Analysis of per capita income in Sri Lanka and comparison between selected country 1977 to up to date

What is Per Capita Income?

Per capita income measures the average revenue earned per person in a given area (city, region, country, etc.) in a specific year. It is calculated using the following formula.

Per Capita Income = Gross Domestic Product

                                                  Mid-Year Population

Per capita GDP is sometimes used as an indicator of standard of living as well, with higher per capita GDP is Interpreted as having a higher standard of living. In other words, it used by human development index as a measure of the quality of life of people living in a particular country.

The per capita GDP is especially useful when comparing one country to another because it shows the relative performance of countries. A rise in per capita GDP signals growth in the economy and tend to translate as an increase in productivity.

The comparison made between countries using GDP per capita must use the purchasing power parity GDP. That creates equality between countries by comparing a basket of similar goods. And also, if comparison makes over time, must use real GDP per capita, that removes the effect of price changes.

According to the World Bank classification, countries are divided into the following income groups.

o   Low income                            : $ 1025 or less

o   Lower middle income             : $ 1026 to $ 4035

o   Upper middle income             : $ 4036 to $ 12475

o   High Income                           : $ 12475 or more.

Per Capita Income of Sri Lanka (1977 to up to date)

After experimenting with the closed and open economic model of development from 1948 to 1977, Sri Lanka finally settled for a free economy model after 1977, with the degree of openness varying according to the political regime in power. Following economic reforms and after that, the economy grew at a higher rate than it recorded in the period before 1977 Which is influencing in increasing per capita income. The income per capita rose at more than 4% a year during 1977- 1983. During these few years, Sri Lanka was one of Asia’s high performing economies. Sri Lanka’s economic growth during the post-independence years was disturbed by several internal and external shocks, including the youth rebellions in 1971 and 1988/89, the war based on Tamil separation in the North/East between 1983 And 2009 and the devastating Tsunami in 2004. Due to the economic depression followed by the slowdown of the growth of GDP, reduction in the growth of per capita income can be observed during the period of 1987 to 1989. A noteworthy outcome during this period was Sri Lanka’s transition from “low income developing country” status to “middle income developing country” status in 1996 by reaching per capita GDP level of US$ 1528.025. Within 1990 to 2000, there was a considerable growth of per capita income between 3% - 5.5% even with the effects of civil war. (Kelegama) stated that, “the war in North and East has deprived Sri Lanka of between 2% And 3% point of economic growth each year in these decades. GDP per capita for the years of 2000 and 2001was US$ 1837.131, US$ 1795.082 respectively which was recorded negative per capita growth (-2.34%) value for the first time since 1977. Reduction in defense expenditure, lower interest rates, an increase in tourist arrivals led to the rise in per capita income from 2002 to 2004 by 5%. Looking at the trend over recent years, GDP per capita grew by 107% from Rs.6414 billion in 2010 to Rs. 11,839 billion in 2016. There has been steady growth in GDP per capita since 2010, and recovery from the dip in growth in 2015 to 2016.

Provincial wise per capita income

The Western province continued to dominate in terms of contribution to GDP. The per capita income of the Western region was 1.4 times the national per capita income in 2015. However, the per capita income ratio in the Western area declined marginally over the period from 2014 to 2015. In the Northern and North Central regions, the per capita income ratio increased while in other provinces, the per capita income ratio remains unchanged except in the Uva province.  Sabaragamuwa, Uva, Eastern, and Northern provinces showed more than 7% in per capita income ratio while urbanized area like Western and Central provinces reported a decline in per capita income ratio.

Comparison of per capita income in other countries.

India – According to the IMF, India ranked 140^th by nominal GDP per capita and 129^th by GDP(PPP) in 2011. India is the seventh-largest economy in the world. After initiation of the new economic policy of 1991, GDP per capita US$ 541.74 in 1990, which accelerate further to US$ 770.34 in 2000. The trends in per capita income at constant prices showed that the rate of growth of per capita income during the 1990s was higher than 1980s. Since 1977 per capita income of Sri Lanka is twofold than that of per capita in India. Inter-regional inequality is another aspect of income distribution in a heterogeneous country like India, measured by the coefficient of variation in per capita SDP. Per capita income of India was recorded US$ 1751 in 2015 with 145^th position in the world in terms of per capita income. However, the growth of per capita income in India increasing than that of Sri Lanka (GDP(PPP)) due to market and service-oriented and expanding the role of private and foreign investment, reduction in import tariffs, deregulation of markets, reduction of taxes.

China – China is the second-largest economy in the world, followed by the United States. China has the largest GDP, producing $21.2 trillion in 2016. But its GDP(PPP) per capita income $15,400 because of its four times the number of people as the US. In 1977 China recorded per capita income less than that of Sri Lanka. (SL-$ 825, China - $280). As a result of introduction pragmatism to the economic system of China to promote the market element, per capita income for the period in 1978 to 1990 Was gradually increased. In 1992 per capita income was increased by 5% due to the establishment of social market economy reforms. In the period 1998 to 1999 slowed down The Chinese economy is partly due to the Asian financial crisis. Therefore, growth f per capita also was less. GDP per capita was recorded at about US$ 6497.73 in 2015 which is about 1.5 more than Sri Lanka.

