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ONOMO RAVITAW
Feb. / Mar 2013
 

●"olめら
ional elopment ri Lanka
A People's Bank Publication

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函y巫垒酸澄
Festuary, 2013
8? In an interview with the “Voice of Russia radio, Russia: Foreign Ministry spokesman Alexander Lukashevich criticize the United States for imposing sanctions on Iran over it nuclear energy programme, saying such measures onl hamper efforts to resolve the West's dispute with Iran ove the programme.
10 Commonwealth Secretary General Kamalesh Sharm: visited Sri Lanka to oversee Sri Lanka's preparations for th: 2013 Commonwealth Heads of Government Meeting (CHOGM) scheduled to be hosted by Sri Lanka in November, 2013.
15th According to the Disaster Management Centre (DMC floods were reported in Matale, Ampara, Batticaloa Kilinochchi, Mulaithivu and Vavuniya districts while a flash flood was experienced in the Kandy district. Landslides wer reported in Badulla and Matale districts. 134,693 people belonging to 45,918 families were affected due to the inclemen weather during the day.
26th Israel President, Shimon Peres congratulated Sri Lank on her achievement in eradicating terrorism, adding Israe stands firmly committed to support the development of the country's economy in the prevailing environment of peace and stability, when External Affairs Minister of Sri Lank Prof G. L. Peiris called on him at the President's Office ir Uerusalern.
23 Speaking at the committee hearing on "The Rebalance to Asia: Why South Asia Matters”, a ranking member of US Foreign Affairs Sub-Committee, Eni F.H. Faleomavaega called for the withdrawal of the US sponsored resolution against Sri Lanka for focusing only on the last few months of the war and failing to acknowledge almost 30 years of conflict.
According to a survey by a China-based wealth magazine report. Asia has more billionaires than any other continent, followed by North America and Europe. There were 1,453 people around the world with a personal wealth of $1 billion or more as O: January, 2013. Asia had 608 billionaires, North America. 44C and Europe 324.
A motion presented by the opposition Social Democratic Party (SDP) group in the German Parliament on Sri Lanka titled "Use the UN Human Rights Council and Demand Observance of aws, Human Rights and Reconciliation Process in Sri Lanka” was rejected with the votes of the governing coalition in the German Bundestag (German Parliament).
March, 2013
o5th Venezuela's President Hugo Chavez died of cancer.
O7. Sri Lanka received the title “Most Popular Tourist Destination” at the 'Buyers Night and Award Ceremony held in Guangzhou, China on the sidelines of the Guangzhou International Travel Fair 2013.
12 President Mahinda Rajapaksa arrived in Japan on a four-day official visit.
13 Japan's Minister of Foreign Affairs, Fumio Kishida called on President Mahinda Rajapaksa at Hotel Imperial in Tokyo. He stated “Japan welcomes the efforts made by

(OS gy ENTS
Sri Lanka in the areas of reconstruction, reconciliation and human rights after the conflict”.
4&** President Mahinda Rajapaksa met with members of the Japan-Sri Lanka. Parliamentary League in Tokyo and told them “We greatly appreciate Japan's contributions to many different sectors in Sri Lanka".
President Rajapaksa held discussions with Prime Minister of Japan, Shinzo Abe at the Prime Minister's Office. Japanese Prime Minister assured Japan's continued support for Sri Lanka's sustainable growth while the two leaders agreed that national reconciliation must take precedence.
After a meeting between President Rajapaksa and Prime Minister Abe a joint statement was issued by expressing their satisfaction at the outcome of the official visit by President Rajapaksa which had provided further testimony to continuing excellent relations between the two countries and the Government of Japan agreed to provide development assistance totaling 43.8 billion Yen to Sri Lanka to be used in areas including infrastructure development and disaster prevention. (Out of this, 41.1 billion Yen will be loans while 2.7 billion Yen is grant aid). Further, Sri Lanka and Japan agreed to work towards expanding maritime cooperation between the two countries, especially with Sri Lanka's potential to become a maritime hlub in the region using its unique location on the ' Indian Ocean sea lanes.
15 President Mahinda Rajapaksa met leaders of Japan's corporate and industry sectors and inaugurated the Sri Lanka Business Forum. During the meeting with Japanese business leaders, Sri Lanka. External Affairs Minister and Governor of the Central Bank of Sri Lanka spoke to the delegation about the economic climate in the country as well as areas of opportunities for potential investors.
17th Indian media reported, Bharatiya Janata Party (BJP) does not endorse the DMK's demand that the Sri Lankan President should be declared awar criminal. It further reported the party also refrained from categorically supporting Tamil parties’ demand that India should take a stringent stand against Sri Lanka at the United Nations Human Rights Commission in Geneva.
18 Sri Lanka's second international air gateway - Mattala Rajapaksa International Airport (MRIA) was opened by President Mahinda Rajapaksa.
21 Chinese media reported at least 24 people died and scores were injured after a tornado carrying huge hailstones lashed southern China, causing widespread devastation.
22nd A powerful tornado ripped through more than a dozen rural villages in eastern Bangladesh, killing at least 20 people and injuring more than 100.
27th The leaders of the BRICS nations (namely Brazil, Russia, India, China and South Africa) wrapped up their latest round of summit in the South African city of Durban to promote their partnership for development, integration an industrialization.
29th The External Affairs Minister of India, Salman Khurshi rejected the resolution passed by Tamil Nadu assembly tha. called for enforcing sanctions against Sri Lanka and holdin a referendum to create a separate Tamil Eelam in Sri Lanka.

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ECONOMO
REVIEW
Published by: Research Department, People's Bank, Head Office,
Sir Chittampalam A. Gardiner Mawatha, Colombo O2, Sri Lanka.
ADWSORYBOARD
eamini Senara
Chairman, People's Bank
N. Wasantha Kunar
CEO/ General Manager People's Bank
Rasia (CunaWardana
Actg. Deputy General Manager
Gregli (COTTOI K. RS People's Bank
CONSULTANT EDITOR
Dr. Fredrick Abeyratne
CO-ORDINATING EDTOR
Liema Candra Senior Research Officer
THE ECONOMic REVIEW is
intended o promote knowledge and interest in the economy and economic development process by a many sided presentation of views and reportage, facts and debates.HE ECONOMIC REVIEW is a community service project of the People's Bank. Its contents however are the result of the editorial considerations only
and do not necessarily reflect
Bank Policies or the official viewpoint. Signed feature articles also are the persona views of the authors and do not represent the institutions to which they are attached. Similar contributions as Well as comments and view points are welcome. THE ECONOMIC REVIEW is published bi-monthly and is a Vaabe 50th On subcription and on direct sale.
E-mail:ecorev peoplesbank.K.
Dr. S. P. Premaratne
A. G. Wimal Nanayakkal
Dr. M. M. Jayawardena
Prof. Danny Atapattu
Regional II
Dr. Wilbert Gooneratine
Prof. Sirimal Abeyratne Dulanii Liyanahetti
Sana Musharraf
R. J. M. Uduporuwa
Prof. M. R. Narayana
Dr. S. B. Ekanayake
Prof. N. S. Cooray
Economic Review wishes extended by Dr. Wilbert (
Development in Sri Lan
Cover - "Impressive Ecor Development Re
Printed
 
 

Nos. 11 & 12 Feb. / Mar. 2013
C O N T ENTS
Features
47 Entrepreneurship and Global Business Competitiveness in Sri Lanka: Is Sri Lanka Bad?
al 54 Poverty in Sri Lanka: Who are Poor
and Where are They?
59 National Defence and its Impact on
Economic Development: The Case of Sri Lanka
Students' Page
67 Fiscal Policy
Special Report
Development in Sri Lanka
O3 Regional Development in Sri Lanka: The Need for a Paradigm Shift
13 Financing Regional Development:
Concentrating the Dispersed
19 SMEs in Regional Development: The Case of Punjab Province of Pakistan
27 The Role of Dynamic Emerging
Urban Centers in Regiona Development
33 Industrial Clusters in Regional Development: Les sons from Karnataka, India
38 The Role of Higher Educational Institutions (HEI) in Regional Development
42 Empowering Local Government for Better Serving Regional Development in Sri Lanka: Sharing Japanese Experience
to acknowledge with gratitude the unstinted support Sooneratne in organizing this special issue on Regional ka.
omic Mountains around Colombo" depicted in World port 2009: Reshaping Economic Geography
at People's Bank, Printing Services Dept.

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soME HIGHLIGHTS ON REGIO
Provincial GDP and per Capita GDP - 2011
35OO
劉_■H_■ ※ Nటోలోసిలోసోఫియాలజ్ఞ్యసిల్వలో
O
GDP (Rs.bn.) 0 per Capita GDP (Rs.) Source: Central Bank of Sri Lanka
Provincial GDP by Economic Sectors - 2011 2OOO
లోలోప్రిలోకియాసియాలజ్ఞ్యంలో స్త్రూ"
Agriculture - Industry Eli Services Source: Central Bank of Sri Lanka.
Selected Key Socio Economic Indicators by Province
12O Electricity as
-- of ty
Households
Pipe Borne
ater as a % of Households
Toilet facility
as a % of **te Households
Educational attainment primary level and above as a 6 of population age 5 years
Source: Central Bank of Sri Lanka and above
翡
翡
i
ཕྱི་
r
X
O
O
Road Density (Road Length km/sq.km) - 2011
All Island
Sabaragamuwa in
North. Central aii North Western অল্পতল্পাঙ্গক্ষে লোক, Northern 8 Easterna
Southern mus
bo"ד - מאה ה-60 מ"ר ממה,
Road Density (Road Length km/sq.km)
Source: Sri Lanka Human Development Report, 2012
2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

IL DEVELOPMENT - SRI LANKA
Provincia Share of GDP
eAAJAeqSAgASAAgegeAAeAeeAASA reSeAeAi کشتقاقتصامی స్టేస్టోరి اطلاعصالیخادع6e متعاNes
| 2005 2007 2OO9 20O 2011 Source: Central Bank of Sri Lanka.
Poverty Beadcount Ratio by Province
50
4-O
30
2O
-3
2002 2006-2007 BE2009-2010 (as Change 2002 to
2O09-2O.O.
Source: SriLanka Human Development Report, 2012
Unemployment Rate by Province - 2011
Western 3.5%
. . . . . w 2.5%
Source: Central Bank of Sri Lanka
Human Development Index - 2011
Manfrarrar Source: Sri LankaLHumanDevelopment Report, 2012
Economic Review : Feb/Mar. 2013 -

Page 5
Regional Developm The Need for a Parad
1. Introduction
he issue of persistent regional
dispalities continues to be a stubborn development challenge and a politically sensitive factor in Si Lanka. While the Western Province (Colombo Metropolitan Region-CMR), as the core region, has continued to experience high rates of
economic growth, job creation and
poverty reduction, rural and peripheral regions continue to lag behind due to an array of stubborn development problems. Over four decades of largely rural focused development policies and interventions have not been successful in closing the gap between the fast growing CMR and the periphery. Sri Lanka, however, has been able to achieve a high degree of leveling in access to most of the critical services such as education, health as well as access to electricity, water, sanitation etc. despite the lower quality of such services and facilities in the lagging regions.
Today, Sri Lanka is on a steady growth path. One of the major challenges is to Sustain and accelerate this trend by maximizing the diverse potentials of the country. While the leading region, the CMR, needs to continue to grow, the lagging regions also need to grow in parallel, without falling too far behind (IPS 2012). Trickle down effects take a longtime to benefit lagging regions. Hence the need for growth promotion as the best way to address regional inequalities by harnessing the potentials of agging/peripheral regions and improving their economic dynamism. This can greatly contribute to national economic development by improving competiveness and resilience of national and regional economies.
Today, globalisation of trade and economic activity increasingly tests the ability of regional economies to adapt, exploit or maintain their
competitive edge. increases the inequalities to w within region technological cha of markets and knowledge offern local and regional countries recog reconsider thei policies to competitiveness o. investment to imp environment, di improvement o upgrading of skil all of which are competitiveness.
This paper underl paradigm shift iI regional developn It stresses the ne delineated systel regions for the col
suited to generate
development of lagging regions, a national developm of a fast changir global economy. the need for regio not only competiti
2. Regional Dis implications
The spatial patter emerged in Sri La regional disparit periphery phenc evident. We are concentration of
region (CMR)}, v capital city regio Iural periphery la The rural periph fairly clear large The four province is the inner perip provinces locatec core region cor periphery. The depressed, distan of the two.
**Author is also Former Senior Researcher, Agrarian Res Nairobi, Kenya and Director, Former Regional Developme
-- Economic Review:Feb./Mar. 2013

lent in Sri
Lanka:
igm Shift"
Globalization also
tendency for iden between and s, Yet, rapid nge, the extension he greater use of w opportunities for development. Most nize the need to r strategies and
improve the regions by focused rove their business versification and f production and ls and innovation, key elements of
ines the need for a h the approach to nent in Sri Lanka. ed for a rationally in of development untry that is better seconomic and social
the peripheral/ ind support overall ment in the context ng and integrating The paper stresses hal economies to be vebut also resilient.
parity: Trends and
h of growth that has nka is one of sharp ies where a core/ omenon is clearly ; witnessing high growth in the core which is also the n, leaving the large gging far behind it. ery consists of two regional groupings. s closest to the CMR hery while the four i farthest from the stitute the outer latter is the more it and more lagging
Dr. Wilbert Gooneratine
Former Senior staff Member & Deputy Director United Nations Centre for Regional Development (UNCRD) Nagoya, Japan.
CMR with only 6% of the land area and 25% of the country's population occupies a pre-eminent position among Provinces in its contribution to GDP (+45%), share of industry (+ 60%), construction (+6.5%) and financial and production services (+ 80%). The GDP growth rate of the CMR has been nearly 3 times higher than in other Provinces.
The CMR accounted for over 5O percent of GDP in 2005. However, it has declined to 45 percent by 2010. The provinces in the inner periphery (North Western, Central and Southern) occupy an inter mediate position contributing around lO percent each to GDP. Sabaraganuwa with a lower GDP contribution is included in the inner periphery due to its proximity to the CMR. All the other provinces (outer periphery) lag far behind contributing 5% or less each. Also, the annual per capita GDP of the CMR was 1.6 times the national average. All other provinces had GDPs below national level (Central Bank 2012). In 2010, CMR's share of GDP has come down to 45.1% due mainly to the gains by the Southern, Central and NW Provinces. The outer periphery as a whole has remained stagnant.
The CMR is also facing diseconomies like congestion, pollution, escalating land prizes, rents etc. Despite this, it is piling up growth. Jobs, wealth, superior infrastructure, services and amenities and, administrative and political power are all concentrated here. The much expected growth spread to the periphery from the CMR
earch Institute, Colombo, Head of (UNCRD) Africa office, int Studies Centre, University of Colombo.

Page 6
1. Large Towns
75,000 - 100,000 Population (2005)
Cities Over 100,000 Populations (2005)
O District Capitals
Outer Periphery Inner Periphery
steps to adic poverty, inequ Besides num and social w others includ in physical
{ Corc
N型
A
infrastructu development irrigation and in the Dr. programmes t groups like pla: and the Kandy up country al redistributic overcrowded W the Dry Z important obje land settlemr Other measl decentralization functions administrati district and
Figure 1 Core and the Periphery - Regional
Disparity in Sri Lanka.
is not taking place. Even the adjoining provinces in the inner periphery, like the Sabaragamuwa, the obvious candidates for such spread effects, have benefited little from the rapid growth of the CMR.
CMR is also depleting the periphery of its valuable resources including capital, the educated, the skilled and the young and more dynamic people further weakening their economies. Note that moving away from the core to the periphery also means moving from developed to lagging, advantaged to disadvantaged and largely urban and industrial to mainly rural and agricultural regions.
The poor growth and slow diversification of the peripheral region economies has been due to a combination of factors such as their predominantly rural and agricultural character with low economic diversification, poorly developed (and linked) urban centres and inadequate and poor infrastructure limiting connectivity within and outside the region. Finally, rural peripheral regions remain grossly deficient in high quality services and amenities linked to dynamic cities and towns in these regions.
3. Past Initiatives in Addressing Regional Disparity
Successive governments, since Independence, have taken noteworthy
4
taken to a coordination activities atth District : le Coordinating Comm. 1953, District Politic 1973, Decentralized (DCB) of 1974 Development Councils
Regional developmen the liberalized econ! 1978 included lead p Greater Colombo Urbo Project, Free Trade Zo Mahaweli Project anc Rural Development E to assist rural areas lead projects. There v to decentralize indust regions by establish estates and gamentf locations.
Introduction of the ele
Councils in 19 considerable au responsibility to th level; the provinces (
The above noted pr initiatives
h a v e Table 1 contributed -
In many different Year W. ways to 2005 so 1im prove the socio- 2OLO45 eCOIOC conditions Source: C
 
 
 
 
 
 
 
 
 

Iress issues of ality and neglect. rous subsidies elfare policies, ed investments and social
Ere, resource involving land settlement Zone, and p assist specific ntation workers an peasantry in eas. Population in from the Vet Zone areas to
OI). S Wa.S al ctive of the early .ent schennes. lires welle the и ofgoиеттепtal to the lowel we unit, the the initiatives
chieve better.
of development e Sub-national/ vel (District ittees (DCC) of al Authority of Capital Budget and District (DDC) of 1980).
t thrusts under Dmic regime of rojects’ like the an Development nes Project, the | the Integrated rojects (IRDPs) not covered by vere also efforts ties to the outer ing industrial actories in rural
:cted Provincial 87 devolved hority and 2 sub-national see below).
}grammes and
of many rural and backward "areas of the country and helped to attain several national level development objectives of employment generation, food production, power generation, population redistribution, etc.
The above were clearly insufficient to promote sustained growth at the regional levels, in particular, in the lagging periphery. They were notable to achieve a spatially balanced settlement system and create dynamic and resilient regional economies. Further, mostpolicies were not geared to address the long standing disadvantages of the lagging regions and did not provide the required tools to generate growth. The policies lacked a strong link between welfare and growth.
Rural/peripheral regions in Sri Lanka are clearly not declining, although they are lagging behind the more prosperous CMR. Whathas been lacking is the absence of sustained innovative policies to valorize their underutilized resources and potentials. The persistence of regional disparities actually demonstrates the unused potential for growth.
4. Emerging Realities of Regional Development
There are several dynamic processes that are at work at different levels which exert a profound impact on regional development today. Globalization has fundamentally restructured the economic and political geography of countries by creating a new architecture of regional space. Some mega cities and city regions are emerging as world centres of investment, economic growth and wealth creation. This is happening at the expense of rural areas, secondary cities and small urban centres pushing other subnational regions to a position of disadvantage.
GDP share of Provinces-96
P || SP || CP || NWP || SBP || UVP || EP || NCP || NP || Total
8 8.9 8.5 8.9 6.4 4.5 4.7 4.3 3.O OO
110.7 1 O.O. 94 6.3 4,55.9 4.8 3.4 100
entral Bank (2005 and 2010).
- Economic Review:Feb. Mar. 2013

Page 7
These developments have altered the background against which future regional development policy will have to be based. They require effective shifts in policy as well as repositioning of strategies to (a) tap the opportunities that globalization opens up in numerous areas such as employment, trade and investment, (b) prevent rural/peripheral regions from further weakening and (c) face the likely damaging shocks of a volatile global economy by strengthening the resilience of the
regional economies. This is possible
by complementing competitiveness uith. a desirable level of economic completeness in the economies by maximizing on their potentials and comparative advantages (Douglass 2001, Stor per 1997).
Today, the unprecedented advances in science and technology and the revolution in transport and communications are eliminating the traditional disadvantages of regions. They help to shift the comparative advantages of regions and alter the industrial location dynamics. They have helped regional centres and small towns to become attractive locations for investment in many countries.
A Regional Development strategy can also provide the framework for meeting the growing demand by local and regional entities for a greater role and say in participating more inclusively in their own development.
5. Need for a Paradigm Shift
Today, there is a growing body of evidence from many countries where regional development has shifted to policies that focus on growth and competitiveness of regions with emphasis on the exploitation of comparative advantages, science and technology, and endogenous effort through stakeholder partnerships at regional and local levels. In other words, there has been a major paradigm shift in regional development concept and strategies.
The need for a paradigm shift in Regional Development in Sri Lanka has also been enhanced by several recent developments, both internal and external. Among the internal factors, the more significant ones are the following:
- Economic Review:Feb/Mar. 2013
regional
The restoratior and political country follow. prolonged 30-y -created a w opportunity fo and sustain development
improvement . places and pe greater integra has also createc on the need to issues with sp the war-affec Northern and as well as the districts, all
periphery,
Notable expans economic activ (such as agric industry / m construction,
services) and op for further grow A Inajor econon of the country seen from the g exports from exports in the l in more recent
Widespread,
accelerated in infrastructur airports, powe which will cre environment
investment & g
parts of the col
High levels of s in the countr education and
lower middle Sri Lanka is u many of the assets that car and transforma
Among the extern the opportunitie posed by globaliza we noted above, S position itself to re. the expected gro region (India, Chir East, Africa as w recovery of the ec
and the US. A s competitive regic
reaping the b
developments. A

of peace, security
stability in the ng the end of the ear conflict. It has ide Window of : achieving rapid :d growth and as well as n connectivity of ople for realizing ion and unity. It greater awareness address regional ecial reference to :ed areas of the Eastern provinces adjacent affected in the outer
ion and revival of ty in all key areas ulture & fishing, anufacturing, tourism & other ening up prospects th and expansion. nic transformation
is under way as Cowth of industrial 5-6% of national 1970s to over 60 %
... years,
extensive 8, vestments in key e-roads, ports, or, irrigation etc. late a favourable for accelerated growth in different untry,
social development y, particularly in health. Among the income countries, (nique in achieving WDGs. These are help drive growth ation.
all factors, besides s and challenges tion in general that Sri Lanka. Ineeds to ap the benefits from with in the Asian a SEAsia), Middle ell as the expected onomies in the EU 'stem of dynamic, ns can assist in nefits of the se
s stressed by the
Chairman of the National Chamber of Commerce of Sri Lanka recently (The Island 27/l/2013), a greater state of readiness is necessary as Sri Lanka is poised to move forward.
A Paradigm Shift in regional development involves the following essential parameters:
- New objectives with focus on
growth and competition,
- New geographical scale with development oriented territorial units,
- New policy instruments with focus on endogenous development, science & technology and innovation as well as focus on key regional growth drivers,
- New governance and institutional
arrangements.
The discussion in the following sections will address some of the essential features of the above noted parameters:
6. Case for a Development Responsive Territorial Framework for Regional Development
Sri Lankaneeds a territorial/regional framework to promote sustainable growth across national space and to revitalize the lagging rural/peripheral regions. The promotion of regional growth is amore realistic way to i deal with the problem of regional disparities. A well-conceived regional development policy will also enable Sri Lankato benefit from the country's great diversity (natural, economic and cultural), manage the environment and the natural resource base more efficiently and deal with the expected urban growth (projected to increase to nearly 60% of the population by 2030) especially to bring about amore balanced spatial development in the country.
Sri Lanka also needs to improve competitiveness of key economic sectors at the national level to gain a competitive edge. This is likely to be greatly facilitated by enhancing the competitiveness of different regions with different and untapped potentials and comparative advantages. We need regional economies that are fit for the 21st century.

Page 8
Today, there is a growing trend in many countries towards strengthening the regional level. This is because economic activities and processes are taking place across traditional administrative structures and boundaries. The prevailing fragmented systems do not permit addressing such economic growth factors or enable existing institutions to develop critical measures to address them. This is why an increasing number of countries have introduced more relevant regional scales and mechanisms for strategy formulation, policy initiatives, resource allocation etc. (see section 10 below). IPS (2012) has recognized the need to focus on regional development the need for the lagging regions also to grow by utilizing their growth potentials and achieve a high degree of resilience and economic dynamism and thereby contribute to national development. The need for Sri Lanka to move towards strategic and integrated national, regional and urban planning has also been highlighted by the World Bank recently (World Bank 2009).
7. The Need for Territorial Unit
a Larger
Since the 1990s, the need for a larger territorial unit to promote regional development in the country has been recognized from time to time as indicated by several initiatives.
The creation of the now defunct Southern Development Authority (SDA) in 1995. It adopted a development-oriented regional unit going beyond the Province (included the Southern Province, Monetagala District and two Southern Divisions of Ratnapura District).
The more recent initiatives to create Regional Development Ministries by previous governments (2001 & 2004) again demonstrated the recognition of the need to move beyond the present administrative unit to promote regional development. Some Regional Development Ministries adopted a larger unit than a single Province. These were, however, largely ad hoc initiatives, with unclear objectives and not guided by sound concepts.
The Regional Development Davison (RDD) after nearly two decades of implementing district IRDPs, introduced the concept of a Regional
- 6
Economic Advance (REAP) going beyonc 2000). The case for development regio economic criteria ha by others (Gooner 2005). More recen the main Tamil pc recognized the need number of larger te or 5) "to avoid the we
Today, the need for units to promot transformation at slowly emerging. T on the CMR and the as well as the incre to the need for a (covering Souther Ratinapura, Monera Batticaloa distric geographically larg benefit from the me and other concentra in Hambantotal are s recent TV advertise airport announce facility caters to peop. districts. A mult integrated regiona strategy covering the region would impro scope of multiplie investments in Han and future.
8. Unsuitability Territoria Units Development
The suitability of th rational territorial regional developm questioned by commentators. The not created by administration
development. It has that Provinces such and the land-loc Sabaraganuwa ar. Province are inc territorial units from of economic deve Economic Review, 1
The suitability of system has also bee other grounds such significantly contrib economic develop dependence on 1 resources and as a wasteful exerci

ment Programme the district (RDD a system of larger S based on geos also been Inade tne (2001 and ily, the leader of litical party has to have a smaller Iritorial units (4 ste of resources”.
larger territorial e growth and regional level is he special focus Northern region asing references larger RUHUNA in Province and gala, Ampara and ts) to cIreate a er hinterland to gainfrastructure ated investments omne examples. A ment of Mattala s that the new le from the above i sectoral and al development entire South East ve the scale and I effects of the bantota- present
of the Present for Regional
: Provinces, as a framework for ent has been
IULIECIOUS Provinces were the colonial tΟ promote been recognized as the Souther. In ked Uva and d the Eastern t meaningful the point of view lopment (see 990).
the Provincial in questioned on as its failure to te to Provincial ment, its over he centre for expensive and ; @。 Many
commentators also reject the Provincial system on socio-political considerations. The most important criticism is that it was imposed on Sri Lanka against its will (Hewavitharana 1997).
The district, on the other hand, though well established, is too small as an effective territorial unit for meaningful regional development as the IRDPs have demonstrated. This was why, in the year 2000, REAP proposed larger territorial units going beyond the district.
Several alternatives to the present Provinces have also been advanced by a number of academics, researchers and others (Economic Review, 1990) and Madduma Bandara (1991). These proposals are mostly based on agro-hydrological, historical and other considerations and were advanced mainly as a solution to the ethnic problem and as an alternative to the PCs. The proposed regions are not development regions. In addition, Imany of these proposals also came up with too many units that lacked scale advantage. Note that the Mahinda Chintana Idir idekma regional development vision is anchored on the existing 9 Provincial units.
9. Development Regions: Key
Attributes
The Concept of REGION continues to be an elusive one and the quest to establish an overarching definition has remained futile. Regions become definable only in relation to specific purposes and criteria. They can be defined for different purposes ranging from economic, social to political and even security. Regions can be demarcated by one or several criteria such as natural (rivers or mountains) or administrative boundaries. Regions are not to be discovered; they are our constructions. Development regions are defined by taking several inter-related socio-economic, geographic and resource management aspects.
Considering the major challenges confronting Sri Lanka, any system of development regions that the country may adopt must have some of the following attributes: (i) they have to be large enough to permit the emergence of dynamic and
Economic Review:Feb./Mar. 2013

Page 9
Table 2
Regional
OECD Countries
Development Regions and Development Institutions in Selected
base; both physi increase the ml capital injection economy, complementari
linkages betwee high and low pe enlarge the sc
Number 8s Year
Type of Intro-Planning Country | Region duced Institution
Denmark.5 regions 2007 RED
Council
Hungary 18 regions 1996 RED
Council
Japan. 8 planning 2006 Reg.
Regions planning
Council
Korea. 5 economic 2008 RED
regions Committ
EE
strategic partne: stakeholders, (v) for a science a regional develc territorial unit w together the mi institutions that and later expa technology supp The impact of g. strong to be ad
*RED-Regional Development Source: OECD (2010)
New Regions in Selected
small regional u
Flexibility ha distinguishing regions delineate
Table 3 urposes in a S 8. S. E. Asian Countries ဒွိကြီးမျိုး environn
к be flexible in
Country New Regions Year important resp Introduced need not have I Malaysia" 5 economic 2006 (under boundaries. F.
regions 9th Plân) regions to make
(corridors) required, in Vietnam' | 8 geographic 2004 changing COO 8. Socio- realities. Second
economic of devolve
key governance at
ZO)CS local levels (Pro Nepal ** 8 regions 2007 : and Lor roposed by evelopment reg
器 /ADB) administrative ar
Source: * WWW.dpu.gov.my/hone
** Vietnam Briefing, May 2012
*** NPC/ADB 2007
competitive regional economies by
enlarging scale and scope of each
region, (ii) they possess certain
common characteristics in terms of development potentials and problems,
and combine strong/weak, high potential/low potential and rural and
urban areas to strengthen
complementarities and (iii) they
should not be altogether artificial or
arbitrary units that are unfamiliar or unconnected to the local populations.
They should make some territorial sense to the people of the region.
There are several advantages that a larger territorial unit can offer in supporting regional development. It helps (i) enlarge the overall resource
They would only and/or constitut The politico-adm and planning/ responsibilities the hands of
decentralized entit
an arrangement W many countries. Tl regions require ol representative,
organizational me major role for the k the region (see belov guide long-term There are sever institutional forII that have been ad countries (see Tabl
Thus, the central r
regions would be ti long-term develo comprehensive ba
- Economic Review:Feb/Mar. 2013

cal and human; (ii) ultiplier effects of ls in to the local iii) enhance ties and growth 2n rich/poor and otential areas, (iv) ope for building ships among key create conditions ld technology-led pment: A larger ill be able to bring nimum bundle of are vital to launch
nd science and ,
ort for the region. lobalization is too equately dealt by nits.
s to be a key characteristic of td for development rapidly evolving ent. They have to
at least three Scts. First, they igid geographical lexibility allows adjustments when relation to the mic and political , under a systern d/decentralized sub-national and vincial/other and >cal Authorities), ons need not have ld political powers. require political ional recognition. inistrative powers implementation
could remain in .
the devolved/ ies of governance,
videly adopted in .
hird, development inly a competent, committed 2chanism with a ey stakeholders Of w) to road-map and regional growth. 'al examples of ls/arrangements opted in different es 2 & 3).
ole of development he elaboration of a pment vision or sic framework of
development (development road map) for each region. This is the elaboration of a bold agenda of strategic initiatives
to expand development potentials and
capabilities of the region
Development region institutions also have the important role of lobbying with the central government for support for the envisioned long-term development strategy, publicising and promoting it among the stakeholders and the larger regional community, assisting in the coordination of policies, programmes and projects of devolved/ decentralized units and guiding and
supporting the sub-national and local
governments and other relevant agencies to translate the regional development framework in to policies, plans, programmes and projects for implementation. Thus, the role of the development regions will be largely regional development strategy formulatien, promotion and advocacy and Inonitoring development rather than actual planning and implementation.
10. International Experience
The need for larger geographical scales to enable regions to harness comparative advantage and strengthen regional (and national) competitiveness has been recognized by many counties. Recently, some countries in the European Union have recognized the need to redefine their regions to better meet the emerging challenges of European integration and global competition. Similarly, several Asian countries have also adopted the concept of larger development regions in different forms, positing them above the existing devolved/decentralized units. Such examples in East Asia include China, Japan and Korea and in South East Asia, Malaysia and Vietnam and Nepal in South Asia. .
11. Propose d Development Regions for Sri Lanka and their Characteristics
On the basis of the criteria and concerns outlined in the previous sections, six development regions for the country are proposed on a rule of thumb basis. These are shown in Map 2. A brief description of the main characteristics of each of the regions is given in Appendix 1. We stress the
7 nonnnns

Page 10
New Development Regions Tuvo Asian Cases
KORA
Close to half century of economic growth has resulted in over concentration of growth in the Capital region and stagnation in peripheral areas. The government now gives priority to policies to balance regional inequality with a new administrative capital in the centre and several innovation and enterprise cities outside. This has been strengthened by the adoption of 5 economic regions in 2008 (RDD 2008).
MALAY
To avoid
fur
concentration aroun
achieve a.
Ω Ο
development, Malae economic corrid Described as 'gatew these corridors are s the path of contin regional growth.
corridors has its ow
and own author.
development. ( Ww home and Borneo P
need for flexibility in delineating development regions. They need not have rigid and permanent geographical boundaries. However, in the case of the regions that we have proposed, it is possible to demarcate the boundaries to coincide with the established administrative boundaries of a mix of provinces, districts or divisions. The actual delineation of the development regions must be done only after a careful analysis of the data/information pertaining to regional characteristics and long term development potentials. The Colombo Metropolitan region need to stand as a separate unit due to the special role it plays in the national ( and global) economy.
There is clearly no conflict between the adoption of a system of larger development regions and the devolved/decentralized governance system. The former provides a more rational and effective territorial unit to organize the national territory for improving regional growth and competitiveness. As we noted above, a well-functioning devolved/ decentralized system of governance is indispensable to enable subnational and local areas to participate meaningfully in their own development and face global challenges. They are an integral component of a regional development strategy for serving as planning and implementation organs of the larger development regions. The development regions create a more effective framework for dealing with development challenges arising from the processes and economic activities
taking place acr
administrative
S
boundaries. The pre decentralized syste! fragmented to permi economic growth fa
12. The Develo
Drivers
To be dynamic an today's global econo be driven by two
powerful forces.
First and for e most , r e g i o n a 1 development must be propelled by endogenous effort. A region's ability to grow and prosper and sustain its prosperity is clearly a function of what the region can do. State and other e x t e r n a 1 participation and i n v e s tm e n t s , interventions can become effective and sustainable only when they are rooted in and internalized by the local/regional economy. This can happen only when strong partnerships are
built among the
- 8

SA
ther growth ld the capital and
bre balanced aysia adopted 5 ors in 2006. ay to prosperity', said to be paving luous domestic
Each of these Vn vision, focus ity to oversee
tw.dpu.gov.my/ ost-24/6/2012).
oss traditional tructures and vailing devolved/ m by itself is too t addressing such Ctors.
pment Region
d competitive in my, regions must
key regional level stakeholders, consisting of local governments, private sector, educational institutions and the civil society and the State. But it is the "committed stakeholders” who need to play a pivotal role. These are the stakeholders with a long-term commitment to the region who want to shape and reshape the future of their region. The stakeholder partnerships improve the capacity for local self organization and create internal ability and capacity for transformation than centre and externally driven development. It is only committed stakeholders who can create faith and hope in the regions and their capacities and potentials. In the context of the prevailing public policy environment, the private sector has to be a key partner in development and the engine of regional growth.
Second, today's regional development must be science and technology-led and eventually knowledge-based. This is because the creation of competitive regional economies rests on sustained increases in production, productivity and value addition through innovation. Regions that have
§ BevEtoPMENT KEston
w of
F*** ** *r
igure 2 Proposed Development Regions for Sri Lanka
Economic Review:Feb. / Mar. 2013

Page 11
World Bank (2009) on the National Physical
The NPP projects that Sri Lanka will see rapid urbanizat 20 years. It is projected that 70% of Sri Lankans will live 2030, of which 80 percent will live in the five metro c district capitals. Some urban areas are projected to exp population growth. For example, the population in the ci is expected to reach 1 million by 2030. (2001 populat Conversely, the NPP projects that the population of Kanc areas with concentration of economic activity outside til ince, will shrink between now and 2030.
The NPP also does not assess the drivers of demograph transformation. For example it is not clear wheth Trincomalee- Anaradhapura-Dambulla. (TAD) triangle will the same density as Colombo. The TAD triangle is exp million people by 2030 compared to Colombo's projected And the NPP does not identify the economic factors d: concentration. This may limit the extent to which the NP a guide for prioritizing infrastructure investments. ...."...t should leave it to firms and households to decide where tol and live, while focusing public policies on facilitating the transformations take place".
Although the concept of metro regions resembles reg concentration, the Plan does not specify how and why suc should emerge specifically in the designated places.
World Bank also notes that the NPP proposals need to mains considerations in the national, regional and urban plans strategic plans for MRs to be anchored on national and regio (including the Provincial)...and the need to assess key
drivers.
acquired the capacity to innovate and create new and better things are known as "innovative regions” and in their mature stage learning regions'. These latter are regions that have created for themselves a sustainable economic advantage based on several things such as, knowledge creation, local technology development, building a regional business Culture, upgrading local labour skills and strengthening production networks (Edington 2001). Learning Region. forms part of the wider concept of the Knowledge Economy. Sri Lanka urgently needs to radically improve all sectors of the economy through extensive knowledge inputs. These include management of the resource base; (irrigation systems, forests, land, water sources and bodies, etc.), diversification and modernization of agriculture, expansion of agro — processing and value addition to local produce, environmental management, energy and so on. Shift to high value added jobs is needed in all sectors and regions. Productivity of industry and quality of products and exports need improvement to enhance competitiveness through extensive knowledge inputs and innovation.
Since innovation is growth and compe countries have plac of their developmer countries have mir. to science, technolo (OECD 2010, IPS, 2 both the global com and knowledge ecc Lanka is placed at l42 and 125 count Sri Lanka’s science policies have been not entirely, on the and the lagging/pc lack even the minir infrastructure strengthening regi capacity.
13. Pillars of Regi
Regional growth i
several interinterdependent fac below several key growth and particularly in the These are indispe region to generate a and move to the development.
- Economic Review:Feb/Mar 2013

a: NPP
n in the coming urban areas by ies and smaller rience explosive r of Hambantotal on was 21,OOO).
7, one of the few e Westen PLOV
c and economic r and why the eventually have 2cted to have 4 5 million people. iving this rapid can be used as ne policymakers ocate production pace with which
ional economic h metro regions
tream economic s... the need for rial level visions regional growth
is a key driver of titiveness, many sedit at the centre ut strategy. Some istries dedicated gy and Innovation. O12). Note that in petitive rankings nomy index, Sri 52 and 82 among ries respectively. and technology based largely, if entralized model ripheral regions um of clustered
needed for onal technology
onal Growth
s a function of 'elated and ors. We discuss illars of regional ransformation
lagging regions.
nsable for any
d sustain growth next stage of
i3.1. An efficient settlement system
The development trajectory that Sri Lankais Currently following envisages an increase of the present urban population of 30% to 50% by 2016 and close to 70% by 2030. This is a . challenge of unprecedented proportions for Sri Lanka, whose management would be greatly facilitated by a well conceived regional approach. Growth, prosperity and resilience of regions are greatly influenced by the nature of the settlement system. A desirable settlement system would be one with
well distributed dynamic urban
centres and rural settlements served by efficient transport systems.
Available data for 2005 (DCS) shows that in the outer periphery there were only 4 large towns with population above 75,000 and only Kalmunai clained a population of 108,696. Other 8 cites/towns with populations above 75,000 were in the core and inner periphery. Five of the large towns with over 100,000 population were in the CMR.
National Physical Planning Policy (NPPP) proposal for the development of 5 Metro Regions is an urban strategy with focus on land management. It is not a strategy for regional development. Whether it can bring about a spatially balanced settlement system is not very clear. Compared to many Asian countries, Sri Lanka has managed to avoid the growth of too many unImanageable cities/city regions. Sri Lanka has also, thanks to its long standing rural policies, managed to sustain a diverse and pleasant rural landscape despite problems of poverty and access to services.
Regional cities: A spatially balanced system of regional cities can ser ve regional growth and balanced spatial development in several ways such as by serving as production, distribution and financial centres, as incubators of industry and innovation and promoters of forward and backward linkages in the regional economy; helping to slow down excessive migration, especially of young, skilled and talented people to the capital city region, and as attractive places for investment and living. Without regional cities, peripheral regions are likely to remain as hostages to a weak rural
9 ----

