The views expressed in this paper/presentation are the views of the author(s) and do not necessarily reflect the

views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make any representation concerning the same.

Case Study on Sri Lanka's Social Policy as an Emerging Middle Income Country: Can PRC's Development Assistance Help in Making Growth in Sri Lanka More Inclusive

Working Paper for Conference on Making Growth Inclusive: Challenges and Opportunities for Asia's Middle Income Countries and the Region" 13 September 2011 Indonesia

October 2011 Prepared by Minuri Amarasuriya, Geetha Mayadunne, Ishara Rathnayake and K. Romeshun

29 Gregorys Road, Colombo 7, Sri Lanka Tel: +94 11 2676955-8, Fax: +94 11 2676959 Email: info@cepa.lk Web: www.cepa.lk

Abbreviations and Acronyms

ADB BOI CEPA DCS ERD FAO FDI GDP HIES HDI HPI IFPRI IMR MDGs MIC MMR NCDs PA PRC SPI UGC UNDP UNP UPFA WB Asian Development Bank Board of Investment Centre for Poverty Analysis Department of Census and Statistics External Resource Department Food and Agricultural Organisation Foreign Direct Investments Gross Domestic Product Household Income and Expenditure Survey Human Development Index Human Poverty Index International Food Policy Research Institute Infant Mortality Rate Millennium Development Goals Middle Income Country Maternal Mortality Rate Non Communicable Diseases Peoples Alliance Peoples Republic of China Social Protection Index University Grants Commission United Nations Development Programme United National Party United Peoples Freedom Alliance World Bank

Table of Contents
1. 2. 3. Introduction ..................................................................................................1 Paper Structure and Methodology ...................................................................2 Inclusive Growth Case of Sri Lanka ..............................................................3 a. Policy initiatives ..........................................................................................3 b. Economic Development and Poverty Levels .................................................. 4 c. Social Development ....................................................................................8 i. Education................................................................................................9 ii. Health .................................................................................................. 12 iii. Social protection ................................................................................... 15 iv. Aging population. ................................................................................ 166 d. Conclusions .............................................................................................. 17 4. Development Experience of Emerging Middle Income Countries Lessons for Sri Lanka ....................................................................................................... 188 5. Chinese Development Assistance to Sri Lanka ............................................... 23 a. Chinese Overseas Development Assistance................................................. 23 b. Overview of Chinese assistance to Sri Lanka ............................................... 25 c. Support to inclusive growth through Chinese assisted projects .................... 27 i. Development of Port in Hambantota ....................................................... 27 ii. Norochcholai Coal Power Plant Project.................................................... 27 iii. Other projects....................................................................................... 28 d. Overall outcomes ...................................................................................... 28 6. Conclusion .................................................................................................. 28 Annex 1: Chinese Assistance for Sri Lanka 1970 to 2011 ....................................... 31 References ......................................................................................................... 32

1. Introduction
This paper reviews existing inclusive growth and poverty reduction policies in Sri Lanka from a social policy perspective. It looks at the emerging economies of India and China and whether Sri Lanka has lessons to learn from these countries in improving its policies relating to inclusive growth. The paper further assesses the nature of development assistance to Sri Lanka from China and analyses how inclusive and poverty oriented this aid has been/is for the development of Sri Lanka. Sri Lanka is a lower middle income country with a Gross Domestic Product (GDP) growth rate of 8 percent, and a per capita income of USD 2,399 targeted to double to USD 4,000 by 2016 (Mahinda Chintana 2006). Doubling per capita income by 2016 requires sustaining the 8 percent growth it achieved in 2010 for the next six years, supported by raising investment to 35 percent of GDP from the present 25 percent, paired with an appropriate supportive macroeconomic environment. Post war Sri Lanka has an internal and external environment with favorable factors for the country to spur inclusive growth and development, including improved investor confidence, favourable macroeconomic conditions and the gradual recovery of the global economy from one of the deepest recessions in history (Central Bank 2010). Sri Lankas achievement comes with the backdrop of reported high achievement in the social sector. Sri Lanka is considered a model in this respect achieving a very high level of development in the education and health sectors. The high achievements in these sectors during the 1990s saw a dip in later years due to under-investment, conflict and lack of a strategic direction, and Sri Lankas achievements are now considered to be slipping (ADB 1998). Sri Lanka could also be a victim of its past success in implementing a successful family planning programme that has resulted in replacement level fertility and the fastest aging society in Asia. The aging of the population would put Sri Lanka in a similar situation to that of Europe or Japan today in another 20 years, the larger issue is that unless Sri Lankas development process is improved and sustained it would have a lower level of income to support this aging population (World Bank 2008). The Peoples Republic of China (PRC) in recent times experienced very rapid growth resulting in notable achievements, particularly in the reduction of poverty. Increase in economic growth began in the early reform period (1979-1984) with the sharp rise in GDP in agriculture, stimulating domestic consumption and high savings rates with savings appropriately transferred into physical capital investments in the nonagricultural sector. From the mid-1980s growth in the non-agricultural sector was stimulated by the growth of township and village enterprises, a distinctly Chinese institutional development and a major factor contributing to the sharp decline in poverty. By 1980, the average annual growth in the GDP reached 10 percent and reforms from the 1990s provided for trade liberalisation, fiscal and financial expansion, establishment of special economic zones to attract foreign direct investment (FDI) and reform of state-owned enterprises, sustaining a high level of growth (FAO 2006).Given Chinas impressive achievements with respect to responding to trade liberalisation, globalisation, rural and urban development and poverty eradication, there is wide potential for Sri Lanka to draw lessons from the growth and developmental experiences of China.. There are lessons to be learned about how the PRC co-operated with international donors, how it developed its agricultural sector and rural areas, how it expanded its infrastructure and how it

created an attractive environment for businesses to flourish and create jobs. Whilst Chinas experience in Township and Village Enterprises that developed small and medium enterprises, the Household Responsibility System which improved agricultural productivity and in policies/ practices that enabled it to become the largest destination for foreign direct investment may not be totally replicable in Sri Lanka, there are aspects within that approach that Sri Lanka can emulate in enabling inclusive development. Similarly analysis of social practices of the PRC would also provide inputs for Sri Lankas social policy that would enhance equitable and sustainable development. India's growth experience, while higher than many other developing countries, was still less than the rapid growth experienced by China. The study would also look at the development experience of India specifically in health and social protection. Starting with the Rubber-Rice Pact in 1952 and the establishment of full diplomatic ties five years later, China has grown to become Sri Lankas largest aid donor, and the biggest investor contributing 44 percent of external finance disbursed to Sri Lanka in 2010. Given the PRCs fast paced development and being Sri Lankas largest donor, this paper looks at possibilities for lessons from the PRCs development process and the possibilities of integrating them into the PRCs development assistance to Sri Lanka.

2. Paper Structure and Methodology

The paper consists of three sections. The first section explains what inclusive growth is with definitions and its importance for an emerging economy. It will also discuss the present Sri Lankan socio-economic situation paying attention to the governments policy framework and elaborates the characteristics of poverty reduction and inclusive growth policies over the past years and how it has contributed to the present achievements. This analysis reveals successes and drawbacks of social policies and its implementation and suggests areas/sectors that require further attention. The second section explores the lessons that Sri Lanka can learn from a larger Middle Income Country (MIC) like the PRC and India. The section focuses on key areas in social policies including health, education, social protection and an aging population. The analysis would suggest what Sri Lanka can learn/cannot learn from the development experience of the PRC and India. The third section explores the characteristics of development aid from the PRC to Sri Lanka which has increased substantially since 2007, and whether it has contributed to poverty reduction and inclusive growth in Sri Lanka. The section focuses on a few development projects funded by the PRC and elaborates on their outputs and impacts on poverty and inclusive growth. The study is based on secondary sources and key person interviews drawing data and information for the analysis and on CEPAs own advisory and research work.

3. Inclusive growth Case of Sri Lanka

a. Policy initiatives Sri Lankas policy since independence and until the mid 1970s has had a high emphasis on human capital development, welfare and inward looking development policies. The emphasis on welfare of the population over the years resulted in the achievement of a significant level of human and social development. These policies include, Education in Government schools being made free of charge in 1938 as a consequence of the Universal Franchise granted in 1931. The colonial education policies had created socio-economic, ethnic, religious and regional disparities in the provision of education and its outcome. Subsidisation of the cost of food to consumers, begun in 1943. A food ration system was introduced in 1948. Free health facilities introduced by the government in1950. Thriposha programme targeting pregnant mothers and children implemented in 1973. About one third of the budgetary expenditure (10 percent of the GDP) was allocated for welfare payments including education, health and food subsidies in the 1950s and 1960s (Rathnayake 1998).

