Asia in the 21st Century: The Potential for Sri Lanka ... 2 I. Asia in the 21st Century III. Sri Lanka’s Potential i. Macroeconomic and Financial Stability II. Ingredients for Sustaining

Outline

2

I. Asia in the 21st Century

III. Sri Lanka’s Potential

i. Macroeconomic and Financial StabilityII. Ingredients for Sustaining Rapid Growth

ii. Outward Orientation iii. Enhancing Productivity Growth iv. Investment in Physical Capital v. Robust Labour Contribution vi. Strong Institutions and Good Governance vii. Inclusive Economic Growth


•Asia’s role in the global economy is rising•Increasing share of global GDP, trade and finance•Supported by sustained robust growth and productivity

4

29%71%

Asia Non-Asia

Share of world GDP, 2000

Share of world trade, 2000

Share of world finance, 2000

Asia: Rising role in the global economy

27%

73%38%

62%

Asia

29%

Asia Non-Asia

5




37% 32%

68% 64%36%

63%

Asia


6




Asia Non-Asia

53%47%

55%45%

54%46%

Asia


Asia’s growth and productivity: Robust and sustained

7

0

2

4

6

7

9

11

Thai

land

Mal

aysi

a

Philip

pine

s

Viet

nam

Indo

nesi

a

Indi

a

Chi

na

1994-1997 2003-2007 2008-2010 2011-2012

Trend Growth(In percent)

-2

-1

0

1

2

3

4

5

Thai

land

Mal

aysi

a

Philip

pine

s

Viet

nam

Indo

nesi

a

Indi

a

Chi

na

Growth of Total Factor Productivity(In percent)

Source: World Economic Outlook; WDI; CEIC Data Co. Ltd; Haver Analytics; and IMF staff estimates

Asia

Country flag =

Outline

8





• Significant body of research on growth successes

• Common ingredients identified

II. Ingredients for Sustaining Rapid Growth

Research on growth successes

• The Commission on Growth and Development, Spence et al. 2008

• “What Makes Growth Sustained”, Berg et al., Journal of Development Economics, 2012

•!“The Quest for Prosperity: How Developing Economies Can Take Off”, Lin, Princeton University Press, 2012

•!“Growth Strategies”, Rodrik, NBER 2003

• Breaking Through The Frontier: Can Today’s Dynamic Low Income Countries Make It?”, World Economic Outlook, IMF 2013

10

Sustaining growth

Common ingredients

11

Growth

Investment in physical capital

Robust labour contribution

Technology & productivity

growth

Strong institutions &

good governance

Macroeconomic & financial

stability

Outward orientation

Inclusiveness

Sustaining growth

Outline

12





• A prerequisite for growth success

• Progress achieved on a number of fronts

• Further fiscal and external strengthening needed

II. Ingredients for Sustaining Rapid Growth i. Macroeconomic and Financial Stability

14

-5

0

5

10

15

GDP Growth(In percent)

Inflation(In percent)

Current account(In percent of GDP)

Gross Reserves(In months of imports)

Sri Lanka’s strides toward macroeconomic stability

2000-2008 2009-2012 ASEAN-4

Sources: World Economic Outlook; and IMF staff calculations.Note: ASEAN includes Indonesia, Malaysia, the Philippines, and Thailand.

Macro-financial stability

-5

0

5

10

15

GDP Growth(In percent)

Inflation(In percent)

Current account(In percent of GDP)

Gross Reserves(In months of imports)

15

Sri Lanka’s strides toward macroeconomic stability

2000-2008 2009-2012 ASEAN-4



Fiscal policy: Consolidation and debt sustainability

16

-10

-5

0

5

10

15

20

25

-40

-20

0

20

40

60

80

100

Fiscal deficit(In percent of GDP)

Revenues excl. grants(In percent of GDP)

Government Debt (In percent of GDP)

2000-2008 2009-2012 ASEAN-4



(Right scale)

0

5

10

15

20

Financial stability: A critical underpinning

17

2000-2008 2009-2012 ASEAN-4

Tier 1 Capital(average)

Non-PerformingLoans (average)

Sources: Bankscope; World Economic Outlook; and IMF staff calculations.Note: ASEAN includes Indonesia, Malaysia, the Philippines, and Thailand.


