credit expansion and regulatory policies in the financial sector, the concept of economic freedom has attracted renewed attention worldwide. How easy or difficult it is to start and run a business, and how efficient courts and insolvency proceedings are, can influence how firms cope with crises and how quickly they can seize new opportunities2. While Sri Lanka ranks relatively well in economic freedom in the South Asian region, its position worldwide remains much to be desired, mainly owing to problems of good governance, increasing non-tariff barriers and the heavy presence of the state in the economy. Reforming regulations and creating a conducive climate for economic activity is thus crucial. This task however is not solely the responsibility of the government - there remains a significant role for other stakeholders of the business environment to play as they are all part of the ‘business ecosystem’.

Involving Stakeholders in improving the

By Ashani Abayasekara

Economic freedom measures have ranked Sri Lanka above its neighbours in the region, but below some of its key competitor countries. To improve the business

environment by addressing problems such as transparency, accountability, etc., there needs to be a genuine

effort to involve all stakeholders...

Economic Freedom:

Business Regulatory Environment in Sri Lanka

Fig 1:


Overall Scores

53.7 Regional Average

59.7 World Average

84.1 Free Economies

57.1 Sri Lanka

Source: Wall Street Journal and Heritage Foundation


ed in




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Jul-Dec 2011 Issue | Talking Economics | IPS 3

Economic Freedom: Link to Growth and Development

As pointed out by Madan (2002), economic freedom is important as it has been linked to economic growth and can be a basis for determining why some countries perform better than others. Several empirical studies establish a positive correlation between economic freedom and economic growth3. Going beyond economic growth, an empirical study by Dehann et al (2006) demonstrates some positive relationships between economic freedom and indicators of well-being; income per capita, income level of the poorest 10%, life expectancy, and life satisfaction4. Many of the relationships, however, reflect the impact of economic freedom as it works through increasing economic growth, and therefore do not necessarily show a direct causal relationship between economic freedom and these variables.

Economic Freedom Measures: How Does Sri Lanka Perform?

Over the last two decades, a number of indicators for economic freedom have been developed. Apart from the frequently cited Doing Business report published by the World Bank and the Global

Competitiveness Index (GCI) constructed by the World Economic Forum, several other indices look at economic freedom in particular, such as the Economic Freedom of the World index (EFW) (Fraser Institute) and the Index of Economic Freedom (IEF) (Wall Street Journal and Heritage Foundation). According to the EFW, in 2010 Sri Lanka ranks 101 out of 141 economies with an overall score of 5.89 out of 10. Meanwhile, the IEF in 2011 places Sri Lanka 107 out of 183 countries with a score of 57.1 out of 100.

The number of indices and the wide-ranging areas covered by each give an indication of the extensive nature of the concept of economic freedom. In fact, there is still no unique way of defining economic freedom.

This article primarily focuses on the degree of economic freedom present in the business environment in Sri Lanka; looking at the extent to which regulations and bureaucratic procedures constrain business activity, makes entry and exit problematic, and reduces competition


vibrancy in product

and related markets.

The overall IEF score places Sri Lanka above its regional average, but below the world average and significantly below "free economies" (Fig. 1). However, it does not entirely make sense to benchmark Sri Lanka against the world average - this score does not suggest much, given that it gets averaged out across ‘highly free economies’ to economies with little or no economic freedom.

Instead, it is important to benchmark ourselves against a basket of competitor countries which compete with Sri Lanka in attracting investments. Fig. 2 shows the overall economic freedom score and scores for components on business, investment and labour freedom for Sri Lanka and some developing country competitors (India, Bangladesh, Vietnam, Indonesia, and Mauritius).

While the overall score for Sri Lanka is on par with the other selected economies, its investment and labour freedom scores are lagging behind. However, according to the fifth major area of the EFW index (Fig. 3) - ‘Regulation of Credit, Labour and Business’ - Sri Lanka ranks well in


rall S


Business Freedom


ent Freedom





Sri Lanka

Sri LankaSri Lanka








Bangladesh Bang

















Sri Lanka














Sri Lanka vs. Competitors

Fig 2:

Source: Wall Street Journal and Heritage Foundation

Page 6: Jly Dec 2011 TE Digest

IPS | Talking Economics | Jul-Dec 2011 Issue 4

terms of labour market regulations but lags behind the developing country average in credit and business market freedom.

Economic Freedom Measures: Take With a Pinch of Salt?

The use of such economic freedom measures in comparisons across countries is questionable, given various concerns regarding their reliability. On the theoretical side, in the final analysis many indices are not very sensitive to substantial variations in the weights of different components.

Comparisons are also marred by differences in collecting statistical data across countries, on which these indices are based. The data collection processes itself have come under severe criticism - anecdotal evidence in the past suggests instances where surveys are conducted at the departure lounge of airports, with interviews being carried out fleetingly with one consultancy firm. Thus, the figures are not completely reflective of the reality. This in fact can be observed in Sri Lanka’s ranking in terms of labour market freedom.

The EFW index depicts Sri Lanka as doing well, above both the regional and developing country averages. However, this is hard to explain, given rigid labour market regulations in the country. Sri Lanka’s Termination of Employment

of Workmen Act (TEWA) requires that firms with 15 or more employees must justify layoffs and provide generous benefits to displaced workers. The redundancy costs in terms of number of weeks of salary that is required to be paid in Sri Lanka is a staggering 217, compared to 56 and 87 in India and Vietnam respectively.

Nevertheless, it is imprudent to fully dismiss such measures purely on this basis - it is clear that there are economic reforms that are crucially required to some extent, if not to the same degree as reported. However much these indices are criticized domestically, on various grounds, they are a key element in the basket of factors that foreign investors and business partners look at when considering doing business with/in Sri Lanka.

In this context, reforming business regulations and creating a good economic climate is not exclusively the responsibility of the government. The relationship between the government and other stakeholders of the business environment is inextricable.

The role of stakeholder groups including shareholders, employees, employers, customers & suppliers, competitors, Trade Unions, consumer groups, and the media is critical as they affect the activities of a business, and are in turn affected by its business environment.

Improving Business Regulations: Stakeholder Involvement is Key

Most enterprises seem to believe that the relationship between stakeholders of the business environment and the firm is one of the key elements of corporate success, if not the most critical factor. The role of various stakeholders may be even greater in many Asian businesses, where a key challenge is to prevent the abuse of power by controlling authorities. Many indices reveal wide-spread corruption in South Asian economies, and Sri Lanka is no exception. The dissemination of information and channeling of feedback about policy and regulation among relevant business players, specifically small and medium enterprises (SMEs), and providing a potentially supportive community for the successful implementation of policy and regulation is important.

Another key initiative is the implementing of industry standards or resolving industry conflicts internally, thereby strengthening the private sector without need for government intervention.

Furthermore, regulatory and supervisory agencies, civil activists, the media, and consumer groups can play an important role in enhancing business governance. For example, securities regulatory bodies and fair trade commissions are directly involved in setting and enforcing the rules on the conduct of business for the purpose of protecting investors.

Media attention can motivate politicians, bureaucrats and managers, who are concerned about damage to their reputations, to adopt more effective corporate governance laws, policies, and practices. Consumers, by bringing to light issues relating to product quality, service delivery, negotiation processes, etc., can make a significant contribution towards enhancing the overall business environment.

In Sri Lanka, there is a need for all stakeholders (in particular, the private sector) to find strategic ways of actively engaging themselves along with the public sector in policy reform processes, rather than merely voicing their concerns. In this regard, an important initiative taken is the ‘Private-Public Dialogue’ (PPD) mechanism run by The Asia Foundation in 5 Provinces. It appears to be an effective model where both the private and public sectors work collaboratively


THE WORLD (2010)

Fig 2:

Source: Frasier Institute

Sri LankaRegional Avg

Dev. Country Avg

Credit Market Regulatio Labour Market Regulation Business Regulation





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Jul-Dec 2011 Issue | Talking Economics | IPS 5

References1 North, D. and R.P. Thomas (1973), "The rise of the western world: a new economic history”, Cambridge Press, 2World Bank (2011), "Doing Business 2011: making a difference for entrepreneurs." [http://www.doingbusiness.org/reports/global-reports/doing-busi-ness-2011]3 Barro (1996), DeHaan and Sturm (2000), DeHaan and Siermann (1998) 4Fraser Institute (2011), "Economic Freedom of the World: 2010 Annual Report" [http://www.freetheworld.com/release.html]5World Bank (2011), "Doing Business 2011 in South Asia: Making a Difference for Entrepreneurs." [http://www.doingbusiness.org/reports/global-reports/doing-business-2011]

with local stakeholders to address local-level business regulatory issues. An important characteristic of the PPDs is the aim to promote transparency and economic governance by disseminating information and creating conditions for improved business vibrancy in each locality.

Improving Business Regulations: When Stakeholder Involvement is Weak

In Sri Lanka, the problems of transparency and inclusive policy-making are reflected in the ‘Transparency of Government Policymaking’ component under the World Economic Forum’s Global Competitiveness Index (GCI), where the country ranks 107th (out of 139 countries) in 2010-2011, compared to India, Vietnam, and Bangladesh which rank better at 42nd, 73rd, and 106th respectively.

The lack of transparency and stakeholder consultations in implementing laws was evident in the Employees’ Pension Benefits Fund Bill (EPBFB), a proposed pension scheme for private sector workers which was to be passed in Parliament, but had to be postponed due to opposition from Trade Unions and employers.

The opposition was mainly due to several uncertainties regarding the Bill, such as whether it was optional or compulsory, what the payment formula would be, and doubts associated with eligibility for pension at old age given the various conditions in the scheme’s implementation. The National Labour Advisory Council (NLAC) is the de facto consultative body for labour legislation and labour issues, and could have been tasked with leading stakeholder consultations on this proposed scheme on behalf of the government.

However, it was not adequately consulted or utilized. It is now clear that the Bill was rushed, and did not go through a robust and inclusive consultative process, resulting in far too much opposition, dissention, confusion, and antagonism. This was unfortunate especially because most of the

stakeholders, in principle, do not oppose the concept of this scheme and the need for it; just the procedure in developing it, and also key features of it.

Businesses, Yes, But Consumers - Underrepresented in Sri Lanka

An important, yet often neglected group of stakeholders - consumers - have remained under-represented due to lack of influential lobbying power. While producer interests are represented through chambers of commerce and other organizations, strong consumer associations are lacking in the country.

In an era of globalization and liberalization where market forces are strong, consumers need to be protected from vulnerabilities arising from hidden strategies and processes implemented by producers and sellers. CUTS International (Consumer Unity and Trust Society), a consumer association founded in 1983 in Rajasthan, India, has been instrumental in providing a forum for disadvantaged consumers by focusing on issues of consumer protection, safety, and rights.

There is a need for such organizations to be established in the country with the aim of creating consumer awareness, skills training, etc., so as to productively and proactively involve consumer groups in creating a better business environment.

Improving Business Regulations: Policy Challenge

In striving towards achieving a higher degree of economic freedom, the need to ensure that the inputs and participation of all stakeholders, including politicians, officials, the formal and informal private sector, and civil society, are reflected in the reform process is crucial.

A major problem in the private sector is the tendency to go in line with every political regime so as to minimize “political risks”. In this context, a challenge is to get to strategic solutions that will create the right incentives for the private sector to push for sustainable and inclusive growth. Encouraging more

direct participation of SMEs in higher level dialogue in PPDs is important, considering the need for a more mass-based bottom-up push for reform and change.

There is also a pressing need to incorporate the principles of good governance – transparency, accountability and legitimacy – as an integral part of the policy process. Finally, a key challenge is to shape stakeholder/interest group dynamics so as to achieve the best possible (‘satisficing’, rather than optimizing) solution in terms of winners and losers.


Sri Lanka’s economic freedom score improved by 1.2 points to 58.3 according to the 2012 IEF, making its economy the 97th freest out of 184 economies. Gains were recorded in trade freedom, monetary freedom, and business freedom. Sri Lanka's score, while slightly above its regional average, continues to fall below the world average.

In comparison to the 2011 index, property rights scored 40.0, the same as in the 2011 index. Freedom from corruption recorded a score of 32.0, a marginal improvement by 1 point.

Fiscal freedom scored 73.5, improving by a mere 0.1 points, whereas government spending decreased by 3.3 points to 81.4. Business freedom recorded a significant improvement of 6.1points, resulting in a score of 78.0. Labour freedom and monetary freedom increased by 0.3 and 2.7 points respectively. Trade freedom showed a considerable boost of 4.9 points recording a score of 77.1. Investment freedom and financialfreedom remained unchanged at 30.0 and 40.0 respectively.

Talk to the Author | [email protected]

Page 8: Jly Dec 2011 TE Digest

IPS | Talking Economics | Jul-Dec 2011 Issue 6

In this article, we bring to you some key quotes from the speech by Dr. Anura Ekanayake, member of the board of governors of the IPS and the immediate Past-Chairman of the country’s premiere private sector body, the Ceylon Chamber of Commerce (CCC), at its Annual General Meeting on 28th July, 2011. His comments were timely and relevant, leaving some important thoughts on post-conflict economic recovery and the role of the government and the private sector.

A key statement he made, on the role of the private sector in driving Sri Lanka’s post-war growth agenda, was: “We cannot leave all this to the government to achieve on its own. After all, over 80% of the national output, a similar percentage of investment, 75% of employment and over 95% of exports come from the private sector”.

He stressed the need for a proactive and productive engage-ment between government and business: “What I am proposing is an approach where, we continue to ask the government for facilita-tion, but, by first taking the initiative to actively demonstrate what is indeed possible. Let us then tell the authorities, ‘see what we have done, now help us to do more”

On the role of the CCC and the private sector in the imme-diate post-war period: “As people who understand markets and business, our commitment was to initially wholeheartedly support the welfare of the displaced and thereafter their speedy re-settlement along with the restoration of economic activities in the affected areas. Our members contributed immensely though silently in these undertakings.”

On the role of the Chamber in medium- to long-term post-war recovery: “Nation building has to be supported by several pillars

– not only that of economic progress. Given the expertise and the cre-dentials of the chamber, our Comparative Advantage was and remains in the area of business and economics. Without any doubt, this is the area where we can make the best and biggest impact”.

On the need to be cognizant of the challenges, while recogniz-ing the strong post-war performance: “Our future progress will be much stronger and surer, if we are mindful of the challenges along the way. Not to take away or reduce the glory of what has been achieved, but rather to ensure its sustainability. Not to point fingers at any one, but to join hands with all stakeholders to do the right things”.

On the key socio-economic challenges facing post-war Sri Lanka: “On the domestic front, my biggest worry is the relatively high rate of youth unemployment. While the overall unemployment rate is a mere 4.5%, 18.1% of our youth between the ages of 15 to 24 years are unemployed, and 10.7% of those qualified with GCE A/L or more are unemployed. At the same time, almost all sectors of the economy are experiencing labour shortages. What a paradox!”“That youth unemployment was one of the major causes of the North-East conflict as well as the several Southern uprisings should never be forgotten”.

Realizing the Post-war Miracle:





ed in




Page 9: Jly Dec 2011 TE Digest

Jul-Dec 2011 Issue | Talking Economics | IPS 7

We created a ‘wordle’ (using the online tool available at www.wordle.

net) of Dr. Ekanayake’s full speech, capturing key words and highlighting

them according to the frequency with which they featured in his speech.

Further emphasizing the need to ad-dress youth unemployment: “We of the private sector need to find ways of employ-ing the youth meaningfully and in a produc-tive manner. If we leave it to the govern-ment alone, to absorb them to the public sector, then, the budget deficit will widen, inflation will revert to where it was, interest rates will rise and the currency will depreciate”.

On the need to be wary of continuing regional disparities in prosperity: “My second big worry is the continuing sharp difference between the level of prosperity of the Western Province and that of the others. While the poverty head count in the Western Province is a mere 4.2%, it is more than 10% in Northern, Eastern, North Western, Uva and Sabaragamuwa Provinces. Again, if the sole responsibility of addressing this is left to the government, then, the same story of widening budget deficit due to direct and indirect subsidies for poverty alleviation, rising inflation along with interest rates, and depreciating currency will recur”.

In a recent article on this blog, we looked at some key highlights in regional economic performance, including poverty and private en-terprise growth (‘2010: ‘Phenomenal Year’ for Corporates, but Shared Growth across Sri Lanka Remains a Challenge’ - http://bit.ly/oHv04G)

In that, it was highlighted that although the Colombo Stock Ex-change benchmark All Share Price Index (ASPI) almost doubled from 3,494.6 to 6,635.9 between January 2010 and December 2010, regional growth disparities are ever prevalent – the Western Province continues to dominate the country’s economic geography (45% of GDP in 2010), and most other Provinces have not grown their GDP share in the last 5-6yearsbyanysignificantproportion.

The article also emphasized that while the total number of industrial enterprises increased from 2,340 to 2,404 between 2009 and 2010 in the Colombo district, the increase in the Anuradhapura district, for example, was only from 27 to 30 during the same time period. Moreover, regions outsidetheWesternProvincehavenotseenasignificantriseinSection17 registered BOI industrial start-ups between 2006 and 2010, with Co-lombo and Gampaha continuing to dominate the BOI industry geogra-phy. While the poverty rate in Colombo ranges at 3.6%, the poverty rates of Batticaloa and Moneragala are 20.3% and 14.5% respectively.

On the need for the private sector to ‘get on board’ with ad-dressing this challenge of regional growth disparities, Dr. Ekanayake said, “Here we need to find ways and means of building sustainable value chains on a win-win basis with the provinces…”“I am not calling for charity. What we need are sustainable, innova-tive business models, which will increase economic value addition in the provinces thus creating new jobs”

On the need to address issues on the political front: “A nagging worry, however, is that addressing economic issues alone may not be sufficient for the people of the North and the East to be happy and content”

“What we as the business community can do to help this process is to build trust between communities based on mutually beneficial commercial transactions, value chains, investments and creation of job opportunities without discrimination. As a Chamber, we must represent the interests of the regions more and more”

On what Sri Lanka should do in preparing for emerging global threats and changing global dynamics: “On the global front, I worry about potential consequences to us arising from the US and European public debt crises, the on-going ‘re-balancing’ from the West to the East, political upheavals in the Middle East which is an important market for us, and then the volatility of global petroleum and food markets”“We should be able to develop some degree of cover from these develop-ments which are beyond our control by whole heartedly contributing to the domestic supply of energy – which in our case will have to be non thermal - and in food production via agriculture, animal hus-bandry and fisheries, and exporting more and more to South Asia and then to the rest of the Asia” “Building much closer economic relations with India has to be an essential part of this effort…”

A previous article on this blog highlighted the need for Sri Lanka totakeacloselookatthechangingglobaleconomiclandscapeandfindstrategicwaysoffittingin.See‘AsGlobalEconomicPowerShifts,WhereWill Sri Lanka Place Herself ’ - http://bit.ly/k3DOOq)

On Sri Lanka’s dependence on special trade concessions: “We can also learn to be more and more self reliant, asking for a level play-ing field and not for any special concessions. Obviously we do not want special barriers thrown across our path either”

In conclusion, he asserted: “The dream of making Sri Lanka the ‘Wonder of Asia’ is realizable – if each of us can contribute what little we can - before asking others to do the same, the totality of what we achieve together will indeed be very large”

a pDF version of the full text of Dr. Ekanayake’s speech is available for viewing on our blog

USJP Student said...Dr. Anura Ekanayake in his speech in reference to the unem-ployment of youth says that "we of the private sector needs tofindwaysofemployingtheyouthmeaningfullyandinaproductive manner". My question is how could the private sector contribute in this aspect in other words what are these aspects





Page 10: Jly Dec 2011 TE Digest

IPS | Talking Economics | Jul-Dec 2011 Issue 8

Results from a Snap Survey of Job Seekers and Issues of

Korea Calling:

Youth Unemployment

Over 4,000 youth gathered along Havelock Road near the Police Field Force Headquarters on Monday to apply for jobs in South Korea, following an announcement by the government under a bilateral foreign employment scheme with South Korea; an arrangement that could potentially provide employment in Korea to thousands of Sri Lankans annually.

This centre in Colombo was one of 29 centres islandwide set up by the Ministry of Foreign Employment that are distributing applications for Korean employment (particularly language tests), and attracted youth from various districts who had queued since afternoon the previous day. While registration of applicants began at

around8am,by11.15amtheofficialsalongwithPolicesupport, announced to those queued that the centre is now closed as the maximum number of 3,500 applicants had been registered.

Just prior to this, and the slight tension that ensued following the announcement, IPS researchers conducted a snap survey of a sample of 41 youth in the queue, togetsomeinsightintotheirprofile,educationlevel,employment status, and reasons for seeking migrant work inSouthKorea.Thisarticlediscussesthekeyfindings,supplemented by background information on youth unemployment and foreign employment migration from current research by the IPS.

IPS | Talking Economics | Jul-Dec 2011 Issue 8

By Anushka Wijesinha, Roshini Jayaweera, Nethmini Perera and Nisha Arunatilleke


ed in





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Jul-Dec 2011 Issue | Talking Economics | IPS 9

Youth unemployment presents a critical challenge in post-war Sri Lanka (see comments by IPS Board Mem-ber Dr. Anura Ekanayake on this issue at the Ceylon Chamber AGM recently - http://ipslk.blogspot.com/2011/08/realizing-post-war-miracle-challenges.html)

The International Organiza-tion for Migration (IOM) estimates that, annually, Sri Lanka sends over 250,000 workers on foreign employ-ment worldwide. According to data published by the Central Bank of Sri Lanka, remittance inflows from Sri Lankan workers abroad amounted to 8.31% of Sri Lanka’s GDP in 2010, second only to export earnings from goods, but far above that of av-erage FDI inflows.

According to IPS research, dur-ing the period 2005-2009, South Ko-rea had been the dominant destina-tion for Sri Lankan migrant workers compared to other East Asian coun-tries. A bilateral agreement between the Sri Lankan and South Korean governments on migrant workers has been a key factor influencing this.

What Does the Snap Survey Reveal?

The results from our snap sur-vey show that the majority of the job seekers were males (78%) in the 25-30 age group, and the hometown districts of nearly all of them were either in the Western or the South-ern Province (see Table 1). Colombo and Matara showed the most num-ber of applicants, counting 26.8% and 22% respectively. An important point to note is that, overwhelm-ingly, nearly 66% of those queuing to apply to work in Korea had passed their GCE A/L examinations (see Figure 1). This is consistent with the overall numbers for Sri Lanka. Ac-cording to the Labour Force Survey of the Department of Census and Statistics, unemployment in Sri Lan-ka is highest among those in the 20-24 age category who have passed the GCE A/L exam, a staggering 37% in 2009 (see Figure 3).