These policies created an environment for the much acclaimed social development achievements in Sri Lanka. The literacy rate in Sri Lanka is 91.4 and life expectancy at birth was 70.3 and 77.9 for males and females, respectively in 2010. Primary net school enrolment ratio is 89.9. The HDI for Sri Lanka is 0.658 in 2010 placing Sri Lanka at 91 out of 169 countries (Central Bank 2010). Sri Lanka is close to attaining the Millennium Development Goals (MDGs) in the areas of poverty, under five and infant mortality, schooling enrollment and completion and gender parity in schooling. In addition, the ADB-Social Protection Index (SPI) for Sri Lanka is 0.47 which means that it ranks 9th out of the 31 Asian and Pacific countries for which ADB-SPIs have been calculated; it is the highest ranked South Asian nation (ADB 2007). The policies geared towards welfare prior to 1977, gave high priority to equity rather than growth. During 1970-77 resource allocation was done through a centrally planned mechanism, private sector activities were minimal and import substitution was promoted. In addition, policies implemented in the early 1970s with respect to land reforms, income ceiling and nationalisation tended to redistribute income in favour of the poor. However, those policies basically focusing on welfare had adverse consequences on production activities and thus slowed down the growth process. The change of government in 1977 marked a turning point in socio-economic policies in the post independence era. The new government considered growth as the major economic objective. Thus, structural adjustments to liberalise the economy and outward looking policies were adopted. These policies, however, were found lacking in providing the growth dividend to the rural poor. Thus, in addition to rural development projects, a specific poverty alleviation programme, Janasaviya, was introduced in the late 1980s which was subsequently remodeled as a welfare and income generation programme called Samurdhi in 1994. In addition, a free mid- day meal programme was introduced in the schools in 1989. Thus since independence, successive governments have relied on the two broad strategies of human development and poverty alleviation. Whilst the policies adopted prior to the economic liberalisation in year 1977, contributed to a greater equality at the expense

of economic growth, the market oriented growth policies adopted after the liberalisation resulted in economic growth with uneven income distribution among the population. The primary objective of these development programmes was pro-poor growth which is also reflected in Sri Lankas Poverty Reduction Strategy developed in year 2000 titled Sri Lanka: A Framework for Poverty Reduction. The three major pillars of the strategy were creating opportunities for the poor to participate in economic growth, strengthening the social protection system, and empowering the poor and strengthening governance. The trend towards inclusive development policies occurred with the adoption of The Future regaining Sri Lanka policy in year 2002 which aimed at offering all people improved health, education and housing, and greater opportunities for productive employment. This strategy direction was further improved with the introduction of

development in the country, with special emphasis on the needs of lagging regions. The strategy based on the policy underlies a long term - a ten year macro economic framework - with an 8 percent GDP growth target for the immediate six years and a higher target of 9-10 percent thereafter. Within the macro economic parameters the programme includes a ten year policy framework for the economic and social sectors of Sri Lanka. It emphasises the need to share the benefits of growth across all segments of the population and also to prevent inequities, social exclusion and adverse environmental repercussions that have been witnessed in some of the rapidly growing economies like China or India which offer new models for development. b. Economic Development and Poverty Levels Inclusive growth is a concept advocated to achieve an equitable and sustainable economic growth. It refers to a development process in which every member of the society participates and benefits from economic growth on an equitable basis, with growth broad-based across sectors, and inclusive of a large part of the countrys labour force. Whilst Sri Lanka is credited with achieving a sustained 5 percent1 annual average growth rate even during the conflict years, the mediocre development achieved has resulted in lower achievements in per capita income. Hence Sri Lankas desire to grow at an average of 8 percent so that it can reach the USD 4,000 per capita income within a short period of time. During the last few years the average growth rate has increased to 6 percent with a high 8 percent growth during 2010. The improving growth rates have enabled Sri Lanka to reduce overall poverty levels. The Household Income and Expenditure Survey (HIES) of the Department of Census and Statistics (DCS) indicates that a sharp and steady decline in poverty and consumption inequality is witnessed at national level and across all provinces, over the last decade. The Headcount ratio or the percentage number of persons living below the official consumption poverty line decreased from 22.7 percent in 2002 to 15.7 percent in 2006/7 and to 8.9 percent in 2009/10 (Department of Census and Statistics 2011). The concept Inclusive Growth differs from the notion of pro-poor growth in that the pro-poor approach is mainly interested in the welfare of the poor while inclusive
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Mahinda Chinthana: Vision for a new Sri Lanka: A ten year horizon development framework 2006-2016 which postulated to improve growth prospects with equitable

Calculated from the Annual Reports of the Sri Lanka Central Bank

growth is concerned with opportunities for the majority of the labor force, poor and middle-class alike. The growth incidence curves show that between 2002-2006 growth is positive, high and more or less equally spread over all income deciles. It is the likely push factor which moved the poor out of poverty or paved the way for people to move out of poverty in the period that followed. Despite growth being lower in the 2006-2009 period, the very high growth rate in the immediately preceding period, that is between 2002-2006 explains the decline in overall poverty from 15.2 percent in 2007 to 8.9 percent in 2010 (Figure 1). Figure 1: Household Income Growth by Income Deciles: 2002-2006 & 2006-2009
10.0 8.0 6.0 Growth 4.0 rate 2.0 0.0 2.0 4.0 1 2 3 4 5 6 7 8 9 10 Hhdmeanincomegrowth rate(%)20022006 Hhdmeanincomegrowth rate(%)20062009

Hhdincomedeciles

Source: Growth rate calculations based on DCS, HIES 2002, 2006/7, 2009/10 data

Whilst overall statistics indicate that Sri Lanka is on an inclusive growth trend, disaggregated statistics indicate issues related to inequitable growth and significant disparities in poverty across regions in Sri Lanka with absolute pro-poor growth in some districts and relative pro-poor growth in other districts (CEPA 2011). The Western Province accounts for 45 percent of the GDP (Central Bank 2010) and the fact that eight other provinces contribute the balance, is an indication of the inequalities in terms of quality and availability of infrastructure and insufficient human resources amongst various reasons for the under development of the other Provinces. High levels of economic activity in the Western Province have enabled the reduction of poverty in the Province to a low of 4.2 percent (Figure 2). In contrast, the incidence of poverty in the two poorest provinces, Eastern and Uva, was 14.8 percent and 13.7 percent, respectively in 2010. In line with the countrys trend of reducing poverty, the Uva and Sabaragamuwa provinces do show a drop of nearly 15 percentage points in poverty in relation to 2006/7. The North2 and East of Sri Lanka have endured an armed conflict for three decades, affecting their productive capacity and requiring substantial investment in both social and economic infrastructure to improve this areas capacity to contribute to the national economy.

Conflict had affected the systematic collection of data and statistics on the Northern Province.

Figure 2: Incidence of Poverty by Province

30 25 Poverty 20 Headcount 15 ratio(%) 10 5 0

2006/07 2009/10

Source: Chart based on DCS, HIES 2006/7, 2009/10

With poverty reducing, inequality is also showing a reducing trend and the Gini coefficient for the real per capita consumption in 2009/10 shows a significant drop in all provinces (Figure 3). However, Sri Lankas Gini-coefficient of 0.47 indicates that there is still substantial inequality (Department of Census and Statistics 2011). Figure 3: Inequality by Province
0.45 0.4 0.35 0.3 Gini 0.25 coefficient 0.2 0.15 0.1 0.05 0

2006/2007 2009/2010

Source: Chart based on DCS, HIES 2006/7, 2009/10

The steady drop in poverty in the rural sector from 24.7 percent in 2002 to 15.7 percent in 2006/7 and 9.4 percent in 2009/10 is the main contributor for the unprecedented drop in poverty at national level (Figure 4). A two third drop in poverty in the estate sector was witnessed between 2006/7 and 2009/10. However, the rural and plantation/estate population still remains relatively poorer than the urban population and the rural sector contributes 84.6 percent to the total poor in Sri Lanka (Department of Census and Statistics 2011).

Figure 4: Incidence of Poverty

45 40 35 30 Poverty 25 Headcount ratio(%) 20 15 10 5 0 1990/91 1995/96 2002 2006/07 2009/10 Urban Rural Estate SriLanka

Source: Chart based on DCS, HIES 1990/91, 1995/96, 2002, 2006/7, 2009/10

Growth Incidence Curves shown in figure 5 indicate income growth across all income groups, and more significant growth in the middle income groups especially in the estate sector, followed by the rural sector. Although growth is low in the lowest two deciles, the high growth in the middle income deciles is likely to have resulted in the fall in poverty in the estate sector from 32 percent in 2007 to 11.4 percent in 2010, in the rural sector from 15.7 percent to 9.4 percent, and in the urban sector from 6.7 percent to 5.3 percent (Figure 5). Figure 5: Household Income Growth Rate by Income Deciles
15 10 5 Growth rate(%)0 5 10 15 20 Householdincomedeciles Source: Growth rate calculations based on DCS, HIES 2006/7, 2009/10 data hhdmeanincome growthrate(%)2006 2009 1 2 3 4 5 6 7 8 9 10 Urbanhhdmean incomegrowthrate (%)20062009 Ruralhhdmean incomegrowthrate (%)20062009

