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CONSTRAINTS TO SUSTAINED AND INCLUSIVE GROWTH IN SRI LANKA!An Initial Diagnosis and Key Topics for Discussion!

Ricardo Hausmann!Colombo, Sri Lanka!7 January 2016!

Sri Lanka has seen strong economic growth over the long-term!

Growth that has become exceptional with the onset !of peace!

And this growth has

been matched by

progress across broader

measures of well-being!

Source:UNDPHumanDevelopmentReport2015

0"

0.1"

0.2"

0.3"

0.4"

0.5"

0.6"

0.7"

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Sri"Lanka" Maldives" India" Bhutan" India" Nepal" Pakistan" Afghanistan"

High"human"development" Medium"human"development" Low"human"development"

Human&Development&Index&(HDI)&for&South&Asian&Countries&

1990"

2000"

2010"

2014"

Whataresomeofthechallengesahead?

Isgrowthconstrainedbyexportsandthebalanceofpayments?

Aregovernmentrevenuestoolow? IsstructuraltransformaHonachallenge? IsurbanizaHontoolow? Howchallengingwillitbetomakegrowthinclusiveofthedifferentregionsandsectors?

Isgrowthconstrainedbyexportsandthebalanceofpayments?

But growth is limited by the Balance of Payments!0

510

15

1990 1995 2000 2005 2010 2015Year

GDP per capita growth (annual %) External deficit in goods and services

Deficitingoodsandservices

GrowthinGDPpercapita

Hitting the constraint shows up in the exchange rate!

Datasource:WikiExchangeRates

100#

105#

110#

115#

120#

125#

130#

135#

140#

145#

150#

2010# 2011# 2012# 2013# 2014# 2015#

LKR$/$USD

$

Daily$Exchange$Rate$(Sri$Lankan$Rupee$to$U.S.$Dollar),$2010$A$2015$

External debt is already pretty high as a share of exports and primary income (including remittances)!

Difference from expected value = +119 percentage points

Aregovernmentfinancestooweak?

Sri Lankas government revenues are significantly lower than other middle-income countries!

LKA

010

2030

4050

2 3 4 5

Revenue, excluding grants (% of GDP)Revenue, excluding grants (% of GDP)95% CI lpoly smooth: Revenue, excluding grants (% of GDP)

GovernmentrevenuesasashareofGDP

Actual 12%Expected 25%Gap 13%

LogofGDPpercapitaSource:WorldDevelopmentIndicators

Public savings are negative, the deficit is substantial!

Source: IMF Country Report No. 15/335 (December 2015)!

Sri Lankas fiscal deficit currently exceeds its level of public investment!

Data source: IMF Country Report No. 15/335 (December 2015)!

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1.0#

2.0#

3.0#

4.0#

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6.0#

7.0#

8.0#

2012# 2013# 2014# 2015# 2016# 2017# 2018# 2019# 2020#

Es/mate# Projec/ons#

Percen

t#of#G

DP#

Select&Economic&Indicators&for&Sri&Lanka&

Government#investment# Central#government#deficit#

IsstructuraltransformaHonachallenge?

Currently, the share of GDP from agriculture is what would be expected based on Sri Lankas level of income!

But employment in agriculture remains well above what would be expected, implying low productivity!

Difference from expected value = +14.9 percentage points

Productivity in agriculture in very low compared with industry and services!

Datasource:WorldDevelopmentIndicators

RelaHveprod

ucHvity

ofind

ustrytoagriculture

RelaHveproducHvityofservicestoagriculture

Sri Lankas exports are focused in garments, tea and rubber products!

Exports,2014

This has been the case for a long time!

Exports,2014Exports,1995

Sri Lankas export basket has changed little!since mid-1990s!

Sri Lanka,!1962-2014!

We can compare its current export basket to the trajectory of export diversification in other countries!

Sri Lanka, 2012-2014!

Tea

Clothing

Thailands export basket in 1991 was similar to Sri Lankas now, but then it changed a lot!

Sri Lanka, 2012-2014!

Tea

Clothing

Thailand, 1991!

Thailand

sexportsin1962

Thailand

sexportsin2010

Turkeys export basket in 1994 was similar to Sri Lankas now, and then it changed!

Sri Lanka, 2012-2014!

Tea

Clothing

Turkey, 1994!

Costa Rica in 1996 was similar to Sri Lanka today, but then it changed!

Sri Lanka, 2012-2014!

Tea

Clothing

Costa Rica,!1996!

In Sri Lanka, many exports are under competitive pressure from lower income countries!

Exports,2014

Tea: Low income competitors!

GlobalShareofTeaExports(Net)in2014 GDPpercapita(USD)in2014

0"

1,000"

2,000"

3,000"

4,000"

5,000"

6,000"

7,000"

8,000"

Sri"Lanka" China" Kenya" India"

Datasource:WorldDevelopmentIndicators

This is also the case for many garment exports, like womens undergarments!