Lasting macro stability: Key policy priorities

• Stabilize inflation in mid-single digits

• Growth-friendly fiscal consolidation, though greater revenue effort, for debt sustainability

• Strengthen the external sector

• Continue safeguarding financial-sector soundness

18


Outline

19





• Openness supports growth and productivity

• Sri Lanka needs to turn decisively outward

•Fast-growing Asian neighbours, and upgrading exports represent significant potential

II. Ingredients for Sustaining Rapid Growth ii. Outward Orientation

Sri Lanka: The need to turn decisively outwards

21

0

23

45

68

90

2 4 7 9 11

JPN

PHLTWN

MYS

HKG

IDN

OMN

THA

LKA

KOR

BRA

VNM

LATAM (ex BRA)

10

15

20

25

30

35

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

0.02

0.04

0.06

0.08

0.10

0.12

0.14

Exports/GDP Exports/World Exports (RHS)

INDCHN

BWA

Expo

rts

to G

DP

rati

o (%

; ann

ual a

vg. d

urin

g su

stai

ned

grow

th e

piso

de)

Real GDP Growth (%, annual avg. during sustained growth episode)

Exports and GDP growth

Sources: Penn World Tables; World Economic Outlook; and IMF staff estimates.Note: Sustained growth episode defined as a period of 25 years after attaining $2500 constant PPP GDP/capita.

Outward orientation

Exports (In percent)

Sri Lanka: The need to turn decisively outwards

22

0

23

45

68

90

2 4 7 9 11

JPN

PHLTWN

MYS

HKG

IDN

OMN

THA

LKA

KOR

BRA

VNM

LATAM (ex BRA)

10

15

20

25

30

35

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

0.02

0.04

0.06

0.08

0.10

0.12

0.14

Exports/GDP Exports/World Exports (RHS)

INDCHN

BWA

Expo

rts

to G

DP

rati

o (%

; ann

ual a

vg. d

urin

g su

stai

ned

grow

th e

piso

de)

Exports (In percent)

Real GDP Growth (%, annual avg. during sustained growth episode)

Exports and GDP growth


Outward orientation

Fast-growing Asian neighbors: Clearly offer potential markets

23

Others34%

India6%

China1%

Other advanced economies9%

EU29%

US20%

Sri L

anka

Philip

pine

s

Viet

nam

Indi

a

Indo

nesi

a

Thai

land

Mal

aysi

a

Sing

apor

e

Hon

g Ko

ng S

AR

Japa

n

Kore

a

Chi

na

Sri Lanka’s Export Destinations, 2012 Intra-Asian Trade, 2011(Exports plus imports, in percent of total intra-asian trade)

Sources: Direction of Trade Statistics; World Economic Outlook; and IMF staff calculations.Note: Intra-Asia sample includes developing Asia, East Asia, Australia, Japan, New Zealand, and Singapore.

Outward orientation

0

5

10

15

20

25

Sri Lanka’s service exports:Modern services required

24

0

10

20

30

40

2000

2012

2000

2012

2000

2012

2000

2012

2000

2012

2000

2012

2000

2012

2000

2012

25

26

27

28

29

30

2000 2012

Share of Modern Services Exports(In percent of total services exports)

Share of Services Exports(In percent of total exports)

Sri L

anka

Chi

na

Indo

nesi

a

Indi

a

Kore

a

Mal

aysi

a

Philip

pine

s

Thai

land

Sources: World Bank, WITS; UN comtrade Database; and IMF staff calculations.