Between 2002-2010, the sectoral shares of GDP, in real terms, remained more or less the same, indicating that the economy had reached a plateau following a structural transformation over the previous two decades. In 2002-2010 period, the agriculture sector share fluctuated around 13 percent, and services and industry sector shares fluctuated around 59 percent and 28 percent, respectively (DCS various years and Central Bank 2010). Employment increased steadily across all economic sectors, with the rate of unemployment decreasing very significantly

between 2002 and 2010. Sectoral shares remained almost stable over this period, indicating a broad based growth in the economy. The share of employment in the agriculture sector fluctuated around 33 percent, industry around 24 percent and services around 43 percent. Inclusive growth requires the creation of a conducive environment for the different sectors to improve productivity levels, labour inclusion, and broad based social policies. It also requires policies that will ensure high, sustained and efficient economic growth to create sufficient numbers of productive jobs and expand economic opportunity to all. Labour productivity or the growth rate of GDP (in real terms) per person employed, increased in all three sectors between 2002-2010, with the least increase occurring in the agriculture sector (Figure 6). The steady increase in labour productivity is likely to be the key factor that resulted in a steady fall in consumption poverty levels between 2002-2010. The productivity levels in the agricultural sector have remained stagnant and persons engaged in agriculture and casual wage labourers remain the poorest communities (Gunewardena 2007). Figure 6: Labour Productivity by Economic Sectors

600000 500000 Output 400000 per employed300000 person(Rs) 200000 100000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010

Agriculture Industry Services All

Source: Calculations based on DCS Labour Force Survey Annual Reports 2002-2009, 2010 data, National Accounts of Sri Lanka, 2002-2010

In a summary the average economic growth rate of Sri Lanka which had been stagnant at around 5 percent, has in recent years shown an upward trend. This has enabled the reduction of poverty; and income growth analysis by deciles reveals that the growth has spread evenly across all deciles, indicating that the growth appears to be inclusive. However substantial inequality persists, largely on account of regional disparities in infrastructure, lack of productivity in agriculture and the three decade long conflict in the North and East. c. Social Development Since independence successive governments of Sri Lanka have placed emphasis on the social welfare of the nation. Provision of extensive health services for the past 60 years and education and other facilities have resulted in commendable achievements in human development as well as being on track to attain the MDG targets early. Sri Lankas human development achievements are very much ahead of its South Asian neighbors and other developing countries.

i. Education Sri Lankas achievements in education are impressive compared to other developing countries. The right to education has been recognised for over six decades in Sri Lanka with the provision of free education and incentives that include free text books, free school uniforms, subsidised transport and special education programmes for disadvantaged students. The policies have contributed to reduce socio-economic, ethnic, religious and regional disparities in the provision of education and its outcomes over the years. It opened up the doors of higher education to the poor. More central schools were opened with a high concentration in rural areas. This has increased school enrolments, and attendance of girls and boys among the poor, increasing the quality of education received by the poor communities. There are however issues with the quality of education so received and its use for gainful employment. The net enrollment rate at the primary level was above 85 percent in 1990 and the country has almost achieved the MDG target of universal primary education with a net enrolment rate of 97.5 percent in 2006/07 with slight variations across provinces and gender (Table 1). The estate sector lags behind with the enrollment rate at 94.8 percent compared to the urban and rural sectors. The high net primary school attendance and completion rates and near gender parity in enrolments can be attributed to a number of factors, including strong household demand for schooling and progressive government policies (IPS 2010). Increasing the already high net enrolment rates would depend on island wide adoption of inclusive education programmes that would bring the differently-abled into main stream schools (Government of Sri Lanka and United Nations Development Programme 2005). Table 1: Primary School Enrolment by Province and Sex Male Female Province 1996 2006/07 1996 2006/07
Sri Lanka Western Central Southern Northern Eastern North Western North Central Uva Sabaragamuwa Note: N.A. Not Available. Sources: Sri Lanka Labour 95.6 96.2 92.5 96.1 N.A. N.A. 98.8 98.7 95.1 93.8 97.5 96.4 98.5 97.7 N.A. 99.3 97.3 96.6 98.1 97.5 95.7 95.8 94.7 95.9 N.A. N.A. 99.1 93.9 95.5 94.1 97.4 97.4 97.6 97.6 N.A. 98.6 98.3 95.6 96.8 96.9

Primary schooling

Force Surveys, various years; Special Survey on MDGs, 2006/07

Although primary enrolment rates in all provinces are very high, low primary completion rates indicate the incidence of a social dimension of poverty nonetheless related to income poverty but not captured by the consumption poverty lines. On an average 9 percent of the students enrolled do not complete primary education (Figure 7), and the situation is most acute in the Uva, Central, North Western and Eastern provinces (DCS 2009). Despite free education and accompanying indirect subsidies, the percentage of children not completing at least primary education is a matter of serious concern; a majority being from poorer households, economically

disadvantaged geographical regions such as the rural hinterland, conflict affected areas and the estate sector, or are differently-abled children (World Bank 2005). Though Sri Lanka has done well in providing universal access to basic education, the students in lower grades exhibit weak performances in English, Mathematics and local languages (IPS 2010). These core skills are essential for higher education and securing employment. There are variations in learning outcomes among provinces. Figure 7: Primary Education Net Enrolment Ratio and Primary Completion Ratio Provincial Differences

105 100 95 90 85 80 75
Net enrolment ratio primary education 2006/2007 Primary completion rate 2006/2007

Sources: Sri Lanka Labor Force Surveys, various years; Special Survey on MDGs, 2006/07

The secondary education cycle is affected largely by the quality of schooling as seen from the pass rates of the Ordinary Level (O/L) General Certificate of Examination (GCE)3. The prosperous and advanced Western Province has higher pass rates whilst the poorer and disadvantaged regions of the North, East, North Central, Uva and Central Provinces have lower pass rates. Around 62 percent of those sitting the Advanced Level (A/L) General Certificate of Examination (GCE)4 qualify to enter the Sri Lankan Universities. However the 15 government managed universities can only accommodate around 16 percent of those who qualify to enter university. The present legal framework prohibits private universities from offering degrees and hence those seeking higher education enroll themselves in overseas universities or locally operated foreign university affiliates or professional courses in law, management, accounting/finance and information technology. Whilst the government universities have progressively doubled their intake from around 11,9625 in 2001 to 20,846 in 2009, in a country that considers education as a means of coming out of poverty, the quantity of university intake is in indeed low (UGC 2011). Poverty incidence in Sri Lanka has a direct relationship to the educational attainment of the head of the household with improved education attainment resulting in considerable reduction of poverty (Figure 8). However, it is also noted that the
3 4 5

Public examination after 10 years of education Public examination after 13 years of education to quality for University Entrance Around 320,000 enter primary education annually

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higher educated tend to remain unemployed for a longer period of time (Table 2). The extended period of job search amongst educated young and the high unemployment was attributed in the past to the slower growth rate of the economy, with a reduced demand for educated young people. The other causes include a lack and or low generic skills demanded within the labour market such as English language fluency, Information Technology skills, the moderate quality of some of the University programmes and inadequate orientation of the education system to the world of work, especially development of skills such as a disciplined work ethic, good team work, creativity, flexibility, effective communication and problem solving approaches (World Bank 2005). The lack of employability of the graduates in the private sector has necessitated the government to absorb them into the government. Figure 8: Poverty Incidence by Educational Level of Household Head
40 35 30 25 20 15 10 5 0 NoSchooling UptoGrade5 Grade510 GCE(O/L) GCE(A/L)and above

Source: HIES 2006/7

Table 2: Unemployment Rates by Level of Education Level of Education

Total Grade 5 & Below Grade 6-10 G.C.E. (O/L)

Total
5.8 1.3 5.0 8.5

Gender Male Female

4.3 1.0 4.1 6.8 8.6 1.8 7.0 11.5

G.C.E. (A/L) & above 11.2 7.0 15.5 Source: Sri Lanka Labour Force Survey 2009, Department of Census and Statistics

Sri Lanka paid dearly for the high levels of youth unemployment in the form of two insurrections in the South of the country in 1970 and 1987-89, with an estimated loss of over 80,000 lives. The conflict in the North and East, though ethnic in nature had its seeds in the dissatisfaction of Tamil students with the ethnic quota system to enter the limited seats available in government universities. In addition, though the education system is free up to the tertiary level, another disturbing aspect is that those participating in higher education are drawn from the higher economic classes. The World Bank (2009) contends that higher education does in general draw from the higher quintile socio-economic groups. Sri Lanka, however, had changed its

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medium of instruction from English to Sinhala and Tamil in 1958 with the specific purpose of improving educational attainment of all socio-economic quintiles. Therefore, still having this outcome is indeed a point for concern. Figure 9: Higher Education Enrollment by Socio-Economic Group

60 50 Percentage 40 30 20 10 0 1 2 3 4 5 ConsumptionQuintiles Source: World Bank, based on HIES 2002 Male Female

The countrys intellectual and human capital is a key factor in reaching middle income country status. The economic relevance and the quality of higher education at present are substantially below the level required of a middle-income country. Enrollments for higher education among male and female has been rising over the years, but under-investments in education compared to other middle income countries and developing countries, is a critical issue. A weak higher education system will not be able to produce international quality graduates and research to meet challenges when the economy moves towards a middle income country. Further the economic and social relevance of the higher education system is important to meet the challenges of a dynamic global economy and world order (World Bank 2009). According to the Central Bank (2010), the government expenditure on education is increasing in monetary terms but as a percentage of GDP, the education expenditure of the government has declined from 2.67 percent in 2006 to 1.86 percent by 2010 and is low in comparison to the South Asian expenditure of 2.81 percent of GDP (Trading Economics 2011). Thus, Sri Lanka needs to increase investment in the higher education system to be able to develop its human resources to compete in the global environment. ii. Health Health care from primary, secondary and tertiary levels are provided by the government free of charge. The countrys health indicators show a steady improvement over the recent decades. The commitment of Sri Lanka to free healthcare has enabled exceptionally high achievements in the health sector. Life expectancy has risen steadily to around 77 for females and 72 for males (2002). The fertility rate or the average number of children that a woman will bear during her lifetime fell below replacement level fertility of 2.1 in 1994. The 2009 fertility figures indicated that there has been an increase in fertility rates to 2.3, but this will have to

