Understanding the growth, poverty and inequality nexus: insights from the Sri Lanka Poverty Assessment *

1. Understanding the growth, poverty and inequality nexus: insights from the Sri Lanka Poverty Assessment* Ambar Narayan SASPR March 23, Washington DC *Drawing on work by the Poverty Assessment team for Sri Lanka – including staff of Department of Census & Statistics, Government of Sri Lanka

2. Structure of presentation • Recent poverty trends and patterns in Sri Lanka • Relating poverty to trends in consumption growth and distribution • A focus on rising spatial and rural-urban inequality • What characterizes poor areas? • A consequence of spatial inequality: internal migration • What are the implications of the pattern of migration for inequality and growth?

3. Poverty trends: Modest decline nationally with widening rural-urban gap • Poverty headcount has fallen modestly over the decade for the country as a whole – excluding conflict-affected areas • Across sectors, a decidedly mixed picture……. • Urban poverty has halved: from 16% in 90-91 to 8% in 2002; rural poverty declined by less than 5 percentage pts • Increase in estate poverty (although less accurately measured) is significant: from 21% in 90-91 to 30% in 2002 • The declines in national, urban and rural poverty headcount, and the increase in estate poverty headcount between 90-91 and 2002 are all statistically significant

4. Large regional differences in poverty incidence • Much of Sri Lanka’s economic activity is concentrated in Colombo and surrounding areas (in Western Province). Western Province accounts for almost half of the country’s GDP.

5. Rising consumption with widening inequalityDensity and Cumulative Distribution of per capita (real) consumption expenditure • Increase in inequality between 90-91 and 2002 • Poverty headcount is lower in 2002 for a wide range of poverty lines • An aside: note the concentration around the poverty line – indicating high potential for frequent movements in and out of poverty

6. Who has benefited from growth? Consumption increased disproportion-ately among the better-off, in both urban and rural areas

7. The impact of growth and inequality on poverty • Rapid increase in average consumption with rising inequality • Mean per capita real consn. increased by 29% from 90-91 to 2002, while gini increased by almost 24% (by 19% and 30% for urban and rural) • Mean consumption increased by 50% for the top quintile, and by 2% for the bottom quintile • GICs show that the consumption benefits from 90-91 to 2002 accrued largely among the better-off – in both urban and rural areas • How has rising inequality affected poverty reduction? • With no change in distribution, growth in average per capita consn. would have reduced poverty by 15 percentage pts. between 90-91 and 2002 (by 12 and 18 in urban and rural areas) • Contrast with the observed reduction of only 3 percentage pts. in poverty headcount (by 8 and 5 in urban and rural areas) • IF consumption Gini grows at the average rate of increase seen from 90-91 to 2002, growth elasticity of poverty is only 0.9 • Sri Lanka will need to grow at an annual average rate of around 10% to achieve the MDG target of halving poverty by 2015 (current rate is 5.7%) • With constant Gini, poverty headcount will be more than halved to around 8% by 2015

8. Decomposition of inequality index • A substantial increase in inequality – by 50 percent or more – within and between districts as well as within and between sectors. • While inequality within districts or sectors contributes much more to aggregate inequality than that between sectors or districts, the percentage increase in inter-district inequality was by far the highest

9. Inter-district inequality has deepened over the last decade • Over the past decade, a tendency towards wider disparity across districts • Between 90-91 and 2002, poverty reduction has been substantial for the three districts in Western Province (Colombo, Kalutara, Gampaha). • More remote and rural districts experienced no reduction or even increase in poverty headcount – four registered increases of 10 % or above • 5 poorest districts in 1990-91 experienced increase or no reduction in poverty by 2002 • Wider regional disparity also apparent from the provincial shares in national GDP. • Western Province’s share in national GDP increased from 40 % in 1990 to 48 % in 2002, while that of all the other provinces (except Southern province) declined by between 1 and 4 % points; the share of Uva, the poorest province, halved

10. Rising urban-rural gap: stagnation in agriculture Stagnation in agriculture • Agricultural output per capita did not grow over the decade while still employing a third of population (higher in rural areas) • Poorest rural and agricultural households suffered a decline in real incomes – consistent with increase in rural gini

11. What characterizes poor areas • Perhaps not surprising for those who know Sri Lanka, but instructive……. • A household is more likely to be poor if it belongs to a district with (controlling for a wide range of household-specific attributes) • lower average access to markets • lower proportion of households using electricity • higher proportion of household heads with education below primary level or employment as agricultural workers (when the accessibility index is omitted) • Spatial factors also important at a more disaggregated level • Replacing district level indicators with DS division level averages yields similar results (a unit improvement in average accessibility index of a DS division reduces the probability of a household located there to be poor by 12 percent)

