On the Southern approach to Vakarai – an East coast town at the mid-point of the Batticaloa-Trincomalee road – past a new bridge over the reservoir’s sluice gates, a car stops to allow a herd of buffalos cross to water by the rice paddy. These are all good signs, because eight years ago there were no cars on the road, no buffalos to obstruct them and the bridge over the sluice gate was in disrepair. Rice farming was frequently interrupted by war.
People here – mostly farmers and fishermen – are among the poorest in the country, but their circumstances have never been better. Vakarai town is buzzing with people, a number of new stores selling household goods have opened, and fisherman and rice farmers now have access to bigger markets along the East coast and inland.
However, at a tea house outside the Vakarai town, discontent is brewing about low returns from agriculture and fishing, and the lack of other work. Despite new opportunities following the end of the long conflict in 2009, Eastern Sri Lanka’s Batticaloa district is one of the poorest.
Officially, only 6.7% of Sri Lankans are poor, according to the Census and Statistics Department’s estimate of poverty. However, this definition of poverty is incredibly misleading and irrelevant because a person only needs to earn over Rs3,930 or a family of four Rs15,720 to be above poverty, the department estimates. Even in one of the island’s poorest regions, they wouldn’t think Rs15,720 can provide basic needs for a family of four.
It can be argued that official income poverty lines in other poor countries are similarly misleading. That may be true. However, there are a number of problems with Sri Lanka using this definition.
First, Sri Lanka is now a middle-income country and a measure of poverty relevant in sub-Saharan Africa is not useful here. Second, many of its population would squirm at the incredulous notion that a family of four with a household income just over Rs15,720 is not poor. Third, the centrality of these misleading estimates to the debate around economic choices facing Sri Lanka and their potential to mislead the discourse is alarming.
Patrons at a Vakarai roadside tea house also treat with incredulity a suggestion that the region’s poverty is just 28%, as data suggests. Few have jobs and an income that can secure food, shelter, education for their children and their family’s basic needs. They think that everybody in the village and in the surrounding villages are in poverty. This is the grand disconnect – between headline-making statistics that policymakers and economists rely on, and reality.
It shouldn’t be surprising that Sri Lanka’s poverty, measured as a headcount ratio, below the poverty line at 6.7% is because governments are often famous for their mindlessly irrelevant measures of well-being. Sri Lanka isn’t an exception. But there is a second, more critical reason, and that is the pace of transformation of its economy over the past couple of decades. A credible headcount poverty rate isn’t difficult to estimate when household income data are available, as they are here.
A recent World Bank report on poverty and welfare in Sri Lanka offers fresh insights into the enormity of the income poverty challenge here.
[pullquote]Despite new opportunities following the end of the long conflict in 2009, Eastern Sri Lanka’s Batticaloa district is one of the poorest[/pullquote]
It cites several global income poverty benchmarks that aid comparison across countries. These are different from a country’s own poverty measure. Some of the most widely used are extreme poverty, measured as those living on less than $1.25 a day (at 2005 purchasing-power parity), and moderate poverty, defined as living on less than $2 a day. Poverty in middle-income countries is estimated as those living on less than $2.50 (2005 PPP) or $4 (2005 PPP) a day.
The two middle-income poverty lines correspond to income of Rs6,058 and Rs9,692 a month per person in Sri Lanka in 2012/13 prices, according to the World Bank. Since inflation in 2012-2013 has been muted here, headline inflation was 3.3% in 2014 and just 1.6% in 2015.
The two middle-income country poverty lines – $2.50 a day and $4 a day – overplayed against per capita monthly income here indicates that 35-65% of the population is poor, measured by those standards. At $2.50 per capita, a family of four would need an income of more than Rs24,200, and at $4 per capita, the same family would need an income of over Rs38,700 to be above poverty. These estimates use income data and prices from the 2012-13 period, when the last household income and expenditure survey was carried out here.
Because the government’s official poverty measure is enormously misleading and few realize its incongruousness, the poverty statistic has lulled people into false security about Sri Lanka’s achievement.
Sri Lanka has some unique economic challenges – some of them similar to those in western societies: how to generate growth with an ageing population, generating higher paying jobs to meet expectations, dealing with globalisation and the shocks tighter integration transmits through the economy, and catching up for war depravations.