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be confirmed in the 2011 demographic survey of the Department of Census and Statistics. The maternal and infant mortality rates show that the achievements of Sri Lanka are much ahead of other South Asian countries. Sri Lanka has achieved considerable success in reducing the Maternal Mortality Ratio (MMR) consistently since the 1940s. The MMR ratio for Sri Lanka was 39.3 per 100,000 live births in 2006 and was the lowest in South Asia. Sri Lanka is on track for achieving the MDG targets of MMR and all the sectors show a substantial reduction. The urban sector shows a sharp reduction in MMR while the estate sector shows the lowest decline between the 1991-2003 period and a highest ratio in 2003. District disparities are also large with a lower MMR ratio in Colombo and the highest in Kilinochchi. The leading causes are complications faced during labour and delivery, illegally induced abortions and postpartum haemorrhage. The Infant Mortality Rate (IMR) in Sri Lanka is 11.3 infant deaths per 1,000 live births; the IMR is lower than that achieved by countries wealthier than Sri Lanka (IPS 2010). In addition, under-5 mortality rates are also reducing over the years (Table 3). Despite the reduction in IMR over the years, there are regional disparities in mortality rates across the country. While infant mortality rates declined in seven provinces during 1991-2003, they increased in the Eastern and North-Central provinces during this period. The rate of reduction of the infant mortality rate has slowed down in recent years and additional efforts will be required to achieve the MDG target of 5.9 deaths per 1,000 live births by 2015 via reductions in neo-natal mortality. This requires more expensive interventions, such as professionallyattended deliveries with improved quality of care, prompt treatment of neo-natal infections (such as pneumonia), and availability of emergency obstetric care at lower levels of health-care facilities.In addition, Sri Lanka has achieved near-universal measles immunisation coverage. Among vaccine preventable diseases, measles is a highly contagious disease and deadliest of all childhood rash/fever illnesses (IPS 2010) Table 3: Infant and Under 5 Mortality Rates Indicator 1991 1996 Under 5 mortality rate Infant mortality rate Proportion of 1 year old children immunized against measles 22.2 17.7* 84.0 (1990) 25 22 95.5 (1993)* 2003 13.5 11.3 97.2* (2006/07)

Note: * The figure is from DCS (2008), MDG Indicators of Sri Lanka A Mid-term Review. Source: DCS (2009).

Child malnutrition rates are improving in Sri Lanka and much lower than that of its South Asian neighbors. However, it has not fallen significantly and is three times higher than other middle-income countries. Inter-sectoral and provincial disparities are also witnessed. Sri Lankas poor performance in child malnutrition is difficult to understand given the higher levels of educational attainment of females. The prevalence of moderately or severely underweight children fell from 38 percent in 1993 to 29 percent in 2000 and is down to 26.9 percent in 2006/07. The percentage of underweight children is highest in the estate sector with 36.3 percent of children

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being underweight, followed by the rural sector, where about 27.1 percent of children are underweight (Table 4). A similar pattern can be observed for stunting, with higher rates in estate areas, followed by the rural and urban sectors. While the incidence of underweight and stunting has declined substantially over time in all areas, it is still high for a country that prides itself on free health and high levels of educational attainment (World Bank 2005). Table 4: Percentage of Underweight Children under 5 Years by Sector Sector 1993 2000 2006/07
All/ Sri Lanka Urban Rural Estate Source: DCS 2006/07 38 31 38 52 29 20 31 44 26.9 21.8 27.1 36.3

Child malnutrition leads to a range of adverse economic and social consequences. It raises the risk of infant and child deaths, and increases vulnerability to a variety of diseases in later life. In addition, malnutrition impairs cognitive ability, decreases school performance, and lowers labour productivity and lifetime earnings. It also affects the likelihood of achieving the other MDGs. Combating child malnutrition is of central importance to the future economic and social welfare of Sri Lanka. Although there are no apparent gender disparities in schooling opportunities at primary and secondary education levels, there are disparities within the household against girls in allocation of nutritional inputs and medical services. It is evident that the situation is worse when intra-household gender disparities are disaggregated by birth order. The risk of infant mortality for girls of birth order 3 or higher is nearly 50 percent greater than for boys of the same birth order (World Bank 2005). These discriminations are reflected in higher infant mortality rates for females than for males. Further these types of household level gender disparities are contributory to severe malnutrition among girls rather than for boys (World Bank 2005). Sri Lanka has been able to reduce the incidence of communicable diseases. Its success in Malaria and Tuberculosis (TB) eradication is mixed: the incidence of Malaria has reduced but with TB the reverse is true (Government of Sri Lanka and United Nations Development Programme 2005). The poor continue to be affected disproportionately by communicable diseases. Sri Lanka is classified as a low prevalence country for Acquired Immune Deficiency Syndrome (AIDS)/ Human Immunodeficiency Virus (HIV) with only 131 dying from AIDS as of 2004. Diseases of the circulatory system and diabetes are now the leading causes of deaths in Sri Lanka (World Bank 2010). The health system would need to move to managing chronic treatment for non communicable diseases (NCD) which accounts for 71 percent of all deaths in Sri Lanka in 2001 (World Bank 2008). Analysis suggests that NCD mortality rates have been increasing during the past decade. The higher prevalence of NCDs in Sri Lanka can be explained by increases in certain risk factors and the legacy of fetal and early childhood under-nutrition (World Bank 2008). However the treatment of NCDs is outdated and relies on under-financing and undertreatment of cases. Therefore re-orientation of the health system to respond to these requirements is needed. The government expenditure on health in monetary terms has been increasing over the years, but as a percentage of the GDP, the health expenditure of the government

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has declined from 1.97 percent in 2006 to 1.32 percent in 2010 (Central Bank 2010). This is comparatively low in relation to the 4 percent expenditure by other Asian countries and 2.5 percent by developing countries (World Bank 2005). Close to 82 percent of the expenditure on health by the Sri Lankan government goes for current expenditure. It is however notable that this accounts for about 43 percent of total expenditure on health in the country, indicating an increasing resort to out-of-pocket expenditure on health (World Bank 2010). Though free, the public sector caters to around 50 percent of the out-patient care, but provides a high 90 percent of the inpatient care. This is an indication that private health care providers are preferred by the generally public and only the expense related to in-patient care prevents the dominance of private sector health provision. It calls into question the efficiency of the free health facilities provided by the government. It is clear that government intervention in the areas of health and nutrition is remarkable. However, unusually high rates of child malnutrition, regional disparities in infant and under-five mortality and the lack of a health system to address the special needs of the aging population have implications for the future inclusive growth process in Sri Lanka. iii. Social protection A well designed social protection system is necessary to address poverty and inequality through redistribution, mitigate risks and facilitate employment opportunities, thus contributing to both growth and equity goals. Sri Lankas social protection system comprises three main components: (i) employment protection and promotion (ii) social security/insurance programmes and (iii) safety nets, or protection. Employment protection and promotion includes labour legislation which is employee friendly, unions, collective agreements, and training of unemployed/retraining of workers in mass layoffs. Social security/insurance programmes include pensions, disability and survivor insurance (coupled with universal health coverage). Safety nets or protection of last resort, are mainly cash transfers and social welfare and care services. Its coverage is much more extensive than in other South Asian countries, with up to a third of the workforce covered in case of employment protection and social security, and about 40 percent of households covered in the case of the largest safety net (cash benefit) programme (ADB 2007). According to the ADB (2007) the SPI for Sri Lanka is higher than that of South Asia and Asia indicating that Sri Lanka is providing a higher level of social protection than one would expect from its overall level of wealth. While devoting significant attention to worker protection and promotion, Sri Lanka has yet to achieve the right balance of policies and programmes. The protection provided through these laws are to formal sector employees, few of whom are likely to be poor, whilst the non-formal sector which accounts for two-thirds of the employed has low levels of protection. This excess protection can lead to lower productivity in the formal sector and also exclusion of vulnerable segments from the labour market. Formal sector workers are favoured by wage setting institutions more than informal sector workers, creating artificial wage gaps between better-paying jobs in the public and the protected private sector, and low-paying jobs in the unprotected private sector. A majority of the informal sector workers are uneducated and perform unskilled jobs. Along with economic growth, a conducive environment is necessary for improving employment, productivity and wages for all workers. In addition a balanced job and worker protection system with the removal of excess job security is required to have favourable labour market outcomes.

