Doubling per capita income in next seven years
Don WIJEWARDANA
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Export,
import trade, an integral component of the economy |
In a recent interview with the Straits Times President Mahinda
Rajapaksa spelt out one of the key priorities for his second term: “My
target is to double the per capita income to US$4,000 by the end of my
tenure”. This is an admirable objective since an increase in income
levels will have several benefits including creating new jobs and
rescuing a large proportion of the population from poverty and drudgery
and facilitating additional expenditure on social services such as
health, education and welfare. In this article we want to examine what
‘doubling per capita income’ means, whether it is achievable within this
timeframe, and if so how.
GDP
The total value of goods and services produced within a country
during a particular period is referred to as the Gross Domestic Product
or GDP. It includes the value of all of private and public consumption,
government outlays, investments and exports less imports. GDP is
commonly used as an indicator of the economic health of a country, as
well as to gauge a country’s standard of living. The other gauge
commonly used to measure the standard of living is a country’s per
capita income. That is GDP divided by the number of people in the
country.
A higher per capita GDP represents a higher standard of living. This
is an especially useful measure when comparing one country to another as
it shows the relative performance of the countries disregarding the size
of their economies. However, per capita income is obviously a broad
brush measure of the level of living. Other tools, in particular ways to
promote equitable distribution, are important to ensure benefits of
growth are spread among the wider community.
Major challenge
Doubling Sri Lanka’s per capita income within the next seven years
will be a major task. To achieve that it will require an annual growth
rate of around 10 percent. However, recent experience with a number of
other countries shows such high growth rates are attainable.
 Over the past five years, while the country was still embroiled in
fighting the LTTE, Sri Lanka has been able to record growth rates of
over six percent per year. Elimination of terrorism has already resulted
in not only allowing for diversion of resources towards productive ends
but also facilitating the inflow of enhanced capital and tourist
dollars. These trends are likely to be reinforced by at least three
major developments. One is the endorsement of the economic policies of
the Government by the International Monetary Fund by approving the
standby facility of $2.9 billion which should spur the confidence of
foreign investors. Another is identifying Sri Lanka as a top level
tourist destination by both the New York Times and the National
Geographic.
And thirdly the coming into fruition within the next few years of a
number of key infrastructure projects including the Hambantota Port
development, the second international airport and a number of major
highway projects.
Expanding growth
Along with expanding growth Sri Lanka may need to address a related
issue. That is, so far economic growth in the country has largely been
confined to the Western Province which accounts for generating more than
half the country’s GDP. Consequently the benefits of growth have tended
to be skewed with rural communities deriving minimal gains. So the
effort needs to be focused not only in ratcheting up growth but also
pushing activity more widely into regions.
Here too the high level of investment in infrastructure building is
likely to contribute in a major way promoting growth, especially in the
regions. On average Sri Lanka has been investing 3.5 percent of GDP on
infrastructure development which will need further expansion.
These developments will stand in good stead towards achieving the
President’s objective. However, the favourable developments are helpful
but insufficient conditions for rapid economic growth. For it to happen
there is the need for major sustained effort on several other key
fronts.
Models of growth
There is a variety of growth theories and models but in the final
analysis the rate of economic growth of a country depends on its
circumstances and the policies followed by the Government. The
circumstances include the availability of resources as well as historic
and cultural factors which impinge on economic policies. In relation to
implementation of growth initiatives also there can be differences. Some
countries adopt inward looking economic measures; some rely on open
economies while still others use a mix of the two. Each of them has
different degrees of success.
But none of the experiences of successful countries could be reduced
to a formula for growth that applies universally in view of the
uniqueness of the situation of each country. The latter half of the 20th
century and the early years of the 21st century saw remarkable economic
growth among a number of developing countries. It was not only rapid
(defined as growth above seven percent per annum) but also sustained
over long periods.
Seven percent growth
Note that at growth rate of seven percent an economy doubles its size
every 10 years. A recent study identified 13 countries, mostly in Asia,
that had maintained such high growth rates consistently over 25 years or
more. (See Table). Two other Asian countries, India and Vietnam, are
also on the way to achieving the same status. As noted before each
country has to charter its course for economic growth dependant on its
own situation. Each of the 13 countries that had consistently recorded
high growth rates also had their own particular conditions on which
their development strategy was based.
However, their development plans were implemented within the
background of these five fundamentals which spawned the rapid take off.
While recognising our own strengths and weaknesses it will be useful for
Sri Lanka to draw on the experience of these high performing economies
in developing its own growth strategy.
Integration with global economy
Close integration with the world economy was perhaps the most
important shared characteristic of the 13 countries identified in the
table. Sustained growth at the pace achieved by these countries was not
possible prior to the 1950s. It became feasible only because the world
economy became more open and more tightly integrated by the second half
of the 20th Century. Expanding multilateral market access and the
technological changes that have taken place have allowed not only more
traditional goods produced in developing countries to reach developed
country markets but also facilitated expanded market opportunities for
new products. So the benefits were in two ways: they imported from the
rest of the world what they knew - the technology, ideas and know-how,
and exported what it wanted to an expanding market. For example, the
four so called tiger economies (Hong Kong, Singapore, South Korea and
Taiwan) increased their manufactured exports from $4.6 billion in 1962
to $715 billion by 2004 (in constant 2000 dollars).
Import substitution polices
This is not to deny that import substitution polices will also help
promote economic growth. Such policies have succeeded up to a certain
point in promoting investment and improving the efficiency of domestic
producers. However, there are closely defined limits to such growth
since in a small country the size of the market imposes limits to what
the producers can achieve in terms of specialization. In fact a shift
towards such policies was partly a reason for the sudden halt to the
high growth rate Brazil was achieving prior to 1980. Similarly, in the
1950s Korea pursued a policy of import substitution and the growth it
registered during that time was only two-three percent. To be continued
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