Moreover, according to this data, the highest unemployment rate for those with A/L qualification is in the Southern Province (20% com-pared to a national average of 12%), followed by the North Central, East-ern and Central Provinces (see Fig-ure 4).

Colombo Gampaha







District oF rEsiDEncE %

78 22% %

gEnDEr proFilE







%agE proFilE

Table 1:


Table 2:


26.8%Higher Wages

14.6%Getting jobs in Korea

easier than other receiving countries

12.2%SL Government

support to migrant workers to Korea

17.1%Other reasons (job

security, joining husband or friends, etc)

9.8%Perceived to be a more favourable environment

than other receiving countries

19.5%No particular









9.8 22






Any Work

Manual Labour

General Factory Worker

Specific Occupation






Majority of Korea job seekers stated they would do 'any work'

Majority of those seeking basic labour jobsinKoreawereA/Lqualified

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IPS | Talking Economics | Jul-Dec 2011 Issue 10

While between 1989-2006 the majority of out-migrants from Sri Lanka were female, by 2008 the proportion had equalized. In recent years, more males have out migrated for foreign employment than females. According to data available for 2009, the Western Province sends the highest number of migrant workers overall, of about 27.3%. The Southern Province sent only around 8.7%. The top 4 sending dis-tricts in 2009 were Colombo – 12.4%, Kurunegala – 9.5%, Gampaha – 9.6%, Kandy – 9.4%. Five districts - Colombo, Kurunegala, Kandy, Gampaha and Kalutara - accounted for 45% of the total departures for foreign employment.

Although we may be quick to assume that most of these Ko-rean job aspirants were unemployed youth, the survey revealed that in fact the majority were already employed in Sri Lanka, around 63.4% of those surveyed. Around 36.6% were unem-ployed. When the respondents were asked as to their main rea-sons for seeking work abroad as migrant workers, 38% cited ‘low wages’ or alternatively ‘low income’ in Sri Lanka, while around 9% cited ‘limited job prospects’. This would indicate that these youth were suffering from underemployment rather than unemployment, and the relative higher wages in countries like Korea was the key attraction for out-migration, rather than pure unemployment in Sri Lanka. (Of those unemployed, the duration of their unemployment ranged from 7 months to 11 years, but on average, was unemployed for around 2 years.)

Of those surveyed, the majority of 61% reported that they did not have any form of vocational or professional training, with only 39% responding that they do. This is an important point to bear in mind, in the context of the new thrust of the country’s skill development agenda towards increasing the

numbers of those with vocational training, under the National Vocational Qualification certification programme and the UNIVOTEC system. This also has an implication on the skills profile of migrants that Sri Lanka sends, where the government is keen to send workers with better skills rather than manual labourers.

The research team also inquired as to what kind of work the job seekers were interested in obtaining. The majority, 58.5% stated that they were seeking ‘any type of work’, while 12.2% stated that they sought ‘factory work’, and another 12.2% sought ‘manual labour’, and 17% sought specific occupations (for example, ‘working in a printing press’, ‘business adminis-tration’, ‘technician’, ‘motor mechanic’, ‘mechanic’, ‘welding’, and ‘sewing’). It appears that nearly all of the applicants had tar-geted Korea as their preferred foreign employment destination, as the survey revealed that nearly 88% had either completed or were in the process of completing a Korean language course.

Better Migration Management at International Level Through Bilatarel MOUs

Bilatarel MoUs of the type signed between Sri Lanka and South Korea, while provided a systematic mechanism for send-ing an agreed number of workers each year, also have important migration management implications, in an era of increasing for-eign worker harassment in countries in the Middle East. In an unpublished report on Sri Lankan migrant worker challenges prepared by the IPS, the benefits of bilateral MoUs with regard to migration management have been emphasized:

•A MoU with a labour receiv-ing country ensures the human rights of the migrant worker such as minimum wage, decent work-ing environment, job security and certainty during the contracted period. So, the rights of migrant workers to South Korea may be better protected than those to many Middle Eastern countries. Recently, there were reports of Sri Lankan migrants in Iraq be-ing denied their basic salaries for months, resulting in street pro-tests by them. •BecauseofthisMoU,theSriLan-kan government provides loans for the migrant workers to cover their migration cost through state banks. This is a good opportunity for migrant workers as the mi-gration cost is high in Sri Lanka. One of the qualitative studies on migration conducted by the IPS in 2011, reveals that most of the migrants from the Anuradhapura district have mortgaged their ag-ricultural lands to cover the mi-gration cost. •Migrantworkershave to repaythe loans when they migrated. Thus, their banking activities are improved and it will reduce the informal money channeling in Sri Lanka.

Figure 3: Unemployment in Sri Lanka by Age and Education45




Below O/L Passed A/LPassed O/L More than A/L

Total 15-19 20-24 25-29 Total 15-19 20-24 25-29 Total 20-24 25-29 Total 20-24 25-29

Below O/L Passed O/L More than A/L





Figure 4: Unemployment Level - By Level of Education and Province (%)

Below O/L

Passed A/L

Passed O/L

More than A/L

Below O/L

Passed A/L

Passed O/L

More than A/L

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Jul-Dec 2011 Issue | Talking Economics | IPS 11



•SamanKelegama,(2011),“Migration,RemittancesandDevelopmentin South Asia”, Sage Publication Pvt. Ltd •Arunathilaka.N,Jayawardhana.P.andWeerakoon,D(2011).“Migra-tion, Remittances and Development in Sri Lanka” in “Migration, Re-mittances and Development in South Asia”, Ed Saman Kelegama Sage Publication Pvt Ltd. •DeshalDeMelandSuwendraniJayaratne(2011).“Migration,•RemittancesandDevelopmentinMaldives”in“Migration,Remittanc-es and Development in South Asia”, Ed Saman Kelegama ,Sage Publica-tion Pvt. Ltd. •JayawardhanaT.andJayaweera,R(2011).“Migration,RemittancesandDevelopment in Afghanistan” in “Migration, Remittances and Develop-ment in South Asia”, Ed Saman Kelegama, Sage Publication Pvt. Ltd. •ArunatilakeN,S.Jayaratne,P.Jayawardhana,R.JayaweeraandDushniWeerakoon (2009) “Impact of Remittances on the Household of the Emigrant and on the Economy of the Migrant’s Country: Sri Lanka”, Study funded by South Asia Network of Economic Institutions (SA-NEI)

Research Studies

•IPSiscurrentlyinvolvinginastudyon‘MigrationandDevelopment:Investment in Agriculture and Food Security” funded by the Food and Agriculture Organization (principal researchers: Dr. Parakkrama Sa-marathunge and Roshini Jayaweera)Presentations•RoshiniJayaweerawasapanelDiscussantoftheconferenceon“Insti-tutionalizing Regional Approaches to Migration Management in South Asia” organized by the IPS•Priyanka Jayawardena,ResearchOfficer,presentedapaperon“Im-pact of Remittance on the Household Welfare of the Emigrants in Sri Lanka” at the Asia Forum on Remittances and Development, Colombo, 11 - 12 January 2011.•RoshiniJayaweera,ResearchOfficer,presentedapaperon‘ImpactofRemittances on the Households of the Emigrant and on the Economy of the Migrant’s Country”, Dhaka, Bangladesh, 30th March, 2010•Roshini Jayaweera andThilani Jayawardhana presented a paper in‘Migration, Remittances and Development Nexus in Sri Lanka’5th May, 2009


•TheIPSincollaborationwiththeFriedrichEbertStiftung(FES),Co-lombo, organised two international conferences on ‘Institutionalizing Regional Approaches to Migration Management in South Asia’ in No-vember 2010 and 2011. •The Institute hosted a SouthAsian conference on“Migration, Re-mittances and Development Network in South Asia”, in collaboration with FES, 4-5 May, 2009 in Colombo.

Dee said...good article. however, i read somewhere that there were several locations fr collecting/registering applications. So I’m assuming the higher numbers at the Colombo centre were obvious given proximity.

deshal d said...glad you refer to youth underemployment. was just looking at the Q1 labour force survey and youth unemployment is at its lowest in a decade (12.8% in Q1 2011, down from 19.8% in 2003) - and has been steadily declining. therefore underemployment is the more pertinent issue in this case.

Korea Job Seekers in Broader Context

Unemployment levels have come down over the last decade, but they are still very high amongst outh (20 to 29 year olds), particularly the more educated (see Figure 3). Unemployment is more of a problem outside the Western Province (see Figure 4), particu-larly for the more educated. But, it is surprising that even in the Western Province, where the unemploy-ment rates are very low, even for the more educated individuals, youth are scrambling to find employ-ment abroad. It is also alarming that a majority of those aspiring to go to Korea are willing to go for any type of job, including for manual labour.

First, this suggests that many youth aspiring to go to Korea, many of whom are already employed, are not satisfied with their employment situation in Sri Lanka. The Labour Force Survey data of the DCS reveal that of those in the non-agriculture sec-tor, about a half of the employed are in the informal sector. Even in the Western Province, around 40-50% of those employed in the non-agriculture sec-tor are working in the informal sector. This suggests a need for creating better jobs in the country.

Second, the data suggest that the job aspira-tions are not very high even amongst youth who have passed O/Levels and A/Levels. A majority of them are willing to go abroad to do ‘any job’. This indicates the need to rethink skill development at the senior and tertiary education levels, such that school leavers are better prepared for the labour market.

So, overall, here are some key takeaways from our snap survey and our background analysis:

•Theunemployment situation foryouth inSriLanka is clearly a pressing issue, and needs to be addressed as an urgent priority in post-war Sri Lanka to ensure inclusive growth and prevent social discord


were in the 25-30 and also the 20-24 age cat-egory.


ing Korean jobswereA/Lqualified,58.5%statedthat they are seeking ‘any type of work’ in Korea


main reason cited by the youth for seeking for-eign employment in South Korea





Talk to the Authors | [email protected], [email protected], [email protected], [email protected]

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IPS | Talking Economics | Jul-Dec 2011 Issue 12

Pulling Ourselves Up:

taxation, development

by Prof. Mick Moore*Institute of Development Studies (IDS), University of Sussex, UK

Inourfirstguestarticleon‘Talking Economics’, British

political-economist and taxation specialist, Prof. Mick Moore,

argues that, as developing countries strive to move away

from their dependence on foreign aid, the discussion on the role

of tax in development is getting renewed attention. ‘Taxation’ is

being increasingly seen not purely asatechnicalfiscaltopic,but

also in the context of broader imperatives of governance,

accountability, and state-building.

In March of this year, the IMF published a new policy paper on Re-source Mobilisation in Developing Countries. Much of the advice that it offers to developing countries is very familiar, including the need to simplify tax systems, to broaden tax bases by reducing the range of tax exemptions and tax holidays, and continuously to im-prove the quality of tax administration. However, Resource Mobilisa-tion also includes some departures from the previous IMF orthodoxy. Three are particularly significant. First, it states clearly that many governments need significantly to increase the proportion of national income that they collect in taxes to fund a range of social needs. Second, it argues the case for more emphasis on property taxes, es-pecially as a way of dealing with the neglected problem of adequately funding sub-national governments. Third, it acknowledges that taxa-tion may serve purposes beyond simply raising public revenue, and talks positively of ‘taxation and state building’ – if only to step back immediately by suggesting that the meaning of the phrase is unclear.

The Role of Taxation: Renewed Debate

Resource Mobilisation is not going to set the world afire. However, in the context of the narrow and rather staid and stable world of or-thodox public finance specialists, it does represent a real policy shift. What brought this about? Why did the IMF feel the need to declare a new policy stance? One possible answer is that it simply represents lessons learned from experience. The new ideas are indeed pragmatic and sensible. The IMF has shifted its tax advice in the right direc-tion. But the shift does not result only from the power of reason and experience. It also reflects the fact that a number of other in-ternational organisations are now competing with the IMF to define international policy in the field of ‘taxation and development’.

While the IMF is still the main repository of technical expertise, other organisations have been setting the pace in the global policy debate. The G20, the European Commission and the European Par-liament have decided that revenue mobilisation is a key dimension of development policy. Hilary Clinton made this the main subject of a speech in Brussels this summer. The OECD, that has long been the main alternative source of expertise and influence to the IMF, has been getting a much wider audience. Even the sleepy United Nations has realised there might be something interesting here. Below the radar, aid and development organisations probably have organised more seminars, meetings and conferences on ‘tax and development’ in the last two years than they did in the previous twenty. The topic

away fROm aId&


ed in





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Jul-Dec 2011 Issue | Talking Economics | IPS 13

is hot, and the IMF feels the need to show that it is being responsive. But why is it so hot?

The dominant reason is the way in which the 2008 private banking crisis has transmuted into fiscal stresses and crises in most of the richer countries. The least fortunate governments are struggling even to meet their immediate financing needs without defaulting on their debts. Most of the others face large and long term public sector defi-cits, which they will have to finance just as their own populations age and become more of a fiscal burden. All governments are looking for revenues, and for ways of closing tax gaps and loopholes. Under pres-sure from the richer countries, tax havens have been rushing to clean up their acts, and get off the OECD’s list of ‘uncooperative jurisdic-tions’. The US Treasury has begun to pummel and bully Swiss banks into cooperating more with US tax authorities. Developing countries are not the main actors in this drama, but they now seem to merit at least a place on the stage. Previous campaigns drawing attention to the extent of capital flight from poor countries, facilitated by weak tax administration, did not get much attention from rich country governments. This is now changing.

If tax evaders begin to lose the generous protection afforded them for decades by Swiss banks and small Caribbean tax havens, they will be looking create new havens in places like Brazil, China, India, Nigeria or South Africa? Not only do the OECD governments now see an in-terest in discouraging such countries from becoming tax havens, but they also increasingly would like the active cooperation of their tax authorities in tracing international capital movements and identify-ing tax evaders. That cooperation in turn implies that tax authorities in the developing world become more powerful and effective. Inter-ests have begun to converge. OECD governments can support with genuine enthusiasm new international rules and practices that will simultaneously help them close their tax gaps and enable developing country governments to raise more revenue to finance the achieve-ment of the Millennium Development Goals.

Away from Aid and the Taxation-Governance Link

While it is the urgent fiscal needs of many OECD government that has propelled ‘tax and development’ to the centre of the current de-velopment policy stage, there is more of a back story. The ground has been under preparation for several years. First, over the past dec-ade, a number of international advocacy organisations have become increasingly active in exposing the extent to which rich people and

transnational companies have been funnelling cap-ital out of poor countries, partly as a result of weak tax administration, sometimes in volumes that seem to equal or even exceed the levels of aid going in the opposite direction. The figures remain very uncertain and disputed.

But organisations like Tax Justice International, Global Financial Integrity, Christian Aid, and Ac-tion Aid have sowed serious seeds of doubt. Does it make sense continually to pressure governments of richer countries to increase aid to Africa if simi-lar sums are coming back clandestinely from Africa to the OECD countries and to tax havens as a re-sult of tax evasion and transfer mispricing? Second, development aid itself has come under more sustained critique. Until a decade or so ago, aid generally was presented in public as a good thing and a moral obligation for rich countries. By arguing that aid might in some circumstances do harm to recipients, authors like Bill Easterly (2006) and Dambiso Moyo (2009) brought into the open views increasingly shared even by people experi-enced in the aid business.

The notion that Africans would be better off with-out foreign aid – and therefore implicitly with higher domestic tax burdens – is not entirely new. It has recently become more widespread, and be-gun to seem more practicable, at least for some countries. There is now more informed discussion about the possible trade offs between aid and do-mestic tax as ways of financing the expenditures of the governments of poor countries. Norway, the world’s most generous aid donor, plays an impor-tant role in encouraging this debate.

Third, a number of academics specialising in de-velopment began to argue, especially on the basis of comparative historical experiences, that govern-ments that were not financed principally from broad general taxation – but rather from aid or natural resource revenues – were unlikely to gov-ern well. Taxation does not serve simply to raise

revenue. It also has state-building di-mensions. (See D. Brautigam et al., eds., Taxation and State-Building in Developing Countries, 2008).

African Tax Authorities: Surpris-ingly Exemplar

Finally, and most recently, there is emerging from Anglophone Africa in particular something of profes-sional movement among senior tax administrators animated by this no-tion that good tax policy and admin-istration can help build states and nations, and by a mission to end aid dependence. This movement has two tangible historical roots. The

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first is in South Africa. Tax is one of the success stories of post-Apartheid governments.

The African National Congress set out to raise more revenue to finance what it often termed the ‘social debt’ of Apartheid – a legacy of poor education, bad housing and deficient health facili-ties. The South African Revenue Service (SARS), strongly directed from the top by senior members of the African National Congress, became a hive of institutional experimentation and innovation. Many senior posts were filled by new recruits from the private sector.

The strategy was to identify the best tax practices from around the world, and adapt them to South Africa. SARS met its revenue targets, and became an inspiration for much of Africa. There were will-ing learners. The economic crises and stagnation that affected much of Africa from around 1970 until recently prepared the ground for some ma-jor reforms in tax administration from the 1990s onwards. In most Anglophone African countries, responsibility for tax collection has been taken away from ministries of finance and lodged in new, partially autonomous revenue authorities. In some

Prof. Mick Moore is currently Professo-rial Fellow at the Institute for Develop-ment Studies (IDS), University of Sussex, and is also the founding Chief Executive OfficerofthenewInternationalCentrefor Tax and Development (ICTD) based attheIDS.Mickhasdoneextensivefieldresearch in Asia and Africa, especially Sri Lanka, Taiwan and India. He has taught at the Massachusetts Institute of Technol-ogy, USA. His focus research and policy

input areas include taxation, governance; politics and power; state ca-pacity; and public policy. He has written extensively in international journals and other publications worldwide.

the ips collaborated with the ictD to hold an ‘international conference on taxation, governance and Development’ in november 2011.

cases, there were large scale dismissals of existing staff and fresh re-cruitment. This change coincided with the large scale adoption of digital information technology that has the capacity radically to im-prove almost every dimension of the tax business. Many senior staff has been recruited from the private sector.

While no African country can match South Africa’s record, there is a strong sense of collective achievement, and of being on the right side of history. Senior tax administrators recruited from the private sector tend to be more articulate and more willing to speak out than career public servants. This is reflected in the establishment in a well-funded new pan-African professional association, the African Tax Ad-ministration Forum (ATAF - http://www.ataftax.net/). State-build-ing was the theme of the conference held in Pretoria in 2008 where the decision to create ATAF was taken. The South African Revenue Service currently provides secretariat facilities for ATAF, and the Commissioner-General of the South African Revenue Service was elected as the first Chair of the ATAF Council. He also co-Chairs the OECD’s Informal Task Force on Tax and Development, and thus has a very direct influence on the international policy debate. ‘Tax and development’ is very much on the agenda, not purely as a technical fiscal topic, but also as a dimension of broader concerns about governance, accountability and state-building. The debate is animated by an optimistic sense of movement, progress and mission, not by pessimism about threatening or intractable problems. And Africa, for once, is in the lead.

and Attiya Waris of the African Tax Justice Network. The conference explored the political-economy of taxation, exposing the Sri Lankan audience, particu-larly stakeholders in the taxation arena, to the new thinking on the link be-tween taxation/government revenue and governance and development. It also explored the African successes in taxation and tax administration, and options and strategies for greater domestic revenue mobilization in Sri Lanka in the context of the country needing to move away from dependence on foreign aid.The thematic areas of the conference sessions were: ‘Global views on Taxa-tion, Governance, and Development’; ‘Taxation to Support Post-war Growth: Emerging Challenges for Sri Lanka’; ‘Tax Incentives for Investment: Making it Cost-effective and Competitive’; ‘An All-round Tax Success: The South African Story’; ‘Tax Administration Reform’; and ‘Decentralized Revenue Mobilization: Challenges and Opportunities’.The final session was a ‘Talking Economics’Open Forum on ‘Taxation Matters for Everyone: The Challenge of Inclusive Tax Policy-making’. The opening ceremony of the conference saw the attendance of Hon. Dr. Sarath Amunugama, Senior Minister for International Monetary Cooperation and Hon. D.E.W. Gunasekera, Hon. Senior Minister for Human Resources. Participants includedIRDofficials,taxexperts,economists,researchers,privatesectorpro-fessionals, governmentofficials, and leadersofbusinesscouncils/chambersofcommerce, journalists, and representatives from relevant civil society organiza-tions. Several IPS economists made presentations and moderated sessions at the conference.

IPS together with the International Centre for Tax and De-velopment, UK, organized an International Conference on Taxation and Development under the theme ‘Pulling Our-selves Up: Taxation, State-Building, and Away from Aid’ dur-ing the 3rd and 4th November 2011 at the Ceylon Con-tinental Hotel. The Inland Revenue Department (IRD), Sri Lanka Institute of Taxation, and the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) were partner organizations in this Conference.While seminars and discussions on taxation matters are ubiquitous in Colombo, particularly in the pre-and post-Budget period each year, the key value addition of this conference was that the Sri Lankan audience gained exposure to the latest thinking on taxation issues from tax practitioners and experts in developing economies, which Sri Lanka can relate to. Uniquely, the international resource persons for this conference were drawn from African countries, including Allen Kagina, Director Gener-al of the Uganda Tax Authority, Aiden Keanly, Director In-ternational Relations of the South Africa Revenue Service,

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Posted in August 2011

by Kithmina Hewage and Harini Weerasekera

As Sri Lanka is on the cusp of a new economic era, the world economy could be on the cusp of a new economic slowdown. This article gives a quick snapshot of the current state of the world economy, particularly recapping the events of the past few weeks indicating the ongoing fragility of Western econo-mies. In closing, it puts forward some issues for debate on the impact of these developments on Sri Lanka.Although media debates on prospects of another serious eco-nomic meltdown continues apace, it is more apparent that, rather than the prospects of a serious collapse, it is the overall uncertainty and lack of confidence pervading these economies that are blighting the current global economic climate. At the outset of the financial year, the IMF and World Bank identified a possible phase of global economic recovery, which has failed to materialize thus far. According to the latest IMF World Economic Outlook Update (June 2011), despite some ‘negative surprises’, global growth in Q1 of 2011 was around 4.3%. Further, although downside risks have been recognized, the latest IMF forecasts for the EU show upward revisions. The update further remarks, that, “growth in the advanced economies is projected to average about 2.5% during 2011–12, slightly weaker than in the April 2011 World Economic Outlook. This would represent a modest decelera-tion from an average of about 3% in 2010”. US growth in Q1 of 2011 was only 0.4% with con-sumer spending at its weakest in 2 years. The Econo-mist newspaper calls America’s outlook ‘grim’; statis-tical revisions have revealed a weaker than assumed recovery, and the odds of a ‘double dip’ recession to be as probable as 50%.(1) Over the past 6 months the US has grown at an annualized rate of merely 0.8%, which was well below expectations(2). The Bureau of Economic Analysis (BEA) revised US numbers through the recession, to reveal a down-turn more severe that previously understood (3).Several continuing challenges have had a signifi-cant influence on these original forecasts causing a reevaluation of the performance of the global econ-omy. Given the magnitude of debt and fiscal issues

involved (as discussed below), particularly in the US and Euro Area, recovery from global recession will be tenuous and may take a fair amount of time, contrary to preceding expectations.