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economy. (see also Uduporuwa this Volume). A strong central city is the key to regional prosperity. It is the psychological and symbolic centre of the region's economy. Investment in regional city growth is an investment in the economic vitality of the entire region. Eventually, regional cities need to become centres that attract businessmen, scientists and
academics and artists. Increasingly,
the locational advantage of a place for sustained growth depends on its attractiveness for residence than only for investment and business.
Urban networks: In Sri Lanka, urban and rural areas have been generally taken as separate entities, independent of each other. This has been true in IRDPs, settlement schemes in the Dry Zone including the Mahaweli Project. The latter developed only dispersed service centres to cater to the needs of the agricultural communities. IRDPs excluded urban development altogether. These policies failed to promote strong rural urban linkages and integration in the rural regions. The expected future urban growth and the need for greater rural-urban integration could be better managed by adopting the concept of “urban networks” (Douglass 1998). These consist of well connected and interactive clusters of urban centres linked through good transport and communication systems. These can integrate rural and urban areas Inore efficiently and improve market access in intermediate areas. The network concept emphasizes greaterhorizontal diffusion of impulses.
A good example of this approach is the Greater Danbulla Development Plan (2005). It envisages five growth centres networked with Danbulla as the administrative and Business Centre (other centres are Habarana, SigiIiya, Galewela, Madatugama and Naula/Nalanda). Urban networks can also provide an alternative strategy to deal with cities/towns confronted with overcrowding and environmental concerns ( Kandy, Nuwara Eliya, etc).
13.2 Integrate d/ concentrated infrastructure
The development of regional cities
and urban networks and rural urban connectivity have clear implications
for infrastructure Lanka, needs exter. development, pa lagging/periphera transport of good efficient, fast a Improved infrast rural/urban
intraregional ex high potential a urban centres as and core-region c.
It is now clear tha obstacles to reg development investment to lagg been the mere infrastructure b connected 2 infrastructure. Th. low profile and u scale infrastruct such as under th programmes wel enhance the gene: regional econor concentrated inf improve the inve general, increa productivity of g and competitive economic sectors economies. The or infrastructure improvement expressways, i Provincial and ot rehabilitation, esp and construction C will improve intra connectivity drama regional growth.
13.3 Industri clusters
Today, clusterdevelopment has regional competiti defined as a sys non-market geographically c and institution: critical Inasses in industries and geographical pro: provide reduc transaction cost: externalities acr enable cost shar such as training critical mass c develops, the attri in the cluster

development. Sri sive infrastructure rticularly in the regions to Inake and people more Ind economical. ucture increases connectivity, hanges between eas and growing well as peripheral nnectivity.
t one of the major ional industrial Lind attracting ng regions has not inadequacy of ut concentrated, .nd efficient largely dispersed, Inconnected sImali iure development, e IRDPS and other 'e insufficient to -ative power of the ly. High quality, Castructure helps stment clinate in ses the capital private investment ;ness of the key and the regional going and planned expansion and (network of improvement of her roads, railway ecially in the North faomestic airports) and inter-regional atically and support
all and business
based economic merged as a key to reness. Clusters are em of market and inks between oncentrated firms . They represent one place of linked institutions. The imity that clusters es search and create marketing ss industries and ng of public goods rad R & D. Once a cluster activity ctiveness of locating increases rapidly,
which accelerates the cluster growth (see Narayanan and Musharraf, this volume).
Many Countries are increasingly adopting cluster development as a strategy for industrial developmentin
lagging regions. Sri Lanka, however,
has been slow to recognize the potential role of this emerging approach in promoting industrial and business development, particularly in the rural/peripheral areas. Although there are many emerging and old clusters of small industries including numerous cottage industrial and tourism clusters in different regions of the country, there are few well coordinated support programmes to assist them.
Sri Lanka's experience in industrial development in the rural/peripheral regions and industrial relocation have had a poor record. The vast majority of industrial enterprises in the rural/ periphery are micro and small and medium enterprises. They are widely dispersed in rural areas. This has Inade them out of reach to even available technology, information, training and skills and markets. (Gooneratne & Hirashima 2006). Location of many State-sponsored industrial ventures including some industrial estates have mostly ignored the benefits of agglomeration. More recently, the National Enterprise Development Board (NEDA) has been supporting a few selected small industrial clusters to improve their competitiveness. These are furniture (Moratuwa), Gane products (Wewaldeniya), Cashew (Mannar), Handloom (Batticaloa) and Light Engineering (Web ada and Bandanagala), {{NEDA Annual Report 2010).
This is an area where detailed analytical studies and information are necessary to initiate appropriate action to support a cluster-based strategy. The adoption of such an approach could help diversification of lagging region economies, revive traditional cottage and craftindustries and expand job opportunities for the young, the educated and the skilled in such regions. Note that Mahinda Chintana Idirideknna has correctly recognized the need to promote geographical industrial clusters.
Economic Review:Feb. 7 Mar. 2013

Page 13
14. Knowledge Infrastructure for Regional Development
Regional growth and transformation are not possible without an educated, adaptable and skilled human resource base. This is the key to enhancing competitiveness and staying competitive, and attracting investment. Emerging and expanding sectors of the economy require highly skilled manpower. This has to be met by high quality tertiary level education. Today, regions lacking high quality educational infrastructure (including research) are placed at a distinct disadvantage. High er educational institutions (universities, research and training institutions) can support regional development in expanding the stock of human capital and skills, providing technology, advisory and leadership support as well as research support for regional analysis.
Universities located in the regions have a keyrole to play here. The potential role of the regional universities would be strengthened when they cooperate and network with local research and other training institutions such as technical colleges. Such cooperation can promote greater coordination of limited resources and provide coordinated responses to regional demands. Further, regional universities form the ideal locations to establish science and technology centres and parks that are increasingly becoming key players in regional development (see Ekanayake this Volume).
All universities in Sri Lanka are national universities but there is at least one university in each of the provinces, but university involvement in the regions has been extremely limited. As Senaratne (2012) recently pointed out, Sri Lanka's universities need to be active partners in the knowledge-led competitive economy by championing regional growth and revival. A more rational approach to regional development can provide the required spatial framework for this to materialize.
15. Role of the state
Regional potentials can rarely be
maximized by relying on market forces alone for well-known reasons. Public
policy has a cen releasing such p
Regional develop development are things. They com and are interco regions form a p space, it is ne national framewo broad guidelir development base potential of the the context of development goal
Sri Lanka still established instit responsible for re for elaborating
development pri the investment
technical supp development and performance. Tod of regional develo by an array of di and agencies dea subject areas. It i that, in the abs regional developm can fall into the t duplication of eff and costly compe
A system of devel make a qualitativ of the central Sta regional developm of a more libera where private dominant role. Th many countries ( market forces an direction in development.
A regional stra allocation of sca: efficient in severa addres sing the regional (provin equity, channell sustained interver regions to gradua entrenched struct activating the potentials of less
16. Conclusion
The adoption development development regi qualitative chan
Economic Review: Feb./Mar. 2013

tral role to play in tentials.
ment and national not two separate plement each other onnected. As all art of the national cessary to have a ck that provides the es for regional d on the needs and lifferent regions in overall national s and strategies.
does not have an utional mechanism gionalization itself, national regional orities, identifying needs, providing ort for regional monitoring regional ay, different aspects pment are handled ifferent ministries ling with different is a well known fact ence of a national lent policy, regions rap of unnecessary ort and unhealthy tition.
ppment regions can e change in the role te as a mediator of hent in the context l market economy sector plays the ere is evidence from of the positive role d conscious policy
speeding lup
tegy enables the Ce TeSOl CeS Ore ul ways, such as in issues of intercial) balance and ing focussed and htions in the lagging ally overcome their ural problems and under-utilized developed regions.
of a regional strategy using ons would make a ge in the roles of
central State, sub-national/local institutions and the relations between the two. The need for a strong regional Planning Agency at the centre has been heightened by the growing demand for strengthening the devolved/ decentralized system of governance.
There is still considerable uncertainty on the type of devolved/decentralized form of governance that Sri Lanka is likely to adopt. The parallel system we have today with the devolved system represented by the centre, PCs and Local Governments on one hand and the central ministries, districts and Divisional Secretariats on the other, create numerous problems due to irrational overlapping of public agency jurisdictions and poor coordination. Whatever sub-national unit Sri Lanka will eventually adopt, it would have to avoid the wasteful parallel systems we have today.
Excessive number of ministries, irrational truncation of common subjects, and the large number of State and Local Government officials at local and regional level further increase the need for a more coherent coordination at local/regional level, in particular by strengthening the local government system, as many countries have done.
If the sub-national and local governments are to play a more dynamic role in regional development they must be provided with real decision-making powers, adequate financial resources and skills for planning and implementation. Hence, the need for a genuine commitment to strengthen the sub-national and local governance system in the country (see Coorey this Volume).
National level policy decisions and regional needs and priorities need to coalesce to achieve national development objectives and targets. In a multi-level governance system, different levels are mutually dependent. A complete separation of responsibilities is not possible. Greater efficiency demands close coordination. The vertical distribution of power between the different tiers of government and the decentralisation of resources and competencies need to be reassessed in order to better respond to the diverse opportunities and demands of
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different regions, challenges of global competition and the need to improve policy efficiency and coherence.
*This paper is partly based on the following previous studies by the author: Gooneratne (2000, 2001 and 2005).
APPENDX
Distinguishing Characteristics of the Proposed Development Regions
South Western Region:
This is a region of high concentration of population, economic and social infrastructure. The national capital, the Imajor airport and sea port as well as most of the largest towns in the country are located here. This is also the most industrialized region. Growth, however, is largely concentrated in the CMR and the
coastal belt, while the interior areas,
especially the present Sabaragamuwa province, remain less connected and lagging in many respects. The region has considerable areas under tea, rubber and coconuts as well as the best gem-bearing areas. With Colombo as the national capital and the commercial hlub and home to five major universities and most national institutes, as well as the best schools and hospitals of the country, it has the potential to grow further as a dynamic region.
CMR Special Region:
This is the capital city region and the dominant region in every respect, accounting for close to half the country's GDP, and demonstrating a high potential for further growth. With better management, it can emerge as an important city region in the global and regional economies, due to its strategic location. With improved connectivity to the rest of the western region (such as Southern Expressway), the CMR can spread its growth dynamism and growing prosperity to the rest of the western region that has remained as lagging neighbours (Sabaragamuwa Province, for example). Given the need to manage this region in the most efficient manner as possible, and to make it a dynamic city region, it is important to take it as a special region within the larger SW region.
South Eastern Region:
Climatically, this is a dry region and
contains some of the poorest districts of the country. It is largely rural and
- 12
agricultural anc infrastructure and a centers. Thé regio for agriculture, fish development is
exploited. The me. projects at Hamba
harbour in the S.
spearhead growth Further, the deve urban centles like E and Hambantota
emerging centres v growth in this r coordinated highe research system fo prerequisite for s regional growth an
Central Region:
This region serves
Imost of the rivers o is an environment: due to its topograph and settlement expi last two hundred yea conservation and management havi development cor expansion of settle activities and urb have to be guided b in managing deve region (NPPP 2006) a large potential
conservation bas exploiting its spe unique natural attri other forms of Lest agriculture. It is als of Sri Lanka, wit
potential for con
productivity gro addition. The w Peradeniya univers Wellassa univers. research station anc Institute are maj region.
North Central Reg
This is the region c irrigation facilities potential for furthe agriculture, livest fisheries. The po based industrial de to be exploited. T coastal fronts of resources and toul However, it is the ri and the living hyd that offer major C

lacks good ny dynamic urban n's high potential eries and tourism yet to be fully ga infrastructure intotal and Oluvil outh East would in this region. lopment of key atticaloa, Ampara as well as other would accelerate egion. A wellr education and r the region is a upporting rapid i transformation.
as the source of f the country and ally fragile region y and agricultural ansion during the urs. Here, resource
environmental e to be the key cerns. Future ments, economic an development y these concerns lopment in this . The region has
for promoting ed eco-tourism cial climatic and actions as well for ource conserving o the tea country h an untapped servation based with and value ell established ity, the new Uva ty, Giannoruwa the Tea research r assets in the
on:
fbest developed
and offers vast development of ck and inland :ential for agrovelopment is yet he region's two er vast marine ism possibilities. :h historical sites raulic civilization pportunities for
tourism development. Trincomalee harbour is a major asset. In addition to the cities included in the NPPP metro region (Trincomaleee, Anuradhapura, Dambulla - and Polonnaruwa) there are several other urban centres with clear growth potential located in the growing and diversifying agricultural areas. The Rajarata University (with other research centres like Mahailuppallama) can support higher educational and R & D needs of the region.
Northern Region:
This region boasts of fisheries and valuable mineral resources such as mineral sands, limestone, salt etc. and underground water for intensive agriculture and livestock development. The rich human resources, in particular the educated (especially youth) population, are a major asset for industrial and higher order services development. The large expatriate Tamil population living and working in the developed countries would be a major asset for this region to tap resources, expertise and investment. The well established Jaffna university with its Vavuniya campus can provide the needed educational and research support for this region's development. Jaffna is the historical centre of the North and will continue to be so, but other towns like Mannar, Vavuniya, Kilinochchi and Mulativu can emerge as dynamicarea (and region) serving urban centles.
References
Central Bank of Sri Lanka (2005 & 2012), Economic and Social Statistics of Sri Lanka, Colombo.
Department of Census and Statistics (2005), Patterns and Trends of Urbanization of Sri Lanka, Colombo.
Department of National Planning (2OlO), Sri Lanka the Emerging Wonder of Asia: Mahinda Chintana Vision for the Future, Ministry of Finance 8s Planning, Colombo.
Douglass, Mike (1998), A regional network strategy för reciprocal ruralurban linkages. An agenda for policy research uith reference to Indonesia, Third World Planning Review, 20 (1)
Edington, David W (2001), "Learning Regions: Lessons for Developed and Contd. on page 26
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Financing Regior Concentrating the Di
1. Introduction
rowth has never been even
across geographical space in
any country. But it is not a valid justification for Sri Lanka to let growth concentrate only in the Colombo metropolitan area in the Western Province. Nearly 29 percent of people in Sri Lanka live in the Western Province occupying less than 6 percent of the country's land area, but contributing to half of total GDP. Consequently, as portrayed in the World Bank's (2010) country report titled Sri Lanka. Reshaping Economic Geography - Connecting People to Prosperity, there are high-rise economic mountains (defined as GDP/km) in and around Colombo. Although Colomb o economic mountains still have a long way to rise further, many have looked at them from a negative perspective as an evil outcome of trade liberalization and globalization.
There are valid economic reasons for people to concentrate in some places rather than to spread everywhere, in order to invest, work, and live. Economic activities get concentrated in some locations because investors find these places offering better investment opportunities than others. People get concentrated in such places as they also find better opportunities to participate in (work) and to derive benefits from (live) growth. The issue is, therefore, not the high rise’ economic mountains in the Western Province, but the 'too low plains below them stretching over the rest of the country. What is important is to acknowledge that provided the necessary “conditions, economic activities would concentrate in a few specific regions according to their local comparative advantages' and that people would also concentrate in such areas enjoying the benefit of growth. Economic regions of a country would differ from each other according to the differences in local comparative advantage, which could be the source of enhancing regional economic identity.
The purpose of this the financing iss concentration in s Sri Lanka. There ; parties to finance the private sector economic activities sector which plays operating at both ( levels. While an constraints related of regional growth, t guidelines that arev an effective regiona in Sri Lanka.
The rest of the pap follows: Section 2 statistics highli disparities and pol followed by a discu on the distribution as a source of disparities. Sectio: problem of decer public finance ena sector to play its f regional levels. Fin conclusions and i study are presentec planning.
2. Regional Growt
Generally manufa end up concentrate regions of a country of scale and tran: leaving much of space for agricult (1991) argued. Hov differences in proc may not necessa Inlanufacturing a because specializi among and within production secto. service sectors, d differences in lo advantages. Eco alising out of exte global competitiven activity by reducin and enhancing pro Falling transport co advantage, when
Economic Review:Feb./Mar. 2013

al
paper is to address ue of economic pecific regions in are primarily two regional growth - which invests in s, and the public a facilitating role central and Local alyzing the key to financial aspect he paper presents italinformulating ll growth strategy
er is organized as presents growth ghting spatial arization. This is ssion in Section 3 of private capital spatial growth n 4 presents the tralization and abling the public acilitating role at ally, in Section 5, inferences of the i in guiding policy
:h Unevenness
cturing activities 2d in one or a few due to economies sportation costs, the geographical ure, as Krugman wever, the spatial luction structure rily be between ind agriculture, ation could exist narrowly defined rs including the epending on the cal comparative nomies of scale :rnalities improve ess of an economic g production cost duct development. ost adds up to cost the location of
Development: spersed
Prof. Sirimal Abeyratne
Professor in Economics University of Colombo
Dulanii Liyanahetti
Lecturer in Economics Open University of Sri Lanka
production gets closer to and connected smoothly with the input and output markets through a decline in physical distance as well as information gaps and institutional constraints. The availability of natural resources would be an advantage for spatial differences in growth, but not necessarily limit the comparative advantage of a region. There are some countries in the world which did not have natural resources but achieved growth and development. At the same time there are some countries in the world which continued to remain poor in spite of abundant natural resources.
Sri Lankahas long-standing historical experience with policies, programmes and projects that were aimed at spatial economic disparities. Nevertheless, the issue received Inuch attention during the past decade at both policy and political spheres. One of the main reasons was the compilation and publication of regional national accounts highlighting the acute growth disparities across the regions (CBSL 2003, Mutaliph et. ai. 2002). PThe issue that was put forward as a priority area of concern at Parliamentary and Presidential elections (Rajapaksha 2005 and 2010), and entered subsequently into the government's main policy documents (MFP2005 and 2010). The end of the separatist war in 2009 has also raised the need and expectations for greater concerns over regional issues with special reference to the war-stricken areas of Northern and Eastern provinces.
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Provincial Economic Indicators
Throughout its development process of Sri Lanka, economic output got concentrated and economic structure got transformed more in the Western Province than in the other provinces. Along with that people also got concentrated as they could find better opportunities in the Western Province than in the rest of the country to work and live. Apparently, the post-1977 trade liberalization process has speeded up the divergence between the Western Province and the rest of the country. This is because market forces are neutral, and by nature they creates competition and rewards efficiency. Liberalization policies in Sri Lanka opened up the market horizon for production activities to benefit from global competition and economies of scale. Thus the market has rewarded the Western Province more than the other provinces of the country, providinglessons to be learnt on the issue of regional growth.
According to the provincial näitional accounts, Western Province accounted for over 50 percent.of GDP in 2005, which declined to 45 percent by 2010 (Figure l). While North Western, Southern, and Central provinces occupy an intermediate position in terms of their contribution to GDP around 10 percent each, other provinces appear to be lagging far behind. Annual per capita GDP of the Western Province, amounting to Rs 430,000 is 1.6 times the national average, whereas that of all other provinbes remains below the national level (Table 1).
The changes in the structural composition in output also explain at least partially the growth disparities across the provinces. The Western Province with its share of agriculture as tiny as 3 percent of the provincial GDP resembles the output composition of an advanced economy where production structures dominated by industrial and service sectors. Sectoral composition of GDP needs to be compared across the provinces with caution, as the figures do not reflect the important attributes of production activities that transform with growth over time, but do reflect specific provincial growth patterns in 2010.oSpatial differences development disparities in the country closely follow the spatial
- 14
Sabaragamuwa Province
Uva Province North Celta. Province
North Province
Westerr
Eastern Province
Norther Province
Southen Province
Central Province
Western Province
Figure 1 Provin
2010
Source: Central
differences in gro resulting in highe of people living Province than thos of the country (Dar Bank 2010).
It is worthwhile no in the provincial sh WeStern PIrovi corresponding inc
other provinces d
half of the decad appears to be larg government's inter and the post-war e both factors that alterations in pr patterns.
Economic backw NortherIn and Ea presents a special prolonged political resulting separatis 1983. Conseque provinces did not time span to bene 1977 trade libera experience its im: impact on the re (Abeyratne 2004 d'uring the cours region also los development prerec investor class, hu physical infras institutions. Give circumstances, at
the war in 2009 th NortherIn and Ea appears to be lag behind the rest of

O O
2O
Provincia 1 Economies d Economic Concentration
We often make use of political and administrative units such as the provinces or districts of Sri Lanka to i d e in t i fy е co no na i с
3O 4O 5O 6O
sial Contribution to GDP, 2005 and
Bank of Sri Lanka (2012)
with unevenness, living standards in the Western e living in the rest galle 2005, World
ting the reduction are of GDP in the nce and the rease in that in uring the second 2. Plausibly, this aly a result of the ventionist policies conomic recovery, have influenced 'ovincial growth
rardness in the
stern provinces case due to the
conflict, and the it war erupted in 2ntly, the two nave an adequate fit from the postlization, but did mediate negative
gional economy
|. Subsequently 2 of the war, the t much of its quisites - the local uman resources, structure and in these specific the conclusion of e economy of the stern provinces ging few decades ihe country.
disparities across space for different
p urip o se s . Nevertheless, there is no valid economic reason for them to be alike in terms of output magnitudes and sectoral composition. It is absurd to think of "economic regions” in terms of spatial boundaries based on political or administrative units, or historical factors (such as ancient kingdoms), or cultural divisions (such as ethnicity or language), or geographical attributes (such as mountains, rivers). Even the policies based on such an imagination would bring about more harm than benefit as they tend to violate economic principles of efficiency, impeding overall economic growth. Rather the uneven growth concentration would provide an opportunity for such units to compete as well as integrate.
It is thus necessary to acknowledge the reality of the spatial transformation of the Sri Lankan economy, giving up two extremist notions. One is the idealistic notion of growth evenness across all provinces or districts. Implicitly, this assumption appears to have dominated some of the development programmes and projects undertaken by the government as well as donor agencies throughout the post independent development history of the country. Sometimes, such interventions appeared to have extended to their extreme ends even to push economic activities away from Colombo damaging their costcompetitiveness in a market environment.
Other extremist notion is the possibility of getting connected to
Economic Review:Feb. /Mar. 2013.

Page 17
Colombo prosperity. In spite of the interventionist strategies to equalize growth across geographical space (as mentioned above), this has been the most dynamic natural outcome of economic transformation of the country. As a result, economic and population density of Colombo in particular, and the Western Province in general, has increased well above the rest of the country.
Although the concep resembles regio: concentration, the specify how and w regions should emer in the designated pla: depending on the ecc based on local compa as well as socio environmental need Gooneratine (2C
Table Provincia1 per Capita Incone and Output Stru
Per Capita GDP || Composition
Province i Rs. P“ပ္ပဗုးal Agricul- | Indu
Ratio
Western Province 430 1.6 3O 3. Centra Province 2O8 O.8 8.2 28 Southern Province 24 O.9 16.7 34 Northern Province 6. 0.6 16.O 4. Eastern Province 212 O.8 22.3 29 North Western Province 225 O8 3.3 3O North Central Province 215 O8 29.8 2O Uva Province 19 O O.7 32.6 9 Sabaragamuwa Province 18. O.7 21.8 24 Island 27. O 12.8 29
(2012)
Source: Central Bank of Sri Lanka
In the same way that economic concentration progressed in the Western Province, given the 'right environment' there would be economic and demographic concentration in a few key areas of the island. Even the World Bank's 3D approach (higher Density, shorter Distance, and fewer Divisions) to "inclusive development from uneven growth" is not specific about the potential for the emergence of few high-rise economic mountains around the country. People would also migrate and gather around such places, leaving other areas of the country sparsely populated. Remote rural areas would also be depopulated leaving the space for forest expansion, as the benefit of providing infrastructure, and establishing services and facilities in such areas
needed for better living would be.
falling short of its economic cost.
The National Physical Plan 20102030 highlights emerging “metro regions” in Sri Lanka within the next two decades to accommodate 42 percent of population (NPPD 2007).
development regions for the planning pu1
3. Spatial Distribu Investment
While long-term gro associated with capi a large extent spati growth unevenness through spatial distr stock and invest un'evenness in gr accompanied by production structl regions. Traditionall production structure a shift away from industry, as depic (1955) analysis ( inequality, producir curve. However, t service-based Small recent past has refl. possibilities for co with the service sec the inverted U Curve Countries were als service sector-base their post-indust
Economic Review:Feb/Mar. 2013

... of metro regions hal economic
Plan does not hy such metro ge in specifically ces. In contrast, nomic potentials rative advantages economic and s of the country, )05) reveals
cture, 2010
of GDP (%)
Services
stry
65. 53-O 48.5 69.8 48.4 SO.8 5O.O 48.3 53.8
57.8
s of the country pose.
tion of Private
with is primarily tal formation, to al differences in can be identified ibution of capital ment. Spatial owth has been changes in re in different y the change in is assumed to be agriculture to ted in Kuznets of growth and tg an inverted U he progress of economies in the ected alternative untries to grow itor by flattening While advanced so shifting into :d economies in rial era, small
countries like Sri Lanka has demonstrated overwhelming progress of its service sector (Wijewardena 2006). It is also noteworthy that the agriculture sector itself would undergo structural changes with changes in the scale of operation, commercialization and mechanization. Therefore, structural change which is still an important attribute of growth may not necessarily be in line with an 'old fashioned industrialization process.
Although there is no reason to argue for even distribution of the share of manufacturing industries across the provinces, it is the Western Province that has attracted much of manufacturing investment in Sri Lanka. This has resulted in an overwhelming contribution to national economy through. Imanufacturing output and employment. For instance in 2009,
Colombo and Gampaha districts in
the Western Province account for the largest share of the total number of
manufacturing units (with five or more
persons engaged), employment, value addition, and additions to fixed
capital. Kandy in the Central
Province, and Kurunegala and Puttalian in the North Western
Province occupy an intermediate
position in terms of the distribution
of manufacturing units. While a
number of districts in all other
provinces appear to have recorded
dismal performance, Uva, Northern
and Eastern provinces were lagging
far behind.
In spite of the government's continuous intervention to establish industrial zones and to provide special incentive packages for investment outside the Western Province, it was the Western Province that dominated in investment under the Board of Investment (BOI) in Sri Lanka (World Bank 2010: 53). This confirms that government intervention and special incentives do not constitute the right’ environment to attract 'right' form of investment. Perhaps, it may not be limited to foreign investment facilitated by the BOI. Although data in this area is not readily available, it is possible that the formal banking system is operating throughout the country to mobilize household savings and to finance investment in leading areas such as the Western Province.
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Table 2 Spatial Distribution of Manufacturing Secto (units, with 5 or more persons engaged) 2009
. . . . As % of totals 4 : , VV i VM Nu Inber. Emplo-. Value Addition Provin District. JP
o ce / 1stric yees added to fixed WM w aSSetS WP Colombo 9.6 25.0 28. 26.9 Gampaha 7.6 27.4 32.5 3.9 Kalutara 5.6 6.9 4.4 4.6
CP Kandy 8.2 5.4 2.7 5.6 Matale 9 1.2 O.9 1.2 Nuwara-Eliya 18 2.7 2.4 25
SP || Galle 5.4 - 5.6 10.0 3.2 | Matara 3.2 2.3 2. .4
Hainban tota l.2 1.4 O.4 O
NPʼ | Jaffna. 1.3 O3 O. O3 Mannar O2 O. OO O.2 Vavuniya O.2 O.O O. 1.2
EP |Battioaloa O9 O.2 O. 5.2 Ampara 2.4 O.7 O3 34 Trincomalee O4 O.I. O.I. O.4
NWP ||Kurunegala, ll.2 8.2 5.4 1.4 Puttalam 8.O 3.O 8 1.6
NCP Anuradhapura. 2.2 3. 1.2 O8 Polonnaruwa .6 ... O O.8 O.3
UP Badula 1.5 14 1.1 1.6 Moneragala O.5 O3 O.9 O.7
SBP || Ratnapura 2.6 3.6 3.6 3.3 Kegalle 2. 2.O O.9 2.4
Total 100.0 || 100.0 || 100. O || OO. O
* Data not reported for Mulativu and Kilinochchi districts which are lagging behind the other three districts ij
the Northern Province.
Source: Department of Census and Statistics (2010)
While economic activities that are integrated with the global markets were getting concentrated in the Western Province, population in general and human resources in particular also got concentrated in the same area. According to Census of Population and Housing 2012 (DCS 2012), out of 3.7 million migrant population in Sri Lanka the majority of nearly 37 percent live in the Western Province. The top most important reason for migration to the Western Province has been employment, compared to marriage' for the all island. Out of 711,400 people migrated for employment purpose, 60.6 percent have migrated to the Western Province. In consistent with their low economic density Northern, Eastern, Uva, and Sabaragamuwa provinces appear to be
those found in the
4. Fiscal Dece. Public Finance
Public finance is : the role played by facilitating region government opera and sub-nation finance is linked decentralization C An appropriate coIII control and loca satisfies regime
popular demand dilemma for gover the world (Turne the global trend f has been strength to technical
decentralized gov
16

| r the least a t t r active provinces for employment. In al general, Sri | Lanka has often been cited as one of - the b est countries in the develop in g region foI in c 1 us i v e development due to its commitment to u n iv e r s a 1 welfare policy, although there are issues Irelated
to the improvement in q u a 1 i t y standards (World Bank 2010). The st at is tical evidence O in t e r n a 1 In ig r a ti on Suggests that even if human
resources are built up in lagging areas flow towards Colombo, because lagging areas do not have the capacity to in provide better work and living conditions as competitive as
a Western Province.
intralization and
an essential part of the government in al growth. As the tes at both central all levels, public l to the degree of lf decision-making. mbination of central
all autonomy that
requirements and ls is a persistent inments all around r 1999). However, or decentralization ened in the past due
efficiency of
ernance systems in "
managing regional economies as well as democratization processes and the regime requirements.
Decentralization process in Sri Lanka which has been neither progressive nor regressive continued to remain as an unfinished agenda. While the subnational governance consists of many layers at provincial, district, divisional, local government and grassroots levels, and of many vertical lines connecting then to the central government. By implication, powersharing between central and subnational levels, demarcation of roles and responsibilities, coordination among different institutions continue to remain a source of confusions and
questions. More importantly, their
relevance in setting up an "environment” conducive to competitive regional growth remains an issue overlooked considerably at policy levels.
Among all the lines and layers of subnational bodies in Sri Lanka, it was the Provincial Council system which Ought to play an important role directly connected to regional growth and
development. After reviewing over 20
years of experience with the Provincial Council system in Sri Lanka, one may wonder asking avalid question: What prevents a Provincial Council's competitive quest to set up a good school or hospital, to attract investment flows to the province, and to retain high-skilled human resources within the province?. Although there are sporadic cases of attempts as such in the Provincial Council systems, much of the capacity and responsibility in relation to above areas continued to remain with the central government.
The Provincial Council systern which was set up in 1987 in response to the country's ethnic conflict and the pressure.from India did not appear to be a purposive sub-national political system created for regional growth and development, and neither has it performed with that objective (Amarasinghe at. el 2010). Decentralization of public finance reveals the financial constraint of the Provincial Councils as well as their financial dependence on the Centre which was a source of academic and policy discussions since the time of the establishment of the Provincial Council system (Leitan 1990).
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Page 19
Table 3 Migration for Employment 2012 ( f Total migrant Migration for I
population employment e
Province
No. % No. 94
(1000s) (1000s) È
Western Province 1352.536.9 431.3 60.6 Central Province 358.69.8 52.2 7.3 Southern Province 276.9 7.6 35.4 5.O C Northern Province 455.4 12.4 23.0 - 3.2 Eastern Province 86. 5. 26.2 3.7 s North Western Province 343.5 9.4 45.3 6.4 North Central Province 295.5 8.1 36.8 5.2 Uva Provincè 177.8 4.9 31.8 4.5 g Sabaragamuwa Province 25.1 5.9 29.3 4.1 C All Island 3661.4 || 100 || 71 1-4 || 1 OO | a
a Source: Department of Census and Statistics (2012) f
C
The Provincial Councils share only 4.3 percent of the consolidated revenue, and 4.1 of the consolidated tax revenue of Sri Lanka (Table 4), in reflecting the revenue constraint of the system. However, the Provincial Councils spend ill percent of the consolidated public expenditure, after receiving the central government transfers amounting to 8.1 percent of consolidated expenditure.There are also substantial disparities between the Western Province and other provinces in terms of provincial public finance, which has been to a great extent neutralized by central government transfers. The fiscal operations at Provincial level reflect a heavy vertical and horizontal fiscal imbalance. There is vertical fiscal imbalance as the Provincial Councils are made to rely heavily on central. government transfers for expenditure. There is horizontal fiscal imbalance, because the Provincial Council tax revenue is much lower than the central government tax revenue; during 2008-2011 Provincial Council tax revenue is only about 0.5 - 0.6 percent of GDP, compared to central government's tax revenue, amounting to 12 - 13 percent of GDP (MFP 2011:
l48).
Provincial Councils are a systern superimposed on the existing institutional arrangement for centralized exercise of state powers and de-concentrated delivery of services (Gunawardena 2010). By Constitution the central government also retains its power to engage in the areas devolved to the Provincial Council, limiting the Provincial
little space for
Councils to play a regional economic they are confined to duplicating or sul central governmen sub-national levels often perceived as
carried out by the ce.
The role of the gov central and Sub-n important in shapil for regional growth level, the public sec in formulating the
development strate in setting up the con (defined as 'rules o in providing socia infrastructure at n. sub-national level,
attempts to set p; environment cond work, and live w boundaries. Howeve experience suggest: sector capacity at S is significantly wea this task efficiently
5. Conclusion
Particular areas of country grow faste than others becaus people choose t investin those area: by reaping thi benefit of loca с о пn p a r a t i v advantages, an( choose to work anc live thereby reapin
Economic Review:Feb/Mar. 2013

council's capacity or decisionnaking. Te : x p end it lure ) atterns at provincial levels how that much of
h e esponsibilities ested upon the r o v in c i a 1
souncils ae elated to the ervice delivery on tehalf of the
e in t r a 1 Overnment. The on stitutional .rrangern ents lone with in a n c is a l onstraint provide the Provincial acilitating role in growth. Rather ) engage in either pplementing the t’s operations at , which are also inferior to those ntral government.
'ernment at both ational levels is ng the conditions h. At the central ctor plays its role country's overall gies and policies, aImon institutions f the game), and l and economic ational levels. At the public sector arameters of an ucive to invest, within its local er, the Sri Lankan s that the public ub-national level
ak in performing
the benefit of growth. Thus, the overwhelming concentration of economic activities in and around Colombo is not the issue in question. The question is how to create such an environment in the rest of the country facilitating fast growth and allowing economic and population concentration. The Colombo episode, in fact, reveals why people choose it to invest, work, and live, and how state supported it, providing valuable lessons for embarking upon regional growth in Sri Lanka.
In respect of regional development disparities in Sri Lanka, an idealistic Inisconception that has to be avoided is that all nine provinces and 25 districts of the country would grow evenly and reap its benefits evenly. It is neither that all of provinces or districts should be connected to Colombo prosperity nor that economic activities located in Colombo should be pushed away into other regions of the country. Given the right environment, there would be few regions where productive resources get concentrated resulting in higher growth. The provinces and districts of the country do not have any valid economic reason to grow in isolation, although some of the regional development policies and programmes were based On such conceptualizations. They would compete with each other and get integrated into emerging economic regions deriving the benefits of economic concentration.
There are two major players in regional growth and development; the private sector which divert their investment finance and, the public sector which play its facilitating role at both central and sub-national levels. In both cases, the deficiency in financing regional growth appears to be a major bottleneck that hinders the formation of economic regions
Table 4 Provincial Council Budget 2010
Rs. National
billion share (%)"
Provincial Council revenue 36.8 43 (of which) tax revenue 31.O 4. Central government transfers O7.O 8. Provincial Council expenditure 45.5 O
budget
* As % of respective items in the consolidated
Source: Central Bank of Sri Lanka (2011)
17 ---

