The challenge before us :Growth with equity

By the Economist
"The operation was successful, but the patient died." This cynical verdict appears to sum up the contrasting economic and political scenarios of the recent past. The economy grew at a fairly fast pace but the government was thrown out.

The evidence on the economic performance of last year placed before us by the Central Bank in its Annual Report for 2003 justifies yet another post-mortem to scrutinise the reasons for the failure of the UNF to retain power.

The gross domestic product grew at 5.9 per cent and the gross national product by 6.4 per cent in 2003.This was an above average growth rate. The signs of economic recovery were unmistakable.

The economy that regressed by 1.5 percent in 2001 recorded a growth of 4.5 per cent in 2002. Last year it nearly reached 6 percent. The rate of inflation fall was modest and unemployment fell. Yet these favourable economic developments appear to have had little impact on the election result.

No doubt many factors accounted for the fall of the UNF government.

These have been scrutinised by many commentators from various perspectives and a host of reasons adduced for the failure of the Ranil Wickrermesinghe regime. The 2004 election result was not necessarily owing to their economic performance. Yet why did the favourable economic performance not impact on the electorate?

Foremost among the reasons was that these favourable economic developments do not appear to have affected the vast mass of people. The growth was in urban centred industries and services. Not that the rural sector did not benefit at all. But the benefits were too little and other countervailing adverse developments and difficulties played their part in making the government's economic performance being of little electoral significance.

A good example is the increase in paddy production. Paddy output reached a new high in Maha 2002/03 and together with an increase in Yala brought the country to self-sufficiency in rice.

Yet farmers do not appear to have derived the full benefits of the higher output owing to a fall in prices. This was due to their inability to store their paddy till later when prices would rise, the ineffectiveness of government interventions in the paddy market and the exploitation by middlemen.

On the other hand, the cost of production rose and farmers were caught up in a cost-price squeeze. While agricultural production increased and the rural sector was a source of national economic growth, the benefits to the small farmer and rural communities were small or none at all. That is part of the reason why rural voters voted against the incumbent government emphatically. There were other non-economic reasons as well.

The breakdown in services available to the poor was no doubt another factor. Medical services and transport were foremost among these. The reduced expenditure on health is a partial explanation for the poor medical services in government hospitals. The spate of strikes by various sections of health workers had virtually crippled services in government hospitals. Financial constraints had led to a lack of drugs and patients having to purchase the needed drugs. Inadequate attention of doctors was still another reason for dissatisfaction with the government health service.

Transport was in a mess. The large fleet of cars available to ministers and some government officials contrasted conspicuously with the shortage of buses on the roads and the railway stoppages and inconveniences in rail travel. In brief, the economic growth captured in the national statistics appears to have had little impact on the rural poor in particular. Recent evidence from the Department of Census and Statistics' Household Expenditure Survey also shows the persistence of rural poverty in the midst of a decline in urban poverty.

The economic strategy adopted in recent years has been highly concentrated in the development of the modern sector. It was a growth-oriented strategy that was expected to reach poor people in the fullness of time. There can be no doubt that economic growth is essential for long term reduction of poverty. Yet, the manner in which that economic growth is attained has a relevance to whether such growth would reduce poverty and improve the living conditions of the vast mass of rural people, especially in the short term.

If economic growth is to reach the poor then programmes and projects that are rural-centred have to be implemented. State interventions that improve the productivity of the rural sector, provide economic opportunities in rural industry and services and ensure that their goods and services command remunerative prices are part of such strategies.

Sri Lanka has a social welfare heritage that cannot be ignored. The lessons of the past are that the sustainability of the welfare package requires good targeting of the benefits to those who need these and economic growth to sustain the costs.

The national economic challenge now, as in the past, is to ensure economic growth with equity.

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