Outward orientation

Sri Lanka’s goods exports: Diversify and upgrade

25

Chemicals, rubber and related products

5%

Garments46%

Tea14%

Machinery and manufactured articles

22%

Food and agriculture12%

0

25

50

75

100

2000

2011

2000

2011

2000

2011

2000

2011

2000

2011

2000

2011

2000

2011

2000

2011

High-Tech Medium-Tech

Share of High-tech Manufacturing Exports(In percent of total manufacturing exports)

Sri L

anka

Indi

a

Kore

a

Mal

aysi

a

Philip

pine

s

Thai

land

Chi

na

Indo

nesi

a

Goods Export Shares, Latest(In percent of total exports)

Outward orientation

Sources: World Bank, WITS; UN, Comtrade; World Economic Outlook; and IMF staff calculations

Tariff and para-tariff structures require reforms

26

0

10

20

30

40

Mal

aysi

a

Philip

pine

s

Chi

na

Thai

land

Indo

nesi

a

Sri L

anka

Kore

a

Indi

a

1995-2000 2000-2005 2005-2010

Weighted Average Tariff (In percent; 5 year average)

Source: World Bank, WITS

0

5

10

15

20

2004 2009 2013

Sri Lanka: Para Tariff Rates (In percent)

Outward orientation

Outline

27





• Sri Lankan industries not at the productivity frontier

• More FDI, R&D, high-tech education required

II. Ingredients for Sustaining Rapid Growth iii. Enhancing Productivity Growth

Sri Lanka’s productivity: Room for improvement and FDI

29

0

5

10

15

20

25

30

Sri Lanka: Industry Productivity Dispersion(Output per worker 90th/10th percentile ratio)

0

5

10

15

20

25

30

Japa

nKo

rea

Philip

pine

sSr

i Lan

kaIn

dia

Indo

nesi

aTh

aila

ndC

hina

Mal

aysi

aVi

etna

mSi

ngap

ore

Hon

g Ko

ng S

AR

Latin

Am

eric

aSp

ence

13

Foreign Direct Investment(In percent of GDP)

Taiw

an P

rovi

nce

of C

hina

Woo

d Fu

rnitu

re

Pape

r pro

duct

s

Mac

hine

ry &

equ

ipm

ent

Che

mic

als,

Rub

ber

Text

iles

Basi

c M

etal

s

Non

-met

allic

pro

duct

s

Food

& b

ever

ages

Sources: World Economic Outlook; WDI; and IMF staff calculations.

Productivity growth

More R&D clearly helps

30

2

3

4

5

7

8

9

10

11

0 0.8 1.5 2.3 3.0

Research and Development Expenditure(In percent of GDP)

Research and Development Expenditure and Growth

Real

GD

P G

row

th R

ate

(%, a

nnua

l avg

. dur

ing

sust

aine

d gr

owth

epi

sode

)

Research and Development Expenditure (% of GDP; when $2500 constant PPP GDP per capita was reached)

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Indo

nesi

aPh

ilippi

nes

Sri L

anka

Viet

nam

Thai

land

Mal

aysi

aIn

dia

Hon

g Ko

ng S

ARC

hina

Sing

apor

eKo

rea

Japa

n

Latin

Am

eric

aSp

ence

13

CHN

PHL

LATAM (ex. BRA)

BRA

MYS

BWA

HKG

IND

JPN

KOR

TWN

LKA

SGP

IDN

VNMTHA

Taiw

an P

rovi

nce

of C

hina


Productivity growth

Education: Falling share in science and engineering

31

25

30

35

40

2002 2003 2004 2005 2006 2007 2008 2009

Prop

ortio

n of

Tot

al E

nrol

lmen

ts (

%)

Arts Science / Engineering Other

Sri Lanka: Trends in Tertiary Education, 2002-2009

Sources: Chelleraj 2012; and IMF staff calculations.Note: Other includes management, law, agriculture, and others.