Page 20
outside the Western Province, Investment capital seeks better location due to economies of scale and smooth connectivity. People get concentrated in places as such, as economic concentration offers them an opportunity to participate in growth (work) and to reap the benefits of growth (live). The government operating at central level should engage in creating the national policy, regulatory, and physical environment ensuring higher growth without spatial discrimination. The government operating at Sub-national levels should have the required capacity to act efficiently and independently within the national policy framework in order to offer a competitive local environment for people to invest, work, and live.
References
Abeyratne, Sirimal 2004, Economic Roots of Political Conflict: The Case of Sri Lanka, World Economy, 27(8): 1295-13l4- Amarasinghe, Ranjith, Asoka Gunawardena, Jayampathy Wickramaratne, and A.M. Navaratina-Bandara 2010, Tuventu Tuvo Years of Devolution: An Eualuation of the Working of Provincial Councils in Sri Lanka, Rajagiriya: Institute for Constitutional Studies
CBSL 2012, Economics and Social Statistics of Sri Lanka, Colombo: Central Bank of Sri Lanka
CBSL (annual issues), Annual Report, Colombo: Central Bank of Sri Lanka
Dangalle, Nimal 2005, Spatial Disparities in Development in Sri Lanka, in M.M. Karunanayake and Anders . Nārmain (eds), Regional Development in Sri Lanka: Resetting the Agenda, S.JP-Sida/SAREC Research Cooperation Project, Colombo: University of Sri Jayewardenepura
DCS 2012, Census of Population and Housing 2012, Colombo: Department of Census and Statistics, Web link:
WWW statistics.gov.lk
DCS 2010, Annual Survey of Industries 2010, Colombo: Department of Census and Statistics
Gooneratne, Wilbert 2005, 'A System of Development Regions for Sri Lanka: Meeting the National and Global Chanllenge in M.M. Karunanayake and Anders Nārman
- 18
(eds), Regional Sri Lanka: Resettiin Sida/SAREC Rest Project, Colombo: Jayewardenepura
Gunawardena, As Devolution: Oper; Ranjith Amara Gunawardena,
Wickramaratne, ar Bandara 2010, Tu Devolution: An Working of Provin Lanka, Rajagiri Constitutional Stu
Krugman, Paul Returns and Ecor Journal of Political E 499
Kuznets, Simon Growth and Inc American Economic 28
Leitan, G.R. Tres Integration throughl Devolution of Pouve Experience, Colom Colombo
MFP 2011, Annu Colombo: Ministr. Planning
MFP 2010, Sri Lan Wonder of Asia, l Vision for the Future Policy Framework, of Sri Lanka, Colc Finance and Plan
MFP 2005, Mahind for a Neuv Sri Lanka, Development Frame Discussion Paper,
of Finance and Pli
Mutaliph, T.M.Z., A.D. Bandaran. Provisional Estima of Regional Econo Lanka (1996-200 Vol.31-32, Colomb Sri Lanka.
NPPD 2007, Natio; and Plain 2 Ol O-. Department of N Planning
Rajapaksa, M MahirudaChirntcarna: W Presidential Electi

Development in g the Agenda, S.JParch Cooperation University of Sri
oka 2010, “Fiscal ational Issues', in singhe, Asoka.
Jaya Impathy Ld A.M. Navaratnaventy Tuvo Years of ualuation of the rial Councils in Sri ra: Institute for dies
..991, Increasing lonic Geography, conomy, 99(3): 483
1955, Economic omne Inequality”, Revieuw, XLV(1): 1
sie 1990, Political Decentralization and er: The Sri Lankar ıbo: University of
Lal Report 2011, y of Finance and
nka: The Emerging MahindaChintana: 2, The Development
The Government ombo: Ministry of ingךְ
a Chintana: Vision A Ten Year Horizor uvork 2006–2016, Colombo: Ministry anning
D. Wasantha, and aike 2002, A tion and Analysis nic Activity in Sri )), Staff Studies, o: Central Bank of
Lal Physical Policy 2O3O, Colombo: ational Physical
ahinda 2010, ision for the Future, on 2010, Colombo
Rajapaksa, Mahinda 2005, Mahinda Chintana: Touvards a Neuv Sri Lanka, Presidential Election 2005, Colombo
Turner, Mark (ed) 1999, Central-Local Relationship in Asia - Pacific: Convergence or Divergence?, London: Macmillan
Wijewardena, W.A. 2006, Services sector grouth - an Unstable Grouth. Component or a Sustainable Wealth. Creator? The case of Sri Lanka, Professor Sirisena Tilakarratina Memorial Lecture, delivered at the Center for Banking Studies, Rajagiriya, 15 December 2006
World Bank 2010, Sri Lanka: Reshaping Economic Geography: Connecting People to Prosperity, Washington DC: World Bank
World Bank 2009, World Development Report 2009: Reshaping Economic Geography, Washington DC: World Bank
Footnotes
The Sri Lanka Country Report of the World Bank (2010) records the publication year as 2004 (sic). As the Report acknowledged, it has been prepared in the context of the analytical framework of the World Development Report 2009 on Reshaping Economic Geography (World Bank 2009).
? Perhaps, for the first time the Ministry of Finance and Planning attempted to compile provincial GDP accounts for 1990s. However, it was the publication of an analysis on provincial GDP data by Mutaliph et. al. (2002), followed by the Central Bank's Annual Report (CBSL 2003) that attracted Inuch attention on the issue.
For instance, the share of industrial sector in the Southern Province (almost 35 percent), and that of service sector in the Northern Province (almost 70 percent) both are greater than the respective shares in the Western Province (Table 1). The figures do not necessarily mean that the technological standards and the scale of units of the economic activities are similar to those in the Western Province. In addition, the figures reflect the specific pattern of government intervention during this period resulting in skewed growth in both Southern and Northern provinces.
Economic Review:Feb. /Mar. 2013

Page 21
SMEs in Regional De of Punjab Province of
1. BACKGROUND: Role of SMEs in the Economy of Pakistan
scale industry to the economy of Pakistan can be judged from the fact that it contributes greatly to value added in the manufacturing sector (35%), to GDP (40%) and to total exports (30%). It also provides employment to 80% non-agricultural labour force of Pakistan. (Pakistan Economic Survey 20ll-12)
he significance of the small
Pakistan faces a major challenge of unemployment as its labour supply continues to grow rapidly. According to the Economic Survey 2011-12, the population of Pakistan is estimated at l80.7l million with an estimated population growth rate of 2.03%.
According to the Labour Force Survey (LFS) 2010-11, Pakistan has a labour force of 57.24 million people which is 0.9million more than the previous
year. The total number of people employed during 2010-11 was 53.84
million, 0.63million more than the preceding year. The overall
participation rate in Pakistan is only 29.79% of the total population. Out of the totallabour force, 67.55 million live in the urban areas while 113.6
million in the rural areas. The volume of labour force shrinks a bitin Punjab and Baluchistan while it expands in NWFP and Sindh in the same order. The change in the provincial profile is more of rural than urban origin.
Therefore, the millions of unemployed workers justify the urgent need for promoting small scale labour intensive economic activities.
Looking ahead, the two largest sectors of the economy, namely the agriculture and large scale manufacturing sector, do not seem to be capable of absorbing the annual growth in the labour force. There is an overall decline in the labour absorptive capacity in the economy. There is the issue of declining employment in the public sector and negative employment elasticity in the manufacturing sector. All indicators point towards a further decline in these two sectors of employment.
SMEs are the only. the stagnant econc their capacity for : and employment p
The role of SM developmentis thr eInployment abso poverty reducti balanced regionald strengthen the are: comparative advan enterprises (LSE). to SME can be justi above. However, in sector has not bee as the engine of gr for desirable emplo Pakistan clearly fall of countries wher SMEs has not bee However, the s informal sector
dynamic and produ tend to show. (Zai
2. Small and Mec in Pakistan
In Pakistan, there 400,000 small sca units, 600,000 se: and one million country adding approximately 2 n. Economic Census lists 3.2 million bu nation-wide and SM 99 percent of all. N infrequent surveys in Pakistan, the units, especially s much larger th reported.
According to t economic census enterprises have s million rupees anc below Rs. 1 millio of the SME’s are ov by an individual as concern, supported The hired workers mostly in growing and technically ql the sector are as the SMEs. The re is either semi-ski
Economic Review:Feb./Mar. 2013

velopment: The Case
Pakistan
option to revitalize my of Pakistan by ncome generation ptential.
T
E in Pakistan's ce fold; to enhance (ption leading to )n, to promote evelopment and to as where SME has age overlarg scale he public support fied because of the Pakistan, the SME an a leading actor owth or a conduit yment generation. s into the category e the potential of in fully exploited. mall-scale and is much "more ctive than figures di, 2005)
ilium Enterprises
are approximately le manufacturing rvice sector units retailers in the up to a total of lillion units. The of Pakistan-2005 siness enterprises MEs constitute over otwithstanding the of the SME Sector Inumber of such small, is probably an is officially
ne IDO St. Tecent s report, 84% of ales below RS. O.5
| 93% report sales
in. More than 97% wned and managed a sole proprietary by family workers.
are few and found fins. ProfessioIna lalified workers in ow as 5 in 76% of maining workforce led or unskilled.
Sana Musharraf
Researcher Hitotsubashi University Tokyo, Japan
Slightly more than 2% of the firms are partnerships and there are hardly any corporate entities in the SME sector. 58% of the SMEs have been established after 1990, while 18% were set up before 1980. Generally, SMEs in the manufacturing sector are 15 to 20 years old. Almost 54% of the
SME's sell their products in the local
markets.
These characteristics of SME sector suggest that Inost of the businesses are in a low growth trap, dealing in traditional products and unable to climb up the technology ladder. They often become vulnerable to various shocks and disappear from the scene. This view gets credence from the fact that 19 percent SMEs are less than 5 years old and only 4 percent are able to survive beyond 25 years. The encouraging sign however, is their mushroom growth which makes it imperative that there should be a mechanism through which they could get supportin terms of resources such as capital, finance, trained human resource or services like advice on technology up-gradation, marketing or quality management etc. (Khawaja 2009)
2.1. SME: Types, Sub-Sectors, Distribution and Size
2.1.1 Defining SMEs
There is no universal definition of small and medium enterprises. Each country has adopted different criteria for defining SME. In Pakistan, there is no single definition of SMEs in use. In fact, the Census of Manufacturing Industries data include all manufacturing units with 10 or more workers in the category of large scale manufacturing units.
Generally, SMEs in Pakistan are categorizedinto the following (but still
19 -

Page 22
there are differences of category among various ministries in Pakistan):
Micro
• Less than 10 people employed
• Productive Assets limit of Rs. 2 million
Smalı
• Between 10-35 people employed
• Productive Assets limit of Rs. 20 million
Medium
• Between 36-99 people employed
o Productive Assets limit of Rs. 40 million
2.1.2 Major SME Sectors
In the formal manufacturing sector in urban areas, the largest number of employed workers is in textiles, as they are in the small-scale and household sector. Fabricated metals account for a substantial share in the small-scale urban manufacturing sector and is ranked second, while food and tobacco are the next largest sector in the formal sector. For Ima sector dominates in the heavier, capital-intensive large-scale industry, while the informal sector dominates in wood and furniture products and jewellery (Zaidi 2005).
According to the Economic Census of Pakistan (2005), there were 2.96 million units in the country, of which 2.8 million (93.9%) W εΙΘ. Establishments and 0.18 million (6.1%) were Household Units (including all activities of producing goods and services for sale or barter in the market). Area wise analysis indicates that, of the total establishments, 44.3 percent were in the rural areas and 55.7 percent in urban areas. Further, Punjab had the largest share of 65.26% in the total establishments in 2005, followed by Sindh (17.82%), NWFP (14.21%) and Baluchistan (2.09%).
Of the total 2.96 millionestablishments about 53 percent were in the Major Industry group of Wholesale Retail Trade 8s Hotels and Restaurants, followed by Community Social and Personal Services group (22.3 percent). Manufacturing is the third largest group sharing 19.72 percent of the total establishments. Among the Household units, the highest share
- 20
is that of the Ma (66.5%), followe Social and Person: Agriculture, Poulth etc. (8.7%), and W trade, etc. (about
The Manufacturin that out of 583, census, 466,153 (8 of establishments Household units ( of the total
establishments
Textile, Appare industries, foll Beverages and Tob and - Wo od Pro Fabricated Metal P. and Equipmen Manufacturing
Handicrafts (8.9%) sectors had 8.2% interesting to not industries group and Leather,
EstablishInents
Households. The group of activi Household sector Mineral Products |
Balc
NWFP
.5%
Figure 1 Distri
PrOvi
Source: Econo] Statist
An analysis of th establishments b division and provi of the total 583,3 industries 68.4 Punjab, 15.9 perc percent in Sindh Balochistan and Islamabad. (Eco Pakistan, 2005)
3. SME Centres Pakistan: Distribution 8s, IL
Clusters of simila developed in ci
 

nufacturing sector 1 by Community, ul Services (20.5%), y Farming, Fishing holesale and Retail %).
g firm's data show 329 units in the O%) in the category and 117,176 were 20%). The majority Imanufacturing (43.2%) were in :l and Leather owed by Food, acco (20.9%). Wood ducts (10.8%), roducts, Machinery (10%), Other Industries and and the remaining
share. It is also
2 that in the large of Textile, Apparel 68.5% were and 31.5% were other important ties within the was Non-metallic (28%).
(surgical and sports goods industry), Gujrat and Wazirabad (light consumer engineering), Sargodha (agribusiness and light electric), and Faisalabad (textiles). However, this clustering has not led to any real development of ancillary activities that will facilitate business growth (Haque Nadeem 2007).
Promoting clusters can strengthen SME competitiveness and thus promote economic prosperity in the area. In Pakistan, there are a number of cities where similar kinds of SMEs are geographically agglomerated, with advantages of easy availability of raw material, labour and technology or information spill over. The following Table shows these sectors and their details. d
The industrial clusters lack both breadth and depth, making it difficult to develop new industries. This eventually weakens the competitive position of the base industries. The development of related and Supporting industries is one way that sources of expertise can ripple through the economy and move
forward. However, the
)chistan
2%
Islamabad 1%
absence of such industries in Pakistan means that so far this avenue for further growth and prosperity has not played a major role.
Punjab 64%
4. Punjab Province of
bution of Establishment by
Ce
nic Census of Pakistan, 2005, FBS, ics Division, Islamabad
e distribution of y major industry lice indicates that, 29 manufacturing percent were in int in NWFP, 13.9 1.4 percent in 0.4 percent in nomic Census of
and Clusters in Specialization, cation
r industries have ies like Sialkot
Pakistan
During the last decades, the Pakistani economy has
experienced dramatic ups and downs with the Punjab historically playing a key role in the country's development. In analyzing its longer-term growth prospects three aspects have to be emphasised: First, history matters. This draws the attention to factors such as the region's ancient role as hub between Central Asia and the Ganges valley, the influences of Islam and the colonial inheritance. Second, institutions matter as they set the . frame for private economic activity. A third aspectis the regional dimension of growth.
Punjab is the most populous province of Pakistan. According to 1998
Economic Review:Feb. Mar. 2013

Page 23
Table 1 Manufacturing Firms by Industry and type
Major Industry Division Total Estab.
No. % No.
TOTAL 295,8310 100 2,782,O
Agriculture, Forestry, Hunting 46,378 1.57 30,9 Fishing
Mining & Quarrying 713 OO2 7 Manufacturing 583,329 19.72 466,1 Electricity, Gas & Water 24 O
Construction 1,410 O.05 1,4 Wholesale 8. Retail Trade and 1,566,720 52.96 1,559,2 Restaurants 8, Hotels
Transport, Storage 8, 51,564 1.74 51,5 Communication
Financing, Insurance, Real- 48,440 1.64 48,3 Estate 8, Business Service
Community, Social & Personal 659,641 22.3 623,4 Services
Source: Economic Census of Pakistan, 2005, FBS, Statistics
census, the population of the Province is 72,585, OOO. The population density is 353 persons per square kilo meter as compared to the national figure of lé4. At the beginning of this century, about 56 per cent of the entire urban population of Pakistan was living in the Punjab (Zaidi 2005).
Punjabis themselves are a heterogeneous group comprising d if f e re n t t I i b e s ,
clans and communities. In Pakistani Punjab these tribes have more to do with traditional occupations such as blackSmiths or artisans as opposed to rigid social stratifications. According to Khalid. Aftab and Eric Rahim 1986), the indigenous labour force in the western Punjab was augmented at the time of the partition of the subcontinent by an influx from the eastern districts of workers with metal working experience. A majority of the united Punjab's black smiths were Muslims. A majority of the labour force in general metal work were also Muslims. Thus, with the 1947 crossmigration of Hindus and Sikhs and Muslims, the Pakistan Punjab inherited more than its share of the black Smith population and metal working labour of the united Punjab. The newcomers together with their indigenous counterparts formed a large reservoir of labour with a metalworking tradition going back many
generations. Concen number of towns t diverse metal wor either as laboure] workshop owners. T formed a modest, bu base upon which working in the Puı founded. After pa subcontinent, the in develop till 1950.
Traditionally, agricu. Punjab the “breadbas The economy of Pak one that is li on agriculture and
Table 2 Main. In
City Indu
Sialkot Surg
Spor
Karachi Leat
Gen
Gujrat Elec
Wazirabad Cut
Faisalabad Text
Chiniot Woo
Source: Towards W Pakistan, N Internation
Economic Review:Feb/Mar. 2013

share of Pakistan's GDP
was 54.7% in 2000 and
lishments Household Units 59% in 2010. Punjab is the most industrialized
% No. .9% province of Pakistan; its 51 100 17627o 100 manufacturing industries produce textiles, sport
95 l.ll 15,383 8.73 goods, heavy machinery, electrical appliances,
13 O.O3 O O surgical instruments, vehicles, auto parts, 53 16.76 l17,176 66.48 information technology 24- O O O metals, Sugar, cement, agriculture machinery,
O O.O.S O O bicycles and rickshaws, 66 56.05 7,456 4.23 floor coverings, and processed foods. Besides
manufacturing important
64 1.85 O O sectors are wholesale and retail trade, housing and
66 1.74 74 0.04 construction, and transport, storage and 6O 22.4 36,181 20.53 Communication. Punjab has more than 68, OOO
Division, Islamabad
trated in a small hey engaged in king activities is or as SImall hese resources ut not negligible,
future metal njab was to be Itition of the industry did not
lture makes the ket of Pakistan”. istan Punjab is argely based t industry. Its
industrial units. There are 39,033 small and Cottage industrial units. The number of textile units is 14,82O. The ginning industries account for 6,778 units. There are 7,355 units for processing of agricultural raw materials including food and feed industries.
Punjab contains several Imajor cities of the country: namely Lahore, Faisalabad, Rawalpindi, Multan, Sialkot and Gujranwala. Lahore and Gujranwala Divisions have the largest concentration of small light engineering units. There is cotton ginning in Multan. District of Faisalabad is famous for Textile products. District of Jhanghas the
dustrial Clusters in Pakistan
stry No. Of Units Employment
ical goods 2,500 6O,OOO ts goods l,OOO-1,500 3OO,OOO
her 17O 5,OOO
s 8s Jewellary 8,000 250,000
tric fan 4OO 5O,OOO
ery 3OO 25,000
ille 7,700 100,000
den furniture 3,000-4,000 25,000
Wision 2030: Direction of Industrial Development in November 2006, Japan International Co-operation Agency, hal Development Centre of Japan.
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Page 24
PAKISTAN is
A F G H AN STÅ N
w لانہ مہ شنتۂ
ងជphងដែរ
Figure 2
largest Wheat & Sugar cane production share with the maximum number of flour and Sugar producing industries. The district of Chiniot is famous for more specialised furniture industry. The district of Sialkot excels in sports goods, Surgical instruments and cutlery goods.
5. Sialko t: Centre of SMIE ·
Development in Pakistan
The population of District Sialkot is Inore than three million. Around 300,000 people are working directly or indirectly in industrial sector of Sialkot, Sialkot epitomizes the industrial bourgeoisie of Pakistan, a class that has created "pockets of efficiency” in the economy. The district of Sialkot is the third most economically active zone in the province of Punjab.
The city is dotted with thousands of Small and Medium Sized Enterprises engaged in production of the following main commodities: Sports Goods, Surgical Instruments, Leather Garments & Products, Sports wear, Military Uniform Badges & Accessories, Musical Instruments, Gloves, Cutlery 8s Kitchenware, Hosiery & Knitwear, Saddlery equipment, Martial Arts Equipment and Uniforms. Currently, the firms registered with the Sialkot Chamber of Commerce 8s Industry in key
Panjab Province of Pakistan
typical of indust parts of the wo much a city at chaotic. It ha exposure to the in with entreprenel numerous trade establishing dy linkages in the ir
Sialkot is earnin billion per ann Ireaches to 6% of Pakistan. Sialkoi in the rank of Pakistan. Almost of Sialkot are dic Pot. Trust and 4 other ports like Karachi, etc.
5. Nature Clusters
Sialkot has a entrepreneurial with widespre subcontracting a has resulted in l and a prolifera medium scale e. majority offirms. owned and mana customized pro« niche markets professional firr
-- 22
 
 
 
 
 
 

industries are approximately 7000 Sialkot Chamber of C o rn m e I c e and IndustrySCCI). Almost all the in dustries
*ბა m ention ed 参 contribute towards the f exports of Pakistan. The success story of Sialkot b a s e di in dustries
Ca be attributed to un Inatch e d skill of local workers and it h e i r Craftsmanship.
e.een
Sialkot's industries are in many ways ial clusters in other rld. Sialkot is very work, energetic and s a high degree of ternational economy urs participating in airs abroad, thereby namic and reliable ternational market.
g more than US$ 1. um and its share the total exports of t is placed at No. 2 exporting cities of 60% of total exports pne via Sialkot Dry D% is exported from Lahore, Islamabad,
of Sialkot SME
strong export and
culture combined ad availability of arrangements which ow barriers to entry ution of small and interprises. The vast in this city are family aged, which produce iucts and focus on s. There are few ls which are staffed
by craftsmen, who learnt their trade by serving as apprentices to other craftsmen. These entrepreneurs lack formal business training and marketing skills. These enterprises are financed mostly through family savings. They compete by remaining lean, with low and shared overheads. They thrive through a network of subcontracting relations which allows each company to specialize in only part of the overall value chain. These enterprises have limited distribution channels, both in the domestic and international markets, which are concentrated in few geographic markets. The “trickle down” effects inter Lns of information, skills, and wealth are many; in sharp
contrast to the relatively insular
circuits of power and wealth promoted by the vertically-integrated organizations which have developed elsewhere in the country.
The craftsmen entrepreneurs of Sialkot, with their middle-class backgrounds, emerged to fill the vacuum created by the departure of the primarily non-Muslim trading and industrial class to India at the time of partition in 1947. These craftsmen entrepreneurs are quite distinct from another small but powerful industrial elite class, which also emerged at this time. This latter class consisting mostly of traders turnedindustrialists, who received strong support from government policies, mostly invested in capital intensive and highly protected large-scale Imanufacturing industries.
In the successful export-oriented industries like textile and apparel, leather and leather product, sports goods and steel basic industries like surgical instruments and cutlery the productivity is low. This is because of the fact that all the se three industries are labour intensive and depend on traditional methods of production. Most of the processes are done manually because of the lack of machines and modern techniques. Moreover, these production techniques are flexible with quick. turnaround times. In Pakistan especially in the case of leather
-garments and manufactures, surgical
instruments and sports goods, firms operate without "real” production techniques and with little concern to improve productivity. They apply the rule of “one-piece-one man'-instead
Economic Review:Feb. Mar. 2013

Page 25
of assembly line method. If the unit needs to double its production it doubles the number of its employees without wanting to improve its productivity. This is particularly true in the case of Sialkot where the number of workers in the factories varies with the number of orders received. This system tends to be harmful over the long term, to the profitability of the firm, the quality of its products and to the social role the companies play in their respective regions. As a result Pakistani products are placed on the 'average' scale in the international market. It is mainly because of these reasons why Pakistan exhibits competitive advantage in fragmented industries or segments of industries.
Firms typically prefer to subcontract rather than to make the investments in equipment and manpower, which would be necessary for manufacturing in-house. Even among the workers working within the firm, many are piece-rate craftsmen rather than salaried employees. Firms subcontract anywhere from 20% to 80% of their manufacturing to vendors. The preference for subcontracting and piece-rate workers rather than on vertical integration and the development of a loyal workforce is a natural outcome of the fierce entrepreneurial spirit, which is characteristic of the citizens of this city. Widespread subcontracting, strong socio-economic networks of support, and the entrepreneurial spirit in the city result every year in the birth of hundreds of companies. This fierce individualism also leads to localized rivalries and price wars, and the lack of collective long terma vision among the various industry segments. A "radius of trust", which is limited to the extended family, preverits medium-sized companies from growing further. No firm in Sialkot has yet gone public and few hire professional managers, thus considerably diminishing the chances of growing into truly worldclass companies.
5.2 Analysis of Industrial
Performance in Sialkot
5.2.1 Sports Goods Industry
More than 200,000 people are directly employed in the sports goods sector exporting sports goods worth US$ 450 million annually from around 2,500 companies of various sizes. They
include LOUI Imanufacturers-cu Medium manufa exporters, 500 Sm - cum - exporters, exporters and 500
Pakistan exports sp 130 countries, up
in 1991, its expor million in the worl US$ 25 billiqn. Pa the world export sa was 0.1%. Pakista
leading only in few
footballs, gloves an
Sialkot continues 1 global market v mechanized indust on old and tradit techniques. The s] can increase its exports through quality of existing : as well introduction Greater emphasis, be laid on diversid goods, where chan the share of wo. comparatively high for Pakistani inv forward and open sportswear reta internationalmarke chains, rather t through OEM will the foreign exchang market but will also image of Pakistani s 1998).
5.2.2 Surgical Inst
The successin sur sector lies due t expertise and skill Sialkot in mechar. About 19 O O sima surgical units, w ranging from 10-5 producing Surgi through the wor 100,000 (SCCI), manufactures ab instruments ann 2007). The surgi sector, as a sub-S engineering sector, 70% to the exports surgical instrum labour intensive. manufacturing ur continue to operate a skilled and semi Due to this, desire addition has not
Economic Review:Feb/Mar: 2013

d 2O large n-exporters, 500 :tTrers - curra • — all manufacturers 1OOO Commercial vendors.
orts goods to about rom 50 countries ts were USS 3O7 market of about kistan's share of le of sports goods n is, however, is sports items like d hockey sticks.
O compete in the without a fully ry, relying mostly onal production ports good sector share in world improvement in tange of products of new products. however, should ication of sports ces of increase in rid exports are der. There is a Ineed
restors to come sports goods and lil outlets in ets. Branded retai han marketing not merely boost ge in international develop the brand ports goods (Ghani
runnents Industry
gical instruments o the technical s of the people of lical engineering. all and medium ith labour force O0 employees, are cal instruments kforce of about
The industry out 100 million ually (Saleem K cal instruments ector of the light contributes about of this sector. The ents industry is Majority of the hits in the sector : manually through -skilled workforce. d growth in value t been achieved.
(Expert advisory cell: Surgical Instruments Sector Profile. September 2000)
Also, as a result of wide spread vendorization in the industry, most of the surgical instruments can be manufactured by outsourcing. There are about 800-1,000 traders in Sialkot, some of them involved in trading of Inultiple products such as, sports goods, leather products, etc. (I&A research publications report # 038 surgical industry).
Despite its successes, the surgical goods industry remained vulnerable to local rivalries, price wars, lack of professional workforce, short term orientation of businessmen and compromise on quality standards. The decline in the exports can be attributed to mainly internal price wars amongst the manufacturers/ exporters selling products in the US Imarket. The other factors are the sanctions imposed especially by the USA in the areas of child labour, noncompliance with the FDA standards, requirements of Good Manufacturing Practices (GMP) and ISO-9000 quality standards. To cope with the challenges in the area of quality standard, the sector is gradually attaining ISO-900 certification. (Expert advisory cell: Surgical Instruments Sector Profile, September 2000.)
Effective quality management practices are required to boost the exports of Pakistan's surgical instruments and to raise the share of this over a century old industry from the current less than 1 % of world exports (www.exportadvisory cell.org, 2005). The average unit export price of Pakistan surgical instruments is US$1.24 compared to German instrument at US$ 18 per unit (www.exportadvisory cell.org, 2005). Despite the low unit price of Pakistan's surgical instruments, the penetration in the world markets is as low as less than 1% of the world exports. Pakistan's surgical instruments industry therefore needs to build competitive edge to revive its lost historical glory and to be able to penetrate the existing export markets deeper as well as develop new ones.
5.2.3 Leather and Leather Manufacturing Industries
Leather and leather products carry a significant importance in the
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Page 26
Pakistani economy. The sector contributes approximately 5 % to the manufacturing GDP and 7% to the total exports in the country, it employs 250, 000 people and has a share of less than 1% in the total national employment. With almost a quarter of the GDP still contributed by agriculture, Pakistan's natural advantage in livestockpopulation can be exploited to enhance output in the leather sector. There are over 723 tanneries, 461 leather garments manufacturing units, 348 Gloves manufacturing units and over 524 Footwear manufacturing units in the country. (Expert advisory cell: Leather Sector Profile. September 2000)
The leather and leather products industry is concentrated in Karachi, Kasur, Gujraniwala, Sialkot, Faisalabad, Multan and Peshawar with the majority located at Karachi, Kasur and Sialkot. (I 8s. A research report # 061 April 01-15, 2007) As per the survey conducted by LIDO in 1997 there were a total of 355 units in the country out of which 186 are in Sialkot. In Sialkot approximately 12,000 people are directly employed by the sector. The leather garments
entrepreneurs of Sialkot enjoy a
distinctive edge over their counterparts in Karachi mainly due to expertise and skills they
assimilated from the export culture of the city. This sector is exporting goods worth US $ 217 million annually from Sialkot.
Although Pakistan is a leading producer and exporter of leather and leather products of various types and has progressed during the last 20 years, it still is an unorganized industry and lacks skilled and efficient labour, high losses of hides and skins value and under-developed accessories industry. Due to nonavailability of export quality leather for high value-added leather garments and leather products, leather garments in Pakistan are made from low and medium grade leather. These goods face a stiff competition from Chinese and Indian products. Both Pakistan and India are facing tough competition from China which has captured about 90% of the lower end of the market of leather garments. The survival of Pakistani leather goods and leather products industries lies in improving quality of its products and moving towards the high-end market.
24 -سن
6. Crucial Issu Comparative Developed Economies
In Pakistan SME serious attentior a resultitis und serious effort generation and
The access to the has been rega. important bottler However, we : attention to the development of First, is the dev Second, is the in resource develop establishment between SME an the level of divisi discuss these as the empirical experience of de such as that of J
6. R8s; D to S
The obvious developing count have to impol technology from c either by technolo licensing or thr Direct Invest experience sugges technology has to adapted to suit t In the contex development c Countries, succes depends on two and improve the of human resou effort to increase R 8s D capacity.
6.2 Human Res
As we have indic receiving coun enhance absorpti the transferred ad would cease to be an enclave, not processing zon manufacturing ir. education and v have to be strer. more importantil science educati level of school : strengthened deli traditional black useful personini

es for Scrutiny: A Perspective of s Developing
shave not been paid for a long time. As erstandable that no was made in data academic analysis. institutional finance ded as the Inost eckfor SME growth. should pay more 2 aspects for further SME in Pakistan. elopment of R & D. nportance of human ment. Third, is the Df useful linkages d LSE for improving on of labour. We will pects by referring to evidence from veloped economies, apan.
ME Development
disadvantage of ries is that that they it the necessary leveloped countries, gy transfer through ough FDI (Foreign ment). However, sts that the imported be internalized and he local conditions. t of sustainable f the receiving sful internalization things; to develop absorptive capacity rces, and to make their own domestic
ource Development
ated earlier, unless tries are able to ve capacity athlone, vanced technologies the technologies in ably in the export :s. In the case of ldustries, technical 'ocational training gthened. However, r mathematics and on from the lower system have to be berately. The son of mith can only be a on 8s steel industry
only after systematic and scientific education.
From the experience of developed countries we can Suggest two things. First, industrial developmentirequires continuous input of advanced technology, which is the outcome of the persistent efforts of R&D by both public and private sector investment. Secondly, since developing countries are handicapped with R8sD, the most efficient way to accelerate technology transfer from developed countries requires serious and well thought out human resource programs. Success in this process would enable developing countries to generate appropriate technology for sustainable development.
6.3 SME-LSE Linkage
In the Japanese manufacturing industrial structure, the subcontracting arrangement between SME and LSE is regarded as normal, while it is not so in the case of Pakistan. Every firm, however small it may be, is conceived as an independent entity in the market place to compete with larger firms, and always tries to grow to LSE. However, as discussed, SMEs are . handicapped compared with LSE in certain crucial areas in doing business.
Because of the smallness in size, SMEs face difficulty in access to institutional credit and capital. SMEs are handicapped in the access to professionally skilled manpower and are less capable of acquiring advanced technologies, thereby less capable of innovating. SME in Pakistan is further handicapped by the simplified industrial structure. In other words, the opportunity to capture forward as well as backward linkage effects is limited.
If the ongoing globalization is
accelerated further, the SMEs depending on the local market would face serious challenges by the influx of less expensive goods with high quality from develdped countries and neighbouring countries, such as China and India. Implications of this challenge for employment, poverty and regional development will be
eOOlS.
One of the means to overcome this situation is to promote SME-LSE linkage in the form of sub-contracting
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Page 27
Company (Assembler)
t
Sub-contractors (Secondary Subcontractors)
Figure 3 SMI-LSI Sub-Contracting Model
Source: Masahiro Shimoya “Japanese Enterprise
Group - Affiliated Companies” Youhikahu,
1993
system. Admitting that the subcontracting arrangement is not the best option available, since it is not an equal partnership between the two in real terms, given so many constraints SME in developing countries face, this is the second or third best option.
In the case of sub-contracting system in Japan, emphasize three points. First, the subcontracting system today is not the one prevalent during the pre-war period, which was exploitative in nature, but the one observed among exporting firms in post-war era (i.e. after 1945). Here the relationship between the two is not completely horizontal as the quality of goods to be exported by LSI is influenced by the quality of components produced by SMI. Second, although SMI and LSI are not e qual partners in subcontracting arrangement, it has a variety of advantages for both parties. SMI seeks assistance from LSI in the fields of finance, procurement of inputs, advanced technology, staff training, managerial skill and assured market. Third, LSI can control inventory, procurement of specialized components, smaller overhead capital and business cycle adjustment.
However, this SMI-LSI relationship should be regarded as a transitional mode of arrangement in which it gives an opportunity for SMIs to become independent and innovative through the learning process with LSI.
it is noteworthy to .
sufficiently innovat words, the effort to foreign technology increasing R&D ex sales value in the . not been realized.
remained as inte contractors withou generate their own u
The relationship be firms and foreign fi to SOUne eXtent ar. Japanese S' arrangement betwe The basic difference i relationship betwee: case of Japan cann.c the former case. In case of Sialkot may FDI arrangements. I firms in Sialkot do incentive to deve technology: they Ina well with same arri are not yet growin entrepreneurs; thi sufficient numbe engineers and skille not much effort to S for future developin R85D.
The Sialkot's expe. reinforce our propos being supported
technical 8, vocal internalization of fo is not possible. Fu clear that technology
Economic Review:Feb/Mar. 2013
 
 
 
 
 
 
 
 
 