Exports,2014

Womens Undergarments: Low income competitors !!

GlobalShareofWomensUndergarmentsExports(Net)in2014 GDPpercapita(USD)in2014

Datasource:WorldDevelopmentIndicators

0"

1,000"

2,000"

3,000"

4,000"

5,000"

6,000"

7,000"

8,000"

China" India" Bangladesh" Sri"Lanka" Cambodia" Vietnam"

Meanwhile, rubber products show a different trend!

Exports,2014

Retreaded Tires: Middle and high income competitors!

GDPpercapita(USD)in2014

Datasource:WorldDevelopmentIndicators

GlobalShareofRetreadedTiresExports(Net)in2014

0"

5,000"

10,000"

15,000"

20,000"

25,000"

30,000"

35,000"

40,000"

45,000"

50,000"

Sri"Lanka" China" Japan" Brazil" Thailand" Belgium"

Richer countries get more from tourism revenue per capita!

Difference from expected value = -598 US$ per capita

Remittance income is probably not going to be an engine of growth in the longer (or shorter) run!

+120US$ per capita

ImplicaHons Sustainedgrowthinvolvesnotjustmoreofthesame Astheygrow,countriesdiversifyandevolvetheircomparaHveadvantageintonewareas

Thesetendtobemorecomplexandabletocompetewhilepayinghigherwages

ThisprocessisnotjustaboutshiZingfromagriculturetomanufacturingbutwithineachsectorandintoservicessuchasICT,BPO,KPO,bunkeringandtourism

TransformaHoninvolveschickenandeggproblemsthatneeda^enHon

Whatcanthegovernmentdo? AretherelimitstotaxincenHvesasatool,giventhelowtaxrevenueraHo?

UrbanizaHonissurprisinglylow

Urbanization is surprisingly low in Sri Lanka!

Difference from expected value = -40.0 percentage points

Questions!

Whydiditnoturbanizefasterinthepast? Fewurbanexports? Fewrents?

Isthecheckinthemail? WhatwouldittaketoseizethepotenHalgainsfromurbanizaHonwithoutthebadside?Wherewillthenewindustrieslocate?Whatgoesintoefficient,producHveurbanizaHon?Willyouhavethefiscalresourcestomakeithappen?

Thechallengeofregionalandsocialcohesion

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

GovernmentServices

OwnershipofDwellings

Agriculture,LivestockandForestry

Agriculture,ForestryandFishing

PrivateServices

Services

WholesaleandRetailTrade

Banking,InsuranceandRealEstateetc.

Electricity,GasandWater

Manufacturing

TransportandCommunicaHon

Fishing

Industry

MiningandQuarrying

ConstrucHon

HotelsandRestaurants

Growthrate2010-2014

Growthratesbyindustryarequiteheterogeneous

AnddifferentregionsfocusondifferentacHviHes

Estate sector production is regionally focused !Caveat: Five districts not included in data (Jaffna, Mannar, Mullativu, Trincomalee, and Vavuniya)!

ExtentunderTeabyDistrict,2002(000sofhectares)

ExtentunderRubberbyDistrict,2002(000sofhectares)

ExtentunderCoconutsbyDistrict,2002(000sofhectares)

Datasource:CensusofAgriculture,2002-AgricultureandEnvironmentalStaHsHcsDivision,DepartmentofCensusandStaHsHcs

As are other agricultural activities!PalayProduc@on,Yala2014

(000sofmetrictons)PalayProduc@on,Maha2014-15

(000sofmetrictons)CaDlePopula@on,2014

(000sofca^le)

Datasource:AgricultureandEnvironmentalStaHsHcsDivision,DepartmentofCensusandStaHsHcs

Different provinces concentrate on different manufacturing industries !

Apparel,Dressing&DyingofFur(%shareofprovincemanufacturingoutput)

Tex@les(%shareofprovincemanufacturingoutput)

Datasource:AnnualSurveyofIndustries2012,DepartmentofCensusandStaHsHcs

Rubber&Plas@cProducts(%shareofprovincemanufacturingoutput)

QuesHons

Asteaandgarmentsbecomelessimportant,asagriculturalemploymentshrinksandotheracHviHesbecometheenginesofgrowth,howwillthedifferentsocialgroupsandregionsfare?

Wherewillthebenefitsandtheburdenofadjustfall?

Whataresomeofthechallengesahead?

Isgrowthconstrainedbyexportsandthebalanceofpayments?

Aregovernmentrevenuestoolow? IsstructuraltransformaHonachallenge? IsurbanizaHontooslow? Howchallengingwillitbetomakegrowthinclusiveofthedifferentregionsandsectors?

Thankyou!

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