Following weeks of political maneuvering and distress calls from politicians and economists, the American political struc-ture succeeded in agreeing on a debt deal that averted a US sovereign default, the first in the country’s history. Yet, just two days following the passing of the debt deal, indicating contin-ued investor uncertainty, the New York Stock Exchange suf-fered severe losses. The Dow Jones Industrial Average plunged more than 500 points on the 4th of August, its ninth decline in 10 sessions. This is the Dow's ninth-worst day ever; the worst being a 777-point drop in September 2008 following the Leh-man Brothers collapse(4). The end of day trading on Monday 08th August 2011, the first full day of trading after the downgrade of US credit rating, re-sulted in Wall Street’s worst day since 2008 and its performance has proven to have a resonating effect on Asian markets, trig-gering a global equity sell off. What should be noted though is


Continuing ConcernsSnapshot of

2010 2011Jan April June

World % % % %

IMF 5.0 4.4 4.4 4.3

World Bank 3.9 3.3 - 3.2


IMF 2.3 3.0 2.8 2.5

World Bank 2.8 2.8 - 2.6


IMF 1.8 1.5 1.6 2.0

World Bank 1.7 1.4 - 1.7

Growth forecasts by IMF and World Bank

Sources: IMF World Economic Outlook (WEO) Update (January 2011), IMF World Economic Outlook (April 2011), IMF World Economic Outlook Update (June 2011), World Bank Global Economic Prospects (GEP) Report 2011, World Bank Global Outlook in Summary 2009-2013

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IPS | Talking Economics | Jul-Dec 2011 Issue 16

that the negative turnover in the US market is not solely due to the debt deal or any single domestic matter, but rather a culmination of reasons pertaining to the economy in general and economic problems faced overseas, particularly in Europe.

AAA to AA+: An Unprecedented Fall, but Limited Global Impact? The downgrading of the credit rating for the United States of America from an AAA to an AA+ rating by the US credit rating firm, Standard & Poor’s, dealt a severe public relations blow to the US, but hardly an indication of a possibility of US debt default.

Given that it is only S&P that has downgraded the US credit rating it could, if at all, add more fear and uncertainty to an already sluggish economic recovery, rather than result in a col-lapse of the economy itself. It is important to understand that the ratings downgrade by S&P is more of a reflection of macro-economic and political factors and not necessarily default risk. Ironically, it is interesting to note that following assurances made by the Federal Reserve on the 09th of August, 2011 the US stock market performed unexpectedly well – the best perfor-mance during the last two years. Moreover, US Treasury Bills suffered little from the ratings downgrade announcement, and global investors continue to park their money in them.Moreover, the fact that it is in the interests of all to ensure that the dollar remains the reserve currency, also contributes to the fact that such a downgrade has limited global impact. Especially given that a potential drain away from US Treasuries will lead to significant losses to those who hold dollar reserves (such as China, the biggest holder), the international community seem to have taken particular interest to limit the global impact of a downgrade in US credit ratings. Essentially, there is no alterna-tive to dollar as a reserve currency for now (especially in view of euro problems). Therefore, it has become a necessity that the dollar remains stable for the benefit of the global economy.

Investor Confidence: Business and GovernmentThe problem for the US and European markets is not a lack of liquid cash available to major companies for investments, but a general lack of confidence in the market, more so, the govern-ment. Since the expansive stimulus packages that were effective since the height of the financial crisis in 2008, by choice or by necessity, a symbiotic relationship between the market and the government was created. As such, today, both the stock mar-ket and the economy have become dependent on government support. With greater emphasis by policy makers on spending cuts, the markets are showcasing a growing sense of insecurity, as safety nets for companies are perceived to be shrinking. That creates worries about economic growth, hurting stocks and oth-er risky assets that depend heavily on the economy. (5)


While the recovery of the American economy has been slug-gish, the global economic situation is compounded by concerns surrounding the debt crisis in European economies. A string of fiscal crises in Greece, Portugal and Ireland (less prominent of late) have fuelled fears of a collapse of the Euro Zone (Greece being the hardest hit economy by the financial crisis, with rev-enues falling 15% in 2009). Following crises in these countries, and a re-emergence of concerns in May this year regarding Greek debt refinancing and austerity measures taken to coun-teract it, Europe is now faced with the new possibility of dealing with a separate debt crisis involving Italy and Spain.In the EU, especially in countries where sovereign debt has increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.(6)

Italy and SpainThe matter seems to have culminated into greater insecurities with financial tensions rising in both in Italy and Spain with an ever increasing level of public debt in both countries. This has

53%Spain Debt

of GDP

79%Portugal Debt

of GDP

153%Greece Debt

of GDP

101%Italy Debt

of GDP

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in turn fuelled worries of default and another potential bail out with the assistance of the economically stronger nations in the region, i.e., Germany and France. On a brighter note though, both Italy and Spain have taken proactive initiatives to address financial issues pertaining to their respective country, thereby somewhat reducing this risk.

Response by the European Central Bank (ECB)Given insecurities regarding the ‘PIIGS’ economies (Portugal, Italy, Ireland, Greece, Spain), there is a growing call for proac-tive measures by the ECB in order to stabilize the situation. Saddled with large public debt and high, and potentially unsus-tainable, debt-to-GDP ratios, fiscal reforms regulated and cen-tralized through this European body may become a necessity. The expansion of the SMP (Securities Markets Programme) to include bonds of Spain and Italy by the European Central Bank (ECB) is also seen as a positive step in reassuring all those involved. The SMP along with the European Financial Stability Facility (EFSF) are essentially designed to get the Euro through the crisis so that fiscal reform can take place in a more orderly fashion.(7) However, albeit such intervention may be a tempo-rary fix, it is not the cure for the problem. The argument holds that the only way to prevent a complete breakdown of the Euro is by stronger AAA rated economies in the Euro zone such as Germany stepping forward, risking their own credit, in order to refinance loans at reasonable interest rates for the likes of Spain and Italy. It is however, a role Germany is eager to avoid and unwilling to accept, with the consequences mounting as it prolongs such efforts.


Sri Lanka is a small open economy dependent on its trade inte-gration with the world economy. As Sri Lanka is on the cusp of a new economic era, the world economy could be on the cusp of a new economic slowdown. Yet, it may not be necessary to revise Sri Lanka’s growth fore-casts for this year despite these concerns, as much of the current growth is being driven less by exports, rather, more by domestic stimulus – heavy infrastructure spending.No doubt, Sri Lanka’s exports are likely to be adversely affected, particularly as the bulk of the country’s exports are to the very markets that are currently in limbo. Rethinking Sri Lanka’s ex-port destination concentration is an urgent need. For decades now, Sri Lanka has relied on Western markets for its export earnings. For much of the last decade, the bulk of Sri Lankan exports (ranging from 55 to 60%) have been to the US and EU. In 2010, 21% of total exports were to the US (8) and 35% of total exports were to EU countries (UK-12%, Germany-5%, other EU countries-13% (9)). However, with the weak recovery, sluggish consumer spending, depressed job market, woes due to austerity measures (mainly in Europe), Sri Lankan exports to

these markets are under severe stress. The case for developing stronger trade ties with apparently healthier economies of Asia couldn’t be stronger, also given that it constitutes for a large share of FDI flows and other development finance to the coun-try. India and China are growing, along with East and South East Asia; but currently account for only around 16% of Sri Lanka’s total exports (10). Sri Lanka has been increasingly losing its global export share over the last few years, having a comparatively weak export per-formance globally. In the backdrop of weak consumer demand in our key markets, is it likely that this situation would worsen? In the medium term, the outlook for the US and EU is, there-fore, decisive. Improving our export performance, and thus our export earnings, becomes an added imperative in the context of increased borrowings from international debt capital markets, which means the need to service growing external debt service obligations.

Among the possible impacts on Sri Lanka resulting from the fragile economic health in the West as discussed in this article, here are some important issues for debate:

• A global slowdown would cause oil prices to move downwards, which will benefit an oil importer like Sri Lanka, particularly in containing inflation. But what about other commodity prices? How will changes in commodity prices as a result of a global slowdown affect Sri Lanka? • The impact of this fragility on investor confidence is likely to be high, as is the likelihood of high risk averseness by the global investor community. In that backdrop, what will be the outlook for FDI and other financial flows to Sri Lanka?• Will we see more inflows of ‘hot money’ to our region’s emerging markets, from investors seeking better returns? Are Sri Lanka’s current safeguards, like the cap on foreign investment in government securities, sufficient? • Is there a likelihood that credit rating agencies take a tougher approach in the future, and therefore will maintaining and improving Sri Lanka’s sovereign credit rating require a more stringent approach, where there are no allowances for policy slip-ups?


1. “Time for a double dip?” The Economist (Print Edition), 6 August, 2011.2. ibid3. “Six years into a lost decade”, Washington, DC, The Economist (Print Edition), 6 August, 2011.4. “How much more could stocks drop”, J. Hough, The Wall Street Journal, http://online.wsj.com/article/SB70001424053111903366504576488853000636600.html5.“Aquestionofconfidence”,E.S.Browning,WallStreetJournal,August5,2011.Avail-able at: http://online.wsj.com/article/SB10001424053111903885604576488672973950288.html (accessed on August 9 2011)6. Financial Times, February 18, 2010. Available at: http://www.ft.com/cms/s/0/7d25573c-1ccc-11df-8d8e-00144feab49a.html7. “European Central Bank signals expansion of SMP”, 08 August 2011, Central Bank News. Available at: http://bx.businessweek.com/european-financial-crisis/view?url=http%3A%2F%2Fwww.centralbanknews.info%2F2011%2F08%2Feuropean-central-bank-signals-expansion.html (accessed on August 9, 2011).8. Central Bank of Sri Lanka, Annual Report (2010)9. ibid10. ibid

deshal d said...a discussion on global economic healthwould benefit from amention of emerging economies, particularly china, brazil and in-dia. tighter monetary policy has slowed down all of these econo-mies towards what is looking like a soft landing - this is a good thing due to its impact on commodity prices in the short term. the ongoing moderation of commodity prices is crucial to help boost consumption across the world (since there is no more room for policy induced consumption increases).

also, sri lanka's exportshave grown significantly in the last 10months or so despite a weak global economy and high exposure to US/EU (though i doubt this is sustainable going forward if things do not improve on the external front). despite export growththetradebalancehasweakenedsignificantlyasimportshave grown faster, anddespite significant capital inflows and aweakening US$, the LKR weakened in August. hopefully a fall in commodity prices will ease pressure on SL's BoP as well.





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JumpS 10 RankS in 2011-12 world Economic forum Report

The World Economic Forum’s Glob-al Competitiveness Report (2011-2012), reports that Sri Lanka has made an im-pressive jump of 10 places in the rank-ings, to 52nd from 62nd in the 2010-2011 report. This is a further improvement from the 2009-2010 report which ranked the country at 79th position.

The Institute of Policy Studies of Sri Lanka (IPS) was the Sri Lankan Partner Institute in conducting the Executive Opinion Survey which is a key element in building the GCR rankings, and on Monday the IPS received an exclusive preview of the results via international audio conference with the WEF head-quarters in Geneva, Switzerland. It was noteworthy that the WEF economists speaking to all the partner institutes spe-cifically mentioned Sri Lanka as having performed strongly in rising up the rank-ings, and are among the top risers in the Asian region.

On the eve of the global release of the report (7th September, 2011), we spoke yesterday (6th September), directly with an official at the WEF to get Sri Lanka-specific perspectives on the latest report.

Thierry Geiger, Associate Director of the WEF’s Centre for Global Competi-tiveness and Performance said, “Sri Lan-ka has made a remarkable performance. When I look at the evolution across all indicators, Sri Lanka shows improve-ments on 80% of them - 80-90 of the 110 indicators - both in terms of scores as well as rank.”

“Last year was a big jump. But you need to be cautious of ranks. So many countries are ranked so close to each oth-er. It’s important to focus on the scores.

In the last GCR, Sri Lanka improved its score by 0.24 points which we consider a big jump. This year the score improve-ment was not as big as last year, but there is consistency”.

Sri Lanka made the greatest improve-ments in scores, year-on-year, in the pil-lars of ‘macroeconomic stability’ (up by 0.48 points) and ‘infrastructure’ (up by 0.33 points). Meanwhile, the most note-worthy decline in scores was in the pillar of ‘labour market efficiency’ (down by 0.11 points).

Certain Pillars Still StickyDespite the strong performance,

however, scores of certain indicators weakened, reflecting the business com-munity’s continued concern on these issues and their impact on economic ac-tivity. Geiger noted that “Everything is on the rise in Sri Lanka except for pillars like ‘public trust in politicians’, ‘irregular payments’, and ‘independence of the ju-diciary’ which have declined. The pillar

of ‘red tape’ has improved significantly from a score of 3.8 to 5.1 (rising from rank of 113 to 59). An improvement of 0.8 is seen in the ‘security’ pillar, which the WEF economist noted was “remark-able”, and attributed it to the improved climate following the end of the war.

Guarding Against ComplacencySome recent reformers appear to have

stalled in their rise up the rankings, and this was considered noteworthy. “What is interesting is that we are observing some stagnation among several developing Asia economies, for example Vietnam and Indonesia. Even though they had been doing quite well on the GCR lately, they have stagnated this year. We attribute it to growing concern among the business community that the necessary reforms have not been made fast enough to sus-tain growth at high levels”, Geiger said.

It appears that, in these countries, expectations have not been met and the business community is “getting impa-

Sri Lanka Continues its Rise up global Competitiveness Index:

By Anushka Wijesinha and Dilani Hirimuthugodage*

Ranks just 2 below the Top 50WEF warns against complacency, biz community expectations will evolve as country develops


ed in






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tient”. This had important implications for a country like Sri Lanka where, although im-provements in the rankings have been made it is important that policymakers and govern-ment officials do not become complacent. Geiger remarked that, “As a country devel-ops, expectations change, the needs evolve. If governments don’t deliver, this creates disap-pointment among the business community, and this is reflected in the scores of countries like Vietnam and Indonesia this year.”

Can It Be Sustained?When asked if it is likely that the recent

dramatic jumps in GCR scores and rankings were mainly due to strong positive sentiment by the business community following the end of the war and whether this was likely to taper off in the coming years, he noted that, “it is hard to quantify the optimism. Rwanda ob-served a similar situation when it came out of conflict in the 1990s. Sometimes we tend to observe overshooting due to short term strong positive sentiment. But for Sri Lanka, it is not only the opinion survey data that shows the improvements, hard data on the various indi-cators support this too. But the country must guard against complacency”.

Asian PictureAsia’s rise to economic prominence has

been accompa¬nied by a remarkable dyna-mism in terms of competi¬tiveness. Over the past five years, several countries in the re-gion—including China, Indonesia, Vietnam, and Sri Lanka—have made important strides in the GCI rankings. Yet the disparities in terms of competitiveness within the region are unique, ranging from Singapore at 2nd place to Timor-Leste at 131st. Two of the region’s largest economies, Bangladesh (108th) and Pakistan (118th), continue to rank very low, while a number of Asian emerging economies enter the top 30.

Sri Lanka scores better than India (91st) this year too, but the WEF economist cau-tioned against comparing the two. “You must keep in mind that improvements in smaller economies are easier to make”. However, he added that even among the ‘developing Asia’ country group, and even among smaller econ-omies, Sri Lanka does well. Table 2 provides a selected cross-country benchmarking, show-ing that the country still lags behind South East Asian neighbours like Malaysia, Thai-land, and Indonesia, and clearly has some way to go to become competitive on par with these dynamic economies.

Switzerland tops the overall rankings of the GCR, while Singapore overtakes Sweden for second position. Northern and Western European countries dominate the top 10 with

Index/Sub-Index/Pillar Year* Rank Score (1-7)

OvERALL INDEx 2009-2010 79 4.0 2010-2011 62 4.2 2011-2012 52 4.33

BASIC REQUIREMENTS SUB INDEx 2009-2010 89 4.1 2010-2011 73 4.4 2011-2012 65 4.61

1. Institutions 2009-2010 73 3.8 2010-2011 55 4.1 2011-2012 50 4.23

2. Infrastructure 2009-2010 64 3.9 2010-2011 70 3.8 2011-2012 60 4.13

3.Macroeconomic stability 2009-2010 128 2.8 2010-2011 124 3.6 2011-2012 116 4.08

EFFICIENCY ENHANCERS SUB INDEx 2009-2010 74 3.9 2010-2011 69 4.0 2011-2012 69 4.03

5.Higher education and training 2009-2010 64 4.0 2010-2011 62 4.2 2011-2012 66 4.18

6.Goodsmarketefficiency 2009-2010 45 4.5 2010-2011 47 4.4 2011-2012 41 4.48

7.LabourMarketefficiency 2009-2010 111 3.9 2010-2011 104 4.0 2011-2012 117 3.89

8.Financial market readiness 2009-2010 65 4.2 2010-2011 52 4.4 2011-2012 45 4.44

9.Technological readiness 2009-2010 85 3.3 2010-2011 84 3.4 2011-2012 85 3.46

10.Market size 2009-2010 63 3.8 2010-2011 68 3.7 2011-2012 67 3.73

INNOvATION AND SOPHISTICATION 2009-2010 44 4.0FACTORS SUB INDEx 2010-2011 40 4.0 2011-2012 34 4.03

11.Business sophistication 2009-2010 42 4.5 2010-2011 39 4.4 2011-2012 32 4.54

12.Innovation 2009-2010 46 3.4 2010-2011 40 3.6 2011-2012 42 3.52

Notes: *Basket of countries was 133 countries in 2009-10, 139 in 2010-11, and 142 in 2011-12. Due to variances in total countries being ranked over the 3 periods, the key point of interest should be the changes in scores of each pillar.

Source: Global Competitiveness Report (various years), WEF

Table 1:

Sri Lanka’s recent performance on GCR pillars

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Sweden (3rd), Finland (4th), Germany (6th), the Netherlands (7th), Denmark (8th) and the United Kingdom (10th). Japan remains the second-ranked Asian economy at 9th place, despite falling three places since last year.

The United States continues its de-cline for the third year in a row, falling one more place to fifth position. In ad-dition to the macroeconomic vulner-abilities that continue to build, some aspects of the United States’ institutional environment continue to raise concern among business leaders, particularly re-lated to low public trust in politicians and concerns about government ineffi-ciency. On a more positive note, banks and financial institutions are rebounding for the first time since the financial crisis and are assessed as somewhat sounder and more efficient.

Within the Eurozone, Germany maintains the lead, although it goes down one position to sixth place, while the Netherlands (7th) improves by one position in the rankings, France drops three places to 18th, and Greece contin-ues its downward trend to 90th. Competi-tiveness-enhancing reforms will play a key

role in revitalizing growth in the region and tackling its key challenges, fiscal con-solidation and persistent unemployment.

The results show that while com-petitiveness in advanced economies has stagnated over the past several years, in many emerging markets it has improved, placing their growth on a more stable footing and mirroring the shift in eco-nomic activity from advanced to emerg-ing economies. China (26th) continues to lead the way among large developing economies, improving by one more place and solidifying its position among the top 30. Among the four other BRICS economies, South Africa (50th) and Brazil (53rd) move upwards while India (56th) and Russia (66th) experience small declines. Several Asian economies per-form strongly, with Japan (9th) and Hong Kong SAR (11th) also in the top 20.

Xavier Sala-i-Martin, Professor of Economics, Columbia University, USA, and co-author of the GCR, notes in the report that, “Amid re-emerging concerns about the global economic outlook, policy-makers must not lose sight of long-term competitiveness fundamentals. For the recovery to be put on a more stable

footing, emerging and developing econo-mies must ensure that growth is based on productivity enhancements. Advanced economies, many of which struggle with fiscal challenges and anaemic growth, need to focus on competitiveness-enhanc-ing measures in order to create a virtuous cycle of growth and ensure solid econom-ic recovery.”

The Global Competitiveness Report’s competitiveness ranking is based on the Global Competitiveness Index (GCI), developed for the World Eco-nomic Forum by Sala-i-Martin and in-troduced in 2004. The GCI comprises 12 categories – the pillars of competi-tiveness – which together provide a comprehensive picture of a country’s competitiveness landscape. The pillars are: institutions, infrastructure, mac-roeconomic environment, health and primary education, higher education and training, goods market efficiency,labourmarketefficiency,financialmar-ket development, technological readi-ness, market size, business sophistica-tion and innovation. The ranking are calculated from both publicly available data and the Executive Opinion Survey, a comprehensive annual survey con-ducted by the World Economic Forum with its network of Partner Institutes. This year, over 14,000 business leaders were polled in a record 142 econo-mies. The survey is designed to capture a broad range of factors affecting an economy’s business climate.

Talk to the Authors | [email protected], [email protected]

*Ayodya Galapattige (Research Officer – IPS) led the IPS team conducting the Executive Opinion Survey for WEF. Harini Weerasekera (Project In-tern – IPS) contributed to this article.

Country Sub Index BasicRequirements EfficiencyEnhancers Innovation&Sophistication Factors

Rank Score Rank Score Rank ScoreBangladesh 112 3.81 99 3.69 113 3.04India 91 4.25 37 4.46 40 3.92Indonesia 53 4.74 56 4.18 41 3.9Malaysia 25 5.45 20 4.88 22 4.65vietnam 76 4.41 66 4.05 75 3.44Thailand 46 4.88 43 4.38 51 3.75South Africa 85 4.32 38 4.44 39 3.93Sri Lanka 65 4.61 69 4.03 34 4.03

Source: Global Competitiveness Report (various years), WEF

Mel Gunasekera said...Nice piece Anushka and good timing

Manoj said...Again a big jump seemingly related to the end of the protracted war. This was not the case in GCRs before the war. The rank was marginally improving with oc-casional set backs.It is also important to understand the factthatthisneverreflectstheregionalvariations. Because SL EOS has never gone beyond the Western Province

rather Colombo District except for few instances due to certain limits. Is there any hope for including more re-gionalfirmsinthesamplenextyear?