7. Lessons and Challenges of Globalization
Considering the clusters Of P a k is t an , Sialkot is the only evidence to call industrial cluster. The private firms in Sialkot have Inade isolated efforts to grow as a centre of е x p o r t . However, it. cannot be called in d us trial cluster in the
real terms, because the firms in the
cluster are not ive yet. In other ) internalize the
in the form of xpenditure over firm so far have Thus they have rnational subut being able to nique technology.
tween Pakistan's (ms in Sialkot is halogous to the ub-contracting en SMI and LSI. S that the mutual in the two in the ot be observed in this context, the be similar to the in either case the not have strong 21 op their own y earn sufficiently angements; they g as innovative ey do not have ær of graduate d manpower; and pend their profit ent in the form of
tience seems to ition that without from R&D and zional training, reign technology rthermore, it is transfer from LSI
to SMI is not possible, if LSI is not guided by the innovative spirit.
SMEs in general are handicapped in many aspects compared with its counterpart, large and medium enterprises (LME) (Gooneratne and Hirashima, 2006). However, the crucialissues faced by most SMEs face are: first, the access to land, water and credit, second, access to technology, including management and marketing and, third, qualified manpower. However, the area of technology and human resource development needs to be given serious attention in the long-run perspective.
Although, Pakistan seems to maintain that SME and LSE should be treated the same in the market place partly, due to the legacy of western business culture, i.e., the support to SME being regarded as distorting the market. Support of the government, however, should be justified on the ground that SMEs are small and poor.
By the same token, the advantages of sub-contracting arrangements with LSEs are not readily accepted. However, most of the SMEs will be wiped out if we allow globalization with liberalization to invade Pakistan, unless we promote SMELSE linkage.
Finally, in discussing SME issues, one tends to focus on financial aspect and government R&D support. Here again, we would like to set forth a strong argument that R8s) and human
resource development are the most
crucial factors to be strengthened vigorously. Otherwise, internalization of imported foreign technology is not possible and there is no chance for SME to establish as equal partner in the market place by specializing the areas where LSE does not have advantage.
The following are some of the suggestions for further inquiry and action:
First, the need for systematic data and statistics enabling us to discuss the issues in a more comprehensive manner; second, among short-term measures for SME development, innovative approach towards effective credit supply is crucial. Investment environment, including the regulatory framework and law 8s order situation, must be drastically improved.
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Third, longer term development requires human resource development with special emphasis on technical education and vocational training, R&D development, and promotion of linkage effects between SME and LSE, fourth, the role to be played by the public sector should not be neglected. The experience of Sialkot demonstrates that it has progressed without enough public sector support. The development process can be accelerated with the appropriate role of public sector as a facilitator and finally, recognize that LSE holds a key position in promoting industrial linkage with SME during its formative stage. In this context, the role of the public sector to promote SME-LSE linkage is significant.
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Ghani, Jawaid A 1998. "Sialkot S. Er in Pakistart: 50. Independence, Berkeley Commu UK, pp. 128-133.
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Developing Countries”, in Neu Regional DevelopmentParadigms, Vol.2, Neu Regions- Concepts, Issues and Practices (Eds. Edington David Wet al), Westport, Connecticut.
Gooneratne, W. “Current Concerns: Regional Development", in A Quarter Century of Mahaueli: Retrospect and Prospect, (edited by A. D. V. de S. Indraratna), National Academy of Sciences of Sri Lanka, Colombo.
Gooneratne, W. (2001), "Rethinking Sri Lanka's Regional Development: Concepts, Policies and Institutions", in M.M. Karunanayake (Ed), Povertu, Spatial Imbalances and Regional Planning in Sri Lanka: Policies and Issues, Sri Jayawardenepura University, Nugegoda, Sri Lanka.
Gooneratne, W. (2005), “A System of Development Regions for Sri Lanka: Meeting the National and Global Challenge", in Regional Development in Sri Lanka: Resetting the Agenda (edited by M.M. Kaunanayake and Anders Narman), University of Sri Jayawardenepura, Sri.Lanka.
W. Gooneratne and S. Hirashima eds. 2007) Small and Medium Enterprise SME) Development in SAARC
Countries: Chall) Reforms, Colomb
Hewavitharana B Consequences to Package, Sinhala Colonbo.
Institute of Policy S
Sri Lanka: State of Keeping i Sri Lan] Expressway, Colo:
Maddurna Banda Regional Bounda Land and Water
resented at the ational Provin Organization Associations an Institute of Sri I Colombo.
National Phy; Department, (20l. of the Natiohal Policy and Plan: 2030, Project Pro
National Phy; Department-NPPE Physical Plannin 2006-2030 (final
湖 Planning
2007), Nepal Reg trategy, Kāthma
QECD (2009 ), Economic Recove)
Sustainable Grow
- 26

bdul. Ghani, J. A. trepreneurial Spirit, th. Anniversary of R. Minhas (Ed.), nications, London,
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Survey 2010-11. l, Federal Bureau of
1, October), Leather acts Industries. EIP ustrial Research t No. 831.
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y, I8s.A Research dustrial Advisory O61. (2007, April)
Leather Tanning & Leather Goods Industry in Pakistan-I, EIPIR Service: Industrial Research Service, IRReport No. 827 (2001, July)
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Footnote
OEM stands for original equipment manufacturerers.
lenges and Policy O.
(1997), Economic
f the Devolution Weera Vidahana,
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sical Planning 独 Implementatioñ Physical Planning
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Regional Development Dialogue 2008), Regional Development trategies for Economic Development, Vol 29 (1) Spring.
Senaratne Ranjith, (2013) Letus make our universities a strategic partner and a catalyst of regional and national development . Address at the Convocation of the University of Sri Jayewardenepura, February 5-2012, The Island, 2 May 2013.
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Economic Review Reb. (Mar. 2013

Page 29
The Role of Dynam Centers in Regional )
Introduction
oday urbanization has become one of the Inost powerful, irreversible forces and an essential part of most nations’ development. There are evidences especially from developed countries that they have achieved stronger and more stable economies with the advantages of urbanization. Cities often hold a great potential for growth creating jobs and innovation and play an important role in their local economies. Many countries have understood the role and potential advantage of cities as centres of In arket, service, commercial, transport, distribution, communication, manufacturing, innovation diffusion, social development and integrating rural economies. Therefore, development of cities as a regional development strategy has been used largely to promote the development of lagging regions by concentrating investment so as to reap agglomeration economies and diffuse development to surrounding areas.
Economic growth and urbanization are often positively linked. Cities are the driving forces of economic growth of a region. They are more productive than rural areas due to the economies of agglomeration effect. Cities are equipped with infrastructure, services, communications and skilled labour. They can achieve economies of scale, agglomeration and urbanization. Agglomeration economies have positive benefits of economic activities when firms are located in close proximity with those engaged in similar businesses. Cities generate positive externalities of agglomeration, scale, diversity and specialization. Sustained economic growth cannot be achieved without the growth of cities. Dynamic cities play a vital role in generating economic growth and development in a region.
Economic Role of Urban Centers
Cities serve as market centers in providing various needs of people in
the rural hinterlar. offer a wide varie goods, and commer services throug enterprises and thro sector activities. The of distribution, tr. brokerage, credit services through
scheduled and in Imarkets or through
and bazaars. They pl locations for decer services through
National Ministries regional or provinc offices, thereby creat for both urban and I public services andf as local or regional provision of variety facilities such as he welfare, recreation (
Cities help rural pro ways. They act as m rural produce. Many processing and agr centres for their re hinterlands. They c that are condu commercialization o to increasing agricul and income in th hinterlands. They pI that are conducive smal and medium scɛ and cottage industri local markets and demand for low-cos goods.
Cities are magnet employment and
income opportunitie through remittance the same time, they
of transport
commercializatior residents and those and towns in thei larger cities and oth country. Regional c the rural migral otherwise more dire city or national cap
- - - Economic Review:Feb./Mar 2013

ic Emerging Urban Development
d. They usually y of consumer iad and personal h small-scale ugh the informal y are the centers ansfer, storage,
and financial their regularly stitutionalized periodic markets ovide convenient
tralizing public *
field offices of
or agencies, or :ial government ng greater access ural residents to acilities. They act
centers for the
of services and alth, education, etc.
bducers in Imany arket centers for cities act as agroicultural supply :gions and their reate conditions cive to the fagriculture and tural productivity heir immediate rovide conditions to the growth of ale manufacturing es that can serve
satisfy internal st manufactured
s for non-farm supplementary is for Iural people s of Imigrants. At serve as centres ation and l, linking their of rural villages r hinterlands to aer regions in the ities can absorb its that might ctly to the largest ital.
R. J. M. Uduporuwa
Senior Lecturer Department of Social Sciences University of Sabaragannuuva
Cities provide more opportunities for learning and sharing. They are the centers of knowledge, innovation and specialization of production and services. High concentration of people in cities generate more opportunities for interaction and communication, promotes creative thinking, creates knowledge spillovers and develops new ideas and technologies.
They accommo date social heterogeneity and encourage the integration of people from diverse social, ethnic, and Ireligious groups, provide organizations that help socialize and assimilate rural people into city life, and "infuse new attitudes, behaviour and lifestyles that are more conducive to urban living, and give new opportunities for social and economic mobility.
The other side of the significance of cities is that cities are proven to be better poverty fighters than their rural counterparts. Today the importance of cities in poverty reduction has become increasingly prominent. For example, average incomes of urban residents are four times higher than those of rural ones in countries such as China and Thailand (United Nations Human Settlements Programme, (2011). China, with its
program of urbanization millions of
people have escaped from poverty in less than 25 years. With economic growth highly correlated with poverty reduction, the high growth of cities bodies well for poverty reduction.
In the above context, the central role of cities in regional development is more obvious. According to Rondinelli and Ruddle (1978) urban growth is
27 -

Page 30
essential to development and according to Freidman (1966), economic growth which is the fundamental factor of development of associety tends to occur more in urban regions. A well developed system of cities of a region creates economies of scale and benefits for surrounding areas. Opportunities that cities offer for investment lead to higher levels of growth and help achieve spatially balanced growth in a country. Today with the increasing globalisation process, regional cities have to play a crucial role in development. They should be more dynamic and productive in building competitive regions to meet the challenges of the global economy. Hence, the pursuit
of competitiveness in cities has
become a major local and national policy objective of many countries.
Urbanization in Sri Lanka: Issues of Data and Definition
It should be noted that accurate and up-to-date information in urban growth and its trends in Sri Lanka. are not available. First and foremost Sri Lanka does not have a clear definition or method in identifying urban areas. "Urban areas" in Sri Lanka are not based on any definite criterion and urban status is conferred on an area by the Minister in charge of Local Government purely for local administrative purposes. There are no definite criteria to guide the ministerial discretion and it seems to be based on "the nature of the development of the locality or its amenities and urban characters. Accordingly, decisions of upgrading of towns or downgrading of towns, is based only on political considerations and no attempt in made to consider morphological, demographic, sociological or economic factors which are prerequisites in the process of urbanization. Current definition of urban status in the country is based on the administrative status and there is no consistency of applying this definition due to the changes made in the administrative status from time to time by the government. The present official definition of urban centres in Sri Lanka considers only Municipal Councils and Urban Councils as urban. Even though, many settlements in the country have
- 28
attracted more p urban type chara shown by statist underestimate til
urbanization. To
a major issue Imeasuring in ur the country.
Available data ol
Lanka shows t rather low level urbanization fo] shown in Tab population in Sı increased from l up to 22.4 perc increased only decades. In 1 increase declined to downgrading C urban settlemen dropped to 14.6 p in 200l. This del downgrading of urban settleme amendment to 1987, Town incorporated government “Pradeshiya Sabh urban settlemer status and were Settlements afte: growth rate of ur does not show a fluctuating tren high increase on natural increase
Table 1 The Le
i Sri
Census Le yeaS | urba
1891 19 O1 191. 1921 1931. 1946 1953 963 197l 1981 2001
Source: Mendis, Departim Statistic

opulation as well as steristics they are not ics. This has lead to he country's level of day this has become in planning and ban development in
nurbanization in Sri he country has a
and slow tempo of a long period. As ble 1 the urban i Lanka has slowly 0.6 percent in 1891 ent in 1971. It has by tenfold in eight 981 this gradual to 21.5 percent due furban status of an t and further, it had ercent at the Census cline was due to the urban status of 89 Ints. After the 13th the constitution in
Councils were into rural local bodies terIned
nas”. Accordingly, 89 its lost their urban : classified as rural r 1987. The animai ban population also gradual increase but ds with considerably ly in some years. The of population was the
vel of Urbanization Lanka, 1891-2001
Average vel of annual nization growth rate (%) of urban
population (%)
O6 1.4 1.6 2.9 3. 3. 4.2 7 5.O 3.4 5.4 1.9 5.3 2.1 9. 62 24 4.
5 1.2 4.6 19
1982
ment of Census and s, 2005
chief factor for the urban population growth up to 1953 and the increase of migration however was particularly significant in the towns in the Western Province and colonization projects in the Dry Zone in 1963. In addition, the creation of 56 towns and the extension of town limits in some municipalities have also increased the urban population in 1963. Decline in average annual growth after 1963 was mainly due to the change of number of towns. These figures show that the share of the urban population in the total population in Sri Lanka has always remained below 25 percent from the period of 1891 to 2001. Current level of urbanization has not been reported since the census data in 201, 1 is still not available. However, in terms of emerging trends in the urban environment urban population of the country may have reached 23–40 percent by 2001 and according to the development trajectory that Sri Lanka is currently following it can be envisaged an increase of the current urban population to 50 percent by 2016 and to 70 percent by 2030 (Climate Change Secretariat, Ministry of Environment, Sri Lanka, 2010).
Spatial Distribution of Urban Centres
Considering the spatial distribution pattern of urban centres in the country, considerable significant differences exist in the number, size, growth rates, and the level of urbanization among provinces. Most urban centres are located in the Wet Zone which corresponds to the South -Western quadrant of the country comprising about 4 of the total urban population. A large concentration of
towns can be found in the Western
Province. According to the census in 2001 there are 17 officially identified towns in the Western Province and 7 larger cities having more than l00,000 population located in the Colombo district. Western Province with the domination of Colombo city has become the highly developed core region in the county and rest of the eight provinces act as the periphery with relatively low level of urban development (Table 02). During European rule especially in the British period Colombo city was
selected as the main centre for all
Economic Review:Feb./Mar. 2013

Page 31
socio-economic, administrative and
political activities. Other urban centers which are located within raw material supply routes were linked to the Colombo city. As a result today domination of Colombo city both demographically and functionally has become a most striking feature in the urban system in the country. It includes both the commercial capital of Colombo and the administrative capital of Sri Jayewardenepura with numerous suburbs and urbanized rural areas. It is the financial, commercial, industrial and administrative centre as well as the hub of the rail and transport system in the country. This concentration of all activities reinforced economies of scale, agglomeration, and migration and created multiplier effects, which generated competitive advantages over all other centres. Competitive advantage made it a magnet for all types of activities. Polarization of Colombo metropolitan region has
already become a major issue in the
context of development of the country creating a problem of regional imbalance in development.
Outside the Western Province rest of the Wet Zone consists of a number . rifadministrative district capitals and small and medium scale towns which have significant potentials for development. Though, urban centres lo cated adjoining provinces of Western Province were stagnating for a long time period today there is a potential for rapid growth with the influence of overspill of Colombo Metropolitan Region. Kaluthara, Galle, Ambalangoda and Matara in Southern Province and Kegalle and Rathnapurain Sabargamuwa Province are several such centers directly connected to CMR experiencing strong employment growth in manufacturing especially in agro processing activities and tourism. related activities. These towns being located in the most dynamic export segment in the country should be well linked by improving connectivity through building up of expressway networkin the interior of the country. Newly established southern expressway would allow cities in these provinces to be well connected.
Among other secondary cities in the country, a number of towns are
located in the Dry Zone. Urban
growth in the Nort is a production schemes and development in th After Independe intensification programs and Mah Program, Northattracted a large vo During 1971-19
recorded in migra
in the Ampara, A Polonnaruwa. DistI the total urban po) in the country be 1981 which had be Dry Zone (Deheragc Zone has a gre diversification and of the economy thr a number of s agriculture, fis industries and increase rural job
income levels and
growth and expan
In the North, Jaffna of the Northern Pr big role as a bloomir Jaffna has strong as a major trade, fishery, and touri l983, it had a vi medium-enterpri dynamic industria salt-processing pla
Table 2 The Le
1963-2OOL
Province
L
ur
2a (
Western 40 Central O Southern 14 Northern 23 Eastern 2C North Cential 9 North Western 5 Uva 6 Sabaraganuwa | 3 Sri Lanka. 19
* No data available
Source: Mendis, 1 ! Departmel
Economic Review:Feb/Mar. 2013

n Centa Province of colonization agricultural e Dry Zone areas. nce, due to the of colonization awali Development central Province lumes of migrants. 81, the highest ion had occurred nuradhapura and icts. 32 percent of pulation increased tween 1971 and an absorbed by the da et al, 1992). Dry at potential of commercialization ough expansion of ectors such as heries, cottage tourism. It will opportunities and will results urban sion.
a as the major city ovince can play a g commercial port. potential to revive
agro processing, st center. Before brant small-and se sector and a al base including ants, cement and
chemical factories, and weaving mills. With the end of the conflict, Jaffna started rebuilding its economy. At the same time, historically important sites of religious attract thousands of people to the peninsula. Trincomalee, a town of 52,000 inhabitants (2010) on the coastal belt, is the capital of the Easten Province. Fisheries and agriculture are the main growth drivers in the Eastern Province, and tourism is emerging as a high-growth sector. Agro processing activities have strong potential for development in Trincomalee due to their linkages with the region's vast agricultural production. Tourism also has strong potential to emerge as a growth sector for Trincomalee, as the city boast s miles of pristine white-sand beaches, one of largest and finest natural deepwater harbours in the world, and the largest Dutch fort in Sri Lanka. Now tourism is expected to revitalize by the government.
There are several urban centers in the central hill country which are directly linked to the plantation economy. In the nineteenth century after opening up of hill country areas for the plantation crops a number of factors contributed to urban growth in these areas. The immigration of British planters and South Indian plantation workers and the development of railway were initial
ve1 of Urbanization in Sri Lanka by Provinces,
963 97. 98. 2OO
evel || No. of Level of No. of Level of No. of Level of No. of of towns urbani- towns urbani- towns urbani- towns pani- zation zation zation tion (%) (%) (%) %)
|-5 38 | 47.9 38 4656 38 305 17 1.2 6 O6 5 ll.i. 15 9.8 9 .8 9 5.4 9 14.9 9 86 6 ..l O 42 O 28 O 安 - 6 16 24 16 22 16 2 6 4. 9.9 4. 7.3 4 5. .9 12 6.7 12 6.2 12 4.6 4. 8 8 6.9 8 6.2 8 4.5 3. . 12 7.1 7.6 2 4.2 3 35 22.4 134 2.5 134 4, 6 45
982
nt of Census and Statistics, 2005
29

Page 32
Table 3 Growth of Large Towns in Sri Lanka Επαι
Population|Population Population Des Town in 1981 in 2001 in 2009 avai (OOO) (OOO) (OOO) is a Colombo 585,776 | 642, 163 | 686,779 || oo Dehiwala- 174,385 209,787 224,661 C Mt. Lavinia urba Moratuwa 135,610 177, 190 189,750 dyn Kotte 101,563 115,826 124,039 loca Jaffna 118,215 - 76,080 || eco Kandy 101,281 110,049 123,952 al Galle 77,183 90,934 97, 101 Cou Negombo 61,376 121,933 153,670 е х Battaramulla 56,535 stag Kolonnawa - 55,341 grov Katunayake - 73,025 η οti Anuradhapura - 56,632 83,312 tren Kalmunai 94,457 108,696 eme Trincomalee 51,624 cou Batticaloa 83,470 || envi Rathnapura 49,477 || 3 sh Matara 75,930 cap Gampola 61,052 cate Source: Department of Census and Statistics, S126 2005 pop http://en.wikipedia.org/wiki/ to 4 Li f Citi in Sri Lan - larg 5O,O
stimuli to urban growth in these areas. The central hill country of Sri Lanka, a roughly triangular mountainous area located at the south-central part of the Island is the most important geographical subregion in the Island. In addition, Urban centers such as Nuwara-eliya, Badulla, Bandarawela, Haputale, Walimada are main urban centers with potential in tea plantation, vegetable growing areas, and eco tourism related activities. These urban centers are significant as main contributors in the export sector, tourism and serve as marketplace to its hinterland. However, excessive growth of urban centers is not suitable in this area due to its environmental sensitiveness and need to be carefully managed as environmentally friendly but dynamic centers focusing on its natural beauty (eco-tourism). Due to its topographical nature most towns of this area are under threat of natural disasters. Towns such as Gampola, Kadugannawa, Kothmale, Rathnapura, Haputhale have been suggested to relocated by the national physical planning policy and plan in Sri Lanka for 2 O 1 O - 2030 for environmental sustainability.
30
is much apprecia they can be development of th increasing deman goods and servi provision of Concentration of concentration of a and service activit Anuradhapura, Trincomalee, Ja Rathnapura locat are emerging as performing a h diversity.
These towns p population with a retail goods,
professional serv are basically adım with different dev in other fielc institutions in schools, hospita offices and cinem are the majority of system in Sri Land an agricultural cc over 75 percent ( and small town service centre:

erging Trends
pite the lack of lable information, it ble to witness the :rgence of an 'easing number of an centres playing a amic role of the al and regional nomy. Even though ny towns in the ntry were pe r i e n c in g nation in terms of vth in the past it is iceable that new ds after 2001 are :rging in the nty's urban ronment. As Table
hows nost district itals which are gorized as medium towns with the ulation from 10,000 9,000 have become e towns exceeding 100 population. This ble trends because stimuli in the eir regions with the d and supply of the ces and with the infrastructure. population leads ll other commercial ies. Towns such as Kalimunai, affina, Batticaloa, ed in the periphery dynamic centers igher functional
rovide the local a wide selection of
personal and ices. These towns ninistrative centers 'elopment potential ls. The public clude secondary ls, banks, state's as etc. Small towns towns in the urban ka. Sri Lanka being puntry still contain of rural population is as lower order
s cater to the
Economic Review: Feb. 1 Mar. 2013
requirements of the agricultural hinterland. These towns are very significant as centres that serve the hinterland and as market towns for the rural producers. A large number of small towns are widely distributed at route junctions as low-order-service centres catering to the basic needs of their residential population and those in their hinterlands. Recently these towns have attracted more goods and services such as cinemas, bus-stop facilities, clinics and low-order administrative activities enhancing their functional significance. In addition, these towns, have also played a very significant role in avoiding the large-scale rural migration to the large towns.
As pointed out recently by Wanasinghe and Karunan ayake (2003) the other new trend in the urban environment at present in Sri Lanka is emergence of small metropolitan regions in the periphery and the formation of agglomerations through the combination of previously separated towns. Sub-urbanization
around Kandy and Galle have already
started and transformed therland use pattern, functions of settlements and the employmeat structure. In addition, the other recent phenomenon is the amalgamation of expanding towns through ribbon development. Tangalle-Beliatta, Tissamaharama - We era wil a - Pannegamuwa and MiddeniyaKatuwana in Southern Province and Rathnapura-Kuruwita, KegalleMawanella are such agglomerations in the Sabaragamuwa Province and Ka du gan nawa - Pilimat hala -
Peradeniya-Kandy also ae connecting due to ribbon development.
One of the other new trends in the urban environment in the country is blooming of some small and medium towns with new growth potentials. Dambulla located in Central Province is one of newly emerging towns as dynamic centre with a great potential due to its location at a major junction, it is the centre of vegetable distribution in the country serve a vast agricultural hinterland. It has a great potential to be developed as a commercial hub and transit centre for agro-cargo and other products and as a tourism and leisure hub because of

Page 33
C Legend i. 畿 Vy CMetro city l A District capital Ο Small & Medium size towns C
e il
e t Kalpitiya р
g uttalam р. ------ 63 hilaw - IIO Madampié N ಙ್ಗpitiya Rattota Ire W Nataldy
cr:appဝှိ Ο[ူပျို့ဖြိုး al Dry Zone 盏 ga ဇွိုငုံ deniya ΙΥ1 Wet Zone Warakapola မီဇို့ Wya 'সুপ্ৰস্তু
Gamgaha N gagussellawa Am ye ိပွဲဲရွှဲနိူ ääčšiuoya Lunugala1 ga Colomoniowitigii?". .
ు. Dikoya ೩ಳ್ಗ ää°a Monaragala bé Bandarawela Kalutar A. ိုါးဗူးငှါ Haputale C Beruwal ృష్టిస్టki ge Authgama Parga Tőwn. Rakwan b vää: Tissamabaarava
ango llwa இ. de సా. Tangal つ th Ma W - r^ -. f. f.- ******
Ire Figure 1 Urban Centres in Sri Lanka C
cit Source: The World Bank Colombo Office, 2012 O6 Ar. the major tourist attraction of the cave Danbull a, Polon.
temples at Dambulla. Hambantotain the Souther Ia Province is now receiving much attention due to the selection as a new growth pole in promoting the development in the Southern Province by the government. With these development efforts it will become a catalyst for major economic, transportation, industrial, and commercial centre not only in the southern part of the country but also in the South-Eastern part of the country. Trincomalee is another town thriving presently due to the favourable conditions after the end of the civil war in the Eastern Province. The civil conflict over the past three decades has denied the development in the Northern and Eastern Provinces and adjoining districts. Eastern Province is one of lowest developed provinces in the country due to the war in spite of having the city of Trincomalee with divers potentials. It can play a major role in regional development as a socialeconomic hub, industrial and tourism zone of the eastern part of the country. It offers vast potential for port related activities.
Trincomalee metro
metro region with Batticaloa metro citie metro region with Hau city and Jaffna met Jaffna metro city will régions covering ent recent future (Map Ol
In addition, towns : Kandy, Horana, Puttalam, Kegalle, Vav Mahiyangana, Awi Monaragala will be regional growth cente them to be competi their regions. These being main urban c regions performing a ( but without a proper Towns such as Hikka Navalapitiya, Katara Maharagana, Panlad Beliatta and Eheliya in middle and lower system of the county v as secondarytown ce Imanufacturing, ag Cultural values are g these towns.
Economic Review:Feb./Mar. 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 

overnment volvement is all in promoting ban growth of a o u in t y Insidering the lerging trends the urban vironment in e country esently the vernment is anning to tablish, five ajor netro gions with 9 tro cities by the aI 2030 so as to in economic
nefits and to
I e a t e ographically а 1 a n с е d velopment in e. country. 2 stern metro gion with lombo Imetro y Central stro region with Lluradhapura, naruwa and cities, Eastern Ampara and :s, Hambantota nbantota metro ro regioIn with be major metro ire country in
).
Such as Galle,
Kurunegala, uniya, Badulla, ssa wella and established as 's so as to allow ive centers in owns are long Intres in their ivers functions lan for growth. luwa, Tangalle, gama, Potuvil, Jura, Garmpola, oda which are evels of urban 'll be developed ters. Tourism, iculture and owth drivers of
Way Forward
With all these capacities, growing importance and weakness in the urban system of the country it is important to discuss what actions can be taken to create the environment that make these towns and cities located in the periphery more dynamic and productive centers and significant contributors to regional development. In this regards a comprehensive and a coordinated strategy is needed to make them better prepared to support development in these regions. None of potential advantages in cities can blos som automatically. They depend on concerted effort of the key stakeholders: State, local government, private sector and civil society groups.
Government intervention is one of the chief factors in making a supportive environment to promote urban growth in the country. Government has a big role to play in providing the enabling environment for cities to hit their full potential, while reinforcing the economic linkages and complementarities among the entire spectrum of urban areas. Since lagging periphery having divers potential for urban growth rebuilding of physical as well as human environment in especially conflictaffected areas for the b etter functioning of the civil society comes as major responsibility of the government. At the same time, recovery of key economic sectors such 3S agricultuře, fisheries, manufacturing industry and tourism which were badly affected during the civil war is essential to improve the urban environment in these areas.
Extensive infrastructure development and expansion which help strength connectivity between urban and rural areas and among towns and cities is the other key factor that is prerequisite in urban growth. Most of the peripheral towns and cities in the country have no sufficient physical as well as social infrastructure facilities. Infrastructure investment in the development Of roads, communications, information technology, schools, and hospitals is important to both economic

Page 34
development and quality of life within cities. Improvement in transport network is important in linking small, medium and large cities to function as an efficient city network. This will lead to improve business environment especially private sector.
and make them attractive places for
investment, employment, living and leisure activities. Majority of urban centers in the country are service oriented centers rather than commercial and industrial centers. Therefore, investment in infrastructure development will attract more private sector involvement in commercial and Inanufacturing sector.
Improving local government capacity is another important factor in regional development. In this respect one critical issue that should be noted and addressed in the context of urban environment in the country is introducing a proper methodology to identify “urban centers". As mentioned at the beginning, absence of proper method is a problem for local authorities in their decision making. On one hands it affects the income
of local authorities. New dwellers.
who are added due to the outgrowth of the towns do not pay taxes but enjoy all facilities provided for the city dwellers. Non-payment of taxes reduces the income of local authorities and cost of providing urban services increases. This affects the poor maintenance and inefficiencies of the urban system. Local authorities such as Pradeshiya Sabhas have yely little capacity in financial, human and institutional resources. They are restricted by some of the by-laws in implementing fiscal and other policies supportive of economic growth and development. There are many urban centers including some district capitals such as Monaragala, Polonnaruwa and fast growing towns such as Mawanella and many satellite towns in Western province with appreciable levels of population and urban functions but
without urban status. The absence of.
a proper definition and not expanding physical boundaries of towns also creates some problems for infrastructure facilities in towns. Physical expansion beyond the city
boundary make urban infrastruc addition of n facilities and se small populati proper functis services and fa infrastructure expanded areas More investin supplying the fa for the areas tha an ad hoc manu proper waste d water managem impossible in sp situation preven vital role in the ( region. It does
urban environm for investinent in
Absence of p1 demarcate the imposes some co: planning proces the instrument achieve the order urban area. In t definition and di centersitis diffic powers of planni control by vari order to guide achieving the b economic uti Excessive use environmentally residential and c emerging of patterns, pre: unauthorized a environmental presence of p activities are so harmful for the cities and town
In Summing up of cities in regi is understanda town and cities growth and de“ much potentia weakness in t regional develc Therefore, it is a coordinated a more dynam components development ir
- 32

more demand for are facilities due to w users. Use of ices designed for a In constrains the ning of existing lities. Provision of facilities for the also is a problem. nt is needed in ilities and services : have developed in er. Organizing of a sposal and waste ent systern also is rawling areas. This them from playing evelopment in their not help create an nt that is attractive
Sri Lanka.
oper methods to urban areas also strains in the urban s. Urban Planning is , which is used to ly development of an he absence of clear 2marcation of urban ultto implementthe ng and development ous institutions in the development better physical and ization of land. of lands including sensitive areas for ommercial purposes, sporadic land use ence of a lot of :tivities, increase in pollution due to the olluting industrial ne of the issues that evelopment of better
he discussion on role onal development, it ble that how much re vitalin generating slopment. There are is as well as sone e urban system in ment in Sri Lanka. eeded to implement proach to make them : and supportive h the growth and regions by lessening
the weaknesses and promoting their strengths.
References
Deheragoda, C.K.M., Wanasinghe, Y.A.D.S and Karunanayake, M.M. 1992. Urban Growth in Sri Lanka: Implications for Regional Development. UNCRD: Nagoya.
Department of Census and Statistics. 2005. Patterns and Trends of Urbanization of Sri Lanka. Colombo.
Friedmann, J. l966. Regional Development Policy: A Case Study on Venezuela. M.I.T. Press: London.
Mendis, M. W.J.G. 1982. Urbanization and Urban Development in Sri Lanka. Office of Housing and Urban Programs: Sri Lanka.
National Physical Planning Department. April, 2O. O. Implementation of the National Physical Planning Policy and Plan: Sri Lanka 2010-2030, Project Proposals.
Rondinelli, Dennis, A and Ruddle Kenneth. 1978. Urbanization and Rural Development: A Spatial Policy for Equitable Growth. Praeger Publisher Special Studies: New York. The World Bank Colombo Office. 2012. Turning Sri Lanka's Urban Vision into policy and action.
Climatic Change Secretariat, Ministry of Environment, Sri Lanka. 2010. Sector Vulnerability Profile: Urban Development, Human Settlements and Economic infrastructure.
United Nations Human Settlements Programme. 2011. The Economic Role of Cities. Nairobi.
Warn a singhe, Y.A.D) - S and Karunanayake, M.M. 2003. Urban Development and Regional Planning in Sri Lanka in M. M. Karunanayake (ed.) Rural-Urban Interface in Sri Lanka: Studies in Regional Development. Department of Geography, University of Sri Jayewardene pura-Sida/SAREC Research Cooperation Project.
1 ikipedi Wiki / ro - accessed on 20th April 2013.
Economic Review:Feb./Mar 2013

Page 35
Industrial
Cluste
Development: Lesso
India
his paper analyze the role of industrial clusters in regional development of Karnataka State in India. The Analysis are focused on identifying the nature and composition, economic size and performance of clusters in the State as compared to national level. Results indicate that the nature of industrial clusters has high degree of homogeneity. Location of multiple clusters in a single place has the advantage of cost-effective provisioning and co-operative sharing of common facilities by enterprises. Clusters in the State are more capital efficient but less labour productive. These results have important lessons for designing of a holistic policy for promotion of clusters and improvements in databases.
1. Introduction
This paper analyze the role of industrial clusters in regional development of Karnataka State in India. The aspects of promotion and regulation of an industry is in the Concurrent List of the Indian Constitution, and the development of industrial clusters is jointly undertaken by the Central and State governments. Thus, economic analysis of the role of industrial clusters in regional development may need to be focused on a comparative framework between the State and national levels.
Industrial clusters are a large spatial concentration of industrial units which are horizontally and/or vertically linked together by inputs and outputs relationships between units. Industrial clusters are generally recognized with productspecificity (e.g. readymade garments, footwear) and location-specificity. This distinguishes the cluster development from other spatial approaches to industrial development in India.
Importance and advantages of clusters for industrial development is specially recognized for small and medium enterprises (SMEs) by policymakers and professional researchers in
India.” For instan the Expert Comn Enterprises (Gove: (1997) had identif advantages: "The p of businesses lower infrastructure, lead skills and is a source economies. From point of view, the co and promotion ar. news spreads fast context.” (p.137). Go (2003) emphasized strong linkages betw give rise to externa lead to emergence technical, admir financial services an firm and inter-ins between public cooperation and sp local production, i collective learning. I showed that, in ter capacity of pro employment ger possibilities for exp and technology upgra eliminate the dis smallness of dispe units, such as, enterprises. Mo distributive objective of clusters are emph For instance, Hashim for cluster developme of inclusive gro employment genera studies from footv Kolkata and Agra cluster in Tirupur Capital Region.
Industrial clusters ae the Karnataka State of India-assisted prog Micro and Small Ent Development Progra objectives of the Pri enhance produ competitiveness thro of economies of sc capacity building of S in the country Gove (2006). Karnataka Technological Upgrac Department of I1 Commerce of the
Economic Review: Feb./Mar. 2013

S
in
Regional
his from Karnataka,
e, the Report of ittee on Small nment of India 2d the following oximity of a web the unit cost of to accretion of of informational an institutional its of monitoring lowered since r in a regional rernment of India hat existence of een units may (a) economies, (b) of specialized istrative and i (c) create intertitutional (e.g. and private) ecialization for nnovation and Narayana (2004) 'ms of size and duction and eration and orts promotion adation, clusters advantages of rsed industrial
small scale re recently, s for promotion asized in India. 2t al (2010) argue nt for promotion with through tion with case rear clusters in and a garment and National
re developed in s a Government amme under its crprises Cluster mme. The key gramme are to tivity and ugh exploitation ale as well as mall enterprises Tnment of India tate Council for ation, under the dustries and rovernment of
Prof. M. R. Narayana
Professor of Economics Centre for Economic Studies ανια Policy Institute for Social and Eсопотic Change Bangalore, India
Karnataka, is the implementing and monitoring agency of the programme within the State. To our knowledge, an economic analyses of the role of industrial clusters in regional development of Karnataka are not available. This paper is an attempt to fill in this policy research gap.
The main objective of this paper is to explain the role of industrial clusters in regional economic development of Karnataka State in Southern India. This explanation is based on available current databases. The methodology is descriptive and positive. Overall, the paper has important lessons to be shared with other States in India as well as sub-national industrial cluster analyses for regional development in developing countries of Asia.
The rest of the paper is organized as follows: Section 2 describes the current databases on industrial clusters in India including Karnataka State. Section 3 describes the nature and composition of industrial clusters in Karnataka. Section 4 distinguishes the economic performance of clusters between Karnataka and all India. Section 5 summarizes the major determinants of size-class of production of clusters in Karnataka. Section 6 includes major conclusions and lessons.
2. Current Databases
Government of India's (2003) database on 358 industrial clusters (including select artisan clusters) in 16 States provides with information on the clusters identified by the UNIDO Focal Point in India. The information distinguishes clusters by (a) natural or policy induced, (b) modern SSI/
33 -

Page 36
traditional consumer goods/ traditional arts and craft, (c) large unit centered/vertical/horizontal/both, (d) high/medium/low heterogeneity, (e) high/medium/low technology upgradation, (g) high /medium/low export potential, (h) market based, resource based or infrastructure based; and (i) presence of competition with large units and (j) production size categories.
The Final Report of the IVth All India Census of Micro, Small and Medium
Enterprises (MSMEs) 2006-07, is the
latest database on industrial clusters on MSMEs (Government of India (2011)).7 At present, its availability is limited for the registered MSMEs. A district having 100 or more registered MSMEs units, and engaged
in manufacturing the same product
as per Annual Survey of Industry Commodity Classification 2000 (at 5 digit), is considered as a cluster for that product in that district. The cluster data is provided for 25 States by 6 indicators: (a) number of clusters, (b) number of working enterprises, (c) employment (number of employed persons), (d) original value of plant and machinery, (e) market value of fixed assets and (f) gross value of output.
Karnataka State Council for Technology Upgradation (KCTU) is the official agency for implementation of the industrial cluster programmes in the State. The cluster database with the KCTU provides cumulative progress of induced clusters in the State as on 31 March 2013. The database includes the list of 108 cluster development projects by their location, main activity and main product/s, and progress of projects under different implementation status. Surprisingly, only three projects are reported in the final stage of implementation and no performance data (e.g. production, exports, capital investment and employment) on these clusters are available.
The available databases noted above are not comparable due to differences in (a) definitions for clusters, (b) composition of units and (c) nature and number of indicators for spatial distribution and for economic performance of clusters. Lack of comparability signifies that each database should be used separately to capture its underlying unique information.
The Directorate Statistics of t. Karnataka estim. of Karnataka, i value added in registered and l. These estimates between the c. clustered unit growth effects o cannot be obtain estimates of Industries in Further, availab. level databases provide the estiu added by cluste available datab personal in coI working populat clusters. Thes preclude the esti distributive effe clusters. Thus, w on nature, performance ofi
the State and it
national level.
3. Nature and Clusters
Table 1 gives an c clusters in Karn CDP database. clusters in Karn 7 per cent of toi All clusters are si with highest s consumer goo products manufa SSIs constitute number of c characterized b and medium ar. Potential for tec (or exports) oft classified under high). Resourc market based c Surprisingly, no are infrastructu are being deve years. Cluste production s variations, clusters belo: production betw INR1 billion. Nu highest size-( (INR10 billion)
The distinguish and composi Karnataka are ( level except by is, unlike in Kae of clusters at : by (a) modern
low potential
- 34

of Economics and 5 Government of es the State Income cluding the gross hanufacturing, by registered sectors. enot distinguished stered and nonConsequently, industrial clusters di from the available State Income by Karnataka State. : national and State on clusters do not Lates of gross value 's. In addition, the uses lack data on le distribution of on in the industrial e data limitations nation of growth and its of the industrial efocus our analyses 3omposition and industrial clusters in s comparison at the
Composition of
overview of industrial Lataka based on the Total number of ataka is 25 or about :al clusters in India. ngle product clusters hare of traditional ds. Clusters with ctured by the modern 48 per cent. Highest lusters (92%) is " horizontal linkages d low heterogeneity. nnology upgradation he clusters is largely Imedium and low (or 2 based rather than uster are dominant. clusters in Karnataka e based because they oped only in recent is by size-class of now considerable ighest number of g to size-class of een INRO) billion and nber of clusters with ass of production s about 4 per cent.
ng features of nature on of clusters in Imparable at all India. the following: That nataka, higher share l India is dominated SIs, (b) medium and r export technology
upgradation, (c) market based and (d) competition with large units.
The above descriptions have the following interesting implications:
First, nature of industrial clusters in Karnataka has high degree of homogeneity in terms of natural clusters and single product clusters. Homogeneity can also be extended to select elements of composition of clusters by the dominant share of horizontal linkages; medium and low potential for technology upgradation; high potential for exports; and value of size class of production between INR billion and INRO billion, Composition of clusters show few remarkable heterogeneity in terms of types of products produced or sources clustering. Nevertheless, elements of
homogeneity are more dominant than
the elements of heterogeneity. This implies that a policy on development of each natural cluster can be designed given the framework of elements of homogeneity.
Second, industrial clusters in Karnataka are not completely distinct by products and location. This is evident in the note to Table 1, where natural industrial clusters are given by their products and geographical location. All products are not distinctly exclusive. For instance, food product clusters are located in Mysore and Mangalore; and silk clusters in Bangalore and Mysore. In the same way, not all locations are distinct. For instance, Bangalore has the location of seven clusters and Mysore has 5 clusters. These two locations account, for about 48 per cent of total natural clusters in the State. Location of multiple clusters in a single place has the advantage of cost-effective provisioning of common facilities and its co-operative sharing by enterprises in different clusters.
4. Economic Performance of Clusters
Industrial clusters are contributory for regional capital formation, employment generation and output. Table 2 presents the current status and select performance indicators of industrial clusters from the IVth All India Census of MSMEs in 2006-07. Karnataka shares about 9 per cent of nations total clusters, number of working enterprises in clusters and total employment. Share of the State in the gross value of output of clusters is about 6 percent. State's share in the capital formation of the total clusters is about 3 per cent by original value of plant and machinery and about 2 per cent by market value of
W.
Economic Review:Feb. /Mar. 2013