Income is a good measure of peoples’ ability to procure basic needs for themselves and their families. This is an absolute measure of poverty. The statistics office arrives at the minimum income to avoid poverty based on its cost of basic needs – mainly the expenditure for a person to meet a daily calorie intake of 2,000 kcal. In 2002, this daily amount was estimated at Rs1,423 a month, which has since been inflated annually using Colombo’s Consumers Price Index. Sri Lanka’s national poverty line is equivalent to about $1.50 per person a day (at 2005 purchasing-power parity terms). The Word Bank observes this and supports a level of consumption ‘below what one might expect from a country of Sri Lanka’s level of development’. It also points out that the poverty line is based on 2002 consumption patterns, “which are likely to have changed significantly in the past decade, making it important to update the current poverty line soon”.
The other dimension to poverty is that it is relative. It is relative to the incomes of your neighbours, villagers and other people in the country. This produces a measure of poverty that is socially defined and dependent on a social context.
Those above Sri Lanka’s poverty line but below the 40th percentile of the earners table are similar to the poor, according to the World Bank. It also says low-income households’ ability to access basic services and public facilities have barely improved since 2002. “The population in the Northern and Eastern provinces are particularly disadvantaged in terms of consumption, labor market outcomes, educational attainment and housing conditions,” the bank adds.
Based on income poverty, its causes and impacts, it’s possible to draw boundaries around three distinct Sri Lankas. The first Sri Lanka is confined mostly to areas in the Western province, a sophisticated place with rapid economic growth and first-world social indicators.
The next are regions that have seen social improvements, but lack good jobs. This, the second Sri Lanka, is vast and includes areas outside or on the borders of the Western province. This Sri Lanka has benefited from good public infrastructure, including health services, education and transport. However, abundant jobs are created due to private companies investing, and these areas have been unattractive for such investments compared to Colombo and the Western province.
Third, Sri Lanka lacks even basic services. Not coincidentally, this third Sri Lanka includes the former conflict zone, but is not limited to these. Areas in the central hills where tea is grown, pockets in the country’s deep south and villages along the Northwestern coast also belong to this dire Sri Lanka.
The second and third Sri Lankas – the one that has seen social improvements, but lacks jobs, and the other that lacks even basic services – are overwhelmingly home to Sri Lanka’s poor. Up to 65% of Sri Lanka’s population is poor if poverty estimates were to use middle-income nation consumption thresholds, and most of these poor live in the second and overwhelmingly the third Sri Lankas.
The violence, difficulties and poverty somehow haven’t extinguished people’s ability to dream. They have greater expectations about the future than most poor people in the region. This is only natural because Sri Lanka’s poor are different from South Asia’s.
Sri Lanka’s poor aren’t considering how better off they are than Dhaka’s economically marginalized, famers here don’t see favorably their circumstances as better than those toiling in Nepal’s unyielding mountains, and their brighter prospects than those living under Afghanistan’s Taliban rule areas won’t endear people in Sri Lanka’s former war zone.
Vakarai, set against the rolling plains and paddies, disguises near two decades of hardship. During the long conflict between the government and the Tamil Tigers, the village was often a major battleground with its control frequently shifting. For the Tamil Tigers, it was strategically important as a center for communication between the Eastern and Northern provinces. In 2007, breakaway senior Tiger commander Karuna helped push the Tamil Tigers out of Vakarai and the southern half of the Eastern province.
Vakarai is an example of the third, and most dismal, manifestation of Sri Lanka. Vakarai, like a majority of the rest of the former war zone, has almost no jobs and basic services. But this isn’t entirely due to the depravation of the long conflict. Services are similarly poor in some areas in the central hills, pockets in the deep south and villages in the Northwest coastal belt.
Economic and social indicators in these areas show that problems are formidable. While school enrolment is high, the quality of education is abysmal and dropout rates are high. Children work in the family farm because jobs are scarce and parents attach lower value to education. Despite some schooling, young adults are sometimes illiterate. Low incomes have made malnutrition a widespread problem.