Productivity growth

Outline

32





• Investment is key to sustained robust growth

•Sri Lanka’s public investment can be increased, but savings must also rise

• Financial deepening will facilitate private savings/investment

II. Ingredients for Sustaining Rapid Growth iv. Investment in Physical Capital

Investment in physical capital and infrastructure spurs growth

34

012346789

1011

15 20 25 30 35 40 45

Investment and Growth

Rea

l GD

P G

row

th R

ate

(In p

erce

nt; y

early

ave

rage

200

0-20

12)

Investment to GDP ratio (In percent; 2000-2012)

CHN

LATAM (ex. BRA)

SGP

IND

VNM

KOR

MYS

MLT

LKA

PHL

BRA

HKG

JPN

TWN

IDN

OMNTHA

BWA

Sources: World Economic Outlook; and IMF staff estimates.

Physical capital

0

5

10

15

20

25

30

Phili

ppin

esIn

done

sia

Sing

apor

e

Kore

aH

ong

Kong

SAR

Japa

nTh

aila

ndSr

i Lan

kaIn

dia

Viet

nam

Mal

aysi

aCh

ina

Latin

Am

eric

aSp

ence

13

The government’s role in raising investment

35

Taiw

an P

rovi

nce

of C

hina

Public Investment Ratio(In percent of GDP; latest)

Average

0

1

2

3

4

Indo

nesi

aJa

pan

Philip

pine

sTh

aila

ndM

alay

sia

Chi

naVi

etna

mSr

i Lan

kaIn

dia

Kore

aSi

ngap

ore

Latin

Am

eric

a Sp

ence

13

Military Expenditure1

(In percent of GDP, 2012)

Source: SIPRI1 Based on NATO definition - includes all current & capital expenditures on armed forces, including peacekeeping forces; defense ministries & other defense related government agencies

Sources: World Economic Outlook; and IMF staff calculations.

Physical capital

Higher national savings needed

36

10

15

20

25

30

35

40

45

10 20 30 40 50

Investment and Savings

0

15

30

45

60

Chi

naIn

dia

Mal

aysi

aIn

done

sia

Philip

pine

sKo

rea

Viet

nam

Thai

land

Sri L

anka

Spen

ce 1

3La

tin A

mer

ica

Taiw

an P

rovi

nce

of C

hina

Total External Debt Ratio(In percent of GDP; 2012)

Gross National Savings to GDP ratio (In percent; 2000-2012)

Inve

stm

ent t

o G

DP

ratio

(In

per

cent

; 200

0-20

12)

IND

CHN

LKA

HKG

VNM

SGP

MLT

BRA

TWN

BWA

PHL

LATAM (ex. BRA)JPN

IDNTHA

MYS

KOR

OMN


Physical capital

-4

0

4

8

12

Sri L

anka

Philip

pine

s

Indi

aJa

pan

Hon

g Ko

ng S

ARC

hina

Indo

nesi

aTh

aila

ndVi

etna

mKo

rea

Sing

apor

eM

alay

sia

Latin

Am

eric

aSp

ence

13

Public savings must rise

37

Public Savings Ratio(In percent of GDP; average 2000-2012)

0

0.4

0.8

1.2

1.6

2.0

2006

2007

2008

2009

2010

2011

2012

CEB/CPC Losses(In percent of GDP)

Taiw

an P

rovin

ce

of C

hina


Physical capital

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Sri Lanka’s demographics: A challenge for savings

38

30

40

50

60

70

80

90

100

1970

1975

1980

1985

1990

1995

2000

Range of comparator countries

Sources: UN Database; and IMF staff calculations.1 Dependency ratio projected using the U.N. medium fertility scenario. Comparator countries include China, India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

Sri Lanka’s Overall Dependency Ratio1

(Ratio of population aged 0-14 and 65+ to aged 15-64; in percent)

Sri Lanka

Physical capital

Sri LankaRange of comparator countries

0

20

40

60

80

Indi

aSr

i Lan

kaIn

done

sia

Viet

nam

Thai

land

Hon

g Ko

ng S

ARC

hina

Mal

aysi

aPh

ilippi

nes

Sing

apor

e

Latin

Am

eric

aSp

ence

13

Financial deepening: To boost savings and investment

39

0

50

100

150

200

0 50 100 150 200

Sources: Bankscope; and IMF staff calculations.