Page 37
Table 1 Nature, Size and Performance of Clusters in
2003
Indicators Valu
Karnat 1. Total number of clusters (SSEs and Artisan) 25
clusters 2. Natural clusters 96 3. Single product clusters 1OO 4. Composition of clusters by nature of products
(not mutually exclusive):
4.1 Traditional art and craft products 4-8 4.2 Traditional consumer good 68 4.3 Modern SSI 48 5. Linkages 5.1 Large unit centred 8 5.2 Vertical O 5.3 Horizontal 92 5.4 Both vertical and horizontal 4. 6. Heterogenity 6.1 High 8 6.2 Medium and low 92 7. Potential for technology upgradation: 7.1 High 24 7.2 Medium and low 76 8. Potential for exports: 8.l. High 68 8.2 Medium and low 16 9. Sources of clustering: 9.l. Market based 40 9.2 Resource based 6O 9.3 Infrastructure based Nil 10. Competition with large units 44. ll. Value of production:
1.l. More than Rs.1,000 crore 4. 11.2 Between Rs.100 crore and Rs.10OO crore 32 11.3 Between Rs.l.. O crore and Rs.100 crore 52 ll.4 Less than Rs.10 crore 12
Note: The product and location of 25 clusters in Karnataka Leather and leather Chappals in Athni; Machine tools, S Ready-made Garments Leather Products, Agarbatti and in Bangalore; Food Products, Agarbatti, Leather Footw Inlay and Silk in Mysore; Leather products in Raichu Products in Arasikere; Powerlooms in Belgaum, Bid I Bidar; Oil Mills in Bijapur; Carpets (Tibetian) in Byla Craft in Channapatna; Dal Mills in Gulbarga; Cotto Ilkal, Gadagh, Rabkavi and Barnhatti, Food Product Sandle Wood Craft in Sagar; and Rice Milling in Shim
Source:
(2003).
fixed assets (include land and buildings).
Further, Table 2 presents select economic ratios per cluster and per working unit in Karnataka and all India. Employment per enterprise is 4 persons in Karnataka and 5 persons at all India level. This indicates the smallness of enterprises in the clusters. Smallness is further evident by original plant and Inachinery per cluster (INR50 million) and per
Compiled by the author using basic data in Gove
enterprise (INRO. Karnataka. According of MSMEs, the size and machinery p equivalent to a II enterprise and that ( is less than for a n
In general, except
working units per c indicators of clusters different between Ka India. In particular, t performance indicat Karnataka.
Economic Review:Feb/Mar 2013

Irnataka State,
of indicator kal All India
354
25 51 5
are as follows. ilk, Electronics, Screen Printing ear, Rose Wood “; Coir and Coir Ware Craft in kuppa; Lacquer Handlooms in in Mangalore; pga.
Inment of India.
7 million) in to the definition f original plant ær cluster is anufacturing per enterprise cro enterprise. or number of uster, all other are remarkably nataka and all evalue of these rs is lower for
In addition, the select performance indicators in Table 2 show a lower value for Karnataka than at all India level. This includes capital labour ratio, capital output ratio, and output labour ratio. A lower value for capital labour ratio and capital output ratio implies that the value of capital (measured by original value of plant and machinery or market value of fixed assets) required per labour unit and per unit value of output is less for Karnataka than at all India level. Thus, other things being e qual, clusters in Karnataka are Inore efficient in using capital per labour unit employed and per unit of output produced. On the other hand, labour productivity, as measured by gross output per employment is less for Karnataka than at all India. In short, clusters in Karnataka are more capital efficient but less abour productive than at all India level. This implies that from the viewpoint of increasing the production and productivity of clusters in Karnataka, efforts should be directed to improve the labour productivity in the enterprises.
5. Determinants of Size-class of Production of Clusters
Production is an essential variable to capture the growth effects of industrial clusters. Knowledge of determinants of production in clusters is useful to introduce policies and measures for attainment of higher production and higher regional economic growth. Using the CDP data of 354 individual clusters, Narayana (2013) estimated the Binary Logit Model to estimate the determinants of size-class of production (in Table 2) by individual clusters at national level. The empirical results showed that clusters belonging to the highest sizeclass of production are higher if they (a) produce traditional and craft or modern SSI products, (b) are horizontally linked, (c) comprise high and medium heterogeneity, (d) include units with high potential for technology upgradation, (e) include units with high or high and medium export potential and (f) are marketbased. The above results are obtained at all India level. Assuming that the estimated parameters at the national are similar at the State level, estimated probabilities across clusters are shown to be remarkably higher in the State than at the national level. Thus, the above determinants are considerable for improving the larger size-class of production of industrial clusters in Karnataka State
6. Conclusions and Lessons
Using the available current national and State level databases, this paper
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Page 38
Table 2 Nature, Size and Performance of Clusters i.
2006-2007
Indicators Value of ind Karnataka (% India total) Number of clusters 9.25
Number of working enterprises 9.19 Total employment (persons) 8.97 Original value of plant and machinery 2.98
Market value of fixed assets 1.92
Gross value of output 5.83
Select ratios per cluster and working unit
Number of working units per cluster
Employment (persons)
o Per cluSter
o Per working unit Original value of plant and machinery
OPer cluster
Karnataka
291
1282
INR50 millio:
oPer working unit INRO.17
million
Market value of fixed assets
o Per Cluster INR130 million
o Per working unit INRO.44
million
Value of gross output
o Per cluster INR350 million
o Per working unit INR 1.19
million
Select performance ratios
Karnataka
Original value of plant and machinery
o Per employment INRIQ. 04
million
O Per output INRO. 14
Maraket value of fixed assets
o Per employment INR0.10
million
o Per output INRO.37
Value of gross output
a Per employment INRO.27
million
Source:
India (2011).
Computed by the author based on the basic
- 36
 

Karnataka State,
atOr
f
All India (Total)
2443
718OOO
3245000
INR379.37
illion
INR 1510.96 billion
INR1344.63 billion
All India
294
1328
INR160 million
INR0.53 million
INR620 million
INR2.10 million
IN550 million
INR 1.87 million
All India
INRIQ. 12 million
INRO.28
INRO.47 million
INR1. 12
INRO.41 million
ata in Government of
has focused on economic analyses of industrial clusters in Karnataka by identifying the nature and composition, economic size and performance of clusters in the State as compared to national level. Contributions of industrial clusters to regional economic development are measured by indicators of capital formation, employment generation and output. Main conclusions and lessons of this paper are as follows:
The nature of industrial clusters has a high degree of homogeneity in terms of natural clusters and single product clusters. Location of multiple clusters in a single place has the advantage of cost-effective provisioning of common facilities and its co-operative sharing by enterprises in different clusters. Clusters are more capital efficient but less labour productive. Further, available empirical results suggest that clusters belonging to the larger size-class of production are higher if they (a) produce traditional and craft or modern SSI products, (b) are horizontally linked, (c) comprise high and medium heterdigeneity, (d) include units with high potential for technology upgradation, (e) include units with high and medium export potential and (f) are market-based. These conclusions offer a useful framework for designing of a promotional policy for industrial clusters in Karnataka with emphasis on attainment of higher regional economic development. In the meanwhile, available databases must be improved and updated for (b) direct estimation of the growth and distributive effects and for (b) monitoring the economic performance of industrial clusters at the State level.
Development of clusters needs a holistic policy approach with coordination between the public and private sectors but also between the policy departments at the Central and State level dealing with industries and commerce, trade and investment, science and technology, and banking and finance. In this regard, Government of India's efforts to formulation and implementation of Cluster Development Programmes in the Karnataka State are most welcome and deserve to be further strongly promoted and strengthened with the above coordination tasks.
Given the comparability of economic structures of industrial clusters, the methodology, results and implications of this paper have relevance and
Economic Review; Feb. / Mar. 2013

Page 39
applicability for assessing the role of industrial clusters in regional economic developmentin other Asian countries. Evidence from such international studies would be useful to generalize the conclusions based on the experiences of Karnataka as well as India in this paper.
Acknowledgement
Author is grateful to (a) Dr Wilbert Gooneratine for constructive suggestions on an earlier version of this paper; (b) M. Maheshwara Rao, Commissioner for Industrial Development 8, Director of Industries and Commerce, Government of Karnataka (Bangalore), for providing useful data on industrial clusters, available with the Karnataka State Council for Technology Upgradation, and (c) Institute for Social and Economic Change (Bangalore) for all institutional support for research in this paper. However, the usual disclaimers apply.
Reference
Government of India. (2006). Guidelines of the Small Industries Cluster Development Programme (SICDP. New Delhi; Ministry of Small Scale Industries, Office of Development Commissioner (Small Scale Industries).
Government of India. (2011). Final Report: Fourth All India Census of Micro, Small and Medium Enterprises, 200607: Registered Sector. New Delhi: Development Commissioner MSME, Ministry of Micro, Small and Medium Enterprises.
Government of India. (2003). Cluster Development and Sector Programme: Achievements & Neu Initiatives by Ministry of SSI. New Delhi: Development Commissioner (Small Scale Industries), Ministry of Small Scale Industries.
Government of India. (2001). Report of the Study Group on Development of Small Scale Enterprises. New Delhi: Planning Commission.
Government of India. (1997). Report of the Expert Committee on Small Enterprises. New Delhi; Ministry of Industry.
Government of Karnataka. (2013). Economic Survey of Karnataka, 201213, Bangalore: Planning, Programme Monitoring and Statistics Department.
Hashim, S.R., Murt Satyaki. (2010). SM Identifying Areas Inclusive Grouth. N for Studies in Indus
Morosini, Piero. (!
. Clusters, Knowledg
Performance'. World 305-326.
Nadvi, Khalid and 1998. Industrial developed count: experiences and re: Philippe Caden Holmstrom, (eds Production in India Flexible Specialisatio pp. 60 - 138. New Publications.
Narayana, M.R. (20 of industrial cluste implications for I
Institute for socia
Change. Processed
Narayana, M.R. (2 size and performanc clustered small sca India: Recent
implications". Intern
Social Economics, 3
Narayana, M.R. (2 clusters of sma) enterprises in Indi: and policy impli
presented for Jo
ICSSR, (New Delhi (Helsinki) on Evoluing on Topics of Curren Delhi: January 31-.
Schmitz, Hubert., a (1999). “Clua Industrialisation: In Development, 27, 1
Footnotes
These spatial industrial devel
Industrial Estates,
Centres, Export P Industrial i Parl Infrastructure Dev and National Prog Industrialisation. description of approaches is give of India (2001).
° International
industrial clusters instance, in the e Nadvi and Schmit and Nadvi (1999) a
The methodologi collection of the available at (acces 2013):
- Economic Review:Feb/Mar. 2013

ly, M.R., and Roy, E clusters in India: If Intervention for w Delhi: Institute tria Development.
OO4). Industrial e Integration and Development, 32,
Hubert Schmitz, clusters in less ies: Review of earch agenda', in and Mark . Decentralised industrial Districts, n and Employment.
Delhi: Sage
L3). Grouth effects rs: Euidence and dia. Bangalore: l an dl EcoIn omic
007). “Economic e of dispersed and ale enterprises in
evidence and lational Journal of 4, 599–611.
OO4). Industrial til and medium a: Current status ications, paper int Workshop of ) and UN-WIDER Areas of Research. it Releuance, New February l.
and Khalid Nadvi. stering and troduction. World 508--151Ꮞ .
approaches for opment include Industrial Growth rocessing Zones, {S, Integrated elopment Centres gramme for Rural An excellent these spatial In in GovernLrient
approaches to are available, for ;xcellent works of z (1998), Schmitz nd Morosini (2004).
cal details of data ese clusters are ssed on 10 March
methcludata.htm#basic
Clusters developed without (or with) deliberate policy intervention by the Government are called natural (or induced) clusters.
Horizontal clusters comprise units, which process the raw materials, and produce and market the finished products by themselves with no scope for division of units. Clusters of units around a large unit or few large units are called large unit based clusters. Vertical clusters are linked with large units as suppliers or processors of raw materials or as subcontractors of large units.
Resources include raw materials and skilled labour. Infrastructure is largely in the form of public provisioning of economic infrastructure (e.g., industrial estates and technology parks).
7 According to the Micro, Small and Medium Enterprise Development Act 2006, the manufacturing enterprises are defined by upper limit on the original value of plant and machinery. For instance, the original value does not exceed INR2.5 million for a micro enterprise, not less than INR2.5 but does not exceed more than INR50 million for a small enterprise, and more than INR5O Inillion but does not exceed INR1OO million for a medium enterprise. Details of the Act are available (accessed on 26 February
2013) at:http://www.d.cnsne.gov.in/. Legal FraneWork.html
8 The Census questionnaire includes questions which distinguish the clusters by two types: Natural Clusters and Artificial Clusters (i.e. developed
through schemes/programmes of the
Central and State governments). In other databases, these artificial clusters are called induced clusters. Data on types of clusters are yet to be released for public information and
Se:
9 Industrial performance in the State is also measured by the Index of Industrial Production (IIP). The Index.
has three components with differential weights: Mining (6.98%), Manufacturing (81.14%) and
Electricity (11.88%). The Index does not distinguish production by industrial clusters. For details, see Chapter 8 in Government of Karnataka (2013).
Contact detail
Nagarabhavi P.O. Bangalore 67OO72, INDIA Tel(O): o80-23397699 Fax(O): 080-23217008
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Page 40
The Role of Higher Ed (HEI) in Regional Dev
1. Introduction
ne of the major development O problems faced by Sri Lanka is the persistent regional disparities. We have developed a growing core region represented by the more industrialized and urbanized Colombo Metropoliton Region (CMR) on one hand and a periphery which is lagging behind and is largely rural and agricultural. The outer periphery is relatively more lagging than the inner periphery. Today, it is recognized that CMR need to continue to grow to generate wealth and prosperity to the country as a whole. However, it is also recognized that the lagging rural regions also need to grow and transform their economies to bring greater prosperity to these regions, as trickle down effects from CMR growth are not likely to filter down to these regions soon. Hence, the need for a coordinated policy of regional development for these regions. A second reason that underscores the need for a focused regional policy for the country is to maximize the diverse and untapped potentials of different regions of the country to support national growth which is already on a rapid path. Third, Sri Lanka needs to aggressively face the ever growing challenges of globalization and global competition. Finally, the Millennium Development Goals (MDGs) agenda of the UN have to be rigorously applied and addressed to bring about a more balanced development profile in the far and wide regions of the country (Gooneratne 2005).
Globalization is creating new opportunities as well as challenges for developing countries like Sri Lanka. Global competition is perhaps the most significant of the challenges and creating competitive regional economies (as part of national economy) has emerged as a key strategy for meeting this challenge. In this regard, HEIs consisting of
Universities, Tec Research and Tra form one of the key more competitive
2. The Rolle of H (HR) and Skills in and Transformati
Regions can play a in identifying o growth and transf can also act as mo such growth and ( identification of n search for new re requires the active “triple helix”, t business and
institutions. To b change, regions ne sophisticated polic in this regard tha critical steps, the II central place. The e shift in regional de favours strategic mobilisation of re growth and bringil innovation to the ci development agenc
Today, the succes knowledge ba Knowledge (K) is practically everyth life (food, clothing a 8s education, communications,
has to be the key improvement an productive sectors, agriculture, indust and skills are, th regional growth competitiveness.
Any growth agenda how to drive and in the region, physical, human endowments. Inve mobilization of h
Dr. S. B Ekanayake is a multi disciplinary educationist. Advisor in several Asian countries and as a member of the
- 38

ucational Institutions 'elopment
:hnical Colleges, ining Institutions 7 drivers towards a regional economy.
uman Resources Regional Growth
O
a determining role pportunities for ormation. Regions bilisers for driving liversification and ew frontiers. This 'gional advantage participation of the he government,
the academic ecome drivers of 2ed to adopt more y approaches. It is ut, among several role of HEIs take a 'merging paradigm velopment policies es based on the 'gional assets for ng knowledge and ore of the regional la.
sful economy is a sed economy. key to improving hing essential for and shelter, health
transport and environment). K to management, d expansion of /activities such as ry, services etc. K erefore central to and regional
needs to consider dynamise growth with respect to and geographical 2stments in, and uman capital in
Dr. S.B. Ekanayake'
developing knowledge-based and knowledge intensive production systems are vital for supporting endogenous growth based on regional potentials. It is here that knowledge Creation, diffusion and exploitation, combining traditional instruments (such as support to human capital and skills), emerging instruments (such as new generations of Science 8s Technology centres/ parks, talent and creativity support) require greater regional focus. Note that innovation of all kinds from simple to complex ones, at the regional level may be more effective given the opportunity to exploit synergies between policies and instruments that are in the hands of sub national entities. Hence, in the modern economies orientation of primary and secondary education along the pillars of knowledge economy is necessary (Sedera MU 2010).
"Sustainable growth at the regional level is now, more than ever, predicated on the capacity to innovate,” said Rolf Alter, director of the OECD's Public Governance and Territorial Development Directorate. "(2010). The competition amongst firms and business concerns have led to searching new knowledge for innovation and production. The States have also realised the importance of this leading edge and the need for development of quality human resources which would help them to increase employment and growth.
3. Critical Areas for University and Research and Training Institutions' (URT) Engagement
Universities & Research 8, Training institutions have always been at the forefront of the production and dissemination of knowledge and
He has served UNESCO and UNHCR as Basic Education
Higher Education Reforms Committee, Sri Lanka.
Economic Review: Feb. 1 Mar. 2013

Page 41
skills. Regions that are not supported by good universities and R & T institutions are clearly destined to lag behind those endowed with high quality HEI institutions. However, in Sri Lanka, though many URTs are scattered throught the country, the regions are still handicapped by the absence of any tangible and active support by HEIs and/or research institutes.
There are several ways in which HEIs can support and assist regional development. They can play a central role in assisting regional economic development by improving Human Resources and skills to expand productive employment opportunities and raise incomes. When working in collaboration, they are able to drive and enhance the competitiveness of regions by supporting key sectors, activities or selected areas to improve their productivity and innovative capacity. HIE contribution can be most vital for the lagging regions to overcome their long standing problems of slow economic growth and transformation.
4. Universities Regional Development in Lanka
in Local and
Sr
In Sri Lankathere are 15 universities with an academic strength of around 4,500, including about 500 Professors and Associate Professors and over 1,750 Senior Lecturers with PhDs or equivalent qualifications. An appreciable number of these senior academics are promising scientists with international experience and make a significant contribution to the advancement and dissemination of knowledge in their respective fields. According to a study conducted by the National Science Foundation in 2004, the academics in the universities have accounted for more than 60 percent of the R&D personnel in the country.
As Senaratne (2012) noted, it is imperative for universities and higher education institutions to be actively involved with the society of which they are a part. Hence engagement should be considered as a 'core value' for the university. Universities need to build close, organic relationships with the economy and society in which they are located. They can no longer keep aloof from society and the
region. Universitie bottom ofissues fa community conce diseases, pove agriculture, indus education, environ be a truly organic
Greatness of a univ by the contributio: locality, region, world. This makes “contribute towar economies and liv rural/peripheral re; it is incumbent upc to develop an org with the communit and assist to har utilized and unuti natural resources Building an organic communities requi) our universities, but the degree program incorporate eng community as a CC integral part of uni and research. TheI members in the uni already constructiv the community an significant contribut development. But s that universities s elite institutions. still work mainly a lines with hardly across disciplinary has to understand the Universities ir
located in the regio)
instituted to solve, ri Hence, there is a change at the high
It should be clea. activities should b integral part of t responsibility to
Undergraduates sh with opportunities ti
government and pri community organiz first hand knowl experience and p "Graduates produc degree programme regional economy la capacities with a go of the regional pr connection alt universities in S extension progral
Economic Review:Feb./Mar. 2013

need to get to the ed by society and ning livelihoods, ty, illiteracy, ry, productivity, lent etc. It should elationship.
rsity is measured
it makes to the ountry and the nem obligatory to s improving the ng conditions of ions”. "Therefore, in the universities nic partnership y and the region less the underized human and in rural areas". relationship with es re-positioning also re-modelling mes so that they agement with re value and an versity education e are some staff versities who are ely engaged with d are making a ion to community some still believe hould remain as Our universities long disciplinary any team work poundaries. One however, though Sri Lanka are ns, they were not gional problems. need for policy est level.
that outreach e treated as an he university’s he community. uld be provided | workin relevant rate institutions, tions etc. to gain dge, hands-on ractical skills. :d through such can assist the ter in Inumerous d understanding blems”. In this hough S On Ee ri Lanka have mes these are
rather ad hoc and do not have an integrated approach to development. Neither are their activities incorporated into a total development package, used as exemples in the designs or at the minimum, lead to improving required skills in the development process of the gion. Rather these are not continuous, and do not assist any specific development programmes of the state and therefore footloose experimental projects and mostly serve as part of an academic exercise leading to course of study.
Engagement with the community can be further facilitated through the establishment of community service centres in the rural regions connected to the university. Studients and teachers could live, study, teach, train, work and learn at these centres representing major faculties. The wealth of knowledge and experience gained through such engagement would enable the universities to offer useful courses related to rural/ regional development.
“Thus the engagement with community would afford a new meaning, new direction and new momentum to higher education, making the universities in Sri Lanka true and effective partners and catalysts in regional and national development” (Senaratne 2012 lind 2013).
Goddard (1997) emphasized the need to move from an "elite to a mass system of higher education and a new emphasis on lifelong learning. The new knowledge in technology and information could be reached through a variety of institutions outside the traditional university.
5. University Contribution to Regional Development in other Countries
In many parts of the world, universities have now become powerful catalysts and agents of
growth and wealth creators. They
Inobilize and channel their intellectual and infrastructure resources for industrial growth and regional and national development. Thus great cities naturally have great universities that contribute to the cities' intellectual, social and cultural
39 -

Page 42
vibrancy as well as influence their development. In a knowledge-based global economy, there is even greater synergy between a city's development and the universitys. Stanford University in California, Punjab University in Punjab, India, Fudan University in Shanghai, China, Chalmers University in Gothenberg, Sweden and NUS in Singapore are Some telling examples in this regard. (Senaratne 2012). Universities located in the regions do play similar roles in many countries.
The UGC, India has categorically stated that the extension programmes of the universities should follow the aims and goals of the State and should imbibe the Extension Culture' of the State. Nepal is another country where the universities have to follow since 1974, Nepal National Development Service code, whereby a mandatory service of one year serving the community is imposed prior to sitting the degree. Sri Lanka too experimented with a similar idea earlier in the 1990s. All these activities do indicate the acceptance of serving the community helping the students to gain access to knowledge from realities as part of the learning programme to prepare them to serve the nation better once they commence work. It should be mentioned that the UN’s International Conference on Adult Education (1997), with its exemplar materials from all, over the world did present an array of projects developed for adult communities. Most of these were related to development of skills and knowledge in the peripheral areas.
6. Possible Åreas for Concrete Action
The concept of a competitive (learning) region entails a greater role and engagement by the universities, technical colleges and research and training institutions at regional and local level. Regions become active learning regions when they adopt principles of knowledge creation and continuous learning. Universities, in particular, can support the regional economy, its firms and production systems to draw from their knowledge resources. In many ways, universities are located at the head of the supply chain that is devoted to the production of knowledge. Regions without high
quality educat: (including res remain disadvau
There are at eas which the contri can have a di: regional ecol technology,
development, ad support and Tes
Technology Little do we universities concentration o. engineering, ag well as most so large number involved in tea This is an invalu source of expe utilized to ach Most importar utilized to acc provide technol improve produc economy in ind and other sectol the production technologies re regional ec employment exp management.
Expanding t capital There are seve improving and 6 capital base oft These incluide relevant skill economy to ha potentials; a c economy also : skilled people regional develo of graduate r linking with actors and o catering to ma undergradua program Ines training. universities ne centres of teac local and Ire planning and I All these are es production o. grown talen economy. It reinember that leadership, in
- 40

nal infrastructure arch) will clearly aged.
four major areas in ution of universities ect impact on the omy; the se are ). Ull 3). CS OULIC 6 isory and leadership arch.
support Tealize that olur have a large faculties of science, iculture, IT etc. as icial sciences and a of Staff members :hing and research, able and unmatched tise. These can be eve several things. tly, these can be (uire, develop and ogies to support and tivity of the regional lustrial, agricultural 's. This is essentially and/or diffusion of levant for local and onomic growth, )ansion and resource
ne stock of human
ral possibilities in Xpanding the human he regional economy. , (a) production of S for the regional rness the untapped omnpetitive regional equires trained and 'O manage local and Inent, (b) pronotion tention schemes by regional e cononic her agencies., (c) Lure local students for e/ post graduate as well as further in ally, regional d also to become the ning and training in ional development anagement. ential to improve the high quality home for the regional also important to beyond technological he context of today's
competitive economy, several production systems mainly add value by investing in non-technological innovations such as talent and creativity, the cornerstones of high quality human resources.
Advisory and leadership support
Today, the HEIs play an insignificant role in assisting and supporting local and regional institutions. These institutions, particularly in the lagging/peripheral regions suffer from a huge deficit in management and development capabilities. HEIs can offer advisory support and services to regional institutions such as local governments, industry/trade chambers, other local organizations like farmer organizations, fisheries cooperatives etc. They can also provide leadership support to local governments and other development agencies, for example by serving in their management/advisory boards.
Research High quality data and information as well as analytical studies on key aspects essential for improving the performance of the local and regional economies are not readily available in Sri Lanka. What is available at different levels (LAs, Districts, Provinces etc.) is no more than basic data and information. HEIs can play a more proactive role in helping to fill this gap by contributing to assess regional potentials, possibilities and problems of (a) their own /local regional economies and (b) of other regions in competition. They can also help create and maintain a data/ information base on the regional economy. These are essential for planning, implementation and monitoring of development activities at regional level. Today, there is also a need to Irevive time tested local knowledge (LK) systems in many different areas of the local economy and society-universities, in particular, can help in retrieving, validating and revitalizing these LK resources. These can be of invaluable relevance to the sustainable development of local/regional economies (Economic Review, April/ May 2010). All of the above would ultimately enhance the potential role of the regional universities when they cooperate and network with local research and other training
Economic Review:Feb. (Mar. 2013

Page 43
institutions such as technical college S. Further, regional universities form the ideal locations to establish science and technology centres and/or parks. These are increasingly becoming key players in regional development, as nines and foundries of the new economy where innovation is induced by design, to create new industrial space, as seen in the East and South East Asian countries (Castells, M and Hall, P 1994).
Sri Lanka’s experience
Today, there is growing recognition of the need for the university to ensure that the knowledge developed and available within the university is put to use, especially in its local region. This can take a variety of forms, including developing internal capabilities for technology transfer and commercialization of research to playing a collaborative role in establishing a strategy for knowledge based regional economic development and participation in initiatives to implement that strategy'. A university should be sensitive to the needs of the community and the region if it is to be entrepreneurial and innovative.
Sri Lanka universities & research & Training institutes are all national institutions and are engaged mainly in the delivery of teaching programmes. They are not expected to or are geared to play a local/ regional development role. The engagement of these institutions with the region in the 4 areas identified above is minimum or insufficient to support the development of the regions.
Sri Lanka has the highest proportion of educational institutes run by the government, accounting for 95% and only 5% run by the private sector . Private sector participation in higher education, compared to many Asian countries, has been minimal. University engagement in industry and business has also not been strong either. Exceptions are that of Moratu wa University and Sri Jayawarden epura. University Management Faculty which have a good track record of cooperating with business and industry and finding employment for their graduates.
Creditably, the recently established Sagara Vishva Vidyalaya, dedicated university for the fisheries sector and Uva-Wellassa university teaching/
training progra plantation econom etc, are forging ah challenging prog geared to the ci employment a Unfortunately , I universities are
actively engaged regional economy.
The Ministry Technology of Sri a valuable grassro practices based knowledge and ) provide useful develop practical community to mau (Vitarana et al 20 quality of the prod a problem. Unf science and techn as 'Centres o Technology (Vidat connected to a industry in the a: gaps in exchange Skills between in: needs of the com II
On the basis ( information, we following observati contribution of HE
(a) academic/r exchanges are n among the HEI ins cooperative prog widespread, not e amongst the univ region related/rel has Ireceived insuff teaching drawin, regional issues/ integral parts of tea and (e) univers contribution in sev areas of concern t not been significa
7. Challenges
The expected ra transformation o economy in the n greatly supported contribution of
peripheral regi favourable cond: enable them maximization of t comparative adva
Hence, the need special/unique as
Economic Review:Feb/Mar. 2013

lmmes covering y, management, IT lead with new and grammes directly
puntry's needs of .
nd production. hone of the other still directly and with the local/
of Science and Lanka commenced ots level innovative
on indigen ous esources. These information and skills and help the ket their products 12). However, the lucts has remained ortunately these ology units known f Science and ha) have not been hy university or rea indicating the of knowledge and stitutions and the
unity.
of the available : can make the ons on the role and SIs in Sri Lanka:
esearch links/ ot well developed titutions. (b) joint/ grammes are not ven widely spread ersity faculties, (c) evant R 85 D work icient attention, (d) g on/from local/ situations is not aching programmes ity engagement/ veral region specific o regions has also nt.
apid growth and if the Sri Lanka's ext stage would be
by enhancing the hitherto lagging/ ons by creating itions that would to improve the heir potentials and ntages.
for HEIs to become sets of the regions
is imperative. The regions have to feel and be proud that it is also their university (s), making a contribution to help attract investments and businesses and talent and skills to the region. They can help transform the regional economy, make it competitive in the global economy and make it economically and socially resilient.
"However, this enviable human resource base in the universities has so far remained untapped or heavily under-exploited. If it is properly Inobilized and channelled for regional development, the universities can become the locomotives of regional growth and effective partners in transforming Sri Lanka” (Senaratne 2010).
Sri Lanka does not have a well articulated regional development policy. We do not have regions demarcated for development purposes (Gooneratne 2005). This has been one of the reasons that has prevented universities 8s R/T institutions from playing a meaningful development role in the regions.
References
People's Bank (2010), Indigenous Agricultural Knowledge in Sri Lanka, Economic Review, April/May.
Castells, M and Hall, P (l994), Technopoies of the World: The making of the 21st century industrial complex, Routledge, London.
Edgington, David W (2001), "Learning Regions: Lessons for Developed and Developing Countries”, in New Regional Development Paradigms, Vol. 2, New Regions- Concepts, Issues and Practices (Eds. Edington David W, Fernendez Antonio L, and Hoshino Claudia) Westport, Connecticut.
Senaratne Ranjith, Let us Imake our . universities a strategic partner and a catalyst of regional and national development , Address at the Convocation of the University of Sri Jayewardenepura, February 5, 2012.
Senaratne Ranjith, The Island, Sri Lanka, 2 May 2013.
Senaratne Ranjith, Sivasegaram Sivanandam, (Eds.) Re-Creating and Re-positioning of Sri Lankan Universities to Meet Emerging C
Contd. on page 46
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Page 44
Empowering Local Gc Serving Regional Sri Lanka: Sharing J
1. Introduction
he local government plays an important role, as it is the closest administrative unit to the people, in delivering the public services. It also serves as the most democratic, as local residents can participate in the decision making process and market friendly, as individual choice is given due consideration, a way of addressing the needs and concerns of the citizen. Classical and neo-classical liberal thinkers who believe in the market mechanism argue that enhancing social welfare of individuals should be the major objective of public policy. Therefore, em powering local governments to better serve regional development and also to better serve individuals is vital as socio-economic, political and cultural systems and values are rapidly transforming due to evolving information technologies and the globalisation process.
The global restructuring has generated strong and growing needs for regional development strategies for peripheral or lagging regions within nations than ever before. Therefore, empowering people at local level is vital. Local governments in Japan, value people and seek public interest in serving local citizens and making strategies for regional development. Their autonomy is constitutionally guarahteed. They also have fiscal health as they have their own revenue sources rather than been dependent on the centre to a large extent.
In Sri Lanka, however, empowering local administration or citizens is quite complicated and sensitive to political regimes as they are keen in empowering the centre rather than the local or periphery. Devolving power to regions as indicated in the 13 amendment to the constitution
and also as recor “Lessons Learnt a Commission (l comprehensive und the vision and miss political leaders However, there is need, particularly conflict, to formu reconciliation, pea development at
provincial and nati current local go Lanka can be inconsistent, centr and as a not so eff
Considering those d reconciliation need of central-local relat this paper aims: (a) t effective, and autor administrative unit (b) to identify the r for the newly propos unit; and (c) to Ti revenue sharing p the activities and public local admini
The paper is orga Following this intr. 2 provides an ove public local governr Lanka. Section 3 at a proper public loc unit for the countr discusses the funct aspects of local gove and Sri Lanka. In some policy inferer
2. Public Local Systen in Sri Lan
The Sri Lankan adm. consists of 9 provi 332 divisional secr 14,000 villages. Ea separately elected u body called Provin with a Governor a
- 42

overnment for Better Development in apanese Experience
nmended by the ind Reconciliation LLRC)” needs lerstanding, given ion of the current of the country. indeed, a strong in the post-war late policies for ace building and all levels-local, onal. In short, the vernment in Sri identified as alized, politicized icient system.
levelopmental and ts and sensitivity ions into account, opropose a viable, lomous local level : for the country; ole and functions sed administrative ecommend some olicies to finance functions of the strative unit.
nised as follows: oduction, Section rview of current nent system in Sri tempts to identify cal administrative y, while Section 4 ions and financial }rnments in Japan the final section hces are drawn.
Administrative.
ca: An Overview
ministrative system inces, 25 districts, retariats and over ch province has a nicameralpolitical cial Council (PC) appointed by the
Prof. N. S. Cooray
Associate Professor International University
ofυαρατι
country's President and Cabinet lead by a Chief Minister. There are 335 Local Government bodies in Sri Lanka which include 23 Municipal Councils (MC), 42 Urban Councils (UC), and 271 Pradeshiya. Sabha (PS). The MCs, UCs and PSs function under the supervision of the Provincial Council. Divisional Secretariats are the closest administrative units to local level communities and coordinate village level government officers called Grama Niladari(Village Officers) and the functions of line Iministries of the central government. There are also other separate governmental (or agencies with different territorial boundaries) institutions at the divisional level which function under their central or provincial organizations.
Several amendments have been made to the administrative system due to political, socio-economic and cultural reasons. Earlier changes were made
: due to economic and the political
interests while recent changes were mainly introduced due to ethnic reasons. Despite many attempts since the 1950s, the country had no strong desire to introduce a decentralized system of administration until the 1970s (Robert, 1986, p. 163). Political insurrection in l971 influeraced reforms heavily. Divisional Development Councils (DDGs) were introduced immediately after the civil conflict in 1971 aiming to minimize regional unemployment by utilizing available local resources (Ramanie & Bennington, 2002, p. 91). DDCs failed to reach their objectives as they
Economic Review:Feb. 7 Mar. 2013