Anonymous said...It’s a great achievemnet. Not only one person or a one organization. It’s a na-tion’s achievement.

Dilani said...Thank you Manojfor the comments. However, this time we were able to cov-

er most of the Districts. For an eg; Nu-wara-Eliya, Kandy, Kegalle, Galle, Matara, Gampaha etc.Which provided a broader picture. And we are hoping to extend if further in the next survey by including Northern & Eastern provinces.

Susantha said...Hi, Dilani, Manoj, Ayodya...You are doing a good job. Its nice to read such knowledge disseminated by own friends. Cheers! We are here reading your valuable thoughts.





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Posted in September 2011

Is Low agricultural productivity

By Roshini Jayaweera keeping Batticaloa poor?





4.9 2Other



4.5Self Employed




Main Occupation of the Employed in Batticaloa


In considering issues of poverty in Sri Lanka, Batticaloa is conspicuous as a district that requires particular attention. In addition to being identified as the country’s poorest district in 2009/10, it is also one of two districts for which poverty statistics actually increased between 2006/07 and 2009/10.1 According to the latest Household Income and Expenditure Survey (HIES) 2009/10 of the Department of Census and Statistics, the poverty rate in Batticaloa district was five-and-a-half times higher than that of the Colombo district – 20.3% vis-à-vis 3.6%.

A major contributing factor to this is the low agricultural productivity which the district continues to experience. This is of particular concern given that the majority of Batticaloa’s residents are engaged in agriculture – especially paddy farming. This article, based on a survey conducted by the Institute of Policy Studies of Sri Lanka in 20112, shares some thoughts on why Batticaloa’s agricultural productivity is low and is, in turn, keeping its people who are engaged in agriculture poor.

The survey focused on two of the poorer and more remote DS divisions out of 14 DS divisions in the Batticaloa district - Manmunai West (Vavunathivu) and Kiran. In the survey, 1,545 individuals surveyed were above 10 years of age, and of them 37% were employed - a statistic which features a larger proportion of men than women. Around 24% of individuals were students. Nearly 10.5% were unemployed, a percentage that is slightly higher than the district’s average unemployment rate of 7.4%.3

Youth unemployment is relatively high in these two remote DS divisions - 84% of the total unemployed population is less than 30 years old and 31% per cent of the population aged between 10 and 30 years are unemployed. So, clearly, attempts at reducing poverty in this district must focus on strategies to raise employment levels.

Many in Batticaloa are ‘Working Poor’A key issue in this district is the persistence of poverty even

among employed members of the population. The existence of this group of ‘working poor’ indicates that employment does not, of itself, guarantee an escape from poverty. So, in addition to lowering unemployment, poverty alleviation efforts must also consider the factors which constrain earnings among the working population of this district.

The three largest categories of employment in Batticaloa are agriculture (largely paddy farming), labour and market gardening (see Figure 1). Taken as a whole, 58% of workers are employed in the agriculture and fisheries sector. The majority of these workers are poor due to low incomes from employment.

Low Agri Productivity – The Blight of Batticaloa?A main reason for the persistence of low incomes among

this group of workers is low agricultural productivity. Batticaloa is ranked among the five districts which recorded the lowest productivity in paddy farming in the 2010/11 Maha season. Certainly, it may be argued that this is due in part to the severe floods experienced in this region in early

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2011. However, although paddy productivity has been slightly higher in previous years (i.e., years unaffected by floods), it has still compared poorly with other districts even over time. For instance, Batticaloa recorded the seventh and ninth lowest levels of paddy productivity for the 2008/09 and 2007/08 Maha seasons, respectively. Thus, it is clear that improving agricultural productivity is the key to transforming the agricultural sector in a manner that meets the challenges currently faced by the district. Consequently, it is important to identify the issues that continue to bar the expansion of agricultural production and incomes.

One of these is weather and other environmental issues. Among those surveyed, 33% of people were engaged in agricultural activities and they reported that this was a key issue for them. Of them, 44% have been the victims of flooding.4 Simultaneously, however, another 22% have suffered from drought. This odd combination would suggest that accelerating climate change may be a contributing factor to low productivity in the region. One of the best solutions to this is the introduction of short-age seed varieties, especially drought tolerant and flood resistant verities. Another possible solution is the development of the irrigation system and sound irrigation water management.

“2/3 of the cultivation areas have no irrigation facilities. Rain-fed farming can only be done during Maha season” - key informant, Vavunathiv.

Attacks by wild animals are also a concern in Batticaloa’s agricultural sector. Nonetheless, measures to minimize the effect of this need to be taken not merely by the government but also by farmers themselves. The latter must take the necessary precautions to protect their farms by traditional methods. The government and Wildlife Department could then become involved only in cases where farmers are unable to protect themselves.

A second important issue which was reported as hindering the expansion of agricultural production is a lack of capital. Around 12% of farmers in the sample identified this as a constraint on productivity. Another 11% identified high input costs as a major concern. Given the links between the two (high input costs might be considered a consequence of capital shortages), it may be inferred that nearly 22% of farmers in this area face financial difficulties in their agricultural activities. This is mainly due to low incomes which in turn, as previously discussed, result from low productivity.

Qualitative information gathered during the survey suggests that the issue is becoming increasingly severe, as most of these farmers also face credit constraints and cannot sell their products at higher prices in order to make larger profits. The low quality of these agricultural products also limits the price that farmers receive and, by extension, their ability to invest in capital. Most of these farmers are unable to sell their paddy to the government’s paddy-buying scheme because it does not meet the required quality standard. A solution to these financial issues is microfinance. The results of the household survey

show that currently, the most important financial sources in Batticaloa are government banks. NGOs, Community Based Organization (CBOs and moneylenders are equally ranked as the second most important financial source. Informal financial lending is high among selected households, mainly due to land ownership issues which give rise to a lack of collateral. Therefore, the availability of microfinance can go a long way in bridging this. Although many microfinance institutions already operate in these areas, and some government banks also engage in microfinance activity, greater awareness must be generated among the population on the availability of such schemes, as well as their benefits. At the time of conducting the survey, most of the villages in this area had an active producer organization or farmers’ organization. These could potentially be a useful medium through which financial institutions could reach the working poor.

A lack of access to inputs is a third obstacle faced by Batticaloa farmers. Insufficient access to seed paddy is a problem, which has become more severe as a result of the floods experienced in the region in early 2011. This contributes to the consistently poor quality of the paddy produced by farmers and, consequently, to the low prices received at the marketplace.

Access to crop insurance is also limited in Batticaloa. Additionally, a lack of market access and of infrastructure facilities (notably transportation) contributes to the phenomenon of the ‘working poor’ in this area.

ConclusionAdverse weather and climatic changes, capital shortages,

high cost of inputs, access to credit difficulties, and poor quality of output are affecting agricultural productivity in Batticaloa, and impacting on the incomes of the farmers in Batticaloa. Among these issues, capital shortage emerged as the most pressing issue that needs to be remedied.. Meanwhile, introducing short-age seed varieties, as well as drought tolerant and flood resistant seed varieties could help to overcome issues generated by climate change. For this, greater investment in agricultural research and development is critical. More access to microfinance is also required, to help ease financial constraints faced by the agricultural community. Developing agriculture-based rural entrepreneurship can also be a solution to the problem of seasonal unemployment among agricultural workers. Interventions such as these, particularly those that could improve agricultural productivity, have the potential to pull up the ‘working poor’ in Batticaloa out of poverty and ensure better living standards in the future.

The author acknowledges valuable inputs received from Dr Parakrama

Samarathunga (Research Fellow –IPS) and Asha Gunawardena (Research Economist –

IPS) in developing this article.

“We get deceived when buying seed paddy”– a farmer from Mandapathadi

References1 Department of Census and Statistics (DCS), Household Income and Expenditure Sur-vey (HIES) 2009/2010.2 This study was carried out in four districts in the Northern and Eastern provinces: Ampara, Trincomalee, Batticaloa and vavuniya.3 Department of Census and Statistics (2009), “Sri Lanka Labour Force Survey – Annual Report 2009”4This studywascarriedout in January2011 immediately after severefloods in theNorthernandEasternprovincesandthereforethisfiguremightnotberepresentative.

“We do not need storage facilities as we have to sell our whole production to the moneylender from whom we borrowed money for the cultivation. We have to sell our products at a lower price to them immediately after harvesting, although the government is buying it at a higher price” – a farmer from Pudumandapathadi

Talk to the Author | [email protected]

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Jul-Dec 2011 Issue | Talking Economics | IPS 23

By Anushka Wijesinha

• Innovation is beyond research, it requires

clever commercialization

• Sri Lanka needs to take a 360 degree

approach to innovation policy

dynamic growth in

Sri Lanka:


As Apple’s co-founder Steve Jobs bids adieu to an ipod/iphone/ipad/mac-book crazed world, it brought to the fore how much technological innovation has touched the lives of millions, and become so important in this new dynamic global economy. Jobs was a veritable trailblazer in innovation, with Apple products forev-er changing the way people interact with technology.

Apple now operates more than 300 retail stores in 11 countries. The company has sold more than 275 million iPods, 100 million iPhones and 25 million iPads worldwide. Jobs' climb to the top was com-

plete in summer 2011, when Apple listed more cash reserves than the U.S. Treasury (US$ 76 bn to the Treasury’s US$ 72 bn) and even briefly surpassed Exxon Mobil as the world's most valuable company.

True, Steve Jobs was a tech titan, a once in a century kind of innovation ge-nius. But neither he nor the Apple com-pany could have done it alone. The key to innovation of this nature is that it is bolstered by a myriad of supporting structures – what is known as an ‘inno-vation system’.Innovation system – more than just S&T and R&D

Posted in October 2011

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IPS | Talking Economics | Jul-Dec 2011 Issue 24

The concept of a national innovation system is not new. Metcalfe (1995) writes that it is “a system of interconnected in-stitutions to create, store and transfer the knowledge, skills and artifacts which de-fine new technologies”. In practice, this is the network of universities, research centres, think tanks, firms, business asso-ciations, and more generally, producers and users of knowledge in the country. A forward-looking innovation system that supports knowledge-interaction and commercialization among various parties is critical for building a knowledge econ-omy. If Sri Lanka is truly aspiring to be a knowledge-based economy hub, it needs to take the creation of an innovation culture and an innovation system much more seriously.

“S&T” and “R&D” are buzz phrases that are often heard in the discussion on how to propel growth by building an economy’s innovative capacity and driv-ing high value exports. The relationship between science and technology (S&T), research and development (R&D) and economic development is a strong one and has been well established in the lit-erature.

But innovation is distinct from just research. In fact, it need not result from it. Innovations come from the entrepre-neurs who make them happen and ulti-mately depend on a society’s responsive-ness and ability to transform research into something that adds value to peo-ple’s lives, to the economy. Innovation, therefore, is fundamentally a social pro-cess. An innovation system is made up of private and public organizations and actors that connect in various ways and bring together the technical, commercial, and financial competencies and inputs required for innovation. Fundamentally, innovations are carried out by entrepre-neurs who exploit existing knowledge and technology to propose new prod-ucts or practices and disseminate them. Government policy should act as the lubricant that helps this process along. So, looking at the business climate that fosters entrepreneurship becomes impor-tant – is the government giving the right signals on private entrepreneurship? Is the technology infrastructure in place? Are the requisite skill pools available? Are government licensing and other regula-tory procedures business-friendly? – these need to be addressed.

Developing a robust innovation system in a country, requires a robust

network consisting of government insti-tutions, regulators, research institutes, universities, enterprises, consulting firms and professional/business groups. Once these networks are firmly in place, the next step is to then develop a productive nexus from this – essentially building an innovation system – strengthen the coun-try’s innovative capabilities. The gen-eral underdevelopment of the individual components as well as this nexus in Sri Lanka is a symptom of the low priority given to S&T and R&D investment over the past several years, and will be a de-terminant of our competitiveness in the coming decades. According to the ICT think tank LirneAsia, Sri Lanka produced just 2.5 PhDs per year on average during 1991-2000 in 7 universities (Colombo - 5 per year and Peradeniya - 6 per year). Meanwhile, qualification levels of univer-sities faculties remain poor, with 23% of Humanities and Social Science teachers having only a Bachelors degree and 33% having a Masters degree from the same university.

In its Five Year Strategy, the Ministry of Technology and Re-search states that “at present very few knowledge intensive compa-nies and very little R&D that is required for innovation, is taking place in the private sector. On the other hand, most of the R&D un-dertaken by Sri Lankan scientists end up as mere publications in scientific journals with very few research outputs yielding a com-mercial product or a process. As such, the contribution of R&D to the growth of our GDP at present is negligible”.

As Figure 1 demonstrates, unlike in most developed countries where much of the R&D expenditure is by the pri-vate sector (over 65% in most cases), in Sri Lanka it is a mere 8%. The bulk of R&D expenditure in Sri Lanka is by the state sector (71%). This has strong impli-cations on the rate of commercialization of research.

Innovation also means adaptation

Innovation as a concept doesn’t just mean the domestic development of cut-ting-edge scientific discoveries – say for

example, Sri Lanka trying to develop a game-changing technology, but also the adaption and use of existing innovations for productive use in the local context. This balance needs to be struck in Sri Lanka. While we continue to drive new innovation, for example, through inno-vative PPP (private-public partnership) mechanisms like the SLINTEC, we need to cooperate more closely with technol-ogy champions in the world – from the world’s most innovative nation, the USA, or Europe’s innovation and tech-nology champion, Germany, to Eastern technology giants like Japan, China, South Korea and even India.

Many developing countries like Sri Lanka have a long way to go before they can start creating world-changing, cut-ting-edge technologies. It will be some time before Asia sees the birth of its own Apple. But this does not mean that their development should not focus on creat-ing an innovation culture. According to the report on ‘Building Sri Lanka’s Knowledge Economy’ (published by the World Bank in 2008), large rewards from technology accrue to those that adopt new technologies, adapt them, and make them productive in the local context. So, an innovation culture for develop-ing countries like Sri Lanka must be un-derstood as the building of a technical culture and a system of incentives that support the adoption and subsequent adaptation of existing (often foreign) technologies. The success of East Asian economies has also followed this pattern of first moving to existing best practices and then attempting to develop new tech-nologies.

With technological transformations continuing at a rapid pace, and the emer-gence of a globalised marketplace, all countries are under pressure to become more innovative and technologically connected. For Sri Lanka too, adopting existing technologies and best practices, while of course gradually developing new ones, is the quickest way for the economy to move up the value chain. A report on Indian innovation revealed that India achieved a five-fold growth in output by simply adopting existing information and technologies elsewhere. East Asian champions like Korea, Singapore and Malaysia also grew rapidly by adopting existing technologies by often ‘looking East’ towards early adopters like Japan. Of course, later they developed new and advanced capabilities and became global innovation hubs themselves.

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Global economic leadership – the in-novation imperative

Steve Jobs once famously said “innovation distinguishes be-tween a leader and a follower”.

As the debate about the changing eco-nomic power balance shifting East, and the debilitation of the economic might and dynamism of Western economies continues apace, we mustn’t write them off just yet. An important reason why several of them remain fundamentally strong is that they possess a key ingredi-ent to adapt to changing tides - innova-tion. Particularly, the United States and Germany.

The strength of the US economy lies in its capacity to invent and innovate. These inventions are converted into com-mercial products at a rate much faster than in other countries. Many social fac-tors and flexibility in economic policies contribute to this innovative dynamism. America’s Gross Domestic Expenditure on Research and Development is the sec-

ond highest in the world (next to Japan) and has consistently been higher than the OECD and EU average. It accounts for a significant 43% of all pharmaceu-tical patents, half of all medical patents and almost 20% of all environmental patents. It publishes nearly 280,000 sci-entific articles each year, the highest in the world. At a recent lecture in Sri Lan-ka, Dr. Razeen Sally, Director of the Eu-ropean Centre for International Political Economy, mentioned that “the number of patents being registered in the USA far exceeded patents being registered by the rest of the world combined”.

Immigration policies have strength-ened the innovation talent pool in Amer-ica, attracting both the best minds from East Asia, and ample labour from South America. The Harvard political scientist, Joseph Nye, considered the father of the concept of ‘soft power’, points out in his book The Future of Power that Chinese- or Indian-born engineers run more than a quarter of all high-tech companies in Silicon Valley. By 2005, one in four tech-nology start-ups had been launched by immigrants.

According to Nye, America’s greatest long-term strategic asset is “its ability to at-tract the best and brightest from the rest of the world and meld them into a diverse culture of creativity”.

In Europe, Germany is the innova-tion powerhouse, and will help it navi-gate the changing tides of the global economy. The country boasts of not only industry-leading firms but also one of the world’s strongest and most inno-vative small and medium-sized enterprise sectors - the powerhouse of its economy. Products with the insignia “Made in Ger-many” still command an unrivaled global position, re-known for their high quality and cutting-edge technology.

In 2008, Germany spent around 2.6% of its GDP on Research & Devel-opment, well above the EU average of 1.9%. In 2009, firms based in Germany registered the 3rd highest number of pat-ents in the world. In an analysis of the world’s leading innovation hubs, 5 Ger-man cities featured in the top 15 – Frank-furt, Hamburg, Berlin, Stuttgart, and Munich. Germany’s focus on Research and Development is clear from the high-











Sri Lanka

0 20 40 60 80 100

R&D Expenditure by Sector - Sri Lanka vs. Other Countries Private Sector Academia Public Research Institutions

Source: Science, Technology and Innovation Strategy for Sri Lanka, Ministry of Technology and Research

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est level – it doesn’t just have a Ministry of Education, it has a Ministry of Edu-cation and Research. The country boasts over 750 publicly funded research institu-tions, the highest in Europe. Yet, it is the German private sector that leads the way in R&D. Of the 62 billion Euros spent on R&D in 2009, more than two thirds was by industry.

China, too, is emerging as an inno-vation leader, mainly by adopting and adapting Western technologies, while developing its own new-innovation capa-bilities.

Although both China and India are touted as the new ‘Asian Giants’, China is clearly ahead of India on the innova-tion pillar. Even when we factor in the different population and land sizes, the numbers are impressive.

China has 708 researchers per mil-lion people compared to 119 in India. By 2009, China had over 16,000 PhDs in science and engineering, while India had around 6,400. In 2007, the Chinese filed 245,000 patents compared to 35,000 in India. China is set to overtake Japan as the second largest spender on Research and Development after the US in the next two years.

So if you thought China is still think-ing of competing on low cost labour, think again.

But some argue that Asia doesn’t have what it takes to give birth to people like Steve Jobs. At an event in Delhi last year, Lord Meghnad Desai of the Centre for Global Governance at the LSE said that “Asians aren’t rule breakers. We tend to follow the pack. What sets Western trailblazers apart is that they break the rules and re-fuse to conform, giving birth to a dynamic innovation culture.” (Similar thoughts are shared by Sri Lan-kan commentators – see ’Goodbye Steve Jobs, Long Live Mavericks!’ (http://groundviews.org/2011/10/09/good-bye-steve-jobs-long-live-mavericks/).

Innovation policy – the Government as a Gardener

An effective and comprehensive in-novation policy needs to take a holistic approach by looking at the overall in-novation climate. This goes beyond just science and technology policy and in-volves many ministries, government de-partments and other state organs, while actively engaging the private sector. A World Bank report on creating innova-tion policies in developing countries uses the analogy of a gardener tending to plants.

“Government action can usefully focus on a few generic functions compa-rable to nurturing plants to help them grow. It can facilitate the articulation and implementation of innovative initiatives, since innovators need basic technical, fi-nancial, and other support (watering the plant).

The government can reduce obsta-cles to innovation in competition and in regulatory and legal frameworks (remov-ing the weeds and pests). Government-sponsored research and development (R&D) structures can respond to the needs and demands of surrounding com-munities (fertilizing the soil). And finally, the educational system can help form a receptive and creative population (pre-paring the ground)”. We don’t need to reinvent the wheel. Advanced as well as less advanced countries offer good prac-tices that Sri Lanka can adapt to local contexts in developing a holistic innova-tion policy towards building a robust na-tional innovation system. But the institu-tional challenges to creating an effective innovation system, and driving forward an innovation policy would no doubt be many. What is critical is leadership at the highest level to ensure the success of a national innovation policy – a high-level task force or commission chaired by the President or Prime Minister would give credibility to a national vision and would facilitate the adoption of key measures to remove hindering bureaucratic hurdles. A good first step has clearly been made

by the Ministry of Technology and Re-search in preparing a National Science, Technology and Innovation Strategy 2011-2015 (the full document is down-loadable via the link below). It is possibly the most comprehensive and futuristic look at driving innovation in Sri Lanka, so far, even speaking of ‘techno-entrepre-neurship strategies’ to promote greater science-industry linkages. However, what needs to happen now is to embed this strategy within a broader strategy that looks at the national innovation system – what are the other government insti-tutions and private sector organisations not only in the science and technology sphere that need to be linked in to take this agenda forward?

Steve Jobs once said in an inter-view with Fortune magazine (9th November 1998) that, “innovation has nothing to do with how many R&D dollars you have […] It’s not about money. It’s about the people you have, how you’re led, and how much you get it”.

For Sri Lanka, it still WILL matter how much R&D rupees are spent. But what Steve Jobs said here about his com-pany Apple, is relevant for Sri Lanka as a country. Spending on R&D, focusing on expanding science and technology education and utilization, alone will not be enough. Innovation is about people, about providing the space and opportu-nity for Sri Lanka’s people to develop their innovative and creative capabilities. It is about providing a conducive busi-ness climate to commercialize their inno-vations and creativity. It is about ‘getting it’ - understanding what it takes to build a holistic national innovation system and how to incentivize all the actors in-volved. And it is about giving the right leadership from the highest levels of gov-ernment. Sri Lanka needs to take a 360 degree approach.

SB said...This gives a timely relevant direction for the top level deci-sion makers to transform policies in to actions. Enough evi-dence exists with regard to possible areas for R&D together with marketable manner to be established in the country. It is obviously true that Sri Lanka needs a transparent and independent leadership to cultivate and foster an innova-tive culture. Excellent blog. Keep it up.

maf said...Excellent piece and one of my personal pet peeves. There is so much to be done from many different angles on this from tax breaks for investment in research and development to celebrating innovation to developing a proper venture capital industry.