12. Poverty Map at DS division level Accessibility Index

13. Regional characteristics matter for poverty in Sri Lanka • Poverty associated with geographic isolation - areas with limited access to markets, infra and lower endowment of human capital • But these are more useful in explaining differences in poverty between Western Province and outside, and less so for differences between areas outside of Western Province • Suggests a stylized story of a “dual” economy circumscribed by geography • Western Province (incl. Colombo) with better access to markets and infrastructure, higher concentration of educated people, and pre-dominance of non-agricultural sectors • The rest of the country, including 6 conflict-affected districts for which little data is available, where largely the converse of these conditions hold

14. Dynamic consequence of spatial inequality: migration • High and increasing rates of internal migration in Sri Lanka • Household data shows doubling of internal migration from 96-97 to 03-04 • Out-migration from all provinces except WP and all sectors but urban increased: WP and the urban sector are thus the main recipients • Consistent with expanding gap between WP and the rest – rising gap in monthly wages even for elementary occupations • Migration can be a viable option for the poor in remote rural areas to lift themselves out of poverty • Internal migration to urban growth centers can also be a growth vehicle through fostering urban agglomeration (WDR 2000) • Potential impact of migration on inequality and growth • Loss of human capital in hinterlands, further widening spatial inequality • Over-concentration in urban areas can eventually place a limit on economic growth

15. Analysis of internal migration in Sri Lanka • Lack of panel data; or even a household survey with a detailed migration module • Comprehensive use of available data……. • Household surveys: Information on out-migrants and their households at the “origin”– doesn’t cover those who migrated with their household • Population Census 2001 as a valuable source of information: on migrants and recent migrants at the “destination” • ….. And some experimentation • Small area estimation method for estimating poverty incidence of migrants in Colombo MC • Quantifying the cost of over-concentration in Colombo MC – drawing on cross-country results • Given data limitations, a static and thus partial analysis, but one that still offers useful insights

16. Characteristics of migrants into Colombo • Presence of both “push” and “pull” factors • Recent migrants in Colombo city more likely to belong to poorer and conflict-affected districts • But also likely to be more educated - loss of human capital from lagging areas? • Migrants have better jobs and lower poverty incidence than long-term Colombo residents • The role of “networks” in influencing migration patterns – an open question

17. Likely impact of internal migration • At the place of “origin” • Better-educated people are more likely to migrate due to lack of employment opportunities • No indication that migration is a positive force for education • But remittances are somewhat effective in reducing poverty among households with migrants • While migration is an avenue out of poverty for those in lagging areas • More of an option for those with better endowments, and sometimes legal status (those with NICs in plantations) • A force perpetuating regional disparities? • Loss of human capital likely to reduce growth prospects (and political power) in lagging regions

18. Impact of internal migration on Colombo urban area • On the one hand, benefits due to agglomeration – increasing returns to scale • But growing concern about over-concentration • Increasing population density in Colombo MC (17,000/sq. km. in 2001); population during daytime expands 3-fold: around 1.5 million people commute every day • Residential land prices increased more than 100 % in even poor areas between 2000 and 2005 • Net out-migration from Colombo District to the neighboring districts, especially among poorer workers • Aggregate impact on economic growth • Estimated growth losses due to over-concentration (based on cross-country model in Henderson 2000): 1.5 % annual growth rate – just indicative, but instructive • Urban primacy of Colombo is 35-50%, compared with an “optimal” primacy of 25% for a country of Sri Lanka’s per capita GDP • A cyclical relationship between inequality, migration and growth? • Increasing regional disparities lead to higher incentives to migrate – can perpetuate regional inequalities and lead to over-concentration in the main urban area, which imposes limits on economic growth

19. Concluding thoughts and policy questions • Enhancing mobility among households in rural/remote areas • Improve access to quality education • Address land policy distortions that tie people to their land • Better links to markets and infrastructure in rural/remote areas • The conundrum: Sri Lanka in fact has high road density for a developing nation • But poor maintenance; and lack of planning – e.g. focus on rural roads is much more on links between remote villages rather than to markets or growth centers • How to plan infrastructure development to promote alternative growth centers to reduce primacy of Colombo? • Recognize agglomeration benefits of Colombo Metropolitan area – may not be efficient to attempt to replicate the infrastructure of Colombo; is it better to identify specific comparative advantages of potential growth centers – more likely in areas neighboring Colombo – and invest on appropriate infrastructure? • Coordinating urban planning and rural development is key to optimal allocation of resources • To reduce costs of over-concentration– allow urban land markets to operate; strengthen local municipalities; develop integrated plan for Greater Colombo area • The classic question of equity vs. efficiency: the tradeoff between investing scarce resources in projects to uplift remote areas, or investing in and promoting links to urban growth centers?