Page 45
suffered from many constraints such as week service delivery, financial and management incapability (Ramanie & Bennington, 2002, p. 92). In 1973, then government introduced District Political Authority (DPA) system with the financial support of the Decentralized Budget (DCB). Under the DPA, a political leadership for lo cal administration was introduced. The new initiative is considered as the first attempt to intrude political leadership to the divisional administration. However,
the DPA system was abolished in 1977 and new District Minister (DM)
system was introduced. District Minister who was an elected politician from the district as a member of parliament, is supposed to
give leadership for the district development activities with the
appointed GA and his staff. However,
three years later, District Development Councils were established with the legal framework of the District Development Act in
198O.
In 1987, Sri Lankan government introduced l3th amendment to the constitution admitting Provincial Councils (PCs). Under the PC system financial decentralization was introduced expecting a more efficient service delivery at the sub national
levels. Other than the provincial
development activities, education, health, rural development, maintaining law and some other powers were given to the PCs. However, PS system has no proper co-ordination with the district level structures which function under the national ministries, but PCs were allowed to use Divisional Secretariats for local activities. The supervision of the local governments was also given to PC without degrading the powers given to local governments by the respective laws. Local political and administrative units remained unchanged under the PC system. For a short period of time local governments and divisional secretariats came under the supervision of provincial councils while divisional secretary was working as the secretary to the local government. However, due to various concerns, this system was terminated and divisional secretariats again came under the central government'.
and
The PC system has
to many adminis First, PCs vere una different levels
Structures at t divisional level. Se financial resour innovative develop) maintaini expenditure. Third of centralization Ies functioning of the simultaneously m. agencies at local le
3. Towards an Ap Local Governme Lanka
Sri Lanka has a rat overlapping local system. The Prades local government functions with its o elected mayor or Divisional Secre administrative l separately, imple: administrative appointed staff by ce According to th interviews we unde and Japan, both P. social services suc child care, technic development activit infrastructure de maintenance. Some are overlapping anc conflict among loca and administrative clear that an all demarcation of th creates confusion, coordination failur.
Table 1 Public II
Function
Organisatio
Local government Divisional Secreta Police Stations MOHI Division Agrarian Services
Zonal Education
Notes: 335 Loca Council
Pradeshi
Source: Adopted f
Economic Review:Feb/Mar. 2013

been criticized due trative' failures. ble to co-ordinate of government e district and cond, scarcity of es constrained nent programmes Ing re:CULII e
the high degree blicted the Smooth °C, as the centre aintained central vel.
propriate Public nt Unit for Sri
her confusing and administrative shiya Sabha (as a political entity) wn staff under an chairman while tariat (as an unit) functions menting general activities with intral government. e surveys and rtookin Si Lanka S and DS perform h as elderly and all services, some ies such as rurali 2velopment and : of these activities lvery often create all level politicians institutions. It is psence of clear e responsibilities inefficiency, and
Թ.
o cal Administrative and Other
la Units in Sri Lanka
Local health department (MOH), agrarian services department (Govi Jana. Sewa Madyasthanaya), police station, and education departinent (zonal or divisional education department) are functioning separately under the central or provincial governments. We propose, with some adjustments, to bring all those separate bodies into our proposed LAU. This is quite similar to what Japan has currently.
Table 2 shows various distances for basic service delivery of divisional government system in Sri Lanka. Access to the public services in the rural areas and estates is inconvenient when compared with urban areas. Since government offices are located in different places of the division, people need to spend longer time to reach particular government office and get a service done. Travelling to various places for obtaining services, given limited transportation facilitiesis more difficult for people who are already living in the rural and estate sectors. However, divisional secretariats and local governments (MC, UC, and PS) are located almost close to each other and people can reach to both offices without much difficulty.
It is obvious from the above discussion that there are different levels of local government structures currently functioning in Sri Lanka. Some of them have overlapping geographical bounderies. The number of local governments (PS, UC, and MC) has almost the same number as DSs. This means both organizations have Inore O less Sale it e r I it or i al boundaries even
though they are
Number Average Average independent from
Of bopu- land area each other.
organi- lation (square
sation || per unit| km) It was found that
over a pp in g
S 33S 60,489 l95.85 responsibilities and
uriats 332 61,035 197.62 functions are the
4-O 50,533 163.62 most significant
332 61,085 l97.62 characteristic of the
6.O 33,219 107.56 service delivery
Offices 67 3O2,444. 979.25 pro cess. The
il Governments include: 23 Municipal s, 42 Urban Councils, and 27l
ya Sabha. (2)
(on http://www.statistics.gov.lk
concurrent list of the 13th amendment creates a great opp ortunity o to e x e I c i s e
43

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simultaneous powers to both central and provincial councils (Gunawardena & Lakshman, 2008, p. 123). Since there are no legal barriers for the divisional secretariats, they are implementing some services Similar to the local governments. Local level overlapping service provisions are mostly related to welfare and development activities. It is common for both central and provincial governments to use divisional secretariats and local governments for the same activity. It should be noted that current local governments contribute non or little to regional economic development.
Japan has a two tier system-central and local government. The local governments are classified into two types: (a) ordinary local governments (includes 47 Prefectures and 1,788 Municipalities) and (2) special local governments (includes Special ward, Municipal cooperative, Property Ward and Local development corporation). Local administrative units are formed in Japan considering the geographical conditions, population size, degree of centralization of power, and content of the local administrative services. The autonomy of local administrative system is guaranteed by the constitution adopted in 1946, and it functions as a well-established democratic system. Japan's local governments do not simply signify administrative units of the central
government. They independent administrative el
respective jurisd
responsibility constitutionally g related to almost a of the residents.
From the authors visits, and inter Sri Lanka and Ja extensive literatuu Countries, it is po; appropriate admin Lanka by combini proposed Local A (LAU at divisional two branches; leg an executive br branch is respon plans for local service delivery introduction of Elected membel systern in Sri La administrative u category and they representatives. T councillors is set depends on the po area. The chief ex let's call him th directly elected by for a fixed term a as the chief execut branch implem. formulated by the The prospective
Table 2 Mean Distance to the Nearest Place of Facilit
and by Sector - 2006/2007
Place of facility Sri Lanka Urban
Non poor Non poor N роог poor p
Bus halt O5 O.7 O. O.3 C Pre sthool O5 O.7 O. O.3 C Primary school 1 1.2 O.5 O.8 M.V./M.M.V./N.S. 2.5 3.5 2.7 1 2 Hospital 6.6 7.7 7.1 3.6 7 Maternity Home 5 6.2 5.6 2 5 Government dispensary 39 5. 4.3 1.9 4 Clinic(Maternity/Infancy) 2.5 3.3 2.6 1.5 2
M.O.H. office 6.7 8.9 2. 2-1 M.C./U.C./P.S. 7.3 O. 2.6 2.8 7 Divisional Secretariat 7.5 O. 3 3.2 7 G.N. office O.7 O-5 O.6 C Post Office 1.6 2.2 O6 O.7 l Bank 35 5 l i.l. 3 Agrarian service centre 6.5 || 7-8 || 5.2 | 5.4 || 6
Source: http://WWW, Statistics.gov.lk/poverty/reportr
44

are incorporated as political and |tities within their ctions having the of carrying out Laranteed functions ll day-to-day needs
experiences, field iews conducted in pan, and also from 'e surveys on other isible to identify an istrative unit for Sri ng PS and DS. The dministrative Unit evel) may comprise slative branch and anch. Legislative sible for preparing ilevelopment and budgeting, and local ordinance. s (similar to PS Linka) of the local unit fall into this function as public he number of the by the law and it pulation size of the ecutive of the LAU, e Mayor, can be 7 the local citizens ind should perform ive of the executive Lenting policies legislative branch. candidate for the
y by Poverty Status
mayoral position may not submit nomination under any political party representation as it might be difficult for the person to be independent in office once it is supported by a
political party.
The current Provincial Council in Sri Lanka has five ministries. In line with this, LAU may also consist five or similar divisions (for example education, health, development, election, information etc.) covering regional development and service delivery. The heads of those divisions are government officers and they perform independently. The current Zonal Director of Education can be the head of the Division (or board) of Education of LAU. The mayor ensures the overall consistency of the governmental operations and holding the power to convince legislature special meetings and sending bill proposals such as draft budgets. The mayor also manages the staff by appointing and dismissing. In order to prevent accumulation of power to a one particular agency or a person, power is devolved to separate committees (created for various functions) allowing each authority to exercise its duties independently. For an example, education committee is holding overall responsibility in
handling its own affairs having its
own standing. Those administrative committees have been established based on the pluralism and each handling assigned duties within its jurisdiction. Members of these committees or boards are appointed by the chief executive
Rural Estate with the consent of the on poor Non poor legislature. Board of education is O OT poor responsible for managing educational institutes of the 5 O.7 O.9 1. division. In Japan, other than 6 O.7 O.9
the education board, there are .l l.2 1.2 .4 - - -
several boards for major public 7 3.5 4.7 5
7.9 94 88 services such as public safety,
. ۔ سی۔ nr elections, and health. .6 65 5.6 5.8 3 5.2 5.3 5.7 The link between provincial .6 3.3 4.4 4.2 councils and proposed LAU are 7 8-4 16.5 lo.5 mutually independententities 7 9.7 16.7 17-4 without any hierarchical .7 9.3 19.3 |19.5 relationship in terms of .6 O.9 1.8 1.9 administrative functions. .6 2.2 3.7 3.6 Provinces are designated 8 5.2 6 5.7 encompassing LAU which .3 7.1 14.1. 14.9 provide closest day-to-day needs of the people. However, province eW-Final.pdf set guidelines, and advice to
Economic Review:Feb./Mar. 2013

Page 47
municipalities from their perspectives
on various issues in order to maintain uniformity within the province. Arrangement can also be made to provide clear division of responsibilities base on the concept that whatever possible should go to the closest institute (municipalities), and if it is not enough, to next the second layer (province) and the finally to the supreme layer (central government) according to the "principle of subsidiarity". However, in practice these institutes execute their responsibilities in a compound nature rather than in an isolated individualistic approach.
4. Functions and Finances of Public Local Government Administration: Lessons from Japan
Having discussed an appropriate local government unit for Sri Lanka in the previous section, an attempt is made in this section to discuss functions and financial aspects of the Japanese local government system with a view to obtain information for the proposed LAU. In Japan the local government system provides clear division of duties between national and local levels. The legal background had been setup by the law aiming to promote decentralization of governmental activities. This act guarantees clear division of responsibilities between national and local level preventing any possible overlaps. While handling the national interests by the central government, local governments are given almost all administrative functions related to their regions with exclusive power to exercise independently and comprehensively. Based on national interests, national policies are formulated by the central government. Moreover, local governments are:
given responsibilities as much as
possible to deliver the services and administration that are much closer to day-to-day needs of the citizen. Main responsibility of local or regional development in Japan, more or less, falls under local administration.
Local governments handle two types of duties; "local autonomy functions” and "statutory entrusted functions”. Statutory entrusted functions are referred to the functions that central government retains original
Economic Review: Feb./Mar. 2013
responsibility
governments havin responsibility. Tl central government be observed for the s functions. Func maintaining nation, statutory entrust others are fall int( functions. Resp municipalities are b of basic public need to residents and fa town planning and public safety an management, provi welfare facilities
insurance schem public places such roads, managing
junior high school responsibilities of ti
As an independen proposed LAU can f to carry out the fu regard, one may lo experience. Indep managementis con requirement of ar Despite close relat central governmer governments maint fiscal operation jurisdiction. Tax aut governments provid organize revenue concept of fisca. guaranteed in this considered as the m for effective de Following figure
eWee SOUCeS a the different layers In 2006, the re governments consi (39.9%), local alloca national treasury (11.5%), local gov (10.5%), and other data suggest that l in Japan enjoy th sources and les s central governm national treasury depends on the fina the local governmer self-controlling dis expenditures. More guarantees the inde of the local governm the other hand, ov of the local gover education (18.5%),

while local g implementation erefore, strong intervention can tatutory entrusted tions such as al roads fall under ed function and local autonomy onsibilities of ased on provision s. Affaires relating mily registration, street addresses, l health, waste sion of water and such as health es, maintaining as parks, public elementary and ls are the major he municipalities.
t authority, our ind its own funds unctions. In this bok for Japanese endent financial sidered as a basic hy organization. ionship with the ht, Japan's local zain autonomy of within their onomy of the local es wider space to sources. The federalism is system and it is hajor requirement 2centralization. shows that the ind their share of of governments. venue of local sted of local tax ation tax (17.5%), disbursements Ternment bonds s (20.6%). These ocal governments Leir own income dependent on ent funds. As y disbur sement uncial situation of hts, they are given cipline over their over, this system pendent operation hent activities. On erall expenditure nments includes welfare (18.2%),
civil engineering works (15.5%), public debt payments (14.9%), hygiene (6.2%), industry and commerce (5.3%), agriculture forest and fisheries (4.2%), police (3.8%), fire fighting (2%), labour (.3), and others (1.4%). These figures show that how local governments are performing and their role at the local level (CLAIR, 2008, p. 21).
5. Concluding Remarks and Policy Implications
The paper discussed the local government systems in Sri Lanka and Japan with a view to find out a proper public local government unit for Sri Lanka for better regional development. Based on the discussion, it is obvious that current local governments (PS and DS) in Sri Lanka lack clarity and division of its functions. This paved the way for confusion, inefficiency and conflict situation among regional political leaders and government officials. Considering all the potentials and limitations of the current Sri Lankan and Japanese local government systems, this study proposes to merge PS and DS creating one local administrative unit close to the citizens. The merged unit may be still called Divisional Administrative Unit (DAU) (or any other suitable name), but the geographical area can be same as current DS area. The proposed DAU has executive and legislative branch. Public participation for the local administration and regional development 2S democratic representation is the base of proposed local administration system. Other than the voting right to elect their representatives, people should enjoy rights of direct participation in local administration and regional development safeguarding rule of law, governance, democratic values, ethnic harmony, and market elements.
Currently, central and provincial governments use existing divisional secretariats as their local agencies, and therefore, one can argue that amalgamation of PS and DS at divisional level seems more appropriate. And also this local focus may be a more viable form of decentralisation than concentrating on district and provincial units, as politicians have deep suspicion of
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cal Transfer Tax: Local Allocation. Tax:
axes:
National Services
Special Local Government. Grants:
Administrative Services
Administrative Services
axes: 186,741
Figure
Source:
devolving power to provinces. The current Government Agent, at district level, can be part of the provincial system by being district coordinator of PC. The present activities of the line departments of the central
government at various levels may also
be absorbed by the proposed LAU and PC.
National politicians and bureaucrats of the central government may think that they should get more resources and power while local level politicians and bureaucrats expect the other way around. The centre believes local administrations are inadequately equipped, less productive, and inefficient. It Inlay also believe devolving autonomy to local levels to handle their own affairs might lead to more corruption at local level. There is also general misperception among some officials that the decentralization effort of provincial councils as a failed system. Proposed
Structure of Local Finance in Japan (2009, Yen 100 Million) http://www.metro.tokyo.jp/ENGLISH/ PROFILE/overview09.htm
public service shol reforms are in urg systen is too poli
Sri Lanka despera development, reconciliation with at local, regional Local citizens consideration and needs, and can c they are empower proposed local a plays vital role ir citizen and ach mentioned goals livelihood of the argue that Mahind not work efficient citizens are fri
politicisation.
approach to emp local level. Consi in Japan and all members of local
Contd. from page 41
Opportunities and Challenges in a Globalized Environment, Workshop Proceedings, UGC, Ministry of Higher Education, June 2012,p 139.
Mauch Werner, Papan Uta (Eds.), Making a Difference:Innovations in Adult Education, UNESCO, Germany,
1997.
Ekanayake S.B., Learning from the People : Strategy for development, National Institute of Education, Sri Lanka, 1993.
Ekanayake, S.B., Lifelong Education: The Mega Changes in the New World Order, Pradeep Publishers, Colombo, 2O09.
- 46
Gooneratne, W. (.. Development Reg Meeting the Nat Challenge", in Re in Sri Larkta: Re (edited by M.M. ) Anders Narman): Jayawardenepura
Ralf Alter( 2 DevelopmentPo. Countries, Paris.
Vidatha Centre: Technology, Minis Technology, Sri L
Godard, John, Regional Develop University of New February 1997.
 
 
 
 
 
 
 
 
 
 

LAU may face some other challenges also. Majority of pureaucrats Who
epresent various
g o v e r n. m e n t al i.epartments at the ocal level may not wish to work under alected politicians as the process night lead to further politicization of u b 1 i c כ administration. instead of political e a d e r s h ip , DureaucratSWant tO work with capable government officers. Despite all unjustified negative nind-set, it is strongly felt that ald be improved and ent need as Current ticised.
ately needs regional peace and n better governance and central level. have committed assessment of their ater those needs if ed. We believe that dministrative unit empowering local lieving the above and improving the citizen. One can a Chinthanayamay ly unless and until eed from undue This is another ower people at the dering experiences so Sri Lanka, the government council
may be elected by the people on nonpolitical party basis. Bureaucrats and technocrats at local level are there to help citizens and not to decide on behalf of people.
References
Bevil, M. (2012). Public Governance. In Governande: ν, Introduction. Oxford: University Press. CLAIR ( Local Government in Japan Tokyo: Council of Logal Authorities for International Relations.
Gooneratne, Wilbert (2005), A System of Yoë Regions - for Sri Lanka: eetಣ್ಣೆ the Global and National allenges’, M.M.Karunan ayake & Anders Narman (င့နှု REGIONAL DEVELOPMENT IN SRI
ANKA: Resetting the Agenda, grsity of Sri Jayawardeñepura
Gunawardena, A., & Lakshnan, W. D. {}; Challenges of Moving into a Devoed Polity in Sri Lanka. Foundation for Local Governance, 117.
Lakshman, ஃஃஃ Issues of Provingial Council and Local Governmerit I'CaXcCLitio r. Moង្h Wilson, D. (2005). The Uniteakingdon an increasingly differentiated polity? In B. Denters, & L. E. Rose, Comparin
Local Gouerance: Trends T an
Developments. New York: Palgrave MacInilan.
Footnotes
Author would likę to thank Wilbęrt Gooneratne and Sirimal Abeyratne for constructiye comments given on earlier draft of the paper. However,
remaining errors are entirely ours.
Presiden R. Premadasa introduced this system and later changed as there was some resistance from bureaucrats.
Contact detail
Prof. N. S. Cooray, 777 Koksaicho, Minami Uonumashi, Niigata 94-9-7277, Japan.
2005), “A System of
ions for Sri Lanka: ,
ional and Global gional Development setting the Agenda Sarunanayake and , University of Sri , Sri Lanka.
2010), Regional licies in OECD
s of Science and stry of Science and anka, 2009.
Universities and ment: An Overview, castle, Upon Tyne,
Lundwall, B.A., Johnson, B., The learning económy”, Journal of Industry Studies, 2, 23-42, 1994
Stuart Rosefield Ed. Institutional and Regional Developmentin Intermediate Regions, Alcoy Spain, June 2001.
Vitharana Tissa, Fernando Sirimali., The National Science, Technology and Innovation Strategy for Economic Development of Sri a, Economic Reyiew, People's Bank Publication, Vol. 38, June/July 2012.
De Alwis Raniani Kusun siri, Liyanagedara Muditha, Role of Vidatha in the Transfer of Locally Developed ဗူ႕ႏွင့္ပတ္တိဝုတ္တိံes, Economic Review June July 2012.
Sedera. Upali M. Knowledge Economy and General Éducation Economic
Review, August-September, 2010.
Economic Review:Feb./Mar 2013

Page 49
FEATURES
Entrepreneurship a Competitiveness Is Sri Lanka Bad?
Abstract
in t rep re n e u r s h tip E. facilitates economic development through income generation, innovation, employment, and uvelfare effects, There are considerable differences across countries in the ordentation of entrepreneurial activities and entrepreneurial development. The nature and level of entrepreneurial activities varies depending on factors such as, the relative nature of competitiveness and opportunities for entrepreneurship. The purpose of the paper is to study the nature and the level of competitiveness of Sri Lanka.
In Sri Lankcan economic development efforts, there has been no clear major step to promote entrepreneurship. A major constraint to development of entrepreneurship in Sri Lanka is the lack of an enabling environment, caused my many factors including, erratic industrial policies and priorities, market imperfections, weak infrastructure facilities, civil conflict and in appropriate technology. Policy and regulatory environment uhich facilitate and encourage entrepreneurship grouth is of tinely inportance.
Introduction
Entrepreneurship is one of the most important factors for economic development through income generation, innovation, employment, and welfare effects (Acs and Audretsch l988; Wennekers and Thurik 1999; Baumol 2002). There are considerable differences across countries in the orientation of entrepreneurial activities and entrepreneurial development (Autio 2007). The purpose of the paper is to study the nature and the level of competitiveness of Sri Lanka.
Sri Lanka has be well as impleme policies to fost
entrepreneurship
mixed results. Thi the comparative over the other or global competiti critical appraisals policy initiati entrepreneurshi competitiveness is Competitiveness I prepared by the Forum (WEF) are source of informa
Competitiveness
World Economic Fo competitiveness institutions, polici determine the lieve a country. Porter
competitiveness country's econol distinguishing thi (1) factor-driven s driven stage and (3 stage; and two tr these stages. Ac countries have to reach the third sta driven stage. Figu: pillars. Deterr productivity and include physic infrastructure,
training, technolo and order, macro good governance, and market effici
World Econon preparing its Glob Report 2010-11 a first stage (i.e. iiI stage), countries their factor endic unskilled labo resources. The fac relay on low cost of commodities c products.
Economic Review:Feb/Mar. 2013

nd Global Business
in
en undertaking as nting liberalised Sr the growth of since 1977, with s article will study advantages of one various fronts of 7eness, alongside of the government's ves to Spur p. As far as the concerned, Global ndex (GCI) reports World Economic ; employed as the tion.
of Environment
Drum (2010) defines as the set of es, and factors that el of productivity of et al. (2002) define according to a mic development, ree specific stages: tage, (2) efficiency) innovation-driven 'ansitions between ccording to WEF,
step l2 pillars to ge, the innovationre 1 displays the 12 ninants driving competitiveness :al capital and
education and gical progress, llaw economic stability, firm-sophistication, ency.
ic Forum while
pal Competitiveness
ssunes that in the in the factor-driven compete, based on wments- basically ur and natural tor-driven countries ... in the production or low value-added
Sri
Lanka:
Dr. S. P. Prenaratne
Senior Lecturer Department of Economics University of Colombo
N.Malimage
Research and Irformation Analyst Department of Economics University of Colombo
The first stage is marked with high rates of non-agricultural selfemployment. Small manufacturing firms and service firms are dominant in this stage (Acs et al. 2008). Maintaining competitiveness at this stage of development depends primarily on first four, pillars: wellfunctioning public and private institutions (pillar 1), well-developed infrastructure (pillar 2), a stable macroeconomic environment (pillar 3), and a healthy workforce that has received at least a primary education (pillar 4).
To move into the second stage which is the efficiency-driven stage, countries must step up lo pillars (Figure 1). Countries must increase their production efficiency. In order to increase the production efficiency, countries must have a quality educated and trained labour force and a large market which allow business firms to make use of economies of scale. The efficiency-driven stage is marked by decreasing rates of selfemployment (Acs etal 2008) and small units.
There are several reasons for decreasing rates of self-employment and small units when countries reach. development stage such as the efficiency-driven stage. Professional 'capital is more important in advanced countries. As a result of
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high professional skills, individuals have different endowments of managerial ability. Consequently, as an economy becomes wealthier, the average firm size should increase as a result of better skilled managers run
entrepreneurial a U-shaped relati economic dev entrepreneurshi confirmed this
developed countri
Basic Requirements
Pillar 1: Institutions Pillar 2: Infrastructure Pillar 3: Macroeconomic
Environment Pillar 4: Health and Primary Education
Ke.
Drj
Efficiency Enhancers
Pillar 5: High Education and Trainings Pillar 6: Goods Market Efficiency Pillar 7: Labour Market Efficiency Pillar 8: Financial Market
Development Pillar 9: Technological Readiness Pillar 10: Market Size
Ke
DiTj
Innovation and Sophistication
Pillar 12: Innovation
Pillar 11: Business Sophistication
Ke Inir Ec
Figure 1.
Source:
2O11-2012
the companies. According to this view of economic development, increases in the capital stock (through large scale firms such as private enterprises, direct foreign investment or government ownership) will increase returns to wage work relative to entrepreneurial activity. Accordingly, the relationship between entrepreneurial activity and economic development would be negative. Empirical studies support the view that economic growth in terms of increase the per-capita Gross National Product (GNP) is negatively related to the self-employment rates (Acs et al 1994, Fölster, 2002). The other argument is that improvements in the infrastructure in countries, such 2S transportation, telecommunications and credit markets, probably increase the advantages of larger firms over smaller firms (Tamvada 2009) through economies of scale. Therefore, the keys for efficiency-driven economies are high education and trainings for human capital development (pillar 5), good market efficiency (pillar 6), labour market efficiency (pillar 7), financial market development (pillar 8), technological readiness (pillar 9) and market size (pillar 10).
However, the innovation-driven stage is marked by an increase in
- 48
The 12 Pillars of Competitiveness World Economic Forum (2011), Global Comp
Evans and Leighto several reasons Empirical studi developed indust show that the se expanded relative
In general, service on average than m. (Premaratne 20 economy-wide ave decline. Service fi opportunities for
(Premaratne 2002) economy charact values of the agg factor substitution with advanced should expect a development, mo and smaller firl competitiveness characterized by ir networks ("Clustel innovation (pillar
Entrepreneurshi Review of Gover
Since Independen given emphasis to in its policy stanc the late 1950s, in not receive high I high demand for

ctivity predicting a on ship between elopment and p. Studies have result for most es (Acs et al. 1994,
y for Factorven Economies
for Efficiencyven Economies
y for novation-Driven ΟΙΛΟΥ116S
betitiveness Report
in 1989). There are
for this trend. es conducted in rialized countries 2rvice sector has to manufacturing. ' firms are smaller anufacturing firms )02); therefore, rage firm size may rms provide more entrepreneurship . In addition, in an erized by higher regate elasticity of h (this is the case economies), one higher level of re entrepreneurs ns. In terms of , this stage is novative business 's') (pillar 11) and 12).
in Sri Lanka: A ment Policies
ce, Sri Lanka has
entrepreneurship es. However, until dustrialization did priority due to the raditional exports
as a result of rubber boom, tea boom and the Korean War during that time. Until late 1950s, since Sri Lanka did not face major economic challenges, it did not identify the importance in implanting entrepreneurship for economic development. However, after this period Sri Lanka faced major economic problems such as unemployment which challenged the policy formulation on developing entrepreneurship. Thus, this led to a policy implementation related to industrialization, import substitution and emergence of large state owned enterprises. The import substitution was encouraged by stances such as high tariffs, and quota restrictions on imports.
In Sri Lanka, policy stances have been based on the government in power at a particular instance. Within this tendency, the government in 1965, introduced a new policy package through the White Paper of 1966 on Foreign Investment'. The objective was to attract foreign investment into the industrial sector which expected enhancement of managerial and technological capabilities of the sector. Moreover, a dual exchange rate system was implemented to reduce expenditure on importing inputs. This WaS to encourage entrepreneurship in the SME sector. Further, Industrial Development Board was established in 1969 for the
same purpose.
Irrespective of the high nationalized policy stance in 1970s, in 1977 a radical policy stance was adopted with the opening of the economy. The tariff structure and exchange rate systems were revised in order to facilitate free market policies. The privatization was justified by the philosophy that private sector is the engine of growth.
In 2002, the government formulated a “white paper “to encourage the SME sector as SME sector was identified as to be having significant socioeconomic implications. In a marketoriented policy framework, it was identified the need to make the SME sector more globally competitive through a business enabling environment. Thus emphasis was given to areas of finance, technology, access to information and markets, business development services,
Economic Review: Feb./Mar. 2013

Page 51
linkage formation, infrastructure, legal and regulatory framework, industrial relations and labour, entrepreneurship skills and environmentissues. To facilitate this, an SME Authority was established and a SME Bank (which was merged with Lankaputhra Bank in 2008) was setup. Neither the SME authority nor SME bank functions well. As an another attempt, however in 2012 the first branch of the SME Bank affiliated to the People's Bank, was opened at Anuradhapura. As proposed in the 2012 budget, the objective of the SME bank is to extend credit facilities to micro, small and medium scale entrepreneurs in the country at a minimum interest rate in order to develop local private sector. The SME Bank disburses funds on the basis of a simplified, flexible collateral policy and a low rate of interest on credit with a suitable grace period for the repayment.
However, with the change of.
government in 2005 it ended up only as policy document. The liberalized economic policy continued regardless of the changes in government. For instance, the current government's “Ten Year Horizon Development Framework 2006-2016" has emphasized more on domestic industrial development strategy. In the new policy framework, industrial policy place emphasis on assisting SME, micro enterprises, and selfemployment ventures as a part of the shared growth strategy (Department of National Planning 2006). Government interventions focus on creating a sound incentive structure, including in centives for new investiments, facilitating access to technology and credit, developing skills and entrepreneurship, maintaining standards and performing regulatory functions among others. Policy uncertainty, as implied, appears to be a major barrier to the entry of new investors.
However, several studies highlighted that economic liberalization did very
little in developing the SMEs in Sri
Lanka (Lakshman etal 1994, Osmani 1987). Though liberalization has brought about some expansionary motivations formany SMEs to operate competitively into international markets, the incentive structures favoured large enterprise against Small
ones, foreign dire against local inv Inetropolitan regions a regional economies (A Those policy incentiv to support local ent development. In add Force for SME Secto Programme (2002) ht despite the liberali policy experience th overly bureaucratic sy results in unnecessal deliberations and is e
Amid the absence of a directly targeting the Sri Lanka, the es1 industrial estates is or initiatives. Industria known by different in Export Processing a Zones. The strategies under this cons encouragement of fo investment, increasir. the export oriente development, the esta Export Processing Z promotion villages, su exchange and small industry credit scheme
“Mahinda Chintana’- V: a New Sri Lanka: A Ten Development Framewo integrates the positive narket economic poli domestic aspirations necessary support enterprises and foreig (Department of Natio 2006). The Sri Lankar focuses on creating friendly environment, bureaucracy in ter governance, and f processing of licence requirements through initiatives' (Departmer Budget 2006). Are entrepreneurial environment?
Global Competiti Sri Lanka
In the results of competitiveness rankin places 70th OVEI competitiveness. In 20 Lanka was 81" place. the latest GCI ranking Sri Lanka secures the out of 139 countries. 62 in 2010-2011.
Economic Review:Feb/Mar. 2013

investment stinent and ainstrural and eyratne 2006). s were unable epreneurship ion, the Task Development hlighted that ed econonic re exists an ten that often delays in its cessive costs.
bolicy package SME sector in ablishing of e of the major Estates are
umes such as
ld Promotion and initiatives st of the reign private g exports for i industrial ablishment of ones, export b-contracting and medium
etc.
ision Towards Year Horizon rk 2006—I.01 6 attributes of cies with the by providing to domestic n investment inal Planning Government an investor limited in its ns of good ast in the s and other
e-Sri Lanka .
t of National we creating friendly
7 eless of
2OO 7-2 OO8 g, Sri Lanka all global D6-2007, Sri According to (2011-2012), 52nd position he rank was
Basic Requirements: Key for Factordriven Economies
As one considers basic requirements (institutional, infrastructure, macro economy, and health and primary education) for global competitiveness, the Global Competitiveness Report (2007-2008) ranks Sri Lanka in 85th place in the year 2007-2008. Sri Lankalifted to 73th position in 20102011 and secures 65th position in 2011-2012. In terms of institutional requirement under the basic requirements for global competitiveness, Sri Lanka is 68th in global ranking in 2006-2007 while 50th in 2011-2012. SriLanka, interns of infrastructure, macro economy, and health and primary education, places 73rd, 125th and 51st respectively in 2006-2007. In 2011-2012, the picture has b een slightly improved by reaching 60th in infrastructure, 116th in macroeconomic environment, and 45th in health and primary education. This reflects, however, a low quality business culture.
When comparing Sri Lanka's rank in GCI in 2008, there is a slight drop in 2009. In 2009, Sri Lanka's rank in GCI is 77th and the country's cornpatitiveness is threatened by certain crucial factors. The competitiveness is threatened by the macroeconomic instability in the country. Moreover, the budget deficit in Sri Lanka is large to the extent that it is one of the countries in the world which has the largest budget deficit. The labour market efficiency and flexibility in the country is low due to high tax rates involved, high firing costs and low participation of females in its labour force. For example, according to GCI 2011-2012, Sri Lanka is in 126th place in the case of women in labour force, ratio to men.
AS per 2OO 8.20 O9 Global Competitiveness Report, Sri Lankais listed as at its “factor-driven” stage in competitiveness. The three most problematic factorsfordoingbusiness in Sri Lanka in order are inflation, corruption and tax rates.
In 2009 Sri Lanka ranks 79th in GCI which exhibits a further decline in its competitiveness compared to the previous year. This is owing to the country's reluctance to investin basic determinants of competitiveness such
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as in infrastructure, macroeconomic stability and basic/higher education. To worsen things, the threat of terrorism used to bear heavily on the business community in this period.
In this period, the three most problematic aetaS against competitiveness in order are, tax regulations, tax rates and access to financing. However, corruption still remains high. If these weaknesses can be rectified, then GCI of Sri Lanka will experience further improvements.
Efficiency Enhancers: Key for Efficiency-driven Economies
According to the graph, it can be observed that there is a considerable improvementin the GCI relative to the previous years. It is stated in Global Competitiveness Report (GCR) that the country is now in the transitioning period from " factor-driven stage" to " efficiency-driven stage" as can be seen in the large improvement in its GCI which can also be proven by its rising level of GDP. The shift to "transition stage” emphasizes on the need to investmore in its efficiencydriven factors. In this year, it is stated that the improvements in GCI is owing to its improvements in the institution pillar, increase in perceived security, efficiency in financial Imarkets and benefits from innovation and business sophistication.
However, , certain weaknesses which impede competitiveness still persist. These are namely, increasing levels
of debt and deficit, declining savings.
rate, poor credit ratings in financial markets, labour market rigidities such as high redundancy costs and low level of ICT. These factors also have an impact on productivity which in turn affects the competitiveness of the country.
Technology and technological capabilities are key determinants of overall competitiveness. The access to latest technology is one of the major constraints in Sri Lanka. This results in poor quality of products and high cost of production result in lack of competitiveness in the international markets. Government intervention and the public and private sector partnership in developing technology
t
appears to be
Though there a offered such se are not need dı
with regard
environment (ra maintains a larg 131). High level (rank 126) and spread (rank 34 intermediation ( banking secto: affect private se contribute to lov The overal de competition an competition hav to the numerou Lanka as a devi midst of an eth: Society Trust, a Studies 2002). notes, the cou: higher performa health sector () primary educa higher educat though it entrepreneurial of higher educ RefoIIn efforts private secto education aJ developing entre under way, but to be lengthy, in (Law and Societ of Policy Studie
With regard regulatory env burden of gov
4.3
4.25
4.2
4.15
4.1
4.05
4.
3.95
2008 20
Figure 2
;
- 50
 

reak in Sri Lanka. e a few institutions vices, their services
VC...
macroeconomic lk 116), government : budget deficit (rank of government debt a wide interest rate indicate the heavy osts in the country's which negatively ctor investment and "er economic growth. rth of progress in d the regulation of ; also been attributed s issues faced by Sri loping nation in the nic conflict (Law and hd Institute of Policy (However, as positive htry show relatively nce on education and tank 45, health and tion, and rank 66, ion and training), is lacking in education, the quality ation and research. , including greater r involvement in ind dealing with 2preneurial skills, are the process is likely literrupted and costly y Trust, and Institute s 2002).
to the policy and ironment (rank 32: :rnment regulation),
despite various reforms introduced during the post liberalization period, the level of bureaucracy associated with business-government intervention appears to be high in Sri Lanka (Bernard 2006). According to the World Bank (2007), Doing Business 2008 Report, Sri Lanka is ranked 10 out of 178 economies in 2008 (Sri Lanka is ranked 89 in the 2007), in terms of ease of doing business. Her rank in 2011-2012 is also the 89th. However, according to Doing Business 2013 Report, Sri Lankais one of the ten economies in the world that are improving the most in the ease of doing business. In terms of starting abusiness, Sri Lanka is ranked 29 in 2008. The Starting a Business rank has fallen down from 35th position in 2011 to 38th position in 2012. The worst scenario is in Dealing with Licences, of which the country is ranked l60 in 2008. In 2012 Sri Lanka is 111th position.
In terms of starting abusiness, when entrepreneurs draw up a business plan and try to get under way, the first hurdles they face are the procedures required to incorporate and register the new firm before they can legally operate. The process in this regard is largely ad hoc in nature (World Bank 2007).
However, the administrative structure in Sri Lanka is very complex, largely as the result of an incomplete decentralization process. At the local level, District Secretaries and their staff represent the Central Government, followed one level lower
GCI Sri Lanka- From 2008 to 2012 吠
0.
• GCII
--
.5 2009 2009.5
2010
2010.5 2011, 2011.5 2012
he changes in Global Competitive Index of Sri Lanka from
O8 to 2012
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Page 53
by Divisional Secretaries and further down by Grama Niladharis (the
government representative at village .
level). Central Government agencies may or may not have representatives at the District level. The Provinces are made up of several Districts and are governed by an elected Provincial
Council, with its own administration
and decentralized budget but no say Over the District administration. Elected Municipal councils and Pradesheeya Sabhas report to the Provincial Councils. There are thus two parallel and partly overlapping Government structures. Some "subjects” (such as local roads) are devolved, while others are not. Some are shared. This includes enterprise development generally and SME development in particular, with the result that a large number of agencies engage in enterprise promotion activities at local level, in addition to the national level agencies, in competition rather than coordination. On the side of the private sector, there are a number of Chambers and an Employers Federation at the national level, while most District Chambers of Commerce and Industry and local level business associations are still weak.
There is also no concerted and coordinate policy to enhance the regulatory and institutional environment for development of entrepreneurship (Bernard 2006, Premaratne 2002). Improving the environment for entrepreneurship development is generally not a part of development planning or day-to-day decision-making. The Officers who implement regulations are interested in control rather than facilitation. Those regulations and administrative procedures are outdated (see IDLO 2007). Law and order is another important area to be considered.
The unfavourable environment is
partly due to the lack of dialogue among central, provincial and district authorities on the one hand and the private sector on the other. Officials are often ill informed about issues relating to the business environment and strategies to address them. Business Associations are weak and often function as welfare societies. Overall, there is little awareness that closer cooperation and b etter organisation would be beneficial to the local economy.
With regard to the lab are more than 48 law to labour relations which at present are I (LST and IPS 200 stringent of the lab Termination of Emplo Act of l97. The rationale for the
widespread retrench II to the shortage of r: industries, and the pr private industries. Ti essentially derive encouragement of sta the expense of priva This act removes th employer to lay off a who have been emp than six months for a than serious, wel disciplinary problem labour marketirigiditie However, this Act doe effect if a company
than 15 persons. Bes less than three emp liable for so ci contributions. Overall polices in Sri Lanka ( nobility of labour encouragement for businesses. Finally, t has notyet grasped the market policy reform.
In addition, Sri Lan. number of holidays v to other countries. Th of public holidays estimated at around SEDF 2007). In additic firms are required to 21 days' leave and a sickleave a year. Labo to the loss of an additi year and absenteeism days (World Bank al. These are some contributing factors i competitiveness o internationally. The V highlights the la efficiency (7th Pillar). T do es not display
competitiveness in the Only three indicators favourable for Sri La Iigidity of employmen and productivity (: reliance on profession (rank 3l).
Enterprise culture at may seem the nostint of the business envirc
Economic Review:Feb/Mar. 2013