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Sri Lanka provides extensive social security (pensions, disability, survivor and health) coverage compared to other South Asian countries. Social insurance schemes created to protect those in the informal sector, provide some measure of protection, but they offer limited coverage, provide inadequate benefits, have weak administration and regulation, and their financial sustainability is in question (ADB 2007). There is a new public sponsored pension scheme that reaches farmers and fishermen, and provides them cover for partial and total disability and death insurance. Two publicly sponsored programmes offer social security for informal sector workers, but face similar and even complex challenges.Income support to the disabled is focused on soldiers injured by the conflict, leaving other poor disabled groups under-covered. Both the government and the non-government sectors are involved in enhancing the education of persons with disabilities, but they are limited to special education or non- formal education. In addition there are regional programmes to develop skills of disabled children. Whilst there is a government administrative policy directing that 3 percent of jobs should be granted to persons with disabilities, it is not implemented by every government department. The Ministry of Defence has its own programmes for ex-combatants, providing them with health, housing, assistance to families and vocational training (ADB 2002). Sri Lanka has an extensive safety net system including Samurdhi, the key income transfer programme, to address chronic poverty, disability payments, social welfare and care services and disaster relief to all affected persons on the basis of the impact and injuries suffered. Relief programmes are also in place to assist families cope with income loss associated with drought. There are limitations and shortcomings associated with the safety net system. For example, Samurdhi, provides limited benefits and has large inclusion and exclusion errors (World Bank 2007). Revamping the existing safety net programmes, wider reach to include more vulnerable, wider coverage and strengthened relief programmes are among the options required to better serve the vulnerable and poor. iv. Aging population Sri Lankas population is aging fast and it is estimated that 25 percent of the population will be over 60 years of age as Sri Lanka enters the 2040s (World Bank 2008). Whilst this would put Sri Lanka in a similar situation to that of Europe or Japan today, the larger issue is that unless the development process is improved and sustained Sri Lanka would have a lower level of income to support this aging population. The low levels of formal support systems and decreasing intergenerational support systems to the aged would push a larger proportion of them into poverty in the coming years. Aging is an outcome of Sri Lankas successful policy and implementation of family planning, decreasing fertility levels and increasing life expectancy. While family planning has brought clear benefits to the development process - a manageable population and increased social achievements to families, the rapidity with which Sri Lanka is approaching an aging society is a cause for concern. The present support system to the aged includes a pension system for government employees, contributory Employee Provident Fund (EPF) and Employee Trust Fund (ETF) for the formal private sector employees, government managed pensions systems for those engaged in agriculture, fisheries and self-employed and transfers

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through the Samurdhi programmes and old age support. Whilst the government pension system to its retired employees and the EPF/ ETF do provide a reasonable cover to the expenses of the aged, the pension system for those engaged in agriculture, livestock and fisheries suffers from low levels of compliance and adequacy. Similarly, the transfers are also low resulting in increasing poverty levels amongst the aging, especially amongst those over 75 years (World Bank 2008). According to the DCS (2009) 63 percent of the Sri Lankan working population being in the informal sector makes it difficult for the government to support them, and this makes it imperative that they continue to work in their old age even with infirmities. Womens participation in the labour force is low in Sri Lanka, but female life expectancy is higher making them very much dependent on support from the family in their senior years. Given the above, as in most parts of Asia, around 77 percent of the aged live with their spouse and/or children (World Bank 2008) and most of the care for the aged is provided by the family. Around 75 percent of Sri Lankas elders receive food and in-kind transfers, 50 percent receive cash assistance and about a third receive household help from their children (World Bank 2008). De Silva (2007) contends that based on current demographic factors, the child depedency ratio which was 37 percent in 2001 will decrease to 26 percent by 2051 whilst old age dependency ratio would increase from 16 percent to 50 percent by 2051. At the same time the increase in the working age population would reverse in 2025, thus increasing the average number of persons who would depend on an income earner. Thus, the present intergenerational caring system for the elderly is unlikely to sustain itself with a larger family to be supported with decreasing income generating members, as Sri Lankas society ages in coming years. The retirement age in Sri Lanka is lower than most of its South Asian neighbours, with females in the private sector allowed to retire (or allowed to withdraw their EPF contribution) at 50 years, whilst males can do so when they are 55 years old (World Bank 2011). Government employees can retire at 57 years. However, the life expectancy of Sri Lankans is higher than their South Asian neighbours, and the discussion on extending the retiring age has had to take into consideration its effect on employment creation for the younger generation, especially the educated. This again is likely to strain the working population in ensuring adequate care for the elderly. Sri Lankas health system does not at this point have geriatric doctors in its cadre indicating low levels of preparation in caring for the elder. d. Conclusions Though, various kinds of growth and development strategies have been implemented aiming at inclusive growth, Sri Lanka is still experiencing disparities and inequalities between regions and different income groups. Although Sri Lanka has attained high levels of achievements in social indicators such as life expectancy, maternal and infant mortality rates and primary education enrolment, there are a number of social issues on which its achievements lack quality. These include education quality at tertiary level that are relevant for the work environment, child malnutrition, adequate social protection, care for an aging society and decreasing levels of government investment in the social sector. These issues also have regional disparities indicating the need of policies, strategies and interventions aiming at more inclusive growth intervention policies.

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4. Development Experience of Emerging Middle Income Countries Lessons for Sri Lanka Spearheaded by the PRC, Asia is experiencing unparalleled levels of growth and the region is undergoing enormous change, both economically and socially. From 1989 until 2010, China's average quarterly GDP growth was 9.31 percent whilst from 2004 until 2010 India's average quarterly GDP growth was 8.4 percent (Trading Economics 2011). This section focuses on the contributory factors for such sustained economic growth performance of these two countries with an emphasis on inclusive growth. The section would also draw lessons for improving development policies of Sri Lanka specifically for those identified in the previous section as being deficient. The PRCs progression from a low-income country with only a myriad of natural resources and an unskilled labour force to an economic giant can be attributed to her evolutionary, experimental and bottom-up reforms which were implemented at strategic points during the developmental process. Prior to 1979, China maintained a centrally planned economy. To support rapid industrialisation, the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s. As a result, by 1978 approximately three-fourths of industrial production was produced by centrally controlled state-owned enterprises according to centrally planned output targets. Private enterprises and foreign-invested firms were nonexistent. These government policies kept the Chinese economy relatively stagnant and inefficient, mainly because there were few profit incentives for firms and farmers; and price and production controls caused distortions in the economy. Chinese living standards were substantially lower than those of many other developing countries (Morrison 2006). Beginning in 1979, China launched several economic reforms. The central government initiated price and ownership incentives for farmers, the government established four special economic zones along the coast for the purpose of attracting foreign investment, boosting exports, and importing high technology products into China. Since the initiation of economic reforms in 1979, China has become one of the worlds fastest-growing economies. Through its high growth levels, the PRC has experienced the fastest poverty reduction in the last three decades (Li 2010). According to Chen and Ravallion (2008), the proportion of people living in poverty underwent an enormous change as it fell from 84 percent in 1981 to 15.6 percent in 2005, thereby lifting over 600 million people out of poverty. The past thirty years have also seen average per capita household incomes (both urban and rural) grow at approximately 7 percent on average per annum (Zhuang 2008). According to Xiaoyun and Laird (2009) agriculture and rural development has been a key force driving steady growth and poverty reduction in China. Productivity improvements in the agriculture sector have resulted from dismantling the commune system, reforming land tenure from a collective to a household responsibility system, relaxing controls over the price of agricultural produce and allowing individual farmers to keep extra produce for consumption or sale on the market. In addition, prices were liberalised and rural markets were allowed to thrive, and many villages and townships were allowed to create small enterprises which could absorb workers who were no longer needed in the agriculture sector. At the same time, rural infrastructure improved rapidly.

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Infrastructure has been the foundation for Chinas rapid growth and poverty reduction, especially after the economic reforms and opening up of the economy. Before the reforms the government invested heavily in infrastructure and there was welfare improvement for citizens. However, rapid poverty impact was observed after the economic reforms since 1978. Over the last 30 years, there has been substantial support for infrastructure in rural areas, for example for irrigation systems, agricultural market development and processing techniques. This has made it possible to improve agricultural production despite scarce arable land per capita. Railways, roads and other transport infrastructure has also been developed, which contributed to reaping the comparative advantage from crossing regions and facilitated entry into global markets (Xiaoyun and Laird 2009). Albeit these remarkable achievements, the PRC has succumbed to ever increasing inequalities between the urban and rural populations. In the 1970s, the Gini coefficient, the most common measure of the inequality of a distribution, was an overall 0.30, whereas in 2005, this figure reached approximately 0.45 (He 2007, Li and Luo 2008, Lin et. al. 2008). Per capita incomes have also diverged dramatically. In 1981, the difference between the average income for the richest five provinces and that of the poorest five was 3,719 yuan (in constant 2000 yuan terms). This number continued to rise to reach 20,188 yuan in 2004 (Tandon and Juzhong 2007). The existence of such large inequalities, both income and non-income, present the potential threat of social tensions, undermine political stability and has the potential to hinder the developmental process itself. Similarly Indias growth has indeed reduced poverty but as seen in China, inequality is on the rise. Whilst the inequality in China was more pronounced in spatial inequalitiesacross regionsin India, vertical inequalities and the rural-urban divide have become much more marked (Ghosh 2010). The pro-urban growth model followed by China between 1978 and 1999 led to large gaps in coverage as well as staggering inequalities in terms of welfare and living standards. Moving away from this model, the Chinese government embraced a pro-poor approach by advocating urbanisation in rural areas, income re-distribution, investing in rural infrastructures and loosening control over rural-urban migration. Connected to the goal of promoting urbanisation, the establishment of Small and Medium Enterprises (SMEs) has played a positive role in creating employment and activating economic development. Grappling with the issue of inadequate financing to SMEs, India and China have both taken several steps to ensure well functioning institutions. India established a credit registry, the Credit Information Bureau of India Limited (CIBIL) to consolidate credit history of private and commercial borrowers, including those in the SME sector thus reducing risks to the lenders (Perera and Wijesinghe 2011). Investing in rural infrastructure is currently underway through programmes like Gamanaguma in Sri Lanka. However, establishment of SMEs to create employment is an important intervention to draw excess labour in the agriculture sector. Educational System: The education system of China in 1949 was developed from the Communist education campaigns before liberation that emphasised mass education. The focus was on equity through providing primary school education to everyone. In the early 1950s, a new system was introduced focusing on the direct contribution of science and technology and the preparation of skills for industrialisation and national defence. As a result, the education system was transformed from a universal education system to an elite education system with the latter paying more attention to higher education and less to basic education, more to

