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Need for balanced multi-sectoral development

by Dr. S. Ganesan

Development planners are unanimous in their view that the State must play a critical role in economic development in the Third World. Especially in providing the necessary physical, social and economic infrastructure.

The most significant indicator of the malaise is stagnant labour productivity. Within a market economy, this leads to low incomes and endemic poverty.

In Sri Lanka's recent context, less than optimal use or wastage of valuable foreign exchange earned-in luxurious consumption rather than in social development infrastructure, insufficient investment in advanced education and research are the two primary causes of stagnant productivity.

*growth rate around 1% annum

Continuing poverty in Sri Lanka and income inequalities are illustrated by the following figures:

Mean Household Income - 3.7% per annum (1989 prices)

Total Household Income - 6.0% per annum (1989 prices)

Foreign Remittance/total Household Income - 13.3% (1996)

However, in the last 10 years real growth in US $ around 2% per annum 17.7% (2002)

Foreign remittances are influential in increasing household incomes in Sri Lanka. Yet the per capita income in 50% of the households is below US $2 a day or less than Rs. 200.

Stagnant state revenues derived from taxes and a declining state asset base reflect this dilemma. This is associated with declining non-tax revenue of the state.

Budgetary allocation for social capital development capital, have fallen well behind both the rate of GDP growth and private sector expansion Increases for the period 1990-2002 at 1996 prices were Public Investment (1990-2003) 1.7% pa, Social Services (current plus capital) 3.7% pa and Education (current plus capital) 2.7% pa.

It seems that the contribution of the economy to domestic job creation is insufficient. Globalisation especially labour transfers for production and services overseas have had a more favourable impact in the recent decade. If GDP grew at about 4.5% pa, why does local employment grow at only 2.7% pa?

Increased capital intensity of new service and manufacturing, and capital construction, is a contributory factor.

There is little doubt that Sri Lanka has allocated substantial resources to achieve poverty alleviation. Yet long term management and economic uplift of the poor has not been successful. Outside the significant benefits achieved through overseas employment and remittances, domestic management of the economy from the point of view of supporting the poor is not robust enough.

This is revealed in the number and state of poor people, and the physical and social environment within which they subsist. Private sector led development has failed to provide for adequate investment in social development of the common people.

Only a multi fold increase in state revenues and investment in social development will make a difference. Let us assume that investment in social capital should be increased at least three fold over a period of time. Then another third should come from more efficient and equitable methods of tax collection. The last third may come from aggressive efforts by the State to take an active role in new investment projects.

However, the state needs to participate actively in capital formation and wealth creation in Sri Lanka, with its own income enhancing role in investment, if systematic poverty is to be removed.

Policy recommendations

In the main, Sri Lanka's economy must grow at a higher rate, and the socially appropriated surplus value should be significantly increased. This will be reflected, first in, higher order state revenues, and much greater investment in social capital development programs.

The theoretical model to achieve poverty reduction demands high output an employment, essentially a growth and employment maximizing model.

Such a model demands a balanced multi-sectoral development embracing of a mix of traditional, rural and advanced technologies; a model which simultaneously maximizes labour use in the economy in locations with an unacceptable level of unemployment.

Infusion of foreign technologies and investment finance from outside the state sector, is essential in the context of low productivity and per capita incomes to modernize the rural and urban economies, to achieve social goals targeting the entire population and at the same time to enhance average national productivity in the long term.

Secondly, sovereign risks arising from foreign capital flow should be controlled. Such risks can arise from sovereign debt directly or indirectly from excessive debt in foreign currencies of businesses set up with foreign capital participation.

In particular, Foreign Direct Investment (FDI) either in partnership with domestic private or state enterprises have proven to be an effective means to enhance national capital formation and improve revenue streams to the Government through taxation plus virtually risk free dividends and revenues from the shareholding of the state in such ventures.

Mainland China provides the most important example for a developing country to explore with respect to the use of foreign resources to increase state sector revenues.

The model presented above has emphasised the capitalisation of social goals, however, maximisation of social capital involves social development beyond "a nation's industrial firms", or simply the modern sector, and must extend to social upgrading of disadvantaged sections of the community. One can clearly see the importance of these concepts in the unsatisfied demand for skilled workers in Sri Lanka today, which is hampering the growth of the nation's National Technological Capacity (NTC).

