Mahoshada

“If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin.” Charles Darwin

“Poverty is like punishment for a crime you didn’t commit.” Eli Khamarov, Lives of the Cognoscenti

It is proper at this time of the year to spare an extra thought for the many people struggling daily in a state of seemingly perpetual poverty. This is especially true now, since at the moment the demands on the country’s attention are so great in other areas – particularly what seems to be a speedy return to some sort of war.

The Bible says that “the poor are always with us”, but they are rarely close to the centre of the national focus. There are, however, two times when poverty and the plight of the poor is at centre stage: during elections and when the country is trying to come to agreement for financial support with the international financial institutions and donors – notably the World Bank, the IMF and the Asian Development Bank. At these times, it seems that significant poverty alleviation is the number one priority of government and the politicians competing for office. Lofty promises are made; detailed strategies are produced. But once the elections and the donor negotiations are over, it is back to business as usual – and for the most part, the government’s business has little to do with the poor.

The sad fact is that it is much as Darwin says (see quotation above), the plight of the poor in Sri Lanka is not the result of unalterable laws of nature, but is primarily self-inflicted. This is a reflection of the failure of most past and present governments to strengthen the economic institutions and implement the policies needed to increase economic growth and to maintain high growth over a number of years sufficient to provide those living in poverty with an adequate opportunity to earn a decent living. The reality is that a high growth rate, with a strong and growing demand for workers, would do far more to alleviate poverty than all of the subsidies and government handouts directed at the poor combined, even if they were doubled or trebled. As the international financier George Soros is reported to have said: “Most of the poverty and misery in the world is due to bad government, lack of democracy, weak states, internal strife, and so on.”

A good indication of the lack of meaningful progress towards reducing poverty can be seen in the latest estimates for employment. The Central Bank’s Annual Report for 2005 indicated that the total workforce increased from 7.98 million people to 8.14 million last year – or about 160,000 additional people needing employment. To be included as part of the workforce, one has to be over the age of 10 and willing and able to work.

In the same section of the Annual Report, the numbers employed are presented. These data, from the Department of Census and Statistics show that total employment increased in from 7,394,000 in 2004 to 7,518,000 last year – or an increase of 124,000 jobs. This is 34,000 fewer jobs than the total number of additional people who entered the workforce in search of jobs. In other words, the prospects for those living in poverty to find the job they need to earn an income actually got worse last year – not better. If this is the government’s idea of “pro-poor growth” – it is obviously missing its target.

Look again at these workforce and employment numbers. Last year there were 8.14 million people in the workforce, ready and willing to work, while total employment was 7.518 million people. This means that “officially” there were some 622,000 people unemployed. But this is a very deceptive estimate because among the 7.518 million people classified as being “employed” includes anyone who worked for as little as an hour or two per week.

There are clearly many people counted as “employed” who are able to earn only a pittance, certainly far from enough to make ends meet. The Central Bank also reports the average level of wages earned by people working in some common types of employment. In the Central Bank’s surveys, which are based on average monthly wages, workers in construction earned wages that were between about Rs 557 for skilled master carpenters and masons to Rs 369 for skilled and unskilled workers. The wages in agriculture were considerably lower, ranging between Rs 217 and Rs 388. This means that there are many who could be working full time yet remain well below the poverty line.

Policies for Genuine ‘Pro-Poor’ Growth

“My major problem with the world is a problem of scarcity in the midst of plenty … of people starving while there are unused resources … people having skills which are not being used.” Milton Friedman

As Milton Friedman, the Nobel Prize winning economist suggests in this statement, the problem of scarcity or poverty arises not because there are a lack of resources available in the country, but simply because the human and natural resources that are available are not being effectively utilized. This is most evident in the large numbers of people ready and willing to work but who cannot find employment – and in the large numbers who are unable to earn a decent wage.

This can also be seen in the vast amount of resources that are essentially being wasted because although these resources are being utilized, including workers and land, they are employed in ways that produce little in the way of value. Policies that keep farmers working plots that are far too small to produce enough paddy to earn an adequate income are a good example of the waste of the country’s agricultural resources. There are millions of people consigned to a life of poverty because they are effectively tied to these very small, uneconomic land holdings, restricted from shifting to more profitable crops.

An economic strategy that aims to substantially reduce poverty must be based on two central objectives: increasing economic growth – to at least the 8 percent target proposed by the President in Mahinda Chintana – and creating an environment where resources can be shifted to more productive activities.

At the heart of this strategy must be the recognition that government is a very large part of the problem. Year after year the government budget spends far more than it takes in as revenues. The difference, the budget deficit, is made up through borrowing, from domestic sources, particularly through savings in the Employees Provident Fund, as well as from foreign sources. One of the biggest expenses in the government’s budget continues to be payment of interest on the huge public debt that has accumulated over the years. This is money that could otherwise be used to invest in productive uses that would lead to higher economic growth. Instead it absorbed to pay the government’s day to day operating expenses.

The other major expense is the compensation for the bloated public sector workforce. The Central Bank reports that last year the total number of public sector workers increased from 1,094,914 to 1,104,243 employees, or by 9,329 additional jobs. Now it is endlessly repeated that Sri Lanka has more public sector employees per capita than any other country in the world. For example, on a per person basis, this is more than double the rate in India – which is not known for having a small bureaucracy. And the large increases in public sector salaries in the last two years have greatly increased the pressures on government finances to the point where this is no longer sustainable.

So, a key element in any genuine pro-poor economic strategy will have to be a fundamental restructuring of the public sector, including substantial reductions in the size of the public sector. This will neither be easy nor politically popular, but is essential and will have to be done sooner or later.

The second key element in a genuinely pro-poor economic strategy will have to be fundamental reforms of policies and regulations that are restricting the utilization of the country’s resources in more productive ways. Vast changes will be necessary in a number of politically sensitive areas, including out of date and totally inappropriate labour market regulations, laws that make it impossible to change to more profitable crops and to easily buy and sell agricultural land. Trade policies will also have to be liberalized so that Sri Lankan producers are able to be more competitive in overseas markets. The economic reality is that no country can simultaneously maintain high levels of protection for domestic producers and still compete effectively in export markets – despite what the politicians might promise.

A country, just like any individual, can deny reality only for so long while it tries to convince itself that it can follow whatever course it wants and still succeed. Sooner or later, these sorts of delusions are inevitably shattered. And usually it is the poor and most vulnerable that must pay the highest price.

It need not be the case that “the poor are always with us”. This country has sufficient human and natural resources to ensure that there are sufficient numbers of good jobs available so that all can earn a decent living. In the end, all that is needed to make this happen is for the politicians to honestly explain to the people what is at stake and then to get out of the way of the people’s ability to build a better life. It is indeed proper at this time of the year to spare an extra thought for the many people struggling daily in a state of seemingly perpetual poverty.