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science and engineering and less to social sciences and the humanities, and more to vocational training and less to general education. University education was made free. Ghosh (2010) quotes Fan, Zhang and Zhang (2002) arguing that government expenditure on education had the largest impact on reducing both rural poverty and regional inequality, and a significant impact on boosting production. Thus Chinas investment in an education system that focused on improving science and technology has contributed to its sustained development process. The most important feature that is lacking in the Sri Lankan education system at the moment is the lack of skills demanded by the market. A higher education system focusing on science and technology that meets the demand of jobs created by industrialisation would be an option for the prevailing unemployment situation in Sri Lanka. However it is important to note that there is less/diminished attention on basic education, unbalanced focus on some subject streams such as social sciences and the humanities and on overall general education as a result of the new education system. Therefore the lessons should consider the resulted social costs related to the conversion from an universal education system to an elite education system. However it is important to note the policies and projects implemented between 2005-2006 focusing on accelerating the development of Chinas rural education. These include compulsory education in poor areas, renovation of buildings in rural primary and secondary schools, the programme referred to as two basics which focused on universal compulsory education and eliminating illiteracy among young adults. These programmes improved conditions of education in rural China, especially in poverty stricken areas, and helped children from poor families to receive education. Further in 2005, reforms for safe guard mechanisms of funding for rural compulsory education was ensured by bringing in funds needed for rural compulsory education into the scope of public financial security. In addition, satellite digital channels for modern distance education in rural schools was also an important initiative to promote distance learning which Sri Lanka can draw lessons from (Xi and Zhang 2010). Child Malnutrition: Reinforcing that rapid rates of economic growth alone are insufficient in attaining common prosperity (gongtongfuyu), both India and China are currently experiencing severe difficulties in relation to child malnutrition. In India, although there was a minor decline in underweight children in early 1990, the levels were stagnant from late 1990 to 2005/06. In contrast, the level of stunting was almost flat between 1992/93 and 1998/99 but declined by 8 percentage points between 1998/99 and 2005/06 (Svedberg 2007). In China, however, the decline in underweight and stunting children between the 1992 and 2002 surveys was quite dramatica reduction of about half. In China, almost all children receive professional health care and are fully vaccinated. In India, less than half receive qualified health care and 30 percent are not vaccinated. Further, the prevalence of poverty, as estimated by the World Bank, is three times higher in India than in China. Poverty is the chief determinant of the proportion of households that can afford an adequate diet and health care and China has found that maternal literacy, reduces the rate of child malnutrition significantly (Svedberg 2007). Further, effective family planning implemented at a larger scale, complementary interventions to address other determinants of child malnutrition, such as water and sanitation (which help reduce illness from infectious diseases) and education, are among contributory factors to reduced child malnutrition in China. Braun et. al. (2008) highlights 4 success factors including 1. the combination of central leadership with a commitment to the process and the establishment of local government ownership, 2. establishment of an

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effective data collection system that provides regular data for monitoring progress, and ensuring that data and information from the countrys strong research institutions are effectively communicated to policy makers and used for policymaking, 3. establishment of strong and effective partnerships between the Chinese government and international partners and 4. increased budget share of government expenditure on education to 20 percent during the 1990s, although the share spent on health was relatively low (34 percent). The malnutrition situation in Sri Lanka is puzzling since Sri Lanka has implemented targeted programmes for the past 20 years. As in China, Sri Lanka is well ahead in availability and utilisation of health facilities and female literacy which are correlates of malnutrition which in turn contributed to the achievement of good MMR and IMR ratio. It is important to look at Chinas complementary nutrition interventions such as interventions on improving water and sanitation and the impact on reducing malnutrition. At the moment, Sri Lanka has implemented substantial nutritional complementary programmes and it may require monitoring and evaluating the progress of interventions systematically to gain maximum output. Further, it is also important to consider correct targeting of the beneficiaries of the interventions. Establishment of an effective data collection system that provides regular data for monitoring progress is also an important learning. Generation of data and information through quality research and ensuring that the evidence is effectively communicated to policymakers and used for policymaking are among the good practices Sri Lanka can learn from China. The latter is one of the practices that researchers should consciously engage in. Non-communicable diseases: Rapidly gaining prominence as the most urgent task faced by the Chinese health sector, NCD prevention is attracting much attention both locally and internationally. 79% of adult mortalities in China are due to NCDs (WHO 2007). The contributory factors are noted to be the rapid aging of the population, high levels of obesity, an increase in the number of smokers, greater psychological stress, changes in diet structures and patterns of physical activity. Upon addressing this issue, several key Chinese interventions include the establishment of NCD prevention networks and related criteria, the introduction of preventive measures to high-risk groups and the implementation of integrative community-based prevention. These interventions provide examples for Sri Lanka to draw lessons from to manage the emerging issues related to NCDs which at the moment lack novel treatment methods and financing. However, the Sri Lankan government is about to introduce a national policy for non-communicable diseases which aims to cut down the deaths caused by NCDs by 80% following implementation (Xinhuanet 2010). India is experiencing similar difficulties. NCDs are known to largely affect the middle aged and older populations. Considering also that these groups are the fastest growing in the country, it is very likely that this will result in future increases. Cardiovascular Diseases (CVD), injury, mental health, cancer, respiratory diseases, and diabetes are the major NCDs in India. Smoking, a major risk factor for NCDs, is already responsible for 1 in 5 deaths among men and 1 in 20 deaths in women. The Directorate of Health Services has a dedicated NCD division that acts as the focal point for coordinating the NCD control programmes in the country. The current financial burden for NCD treatment falls disproportionately on the poor with persons with NCDs in India incurring significantly higher treatment costs (about double) in

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terms of out of pocket expenses compared to persons with other conditions and illnesses (World Bank 2011). Social Protection System: Until very recently, the Chinese government had in progress a social protection system that was primarily geared towards urban residents and neglected persons in rural regions. However as of late, the country has taken great strides in providing a social security system that is accessible to all. The programme includes, Work Unit Welfare/Subsidy Enjoyed by retired civil servants, retired government workers, and retired public institutional workers. Urban Endowment Insurance Includes retirees from monopoly enterprises, retired non-institutional people and retirees from other companies including individual economic organisations, private non-enterprise units, self employed individuals etc. Rural Endowment Insurance Aims at covering all rural residents before 2020. This reform is enjoyed by migrant workers and retired peasants. Social Assistance The poor elderly who are not eligible for any of the above endowment insurance programmes benefit from the Minimum Income Security Programme. This programme extends special assistance to elderly persons without family support and to those with only one child. Wei (2010), however, cautions that the quality and coverage of the protection system is influenced very much by the efficiency and capacity of local officials. Although Sri Lanka has an extensive social protection system and is well ahead of other South Asian countries, it can still improve its system by looking at Chinas urban and rural endowment insurance schemes and how they are operationalised to cover a majority of rural and urban communities. Treating the Elderly: Home to over one-fifth of the worlds elderly population, China is currently faced with the difficult prospect of having too small a working population to support its staggering number of aged persons (United Nations Population Division 2005; Kaneda 2006). The Chinese government having acknowledged the detrimental implications of an aging population has launched several policies and programmes in an effort to address this issue. These programmes include, Allocation of substantially more public funds to cater to the needs of the elderly population (Bei Wu et. al. 2005, Kaneda 2006). Chinas social-welfare reform implemented in the 1990s, has caused entrepreneurial opportunities in the health service industry to sprout up (Heying J. Zhan et. al. 2006; Kaneda 2006).- An increasing number of private elders homes along with the formal government supported elders homes are providing alternatives for in-house elderly care (Zhan et. al.). Informal and local-government supported, community based institutions providing health care services such as daily care, home maintenance and information and referral services have begun to emerge, especially in urban regions (Bei Wu et. al., 2005 and Kaneda 2006). Local government agencies have begun offering training to laid-off workers in the provision of long-term health care (Kaneda 2006). Plans to initiate geriatric medical training at an undergraduate level, and to establish more geriatric units to enhance the countrys ability to respond to the specific needs of the elderly (Jean Woo et. al., 2002; Kaneda 2006).

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Considering the recent trend towards increasing cases of chronic diseases among the elderly, Chinas ministry of health has bestowed more attention on the prevention and control of chronic diseases.

