Skirting the Middle-Income Trap

Just four years after the end of the 30-year civil conflict that had impeded developmental progress, Sri Lanka is focused on policies that could speed economic growth and steer around the middle-income trap, a predicament countries might face in moving from low to high income levels.

Per capita gross national income, by some estimates, could rise from $3,000 in 2012 to around $4,000 by 2016—which would move the country into the mid-range of middle-income (as measured by the so-called Atlas Method). As with other countries in this range, such as China and Thailand, the question is: what is needed for a steady move into a higher income position?

In our changing world, the imperatives in this effort are not only to address economic and social impediments, but  to increasingly  confront environmental roadblocks as well.

Economics still clearly matter. Sri Lanka on average grew some 5% annually in the three decades of the civil conflict. GDP is forecast to grow 6.8% in 2013 on the back of a strong performance in the first quarter of the year, well above the 5.6% rate expected for all of South Asia for 2013. The challenges include the priority to carefully navigate the obstacles of national debt, budget deficit, and debt-servicing costs, alongside the trade deficit.

Furthermore, the social agenda looms large. Sri Lanka is a leader in many aspects of development in education and health, while the proportion of population living below the $1.25-a-day poverty line fell from some 15% in the early 1990s to an estimated 4% in 2010.  At the same time, the proportion below $2 a day in 2010 was an estimated 24%. And inequality had risen between the two decades. The opportunity is in realising that the broader the economic participation of lower-income groups, the greater the chances of maintaining high growth.

It may be surprising to list the environment as a game changer. But that is the new reality. In particular, the country needs to continue to prepare for the effects of climate change by boosting resilience to the inevitable consequences of global warming, while implementing mitigation measures. These issues will feature strongly in discussions at the upcoming International Conference on Building Resilience in Ahungalla looking at the challenges of disaster risk.

Natural disasters in Asia and the Pacific in recent decades have been among the world’s most damaging. According to a recent study of the Asian Development Bank, this is likely the result not only of the growing exposure of people to these calamities, but also of the rising frequency of intense climate-related hazards—floods, storms and droughts. The climate in the region has been changing while average temperatures have been higher and average temperature and rainfall have been both more variable and extreme.

Sri Lanka has faced its share of natural calamities, the deadliest being the 2004 Tsunami. In addition, severe drought in 2011–12 left many districts in the northeast and southwest of the country parched; reservoirs dwindled and people in hard-hit areas lacked safe drinking water.

According to the International Federation of the Red Cross, by October 2012, a second straight season of scanty rainfall had dried out several districts in these areas. Yet, as rains in November-December 2012 returned, they quickly turned to severe flooding.

Such events disproportionately affect the poor and exact crippling economic damage.  Assessments of the effects of the combined drought-floods estimated that some 20 percent of the island’s rice harvest was destroyed. Among about half-a-million people affected, the floods left many without easy access to food. Power generation, about one half of which comes from hydro-power plants, fell sharply at the height of the dry spell.

That economic trouble should arise out of environmental calamity should not be surprising; natural disasters play a visible role in hindering social and economic progress throughout Asia and the Pacific. With 25% of the world’s gross domestic product, the region accounted for 38% of the economic losses due to natural disasters from 1980–2009.  Unless governments, businesses and households better prepare for the increase in storms, floods and droughts, the economic consequences would likely worsen.

Sri Lanka’s economic progress and social accomplishments made with limited resources are renowned. But as the country seeks a trajectory that avoids the middle-income trap, it would be increasingly necessary to blend economic and social measures with environmental action.