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By Stephanie De Mel and Anushka Wijesinha

In late October in Dhaka, Bangladesh, policymakers,economists,SAARCofficialsanddiplomats came together for the 4th South Asia Economic Summit (SAES), following on from thefirst threeheld inColombo,Delhi,and Katmandu. The theme for this SAES was: ‘Global Recovery, New Risks and Sustainable Growth: Repositioning South Asia’. In this context, this article takes a look at some of the positive factors that are likely to support South Asia’s emergence as a formidable economic force in Asia.

Following the Asian Tigers’ emergence in the 1970s and China’s subsequent rise, the South Asian region has displayed strong and consistent growth, due in no small part to India’s growing preponderance in the world economy. South Asia’s average growth rate in 2003-08 was approximately 8% and, de-spite the protracted ill-effects on the global economy of the re-cent financial crisis, the region is projected to grow quite strong-ly into the future.1 Certainly, numerous challenges remain to be met: the persistence of poverty, difficulties associated with facilitating regional integration, and inherent structural and

institutional weaknesses in these economies are significant in this regard. Nevertheless, there is reason to be optimistic about South Asia’s future economic prospects, not only because these issues are beginning (however slowly) to be addressed, but also due to a range of emerging growth opportunities. Key among these opportunities are the ‘demographic dividend’ created by South Asia’s current demographic transition (not in all coun-tries in the region), a rapidly growing middle-class, increased global integration, and the regional benefits derived from In-dia’s continued and increasing economic successes.

a Positive look

Posted in October 2011

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| The Demographic Dividend |

South Asia is currently undergoing a demographic transi-tion, resulting from a change over time from high mortality and fertility rates to low ones. This has important growth implica-tions: as the generation born just after the fall in mortality but just before the fall in fertility approaches working-age, the region experiences a significant swell in its labour-force. Indeed, it is estimated that by 2020 South Asia will have the youngest popu-lation in the world.2 The opportunity for increased economic growth which the demographic transition affords is termed the ‘demographic dividend’, a phenomenon which arises out of an increase in a country’s working-age to non-working-age ratio.

South Asia’s working-age population is projected to grow by an average of 18 million people per year for the next twenty years.3 If this excess labour is productively employed, the poten-tial benefits to be reaped by the region are extensive. Apart from Sri Lanka, whose relatively early and rapid mortality and fertil-ity declines have already generated a demographic dividend, the working-age to non-working-age ratio is still rising for the South Asian states, and is estimated to peak at various times over the next four decades. Thus, these economies require a favourable policy environment in order to capture the maximum possible benefits of this demographic change.

Bloom et al. consider some important factors in this re-gard.4 The ability of government institutions to provide a sound base for facilitating the demographic dividend is one. Particu-lar attention must also be paid to labour legislation, in order to ensure that the extra labour generated by the demographic transition is productively employed. The study suggests two al-ternative paths in this respect: a ‘low road’ approach, which consists of expanding low-wage jobs in order to absorb the ex-cess labour, and a ‘high road’ approach, which seeks to develop more highly-skilled forms of employment in the services, indus-trial and agricultural sectors.5 Macroeconomic management and trade policy are two other factors that contribute to an enhanced demographic dividend. Curbing inflation and main-taining a favourable domestic environment for the expected sav-ings and investment increases are important, as is developing the export industry in order to increase employment opportu-nities. Another consideration is education policy: the burgeon-ing services sector in South Asia requires highly-skilled workers. The demographic transition provides an ideal opportunity for swelling the ranks of this type of worker through effective in-vestment in education. Such investments enhance the possibil-ity of achieving a ‘high-road’ form of employment for a larger cohort of workers.

| The Rise of the South Asian Middle-Class |

Demographic change in South Asia has also occurred along income lines. A significant decline in poverty has pushed large numbers of people who formerly survived on less than US$ 2 a day into the ranks of the middle-class. This effect is particularly marked in India, a country home to a significant proportion of South Asia’s poor, and where strong growth has generated improvements in income over several years. Sri Lanka is the other South Asian state expected to experience a large middle-class expansion within the next decade. South Asia’s middle-class has grown at an average rate of 12% per annum over the last decade, rising in absolute terms from 24 million in 2000 to 72 million in 2010.6 It has been estimated that, by 2025, South

Asia could boast a middle-class of 1 billion people, or 55% of its population.7 This is a notable increase from its current pro-portion of 4.5% and, even more significantly, represents ap-proximately one-quarter of the global total. India’s middle-class could, by the same year, become the largest in the world in ab-solute terms.8

The ways in which a large and growing middle-class can con-tribute to economic growth processes have been frequently doc-umented.9 Firstly, strong links exist between the degree of en-trepreneurship in an economy and the size of its middle-class. Secondly, members of the middle-class contribute significantly more, at least in absolute terms, to aggregate savings and human capital investment than do their poorer counterparts – middle-income groups typically save sizeable amounts for retirement, housing and their children’s education, thereby providing am-ple resources for capital investment. Another consideration is the relationship between the size of the middle-class and levels of domestic consumption. Growth in the middle-class raises de-mand for consumer durables and other manufactured goods. This increase in the size of the domestic consumer base encour-ages capital investment and fosters the development of interna-tional trade.

There is also the possibility that, once the middle-class reaches a critical mass, it creates a virtuous cycle of higher con-sumption, higher firm profits, higher savings and investment, higher growth and, consequently, a larger middle-class. A con-tributing feature is the middle-class’s willingness to pay more for high-quality goods, which encourages product differentia-tion among firms and, consequently, higher profits.

| Increased Global Integration |

South Asia has made significant strides in trade participa-tion and financial openness in recent decades. Imports and ex-ports have grown strongly – the region’s average export growth rate rose from 5.3% in 1997-2001 to 14.3% in 2002-2006.10

Similarly, import growth increased from 2.2% in 1997-2001 to 24.6% in 2002-2008.11 Notably, the region’s export growth rate in 2002-08 of 19.3% is significantly higher than the global aver-age of 11%.12

Another important development has been an expansion of the region’s base of trade partners. Traditionally, most South Asian states supply agricultural and manufactured products to Western markets. More recently, however, strong trade link-ages have developed between these states and other develop-ing states, notably in Africa, the Middle East and other parts of Asia. Developing countries received 38.1% of South Asia’s exports and provided 43.8% of its imports in 1985. By 2006, these shares had increased to 42.7 and 49.1 percent, respective-ly.13 Trade with China has, in particular, been expanding quite strongly since the early 2000s – aggregate trade between China and the group of SAARC states was valued at approximately US$ 80.5 billion in 2010, for example.14 Seeking to further ex-pand the scale of these mutual benefits, India and China have agreed to a bilateral trade target of US$ 100 billion for 2015.15

Encouragingly, South Asia also experienced a doubling of its intra-regional trade figures from 2003 to 2008.16

Furthermore, FDI flows to South Asia have increased stead-ily over the last decade. FDI grew from US$ 6.7 billion at the start of the 2000s to US$ 22 billion in 2006-07.17 Between the periods 2003-04 and 2006-07, FDI inflows more than doubled for the region’s three largest recipients: India, Pakistan and Sri

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Lanka.18 Although South Asia’s share of FDI inflows is only about 5% of inflows to developing states in Asia and about 3% of inflows to developing states in the world, this share is increasing over time, an indicator of its growing attractiveness as a region for investment relative to its other developing coun-terparts.19 An interesting development in South Asia’s process of financial integration with the world is its slow but definite emergence as a source of outward FDI. In 2006-07, FDI out-flows from South Asia amounted to nearly US$ 10 billion. Of this, US$ 9.67 billion came from India, US$ 0.11 billion was from Pakistan and US$ 0.03 billion was attributed to Sri Lanka.20 In fact, India is beginning to be viewed as a significant source of intra-regional FDI. This represents another means by which the states of South Asia can aid each other’s growth through closer cooperation.

| India’s Success Story: Regional Spillovers |

India’s emergence as a significant player in the global eco-nomic arena represents one of South Asia’s most important opportunities for regional growth and development. The na-ture of such potential is multiform. Firstly (and arguably most importantly), we consider India’s booming service sector.

Beginning in the late 1980s with a burgeoning software industry, India’s service sector has expanded over time to em-brace IT enabled (including Business Process Outsourcing (BPO)), pharmaceutical, biotechnological and medical services. As an indicator of the speed of Indian service sector growth, the country’s services exports tripled between 2002-03 and 2005-06, increasing from US$ 20 billion to US$ 60 billion.25

Furthermore, India accounted for 60% of all global software outsourcing in 2008.26

Importantly for the region, as Indian IT and other service sector firms continue to move up the production value chain, they are themselves beginning to outsource more routine pro-cedures regionally. South Asian states which demonstrate low wages and a sufficiently skilled workforce therefore benefit considerably from continued developments in the Indian ser-vice sector.

Regional service sector developments are thus no longer confined to India bur rather, have extended to the other South Asian states, notably Pakistan and Sri Lanka. The notion that South Asia could become a global ICT outsourcing hub is, consequently, garnering attention. In order to realise such an aim, however, considerable efforts are required to deepen the degree of regional integration within South Asia, as well as to improve the regional infrastructure necessary to sustain a vibrant service sector. Endeavours to improve education and

to lower establishment costs in order to foster a favourable business environment are also desirable.

Furthermore, Indian service-sector firms are increasingly moving towards economic activity that involves knowledge production. For example, certain Indian pharmaceutical com-panies have begun to develop new drugs, rather than merely producing low-cost, generic versions of existing drugs, as was previously their practice. If, in this manner, India is able even-tually to establish itself as a centre of research and develop-ment, the potential spillover benefits to the region – in terms of knowledge and technology transfer – would expand consid-erably. Yet again, however, the realisation of these benefits de-pends crucially on states’ ability to integrate effectively, both amongst themselves and with India.

A second Indian ‘success’ which could benefit the region is its emergence as a source of FDI outflows. As previously dis-cussed, capital inflows to South Asia have been on the rise in recent years. Equally, however, growth in the Indian economy has spurred a culture of Indian investments overseas. India’s FDI outflows have grown appreciably in the last five to ten years: for instance, they grew from US$ 5 billion in 2005-06 to US$ 12.8 billion in 2007-08.27 Notably, much of India’s FDI is directed towards developing states, a significant proportion of which are regionally located. India is Sri Lanka’s third-largest source of FDI at present, for example. As is the case with service sector development, however, deepened regional ties are desir-able in order to ensure that higher levels of Indian FDI flow intra- rather than inter-regionally.

| Conclusion |

Despite the continued challenges posed by poverty, global economic volatility and the slow progress of regional integra-tion, the unique and important opportunities currently af-forded to South Asia have poised it on the brink of a period of significant economic growth. If appropriately harnessed, these opportunities could establish the region as a growing econom-ic power of considerable note. Its success in this regard will, however, depend crucially upon India’s continued economic achievements and the region’s ability to absorb the consequent spillover benefits. This in turn relies upon a far greater level of regional integration than is currently being experienced. Yet, despite the relative slowness of the process, greater attention is now being paid to achieving just this. If, during the next few years, South Asia is able to overcome geopolitical concerns and improve regional integration, particularly with India, to a more desirable level, it could well fulfil its potential of becoming Asia’s newest economic ‘miracle’.


1 Tan Tai Yong (ed.), Challenges of Economic Growth, Inequality and Conflict in South Asia, Singapore: World Scientific Publishing, 2010, p. 32.; 2 World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 3 David E. Bloom, David Canning and Larry Rosenberg, “Demographic Change and Economic Growth”, in World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 4 Ibid.; 5 Ibid.; 6 Homi Kharas, “The Rise of the Middle Class” in World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 7 World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 8 Ibid.; 9 Ibid.; 10 Research and Information System for Developing Countries, South Asia Development and Coopera-tion Report 2008, New Delhi: Oxford University Press India, 2008, p. 27.; 11 Ibid., p. 27.; 12 Ibid., p. 27.; 13 Ibid., p. 29.; 14 IMF Direction of Trade Online Statistics, <http://www2.imfstatistics.org/DOT/>, last accessed 16 June 2011.; 15 ‘Sino-Indian Trade Volume Exceeds USD 60 bn Target’, Jagran Post, 27 January 2011, http://post.jagran.com/SinoIndia-trade-volume-exceeds-USD-60-bn-target-1296141127, last accessed 26 June 2011.; 16 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. xix.; 17 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. 47.; 18 Ibid., p. 47.; 19 Ibid., p. 48.; 20 Ibid., p. 53.; 21 Ibid., p. 19.; 22 Ejaz Ghani (ed.), The Service Revolu-tion in South Asia, New Delhi: Oxford University Press, 2010, p. 6.; 23 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. 37.; 24 Ibid., pp. 38-39.; 25 Arvind Panagariya, India: The Emerging Giant, New Delhi: Oxford University Press, 2008, p. 266.; 26 Ejaz Ghani (ed.), The Service Revolution in South Asia, p. 216.; 27 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. 54.

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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 develop-ment efforts. Besides the desirability of inclusive growth from a purely ethi-cal 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 employ-ment is a critical element to drive

inclusive growth. It requires im-proving 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 re-gions and for diverse types of workers.

MakIng It IncluSIve


The IPS launched its ‘Sri Lan-ka: State of the Economy 2011’ report (on 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 arti-cle, we bring you some extracts of the ‘Pol-icy Perspectives’ section, the introductory chapter in the report. The full version of it is available in PDF format on our blog.


ed in





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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 strate-gy’. 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 con-trast to the experience a mere two years ago, when economic perfor-mance was at best erratic, with unac-ceptably high inflation and dwindling foreign exchange reserves.”

Some issues remain…

“Amidst the strong recovery and seem-ingly bright medium term prospects for the Sri Lankan economy, there are, nevertheless, some concerns about specific aspects of the coun-try’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 di-rect investment (FDI) to the country. Private sector credit growth was slug-gish 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 infrastruc-ture capital in the country will no doubt provide a useful initial boost to growth. But, the longer term sus-tainability of that growth momentum can only be ensured with appropriate investment in technology, knowledge

transfer, etc. Here, private sector in-vestment, and FDI especially, has a particularly important role to play.”

Financing development…

“[…] the government’s stance on defi-cit financing - i.e., limiting reliance on domestic sources of finance - in its at-tempt 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 coun-try’s growing public investment needs. The repeated calls for fiscal consolida-tion efforts stem from a recognition of the potential medium to long term risks that arise from rising exposure to exter-nal 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-conces-sional 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 sur-prisingly, 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 com-fortably and limit the country’s expo-sure 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 industri-alized 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 Lan-ka, 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 en-couraging that the overall fiscal outcomes in 2010 are positive. The deficit was re-duced 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 ex-pansionary 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 de-pressed 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 pub-lic finances allows a country the neces-sary 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 construc-tion 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.”

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IPS | Talking Economics | Jul-Dec 2011 Issue 32

Inflationary pressure…

“Sri Lanka’s rate of infla-tion has been rising in-crementally from the last quarter of 2010, primarily on account of rising food prices following inclem-ent weather conditions. Political turmoil in some key oil exporting coun-tries has also mounted rising pressures on inter-national oil prices. Such supply-side price shocks will have inevitable one-off impacts on in-flation. Standard mon-etary policy responses to contain supply-side induced inflation are not effective and alter-native 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 signifi-cant 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 can-not be complacent about the need to push for higher foreign exchange earn-ings 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 dol-lar 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 in-frastructure, 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 ser-vices.”


“[…]sustained growth can help poverty al-leviation by not only pulling the poor up

i n t o gainful employment, but also by pro-viding larger volumes of revenue to fi-nance targeted social programmes. On the face of it, Sri Lanka appears to have made significant strides in tackling over-all poverty in the country and reducing emerging gaps between sectors of the economy. The Household and Income Expendi-ture Survey (HIES) carried out by the De-partment of Census and Statistics (DCS) appears to suggest that the poverty head-count 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 in-terim.” “Despite the overall narrowing of im-balances, inequities in access to gainful economic opportunities - across different dimensions such as gender, geographic location, sector, ethnicity, etc. - contin-ue to persist. Policies to address these become all the more important in the context of post-conflict reconciliation ef-forts.”

Skills for growth…

“If, as anticipated, Sri Lanka’s economic growth becomes increasingly driven by a higher skilled services sector in the com-ing years, widening wage gaps can emerge. Additionally, as more and more employ-ment is created in the contractual/infor-mal sectors - where limited incentives are

p r e -sent for employers or the self-em-ployed to invest in training - the lack of skills development can exacerbate struc-tural rigidities in the labour market. Of-ten the most vulnerable segments will be unskilled, female labour.”

The inclusiveness imperative…

“While there is broad consensus that economic growth is vital for develop-ment, it is also recognized that growth alone is not the be-all and end-all of development. In this context, the no-tion of economic growth that is both sustainable and inclusive becomes an important policy imperative for gov-ernments. While these are often fash-ionable 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 ac-cess to, resources.”

The IPS State of the Economy 2011 report - ‘Post-Conflict Growth: Making it Inclusive’ - is nowavailable for purchase at the IPS. http://www.ips.lk/publications/contact_informa-tion.html

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Jul-Dec 2011 Issue | Talking Economics | IPS 33

by Athula Senaratne*

The IPS commenced its climate change research programme three years ago with the support of a UNESCO partnership programme. From the outset, we assessed our strengths on how we can make a productive contribution to the emerging field of climate change research in the country. Despite the increasing research on various aspects of the subject, we recognized that there is a gap in policy dialogue on issues that are emanating from the findings of research. So we decided to fill this gap by opening a dialogue on climate change policy which is accessible to, and participated by, other concerned stakeholders.

The first milestone of this process was a national workshop held at Dambulla in 2009 with the participation of a number of scholars, researchers, and policy makers (http://www.ips.lk/events/workshops/19_8_09_climate_change/more_detail.html). This web portal you are now on, ClimateNet, is another milestone of the climate change research programme of the IPS. Our hope is to make it an important source of climate policy re-search in Sri Lanka as well as in the region. We first announced about ClimateNet in Dambulla and allocated a short session to elaborate our vision. Participants were invited to offer their views and all their inputs were given due consideration in de-signing ClimateNet.

ClimateNet is primarily intended to serve the purpose of a platform for policy dialogue on climate change issues in Sri Lanka and the South Asian region. We hope this will serve as a repository of information on climate change issues in Sri Lanka that is open for scholars, policymakers, and the public. We will update our Resources page regularly with important ma-terials on the subject so that concerned parties can find a reli-able source on climate change issues on Sri Lanka. ClimateNet will also bring in news and information on important develop-

ments in the field on a regular basis. This will be achieved through developing an extensive network with other important stakeholders. ClimateNet will provide a forum for exchange of ideas among relevant stakeholders through blogging. Perhaps, this may be the most important of all. We initially launch this activity with invited guest contributions in addition to contri-butions by IPS staff members. However, we expect to open up for more unrestricted forms of exchange in the future as we acquire more experience and resources.

Despite the fact that IPS has taken the initiative of launch-ing the ClimateNet, we do not wish to assume a role more than one 'stakeholder' among many. Climate change is a complex issue and complex issues involve many stakeholders. Solutions for such issues also cannot be found without the participation of all stakeholders. It needs frequent exchange of information and ideas among stakeholders and ClimateNet is designed purely to facilitate this process. This is the underlying principle of all activities involved with the ClimateNet.

Therefore, ClimateNet belongs to all stakeholders who are involved in the climate change issues and you are welcome to contribute to the goals of this venture. You can make your con-tribution through providing us with useful materials that can be stored in Resources page, sending us important information to be published in News page or by sharing your valuable opin-ions and ideas on the Blog**. Not limiting to that, you can also send us your suggestions on how we can improve and develop ClimateNet so that it would serve its purpose even better in the future. We hope you will continue to visit, and we look forward to engaging with you in the future.

*Athula Senaratne is Research Fellow and Head, Environmental Economic Policy Unit of the IPS**ClimateNet blog content (including external contributions and comments) will be subject to Terms of Use set by the IPS.

Climate Change discussion taking forward the

in Sri Lanka

From w



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IPS | Talking Economics | Jul-Dec 2011 Issue 34

By Buddhika Brahmanage

Electricity: Continued Constraint for Sri Lankan Industries

Speak to any major industrialist in Sri Lanka, and they will tell you that electric-ity is a critical constraint on their opera-tions. A forthcoming World Bank report entitled ‘More and Better Jobs in South Asia’ reports results from country-level Enterprise Surveys that shows that elec-tricity is the number one constraint for enterprises in Sri Lanka, and is in at least the top 5 list of constraints for all South Asian countries1.

The World Bank report investigates major constraints hindering employment generation and expansion of enterprises, and their severity, through the surveys. While in Sri Lanka electricity is reported as the top constraint, it is second most se-vere constraint for a South Asian bench-mark firm in the urban formal sector (a benchmark firm is defined as a medium-size manufacturing firm with 30 employ-ees that is domestically owned, does not export or import and, is located in a large city).

More significantly, according to the Enterprise Survey results contained in the jobs report, electricity in Sri Lanka out ranks other constraints such as busi-ness licensing, corruption, political insta-bility and macro instability. It is the top constraint for medium-size and micro benchmark firms in the urban formal sector and second most severe in a mi-cro benchmark firm in the rural sector in Sri Lanka2. These results indicate the severity of electricity related issues for the commercial sector in the country.

Industrial firms in Sri Lanka are faced with three main bottlenecks with regard to electricity - accessibility, reliability and affordability. The problem isn’t new. Even in 2004, a World Bank report Sri Lanka: Improving the Rural and Invest-ment Climate identified that over 40% of urban manufacturing firms and 25% of rural enterprises in Sri Lanka found electricity to be a major bottleneck for

enterprise growth. The report noted that less than 70%

of rural enterprises received electric-ity from the national grid3. This has no doubt changed since then. Electrification levels in Sri Lanka have improved sig-nificantly and by the end of 2010 it was estimated at 90%. Yet, we must remem-ber that this was achieved partly due to the host of rural electrification schemes, many of which are not yet connected to the national grid.

Apart from urban centers, particularly in the Western Province, few areas enjoy uninterrupted power supply in the coun-try - 52% of medium-size enterprises in Sri Lanka are compelled to use genera-tors to cope with power outages. Genera-tors could account for as much as 12% of a firm’s fixed assets on average. So, the lack of reliable power supply significantly impacts operational costs of Sri Lanka’s industries, which in turn impinges on their competitiveness.