Weak health, education and other social attainments should then become the political stick with which the government’s inveterate opponents beat it. However, Sri Lanka’s apathetic communal politics have ensured that this doesn’t happen. Its main majority pandering parties have, so far, portrayed minorities living in the third and bleakest Sri Lanka as threatening. Politicians representing these most marginalized constituents have done a miserable job. As a force in Sri Lanka’s coalition politics, they have advanced their own ambitions for wealth and power to the chagrin of their poor constituents.
[pullquote]This is the grand disconnect – between headline-making statistics that policymakers and economists rely on, and reality[/pullquote]
In a country that takes pride in its regional leadership in social indicators, communal ideology still rules its politics. Sri Lanka is no longer a low-wage economy like the rest of South Asia, and people here have long since stopped comparing themselves with their poorer neighbours. Since its emergence from the conflict, links families here have with the rest of the world (because a family member works or lives overseas), openness to trade and Colombo’s sophistication have reset people’s expectations. The dichotomy, however, is that Sri Lanka has no robust growth model to meet these aspirations of its citizens. Sri Lanka’s economy is rudimentary.
The heavens opened. Between October and November 2015, rainfall in Sri Lanka’s dry zone was 30% above the long-term average. During a good monsoon season, October to November rainfall is a deluge in Sri Lanka’s main rice growing regions. Combined with inter-monsoonal showers in September, Sri Lanka’s dry zone receives most of its annual rainfall in just three months.
Rice is a semi-aquatic crop for which ideal growing conditions have been simulated by Sri Lanka’s reservoir and irrigation system in the dry zone. It is three times more water intensive than other cereals, and is most successfully grown in Asian river deltas where year-round water makes it possible to grow three crops.
More than 70% of Sri Lanka’s rice acreage receives water from the 10,000 small and large reservoirs, to grow one crop and a limited second one. The other 30% of rice paddies, watered just by rain, grow a single crop a year. The first showers of the year – March’s inter-monsoonal rains, which famers refer to as Thaala wessa, describing the light rain’s rhythmic fall over the fields, followed by Bakmaha Akunu or April’s lightning, heralding the Southwest monsoon – are critical for aswaddumizing the smaller of Sri Lanka’s two annual rice crops: yala. Endearing weather phenomenon nomenclature heralding yala contrasts the absence of such mellifluousness around October’s Northeastern monsoon.
So much more hinges on the abundance of the Northeastern monsoon.
The wettest October-November season in years in 2015 ensured that rice planted just weeks before took deep root and filled the dry zone’s thousands of reservoirs – which supply water during the dry months – to their brims. For a third of rice fields that depends on rainfall alone for water, a bountiful maha crop – which yields in four months – gives them their only income.
Those with reservoir-fed small fields can plant a yala crop on some of their land, depending on how much water is available.
The fortunes of rice farming are inextricably linked to rainfall and critically to the intensity of the Northeast monsoon’s kickoff in October and November. A bountiful maha harvest keeps inflation low. Food accounts for nearly half of the consumer price index, so prices rise and fall following rainfall. Other agricultural crops like tea, rubber and coconut are all watered only by rainfall.
Rice farming’s economic value addition fell 17% from 2013 levels due to the drought in 2014, and the crop declined 27%. The drought entirely destroyed paddies watered by rain and reduced yields elsewhere by forcing farmers to abandon part of their aswaddumized land and divert water to the rest.
In a good year, rice farming contributes 1.6% or more to the economy (GDP). Rice is Sri Lanka’s largest agricultural crop. For comparison, tea, the island’s largest export crop and the second-largest agricultural crop, contributes just 0.9% of GDP, about half the value added by rice farming. Despite its sophisticated industry and high value-adding services, much of Sri Lanka’s economy still depends on the monsoon. An indifferent or weak monsoon – an occurrence every other year – wrecks rice farming and affects the incomes of many of the 2.2 million workers – or 27% of Sri Lanka’s workforce – employed in agriculture. As farming wages and investment returns are low, the sector only accounts for 6.2% of economic output (7.5% including fishing).
Four months after the Northeast monsoon rains produced a bumper rice crop, the agriculture sector has taken an about turn. The yala rice crop will require water for leveling and readying paddies for planting, but the reservoirs are dry, inter-monsoonal rains are a month away and the southwest monsoon starts in mid-May. Prices of agricultural commodities will increase because rain-dependent farming like vegetables (in the central hills and lowlands), tea and other crops are being destroyed or seeing plummeting yields.