purpolicy, there that are related in Sri Lanka, ot been codified. 2). The most nur laws is the InentWorkmen rigin and the Act was the entin971 due w material for oblems faced by hese problems di form the e enterprises at te enterprises. le right of the (nd fire workers loyed for more ny reason other - documented s. This creates sin the market. snot come into employs fewer ides, firms with loyees are not al security , labour market io not facilitate . There is no starting own the government 2 need for labour
ka has a large when compared Le total number, ; per year is 30 days (IFCn, formal sector allow workers cound 21 days' lur unrest leads ional 2.5 days a to another 3.5 nd ADB 2005). of the major in reducing the f the island WEF evaluation bour market he rank (104th) Sri Lanka’s Global context. are somewhat unika. They are t (rank 48), pay rank 40) and al Imanagernent
the local level ractable aspect inment. Norms,
values and attitudes as they relate to business, i.e. enterprise culture are not favourable for entrepreneurship in Sri Lanka. A range of studies have found a strong Cultural bias in favour of public sector employment (Hettige, Mayer and Salih 2004, Ibarguen 2005). If this cannot be obtained, other white collar employment is preferred over own business, which is seen as an option of last resort. The enterprise culture is one of the underlying causes for lower rate of business start-up in Sri Lanka (ILO 2007). Women are generally discouraged from starting a business, or are expected to keep it small, especially in more rural areas. This is owing to factors such as lack of
social capital and cultural values such
(Reinprecht, and Weeratunga 2006).
Political stability is one of the positive factors in the business environment. Politically, Sri Lanka is now one of the world's most stable countries even though major issues in the Northeast and the South have not yet addressed properly. Nevertheless, policies in Sri Lanka have been changed when even a new minister is appointed. Policy and development decisions are making ad-hoc basis without proper analyses partly owing to changes in the government. ry
Weak infrastructure (poor roads, frequent power cuts, weak communications) and poor access to infrastructure (rank 61: quality of overall infrastructure) causes production stops and disturbances which has a negative effect on Imarkets access, access to inputs and to information. Most of the businesses particularly SMEs suffer due to the
weakinfrastructure facilities (Bernard
2006, IFC-SEDF 2007, World BankADB 2005). The availability of electricity for the smooth operation of industries and business enterprises was highly irregular (rank 62: quality of electricity supply). In addition, the unit cost of electricity is high as compared to competing countries. Transport is another bottleneck owing to the low quality of roads (Rank 49: quality of roads). Despite its higher rate S, the telecommunications sector (rank 73fixed telephone line, and rank 96mobile telephone subscriptions) performs much better than electricity and transport (World Bank-ADB 2005).
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Page 54
Table 1 Twelve Pillars of Global Competitiveness. In
Basic requirements (Sri Lanka
Efficiency enhar
rank 65) Rank 69)
1st pillar Institutions (rank: 50) 5th pillar Hi
2nd pillar Infrastructure (rank 60) 6th pillar GC ر. eff
Macroeconomic 7th pillar La ܕ݁.ܶ 3rd pillar environment (rank eff
116)
4th pillar Health & primary 8th pillar || Fir education (rank 45) de
9th pillar Te
re.
10 pillar Ma
(Ranks: 40 - quality of railroad infrastructure, 44 - quality of port infrastructure, 62 - quality of air transport infrastructure). All these factors increase the cost of doing business and thus impede competitiveness, which again greatly affect development Of entrepreneurship.
Innovation and Sophistication factors: Key for Innovation-driven Economies
Is Sri Lanka an innovation-driven economy? Innovation-driven economies are led by innovation and sophistication factors, in which Sri Lanka is in a good position (rank 34). However, Sri Lanka has weak infrastructure for scientific research and innovation and still not an efficiency-driven Companies and government spend
very rarely on research and
development. With regard to the innovation, Global Competitive Report in 2007-2OO8 ranks Sri Lanka in 47th place where as it was in the position of 40 in the year 2010-2011 while it was 42th position in 2011-2012. To
identify the level of innovation on global competitiveness, WEF employs indicators such as capacity for innovation (50), quality of scientific research institutions (50), company spending on R&D (37), universityindustry collaboration in R&D (73), government’s pro cuirement of advanced tech products (15), availability of scientists and
engineers (34), and utility patents
economy.
granted/million parentheses ar
ranks in 2011-2
The fact is that achieve a strong (pillar 12) withic educated and (pillars 4 and absorbing new te and without su (pillar 8) for R&D market that mak new innovations Therefore, Sri L transition stage factor-driven sta efficiency-driven Lanka was in the (Stage 1).
Conclusion
In Sri Lankan ec efforts, there has step to promote major constrain entrepreneurshi lack of an enal caused mainly b policies and p imperfections, v facilities, an technology.
In conclusion, properly plan ind the supports fror through sub-cont provide with qu facilities if the co
52

dex: Ranks of Sri Lanka 2011-2012
cer (Sri Lanka.
Innovation and sophistication factors (Sri Lanka rank 34)
gher education and 11th pillar Business
ining (raInk 66) sophistication (rank
32)
iods market 12th pillar Innovation (rank 42)
iciency (rank 41)
bour market iciency (rank 117)
hancial market velopment (rank 45)
chinological adiness (rank 85)
urket size (rank 67)
population (77). The e given respective O12.
it is very difficult to innovation capacity out a healthy, welltrained workforce 5) that is adept at :chnologies (pillar 9), afficient financing or an efficient goods es it possible to take to market (pillar 6). anka is still in the from the stage 1 (the ge) to the stage 2 (the stage). In 2008 Sri a factor-driven stage
onomic development been no clear major entrepreneurship. A t to development of p in Sri Lanka is the pling environment, by erratic industrial priorities, market weak infrastructure d inappropriate
Sri Lanka must ustrial clusters with n foreign enterprises racting linkages, and ality infrastructure
untries are eager to
develop entrepreneurship. Sri Lanka is also suffering from low level of inclusive growth. Further studies Inay focus on dynamic patterns of global competitiveness of entrepreneurship in Sri Lanka and how entrepreneurs
react to the changes of the
competitiveness.
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Contact details
S.P. Prenalatne premarat(decon.cnb.ac.ik
N. Malimage nalindranimalimage@yahoo.com
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Poverty in Sri Lanl Where are They?
Abstract
ri Lanka has na de S considerable progress in reducing poverty during last tuvo to three decades and has already achieved the Millennium Development Goal (MDG) of halving the incidence of Income Pouerty, well before the target year 2015, at national level. The achievement of the MDG on poverty is not only at national but also at regional level. However, still there are regional disparities in the incidence of poverty, which needs the attention of the relevant authorities.
It would be necessary to identify
regions uhlich are still lagging behind and also the people belonging to certain socio-economic groups, uho are still destitute and therefore needs the attention of the State agencies involved in developing strategies to reduce poverty in Sri Lanka. If the poverty levels in Sri Lankca are to be reduced further, the people in all the regions in the country and belonging to different socioeconomic groups, should be able to enjoy the benefits of grouth.
This paper attempts to identify the poorest groups in Sri Lanka and to identify uhere majority of then live, uvhich may help the planners and policymakers, when developing and implementing poverty reduction strategies, to help the poor to get out of poverty.
What is Poverty?
Being poor is generally viewed in terms of deprivation of some of the life's basic human needs, such as food, shelter, clothing, safe drinking water, sanitation facilities, basic education, primary health etc.
Different Measures of Poverty
Different Measures are being used to
measure poverty. There are two broad classes of methodologies for
estimating pov and Relative P.
Absolute Pove is a condition c deprivation of including food. hygienic sanita education, he (United Nation
Relative Pove could be defi: position of the deemed poor, individual or community in
For the purpose for poverty red should prefer especially wher being considere is argued that guarantees
comparisons a two individual of welfare are t
Absolute Pove used in meas Lanka, by the and Statistics in poverty over can be compa approach is u: a consumpt includes food the Ininimun in and other bas: The cost of th is called the “E is considered which varies a regions. In oth Line” also var items and othe basket varies regions. For e fixed basket urbanized are the total cost district like M poverty line Colombo Dist District. The Poverty Line:
- 54

ca: Who
rty: Absolute Poverty verty.
ty: Absolute Poverty aracterized by severe basic human needs, safe drinking water, ion facilities, shelter, lth and information , 1995).
ty: Relative Poverty led in terms of the person or a household in relation to other households in the which they live.
of formulating policies uction, a poverty line ably be “Absolute", welfare measures are ed (Ravallion, 1994). It
such a poverty line that the poverty re consistent so that s with the same level reated the same way.
rty Line approach is uring poverty in Sri Department of Census DCS), as the changes time or across regions red easily, when this ed. In this approach, on bundle, which tens needed to meet utritional requirements c needs, is kept fixed. s fixed basket, which asket of Basic Needs", as the "Poverty Line", cross time and across er words, the "Poverty es, as the cost of food essentials in the fixed over time and across ample, the cost of the s high in the highly is like Colombo, than f the same basket in a naragala. As such, the nas higher value in ct than in Monaragala DCS publishes the at national level, as
are Poor and
A.G.Wimal Nanayakkara
Retired Director General
of Census and Statistics Senior Visiting Fellou
Institute of Policy Studies
well as district level on a monthly basis, in its official website WWW, statistics.gov.lk.
The percentages of people below the poverty lines at national level, as well as district level are computed based on "Household Income and Expenditure Surveys (HIES)”, conducted by the DCS, around once in five years. The percentage of people below poverty line is usually termed as "Headcount Index” or sometime as "Headcount Ratio", is the percentage of people in poverty. The series of HIES, based on which the incidence of poverty has been computed using the methodology developed in 2004, are HIES-1990/ 1991, HIES-1995/1996, HIES-2002, HIES-2006/2007 and HIES-2009/ 2010. The measurements of poverty based of these surveys are consistent as the food and non food items considered in the basic needs basket, explained earlier is kept fixed. It is essential to keep this basket fixed in order to compare the incidence of poverty, over time and across regions. The methodology adopted in measuring poverty is somewhat complex to be described in an article like this, which is meant for the general public. However, the details on the methodological aspects are found in Poverty in Sri Lanka-Issues and Options (Nanayakkara, 2006).
Although some criticise the poverty figures compiled by the DCS, which are based on the Household Incorne and Expenditure Surveys, the Headcount Index or the percentage of the poor, computed by the DCS is slightly higher than the percentage of poor, computed based on the poverty line used for international
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Page 57
Table 1
Population (%) Below International Incone Po
in Purchasing Power Parity Terms Per Day P the National Poverty Lines, for Countries in the
- 2009
Country in Rank of the Percentage of Population Popu the sAARC ||country based || Below International || Natio Region Ο ΙΥ the Income Poverty Line (Incon
H um a n (US$ 1.25 per day per Development person, in purchasing Index (out of power parity terms) 187 countries)
Sri Lanka g7 7.0 (2009) 8.
Maldives 109 1.5
India 34 4.6 27.
Bhutan 141 26.2 23.
Pakistan 45 22.6 22.
Bangladesh 46 49.6 40.
Nepal 157 55. 30.9
Afghanistan 172 − 36C Source: Human Development Report-2011 (UNDP)
comparisons: US$1.25 per day per person. For example, the percentage of poor, based on the national poverty line was 8.9 in 2009/2010, while the corresponding figure based on the international poverty line (US$1.25 per day per person) was 7.0.
Although US$1.25 poverty line could be used to compare the incidence of poverty between the countries, it is not quite appropriate to compare the incidence of poverty between regions within a country. As such, most of the countries have developed their own national and regional poverty lines to compare the poverty situation between regions, within the countries. Most of the countries use Absolute Poverty and the Cost of Basic Needs approach to determine the poverty lines, like in Sri Lanka.
The Table l gives the population below international poverty line and the national poverty line, for the countries in the SAARC region. In Sri Lanka, the difference in percentage of population below international poverty line and the national poverty line is marginal. As such, it is reasonable assume that the percentage of persons in Income Poverty, computed by the DCS, based on the Household Income and
Expenditure Surveys, with the correspon computed using the i poverty line (US$1.25 person). Therefore, estimates of the DC Household Income and surveys, using the n district poverty lines c. with confidence, to c changing status of pove and across regions.
Multidimensional Pov
lin addition to the abov poverty measures, a ne index called "Multic Poverty Index (MPI) developed by the Uni Development Fund Oxford Poverty a Development Initiative. I of acute poverty, whic combination of depriv batter a household at th The Multidimensional assesses the nature an poverty (i.e. how many poor people experience time) at individual leve of their poverty is mea on the extent of their de can be used to create a c picture of the people livi
Economic Review: Feb./Mar. 2013

rty (US$1.25 Person) and AARC Region
tion Below al Poverty ) Line
─
(2009/10)
is consistent ding figure International
per day per the poverty S based on
Expenditure ational and ould be used ompare the rty over time
erty
e mentioned w innovative imensional has been led Nations UNDP) and d Human is a measure reveals the ations, that 2 same time. overty Index intensity of ieprivations, at the same The extent ured, based rivations. It mprehensive gin Poverty,
and permits comparisons, both across countries, regions within countries, as well as between various socio economic groups. The "Multidimensional Poverty Index" offers a valuable complement to traditional "Income Poverty". Multidimensional Poverty, is measured using three dimensions: Health, Education and Standard of Living. These are measured using ten (10) indicators. Each dimension is equally weighted and each indicator is weighted within each dimension (Human Development Report, 2011, UNDP). The Table 2 gives the three dimensions, the indicators considered under each dimension and the weights assigned to each indicator. If a household is deprived of any of the 10 indicators, given in Table, the corresponding weight is added for that particular household. If the sum of the weights exceeds 3, such households are considered to be in "Multidimensional Poverty". Then all the members in such households are considered to be "Multidimensionally Poor”.
Income Poverty Trends since 1990/ 1991
Based on the Household Income and Expenditure Surveys (HIES) conducted by the Department of Census and Statistics (DCS), since 1990/1991, Sri Lanka has performed well, in terms of reducing poverty. The country has achieved the Millennium Development Goal (MDG) of halving the incidence of Income Poverty at national levels, around 5 years before target year 2015, which is an achievement for a country like Sri Lanka, which had affected by a 30 year long conflict. The incidence of Income Poverty declined from 26.1 percent in 1990/1991 to 8.9 percent in 2009/2010, while the target to be achieved in the year 2015 was 13 percent.Similar achievements are observed in both Urban and Rural sectors, as well. In the urbara sector, poverty declined from 16.3 percent in 1990/1991, to 5.3 percent in 2009/ 2010, reaching the MDG target of halving poverty as early as 2002. In the rural sector, poverty declined from 29.4 to 9.4 percent during the same period. However, rural sector has the highest share of the poor in the country (84.7 percent of total number of poor persons in the country).
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Table 2 Multidimensional Poverty - Dimensions,
Multidimensional . Multidimensional P o v e r t y || IndiDimensions cator , ||Nunn
ber
1. Bealth 1 The Calorie consumption of the requirement and the food expe household expenditure
2 Head of the Household is Chron
2. Education . 3 | No one in the household has col
4. At least one school-age child no
3. Living 5 Household has no electricity C iti
onditions 6 Household has no access to clea
7 Household has no access to adeq
8 Household has a dirty floor (mud
9 | Household living in a shanty/ li
1O
Household has no car and does n TV, telephone, bicycle, or motor
Source: Human Development Report-20ll; Sri Lank
Although the estate sector is still
lagging behind, with 11.4 percent in .
poverty, if the present declining trend continues, this sector will also be able to reach the target before 2015. The share of the poor in estate sector is 6.5 percent, out of the total number of poor in the country. -
The number of poor people in Sri Lanka declined from 2.8 million in
2006/2007 to 1.8 million in 2009/
2010, showing a reduction of around one million poor people, between 2006/2007 and 2009/2010. However, analysis of the data shows that a large proportion of them are just above.the poverty line and therefore they are at risk of slipping back to poverty, due to economic or any other reason. If for example, the poverty line is increased by 10 percent, the percentage below the poverty line increases to 12.8, instead of the estimated 8.9 percent, which amounts to an increase of around 800,000 poor people.This indicates that they
are within 10 percent above the .
poverty line. As such, suitable strategies need to be developed to prevent such near poor highly vulnerable people, from slipping back
to poverty. If they are far above the
poverty line, the risk of slipping back to poverty will be less.
56
Regional Dispa
Although Sri
considerable c national level, st disparities, with of the country ai. (Figure 2). In e districts in the Sabaragamuva District in the W Kandy Distric Province, aroun poverty. Howeve showed a remark 2006/2007, ex Monaragala, Bac Kegalle District poverty has i percent 1990/9 2006/2007. In districts were
Monaragala, w percent in po 2009/2010, th changed comp districts exce Northern and
achieving the around 5 years 2015. As the pov districts in the N Provinces are Inc 1991, it is not

Indicators and Weights Used
Poverty Indicators used Weights Assigned to Each Indicator (equal weights are given to each dimension
household is less than 80% of the 10/3 5/3 = 1.67 inditure is Inore than 60% of total
ically ill or disabled 5/3=1.67
mpleted five years of schooling 10/3 5/3=1.67
E enrolled in school 5/3=1.67
10/3 || 5/9=0.56
in drinking water 5/9=0.56
Quate sanitation 5/9=0.56
/dung) 5/9=0.56
e OO 5/9=0.56
5A9–05 lot own one of radio, / bicycle
a Human Development Report-2012
rities
Lanka has made }verall progress at till there are regional some of the regions
'e still lagging behind
arly 1990s, all the Southern, Uva and Provinces, Kalutara
Western Province and
it in the Central d 30 percent were in er, all these districts kable improvement by cept Nuwara Eliya, iulla, Ratnapura and s. In Nuwara. Eliya, increased from 20 l, to 33.8 percent in 2006/2007 the worst Nuwara. Eliya and with more than 32 verty. However, by e poverty situation letely, with all the :pt, those in the Eastern Provinces,
MDG. on poverty, before the target year erty estimates for the Northern and Eastern ot available for 1990/ possible to compare
the estimates available for 2009/2010, with the base year for MDGs (1990/ 1991). As such, for these districts, it is only possible to Inonitor the progress from 2009/2010. The Household Income and Expenditure Survey which is being conducted by the Department of Census and Statistics, from July 2012 to June 2013, will be able to show the latest position on poverty, in all the regions. As the latest estimates on poverty are based on HIES-2009/2010, the analysis in this paper is Inainly based on this survey. .
The HIES-2009/2010 survey covered all three districts in the Eastern Province, and Jaffna, and Vavuniya Districts from the Northern Province. The Batticaloa (20.3%) and Jaffna (16.1%) Districts recorded the highestincidence of poverty in 2009/ 2010. Although these two districts records a higher level of poverty, compared to rest of the country, in 2009/2010, the incidence of poverty in these two districts are much lower than the poverty levels of the two worst districts in 2006/2007: Monaragala (33.2%) and Nuwara, Eliya (33.8%). If the , present development activities taking place in Northern and Eastern Provinces
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O.O 5.0 1.O.O. 15.O. 20.O 25.0 3O.O 35.(
Sri Lanka Urban Rural Estate ES 89 5.3 9-4 11.4 15.2 6.7 15.7 32O 22.7 7.9|24.7 30.0
28.8 14.0309 38.4 চক • | 26.1 16.3 29.4 20.5
Figure 1 Trends in the Incidence of Income Poverty by
1990/1991
Source: HIES-1990/1991 to HIES-2009/2010, Departmen
Statistics
Colombo Gampaha. Kalutara Kandy Maltalė Nuwara. Eliya Gallie
Matara. Hambantota Jaffna Vavuniya Batticaloa Ampara. Trincomalee Kurunagala Puttalam Anuradapura. Polonnaruwa. Badulla Monaragala Ratnapura Kegalle
O.O 5.O. 1.O.O. 15.O 20.O 25. O 3
2009-200E 2006-2007
Figure 2 Comparison of Poverty between 2006/2007 an
by Districts
Source: Household Income and Expenditure Survey 2006/2
201Om DCS
continue without any interruption reduction in 器院恶 and the services to the people are 2006/2007 and 2009/ improveds further, poverty levels in the districts in these two Provinces, Who are Poor in Sri I may also decline rapidly, like in the case of Monaragala and Nuwara Eliya. To identify the poorer Districts, which showed a rapid Lankan society,
- Economic Review:Feb./Mar 2013
 
 

Sectors, since
of Census and
zzzzzzzza 33-8
α:Σ.Εκείαςν 33.2
). O 350
2009/2010
O7 and 2009/
tvels between 2O.O.
anka
oups in Sri e sample
households in the Household Income and Expenditure Survey-2009/2010, were classified into 1 1 Socioeconomic Groups, based on the main occupation category of the Head of the Household or his/her activity.
The households headed by 1. Administrators, Senior Officials & Professionals; 2. Technicians 8, Associated Professionals; 3. Clerical, Services, Sales & Similar Workers; 4. Skilled Agricultural, Forestry & Fishery Workers; 5. Craft 8s related
trade workers, plant & machine
operators, etc.; 6. Non Agricultural Labourers 8s similar workers; and 7. Agriculture, Forestry and Fishery
Labourers), were considered, as the
Socio-economic Groups with employed heads of household. The other Socio-economic Groups are those with the head of the household is either “an unemployed person”, “a household worker”, “a person who is notable to work or too old to work” or “a person whose occupation is
not properly specified”. Any member
in a household belonging to the eleven Socio-economic Groups, as classified above, is considered to be in that particular Socio-economic Group. It is also possible to consider mainincome earner of the household, instead of the head of the household. However, the following analysis is based on the occupation or the activity of the head of household.
Based on the above classification, it is possible to identify the poorest socio-economic groups in the country. The Figure 3, shows that the Income Poverty is highest among the households headed by the "Non Agricultural Labourers and similar workers” (18.1%), followed by “Agricultural, Forestry and Fishery Labourers” (15.0%). The other Socioeconomic Groups with significantly high poverty levels, are the groups in which the head of the household is “unemployed” (10.5%)”; “Skilled Agriculture, Forestry and Fishery Worker” (10.1%); and those headed by persons who are “Unable or too old to work” (9.7 percent).
The Socio-economic Groups with high. percentage of people in Multidimensional Poverty (or acute poverty), also show a similar pattern, with households headed by "Non Agricultural Labourers and Similar
57 -

Page 60
All Socio-Economic Groups Not properly specified
Unable/Too old to work
Household Worker
Unemployed
Agriculture, Forestry & Fishery Labourers Non Agricultural Labourers &
similar workers Craft 8s related trade workers, Plant & machine operators etc. Skilled Agricultural, Forestry & Fishery Workers Cleriacal, Service, Sales 8s similar workers Technicians & Associated professionals Administrators, Senior oficials & professionals
E. Percentage of persons in Multi
dimensional Poverty
O.O
Percentage c Poverty
5.O
Figure 3 Comparison of Income Poverty and
erty by Socio-economic Groups -2009,
Note: In the above chart: Socio-economic GI
Occupation or Activity of the Head of t percentages are the "Percentages of poor Headcount Index) within each Socio-ec
Workers” recording the highest percentage in acute poverty (8.1%). The other Socio-economic Groups with higher level of Multidimensional Poverty are those headed by persons who are "Agricultural, Forestry 8s Fishery Labourers (7.7%) , followed by householdsheaded by persons”Unable or too old to work” (7.3%).
Nearly one fourth (23.6%) of the people in. Income Poverty are living in households headed by "Non Agricultural Labourers & Similar Workers". Around another one fifth (19.4%) of the “Income Poor” are in households headed by “Skilled Agricultural, Forestry and Fishery Workers”. Another nearly 18 percent, are headed by persons who are “Unable to work or too old to work”. As such, these three Socio-economic Groups accounts for more than 60 percent of the "Income Poor” in the
country.
The share of the people in Multidimensional Poverty (orin acute poverty) also show a similar pattern, with the people in the same three
Socio-econoI. highest multidimen householdsh “Unable to w leading with number Multidimens. in househo agricultural Workers”, a and those headed by Forestry a accounts fo people in M in Sri Lank “Income Pov Poverty” a contribution economnic GI
In SriLanka in Multidine than the Poverty. In
1,806,000 p Income Pov figure in M was 957, OC shows that
58
 

ن 3
7
5.
4.
15.O
10.0 15.O 200 If persons in Inconne
Multidimensional Pov/2OO
oups are based on the he Household and the persons” (or the Poverty onomic Group
nic Groups having the
percentage in sional poverty: the eaded by people who are
ork or too old to work", 25.4 percent of the total of persons in onal Poverty. The people ld headed by “Non Labourers and Similar ccounts for 20 percent living in households Skilled Agriculture, hd Fishery Workers” r 14.1 percent of the ultidimensional Poverty a. Like in the case of rty”, “Multidimensional so has the highest from these three Socio
DupS.
the percentage of people insional Poverty, is lower ercentage in Income 2009/2010, there were ;ople (or 8.9 percent) in rty, while the estimated ltidimensional Poverty, ) (or 4.7 percent). This while 1.8 million people
were in income poverty, nearly one million were in acute poverty.
As already explained, Multidimensional Poverty is measured considering, Health, Education and Living Conditions, as the dimensions. The analysis based on Household Income and Expenditure Survey-2009/2010, shows that the contribution to deprivation due to Health dimension, experienced by the average Multidimensionally Poor persons, is as high as 53 percent, while the contribution from Education dimension is 12 percent and from the dimension of Living Conditions 35 percent (Sri Lanka Human Development Report-2012). The two indicators measuring the Health Dimension where, (i) Nutrition: The household not receiving at least 80 percent of the calorie requirement, although they spend more than 60 percent of the total expenditure, on food; (ii) Head of the household is chronically ill or disabled. In acutely poor households (or Multidimensionally poor households) the contribution to deprivation from the nutrition factor was 25 percent. and due to disability or chronic illnesses of the head of the household
was 28 percent. This clearly indicates
that the chronic illness es or disability of the head of the household and inadequate nutrition, are the two major contributory factors to acute poverty in Sri Lanka. When the head of the household is chronically ill or disabled, the entire family is affected. As such, acutely poor households headed by chronically ill or disabled persons, need attention.
Summary
e Sri Lanka has made considerable progress in reducing poverty, achieving the Millennium Development Goal (MDG) of halving the incidence of poverty (compared to the incidence of poverty in 1990) at national level, five years before the target year 2015. However, still there are regional disparities, which needs attention.
o Some argue that the poverty figures, based on the national and regional poverty lines computed by the Department of Census and
Contd. on page 66
Economic Review:Feb./Mar. 2013

Page 61
National Defence 3. Economic Developm
Sri Lanka
1. Introduction
ational defence is the main N component of national security structure of a country. The main objective of national security is to protect national interest, sovereignty and the territorial integrity of the respective nation. National security includes military services, paramilitary services, police, private security mechanisms and other security related institutions. National defence and national security are two different terms. In many countries, military services that focus on external threats are identified as national defence and other security mechanisms are identified as homeland security which deals with domestic conflicts and other disputes and provides the security in the given specific area of national security (for example coastal guard service). In these countries the police is a separate civilian institution and plays a complementary role in providing the security to the nation. Example, USA. There are certain other countries where military service is combined with other security mechanisms depending on the requirement. All such defence structures are called national defence which holds the responsibility of dealing with both external and domestic threats. Example, Sri Lanka. In the case of Sri Lanka, national defence holds the responsibility of the security of the nation from both domestic and external threat.
In Sri Lanka, except in 2002 and 2003, in all the other years the military service (the armed forces), police and other paramilitary services have been under the Ministry of Defence. Further, in the case of Sri Lanka, depending on the importance, certain portfolios in the civilian sector are also assigned to the Ministry of Defence. For example Department of Registration of Persons, Department of Immigration and Emigration in the
1970s, Department of Department of Urban and the Departme) Conservation in the po are such civilian sect been brought under nat Yet, Military service component of nation Unlike that of in countries, national di Lanka needs to be differently from th; countries. Firstly, substantial civilian dep secondly, all the depa institutions under nati are either directly o connected to nationals country. This has trans due to the specific sociopolitical conditions historically developed in Therefore, here in th national defence it ad armed forces, Sri La paramilitary service homeland security and ( services that are res) national interest, sove territorial integrity of However, the analysis i is applicable for other well because as far as the national se curity of those nations are concerned; the institutions coming under national defence of Sri Lanka hold a greater responsibility than others.
2. Gross Domestic Product (GDP) and National Defence as a Public Good
The original concern with respect to national defence as a public good can be traced by going back
S
r - - - Economic Review...Feb-Mar. 2013

ld its impact on ent: The case of
'ivil Aviation, Development it of Coast st 2009 years rs that have onal defence. is the major all defence. many other fence in Sri considered at of other it includes artments and rtments and onal defence r indirectly ecurity of the pired as such economic and
that have in the society. is study of tdresses the inka Police, is such as :oastal guard ponsible for :reignty and
Sri Lanka. in this study countries as
Dr M. M. Jayawardena
Head
Department of Social Sciences Kotelauala Defence University
to the 'social contract theory which explains the origin of the State/ government(Hobbes 1651'; Rousseau? 1762; Wolff 1998). The social contract theory says that people surrendered a certain part of their freedom to the government in reciprocation of what the government does for the protection of their individual freedom (Hobbes 1651). The government is strengthened by the surrendered freedom of the people that was referred in the social contract/ agreement. It is believed that political structures and the legitimacy of the State are derived from an (explicit or implicit) agreement by individual human beings to surrender (some or all of) their individual rights in order to secure the protection and stability of an effective social organization or government. Distinct versions of social contract theory were proposed by Hobbes (1651), Locke (1690), Rousseau (1762), and Rawls (1971).
Transformation
Economic Development
Pefence Service
Defence (ND) Expenditure
National Program
gure 1
National Defence and Economic Devel
орment
)TCS:
Jayawardena, 2O11

Page 62
4N. 7OOOO (
AA 60000
γ. ΜN 5OOOO" WV J 4OOOO I −v 8зоооо t سمبر<\
20000 --- I 1OOOO 2. V
ο Τ Υ - TTτTτ ντ τ - ΓτΤ τη Τιττ-ιτ-τ- Τα τετ. Τα :
is so sesse gens gig § ့ ့ ့ဝံ့၊ ငါ့ 添谷版济济密密密密密88888 爵爵爵爵系 r- r- r- r- r- r- r- r- r- r- r- r- r- r-H CN N C CN
RDGDP Year m (1996)
Figure 2 Real Defence GDP (RDGDP) and its
Changes Over Time
Source: 1. Central Bank of Sri Lanka Annual
Reports 2. General Treasury Annual Estimates
Note: Assumed that the contribution by national defence equals its expenditure
20OOOOO 18OOOOO 16OOOOO 14OOOOO. 12OOOOO. 1000000 菲 8OOOOO 600000 82 400000
ܝ ܢ ܒ - ܗܝ سےبیبا 200000
0, ris -, -,-,-,
Figure 3
Sources:
In an economy the public sector is just like a private company, producing and supplying goods and services for the public. Here, the main difference is that the private sector supplies the goods and services at market price whereas the public sector supplies commodities either free of charge or at nominal prices. Under these circumstances, the value of public sector production cannot be measured at value added method or at the market price method. In this situation, the value of goods and services produced by the public sector is measured at cost prices and assumes that the value of public sector production is at least equal to its expenditure. That is why according the theory of national income, the value of national production of an economy is explained
*TC+7+ G + (x- M) (Y ”
Central Bank of Sri Lanka Annual Reports
defence as a underlying di defence that detailed relationships important developmen context of Sri as a public g amount of re and therefo1 economic de associated natures of public go prominence and its role it with the tir significantly regimes in national de linked with the social c theme that
- 60
 

National Income, C = P r i v a t e Consumption, I - Private Investment, G = Government Expenditure, X = Exports, M C Imports). The value of national defence as a
public good is included here as “G” that denotes
g o v e r m m e n t ex p end it u re. According to this, the contribution by national defence to the economy is equal to its annual ex p end it u re (Jayawardena, 2011).
3. National Defence and Economic Development of Sri Lanka
The surface picture
of national defence
and its relationship indicates either an | alienation from
national production
O a negative
relationship between
the expansion of
national defence and
the economy. Yet,
the theoretical
analysis of national public good and the imensions of national can be witnessed from analysis of such indicate that it plays an role in economic of a country. In the Lanka national defence ood absorbs significant sources in the economy e, national defence and velopment are closely with each other. The lational defence as a d, its extent and against the challenges Srt Lanka have evolved e. These changes are related to the types of history. However, as Fence is theoretically the government under intract the underlying is the protection of
national interest, sovereignty and the territorial integrity of the nation remains unchanged (Jayawardena, 2011).
3.1. Role of National Defence as a Final Public Good in the Economy of Sri Lanka
National defence as a public good absorbs substantial amount of resources (see Figure 5) and therefore, it needs to deliver the returns for such expenditure back to the public and enhance the level of welfare of the people' As identified in the conceptual framework (see Figure 1), the contributions of national defence plays a dual role as a public good (Jayawardena, 2011). Firstly, it plays the primary role as a final good and contributes through the deterrent programs and controls threats against the country's sovereignty and protects individual freedoms that contribute to enhancing self esteem while allowing the society a smooth transformation which is part and parcel of individual and collective development. This is the primary direct contribution of national defence. It is assumed to be equal to the expenditure on national defence (See section 2). However, in reality, it can be either less or more than its expenditure, because the deliveries of national defence towards GDP are dependent on the effectiveness and efficiency that is based on the current and forward defence policies. In the 1970s, the JVP insurgency was under control and peace was re-established to the country and therefore, the contribution made by national defence as a final good in this period was greater than its expenditure. However, as far as the long run is concerned national defences' contribution to the economy could not be maintained due to the failure in forward defence policies and therefore, as far as the long run is concerned, national security and sovereignty in the 1980s were under threat and therefore, there had been severe interruptions of for the individual freedoms, self esteem and social transformation of the society. Therefore, it can be argued that the primary direct contribution of national defence, until 2009 had been to a moderated level, despite its short run achievements in the 1970s, 1986, 1987 and 1996 to 1999. In 1986 and
Economic Review: Feb./Mar 2013

Page 63
LKRMillion
2000000 1800000 1600OOO l4OOOOO 2OOOOO 1000000 8OOOOO 600000 4-OOOOO 2OOOOO 0.
рзан" DP Year
(1996)
Figure 4 The Real Non-Defence GDP and
Its Changes Over Time a.
Source: 1. Central Bank of Sri Lanka.
Annual Reports
2. General Treasury Annual Estimates
C LLLLLL S S LLL S eL S L S L S SqLS S SLSq S SLLLLL S Leee S LLLL SS LLLL t>~ N tJ cO CO CO CN Con On C. C. C. C. OY C. C. C. C. ON CA On C. Cd ced C. r- SJSS S SSS SSSSSSJSSS S SJSS S SSSSS S SSSSS S SiiS S SSSL S L S L S L S L
ams Mx as a % GDP as Dx as a % GDP
Figure 5 Defence ani di Military Expenditure as a Percentage of GDP
Note: MX - Military Expenditure
DX - Defence Expenditure
Sources: 1. Central Bank of Sri Lanka
Annual Reports
2. General Treasury Annual
Estimates
'87 eventhough the security threat could not be totally eradicated, as far as the short run was concerned the defence's contribution to GDP had been substantial, because the armed forces of Sri Lanka was able to trap the LTTE operations to the Vadamarachchi area and it was about to destroy its terror network. However, as far as the long run is concerned the particular contribution Could not be sustained as in the short run. Similarly a short run. contribution with a value that equals over shoots the expenditure was witnessed in 1995-1999 as the Sri anka forces were able to take Jaffna back under the full control of the
Economic Review:Feb./Mar. 2013
government. according to until 2009, th contributioI. defence has and contribut moderated lev, to Real GDP a over time. Fu argue that onwards natio: been effective able to defea and mainta security, nati sovereignty an integrity of the Figure 2 and GDP With les; moderately h During the pe national defel effective in acc missions, the c national defer greater than it that was accou) GDP. Therefore, that the W determined by p individual fri esteem is more depicted by GD However, we ca granted on hc increasing lev can be Sustained On the effect efficiency of nat that is supporte national defenc the country. Ir research and de national defenc maintained dyn
3. 2 Role Defence as an Public Good in of Sri Lanka
Apart from the con national defence as a
also contributes as an good. According to t. determination of nati intermediate goods are as such contributions included in the fina services. However, nat as an intermediate gooc in creating necessary
produce non defenc services in the econom
 
 

Therefore, he analysis, primary direct of national een effective | only up to a (see Figure 2) di its changes
ther, we can
since 2006 all defence has s it has been LTTE totally ls national nal interest, the territorial country (see compare the variation at igher level). iods in which ce has been mplishing its ontribution byr Ce has been s expenditure hted for in the we can argue elfare level er capita, GDP, eedom, self than what is P since 2009. nnot take for w long this el of Welfare as it depends veness and ional defence 'd by forward !e policies of ... this aspect ivelopment of needs to be amically.
of National ntermediate he Economy
ribution of inal good, it intermediate e theory of nal income, ot accounted are already goods and onal defence is important onditions to goods and ". If there is
no political stability, the conditions for production are not conducive and as a consequence, the production function may place below the potential level. In other words, if there is no peace in the country factor mobility and other conducive atmosphere can be affected and thereby, factor productivity can be declined. The significant lower growth rate in 1971 and the negative growth rate (-1.5) in GDP in 2001 are clear example for such failure of national defence as an
intermediate good. According to Figure
4 real non defence GDP except 1971 and 2001 has been increased, if we ignored the short term setbacks in certain periods. Among the factors that affected the increase in GDP, the expansion of national defence as a public good and its role as an intermediate good has been an important factor.
3. 3 Indirect Effects of increase in National Defence Expenditure on the Economy of Sri Lanka
In the context of Sri Lanka as a developing country the indirect effects that include both negative and positive effects also influence national production. As shown in the conceptual framework, the identified “crowding out effects” and trade off effects generate negative impact on GDP where as the “spin offs” and “spillovers”, contribute to enhancing equity and improving the employment level of the economy (Benoit, 1973; Benoit, 1978). The expansion of national defence as shown in the Figure 2, defence expenditure as a share of GDP has been at a higher level and therefore, the crowding out effect, spillovers, spinoffs are also similarly increased.
3.3 - 1 Indirect.Negative Effects of Increase in National Defence
Expenditure
Here, the crowding out effect is one of the negative indirect effects of the expansion of national defence (see Figure 1. ). Increase in defence expenditure increases the budget deficit and affects on the interest rate in the lending market and affects on the investment of the respective country (Smith, 1980). According to the Figure 5 and Figure 6, there is a close association between the increase of defence expenditure and
61 -