Electricity: Impacting Enterprise Profit-ability

Maintaining cost competitiveness is cru-cial for the industrial sector. However, the industrial sector in Sri Lanka, along with the hotel sector, cross subsidizes other categories of consumers such as households and religious establishments. The Public Utilities Commission of Sri Lanka (PUCSL) has started implement-ing a new tariff rebalancing exercise since the beginning of 2011 with a view to bringing the power sector back to prof-itability4. Mandating time-of-use (TOU) tariffs (applying differential tariffs de-pending on the time of the day electricity is being used such as daytime, peak, and off-peak) for all medium and large indus-tries as well as medium and large hotels since January 2011 is a salient feature of this exercise. This has further driven up the costs of hotel and industrial catego-ries.

Tariff increments in the hotel category affects the key growth sector, tourism, where it is estimated that top city hotels

will incur additional costs of Rs. 120 mil-lion due to electricity tariff increases in 20115. Similarly, electricity-intensive in-dustries such as textile, cement, ceramic, metal and aluminum, ship building, and food and beverages are also affected. In-dustry sources expect a cost increase of 4% to 8% on average, which adversely affects the competitiveness of export-oriented manufacturers in particular (with the current exchange rate policy). In the ceramic industry, for example, the electricity component alone accounts for about 50% of total costs. A statement by the Sri Lanka Ceramics Council, the industry body of the sector, noted that, under the new measures, the cost of elec-tricity of their member companies could increase by as much as 20 to 42%6.

CEB Profitability: Passing on to Users

According to the tariff rebalancing ex-ercise, the licensees (i.e., entities tasked with generation, transmission and distri-bution) are to be “compensated transpar-ently for external or market related fea-tures of the business” such as weather7. Similarly, any direct or indirect subsidy received by the CEB is to be “clawed back and passed-on to customers as a dis-count, as provided in the approved Meth-odology for Tariffs”8. Tariff revisions are to take place every six months in order to facilitate this process.

The recent financial turnaround of the CEB should be viewed in this light. In 2010, the CEB recorded profits worth Rs. 5 billion after a decade of steady losses. According to the methodology outlined above, these profits should be passed on to consumers as discounts. A careful look at the factors behind CEB’s profits indicates that this may not be pos-sible.

According to the Ministry of Power and Energy, numerous reasons contrib-uted to the financial turnaround of the CEB. First, is the implementation of the Ten Year New Plan which brought the CEB a profit of Rs. 8,006 million9 (the details of this plan are not available in

Electricity Constraints:


ed in





lIghten the BuRden Can CEB Profits

on the Industrial Sector?

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Jul-Dec 2011 Issue | Talking Economics | IPS 35

the public domain). Second is the reduc-tion of unlawful usage and wastage of electricity by strengthening the Investi-gation Unit of the CEB. As reported by the Ministry of Power and Energy, total wastage in 2010 was 1.19% lower than in 200910. Third is the adoption of “strin-gent methods of staff administration” at CEB which improved productivity and financial efficacy11. In addition to these, the increment in hydro power generation during 2010 reduced the dependence on the more expensive, thermal power gen-eration.

While the above measures undoubt-edly had a significant role in the CEB’s profitability, it seems likely that other factors also contributed strongly to this result.

CEB Profitability: Taking a Closer Look

The heavy rains experienced in 2010 favoured hydro electricity generation, a fact which may not have received enough significance when considering recent reports on CEB profitability. At present, Sri Lanka is heavily dependent on oil-fired thermal generation. The aver-age cost of thermal electricity generation by the CEB licensee is Rs. 18.11 per kilowatt hour. This is signifi-cantly higher than the average cost of hydro electricity which is just Rs. 1.35 per kilo-watt hour12. In 2009, the generation mix was 60% thermal and 34% hydro. While in 2010, thermal generation was 47%, hydro electricity generation increased to as much as 47% due to heavy rainfall13. Thus, the reduction of thermal genera-tion was a key contributor to CEB prof-itability, without which the generation costs incurred by the CEB would have

escalated much further.The financial assistance provided by

the government to the CEB also needs to be considered. As the ‘Consulting Paper on Setting Tariffs for the Period 2011 – 2015’ by the sector regulator, the PUC-SL, states - “the total outstanding debt stock (of CEB licensees) to the Treasury and Ceylon Petroleum Corporation as at 31.12.2009 should be considered as zero”14. This includes dues to the Ceylon Petroleum Corporation (CPC) for Heavy Fuel supply amounting to Rs. 46 billion as at the end of 200915. This moratorium was continued in 2010 as well16.

The fuel subsidy given to the CEB is also an important element. The CPC has remarked that 80% of their losses are due to selling underpriced Heavy Fuel to the CEB17. Although the exact percentage cannot be verified, it is established that the CEB receives heavily subsidized fuel from the CPC, also a state-owned enter-prise afflicted with profitability issues.

While the price of furnace oil is Rs. 81 per litre, the CEB has been paying Rs. 25 per litre until September 2010, at which point it was revised to Rs. 40 per litre, still half of the market price18.

Therefore, it is clear that even though administrative reforms taking place to streamline the CEB as an entity would

have contributed to the profitability of the CEB in 2010, it has also been signifi-cantly dependent on favourable weather and direct government assistance. Moreo-ver, due to very low water levels in major reservoirs during the middle of this year (reducing to as low as 20%19), the CEB had to increase the share of thermal pow-er generation to cater to the demand in the country. Thermal power generation has been stepped up further as the sec-ond inter-monsoonal rains have been de-layed. The CEB states that hydro power generation has dropped to 20% as of Oc-tober20. This would no doubt mean that generation costs would be higher again in 2011, unlike in 2010. In fact, the CEB has already requested the PUCSL to in-crease electricity tariffs in order to cover their monthly losses of around 5 billion21. Moreover, according to the forecasts by a renowned energy specialist, electricity costs will keep rising until 2013, which will burden industries further22.

So, it is unlikely that the concerns of the industrial sector could be effectively addressed amidst the attempts by the CEB to make the power sector financially vi-able. It seems that the industrialists would have to continue to grapple with their electricity issues at least until financial viability is restored to the sector by 2015, assuming the tariff rebalancing exercise is executed on sched-ule. Meanwhile, the Sri Lankan industrial

and commercial sector (including tour-ism) needs to place greater focus on en-ergy efficiency and go ‘lean and green’ in their energy consumption. These changes take time and won’t be easy in the short-term, but would no doubt reap rewards in the longer run.

Citations1 The World Bank, 2011, More and Better Jobs in South Asia: Overview, Washington D.C.; 2 Ibid; 3 The World Bank, and International Finance Cooperation, 2004, Investment Climate Assessment. Sri Lanka: Improving Rural Urban Investment Climate.; 4 Public utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 5 http://www.porcelaintablewares.com/news/news32.html; 6 Ibid; 7 Siyambalapitiya Tilak, 2011, The New Electricity Pricing Policy in Sri Lanka, Prof. R. H. Paul Memorial Lecture.; 8 PublicUtilitiesCommissionofSriLanka,2010,ConsultationPaperonSettingTariffsforthePeriod2011-2015.;9OfficialwebsiteoftheMinistryofPowerandEnergy-http://power.lk/2011/03/ceb-has-made-profit-of-5-billion-for-2010-financial-year-after-incurring-losses-running-into-115-billion-in-the-previous-10-years/;10Ibid;11Ibid;12MinistryofFinanceand Planning, Annual Report 2010.; 13 Ibid; 14 Public Utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 15 Ministry of Finance and Planning, Annual Report 2010.; 16 Ibid; 17 http://www.lbo.lk/fullstory.php?nid=1668399651; 18 Ministry of Finance and Planning, Annual Report 2010.19 The Daily Mirror, July 18, 2011. The Real Truth Behind the Power Crisis.; 20 The Daily Mirror, October 4, 2011. Rain delayed: Threat to food, hydro-power. 21 Lanka Business Online, October 24, 2011. Sri Lanka power sector facing bankruptcy: minister. 22Siyambalapitiya Tilak, 2011, The New Electricity Pricing Policy in Sri Lanka, Prof. R. H. Paul Memorial Lecture.

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IPS | Talking Economics | Jul-Dec 2011 Issue 36

but tax Relief is

SMEs and Budget 2012:

StROng StEpS, By Anushka Wijesinha

Budget 2012 is clearly the most SME-friendly budget in recent years. A compre-hensive set of tax and financial propos-als, specifically intended to strengthen and develop the SME sector have been put forward in the budget proposals an-nounced by H.E. the President on 21st November. Business Chambers with a strong SME interest, like the NCCSL and the FCCISL, have commended the budget for its focus on the SME sector.

As is clear from Table 1, apart from the SME-specific concessions and exemp-tions, many other concessions will have a positive impact on SMEs engaged in particular activities.

Definitional IssuesA few areas are yet to be clarified,

and would likely be done in the imple-mentation documents that would fol-low the Budget 2012. For example, the minimum investment requirement of Rs. 25mn for a new “small scale enterprise” may be a challenge. Most small-scale enterprises have much less in terms of fixed capital. This concern also applies to certain bands of minimum invest-ment in the “medium-scale” category –

Rs.100mn-200mn -- is a steep investment for a standard Sri Lankan medium-scale enterprise. The level of investment will also vary widely depending on the nature of the activity. An enterprise engaged in gem cutting and an enterprise engaged in canned fish production may both have similar turnover to be classified in the “medium” category. But the minimum investment needed in each will be quite

different. In all of this, a key issue that emerges - in fact a recurring challenge - is that of the need for a common SME definition. Commercial banks, the Cen-tral Bank, EDB, IDB, business licensing authorities of the government, etc., all have slightly different definitions, and this causes various problems for an SME in participating in the various schemes/services offered by each of them.

Important SME-promotion proposals were contained in

Budget 2012, but as this article argues, promoting the SME

sector requires a look beyond just tax relief.

haLf thE StoRy

Ministry of Finance has delivered, now time for

SME-mandated government institutions to sharpen their

focus and address the vital issues


ed in



r 2


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It’s Not Just About TaxesSo, yes, the tax burden on SMEs

has been reduced in Budget 2012. This builds on the reduction to 10% of cor-porate tax rates for SMEs introduced in Budget 2011. But SMEs need more, and it’s not just about tax incentives. SMEs in Sri Lanka are facing numerous other con-straints that need to be simultaneously addressed in order for these valuable fis-cal incentives to have maximum impact.

Electricity ConstraintsIn a visit last week to a couple of Indus-

trial Estates which are home to small and medium industries (SMIs), it emerged that electricity issues are severely hamper-ing their operations. One medium-scale industry that produces rubber products for the Swedish market, employing near-ly 500 people, noted that it faced 118.5 ‘electricity down hours’ last year. This is an average of over 2 hours a week, but in some weeks it peaked to as high as 10-14 hours. At a recent public-private consultation, an industrialist remarked that at the Ekala Industrial Estate there have recently been 14 electricity ‘brown outs’ in as many days. The Yarlpanam Chamber has noted that of around 24-26 working days in a month, they enjoy only about 10 days of reliable power supply. A small industrialist in the Kalutara district lamenting on the impact of the electricity issue on his ceramic ornaments opera-tion remarked (translated from Sinhala), “the power brown outs not only ruin our machinery, they cause production delays, increase costs, and cause a higher proportion of rejects”. So, although con-nective infrastructure in areas outside Colombo are improving, and electricity coverage is reaching 80-90% in many ar-eas, electricity reliability and continuity that impinge on SMEs profitability needs to be addressed quickly.

Financing SME Growth The proposals contained in Budget

2012 are very progressive and important further steps in improving the access to finance for SMEs were announced. They are:

•OutofthefundsavailableintheInvestment Fund Accounts in banks (which was introduced through Budg-et2011toensurelongtermfinance),10% must be lent to the agricultural sector and a further 10% to be lent to SMEs.

• State-owned banks (Bank of

Ceylon, People’s Bank and Regional Development Bank) will each set up a special SME bank branch in all districts within 2012, and all other banking and financial institutions also encouragedto set up such branches in all districts.

•Interestincomefromsuchbank-ing and other fee levying activities will enjoy a reduced income tax rate of 24% (from the standard 28%).

•Agovernmentguaranteeof50%for those banks that provide loans to restructure SMEs to improve their performance

These are important proposals. Many regional entrepreneurs complain that bank branches in their area are not SME-friendly and do not know how to evaluate loan applications with an “SME lens”. One entrepreneur in Batticaloa remarked that “most branch managers just don’t know to deal with us, they sometimes treat us like dirt, a nuisance”. The setting up of dedicated SME bank-ing units is, therefore, an important first step.

Meanwhile, it is important for all banks to train all their regional bank-ing staff -particularly loan officers and branch managers - on how to cater better to SMEs, which is the majority of their client base in the regions. The Central Bank could also consider some mandat-ed training/orientation for these officers on ‘SME Banking Best Practices’, similar to the mandated training it conducts for bank directors on corporate governance and other issues.

The 10% mandated SME portfolio is also a useful step. But it needs to be care-fully monitored by the regulator to ensure it is not abused. For instance, ensuring that a bank doesn’t provide the majority of the portfolio to a few, low-risk enter-prises, at the larger end of the SME chain just to comply with the requirement.

At a recent private-public dialogue on the cut-flower industry organised by The Asia Foundation in Nuwara Eliya, it emerged that the awareness of SMEs on special loan schemes is minimal. Out of 10 cut-flower associations, representing dozens of cut-flower SMEs, not one of them were aware of the two concession-ary loan schemes offered by the Central Bank (the ‘Saubhagya’ and ‘Viskam’ schemes).

There’s clearly a disconnect with the generous and valuable loan schemes on offer and their utilization by the SME

sector. Commercial banks must do more to actively disburse concessionary credit lines available to them from multilateral financial institutions, to SMEs.

We could also think of innovative models like revolving funds, financed possibly by donors, that are housed in one or more selected local bank branch-es, and are used to finance specifically targeted enterprise sectors that are of par-ticular importance to a region - for exam-ple, the tourism and cut-flower sectors in Nuwara Eliya. This type of ‘policy-based lending’ would help direct credit to sec-tors that have the most potential to grow that locality’s economy, provide employ-ment, and reduce poverty.

The role of the Regional Development Bank (RDB) is also now more important than ever in taking up the cause of SME banking. The Lankaputhra Bank (LPB), which was meant to be a strong develop-ment bank after merging with the SME Bank and cater better to SMEs, seems to have lost its way.

Business DevelopmentAnother key area is on business de-

velopment and organizational improve-ment. Many SMEs do not get necessary advisory and technical support for tech-nology upgrading, improving manage-ment and accounting practices, enhanc-ing efficiency, and boosting productivity. Institutions like the IDB, mandated to assist SMIs need to take a strong look inwards to see if they are providing the services they are mandated to provide, and whether the services they do provide are useful and sufficient for the SMEs to grow to the next level. These SMEs don’t need basic support.

A closer look at many of them will show that they have set up without any generous tax holidays unlike the BOI projects, and operated in trying times. They have grown gradually and won foreign markets. They certainly do have the potential to go to the next level, but getting the right support package is key – taxation and access to credit are only two elements in this.

Entrepreneurs are asking for not just lower taxes and cheaper credit, but a more holistic support. As one entrepre-neur in Nuwara Eliya said, “what we want is a package of support, not just better access to loans, but also help with technology, and help with market devel-opment, along with it”.

Again, we have much to learn from neighbouring countries. For example,

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IPS | Talking Economics | Jul-Dec 2011 Issue 38

in the Philippines, SMEs are partnered with Universities and other tertiary train-ing institutions in local areas that have management faculties. Senior students in business administration and related subjects in these institutions run ‘busi-ness clinics’ at subsidised fees for local SMEs. This is a ‘win-win’ scenario – the local SMEs are able to get affordable as-sistance on business improvement, while the students get hands-on business expe-rience and real world insight – thereby improving their non-academic skills and enhancing their employability.

Getting Serious About SME StrategyIt’s time we got serious about the

National SME Policy that is still under formulation, despite a draft being pre-sented at a stakeholder discussion al-most a year ago. We need to build on the strong SME White Paper of 2002. Since the formulation of this document there has not been an all encompassing national strategy document for SME development. Sri Lanka needs to learn from its Asian neighbours in developing this SME strategy. A good start would be looking at the Philippines comprehen-

sive ‘Magna Carta for SMEs’ document, which has very relatable ideas and trans-ferable concepts like SME credit guaran-tee schemes and strategies to encourage subcontracting between SMEs and large enterprises.

Once the National SME Policy is ready, there needs to be a taskforce to implement the various elements. The taskforce should include representatives of all relevant stakeholder groups – both from the public as well as private sec-tor. Currently there are a myriad of pro-gramme and interventions, all of which are strong individually, but are hampered by the disconnect with each other and therefore cannot have the impact that they actually could.

This fragmentation and overlap leaves SMEs confused on what programmes are on offer. The National Enterprise Devel-opment Agency (NEDA) needs to play a vital coordinating role and assume lead-ership once more as the apex SME body – this was what was expected of it when it was initially set up as the ‘SME Author-ity’ under a proposal of the 2002 SME White Paper.

“The SME sector is the future”, Treas-

ury Secretary Dr. P.B. Jayasundara said at a post-Budget forum organized by Ernst & Young this week. The importance of SMEs has clearly been identified and ar-ticulated. The Ministry of Finance has done its bit by announcing a variety of SME-focused proposals. It is now time for the other government institutions mandated to develop the SME sector like NEDA to sharpen their focus, coordinate and collaborate more for maximum im-pact, and work closely with the private sector on really growing Sri Lanka’s SME sector.

Yes, tax concessions are a vital com-ponent in the SME-strengthening effort, and the Budget 2012 has much to offer for SMEs. But tax concessions should not be thought of as the panacea for the struggles of Sri Lanka’s SMEs. Other is-sues are often equally constraining, and more needs to be done about them. Of course, it is unrealistic to expect such non-tax related policy support from a Budget, but SME supporting institutions have to come into action and address these vital issues without further delay.

Special incentive for start-ups

Income tax incentives for new enterprises

Exemptions for existing enterprises

Economic Service Charge (ESC)

Research and Development

Incentives/protectiontosupportspecificlocal manufactured products

To ease the burden of new enterprises’ set-up costs, amend tax laws to permit SMEs (where annual turno-verislessthanRs.500mn)todeductexpensesinthepre-establishmentyearfromtheincomeofthefirstyear in which tax becomes payable

SmallscaleenterprisesinspecificactivitieswithaminimuminvestmentofRs.25mngeta4yeartaxholiday(agricultureand/oragroprocessing,animalhusbandryand/orprocessing,fisheriesand/orfishprocessing,creating work including art work)

Medium scale enterprises in any activity get a tax holiday depending on size of investmentRs.50mn-100mn: 4 years; Rs.100mn-200mn: 5 years; More than Rs.200mn: 6 years; If in agriculture and infor-mation technology – Rs. 25mn minimum investment

Existingenterprisesinspecifiedactivitieswithaminimuminvestment(infixedassets)ofRs.50mnonorbefore 31st March 2015 get a 3 year tax holiday(agricultureand/oragroprocessing,animalhusbandryand/orprocessing,fisheriesand/orfishprocessing,IT,BPO/KPO,healthcare,education,beautycare,coldroomandstorage,tourism,sportsandfitnesscenters,creative work including art work)

SMEs with quarterly turnover of less than Rs.500 million to be exempt from ESC up to Rs.100 millionESC threshold raised from Rs.25mn to Rs.50mn (further raise from Rs.7.5mn in Budget 2011)

Triple deduction for R&D expenditure by an enterprise through government institutionsSMEs to obtain government research facilities at a nominal fee (more details not available)

Moulds for rubber and plastics – reduced customs duty on importsMoulds for rubber, plastics, steel, glass – exempt from vATHandloom – income from such manufacturing tax at reduced rate of 12%Fisheries–cannedfishmanufactureexemptfromVATPoultry – import & supply of items for poultry industry exempt from vATSmall enterprise engaged in the collection of fresh milk, green tea leaves, cinnamon, latex, will be exempted from Nation Building Tax.Agriculture/horticulture/floriculture–importofgreenhouses,polytunnelsandrelatedmaterialsforcon-struction of such exempt from vATRice milling – tax concession for setting up modern rice processing mills in South, East, Rajarata, and North.

Table 1: What is in Budget 2012 for SMEs?: Snapshot of the Proposals


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Sri Lanka Grapples with Child Malnutrition

By Priyanka Jayawardena

Despite remarkable achievements in the health sector, malnu-trition has been a persistent health challenge in Sri Lanka. More than 1 in 5 under-five year olds are underweight in the country. Nearly 1 in 6 babies born has a low birth weight. These numbers are worse for some population groups in the country. Children in the estate sector are twice as likely to be underweight than children in the urban sector, and in the Badulla district, 1 in 3 children are underweight. Despite countless initiatives to alleviate malnu-trition over the years, child nutritional levels have improved only marginally in the country (see Figure 1). As Sri Lanka aims to set itself on a high growth trajectory, this is no doubt a cause for con-cern as it impacts on the quality of the country’s workforce.

Major Improvements in the Health Sector


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Child Malnutrition: Looking Beyond Health

Internationally, there is recog-nition that, improved health care alone cannot improve all health outcomes. This is because there are deep rooted socio-economic factors affecting health. For exam-ple, a child’s nutritional status in life as well as child’s birth weight is determined by a number of factors, genetics, maternal characteristics, the environment in which a child lives, and social circumstances. Nu-tritional disparities themselves are also driven by so-called social and economic determinants, such as income level, mother’s education, and living conditions in homes and neighborhoods. Therefore, the study of overall determinants of childhood malnutrition is not solely enough to address the malnu-trition problem at a practical level. Information on socio-economic determinants of childhood malnu-trition as well as causes of higher childhood malnutrition amongst lower socio-economic groups is im-portant to improve the effectiveness of policies aimed at reducing child-hood malnutrition, especially in se-verely affected populations.

Childhood Malnutrition: Exploring the Causes

Low birth weight is a major cause of malnutrition in children under five years old. Babies born with low birth weight are twice as likely to become under-weight children compared to babies with normal birth weight. Low birth weight is also associated with growth retardation throughout childhood, adolescence, into adulthood, and also carry on the vicious cycle of malnutrition. Finally, low birth weight causes long-term consequences for individuals, house-holds, communities, as well as the country.

Growth retardation accelerates with weaning. One child in four is underweight among 18-59 months old children (see Fig-ure 2). Child malnutrition seems to increase after the first year of life and remain high thereafter (see Figure 2). Long term childhood growth retardation may be an indication of either inappropriate food intake in terms of quantity or quality during the weaning period as well as poor health status. The low risk of malnutrition during the first 6 months may be due to the protective effect of breastfeeding. According to DHS (Demo-graphic and Health Survey)) estimates, 98% of children in the country are breastfed, while about 73% are exclusively breastfed during the first four to six months.