Dep

osits

/GD

P (In

per

cent

)

Bank Branches per 1000 persons.

Loans greater than 5 years(In percent of total loans)

Taiw

an P

rovi

nce

of C

hina

Physical capital

MLT

JPN

KOR

MYS

SGP

CHN

LKA

THABRA

PHL

IDN

BWAIND

OMN

LATAM(ex. BRA)

VNM

Deposits and Bank Branches

Outline

40





•Higher labour force participation, particularly for women, is needed

• A healthy and educated labour force boosts productivity

II. Ingredients for Sustaining Rapid Growth v. Robust Labour Contribution

0

15

30

45

60

75

90

Sri L

anka

Indi

aM

alay

sia

Kore

aPh

ilippi

nes

Hon

g Ko

ng S

ARIn

done

sia

Sing

apor

eJa

pan

Thai

land

Chi

naVi

etna

m

Latin

Am

eric

aSp

ence

13

Labour force participation key, especially for women

42

Taiw

an P

rovi

nce

of C

hina

Overall Labour Force Participation Rates(In percent; average 2000-2012)

30

40

50

60

70

80

50 60 70 80 90

Overall and Female Labour Participation Rates(Latest)

Fem

ale

Labo

ur F

orce

Par

ticip

atio

n R

ates

(in

per

cent

of f

emal

e po

pula

tion

aged

15-

64)

Overall Labour Force Participation Rates (in percent of population aged 15-64)

TWN

MLT

LKA

IND

PHL

KOR

MYS

LATAM (ex. BRA)IDN

CHN

VNM

BWA

THA

BRA

JPN

SGP

Sources: WDI; CEIC; and IMF staff calculations.

Labour contribution

0

1

2

3

4

5

6

7

Chi

naSr

i Lan

kaPh

ilippi

nes

Indo

nesi

aSi

ngap

ore

Indi

aH

ong

Kong

SAR

Thai

land

Japa

nKo

rea

Mal

aysi

aVi

etna

m

Spen

ce 1

3La

tin A

mer

ica

Labour quality:Education raises productivity

43

Public Spending on Education (In percent of GDP; latest)

0

20

40

60

80

1.0 2.3 3.5 4.8 6.0Education Spending (% of GDP)

Education and Productivity

JPN

HKG

LKA

SGP

IDN

IND

MYS

THA

Sources: WDI; Ark & McGuckin.

Labour contribution

Prod

uctiv

ity

(GDP

per

hou

r wor

ked,

rela

tive

to U

S)

A healthy labour force is equally important

44

0

2

4

6

8

10

Indo

nesi

aSr

i Lan

kaM

alay

sia

Indi

aTh

aila

ndPh

ilippi

nes

Sing

apor

eC

hina

Viet

nam

Japa

n

Spen

ce 1

3La

tin A

mer

ica

Public Spending on Health(In percent of GDP; latest)

Sources: WDI; Ark & McGuckin.

0

20

40

60

80

2 4 6 8 10Health Expenditure (% of GDP)

Health and Productivity

JPN

LKA

SGP

IDN

IND

THA

PHL

MYSKOR

Labour contribution

Prod

uctiv

ity

(GDP

per

hou

r wor

ked,

rela

tive

to U

S)

Outline

45





•A sound business environment requires strong institutions and governance

• Room for improvement in a number of areas

II. Ingredients for Sustaining Rapid Growth vi. Strong Institutions and Good Governance

0

20

40

60

80

100

120

140

Sing

apor

eH

ong

Kong

SAR

Kore

aM

alay

sia

Thai

land

Japa

nSr

i Lan

kaC

hina

Viet

nam

Indo

nesi

aIn

dia

Latin

Am

eric

aSp

ence

13

Sri Lanka!

Business environment: Strong institutions are key

47

Ease of Doing Business Indicator(Rank, 2012)

World Governance Indicator(Score, 2012)

Sources: WDI; and IMF staff calculations.

Institutions/ Governance

Voice & Accountability!

Political Stability!

Government Effectiveness!

Regulatory Quality!