The above mentioned support systems for the elderly in China provide good examples for Sri Lanka to improve its existing systems as China has been experiencing issues related to aging for a considerable time period. Plagued by similar problems associated with an aging population, India launched a strategic financial security plan for the aged that included the expansion of the pension system and also established the National Policy on Older Persons in 1999 aimed at training medical personnel from primary, secondary and tertiary health care facilities on caring for the elderly (WHO 2007). Thus, India and China have had similar social issues that concern inclusive growth, as has Sri Lanka, and have evolved different methodologies in dealing with these issues. Sri Lanka can thus learn from the experience of these countries in dealing with issues related to higher quality education, child malnutrition, social protection, non-communicable diseases and aging. 5. Chinese Development Assistance to Sri Lanka External development assistance, received in the form of loans and grants from bilateral and multilateral development partners plays an important role in meeting Sri Lankas development financing needs and contributes to around 50% of the public investment. The composition and the form of external development financing has changed substantially over the last few years consequent to the implementation of the governments economic policy strategy under Mahinda Chinthana - Vision for a new Sri Lanka and the graduation of Sri Lanka to a middle income country status. As a result, expected concessional financing is decreasing at the moment. A greater focus has been made on needed large investments in the priority sectors in Sri Lanka such as energy, roads and express highways, ports and aviation, irrigation and water supply schemes without compromising the allocation of required resources for the development of lagging regions. Under this new development strategy China and India have emerged as the two leading development partners. a. Chinese Overseas Development Assistance China provides aid operating within the context of its position as a developing country, but also to fulfill its international responsibilities. The overall objective is that, China is providing foreign aid to help recipient countries to strengthen their self-development capacity, enrich and improve their peoples livelihood, and promote their economic growth and social progress. There is a clear declaration that Chinese aid is a model with its own characteristics. There are three stages of Chinese aid provision: 1950-1978, mid-1978 to 1990s, and 1990s-onwards, which reflect shifts in Chinas own development situation and strategies. Chinese aid has traditionally been guided by the Eight Principles for Economic Aid and Technical Cooperation to Other Countries advocated by Premier Zhou Enlai in the 1960s. The basic features of Chinas foreign aid policy include, Continuously helping recipient countries build up their self-development capacity,

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Imposing no political conditions, respect recipient countries right to select their own path and model of development, Adhering to equality, mutual benefit and common development, Remaining realistic while striving for the best, Keeping pace with the times and paying attention to reform and innovation.

Chinese foreign aid is provided in three forms: grants and interest-free loans (through state finances) and concessional loans administered through China Ex-Im Bank. At the end of 2009, China had provided a total of 256.29 billion yuan (US$39.3 billion) in aid, with approximately 41% grants, 30% interest-free loans and 29% in the form of concessional loans. Chinas aid also confirms a balance provision among varied sectors. In general, of Chinas concessional loans, 61% are used to help developing countries to construct transportation, communications and electricity infrastructure, and 8.9% are used to support the development of energy and resources such as oil and minerals. In terms of the forms of aid, China classifies activities into eight categories: complete projects, goods and materials, technical cooperation, human resource development cooperation, medical teams sent abroad, emergency humanitarian aid, volunteer programmes in foreign countries, and debt relief. At present, 40% of Chinas foreign aid expenditure is in the form of complete projects. Figure 10: Geographical Distribution of Chinas Foreign Aid Funds in 2009

Latin America and the Caribbean 12.7%

Oceania 4.0%

Others 4.5%

Africa 45.7% Europe 0.3%

Asia 32.8%

The major areas that Chinese aid is directed towards include agriculture, industry, economic infrastructure, public facilities, education, and medical and health care. Climate change has also become a new area of Chinese aid in recent years (Brant 2011). China has currently become a major source of foreign aid in Asia, Latin America and especially in Africa (Figure 10). Today, Chinese aid appears tied more to Beijings interests in raw materials, such as oil, minerals and timber, necessary to fuel its incredible growth machine.

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b. Overview of Chinese assistance to Sri Lanka Historical relations in the field of economics and trade entered through the silk-route from ancient China many centuries ago. In 1952 the Sri Lanka - China Rubber Rice Pact marked a new chapter in economic and trade relations. More recently economic and political ties have been cemented since the establishment of formal diplomatic relations in 1957. In 1981, the Sri Lanka China Society and in 1982, the Sri Lanka China Joint Committee for trade and economic cooperation were formed. Economic cooperation between the two countries has also grown significantly since the establishment of diplomatic relations. The Chinese government provides their assistance through, 1) economic and technical cooperation agreements and 2) direct project assistance. Priority areas for assistance are cultural sector, social infrastructure, irrigation and power sector and micro enterprise development in Sri Lanka. Figure 11: Share of Foreign Financing Commitment by Donor
Others 8% ADB 15% Australia 5% World Bank 9% China 27% Japan 17% Iran 4% India 3%

Russia 12%

Source: ERD (2010)

The total commitments made by development partners and lenders to Sri Lanka during the period of January to end September 2010 were around US$2481.9 million. Over 68% of the new commitments in 2010 were for development of infrastructure and the highest commitment was made by China (Figure 11) and Chinese assistance to Sri Lanka has also been increasing over the years (Figure 12). For example, China increased its aid to Sri Lanka to about US$ 1 Billion in 2008. By 2009 it was expected to come very close to or exceed the aid received from Japan, the major aid donor to Sri Lanka during that period.

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Figure 12: Ownership of Outstanding Foreign Debt from China to Sri Lanka
60,000 50,000 R s m n 40,000 30,000 20,000 10,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Annual Report Central Bank of Sri Lanka (various)

Figure 13: Foreign Financing Disbursement in 2010

Others 12% World Bank 8% Japan 16% France 3% China 44% ADB 13% Netherlands 4%

Source: ERD (2010)

Figure 13 shows that China, Japan and the ADB were the 3 main donors that contributed the largest proportion, 73% of total external finance disbursed to Sri Lanka in 2010. A majority of the past and ongoing projects funded by China in Sri Lanka are for cultural and infrastructure development projects. Among the projects, infrastructure development is a key area, which is a necessary condition for a rapid and sustained high growth (Annex 1). The priority investment sectors are roads, energy, ports, irrigation and water supply and aviation. China provided monetary support and relief goods to Sri Lanka after the Tsunami and undertook to reconstruct projects in tsunami affected areas. Examples are China - Lanka friendship Village,

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Red Cross Village and restoration work in 3 fishery harbours. In addition there are minor contributions to the education and health sectors in Sri Lanka. Further, China has become a major investor in Sri Lanka. Investment by China in Sri Lanka as at end 2005 was USD 11.66 Mn. Major sectors into which FDI was received include the apparel and textile sectors, services and fishery products. As per statistics from the BOI, there are 63 entrepreneurs, from China and more Chinese enterprises are interested in the Sri Lankan market. Co-operation in the field of agriculture has also been promoted in the recent years particularly with the signing of a MoU in February 2008 between the Ministry of Agriculture and Chinese Academy of Agricultural Mechanisation Sciences (CAAMS). This has enabled the exchange of high level delegations for improving agricultural research and technology transfers between the two countries (Embassy of Sri Lanka in the Peoples Republic of China 2011). c. Support to inclusive growth through Chinese assisted projects This section would look at a few recent China funded projects to assess the support to inclusive growth in Sri Lanka. i. Development of the Port in Hambantota The port of Hambantota was planned to be developed as a services and industrial port. The total estimated construction cost of Phase 1 of the project is US $ 361 million, out of which, 85% has been funded by the Ex-Im Bank of China. The main construction work of Phase 1 was commenced in January 2008 and the project duration is 39 months. The project was planned to be completed by April 2011. The first vessel was ceremonially berthed at Hambantota Port in November this year. A number of foreign and local entrepreneurs have already expressed interest to invest in business opportunities at the port. Hambantota was one of the lowest per capita income regions in Sri Lanka. Thus, the construction of a port in Hambantota would be an important catalyst for major economic development in Sri Lanka. Further, it will reduce the prevailing higher unemployment percentage in the Hambantota region as expected employment generation of this project estimated is more than 50,000. This project has a focus on one of the lagging regions in Sri Lanka and would contribute to an increase in income levels of the population and hence on reducing the level of poverty in the Hambantota. Further, the employment generated through the project would contribute to reduce the level of unemployment of the region. However, it is argued that the extensive use of Chinese labour and technical expertise would not provide the expected employment opportunities and technological transfers to Sri Lanka. ii. Norochcholai Coal Power Plant Project Sri Lanka is expected to give a major boost to its power sector with the completion of the Norochcholai coal power project, of which 95% is completed at present. The first phase of its construction was completed in 2009 while the second phase of the project, aimed at generating over 600MW commenced with financial assistance from the Chinese Government. China provided US$ 891 million for the commencement of second phase and the Government allocated Rs. 11,000 million for the project.