Child malnutrition is linked with mother’s malnutrition,

education and knowledge. Mother’s nutritional status has a strong impact on a child’s nutrition as well as a child’s birth weight. 1 in 6 reproductive age (15-49 year olds) women are mal-nourished in Sri Lanka. Other than this direct impact, mother’s education has an indirect impact on childhood malnutrition. A child with a mother with an education level below primary level is twice as likely to be underweight than a child with a mother who has completed senior secondary level education.

Child Malnutrition: Influence of Socio-economic Status (2)

There are considerable disparities in child nutritional across socio-economic groups that favour the better-off (Figure 3). A child belonging to the “poorest” socio-economic quintile is three times more likely to be underweight than a child in the richest quintile.

In the estate sector, about 1 in 3 under-five year old children are underweight, and 40% of babies have low birth weight (see Figure 4). A household’s socio-economic status is significantly lower in the estate sector than in the urban and rural sectors. In the estate sector, almost 63% of households fall into the poor-est category while in the urban and rural sectors this is 8% and 19%, respectively. In the estate sector, low levels of education, especially among females, are a major cause of poor nutritional







Figure 1:

Little improvement in prevalence of Underweight Children and Low Birth Weight Babies

Figure 2:

Growth Retardation Accelerates With Age

age in months









Growth retardation accelerates with weaning. One child in four is underweight among 18-59 months old children. Child malnutrition seems to increase after the first year of life and remain high thereafter

Despite countless initiatives to alleviate malnutrition over the years, child nutritional levels have improved only marginally in the country

30 25 20 15 10 5 5 10 15 20 25 30%0 0

Boys Girls

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Notes:(1) Study uses the nationally representative DHS (Demographic and Health Survey) conducted in 2006/07. All the estimates of this paper are based on DHS 2006/07 unless other-wise mentioned. Anthropometric index weight-for-age (underweight) is considered as a measure of underweight children. This index is expressed in standard deviation units (SD) fromthemedianoftheWHOChildGrowthStandardsadoptedin2006.Lowbirthweightisdefinedasabirthweightoflessthan2500g.BodyMassIndex(BMI)classificationisemployed for identifying mother’s nutritional status(2) Household asset index was used as the measure of socio economic status(3) The measure of socio-economic inequalities of underweight children and low birth weight babies are decomposed into determining factors. Concentration Index is used as measure of socio-economic inequality.

status, where nearly half of all women of reproductive age are educated below primary level. Poor education reduces the abil-ity of mothers to benefit from the awareness programmes on family health and hygiene conducted by the health service.

Child Malnutrition: Sources of Disparities (3)

There is a need for improving child nutritional status not only in terms of averages but also for reducing disparities. Therefore, the reasons for prevalence of higher childhood mal-nutrition amongst lower socio-economic groups need to be examined. Half of the socio-economic inequality in child un-derweight is explained by the continuity of maternal malnutri-tion and low birth weight babies among lower socio-economic groups. On the other hand, 30% of the inequality in low weight births is also due to mother’s poor nutrition. A mother’s low level of education and health knowledge contributes one fourth

of total inequality childhood malnutrition, while 40% of ine-quality in underweight birth babies. We must also bear in mind that regional factors also contribute considerably to measured inequality.

Addressing a Critical Concern

To break the vicious cycle of malnutrition in the country, Sri Lanka needs to go beyond health and look closer at the deep-rooted socio-economic factors which are transmitted from generation to generation in lower socio-economic groups. As the country enters middle-income status, it would be impru-dent not to address this important issue of child malnutrition. It will be critical to ensuring inclusive and sustained growth in Sri Lanka in the coming years.

Talk to the Author | [email protected]

Figure 4:

Prevalence of underweight children and underweight birth babies by region




0 10 20 30 40 50

Source: Constructed using DHS-2006/07 survey data

Poorest Quintile Second Poorest Quintile

Middle Quintile Second Wealthies

t Quin




st Q



Figure 3:

Prevalence of underweight children and underweight birth babies by wealth quintile”

Source: Constructed using DHS-2006/07 survey data

There are considerable disparities in child nutritional across socio-economic

groups that favour the better-off. A child belonging to the “poorest” socio-economic quintile is three times more likely to be underweight than a child in

the richest quintile.





In the estate sector, about 1 in 3 under-fiveyearoldchildrenareunderweight, and 40% of babies have low birth weight

Underweight ChildrenL ow Birth Weight Babies

IPS launched a new series entitled ‘Policy Insights’, whichhighlightresearchfindingsonkeydevelopmentchallenges in Sri Lanka and provides them as freely downloadable pdfs in Sinhala, Tamil and English. The firstintheserieswasbasedonthisarticleandisavail-able for download on the IPS website and the blog.

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IPS | Talking Economics | Jul-Dec 2011 Issue 42

By Parakrama Samaratunga

possibilitiesSri Lanka as a Rice Exporting Country:

problems &

Sri Lanka has just achieved near self-sufficiency in rice. But the rice sector, including both production and consumption, is still plagued with a multitude of economic and social problems. Against this backdrop, a proposal to commit resources to pro-mote rice export raises a number of questions ranging from “is it possible” to “at what cost and for whose benefit”. This article

seeks to take a deeper look into this complex issue. Promoting exports of agricultural commodities is certainly a good thing and Sri Lanka should have done this before. But the question is whether rice is the right choice. Although we have touched self-sufficiency in a good crop year we have not yet become fully self sufficient, let alone being able to produce sur-pluses for export on a regular basis. Although “self-sufficiency”, as defined in Sri Lanka, is not a necessary condition for becom-ing an exporter, having an “excess supply” or a surplus over domestic demand is a must. Therefore, in order to gainfully

export rice without negatively impacting domestic consump-tion, Sri Lanka should (1) raise production over and above the present level, (2) through a process that is (socially) profitable and (3) find stable international markets for the surplus. A closer look at these three aspects is necessary for evaluating Sri Lanka’s possibilities of venturing into the rice export arena.

Increasing rice productionIncreasing rice output to have a surplus is possible with area expansion, yield improvement, or both. The fact that Sri Lanka does not have additional area to be brought under rice is well known and if the government commits some prime land in four highly productive areas exclusively for the purpose of exports, that would reduce the supply to the domestic market. So, the only logical solution is to improve yield levels. But this is a chal-lenge too. Rice yield levels have not been increasing significantly over the last two decades and the country’s average yield hovers around 4.5 mt/ha. The highest level achieved in high potential areas is 6 mt/ha and a quantum jump in Sri Lankan rice yields is therefore necessary to produce a surplus for exports.

Cost of production Sri Lanka is a high cost rice producer. Cost of production of paddy in high potential areas is around Rs.15,000 per metric

The Budget 2012 presented last month touches on agriculture at several points. However, the proposal to establish “four rice export zones” stands out as the most provocative, in an eco-nomic sense, amongst all of them.


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ton. At prevailing milling, transport and storage costs, this translates to Rs. 41,000 per mt of milled rice at Colombo. With the ceiling price of Rs. 70 per Kg of rice in the local market, the exporters are not likely to export at a lower price and the mini-mum price at which Sri Lanka can export rice will be Rs.70,000 per mt. As such, exporting rice produced in high potential areas appears to be feasible on private profitability grounds, if it can be exported at Rs. 70,000 per mt or more.

“Profitability” of rice exportingHowever, the profit of Rs.29,000 per mt of rice achievable ac-cording to this data is a “private profit” accruing to various par-ties involved in the rice value chain. This private profit is possi-ble because the state bears the costs of free irrigation, subsidized fertilizer (Rs. 25,675 per ha) and the artificially high guaranteed prices. Although private agents do not bear the above costs, the society (or the country) bears these costs for producing rice in Sri Lanka. Hence, in calculating the social cost all these should be added to the private cost. The “social profit” or the net gain to the country by exporting a metric ton of rice is the difference between Rs. 70,000 and this social cost, which is larger than the private cost mentioned above. This is not the perfect way to compute social profit but it is good enough to show that social profit is significantly lower than the private profit in the case of rice production in Sri Lanka. In fact, systematically conducted research has shown that rice is only marginally profitable at so-cial levels even when its private profitability is substantial as in the case of high potential irrigation areas1. .

Does Sri Lanka have the scale?The third issue is whether exporting rice is feasible at a large enough scale on a sustainable basis. Sri Lanka produces me-dium and small (grain) non-sticky rice varieties for which there is no international demand. Most importers prefer long grain varieties with varying degrees of stickiness. Moreover, the qual-ity of milled rice produced in Sri Lanka is lower than that of average quality rice traded as bulk exports. Other competing countries offer better quality rice of preferred varieties at the same price - for example, ‘Thai 5% broken’ at Rs. 70,000 per mt. Under such conditions the chances of securing an FOB price of at least Rs.70,000 per mt of Sri Lankan rice in the world market is bleak.

In addition to competitive prices and acceptable qual-ity standards, another important requirement for being estab-lished as a food exporter is the ability to maintain a regular and orderly supply. As was mentioned earlier, Sri Lanka just man-aged to fulfill the domestic rice demand in good crop years and hardly produces a surplus maintained over the years. As such, Sri Lanka’s chances of securing an export market at this point in time are further reduced by this instability of production.

Yes, to niche markets?All the above factors lead to the conclusion that Sri Lanka is not yet in a position to enter the bulk export market for rice. Nevertheless, Sri Lanka is already engaged in exporting to small niche markets. These markets comprise the Sri Lankan dias-pora abroad who create a limited demand for “Samba” and red rice and another limited market for special varieties such as red pericarp long grain rice. Neither of these niche markets offer

sufficient demand for Sri Lanka to embark on an ambitious ex-port promotion programme. Moreover, the varieties for the sec-ond type of niche markets is in the possession of private firms and seed material is not available to the farming community in sufficient quantities.

If Sri Lanka wishes to be a steady rice exporter in spite of these problems some adjustments to the rice sector are essential. Ob-viously, these adjustments should be targeted at producing a steady surplus of better quality rice at internationally competi-tive prices. Although there are two possible markets to enter - i.e., average quality bulk export market and high quality special rice varieties market - the adjustments to be effected do not vary accordingly.

To be improved…The first aspect that needs an improvement is the profitability at a social level which results from higher yields and reduced cost of production. This involves technical change in rice pro-duction which comprises breeding new higher yielding varieties and substituting the present high cost production techniques with low cost ones. Unfortunately, there is no short cut for this and the only way it could be achieved is through time consum-ing research efforts. Sri Lanka allocated only a marginal propor-tion of the GDP for agriculture research and extension during the last three decades2 and consequently, there does not exist a possibility of bridging the technological gap without investing in this area over an extended period of time.

The second requirement is that the surplus we produce needs to be of the types of rice that are in high demand in the world market. For bulk export, we do not produce the preferred rice varieties as the Sri Lankan rice breeding programme never attempted to breed such varieties which are not preferred by Sri Lankans. However, as new destinations for rice exports emerge, for example Africa, Sri Lanka may find an outlet even for lower quality grades. But exporting large volumes will only be a long run possibility. For the specialty rice category, Sri Lanka neither possesses any preferred variety nor do we have the right agro-climatic conditions to grow them.

Another aspect of quality is related to the post-harvest han-dling of rice. The milling quality of rice produced for the do-mestic market is poorer than what is expected in international markets. In fact, the cost of milling envisaged in calculating the profits relates to substandard milling. Producing better quality milled rice involves higher capital and operating expenditure, but this is a must if Sri Lanka aspires to enter the rice export market.

ConclusionWith this simple cost analysis, it emerged that an immediate or short run boom in rice exports is not possible within so-cially profitable limits. Private profitability could be increased through the continuation of the existing input and price subsi-dies as well as the introduction of export subsidies. If exporting rice in the short run is a pressing political priority, it could be done at positive private profits but not social profits. This means that the country as a whole would not be making a profit although various parties involved in the value chain will.

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References1. Rafeek, M.I.M. and P.A. Samaratunga (2000) “Trade Liberalization and its Impact on Rice Sector of Sri Lanka”, Sri Lankan Journal of Agricultural Economics, vol.3, No.12.InstituteofPolicyStudies(2008),“Does‘Foodflation’CallforAgriculturalReforms?”,inSriLankaStateoftheEconomy2008,InstituteofPolicyStudies,Colombo,SriLanka.

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Budget 2012:

StREngthEnIng Sri Lanka’s Logistics Sector

first Steps towards

by Burhanudeen Thassim

“We are very excited and bullish with the possible de-velopments taking place in the logistics sector. I’ve al-ways been saying that the time for Sri Lanka’s logistics sector will come, and this budget has brought it, with a stroke of a pen”.

These were the comments shared by the Group CEO of Expolanka at the DailyFT post-budget seminar recently. The transport and logistics sector is important in any economy as it impacts much of a country’s economic activity, whether it is for an individual – accessing agricultural produce from farm-gate to retail shop, or for a firm - the entire process of materials and products moving into, through, and out of it. The efficiency and effective-ness of this sector can translate into an increase in productivity of the economy and facilitate faster economic growth.


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Sri Lanka is ranked poorly in the World Bank’s ‘Logistics Performance Index’ (LPI), falling consistently on the rankings from 92 out of 150 in 2007 to 137 out of 155 countries in 2010. The LPI is a perception-based index that takes into account six indicators to determine the logistics ‘friendliness’ of a country. Here, Sri Lanka has been ranked even below that of some less developed countries like Bangladesh and Kenya. So, will the new budget proposals be a shot in the arm for this sector to be put on a stronger footing? This article reviews the budget proposals relevant to this, takes a first look at how it would impact the sector, and what other issues need to be borne in mind. Several key persons in the sector were interviewed to obtain better insights.

Budget 2012: What is in it for the domestic logistics sector?The Budget 2012 announced last month introduced several proposals in favour of the logistics sector, particularly in terms of tax reductions.

A direct incentive in terms of taxation is on the importation of lorries, trucks and new lorry engines where it is proposed to remove VAT which was at 12% and Customs Duty which was at 5%. Currently, the bulk of domestic transportation is under-taken using trucks and lorries. Here it should also be noted that the majority of truck owners are individuals. The removal of these taxes will naturally reduce the cost of purchasing new ve-hicles for transport operators who run small fleets of trucks as well as larger logistics operators. This will also help re-fleet age-ing truck and lorry fleets of smaller operators – having spillover positive externalities in terms of enhanced safety and reduced pollution.

The budget also proposed reducing by 50% the import duties on specific tyres used for buses and lorries. A General Manager of a transport and logistics company noted that tyres amount to around 20% of the costs and therefore the reduction in import duty on tyres is likely to be a substantial cost saving and will certainly help achieve higher standards in the sector.

Indirectly, this and previous budgets benefit the logistics sector through continued efforts to improve roads and build-ing new highways. Moreover, budget 2012 further incentivizes small and medium enterprises, the backbone of the country’s Provincial economies, by offering various tax benefits. For these provincial enterprises to thrive, an efficient, reliable, and af-fordable transport and logistics services will be integral. As pri-vate enterprise growth in the Provinces increases in the coming years, the demand for logistics is likely to receive a substantial boost.

Apart from direct beneficiaries of lower costs of acquiring vehicles for domestic logistics, users of these services would also benefit. Supermarket chains like Cargills Food City which have a strong collection and distribution network, and have grown to become an integral part of most urban and sub-urban house-holds, may see a reduction in their operational costs and could in turn pass these on to consumers in the form of lower prices. Improving domestic logistics and supply chain will be particu-larly important for agricultural produce and agri-business. At the post-budget seminar, the Expolanka CEO noted that “45% of perishables are lost in transit”.

Taking a closer look…Although these budget proposals appear quite favorable for the logistics sector, there are other key issues that impact the sector that need to be considered. Stakeholders in the sector observed that the recent increase in fuel prices causes significant cost in-

creases as around 30% of the costs are on fuel. This resulted in many operators feeling less optimistic about the positive budget proposals, and remarked that the impact of the higher fuel pric-es would offset the tax benefits introduced through the budget. However, what is important to bear in mind is that operators must not take a myopic view – while the fuel increase does raise operating costs in the short term, the fiscal benefits proposed in the budget would help strengthen the sector in the medium to longer term.

Another area that needs to be considered is whether the tax cuts on imported trucks and lorries and their tyres will translate into lower prices for logistics firms and in turn for consumers. Many formal logistics firms tend to outsource their transpor-tation. There were two views that were brought out by them. The majority of transportation in this sector is undertaken by individuals who run small fleets of trucks, and logistics firms that outsource to them remarked that they were doubtful that these smaller players would reduce prices even if their costs re-duce as a result of the tax cuts proposed in the budget. Logistics firms observed that it will be likely that the marginal benefits will be retained by truck and lorry owners as well as being passed on to their drivers who constantly agitate for wage increases or a bigger proportion of earnings in the case of a profit-sharing scheme. However, another operator was of a different view. Cur-rently, the transport and logistics market has heavy competition with a large number of trucks and lorries in operation. There-fore, in order to remain competitive, some operators may reduce prices charged to logistics firms, accruing from the tax savings.

However, much of these arguments are on the basis that transport operators – whether large or small – will take advan-tage of the tax relief to invest in expanding or renewing their fleets. For this, a key consideration is the ability to raise capital to do this, especially as most of the truck and lorry owners are individuals. If they do not have access to sufficient funds, the desired effect of the tax relief may not materialize. Therefore, an important add-on to the tax relief proposed in Budget 2012 would be a scheme to assist these operators raise capital – for example, through concessionary loan facilities.

Meanwhile, the depreciation of the rupee would have an overall effect as well. An official at the Container Transport Owners’ Union noted that the benefits stemming from the Budget 2012 would be mixed – while tax relief on vehicles and tyres was a good thing, they noted that as a result of the depre-ciation, the cost of spare parts and the imports of tyres, etc., have increased. It remains to be analyzed whether the benefit of the former outweighs the impact of the latter.

At first glance it appears that it is only a few large logistics companies that can afford to own a large fleet of trucks and lorries, and may have the capacity to raise capital to re-invest in new fleets, etc., utilizing the proposed tax benefits. Meanwhile, the majority of transportation in the sector is by smaller players - individual truck and lorry owners as well as owners of small fleets. They may in fact need assistance the most in terms of re-fleeting and becoming modern, competitive, and efficient. Yet, the critical factor would be ensuring that they have the requisite financing facilities to take full advantage of the tax cuts offered.

With stimulated economic activity in post-war Sri Lanka and the heightened investment in connective infrastructure is-landwide there is no doubt that the logistics sector will have a key role to play in supporting growth. Budget 2012 has indeed brought in proposals that give the logistics sector a ‘shot in the arm’. But it is just the beginning.

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Dampening growth of Sri Lanka’s Small and Medium Industries

Electricity Constraints Are

By Anushka Wijesinha “Speaking with the small and medium-scale industrialists there I realised that electricity issues are severely hampering their operations. One medium-scale industrialist, who produces rubber products for the Swedish market and employs nearly 500 people, noted that his plant faced 118.5 ‘electric-ity down hours’ last year.” is what Mr. Poornachandran, President of the Yarlpanam Chamber of Commerce lamented at a public-private stakeholder consultation hosted by an SME-focused Ministry in Co-lombo recently. He repeated this gripe at a post-budget discussion held in Colombo, shortly after Budget 2011 was presented

*the World bank south aisa blog featured an article by ips Economist anushka Wijesinha. We reproduce the article in full here.

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Mr. Poornachandran heads the leading business chamber in Sri Lanka’s Jaffna district, which was caught up in the con-flict that ravaged the country for thirty years. Building the small and medium enterprise sector in conflict-affected ar-eas is challenging as it is, and many new opportunities are opening up, but the issue of electricity continues to blight the recovery of the region. But it’s not just in war-recovering dis-tricts like Jaffna. Mr. Poornachandran shares this frustration with his fellow businessmen in other parts of the country.

Last week, I visited a couple of Industrial Estates in the Kalutara district (which borders the capital district of Co-lombo) which are home to many small and medium indus-tries (SMIs). Speaking with the small and medium-scale in-dustrialists there I realised that electricity issues are severely hampering their operations. One medium-scale industrialist, who produces rubber products for the Swedish market and employs nearly 500 people, noted that his plant faced 118.5 ‘electricity down hours’ last year. This is an average of over 2 hours a week, but in some weeks it peaked to as high as 10-14 hours. Another small industrialist in the Estate, who pro-duces ornamental ceramic products for the local and inter-national market remarked (translated from Sinhala) that, “the power brown outs not only ruin our machinery, they cause production delays, increase costs, and cause a higher propor-tion of rejects”. Another industrialist remarked to me that at an Industrial Estate in Ekala, just North of Colombo, there have recently been 14 electricity ‘brown outs’ in as many days.

A forthcoming World Bank report also highlighted this issue. The report entitled ‘More and Better Jobs in South Asia’, publishing results from country-level Enterprise Sur-veys, shows that electricity is the number one constraint for enterprises in Sri Lanka, and is in at least the top 5 list of constraints for all South Asian countries . The report inves-tigates major constraints hindering employment generation and expansion of enterprises, and their severity, through the surveys. While in Sri Lanka electricity is reported as the top constraint, it is second most severe constraint for a South Asian benchmark firm in the urban formal sector (a bench-mark firm is defined as a medium-size manufacturing firm with 30 employees that is domestically owned, does not ex-port or import and, is located in a large city).

More significantly, according to the Enterprise Survey results contained in the jobs report, electricity in Sri Lanka out ranks other constraints such as business licensing, cor-ruption, political instability and macro instability. It is the top constraint for medium-size and micro benchmark firms in the urban formal sector and second most severe in a mi-cro benchmark firm in the rural sector in Sri Lanka . These results indicate the severity of electricity related issues for the commercial sector in the country.

Industrial firms in Sri Lanka are faced with three main bottlenecks with regard to electricity - accessibility, reliability and affordability. The problem isn’t new. Even in 2004, a World Bank report Sri Lanka: Improving the Rural and In-vestment Climate identified that over 40% of urban manufac-turing firms and 25% of rural enterprises in Sri Lanka found electricity to be a major bottleneck for enterprise growth. The report noted that less than 70% of rural enterprises received electricity from the national grid . This has no doubt changed since then. Electrification levels in Sri Lanka have improved significantly and by the end of 2010 it was estimated at 90%. Yet, we must remember that this was achieved partly due to the host of rural electrification schemes, many of which are not yet connected to the national grid.