The centrality of rain to the economic fortunes of so many people illustrates not just the fragile nature of farming but also – despite advances – the Sri Lankan economy’s unsophistication. Neither this nor the effects of violence and poverty have extinguished people’s ability to dream. They have greater expectations about the future than most in similar circumstances in the region.
International experience shows that immediate action following a conflict’s end can make the difference between success and failure. Sri Lanka took the slow path. Despite the Tamil Tiger leadership being wiped out and remaining fighters in rehabilitation, mistrust continued. The war-affected were unable to enjoy peacetime normalcy because they weren’t sure what happened to their loved ones, the military was occupying their property and job-creating investment was not trickling in.
Still, on the surface, it seem things are slowly improving. Rural poverty has fallen sharply in the official count over the past 14 years. Worryingly, these aren’t gains due to improving productivity. Services such as mobile phones and consumer goods sales have boomed across the country. Welfare and infrastructure spending have also contributed to rural growth and poverty reduction.
The World Bank identifies four possible reasons for the poverty decline in the decade to 2013. First, growth of the services sector, which has improved productivity and created many jobs. Second, more people now live in cities where jobs and opportunities are plentiful, and it costs less to deliver services. The bank says the third and fourth reasons it sites may not have contributed as much as the first two, but they are the rise in global food prices, which improved returns on tea, and higher domestic demand for goods and services.
However, agriculture productivity – where nearly 30% of the workforce is engaged – is woefully low and annual improvements are marginal. The sector grows at around half the rate as the rest of the economy.
Economist Indrajit Coomaraswamy describes Sri Lanka’s economic management strategy as one that took the ‘easy way out’. “It’s not by addressing significant structural and productivity issues that we have grown, but by import-led consumption and government spending on construction,” he recently told a seminar organised by stockbrokerage Asia Securities.
Critics like Coomaraswamy have been pointing to Sri Lanka’s lack of a model that can deliver 8% growth for a sustained period. “This is what successful countries in Asia have done,” he says about the need for such a plan that must have three elements. First, growth has to be driven by investments from the private sector – not for ideological reasons, but because the government does not have the means to fund it. Second is a renewed focus on exports, which has declined by half in the past couple of decades relative to the economy’s size.
The third element is to boost foreign direct investment (FDI), which at the equivalent of 1.3% of GDP is around a third of the level East Asian nations achieve to maintain high economic growth.
The government pumped up consumption in 2010 when pressure mounted for a peace dividend following the end of the war by lowering interest rates, import tariffs and by borrowing. This was unsustainable, and in 2012, faced with a balance of payments crisis, it secured an IMF package.
Soon after, another unsustainable model of foreign commercial borrowings for public infrastructure was introduced. Because globally interest rates are rising and Sri Lanka’s credit standing has deteriorated, this will become costlier to maintain. With inflation nudging up and the Rupee under pressure, Sri Lanka has to raise interest rates to prevent these from spiraling out of control. No longer is there any fiscal, monetary or exchange rate space for another artificial boom.
[pullquote]In a country that takes pride in its regional leadership in social indicators, communal ideology still rules its politics[/pullquote]
One reason the countryside’s discontent about the lack of jobs and social improvement has remained muted is because of the billions of dollars sent home by Sri Lankans working or living overseas. These remittances are close to 10% of the GDP level. But it can’t be expected that they would keep growing at the same pace.
Although the government appears to be serious about tackling rural problems, it faces the stumbling block that is its own lack of resolve over the difficult choice of keeping the budget deficit in check. Uncertainty in the policy framework comes from the budget.
Coomaraswamy explains, “Sri Lanka post-1977 has been high budget deficit, high inflation, high nominal interest rate and overvalued exchange rate economy, which is diametrically the opposite to what a successful country is.”
The triggers of rural antipathy vary, but poverty is an underlying factor. The drought in early 2016 will put rural income under pressure. However, in political terms, this may not be the incident that triggers an outpouring of rural discontent.
Sri Lanka’s poverty is not uniform. Cleary, more jobs and opportunities, which only investment can bring, will give people, marginalized by the circumstances of their birth, more opportunity. The problem is not of local politicians, lazy farmers or war, but irresolute governments and weak governance.