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Making Sri Lanka a rich country by 2048 is a gargantuan challenge for policymakers
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Being tangent with India for richness
Sri Lanka’s avowed goal of becoming a rich country by 2048 was formally announced by President Ranil Wickremesinghe in August 2022. This target year is a historical milestone for Sri Lanka because in that year, the country will celebrate the centenary of independence from Britain. A week before Wickremesinghe set his goal, Indian Premier Narendra Modi too announced his Government’s plan to become a developed country by 2047 when it will celebrate the 100th anniversary of independence from Britain. It seems that the two neighbours are planning to move along the same growth path tangent to each other.
Given India’s pronouncement to convert its $ 2.7 trillion economy in 2022 to a $ 5 trillion economy soon, this is a win-win strategy for Sri Lanka’s $ 75 billion economy. That is because the beneficial externality-free benefits received from a successful man-that will flow from the fast-growing Indian economy could be productively harnessed by the problem-stricken and stagnant Sri Lankan economy if it gets effectively aligned to its fast-growing neighbour. Benefits could be realised by Sri Lanka not only through access to a bigger market, but also by the transfer of technology, especially agricultural and digital, and the receipt of capital by way of direct investments. A poor person begging for alms should view a rich neighbour as an opportunity and not as a threat.
Pre-requirements for delivering richness
At the present state of despondency and desperation, it is foresightful for Sri Lanka to have such a long-term growth target. It will at least keep the population in hope. But those hopes will just be wishes unless they are brought to reality at the ground level. It is a long-term program spanning over a single generation. Hence, there are some requirements which should be fulfilled when implementing such a long-term program.
First, there is the policy management side. Hopes should be converted to goals, goals to policies, policies to plans, plans to programs, programs to activities and activities assigned to units that will carry them out. Then a machinery to supervise and direct the work in accordance with the goals, on one side, and assess the achievements in relation to the plans with powers to take remedial action, on the other, should be established.
Second, there is the requirement of pursuing the goals consistently irrespective of the political regime in power. One mistake which political leaders often make when setting such growth targets is making them exclusive so that only a limited number around the political leader is privy to it. A country’s development is a national goal and, therefore, the whole population should take ownership of the goals involved. What this means is that growth targets should be inclusive and not exclusive. As it is, the target of richness by 2048 is an exclusive policy strategy confined only to the President and a few of his close associates. This was the pitfall to which the previous Governments in Sri Lanka fell when they sought to implement policy strategies for the development of the country. This should not be the case in the present richness goal pronounced by the President. But to get the wide population on board, there should be a comprehensive policy document prepared.
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Using Harvard’s lab approach
The President in addressing the nation on 1 June 2023 said that the lab approach will be adopted by his Government to prepare the comprehensive policy document to lead Sri Lanka to richness by 2048. The lab approach is a policy strategy developed by the Growth Lab of the Center for International Development or CID of the Harvard’s Kennedy School of Government. In the policy lab proposed by the President, top leaders of the private sector, bureaucracy, and the Cabinet of Ministers will be assembled into a policy conclave that would sit in a retreat for six weeks continuously and come up with a policy document signed off by all.
According to the timeline set by the President, the conclave will be summoned in early July, and it will complete its report by September 2023. It will be presented to people for acceptance before the end of 2023. This is a top-bottom policy strategising program. From a time saving point, it has its merits. But a proper inclusive policy strategy should be a hybrid of both the top-bottom and the bottom-up approaches.
Sad missing of the timeline
It is noteworthy here that Sri Lanka has so far not assembled the conclave and, therefore, missed the timeline for the release of the report. These delays which are avoidable imply that the timeline set by the President in June 2023 will be shifted to the first half of 2024. Though the President’s statement underscores the importance of engaging people and civic society leaders in the country’s development, it is short of an inclusive policy strategising process. That is because the policy is first set at the top by leaders and then, sent through the throats of people leaving them no choice. Such an approach will not make the people of the country owners of development policy, a requirement under the democratic economic policy governance pursued by the President in his social market economy approach. It will also impede the present as well as future governments to get the support of the people for the richness target by 2048.
Richness requires faster compound economic growth
Richness has not been explained by the President when he set the target for the country. Hence, people should understand it in terms of the present global acceptance of the concept which is synonymous with a high-income or a developed country. The classification commonly used today about the different levels of richness of world’s nations is based on the World Bank’s country development thresholds. It is based on the per capita gross national income or GNI levels as calculated by its Atlas Method in which individual country GNI numbers are recalculated to avoid country bias due to exchange rate manipulations by individual governments.
Accordingly, a rich country in 2024 is one with a per capita GNI of more than $ 13,845, up from $ 13,205 applicable in 2023. With annual global developments, this threshold is changed every year and over the last 10-year period, it has been increased annually by 1%. Hence, the threshold level applicable to 2048 will be different from the level used in 2024. Assuming that this threshold is increased by 1% annually over the next 25 years, the threshold for a rich country in 2048 will be a per capita GNI level of $ 17,579. Based on the demographic projections, Sri Lanka’s population is projected to peak in 2035 and decline thereafter. Accordingly, the population of the country in 2048 will be same as what it is today at 22 million.
Hence, for Sri Lanka to become a rich country in 2048, its economy should expand to $ 387 billion from $ 75 billion in 2022. This requires Sri Lanka’s economy to record a compound annual growth rate of 6.5% from 2023 to 2048. Since Sri Lanka’s economy is to record a slower growth rate from 2023 to 2027 reaching a GNI level of $ 84 billion, the compound annual growth rate needed to become a rich country in 2048 is 7.6%. This is an insurmountable challenge faced by Sri Lanka in its march toward richness as planned by the Government.