Apart from urban centres, particularly in the Western Province, few areas enjoy uninterrupted power supply in the country - 52% of medium-size enterprises in Sri Lanka are compelled to use generators to cope with power outages. Gen-erators could account for as much as 12% of a firm’s fixed assets on average. So, the lack of reliable power supply sig-nificantly impacts operational costs of Sri Lanka’s industries, which in turn impinges on their competitiveness.

Meanwhile, electricity coverage in most parts of Sri Lanka is reaching 80-90% under an unprecedented electrification scheme launched by the government. This is extremely laud-able, and will no doubt bolster the current efforts to promote inclusive growth. Yet, in many areas, electricity reliability and continuity continues to dampen the business environment for small and medium industries (SMIs). This needs to be addressed fast, particularly as SMIs are the backbone of the Sri Lankan economy and will play a critical role in ensuring inclusive growth through local private sector development in post-war Sri Lanka.

References1. The World Bank, 2011, More and Better Jobs in South Asia: Overview, Washington D.C.2. ibid3. The World Bank, and International Finance Cooperation, 2004, Investment Climate Assessment. Sri Lanka: Improving Rural Urban Investment Climate

one medium-scale industrialist, who produces rubber products for the Swedish market and employs nearly 500 people, noted that his plant faced 118.5 ‘electricity down hours’ last year. this is an aver-age of over 2 hours a week, but in some weeks it peaked to as high as 10-14 hours.

More significantly, according to the enterprise Survey results con-tained in the jobs report, electricity in Sri lanka out ranks other con-straints such as business licens-ing, corruption, political instability and macro instability.

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“ “





- Christine Lagarde (Executive Director, IMF) at the International Finance Forum in


Consistent government policy: that is what investors are looking for

- Sujeewa Mudalige (President, Institute of Chartered Accountants of Sri Lanka) at the

International Conference on Tax and Development organized by the IPS together with the ICTD, UK

Despite some turbulence in international capital markets due to concerns on sovereign debt vulnerabilities in advanced countries, the Sri Lankan government was able to raise capital from international capital markets at historically low rates

– Hon. Sarath Amunugama (Senior Minister for International Monetary Cooperation), addressing

the Annual Meetings of the International Monetary Fund (IMF) in Washington D.C.

– Dr. Anura Ekanayake (immediate Past Chairman, Ceylon Chamber of Commerce and

Governing Board Member, IPS) at the Annual General Meeting of the CCC

Migration, yes. But migration with dignity

– Hon. Dilan Perera, Minister of Foreign Employment Promotion and Welfare, at a international

conference organized by IPS together with Fedrich Ebert Stiftung on ‘Institutionalizing Regional Approaches to Migration in South Asia’, November 2011

Our school text books don’t even mention IT-BPO in the chapters on Sri Lanka’s exports. It still talks of just tea and rubber. Why? IT-BPO is a top-five export earner for Sri Lanka

- Sujiva Dewaraja (Chairman, SLASSCOM) at the DailyFT Post-budget Forum

The appointment of unqualified people to top management posts on political grounds and the lack of financial and administrative disciplines had ruined many of the public enterprises

– Hon. D.E.W. Gunasekera (Senior Minister for Human Resources) at the release of the Report by the

Parliamentary Committee on Public Enterprises (COPE).

Decentralized governance has contributed little to bridge regional disparities

– Asoka Gunawardena (fmr. Chairman, Finance Commission) at a forum organized by the Sri Lanka Economic Association and the Fredreich Ebert Stiftung

– Prof. A D V De S Indraratna

(President, Sri Lanka Economic Association – SLEA) at the Inauguration of the SLEA Annual Sessions 2011

This budget has given much to develop enterprises in Jaffna…but power shortage is a serious issue. We have about 13 days of no power every month

- Mr Poornachandran (President, Yarlpanam Chamber of Commerce) at the DailyFT Post-budget Forum

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seminar & ‘Expert insights’ panel on ‘2011 and beyond: trade & investment prospects in asia and impli-cations for sri lanka’, colombo

A Seminar & ‘Expert Insights’ Panel on ‘2011 and Beyond: Trade & Investment Prospects in Asia and ImplicationsforSriLanka’,organizedbytheIPSandsupportedbytheAsia-PacificResearchandTrain-ing Network on Trade (ARTNeT) took place at the IPS Auditorium. Chief Guest at the occasion was Hon. Dr. Sarath Amunugama, Senior Minister for International Monetary Cooperation, Government of Sri Lanka and Chairman, 67th Session of the Commission, Unit-ed Nations Economic and Social Commission for Asia and the Pa-cific (ESCAP).AnushkaWijesinha,Research Economist, IPS, made a presentation on ‘Key Highlights of Asia-PacificTrade and InvestmentReport 2011 (UNESCAP)’, while Expert Insights were presented by Narhari Rao, Lead Economist – Asian Development Bank Sri Lanka CountryOffice,Anura Ekanayake,Immediate Past Chairman - Ceylon Chamber of Commerce and Mem-ber, Board of Governors – IPS, and Mafaz Ishaq, Director - Calaman-der Capital Singapore Pte Ltd (Co-lomboOffice).

4th saarc business leaders conclave, kathmandu, nepal

The 4th SAARC Business Leaders Conclave took place in Kathmandu, Nepal, during 20-22 September, 2011 and IPS Executive Director made a presenta-tion on ‘Trade and Investment in South Asia: Oppor-tunities and Challenges’. The Conclave was inaugu-rated by the President of Nepal, H.E. Dr Ram Baran Yadav in the presence of the Guest of Honour, the former Prime Minister of Sri Lanka, Hon. Ratnasiri Wickremanayake. The Conclave was organized by the SAARC Chamber of Commerce and Industry in collaboration with the Federation of Nepalese Chamber of Commerce and Industry in partnership with Friedrich Naumann Stiftung.

Regional Conference on ‘Knowledge Sharing on Regional Cooperation and Integration’ and Consultative Meeting on Strengthening SAARC’s Institutional Mechanism, Malé, Maldives

ips annual national conference, colomboThe IPS inaugural Annual Na-tional Conference on the theme “Post-conflict Sri Lanka: To-wards Shared Growth”, took place at the IPS Auditorium on 19th October, 2011. The Chief Guest at the occasion was Hon. Tissa vitarana, Senior Minis-terof ScientificAffairs and theGuest of Honour was Hon. D.E.W. Gunasekera, Senior Min-ister of Human Resources.

Dr. Saman Kelegama, Executive Director, IPS, and Anushka Wijesinha, Research Economist, IPS were resource persons at the Regional Confer-ence on ‘Knowledge Sharing on Regional Coop-eration and Integration’, held in Malé, Maldives, during 8-9th October 2011. It was organized by the Government of the Republic of Maldives in association with the SAARC Secretariat, and the Asian Development Bank (ADB). Executive Director made a presentation on ‘vertical Integration of Industries in South Asia’ while Anushka Wijesinha made presentations on ‘Trade Facili-tation Issues in South Asia’ and ‘Liberalization of Air Services in South Asia’. All three presenta-tions were based on research stud-ies that the IPS completed for the SACEPS. These re-search papers will be forthcoming as

Chapters in a book edited by Hans Brunner of the ADB and published by Edward Elgar, U.K.On the 9th of October a Consultative Meet-ing on Strengthening SAARC’s Institutional Mechanism took place with H.E. the President of Maldives, Mohamed Nasheed inaugurating the meeting. The Executive Director made a presentation on the subject and made a sum-mary presentation of the recommendations at the end, which will be submitted by the SAARC Secretariat as a policy document for the forth-coming 17th SAARC Summit in Male.

4th south asia Economic summit, Dhaka, bangladesh

Dr. Saman Kelegama, Executive Director, IPS, Dr. Dushni Weerakoon, Deputy Director, IPS, and Anushka Wijesinha, Research Economist of IPS were resource persons at the 4th South Asia Economic Summit (SAES), held in Dhaka, Bangla-desh during 22 -23 October, 2011. It was organized by the Centre for Policy Dialogue, Bangladesh. IPS was a co-organizer of the 4th South Asia Economic Summit along with RIS (India), SACEPS (Nepal), SAWTEE (Nepal), and SDPI (Pakistan).


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ips, together with the united nations and ministry of Economic Development hosted a policy Dialogue on poverty at the ips in october 2011. here are some of the perspective shared by the local and international experts who spoke at the event.

nalani m. hennayake (University of Peradeniya) highlighted the need to move away from thinking from the point of view of poverty, employment and productivity to focus on three key principles, namely, enhancing capabilities, improving equity and ensuring social sustainability.

nihal somaweera (Ministry of Economic Development) explained that the government programmes for regional development are centred on developing villages (16,000) and fast trackingdevelopmentinlaggingregions.Thespecificareasoffocusinclude, improving accessibility (provincial and rural roads, bridges, improving irrigation and other (health, education and markets) infrastructure. Priority is given for industrial development outside the Western province.

p.a.kiriwandeniya (SANASA Movement) highlighted the need to put people at the centre of development. He argued that when market connectivity is made through infrastructure development it is equally important to ensure that the communities relative bargaining capacity to engage with these new market opportunities. Capital must be made available to these areas and matching capital should be generated from within. He added, “This will enable people to exploit the opportunities and invest in projects and programs that make it locally meaningful and sustainable”.

priyanthi Fernando (Centre for Poverty Analysis) stressed that poverty in the estate sector remains high in the country. To help the sector move out of poverty more attention should be given to the vulnerable groups – including women, children and old people -- within the plantation sector and key areas of vulnerability – such as nutrition, information and communication technology and mainstreaming.

anuradha rajivan (UNDP)arguedthattheAsia-Pacificregionas a whole has made gains in human development - economies have grown and countries have made MDG progress. But she added that, “wide variations in economic and social opportunities - across and within countries - are opening up questions of their legitimacy and durability”. She posed the question, “Can growth be sustained as it urbanizes, globalizes, depletes the environment, and faces global warming?” South Asia is particularly vulnerable to shocks – large number of workers are poor, Recent crises has pushed people into poverty, Greater vulnerability to food insecurity, disasters and shocks. Although income poverty has declined, malnutrition is a persisting problem. She posited that, “Freedom from poverty is not only a right; it also makes good economics, promotes democracy and assists in long-term stability. The need is to put right policies in place to achieve positive results”.

markus ruck (ILO) explained that the ‘Social Protection Floor’ is now recognized as a key strategy for coping with shocks and the fast recovery from them and ensuring minimum levels social protection also fairer globalization. The United Nations suggests that asocialprotectionfloorcouldconsistof twomainelements–1)services:geographicalandfinancialaccesstoessentialservicessuchas water and sanitation, health, and education; 2) transfers: a basic set of essential social transfers, in cash and in kind, as aid to the poor and vulnerable to provide minimum income security and access to essential services, including health care.

lal panapitiya, mD. (Ministry of Health) emphasised the need for paying more attention to preventing non-communicable diseases in the country, and stated that, “Poor health leads to poverty”.

azeb asrat (World Food Programme) remarked that “Food insecurity and poverty are intertwined”. Food Insecurities can result from various factors including, economic recession, high energy and food prices, climate change, population growth and resulting stresses on land less cultivable land and health. In Sri Lanka the main causes of food insecurityincludes,longyearsofconflictandthetransitiontoreturnto normal livelihoods, adverse impacts of climate change, lack of access to agriculture related technology, post harvest losses, high prevalence of maternal and child under nutrition, gap in food security monitoring and information management systems, high food prices. “The fact that food security is a value addition to business and operational plans needs to be communicated widely”, he remarked. He added that rehabilitating small farms and connecting them to supply chains, improving village level infrastructure, and improving access to modern technology and empowering people (especially women) to participate in the food security sector are important in improving the status of food security.

andrea rossi (UNICEF) acknowledged that, “Child poverty deserves special attention”. The ill-effects of poverty may not be permanent in adults but the consequences of lost opportunities in childhood could be permanent in children and may lead to poverty in adulthood. South Asian countries are on track to reduce poverty, but regional and national averages mask large inequities between and within the eight countries of South Asia.

nisha arunatilake (Institute of Policy Studies) stressed that, “Productive employment helps people out of poverty and improves their living standards”. She added that better jobs are seen in the services sector, where more workers are in the formal sector and as such have better social protection and less are working-poor. But better jobs in the services sector require better education, and investments in health and education are key for better education and keeping children in schools.

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you have been with ips for nearly a year now, what has been the highlight of your work so far?

“I would have to say that the Telecom Regulatory Environment survey was the highlight of my work, not only because of our contribution tothefieldofregulatorygovernancebutformanyotherreasons.ItwasmyveryfirstresearchprojectatIPSandIwasasgoodasafreshuniversity graduate when I joined. It put me through an intensive pro-cess as I had to juggle the different aspects of administering a survey, research for the report that was to follow the survey as well as meet multiple deadlines. It also required dealing with different individuals from different backgrounds with different work ethics which was fun and interesting. While the project itself was a learning experience, the excellent guidance and training I got from my unit head and other colleagues was invaluable. They basically helped me gain the skills es-sential for research within very short period. So in many ways this was the work which laid the foundation of my career as a researcher. And the positive feedback from everyone from donors to supervisors was definitelyrewarding!”


Buddhika BrahmanageIndustry, Public Enterprise Reform, and Regulatory Policy Unit

What made you choose ips to do an internship and how has the experience been?

“As an undergraduate studying Economics and Finance, I was told that IPS could help show me the practical aspects of Economics and IPS did not disappoint! In fact, not only was I given exposure to the current economic issues, I was also given an opportunity to listen to some of the foremost economists in the country and visiting economists from the world bank and other global organizations. The highlight of my internship so far was the fact that I was allowed to write and publish an article by myself. Sometimes I forget I am just interning!”

“So in many ways this was the work which laid the foundation of my career as a researcher

Burhanudheen ThassimProject Intern““The highlight of my internship

so far was the fact that I was allowed to write and publish an article by myself

migration and development is an area that you are focusing quite keenly on. What is it about this area that interests you most?

“Ifirstbecameinterestedinmigrationissuesthroughanassignmenton ‘Migration in Sri Lanka’ which I did for my masters’ degree. Once I returned to IPS after completion I had several opportunities to look more into migration issues not only in Sri Lanka but also other countries in the region. Most of Sri Lanka’s poor people are leaving the country in order to earn more money. But I really doubt as to how people use this money for their children’s education, family health, etc. I also wonder who will look after their children while mothers are abroad and what are the issues faced by these poor women in host countries. I am really interested in investigating these issues and informing policy makers. I am nowinvolvedinpreparingSriLanka’sfirsteverMigrationProfilefortheMinistry of Foreign Employment Promotion and Welfare - I consider this a milestone in my research life.”

Roshini JayaweeraPoverty and Social Welfare Unit““

I am now involved in preparing SriLanka’sfirsteverMigrationProfilefortheMinistryofForeign Employment Promotion and Welfare - I consider this a milestone in my research life.

you have traveled for conferences to several countries in this region - tell us about an interesting experience you’ve had during these?

“The most interesting experience for me was when I attended a workshop held in Yogyakarta, Indonesia, on Trade Research. Unlike the other conferences which were one day events, this workshop lasted for a whole week, and focused on trade theory and policy analysis - an area directly relevant to my research work at IPS. Of particular interest was the experience I gained in analyzing trade policy issues using actual micro-levelfirmdata.Apartfromthesubjectmaterial,interactingwithfellowparticipantsfromcountriesaroundtheAsia-Pacificregionand learning about the work they do, was a rewarding experience. The opportunity to travel around the city and visit some key tourist attractionswasdefinitelyanaddedbonus!”

Ashani AbeysekeraInternational Economic Policy Unit““Interacting with fellow

participants from countries aroundtheAsia-Pacificregionand learning about the work they do, was a rewarding experience

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you joined ips after living for many years in the usa and aus-tralia, where you studied and worked - what was your motiva-tion for returning to sri lanka?

“There were a couple of different factors that pushed me to move to Sri Lanka. My parents and older brother have been residing here for the last 10 years or so, and seeing them only once a year on holidays didn’t make much sense - I wanted to spend more time with them. With regards to my career, I had known for several years that I wanted to pursue work in the area of economic development. But, as a foreigner with limited permission to work in the USA and Australia, I didn’t have many oppor-tunitiesinthedevelopmentfield.Whatbetterplacetopursuethisworkthan Sri Lanka, at a time when the country is just entering a new era of development? I wanted to be a part of that process and not simply watch from the sidelines.”

Chandana KarunaratneMacroeconomic Policy and Planning““What better place to pursue

this work than Sri Lanka, at a time when the country is just entering a new era of development?

you have been working on issues of poverty and exclusion for some time now. in your experience, what is the one thing that can transform poverty in sri lanka?

“I don’t believe there is ‘one thing’ that can transform poverty in Sri Lanka. What is important is a combination of key factors, which I think is necessary for a transformation. Creating opportunities for productive employment and enterprises is one of the most critical factors. Access to such opportunities has to be ensured with improvements in infrastructure and service delivery. It should go hand in hand with improvement of capabilities. The combination of these can lead to a transformation. In fact, these are included in the anti-poverty strategies. I keep thinking that promoting entrepreneurism would be a real catalyst for poverty reduction. I’ve always believed that instilling the entrepreneurial spirit in the youth can transform the problems of poverty in Sri Lanka.”

Ayodya GalappattigePoverty and Social Welfare Unit““I’ve always believed that instilling the

entrepreneurial spirit in the youth can transform the problems of poverty in Sri Lanka

Economic and social Development under a market Economy regime in sri lankaBuddhadasa Hewavitharana Felicitation volume I and volume 2

Edited by Saman Kelegama and Dileni Gunewardena, Published by Vijitha Yapa Publications, Sri Lanka

These two volumes cover a broad spectrum of Sri Lanka’s economic and social development and critically explores the market economy. The volume of essays offer comprehensive accounts of the actually existing market economy of Sri Lanka, complete with disaggregated analyses of key economic and social problems faced by the country during recent decades. The chapters examine many aspects, rangingacrossabroadspectrumof issues:publicfinanceandmoney,fiscalpolicyandtaxation,andtheimpactofthemarketeconomy on different sectors and parts of society, to regional disparities and income distribution.

microinsurance in sri lanka: combating multiple and overlapping vulnerabilities

by Ayodya Galapattige, Roshini Jayaweera, Ganga TilakaratnaResearch Studies: Poverty and Social Welfare Policy Series No.9, October 2011

This study evaluates the current provision of microinsurance products in Sri Lanka, offered by grass roots level institutions - Microfinance Institutes(MFIs), Non-Governmental Organizations (NGOs), and Community Based Organizations (CBOs). It examines the differences of the products, delivery methods, and the extent to whichtheyreflecttheneedsand preferences of the poor households. Comprehending the demand side factors and supply side limitations is

helpful in enhancing the understanding of the nature of the service provision in microinsurance. The study is based on both qualitative and quantitative research methods, which supplement each other.

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Fast Facts From July to DEcEmbEr 2011

$600mnSri Lankans have spent a record 600 million dollars of gold in 2011 up more than seven times from 2010, according to CBSL

855,975Tourist arrivals to Sri Lanka in 2011 reached a record high of 855,975 according to the Tourist Board, up 30.8% from a year earlier.. Sri Lanka is targeting 2.5 mn by 2016.

5000About 5,000 vehicles travel daily on the new Southern Ex-pressway on weekdays bringing in revenues of Rs.1.5mn a day and up to 10,000 vehicles travel on weekends. The expressway cost Rs.70 billion to build, and was years behind schedule and heavily over budget.

£200mnBetween the 6th and 10th of August 2011, several London boroughs and cit-ies and towns across England suffered widespread rioting, lootingand arson. An estimated £200 million worth of property damage was incurred, and localeconomicactivitywassignificantlycompromised.Therewereatotalof3,443 crimes comitted across London linked to the disorder.

$8mnIt is estimated that Sri Lanka spent around eight million dollars for the Hambantota 2018 bid to host the Com-monwealth Games. Sri Lan-ka lost the bid to Australia’s Gold Coast. Sri Lanka’s cor-porate sector contributed substantially to the bid.

4000Sri Lanka’s government information service, the 1919 call centre, an-swers around 4000 calls from citi-zens each day with more than 7mn calls having being answered since its inception. Mr. Lalith Weeratunga, Secretary to the President, made this observation at a forum on pro-ductivity organized by the Sri Lanka Association for the Advancement of Quality and Productivity

7379Following a elephant census undertaken in the latter half of this year, wildlife officials saidSri Lanka has 7,379 elephants. Of that number, some 5,879 wild elephants are living near wildlife parks and sanctuaries while another 1,500 were es-timated to be in other areas. "We have an elephant popula-tion which is in good health and its population growth is also very good", remarked H.D. Rat-nayake, Director of the Wildlife Conservation Department.

146The number of Billion-aires in China topped 146 according to Forbes Asia 2011’s Chi-na Rich List announced in September 2011. This is an increase from 115 in March 2011 and 64 in 2010. It is also re-ported by a local news-paper that 72 Chinese billionaires died of unnatural causes. The newspaper which con-ducted a survey of pub-lic reports about bil-lionaires’ deaths over the past eight years, found 15 billionaires were murdered, 17 committed suicide, 7 died from accidents, 14 were executed, and 19 died from diseases

25The Colombo Stock Ex-change (CSE) witnessed 25 Initial Public Offerings in 2011, up from 11 listings in 2010.Thefirmsraised US$ 414 million from initial public offers and cash calls in 2011, up 64% from a year earlier,.

37,000The Sri Lankan government is to take back 37,000 acres of unused land from regional plantations companies and distribute it to small farmers, H.E. the President announced in the Budget 2012. He said the government had done surveys of plantations and identi-fiedthelandthathadbeenlyingunusedsince the estates were privatised in 1992.

37The government passed a controversial new law in November 2011 to ac-quire 37 privately owned enterprises citing them as ‘underutilized’ or ‘under-performing’. The enterprises included several apparel factories, two sugar plants, a high-rise hotel and resi-dential development, and a conference centre which was under a Public-Private Partnership agreement.

$380bnA leading insurance group based in Germany, Mu-nich Re, reported that the world faced total losses of $380 billion as a result of natural disasters in 2011. This is over $150 billion more than in 2005, the previ-ous record year.

rs. 19bn+Reviewing the performance of 249 government-owned institu-tions, the Parliamentary Commit-tee on Public Enterprises (COPE) reported that losses amounting to a staggering Rs 19 bllion were incurred during the 2007 – 2009 period.

40,000 New vehicles are now put on Sri Lankan roads each month compared to about 20,000 two years ago. This includes about 20,000 mo-tor cycles and 11,000 three wheelers, which are mostly used as taxis.

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