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300 MW is added to the national grid with the completion of the first stage and 600 MW will be added in the second stage. The project is expected to make a significant contribution towards meeting the country's electricity needs by 2011. The cost of power generation from coal fired power plants is relatively low compared to oil fired power plants. Thus, this project will result in saving a considerable amount of foreign exchange and lead to a reduction in the cost of power generation. The project is expected to contribute towards the expansion of the industrial sector as well as other development sectors. It will thus contribute to increased employment as well as income generation opportunities. The tariff for electricity can be reduced due to cost effective power generation. However the impacts of the project on the environment and on different livelihoods are yet to be valued. iii. Other projects China has also funded the re-development of the Lady Ridgeway Children's Hospital and it was one of the few China funded social infrastructure projects. In addition, there are educational linkages between Sri Lanka and China including scholarships and a series of training programmes for Sri Lankan government officials, scientists, journalists and entrepreneurs. Chinese students are studying Buddhism, Sinhala and even tea cultivation in Sri Lanka. d. Overall outcomes It is clear that most of the projects are on economic infrastructure with fewer focusing on social infrastructure including social security. However when considering the geographical spread of the projects, it is clear that the projects have reached the lagging regions of the country such as Puttalam, Hambantota and conflict affected areas in North and East. Further, most of the projects have direct impact on economic growth. Emphasis on employment generation and opportunities for business are also the benefits of the projects but further in depth micro studies are required to assess the impact on the poorest communities in the respective regions. Further, the environmental impacts, impacts on different livelihoods and other social costs are also yet to be valued. 6. Conclusion A significant proportion of the Sri Lankan population remains outside the ambit of basic physical, social and financial infrastructure and lacks the opportunity to contribute to the present growth momentum. Hence, the governments infrastructure drive places an emphasis on regional infrastructure development to achieve a regionally balanced inclusive growth. It is equally important to identify public policy priorities to improve economic, social and financial infrastructure to achieve inclusive growth and increased spatial equity. In this process, emphasis on social policies plays a key role in the achievement of better human development of a country. In Sri Lanka, the policies adopted prior to the economic liberalisation in 1977, contributed to a greater equality but at the expense of economic growth. The market oriented growth policies adopted after liberalisation resulted in economic growth with uneven income distribution among

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the population. In contrast, the Chinese social policies adopted even in the pre liberalisation era were put in place to support the industrial production in urban areas. The subsequent social policy reforms were also taken to support the economic growth models. The social policies implemented in Sri Lanka since independence have contributed to greater achievements in human development across the regions when compared to its South Asian neighbours, thus contributing to inclusive growth in Sri Lanka. However regional disparities i.e. among provinces/sectors/districts and disparities among income groups in the achievement of MDGs still exist. Further, lack of coverage of social protection programmes and a lack of targeting of needy groups and a lack of preparedness to face the issues of an aging population are among the social development issues Sri Lanka still has to contend with. China is becoming the leading donor specially for providing funding for infrastructure development projects in Sri Lanka. At the same time, China is emerging as an economic giant with an impressive reduction in poverty levels providing lessons for other emerging economies like Sri Lanka. China comes with a very different background when compared to Sri Lanka. The larger economy and the centrally planned economic system are among the major differences and this adds to the complexity in drawing lessons from Chinas development experience. It is important to note the specific characteristics of health, education and social protection systems in China/India which contribute to the present status of economic growth, poverty reduction and human development. However, despite the impressive growth achievements inequality is a much debated issue in China. The pro-urban growth model followed soon after liberalisation led to large gaps in coverage as well as staggering inequalities in terms of welfare and living standards. Moving away from this model, the Chinese government later embraced a pro-poor approach by advocating urbanisation in rural areas, income re-distribution, investing in rural infrastructures and loosening control over rural-urban migration. Reforms to the education system introduced in 1950 in China which focussed on the direct contribution of science and technology and the preparation of skills for industrialisation and national defence helped improve its higher education system. Although, the education system paid more attention to higher education, the system paid less attention to basic education, more to science and engineering and less to social sciences and the humanities, and more to vocational training and less to general education. In Sri Lanka weaknesses in the higher education system have contributed to producing low quality graduates who are not ready to meet the demand of an emerging middle income country. Therefore, the model adopted by China in developing its technical and higher education system would help shape the higher education system to produce graduates with marketable skills that would meet the demand of an emerging economy like Sri Lanka. However, it is important to note the resulting low levels of attention on basic education, subject streams such as social sciences and humanities and on general education in drawing lessons for Sri Lanka and efforts be made to avoid these situations. China has been able to show a dramatic reduction in child malnutrition levels but the prevalence of stunting is significant. Data shows that China reached its MDGs more than a decade ahead of the target year 2015. Rapid poverty reduction and access to professional health care and vaccination of all the children in China has contributed

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to the present achievements. Although Sri Lanka is well ahead in achieving good MMR and IMR, Sri Lankas poor performance in child malnutrition is difficult to understand given the high levels of maternal educational attainment. Provision of professional healthcare and full vaccination for all the children and systematic monitoring and evaluation of the progress of health and nutritional intervention programmes are among the lessons Sri Lanka can draw from China. NCDs which are partly a result of an aging population in China and Sri Lanka are an issue. China considers NCDs more as a public health problem than a clinical one and focuses more on prevention. Establishment of NCD prevention networks and related criteria and the introduction of preventive measures to high-risk groups and the implementation of integrative community-based prevention are among the interventions that Sri Lanka can draw lessons from. In addition China has launched several policies and programmes in an effort to address the aging issue. Allocation of substantially increased public funds to cater to the needs of the elderly populace, plans to initiate geriatric medical training at an undergraduate level, and establish more geriatric units to enhance the countrys ability to respond to the specific needs of the elderly are among the important interventions. Plagued by similar problems associated with an aging population, India launched a strategic financial security plan for the aged that included the expansion of the pension system and also established the National Policy on Older Persons in 1999 aimed at training medical personnel from primary, secondary and tertiary health care facilities on caring for the elderly. Initiation of geriatric medical training at an undergraduate level, and establishing more geriatric units in the country, expanding the pension system with financial security plans and more public funds to cater to the needs of the elderly population are the lessons that Sri Lanka can adopt to face the issues that arise with an aging population. A social protection system primarily geared towards urban residents was observed in China until recently as a result of the focus on industrial and urban sector development. However as of late, the country has taken great strides in providing a social security system that is accessible to all. Among the interventions, the urban and rural endowment insurance system is prominent. External development assistance, received in the form of loans and grants from bilateral and multilateral development partners plays an important role in meeting a countrys development financing needs in public investments and China is one of the emerging leading development partners in Sri Lanka. Chinese funded projects in Sri Lanka are mainly on economic infrastructure development and hence have contributed to the economic growth in Sri Lanka. Education and health have been identified as key aspects of social infrastructure which can directly contribute to inclusive growth. Improvements in the social infrastructure of a country influence the creation of a productive and skilled workforce capable of meeting the demands brought by economic growth and ensuring that the country is conducive for further well-paced economic growth and development. Thus, Chinas development assistance to Sri Lanka should consider the possibilities of transferring its experience on development issues that would have a beneficial effect on inclusive growth in Sri Lanka.

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Annex 1: Chinese Assistance for Sri Lanka 1970 to 2011

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. Construction of the BMICH Nilabe Hydropower Station Central Mail and Telegram Complex Ginganga Flood Protection Project Udawalawa Fresh Water Fish Breeding and Experimental Station Polonnaruwa Water Supply Project Veyangoda and Pugoda Textile Mills Restoration of Abhayagiri Dagaba Re-development of the Lady Ridgeway Children's Hospital Fourth Rural Electrification Project Renovation of Fisheries Harbours Damaged by Tsunami Making Statues of Leaders at BMICH Assistance for South Asian Games Construction of Few Selected Road Infrastructure Elements Project to Upgrade Facilities at BMICH Construction of National Performing Arts Theatre Refurbishment of Superior Courts Complex Puttalam Coal Power Project Phase I (34%) Puttalam Coal Power Project Phase I (66%) Supply of 100 Railway Passenger Carriages Supply of 13 Diesel Multiple Units to Sri Lanka Railways Hambantota Port Development Project Bunkering Facilities and Tank Farm Project at Hambantota Colombo-Katunayake Expressway Project Southern Express way (four lanes from Pinnaduwa to Godagama ) Puttalam Coal Power Project Phase II Mattala Hambantota International Airport Project Purchase of 2 MA60 Aircrafts Power Sector Development Uva Province (Uva Udanaya): procurement of material required for construction of new 250 new substations 625 km new MV lines and 2250 km new low voltage lines. 30. Construction of Matara- Beliatta Railway Line Phase 1 31. Procurement of Material for the Northern Province Power Sector Development Programme 32. Northern road rehabilitation programme- package financed by China Rehabilitation and improvement of 67 km length of Navatkuli-KerativuMannar road (A32) Rehabilitation and improvement of 113 km length of PuttalamMarichchikade-Mannar road (B 379, B 403) Rehabilitation and improvement of 153 km length of Kandy-Jaffna road (A09) Rehabilitation and improvement of 84 km length of JaffnaPoint Pedro road (AB 20), Puttur-Meesalai road (AB 32), Jaffna-Kankasanthurai road (AB 16), JaffnaPalaly road (AB 18) Rehabilitation and improvement of 42.4 km length of Mulativu-KokilaiPulmudai road ( B 297), and 52.6 km length of OddusuddanNedunkernyroad(B 334); Mulativu-Puliyankulam road (B 296) Source: Department of External Resources, Ministry of Finance and Planning, Sri Lanka (various years)

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