This lack of capacity raises the issue of NTC, raises the urgency of promoting investment in advanced technical, professional training and research. The privately funded advanced education sector has a unique ability in competitive environment to serve a nation's poor, unlike other sectors. The principal raw material for these enterprises (students) has also to be recruited from the poor.

Funds required are more than what the state can afford; besides the majority of students in Sri Lanka cannot afford full fees.

Under well structured Government regulations, it is possible to guide private investors in tertiary and further education, to proliferate the benefits to low income families, and thus contribute to social development as desired. This has been achieved in numerous countries, e.g., the need blind - purely merit based admissions policy in many leading private universities in North America.

Poverty is linked to low productivity as measured in local prices of output per worker. Productivity enhancement through education and social development must target all, especially those in the small scale and rural sectors. In a post colonial society (subjected to five centuries of foreign colonial rule)... infusion of scientific and technologies from more productive societies is essential.

Foreign know-how and advanced technologies are necessary to lift productivity levels in Sri Lanka, especially with the historically low investment in R&D. Foreign Exchange will be recognised as a scarce resource, for the time being, and will not be confined to high tech endeavours, but also for the modernisation of the rural and traditional industries, such as to maximise not profits in individual enterprises but average national productivity.

Essentially the richer sections should subsidize the poorer sections of society until those sections can stand on their own, or reach a per capita income of $5,000 say. Such subsidies need to cover both economic and social endeavours. This is imperative for stable economic growth in a democratic mixed economy.

At present revenue from state enterprises is a minor component, and even a good part of it is absorbed by subsidies and loss making units. Many profitable businesses have been sold out, with only the banks among them remaining in the state fold.

The public sector will play an active role with twin objectives: first, set up necessary preconditions including infrastructures necessary for economic take-off.

Most development economists have explicitly or implicitly accepted some role for the state (from Nurske, 1964); second, expand its asset and revenue base, in collaboration with private domestic and foreign businesses, so as to underpin financial support for the realisation of social goals for the whole population.

A strong public sector is the guarantor of a welfare regime in Sri Lanka. A weak public sector will have adverse implications for the property and social relations in Sri Lanka.

The CB (Annual Report 2003, p.176) calls for urgently "increasing resource allocation for public investment with high return to accelerate growth" using "concessional foreign sources and government revenue". "Countries like Mainland China, Singapore, and Hong Kong, France Norway etc provide evidence of substantial state revenues from investment by the State in financial and industrial and infrastructure capital.

The State has actively collaborated with the local and foreign capital to expand state sector capital base and long term revenues necessary to sustain a welfare regime. Dr. Kelegama (2004) has presented a convincing array of data to show that strong public investment sectors exist in free market economies.

Government spending in 22 OECD countries rose from 32.3% of GDP in 1970 to 42.3% in 1995. A quarter of the workforces in France are employed in public sector in over 3,000 enterprises with full state or partial state ownership. State capitalism in Norway is represented by 40% of the local stock market and one in three workers in the country.

Dr. Kelegama argues that the impressive growth of East Asian economies such as South Korea, Taiwan, Malaysia, Singapore in the recent decades is positively linked to the public sector's 45% share in total investment. Practically all land in Hong Kong is owned by the Government and land revenue from leases has enabled large scale infrastructure investments with full or part state ownership.

Where the state is not especially wealthy to develop projects on its own, yet numerous methods of public private partnerships, joint ventures, equity sharing arrangements, extension of franchises to joint ventures, Build own operate (BOT), or build Own Operate and Transfer (to State) (BOOT) schemes have been developed.

A national government's right to issue franchises, collect fees, lease urban and rural land it owns, raise domestic and foreign loans specially for equity investment, have been utilised to develop these profit sharing ventures in many countries. Ultimately to increase state revenues and guide capital formation. The state sector already plays complementary role in capital formation in Sri Lanka, except that it derives only limited revenues from its physical infrastructure.

(The above article has been extracted from a lecture delivered by Dr. S. Ganesan, retired Professor of the University of Hong Kong at the Dr. N. M. Perera Centre, Colombo organised by the Better World Forum)

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