Budget 2007:

Poverty alleviation in rural areas govt's aim

by Lloyd F. Yapa

The present UPFA government has unerringly selected poverty alleviation, particularly in rural areas, as its primary objective. Poverty is in fact the major problem confronted by the nation.

About a quarter of the population is said to be earning less than Rs. 2,000 per person per month. But this percentage is higher in rural and estate areas such as Uva, Sabaragamuwa, Southern, Central Provinces and in the areas affected by the ethnic conflict and the tsunami.

As long as demand for goods and services by such a large number of people remains low due to poverty, the rest of the areas and therefore the entire country will not take off economically, because only a continuous rise in demand created by increases in real disposable incomes or purchasing power can pull up the supply of goods and services.

Targets

The first requirement of an implementable plan as presented in every Budget is to announce measurable quantitative short and medium - term targets with a time frame, always keeping the goal or long - term objective of making the entire country free of poverty.

Key result strategies

Having identified the objectives/targets, the next task in preparing a plan is to formulate high impact strategies to realise the objectives, on the basis of an analysis of internal/external impeding and impelling factors.

A common feature of the policies of recent governments is of course poverty alleviation through welfare measures such as 'Samurdi', (free education and health, which suffer from absence of quality and therefore expensive) and not elimination of poverty which can only be achieved by creating productive jobs by increasing investments as well as productivity improvements or cost reductions and value addition for customers by catering to their preferences.

If we take a careful look at the way the miracle economies of Asia have performed, it will be seen that poverty can be drastically reduced, if investments amounting to about 35-40% in GDP terms are made in a sustained manner over 20-30 years.

However, in the case of Sri Lanka, investment both by the public and private sectors in the past has been about 25% in GDP terms as against the desired rate for it to grow at more than 8% per annum and create jobs, which help to produce goods and services for the local as well as export markets.

What are the requirements or strategies to be implemented in a sustained manner for such a real rate of economic growth?

Stability

First it needs an enabling environment consisting of ethnic peace, political, economic (price) stability along with good governance. Our record of maintaining price stability or curbing inflation has been poor.

The Colombo Consumer Price Index is reported to be hovering around a yearly average of about 12%, which is still high compared to the single digit rates of less than 5% prevailing in the high performing countries.

Inflation is also a tax on the people as unproductive government expenditure (such as wages for 'armies' of excess staff in the public sector, defence, debt servicing, the various untargeted welfare measures demanded by the people as well as subsidies to loss making State Owned Institutions leading to budget deficits (about 9% in the last six years) can erode the purchasing power of consumers.

This year the deficit may reach double digit levels leading to further increases in prices, especially of imports as the currency may also depreciate (currently Rs. 107 to one US $), unless compensated by an increased income tax collections only 15% as a percentage of revenue (59% in Indonesia and 36% Malaysia) from those who can pay, against VAT payments even by the poor at 43% of revenue in 2004.

Worse still, retirees struggling to survive amidst rising prices of medicine etc. have to pay a Withholding Tax of 10%, when interest incomes from their meagre savings exceed Rs. 108,000 per year, whereas for businesses the limit is Rs. 300, 000.

Socio- economic development

Therefore socio-economic development can be achieved only by protecting purchasing power by creating jobs yielding higher incomes accompanied by an increase in goods and services at a lower cost.

In Sri Lanka only the private sector can do it, as the State Owned Enterprises are incorrigibly inefficient.

The policy of controlling inflation adopted by most governments has been to get the Central Bank to control the money supply or jack up interest rates and not curbing their fiscal profligacy. The latter is a negative approach, in that high interest rates discourage investment, which in turn affects creation of jobs unfavourably.

Competitiveness

Talking about jobs, it has to be stated that they can be proliferated only by setting up private sector industries and services.

Invariably the products have to be exported to the rest of the world since Sri Lanka is a small country with a small market and as large - scale production is the first requirement to reduce fixed costs (gain economies of scale), to be competitive against foreign competitors, especially in the case of standard goods and services.

Competitiveness also means being able to reduce costs on routine activities in the value chain (from suppliers to producers, distribution channels and marketers), where value cannot be created for customers, while increasing value on those do matter for them.

Firms could be pressured to do so, only if they have to compete among themselves. (Protection through high import tariffs, subsidies and preferential treatment will make them sluggish about catering to the preferences of customers, though a certain degree of protection of local firms is necessary to prevent foreign firms from dumping their goods and services at prices lower than their own market prices). This alone is not sufficient.

Firms have to always maintain a competitive edge over their international competitors by being innovative or uniquely different in their presentation of products and services with regard to quality, timely delivery and availability as well as after sales services.

The international competitiveness of most local firms is low, also because they do not possess sufficient capital to operate on a large - scale nor the technologies, higher skills and knowledge of markets. This is why foreign direct investments (FDI) have to be attracted.

Liberalisation and development factor markets

In a knowledge intensive world, a small natural resource poor country such as Sri Lanka, competitive advantage for enterprises can be promoted faster mainly by creation of skilled human resources to develop their innovative abilities, not just by achieving high literacy.

The opposite has been done in Sri Lanka, where more than 80% of students passing their A Levels are being denied entry to the government run universities, in which in any case standards are low because of lack of resources to enhance teaching facilities and revise curricula to match demand mainly of businesses; private sector investment in the sector is therefore essential.

Rural infrastructure

If the rural regions are to be developed, at least infrastructure in such areas have to be developed (not just irrigation, roads and water/power supplies but also specialised facilities in research, training, banking, housing, health and education and supporting industries and services concentrated in naturally located urban centres or clusters connected by first class highways with Colombo, all of which heighten economies of scale and competitiveness).

All governments since the eighties have spent/invested only an average of about 5% in terms of GDP in the entire country in such capital works, mainly funded by donors! It should gradually be increased to about 10% per annum by making an effort to prune the types of unproductive recurrent expenditure of the government mentioned above in a targeted manner and increasing the absorption rates of such funds.

Research and development

Government should in addition support research in firms, particularly the resource poor SMEs keen on innovation.

The EDB in collaboration with the Ministry of Finance, the Central Bank and the Customs made available around Rs. 45 billion worth of incentives to the exporters and their suppliers between 1982 and 1998 through grants, duty rebates and tax holidays, apart from persuading the authorities concerned to avoid an overvaluation of the exchange rate, introducing exporters to the world market, making matching grants to help firms to increase value addition and simplification of procedures to boost exports.

Now the type of incentives required are those that help firms to reduce costs, add value to and differentiate their products and services to capture the loyalty of discerning customers prepared to pay premium prices, as the country is still exporting products involving low skills, especially by providing (supervised) matching funding or part subsidisation, to retain the latter's commitment and not granting tax deductions (as at present) which may help only the larger enterprises paying taxes.

Such help should also include training in entrepreneurship and management of human, financial and other resources as well as obtaining information on emerging future scenarios and about the strategies adopted by competitors.

All these strategies and policies can be implemented and poverty can be eliminated significantly in about a decade or so, if consensus on them can be reached by the two major parties (government), businesses and trade unions (tri-partite agreements as in Australia).

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