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Need for modern physical capital and proper governance
The accomplishment of this task is difficult but not impossible. To attain this, Sri Lanka needs a stock of sophisticated physical capital – roads, buildings, infrastructure, and machinery – supported by creative human capital blessed by knowledge as well as readiness to change for the better, and a governance system free from extractive institutions and corrupt practices. Laying foundation for the first and the third can be attained in the short to medium term. The first requires Sri Lanka to have an adequate flow of resources generated partly by domestic savings and partly through external funding. Domestic savings should be boosted by the Government by converting its revenue account to a state of savings by cutting extravagant consumption expenditure and increasing revenues.
The present target of having a surplus in the primary account of the budget, as agreed with IMF, does not help Sri Lanka to attain this goal. Since domestic savings are not adequate to meet this goal, Sri Lanka should necessarily tap the foreign resources to build its physical capital stock on modern lines. The establishment of a proper governance system not as a fashion but with passion must be the aim of the Government. In this context, the bold statements made by political leaders are not sufficient. The people should feel that the Government practices good governance principles supported by the observance of the rule of law.
Go for creative human capital
The main challenge faced by Sri Lanka is to generate creative human capital, retain it within the country, and use it productively in economic activities. In this connection, Sri Lanka faces two issues. First, with the decline in the rate of growth in population, Sri Lanka is now fast aging. Its median age at 34 today, compared to 27 in India, is to rise to 47 by 2048. An aged population cannot generate creative human capital needed for transforming the economy to required levels. The second challenge is the exodus of a massive number of professionals from Sri Lanka seeking greener pastures in Western countries. The sectors that have been unduly shocked by this disastrous development are the healthcare, engineering, accounting, banking, and higher education.
The approach by the top policymakers to resolve this issue seems to be shortsighted. One approach is to castigate them as traitors who are now planning to serve foreign employers after receiving ‘free education’ funded by Sri Lanka’s taxpayers. The other is a naïve suggestion that those countries which employ Sri Lanka’s professionals should compensate Sri Lanka. Both arguments are untenable.
Free education is funded by all
Sri Lanka has a non-fee levying educational system up to the first-degree level. The contention made by critics is that those taxpayers and recipients of education are mutually exclusive groups. This is not the case as presented by the early 19th century English economist David Ricardo which is known as Ricardo Equivalence. The general understanding by many Sri Lankans including those in power is that if a government finances its expenditure through taxes, it is only those taxpayers who bear the burden. If the government finances it by borrowing from citizens, they contend, it is not a burden since it is simply a redistribution of the holding of assets. But Ricardo argued that debt financing is equivalent to tax financing as far as the burden is concerned.
In the case of tax financing, taxpayers bear the burden today because they are required to sacrifice their current consumption to pay taxes. According to Ricardo, debt financing passes an obligation to taxpayers to pay more taxes in the future to facilitate the government to repay that debt. Hence, it is the citizens who bear burden in the current period as well as in the future. Ricardo’s analysis did not cover the impact of inflationary financing by the government through money printing. But if the government generates inflation by money printing, it is equivalent to imposing an inflation tax on citizens. As a result, if government expenditure programs are funded by tax financing, debt financing, or inflationary financing, all citizens bear the burden.
Today’s Sri Lanka is a classic example to prove this point. Hence, the entirety of total gross Government expenditure financed through all these methods is a burden to citizens. As such, the non-fee levying education is funded not by a mutually exclusive group called taxpayers. It is funded by the recipients of education themselves. It is an investment made by them in their future and, therefore, they have a right to get the best return on their investment.
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Encourage reverse brain drain
Calling foreign countries to compensate Sri Lanka for using its professional talents does not stand to economic logic. It is not the countries that hire Sri Lankan professionals but employers. If they are taxed for hiring Sri Lankan professionals, to avoid the tax, they will shift their demand to countries which do not ask them to pay this tax. Or if they want to hire Sri Lankan professionals, they will deduct that tax from the compensation paid to Sri Lankan professionals. Such a system will develop an underground market through which Sri Lankan professionals are smuggled out of the country.
Hence, what should be done is not to dissuade Sri Lankan professionals to seek employment elsewhere, but to encourage them to return to Sri Lanka – called reverse brain drain – after gaining money, experience, and market access. This is how India has been able to establish a Silicone Valley in Bangalore and Vietnam to join the fourth industrial revolution in recent years. Since Sri Lanka’s labour force is declining, it should commence automate the main productive operations as a solution.
In conclusion, making Sri Lanka a rich country by 2048 is a gargantuan challenge for policymakers. The requirement is to expand the current $ 75 billion economy to a $ 387 economy recording a compound annual growth rate of 7.6% over the next 25 years. To do so, it should develop physical capital on modern lines, generate creative human capital, and introduce a governance system free from extractive institutions and corrupt practices. Since there is an exodus of professionals from Sri Lanka, to address the declining labour force, it should encourage reverse brain drain, on one side, and automate production operations, on the other.
(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)
The main challenge faced by Sri Lanka is to generate creative human capital, retain it within the country, and use it productively in economic activities. In this connection, Sri Lanka faces two issues. First, with the decline in the rate of growth in population, Sri Lanka is now fast aging. Its median age at 34 today, compared to 27 in India, is to rise to 47 by 2048. An aged population cannot generate creative human capital needed for transforming the economy to required levels. The second challenge is the exodus of a massive number of professionals from Sri Lanka seeking greener pastures in Western countries. The sectors that have been unduly shocked by this disastrous development are the healthcare, engineering, accounting, banking, and higher education