Becoming the Wonder of Asia:

Accelerating inclusive growth in Sri Lanka

Excerpts from the speech by Dr. Ngozi Okonjo-Iweala, Managing Director, World Bank at the 60th anniversary ceremony of the Central Bank of Sri Lanka on Friday.

Sri Lanka is again designing an ambitious policy course in challenging times, characterized by a post-conflict situation and a post-financial crisis global economy that now consists of multiple growth poles. Sri Lanka has managed to end the conflict and I must congratulate you all. Managing the peace in a balanced, transparent and fair manner will be critical to accelerate economic growth and poverty reduction.

The choices that policy makers make today and the collaborative partnerships they form to navigate this new environment is going to shape the economic fortunes of Sri Lankans tomorrow in much the same way the creation of the Central Bank of Sri Lanka did 60 years ago. The Government’s development plan, as described in the Mahinda Chintana is bold and ambitious.

Thinking big

It is good to be ambitious, it is the right time for Sri Lanka to think big. President Rajapaksa wants to transform Sri Lanka into the “Wonder of Asia” and is dedicated to seeing per capita income rise well above US $4,000 over the next six years. It is a wonderful vision and is one that the Bank would like to help Sri Lanka realize. The vision is clear, but what are the actions required to realize a doubling of per capita income within six years? Or, as it has been alternatively stated - How can Sri Lanka reach 8 percent real GDP growth into the medium-term?

These are challenging questions for any developing country, as there are no set recipes for accelerating growth. In looking at successful high-growth economies - 13 economies that have grown at an average rate of 7 percent a year or more for 25 years or longer - we found that one common ingredient was high rates of investment.

The Government of Sri Lanka has stated that investment rates must rise by almost 10 percentage points of GDP from about 25 percent of GDP to about 35 percent to reach the goal of 8 percent GDP growth on a sustained basis. The Government’s stated goal to improve its place from 102 in the World Bank Group’s overall “Doing Business” rankings will be important in this regard.

Tax policy

One of the policies that has consistently been at the top of the list of constraints to doing business in Sri Lanka is tax policy. The recent actions taken to broaden the tax base and simplify the tax structure in the 2011 budget send a positive signal to the private sector that Sri Lanka is now a better place to do business. At about 25 percent of GDP, investment levels are already quite high given Sri Lanka’s stage of development, which I must say is quite remarkable given the years of conflict. How can we do better with what we currently have?

This calls for strong innovation policies. That is, policies to promote “imitation” and the discovery of doing new things or doing old things in new ways. Such policies are at the heart of the President’s drive to make Sri Lanka a knowledge hub of Asia.

One well known channel that can help spur a wider transfer of knowledge and innovation is foreign direct investment (FDI). Post-conflict, FDI is bound to improve as a key source of uncertainty for the private sector is gone. Sri Lankans have long been aware of the importance of the global market to their development success. This opening-up helped generate a growing export sector led by garments and tea. Exporting world class services is also making its mark. Re-energizing the export sector for accelerated growth is not going to be easy in a post-crisis world, but it can be done if the multipolarity of growth is used by Sri Lanka to expand into new markets.

Challenges and opportunities

The global economic transition has important implications for Sri Lanka. It presents challenges, but also many opportunities. On the side of the challenges that will have to be faced, is competing for a share of the U.S.’s and EU’s - its largest trading partners - contracting imports. But on the opportunities side, Sri Lanka, with a few changes that we talked about, is well positioned to compete for the rising imports of China, India, Brazil South Africa, Indonesia, Colombia, Mexico and in the World’s other emerging markets in Asia, Latin America and Africa. The skills of today may not be the “right” skills for tomorrow, so an emphasis on sustained investments in education and training is a must for Sri Lanka to gain and maintain a competitive edge in global markets. Private sector investment can also get a boost from government expenditures when, for example, the private sector gets crowded in through public private partnerships (PPPs).

This is particularly relevant in the current context where the “Peace Dividend” which can arise from progressively reducing defense expenditures can open up some fiscal space for productive investments.

Inflation has come down to the 6-7 percent level this year, the recent uptick due to rising international commodity prices notwithstanding. This is an important development and the challenge now is to lock in inflation expectations at roughly this level and permanently break from the past of double digit inflation. Let us pause for a moment to re-cap our ingredients for a successful growth strategy.

I’ve spoken about the importance of savings and investment, innovation and knowledge-led growth, redoubling efforts to connect to global markets and macroeconomic stability as a necessary condition for accelerating growth. Suppose with implementation of these and other polices Sri Lanka reaches its destination.

What will it look like? One thing we know is that the benefits of accelerating growth are unlikely to be spread evenly across the country, across households, across income levels etc. etc. Unbalanced growth is the norm, not the exception. Another important set of policies will be needed to ensure equality of opportunities across all segments of society.

Growth process

Policies to promote inclusion of all segments of society in the growth process are critical so that no group will seek to derail it. Leadership in this area requires policies that unite the nation so that all move toward common goals. A nationally shared sense of identity is a foundation for making the tough, often painful choices that are required for sustained growth. Policies that help improve access to services for all people of Sri Lanka will be critical. For example, providing well-targeted safety nets to the poor and vulnerable, and access to quality education and health services - especially when the demographic dividend is going to begin to decline within a decade. Another example might be putting in place incentives to agriculture and agro-based industry, especially in the North and the East of the country, to amplify market linkages to the rest of the country and internationally.

The World Bank is an active partner in supporting Sri Lanka in its transition from a low income country in conflict to a middle income country in peace. We have supported the Government’s efforts with rehabilitation and reconstruction in the North and the East, we have an active portfolio of road infrastructure projects, and have long been a partner in the health and education sectors.

The post-conflict environment provides us with an opportunity to build on this relationship and become a trusted partner in the Government’s vision.

Development ambitions

A middle income country partnership with the Bank requires more resources. The IDA allocation has been running at below $200 million annually and while I think that amount served the relationship well in the past, the time is right to increase the lending envelope to an amount that better reflects the new development ambitions of the Government.

I am pleased to be able to announce that the Bank’s recent creditworthiness assessment has been concluded and that Sri Lanka is now eligible for IBRD financing - funding from the Bank’s non-concessional window.

IDA resources will continue as it is important that Sri Lanka benefit from these highly concessional resources to support its post conflict reconstruction and rehabilitation needs. Together, these financing sources have the potential to significantly increase the amount of resources available on an annual basis.

This is an important recognition of the middle income country status of Sri Lanka and signals a different sort of relationship going forward - a relationship that is founded on knowledge sharing that complements the available financing.

Sri Lanka has what it takes to be the Wonder of Asia and decisively tackle issues of poverty reduction and economic growth acceleration. I have mentioned the importance of raising investments and improving the productivity of those investments through innovation policies.

I have mentioned the importance of skills development, macroeconomic stability and implementing policies that promote the inclusion of all segments of society in the growth process. The Bank stands ready to collaborate with Government as they implement the Mahinda Chintana. We are willing to increase our lending envelope and will scale-up our knowledge services to help support your ambitious development plans. Let us find creative ways to work together to help Sri Lanka become the “Wonder of Asia”.

As we say in my language: Onye si naya ge na enu ugwu chiya ekwelu. Determination is everything. A person who determines that they will reach the mountain top will surely get there because once they agree, their personal spirit will agree and everything will support them.