Page 64
to increase its borrowings. The increase in borrowings lead to increase the interest rate in the money market and subsequently the investment will be declined. Figures 5, 6 and 7 indicate such relationships. Therefore, we can argue that the increase in defence expenditure has crowded out a certain level investment that lead to a negative effect on GDP. During the years of with high defence expenditure has led for higher interest rate in the lending market and reduction of investment in the respective years/consecutive years subsequently. See the changes marked in black thin line in Figure 8, with that of the circles of Figures 5, 6 and 7.
According to Figure 8 the ash lines indicate comparatively higherinterest rate which may be an outcome of increasing government borrowing whereas the black line indicates lower interest rate. which could be an outcome of a comparatively less burden or relief for the government as far as government expenditure is concerned. On the other hand in Figure 7 the circles indicate selected drops in investment that may be a result of high interest rate in the lending market. Accordingly, the interest rate in 1995 and 1996 was at a higher rate and as a consequence the investment reported low. Similar drop in investment can be observed at the end of the 1990s and in 2007 and 2008. The changes in the interest rate and the drop in investment could
6OOOOO have 500000 othe
C
400000 expe 300000 incr 酯200000 expe | ਝੰ 100000 reas O inve
resp مہ
-OOOOO + سس } } ہی ـ wH imm
aRevenue Deficit (Mn) cross Overall Deficit (Mn)
Marmor T/Defence (Mn) The
expe
Figure 6 Defence Expenditure and effe
Budget Deficits (Values in Mn) -
activ
Source: 1. Central Bank of Sri Lanka Cal
Annual Reports follo" and (
2. General Treasury Annual 3S
Estimates expe the budget deficits. The increase in associated v budget deficit pushes the government developme
services. Fi the years wi
expenditure
non defence The reductic affect ec developme defence
associated v developme services.
Another n expansion inflation expansion aggregate
acceleratio defence. F. increase in
would incre
the particu year / s. cor circles wi black thick Irelationsh observed w decline ir expenditl decline in
33 - 2 T Human Environ
Military (
In a situa is an incr national s interest s the territo country, t
62
 

been associated with factors other than the
3.Տ Յ in defence diture. Yet, the drastic a Se in defence
diture is one of the main ins for the drop in timent either in the :ctive years or in the diately following years:
increase in defence diture also has trade off ts on non defence ties in the economy and affect GDP growth rate ved by economic growth evelopment unfavourably these non-defence hditures are more closely rith economic growth and nt than the defence gure 9 indicates that in than increase in defence there is a reduction in services in the economy. bnin non defence services onomic growth and nt because these non services are closely with economic growth and int than the defence
egative impact of the of national defence is followed by monetary and the increase of demand due to the n of the size of national gure 10 shows that the real defence expenditure ase the inflation either in aryear or in the following pare the small black thin h that of the
generate a substantial deterrent. In such conditions, increase in defence expenditure is unavoidable as the defence industry needs substantial increase of its man power military equipments, ammunitions and other inputs that are used in operations under security programs. In military operations economic factors are alienated as the effectiveness of military operations is a necessary condition in accomplishing the missions. The extensive operations especially offensive operations create conditions for more damage on human lives and resources. Under the increasing threat to national security, this particular damage is unavoidable. In the case of Sri Lanka, during the JVP insurgency in 1971, initially police and troops were massacred with a massive threat on national security. In the retaliations thousands of (over 12,000) rebel died (Bandarage 2008: 56-57). During the 2nd JVP insurgency that is connected to the North and East war, it is estimated that over 40,000 died (Bandarage, 2008). The total numbe) of people who died due to North and East war is over 100,000 (UN Estimation). Unconfirmed source:
reveal that the number of LTTE anc the armed force members togethe
died in the war was over 50,000
Apart from the homicide victims
number people injured and disablet
were also substantial. Further, amon
those who were killed by th
militants, there are national leader
as well as well as regional leader
that cost the nation as well as th
region. A similar loss of lives ha
been caused in the militants' side a
well. In the analysis of nationa
circles. Similar LSSMEs ips can be 1600000 A threspect to the 77
1200000 real defence loooooo Z re and the 800000 ހސި/ inflation. ჭეჭე سمے \حکسمبر
"リ三ー。三ー le Damage to O t ァーマーモー ----- Lives and 88器88888888吕8吕88召岛883 SSS SSS S SSS SSS SSS SS SS SSAASSSS SSASS L LLLL LLL LLLL SqLLLL LL LLL LLL LLLLL S LL S Lqq , ent during
armoors Total Investment perations
Figure 7. The Total Investment and its Chiang
on where there asing threat on curity, national vereignty and all integrity of a ere is a need of
Source:
Over Time
1. Central Bank of Sri Lanka Annl
Reports
2. General Treasury Annual
Estimates
Economic Review:Feb./Mar. 2013 -

Page 65
Percentage of Interest
25
A
market enhance side. - Th impact.
-YN /
1S
significa because it
Sri Lanka
المطرس البلبيس
كطيح
labour in
0.
industry, of th
흥룡용 용홍 cs N.
as Interest Rate
3.
སྐྱི་
';
:
5.
劃
s
t
expenditu labour fo and wage
5
Figure 8
Source:
Reports
2. General Treasury Annual
Estimates
defence and its impact on the economy we need to address such cost on human lives. However, in a scenario where the country's national security, national interest, sovereignty and the territorial integrity are under threat this cost is going to be inevitable and without these operations the country could have been vulnerable as a nation and could cost more than that which has been incurred at present. In the context of the Sri Lankan case some argue that if there had been no such role of national defence, Sri Lanka could have been another “Israel' and the region could have been another "Middle East” that interrupts the peace of individual countries, region and the world. Yet, if national defence had been effective in a consistent manner right from the initial stage, the number of homicide victims and the damage to the society could have been minimized and national defence as a public good could have been more productive.
3.3 - 3 Indirect Positive Effects of Increase in Defence Expenditure
In spite of these negative impacts of the above indirect effects of the expansion of national defence on economic growth and development, there are positive indirect effects on economic growth and development. Among them, Keynesian effect is important (Wijeweera and Webb, 2009). As a developing country, the expansion of defence generates a Keynesian effect and expands national income as the increase in government expenditure expands the
Lending Market Interest Rate
1. Central Bank of Sri Lanka Annual
Jayasuri Kelegama expenditu the loca consumpt with an aggregate induce production and fina economy. As a count employment, the Keynesian impact are increase in aggregate
during the war period
Figure 10 and 11, giv have originated from
defence expenditure circled areas of the di
In the developing
countries, the - socio- economic disparity in
society, is greater, and therefore, the lower stratum of the population is ready to take more risks than the upper strata of the society. In the case of Sri Lanka, during the period of war, employment opportunities were more in the defence sector with a higher offer due to the life risk in the intensive operations, and therefore, the
F demand for employment in the defence industry S
was significant in the general labour market. On the contrary, the traditional labour
Economic Review:Feb/Mar. 2013

size and S the supply is particular becomaes nit mainly in the context of as country of ensive military 40-50 percent e defence ire goes to the (ce as salaries s (Arunatilake, yal, 8s ,2000). These res go back to l market as ion expenditure expansion of demand that the national lly benefit the try with under benefits of significant. The 2 consumption as depicted in en below might the increase in : (refer to the agrams).
supply source in the population had been witnessing a reluctance to respond to this increasing demand in the defence industry due to the increasing life threat. In this environment, the lower strata of the population in the poverty ridden areas of the island received more jobs in the defence industry and received higher salaries compared to their normal job opportunities in the respective villages depending on their qualifications. Under these conditions, expansion of national defence has increased the level of employment and the consumption capabilities in the rural sector in Sri Lanka. These expansions also created more trickle down effects in the respective areas. Therefore, the Keynesian effects of the expansion of national defence have become more meaningful as it brings down the regional disparities while enhancing equity level of the society (Jayawardena, 2009). One can argue that the favourable changes in the Gini Co-efficient; during the last 20 years has been an outcome of the extensive employment opportunities in the defence forces for the rural sector as less income earning
Other
鹽 Defence Services?
Social Services%
- Econ Services%
CN to CO CO d d Ch O. On y- - vik
igure 9
Comparison of Defence Expenditure with
other Government Expenditures
OUlrCeS:
1. Economic Progress of Independent Sri
Lanka, Economic and Social statistics of Sri Lanka 2006 and 2011, Central Bank. of Sri Lanka
2. Annual Estimates, General Treasury of
Sri Lanka
63 -

Page 66
ہو۔
Real Increase in Dx6)
bee
COòj
e C
Ο Ο
H Rate of Inflation%) inc
Figure 10 Rate of Inflation (Base year 1996) and the percentage of the increase
of real Defence Expenditure . Fu
Source:
Reports
2. General Treasury Annual
Estimates
population. For example in 1981 / 1982 Gini Co-efficient was 0.52 and it has declined up to to O.36 in 2009/ 2010 (Central Bank of Sri Lanka).
The employment opportunities in the defence sector have immensely contributed to the reduction of unemployment of a country (Dunne, Smith 199O; Dunne, Nikolaidoua, 86 Vougas, 2001). The expansion of Sri Lanka armed forces and Police during the last 30 years have created employment opportunities and therefore, the unemployment rate in Sri Lanka has reduced from over 15 percent to about less than 5 percent during the last 30 years (refer to area denoted by the circle in Figure 13). It is true that other factors also may have affected the decline of unemployment. Yet, as a source of employment during the last thirty years, the defence sector has played an important role (Jayawardena, 2O1O). The contribution by national defence had been crucial as the defence sector provides employment opportunities for unskilled labour that have less demand in the labour market. The unemployment of this category of population could have created problems due to the political sensitivity of such unemployment, and could have created other socioeconomic and political tension that could cost the society, if they were not provided such employment. Therefore, national defences contribution to employment of 25,OOO - 40,000 in the armed forces to about more than 3 OO,OOO - 4OOOOO as
- - 64
1. Central Bank of Sri Lanka Annual pre
economical so semi skilÍ labc sector of the ec era also it ha the labour forc can be deploy sectors where maintaining efficiency. Ex: armed force construction : economic infra and East. Thu the defence ir the economy indirectly.
4。 Summary
National sec defence are c each other. N umbrella ter defence included. In context of Lanka, natic defence inclu the armed for Para milit forces (e.g. ( security foi coastal gu service), Sri La Police, as Lanka is na focuses internal thre that linked v regional fac and global fact Prior to 1."
 

ect employment since 1980s to 2009 has 2n a significant positive intribution to the onomy- Te intribution may be ther encouraging when e considers the
le:OS indirect ployment opportunities
the non defence illustries that linked h supply of needs of 2 defence industry. rther as far as the mobilization of the maturely retired armed ces in the nom defence tors of both private and 7ernment sectors are lcerned, labour force of : defence industry is an urce of employment for our in the non defence :onomy. In the postwar s been identified that e in the defence sector ed in the production. there are difficulties in the effectiveness and ample: deployment of is in the post war and reconstruction of astructure in the North ls the labour force in ndustry contributed to 7 both directly and
and Conclusion
rurity and national
losely associated with
ational security is an
m in which national
S
insurgency, national defence has been below 1 percent of GDP andless than 5 percent of government expenditure. This was increased marginally along with the 1971 insurgency and then it increased drastically with the Tamil separatist threatin 1980s. Thereafter, until the defeat of the LTTE the defence expenditure has been over 4 percent of GDP and about 15 percent of all government expenditure. The conceptual framework shown in Figure 1 has addressed all the linkages of national defence in an economy and has analysed each such relationship in the context of Sri Lanka. Here, the contributions of national defence is firstly, identified as direct, indirect and externalities, and secondly, it is identified as primary direct effects as a final good and then secondary direct effects as an intermediate good and then the indirect effects that include Keynesian effect, employment and the contributions of employment and equity. Thirdly, the externalities of national defence are identified as negative and positive externalities. Finally, the cost of damage to human lives and environment is also considered in evaluating the economic implications of national defence as a public good. Here the net outcome of national defence can be evaluated in comparison with a scenario based analysis as there is no actual situation to compare the condition. without national defence. In the context of Sri Lanaka, if national defence has not been there, at the prevailing level national interest, sovereignty and the territorial integrity could not have been
the LKR Millions Sri. 25OOOO nal
2OOOOO Lldes
ces, 150000 :ary OOOOO) civil rce, 5OOOO ard O Inka Sri inly m Defence Expenditure
O ats Figure 11 Defence Expenditure and its Increase Over With Time ::: Source: 1. Central Bank of Sri Lanka Annual Reports 971.
2. General Treasury Annual Estimates
Economic Review:Feb. A Mar. 2013

Page 67
LKRMillions
6000000
5OOOOOO
4000000
3OOOOOO
2000.000
N
OOOOOO
(
一ムつ。
O
s
溪
སྒྲི
器
豹
戮
ལྷོ་
ལྷོ་
赛
3.
s
e Consumption
V/
s
རྨི་
臺
སྤྱི་
སྤྱི་
Figure 12
Time
Source:
Reports
Consumption and in its Increase Over
1. Central Bank of Sri Lanka Annual
Percentage of Unemployment گا۔ 25
20
15 TR-Z
1 Ο
ap bee
Hov loIn.
CO
p er
Figure 13 Unemployment Rate in Sri Lanka
Source:
protected as at present. When one looks at the complex Tamil issue, South Asia could have experienced the pandemonium of Middle East at country level as well as regional level. Within this background the contributions of national defence in Sri Lanka needs to be evaluated. In the overall analysis, the direct and indirectimpact of national defence as a public good is considered in two scenarios. Firstly, the scenario in which national defence is involved in ceremonial functions, and along with the preventive measures against the national security threats and the second scenario in which national security is under threat and needs to function against such threats along with preventive measures. Under the first scenario, national defence is limited to basic functions and therefore there is no need for higher
1. Central Bank of Sri Lanka.
nat has
զ ս bec time the thre security became an economy. During th period, specifically up achievements of natio: a public good both in and long run needs to carefully as the defenc as well as the threa defence had been incre years. For exam insurgencies in 197 Tamil ethnic clashes it 1983 and the Tamilmi from the mid 197Os ar. of defence expenditul GDP to over 4%. If na contributed to the eco the short run and long the size of national d have gradually dec saturated point that is c the economy while
Economic Review:Feb./Mar. 2013

o cation s. der the second nario, 2S ional security under threat ional defence ds to be p a n d e di ending on the ensity of the eat. In the LiteXt of SI. lika prior to 71 and the iod in between 2 to 1980 can viewed under. first scenario ereas, the iods of 971and 1980 - vards can be ved under the scenario. ing the period der the first nario, asfar as short run is lcerned the ectives of the ence service as јblic good have in achieved. wever, as far as g run is lcerned the formance of ional defence S been e stion a b1 e :ause time to 2at on national issue to the Le post 1971 to 2009, the nal defence as the short run. be addressed e expenditure t on national 2asing over the ple the JVP 1 and 1987, in 1978 and in litancy started Ld the increase e from 1% of tional defence nomy, both in run effectively, efence should lined to the ompatible with maintaining
sustainable peace in the country. Such conditions can be fulfilled only if national defence is effective both in the short run and long run. If national defence expenditure is increasing continuously, it is evidence of inefficiency and ineffectiveness of national defence. In order to accomplish such missions forward national defence policies that are strengthened with adequate research and development is important. In the context of Sri Lanka during the post 1972 period, the overall net contribution to GDP as a public good in the short run had been moderate except in the years of with negative growth rate. However, the contribution by national defence in the long run until 2006-2009 had not been substantial. In the post 2009 period the contribution to GDP as a public good has been substantial both in the short run, and long Irun, because of the effectiveness of national defence against national security threats. If national defence had been effective in the early period of the conflict with the support of its complementary mechanisms, such as diplomacy, public participation etc. and with conducive environment, the cost of war could have been reduced considerably and could have created necessary conditions for a smooth socio economic atmosphere with significant contribution to economic development of the country, without waiting for thirty long years.
Therefore, in the context of Sri Lanka, while maintaining the peace that was achieved with the cost of lives and opportunities for development especially during the period from the 1970s to 2009, a sustainable peace needs to be secured through the prevention of similar crises in the future. Here, the maintenance of the momentum in all segments of the society while addressing its retrospective and prospective aspects of performances against the challenges of national
defence and the aspiration of
development of the nation is important. Such momentum has to be aligned with the compatible philosophy that enables to guiding the nation with appropriate policy considerations.
Bibliography
Arunatilake, N., Jayasuriya, S., &s Kelegama, S. (2000). The Economic Cost of the War in Sri Lanka. Colombo: Institute of Policy Studies.
65 -

Page 68
Benoit, E. (1973). Defence and Economic Grouth in eveloping
ಸ್ಧಿಗೆes. Boston, MA: Lexington OOKS.
Benoit, E. (1978). Growth and Defence in Developing Countries. Economic Develo Change, 26(2), 271-280
Bandarage, A. 2009. The Separatist Cqipflictin Sri Lanka, South Asia Edition.Tharanjee Prints. Colombo, Sri Lanka.
Dandker, C. 2001. The Military in Democratic Spcieties. Society. September/October: 16-24. Dunne, P. NikolaidQua, E. & Vougas, D. gbőÍ). Defende ဗဲ့ဒ္ဓိဋီနွို”ဦ, and conomic Growth: A Causal alysis for Greece and Turkey. ಙ್ಞrce and Peace Economics, 12(1), 5-26,
Dunne, P. and R. P. Smith. 1990 Military Expenditure and Unemployment in the OECD. Defence Economics. Vol. 4. No. 2: 113-22.
Jayawardena, M. M 2006. Possibili gof Measuriņg the Effectiveness an Efficiency of National Defence against LTTE threat, on National Security of Sri Lanka, A Paper Presented at the
International Conference on Sri Lanka's Studies, University of Sabaraganuwa.
Jayawardena, M. M 2O10. Expansion of National Defence and Its Impact on Epnplgypent: The Case of Sri TLanka. Thê 12th International
merit and Cultural
Conference O Royal Asiatic Open Univers
Jayawardena,
Freedom and Developing C Lanka in the C War. Annual S John Kotelaw; Ratmalana, S1
Jayavardeņa
of National) gn Employne International C Studies.RASSI
Jayavardeņa
ojfoNationafîb Contribution Lanaka, Annua
Jayawardena, Implications
University of
Unpublišhed
tudies.
Sandler, T. Economics of Iniyer sity. P: 盘器坠 M
nvestinent i Journal of Com 19-32.
Wiięweera, A., Military. Spe Growythin Sri Analysis. L Econõmics, 20 (
Contd. fron page 58
Not properly specified Unable/Too old to work sessical
Household Worker
Unemployed: Agriculture, Forestry 8, Fishery Labourers få
Non Agricultural Labourers 8, similar workers
Craft & related trade workers, Plarit 8s machine
器 etC.- Skilled Agricultural, Forestry 8, Fishery workers sists
OO 50 10.
% Multidimensionally poor persons (out of % of Income p the total No. of poor in the country) total No. of po
Figure 4 Percentage of pepple in Income Poverty Poverty, 6tgif the Total Number of Peo and in Multidimensional Poverty, by Sd 2009/2010
Note: In the above chart: Socio-econgmic C Occupation or Agtivity of the Head of th ಟ್ಲಿ are the shiare pf pogr people it roup, ott of the total number %წწჭჭ: persc category (Income Poverty and Multidimen Statistics, are underestimates. o Although S However, according the povert to కి 3 ΙΟι line used by internationa OU O 邵疗 agencies to Compare poverty ind, 2009/
t bētween couņtries* (US$1.25 pe 器器 3 OU) persoņi per dąy), percentage of გზgუჯ the
oor in Sri Lanka, has been ете 1S а ဒိန္နိဋ္ဌိဂုံatéa as 7.0 percent, in 2009, 器 ဖြိုး ; which is lower than the poverty Whatev er figure (8.9 percent) estimated b strategies I the Departinent of Census an revejht si Statistics. # slippi
- 66
 
 
 

p. Sri Lanka Studies Society Sri Lanka and ty of Sri Lanka.
M. M., 2010 İndiyidual
National Security in ountries: Case of Sri ontext of the Separatist YE osium. General Sir la Defence University. i Lanka,
M. M. 2010. Expansion efence and its Impact ht: Case of Sri Lanka, onference on Sri Larukarń.
M. M. 2009. Expansion efence and Its ಕ್ಲಿಟ್ಟ! Case study of Sri l Symposium, KDU.
M. M. 2011 Economic pf National Defence. Colombo, PhD Thesis | Faculty of Graduate
and K. Hartley. 1995. Defence. ದ್ವಿಚ್ಗidಷ್ಟೇ
ress UK. Smith, ary | ဒွိုဦ႕ီrိုရွီးဌ:'''; and In OE 1954-1973.
parative Economics 4 (l),
8. Webb, M.J. (2009). nding and Economic Lanka: A Time Series
efence – and Peace 6), 499-508.
23.6
So too 25,036.o
oor persons (out of the or in the country)
and Multidimensional ble in Income Poverty cio-economic Groups
್ರಲ್ಯಣ್ಣ are based on 2 Househgld and the h each Socio-economic ns, undereach poverty sional Poverty)
iri ಙ್ಗ. 器體 ಕ್ಲಣ್ಣೇ 2il C1. O 162 111 OC). Oe OTO 1632 ಕ್ಲಿಕ್ಗಿ 82 VSS SOWS ld 8000 欲 are just ppve line sūIch, risk of sçQme of those ping back to poverty, norňáic shocks, due fó reas ors. As such, ಕ್ಲಿಕ್ಗಿ! to be developed Licin, near p oor people ng back to poveity.
Footnotes
Available at 器踏 / www.iep.utm.edu/s/socconthtm#SH2aInterne- Encyclopedia of Philosophy.
2 Ibid
3 Ayailable at www.philosophypages.com.
4. Accordin theory people
ortion of their freedom to 醫 protected om others in their life. In the ćontext of Sri Lanka prior to 2006 there was, no grantee df such protection but it was guaranteed gradually in the post 2006 period.
5 In 1986 and 87 national defence was able to the LTTE as the Inajor militants against the security of the gಳ್ಗೆ and was able to prove the armed forces capability ಶ್ವೇಜ್ಜಜ್ಜೇ the failure to accomplish the Inission due to India's intervention.
6 During the period from 1995 to 1999 also the afined forces were able to take over Jaffna under their control and proved its defence capability yet, as far as total control over LTE was a failure
to the social gontract ave surrendered certain
7 Herę the crowding outęffects refered to reduction in national production coming put from excessive borrowings due to the increasing budget deficit resulted from excessive government expenditure national defence.
Budget deficits here referred to the overall budget deficit (net cash deficit and the deficit that equals to the difference between the revenue and expenditure,
s The Income Poyerty is highest ampnghouseholds headed by“Non agricultural labourers and Similar workers (18.1 Pಠ್ಠgo followed
by those headed by "Agriculture förestry andřisherý lab5urers*(j5 perceňť).
s The other Socio-econqmic Groups
ywith significantly high power
ęvels, are thę gifoupš iri whic the head of the household is In enployed (lO.5 percent) Skilled Agriculture, Forestry, a Fishery Worker !് perceňt )? ; and those headed by persons whd are “Unable or too old to work (9.7 percent).
o The most deprived Socio-economic Groups in the country in 2009/ 2010, were, those living in hg useholds headed by persons ywho are “Ngn Agriĝu turąl Labourer and Similaf Workers”
Skilled AÑ; Forestry an Fishe orkers” and those heade
tಣ್ಣ persons who are / too old to work", with a total share of around 60 器 out of those in, Income Poverty as well as in Multidimension Poverty.
a Chronic illnesses or disability of the head of the household and inadequate nutritign, are the two major contributory factors to agte p overt jin Sri Laņka. The contribution from these twq actors alone to Multidimensional Poverty or acute poverty, is 52 ercerit. As such, the poor puseholds with chronically ill or disabled heads,may need urgent attention. Usually when the head of the householdisill or disabled, the entire family including children are affected. The members of such h9useholds are affected ಬ್ಲೇಡ್ಗಿ as Well, as they cannot afford to fulfil their nutritional requirements.
Economic Review:Feb./Mar. 2013

Page 69
STUDENTS PAGE
Fiscal Policy
Introduction
T he major economic policies
available to influence the
demand side of markets are called fiscal and monetary policies. Fiscal policy is the use of government expenditures and taxes to promote particular macroeconomic goals such as full employment, stable prices, and economic growth. In other words, fiscal policy is the use of the government's budget to influence the total level of economic activity in the country by influencing the total demand for goods and services. Government expenditures consist of purchases of goods and services, such as the procurement of vehicles, furniture, aircraft, and transfer payments such as fertilizer subsidy, Samurdi grants, and flood relief. An increase in total demand can be achieved either by increasing total government expenditure or by reducing total taxes, or both. Reducing total demand requires reducing government expenditure, increasing taxes, or both.
An increase in government expenditure means that the government is demanding more of the goods and services to which it allocates its extra expenditure. This means that that the government is directly causing an increase in total demand. Reducing taxes has a similar, though indirect, effect on total demand. It leaves more money in the hands of the private sector and relies on that sector to increase total demand by spending some of this money. Fiscal policies thus, may be expansionary or contractionary. An expansionary fiscal policy increases real output, employment, and income. Such a policy can be used to move the economy out of recession. A contractionary fiscal policy decreases real output, employment, and income. It can be used to combat the problem of inflation.
Up until the 1930s, it was generally accepted that a prudent government should always balance its budget. The
argument was based o with what seems prud for the household. It household whose currer consistently exceed revenue so that it goes st into debt. It was then a avoiding steadily rising for the individual, it good for the nation. Bu of thrift suggests that between the natio household may be misl government balance annually, it must expenditure during because its tax re' necessarily be fallin recovery, when its rev and rising, it will i spending. In other wor with the economy, lowering its expenditur everyone else, thus accentuate cyclical flu expenditure.
By the end of the 1 because of the lead ta Maynard Keynes, man had concluded that thi could stabilize the econ just the opposite of what was doing-by increasir when private demand w lowering its demand demand was rising. ' economists were of the economy automatically I full employment in ti They ruled out the poss production and hence u in the long period. Th government in the according to the classic should be the minimal.
famous book, "Gener Employment, Interest
disagreed with the classical economists tha has the tendency to mov employment in the long of the strong view that th must interfere in econo) achieve full employme) inflation and to pri economic growth. In or
Economic Review: Feb./Mar. 2013

in an analogy ent behaviour
is a foolish it expenditure s it current teadily further urgued that, if debt is good must also be t the paradox
the analogy n and the eading. When s its budget restrict its a recession venues will g. During a enue is high increase its ds, it will roll raising and e in step with helping to actuations in
930s largely ken by John y economists e government omy by doing everyone else ng its demand as falling and when private The classical view that the noves towards he long run. sibility of over nemployment te role of the
e Conomy, all economists, Keynes in his "al Theory of and Money", views of the it the economy 7e towards full g run. He was he government mic matters to int, to prevent omote rapid der to achieve
Prof. Danny Atapattu
Senior Professor of Economics University of Ruhuna
the macro economic goals, he stressed that the government must step in and use government expenditure and taxes for changing the size of national income and the tempo of aggregate economic activity in the country. The use of deliberate changes in government expenditure and or taxes to achieve certain national economic goals is called fiscal policy.
Today many people feel that governments have abused the respectability that Keynesian economics gave to budget deficits. Instead of using deficits as an anticyclical tool, they have often spent in excess of revenues in good times as well as bad times. As a result, there are strong pressures in many countries to force a balanced budget policy on their governments. This may or may not be an effective way to restrain those governments who would run deficits at all times. If balanced budgets are enforced, however, they will contribute to cyclical instability by forcing governments once again to roll with the rest of the economy rather than, as Keynes advocated rolling against it.
How does Fiscal Policy Work?
Fiscal policy affects aggregate demand, the distribution of wealth, and the economy's capacity to produce goods and services. In the short run, changes in spending or taxing can alter both the magnitude and the pattern of demand for goods and services. With time, this aggregate demand affects the allocation of resources and the productive capacity of an economy through its influence on the returns to factors of production, the development of human capital, the allocation of capital spending, and investment in
A.
67 -

Page 70
f
technological innovations. Tax rates, through their effects on the net returns to labour, saving, and investment, also influence both the magnitude and the allocation of productive capacity.
Discretionary fiscal policy is the deliberate use of changes in government expenditures and taxation to affect aggregate demand and influence the economy's performance in the short run. Governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing. Governments directly and indirectly influence the way resources are used in the economy. A basic equation of national income accounting that measures the output of an economy - or Gross Domestic Product (GDP) - according to expenditures helps show how this happens:
GDP = C+. I + G + NX.
On the left side is GDP - the value of all final goods and services produced in the economy. On the right side are the sources of aggregate spending or demand-private consumption (C), private investment (I), purchases of goods and services by the government (G), and exports minus imports (net exports, NX). This equation makes it evident that governments affect economic activity (GDP), controlling G directly and influencing C, I, and NX indirectly, through changes in taxes, transfers, and spending. Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or "loose.” By contrast, fiscal policy is often considered contractionary or "tight” if it reduces demand via lower spending.
The most immediate effect of fiscal policy is to change the aggregate demand for goods and services. An expansionary fiscal policy, for example, raises aggregate demand through one of two channels. First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households' disposable income rises, and they will spend more on
68
consumptio1 consumption aggregate dem.
Fiscal policy c lifting the ecol and closing
When the eco it is faced with falling incor investment
economic ac economic unemploymen increase ag increasing ex services. Al increase ag increasing d increase con through decr increasing tı addition to in expenditure, a income tax w after-tax re investments r in investment aggregate de fiscal policy he closer to full
When the eco inflationary contractional policy shoulc down the pric inflationary g the govern1 aggregate de expenditure ( Alternatively aggregate de disposable
consumption increasing dir transfer payı
decreasing co1
an increase iu will also lea returns on resulting in a expenditure
demand. In 1 demand-sid commonly us of aggregated
This ability o output by affe makes it a pot stabilization government c. fiscal policy,
output to its

n. This rise in in will in turn raise land.
can play a major role in nomy out of depression the deflationary gap. nomy is in depression, rising unemployment, ne, severe declining and shrinking of tivities. To increase growth or reduce ut, the government can gregate demand by benditure on goods and lternatively, it can gregate demand by isposable income to sumption expenditure easing direct taxes or ransfer payments. In creasing consumption a decrease in corporate ill also lead to higher turns on planned esulting in an increase expenditure and hence mand. Expansionary lps moving an economy 2mployment.
nomy is faced with an gap, then the ty or restrictive fiscal l be adopted to bring res and for closing the ap. To reduce inflation, ment can de crease mand by decreasing on goods and services. y, it can decrease mand by decreasing income to decrease expenditure through ect taxes or decreasing nents. In addition to hsumption expenditure, h corporate income tax ld to lower after-tax planned investments decrease in investment and hence aggregate reality, contractionary e policies are more ed to reduce the growth emand.
f fiscal policy to affect cting aggregate demand ential tool for economic . In a recession, the an run an expansionary thus helping to restore normal level and to put
Economic Review:Feb./Mar. 2013
unemployed workers back to work. During a boom, when inflation is perceived to be a greater problem than unemployment, the government can run a budget surplus, helping to slow down the economy.
Problems of Fiscal Policy
Although Keynesians usually view fiscal policy as effective in combating recession and inflation, others are concerned about the shortcomings of fiscal policy. Let us examine some of these concerns. In theory, when there is an instability in the economy, the government should enact timely and effective fiscal policies to remove the instability. In practice, however, it takes months and often years for fiscal policies to be enacted and to have an impact on the economy. In particular, three timing lags constrain the operation of fiscal policy: (a) recognition lag, (b)'administrative lag and (c) operational lag.
The recognition lag refers to the time between the beginning of inflation or recession and the recognition that it is actually occurring. For example, if the economy goes into a slump in January, the decline may not be apparent for three or four months. Once policymakers become aware of the problem in the economy, they rarely enact policies immediately. Instead, they want to be sure that the problem is more than a short-term disturbance.
After an economic problem is recognized, a solution must be formulated; thus there will be an administrative lag between the recognition of a problem and the implementation of policy to solve it. For fiscal policy, the administrative time lag is particularly long as much debate occurs before fiscal policy can change.
Finally, there is the operational time lag: After fiscal policy is enacted, it takes time for the policy to affect the economy. Although changes in tax rates can be implemented quickly, increased spending for public-works programmes will require construction firms to submit bids for the work, negotiate contracts, and so on.
Because of the se lags, some economists contend that discretionary fiscal policy is too slow to have a

Page 71
timely effect on the economy. By the time the full effect of the fiscal policy is felt by the economy, the economic situation may have changed considerably. A policy designed to combat a recession might not produce results until the economy is already out of that recession and perhaps experiencing inflation, in which case the fiscal policy would worsen the situation. Or a fiscal policy designed to eliminate inflation might not produce effects until the economy is in a recession; in that case, too, fiscal policy makes the economic problem worse rather than better.
Another concern about fiscal policy is the natural bias for Parliament to favour expansionary policies over contractionary policies. Because we elect politicians to office, they are
generally apprehensive about voting
for unpopular policies. Indeed, politicians may be voted out of office if we are not pleased with their performance. It is generally easier to get members of Parliament to vote for more government spending or tax reductions than the reverse. As a result, there is a natural tendency for Parliament to favour expansionary fiscal policies over contractionary policies this leads to an expansionary and inflationary bias in fiscal policy.
Crowding-out Effect
Not all economists believe that an
expansionary fiscal policy can stimulate the economy the way we have described. Their concern coming under the heading of the crowdingout effect. With crowding-out, private spending (consumption spending and or investment) falls as a result of increased government expenditures and the subsequent budget deficits. According to the crowding-out effect, a decrease in private spending will occur because of higher interestrates generated by budget deficits that are financed by increased government borrowing. When the government enacts an expansionary fiscal policy, say, an increase in defence spending, the policy must be financed either by increased taxes or through the borrowing of funds to finance the enlarged budget deficit. If the government borrows funds to finance the deficit, the total demand for funds will increase as the government competes with the private sector to borrow the available supply of funds.
The additional govel thus increases the and pushes up inte
What effect will hig
have ೦ಗ್ಲ ಇಂಗ್ಲYe Eusinesses will ( purchases of m
equipment. Resid construction will all Consumers will ref interest-sensitive goc appliances and
Therefore, the high caused by govern) squeeze out private : This decrease in priv at least partially offs government spendir. crowding-out effect : effect of a budget, de demand, output, and not be very pote] crowding-out, an ex) policy may not be combating recession
Fiscal Policy and A
Fiscal policy is re demand-side policy b to influence aggr However, it may als
on aggregate supply
For instance, ar government expendit and training will productivity of the increase in governm on research and di
increase the producti
stock. An increase expenditure on inf increase investment hence the size of th An increase in expenditure on ca. increase the size oft A decrease in corpo will increase expe returns on planned i hence investmen resulting in an incr of the capital stock personal income tax incentive to work an of the labour force. economists talk abo they are normally ref of it to influence agg
From a supply-side
marginal tax rate importance. The mau the fraction of additic
Economic Review:Feb/Mar 2013

nment borrowing emand for funds "eSt rates.
Ler interest rates te spending? elay or cancel achinery and ential housing so be postponed. ain from buying ds, such as major
automobiles. er interest rates nent borrowing ector borrowing. ate spending will et the additional g. Therefore, the suggests that the icit on aggregate employment may ht. Because of pansionary fiscal very effective in
ggregate Supply
ferred to as a because it is used 2 gate demand. o have an effect in the long run. increase in ure on education increase the abour force. An ent expenditure 2velopment will vity of the capital in government 'astructure will expenditure and e capital stock. government ital, goods will he capital stock. rate income tax cted after-tax nvestments and expenditure :ase in the size A decrease in will increase the i hence the size However, when Jt fiscal policy, :rring to the use 'egate demand.
perspective, the is of crucial ginal tax rate is nal income paid
in taxes. A decrease in marginal tax rates increases the reward stemming from extra work, saving, and investment. According to advocates of supply-side economics, a policy that reduces marginal tax rates will cause productivity to increase because individuals work harder and longer, save more, and invest more. As the total supplies of labour and capital in the economy expand, the aggregate supply curve shifts rightward, which will lead to higher real output. Lower tax rates encourage risk takers. Entrepreneurs and businesses will be
more willing to risk their energies
and financial capital on new production methods and new products when lower tax rates promise a larger potential after-tax
reward. Besides cutting marginal tax
rates for individuals, the government can promote increases in aggregate supply by enacting tax breaks that subsidize investment and by eliminating burdensome regulations on business.
Summary and Conclusion
Fiscal policy is an outgrowth of Keynesian economics. The goal of modern fiscal policy is to achieve economic efficiency, and stability. According to fiscal policy theory, government spending and tax policies can be used to alter aggregate demand in order to close inflationary or deflationary gaps. Fiscal policy may be nondiscretionary or discretionary. Nondiscretionary fiscal policy is passive. It relies on automatic or built -in stabilizers to keep the economy on course. Discretionary fiscal policy is 'active’. It...involves purposeful changes in government spending and taxation to create expansionary or contractionary effects. Although Keynesians usually view fiscal policy as effective in combating recession and inflation, others are concerned about its shortcomings. Among the problems of discretionary fiscal policy are timing lags, inflationary bias and the crowding-out effect.
Besides having potential effects on
aggregate demand, fiscal policy can
also influence the level of economic activity through its effect on aggregate supply. According to supply-side fiscal policy, a reduction in marginal tax rates will cause productivity to increase resulting a rightward shift
of aggregate supply curve leading to 1
high real output.
.
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Page 72
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