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Reflections on economic growth, unemployment and poverty
View(s):
There has been significant economic growth in recent years. Unemployment and poverty, too, have been reduced. These developments have been especially manifest in the five years after the war. There is visible evidence of economic growth, decreased unemployment and reduced poverty. Exogenous factors and foreign borrowing have played an important role towards these achievements.
However, there has been scepticism about official estimates of economic growth, unemployment and poverty. Economists have pointed out certain inconsistencies in statistics that lend support to the view that economic growth is not as high as estimated. One such evidence is the falling revenue to GDP ratio. When the GDP and per capita incomes of a country are increasing, the proportion of revenue to GDP is expected to increase. In Sri Lanka it has decreased in recent years. This has led to the questioning of the GDP estimate that is the denominator.
Another is the trend of decreasing exports as a proportion of GDP. Despite economic growth exports have declined and imports have increased resulting in large trade deficits despite high economic growth. The increasing agricultural output in years when crops have been adversely affected by drought and floods also adds to such scepticism. One can give explanations to these paradoxes but these explanations may in turn lack adequate facts and figures.
Weaknesses in statistics
No doubt there are serious weaknesses in national statistics. Their sample design, collection and computation may leave much to be desired. Nevertheless there are no alternate statistics with which these may be compared. It is best to consider these estimates as ordinal measures than as precise cardinal values.
Incomes have risen
There is adequate visual evidence countrywide that there has been economic growth, that incomes have increased, that consumption levels have increased, and that unemployment has declined. However, the reasons for these improvements are not entirely the economic growth in the country but significant other exogenous and endogenous factors.
Remittances
One of the important reasons for improvements in income is the large amount of remittances that come into the country. The majority of these remittances are from Sri Lankan migrant workers in the Middle East, but there are workers employed in many other countries as well. There are significant amounts of remittances from European countries, East and South East Asia, Australia and even the Maldives and Bangladesh.
In 2013, total remittances amounted to US$ 6.4 billion and are expected to exceed US$ 7 billion this year — about a tenth of this year’s projected GDP. This gives an idea of the enormity of these funds. It is most likely that the actual amount of remittances is higher as there are informal ways by which monies are remitted that are inadequately captured in the official statistics. These considerable remittances are mostly to the lower income segments of the country. Consequently incomes in rural areas as well as in lower income urban populations are enhanced and are an important causal factor for the reduction of poverty in the country.
The economic and social impacts of these remittances are an important explanation for the increased incomes and improved livelihoods of a large number of households. Remittances have improved housing of low income earners and rural homes have television, electronic and electrical appliances. Many households have three wheelers or motor cycles and some have vans. All these improvements have been due to remittances and consumer durables brought in by these workers.
Unemployment exported
The exodus of large numbers of the labour force abroad is a reason for the reduction of the unemployment rate. About 20 per cent of the labour force is estimated to be employed abroad.
Wages of armed forces
The wages of armed personnel is another significant factor for the improvement of incomes. These wages that are a high proportion of the large defence expenditure go mostly to lower income groups in rural areas. Incomes have consequently increased though their impact is not of the same magnitude as remittances.
Employment in the armed forces and the absorption of large numbers of educated youth to an already bloated public service, as teachers and into state banks have reduced unemployment, though their productive deployment is questionable.
Economic impacts
Both these income sources have multiplier impacts and backward linkages. Quite apart from raising incomes and reducing poverty, these resources have been used for economic enterprises: financing a three wheeler, obtaining tools for small industrial enterprises, obtaining educational services and technical training. In addition the increased consumption has led to stimulating trade and increased demand for consumption goods.
The rapid growth of towns in the hinterland owes much to the increased demand for consumption goods. The wide variety of goods available makes small shops and boutiques miniature super markets. This phenomenon is evidence of the impact of these income flows.
Concluding perspectives
Exogenous factors rather than internal economic developments have been mainly responsible for improvements in employment and incomes and stimulating growth. The large foreign funding of investment, consumption and the consequent high foreign indebtedness have raised doubts about the sustainability of the growth momentum.
The sources of growth also leave much to be desired: increased wages and salaries of public servants, foreign-funded government investment in infrastructure rather than increased manufactures and growth in certain services have raised concerns.
Assessing the nature and sources of growth and the causes for the improvements in employment and poverty are more important than quibbling about the veracity of statistics. The official estimates can be taken as ordinal measures of high growth, a reduction in unemployment and a lowering of poverty. The reasons for these improvements are largely exogenous or owing to foreign borrowing that has increased foreign debt beyond safe threshold levels. Consequently there is apprehension on whether the growth momentum is sustainable in the long run. This is the issue rather than whether the economy has grown by the amount estimated or unemployment is as low as estimated and whether poverty has been reduced to the extent assessed. These economic indicators have improved but the ways and means by which they have been achieved creates doubts about the quality and sustainability of growth, employment and incomes.