Rule of Law!

Control of Corruption!

Spence 13! Latin America!

Policy initiatives

48

• Strong rule of law

• Restrained government involvement

• Focused and concise regulatory environment

• Basic social protection

•Political and economic inclusiveness

Institutions/ Governance

Outline

49





• Sri Lanka’s poverty reduction is commendable

• Inclusiveness will reinforce sustained growth

II. Ingredients for Sustaining Rapid Growth vii. Inclusive Economic Growth

Growth must lift all boats

51

0

1

2

3

4

Indi

a

Philip

pine

s

Chi

na

Indo

nesi

a

Viet

nam

Sri L

anka

Thai

land

Poverty Headcount Ratio(In percent of population)

Source: WDI; World Economic Outlook; and IMF staff estimates

Inclusive growth

0

5

10

15

20

25

30

Chi

na 2

004

Mal

aysi

a 20

09Th

aila

nd 2

009

Indo

nesi

a 20

11Vi

etna

m 2

008

Philip

pine

s 20

09In

dia

2010

Sri L

anka

200

2Sr

i Lan

ka 2

007

Sri L

anka

201

0

Growth Elasticity of Poverty Reduction(Average, 2000-2010)

JPN

KOR

TWN

HKG SGP

LKA

PHL

IND MYS

THA VNM

CHN

IDN

BRA

LATAM (ex. BRA)

2

4

6

8

10

12

25 30 35 40 45 50 55

Inclusiveness: A virtuous growth cycle

52

Gini coefficient (In percent; when $2500 PPP GDP per capita was reached)

Inequality and Growth

Sources: Penn World Tables; UN Wider Database; World Economic Outlook; and IMF staff estimates.Note: Sustained growth episode defined as a period of 25 years after attaining $2500 constant PPP GDP/capita.

Rea

l GD

P gr

owth

rate

(In p

erce

nt, y

early

avg

. dur

ing

sust

aine

d gr

owth

epi

sode

)Inclusive growth

Outline

53





• Sustained rapid growth over prolonged periods is achievable

• If Sri Lanka follows the key ingredients for growth success, it can narrow the gap with Asian emerging market economies


Sustaining rapid growth:Challenging, but achievable

55

100

120

140

160

180

200

220

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Note: GDP per capita is in 2005 PPP adjusted terms. The slope of each series reflects the growth rate. Period = 1 defined as the year when GDP per capita for the country considered reached US$ 2500. Sri Lanka reached this level in 1998 ; Thailand - 1981; Malaysia - 1972; India - 2006; China - 1995; Japan - 1950; Singapore -1960; Korea -1969.

Past Growth Trajectories

Spence 13

Source: Penn World Tables; World Economic Outlook; and IMF staff estimates

Sri Lanka’s potential

Korea

JapanSingapore

Malaysia

Thailand

India

China

100

120

140

160

180

200

220

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Sri Lanka

t

Log

GDP

per

cap

ita (p

erio

d =

100)

Sri Lanka’s convergence with EMEs:Possible with sustained growth

56

5000

10000

15000

20000

25000

30000

35000

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

Labour and Human Capital Capital Deepening TFP

EMEs

GDP per Capita(In constant 2005 international dollars)

Source: Penn World Tables; World Economic Outlook; and IMF staff estimatesNote: Emerging Market Economy, with real per capita GDP 3 times Sri Lanka’s in 2011, growing at 4.5 percent per year.

Sri Lanka’s potential

2

Sri Lanka: Potential Growth: Last Decade and Future Target

2003-2012 Possible Range Future

Potential Growth (percent) 4½ – 6½ 8

Contribution of: TFP 2 – 3 3½ Capital deepening 1½ – 2 3 Labor and human capital 1 – 1½ 1½

Source: IMF staff estimates.

Sri Lanka

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Documents

Asia in the 21st Century: The Potential for Sri Lanka ... 2 I. Asia in the 21st Century III. Sri Lanka’s Potential i. Macroeconomic and Financial Stability II. Ingredients for Sustaining