Singapore – Highly developed and successful free-market economy is owned by Singapore. It enjoys a higher per capita income than that of most developed countries. In 1995 Sri Lanka’s per capita income was US$ 1480 far behind Singapore’s per capita income of US$ 29000.  As the economy contracted 0.6% in 2009 due to the global crisis, and at the same time growth per capita income also was -3.6%. Per capita income of Singapore in 2015 is about 14 times higher than that of per capita income of Sri Lanka. (Singapore- US$ 51855, Sri Lanka – US$ 3638) due to its attractive investment environment, exports are mainly on high value-added products rather than labor-intense goods. According to Forbes, Singapore is the first ranking in terms of trade freedom as well as investor protection than other countries which help to earn high per capita income.

To overcome this impasse, the growth strategy of Sri Lanka has to be changed. Sri Lanka should pay much attention to research and development because its high tech exports are very low and its share in total manufactured exports has come down. (0.15% of GDP) According to the global competitiveness report, Sri Lanka’s overall performance, particularly
concerning technology-related factor, is inferior. In terms of technology index, Sri Lanka is placed at 72^nd position out of total 148 Countries. According to the World Bank Group’s Ease of Doing business 2017 index, out of 190 Sri Lanka was ranked 110^th, down from 107^th In 2016. This indicates that the government’s aim of improving the investment climate has not served up to the expected dividends.
On the other hand, due to shadow economy and value of unpaid work by volunteers, political manipulation, ignoring externalities GDP statistic may understate and thereby mislead per capita income of Sri Lanka.
Moreover, slower steps towards the industrialization, availability of social infrastructure, slower population growth leads to the low level of urbanization and thereby Sri Lanka making as middle-income country. Recently most of the developed countries intended to use National Happiness Index as an alternative which measures the nation’s well-being goes beyond the rate of growth of GDP.

However, according to the recently released macro-economic forecast by the Economic Intelligent Unit(EIU), Sri Lanka has been named as the only Asian country which is expected to be among the top five countries by 2050 in terms of nominal GDP per capita.

Analysis of Per Capita Income in Sri Lanka and a Comparison among Selected Countries. (1948 to 1977)

Introduction

Per capita income could be defined as the average income that could be attributed to a person in a particular country for a specific period. It is calculated dividing GDP/GNI by the midyear population.

Per capita income can be measured based on Gross Domestic Product (GDP) or Gross National Income (GNI) and could be calculated using the current base, steady base, and purchasing power parity base.

Importance

Per capita income is frequently used to understand and compare a country's standard of living over time. And thereby can use to analyze the economic performance of a particular country with other countries.

Limitations

Standard Living of people is not correctly reflected by per capita income. Per capita income is an average figure, and this average may not represent the correct standard living of the people. Also, the population includes economically inactive people like infants as well. Therefore we have to consider the income distribution in line with the per capita income analysis.

Per Capita Income is an inadequate measure of economic welfare. Since development is multidimensional aspects like health, education is not being reflected in per capita income.

Per Capita Income of Sri Lanka 1948-1977

Sri Lanka after Gaining independence in 1948 has surpassed many Asian countries in terms of per capita income at the beginning of 1960. However, in 1977 many countries that were equal or below in terms of GDP per Capita during the 1960s have surpassed Sri Lanka. During the period being considered real Gross National Product grew at an average of 4.1 percent while the population grew at an average of 2.3 percent per Annam. Therefore per capita, GNP at constant prices increased annually at a rate of less than 2 percent during the period being considered.

Income distribution has shown more equality despite a relatively low average growth rate. In Sri Lanka, period up to 1977 benefits of economic growth has been distributed to lower-income brackets. Government has tried to reduce the disparities in income by designing specific policies such as income transfers through welfare expenditures, fixing minimum wages through income, gift, wealth and turnover taxes, and ceiling of ownership of land.

There was a relatively weak economic performance of the country over the post-independence Period. Reasons for this issue were the low rate of savings and investment in the country. Low level of investment could be observed in small enterprises, the self-employment sector of the economy, including small farms, small scale fishing activity, and cottage industries.

Although Sri Lanka is rated low in terms of its past performance in economic growth, it is highly rated in terms of the level of human development it has achieved for its people. Since the 1970s, when the Physical Quality of Life Index (PQLI) came into the economic context, Sri Lanka has considered as a country with an ‘Unusually’ high PQLI because its rank in terms of per capita income was very low. This was because Sri Lanka’s human development achievements were based on massive investment in the social sector in the sectors such as free health care, free education, and subsidized food. Sri Lanka’s failure point is its inability to translate this social sector achievement in rapid economic growth.

GDP Per capita income of Sri Lanka during 1960s was US$ 582(constant 2010 US$). The figure was the same as in Taiwan and South Korea and significantly higher than Indonesia and Thailand. However, in 1977, the GDP per capita income of Sri Lanka was US$ 824 (constant 2010 US$) reflecting a lower per capita income growth in Sri Lanka.

East Asian Countries growth has averaged 8% since 1960. The disparity in income growth between Sri Lanka and East Asian countries was savings and investment in Sri Lanka was much less than of East Asian countries. Therefore according to the above mentioned economic conditions, Sri Lanka has earned relatively lower per capita income during this period.

Comparison of Per Capita Income between selected Countries (1948 – 1977)

In this section, Sri Lanka is compared with three Asian countries in terms of GDP per capita income of each country for the period of 1948 to 1977. The rationale to select the states was in the 1960s these countries had equal or below GDP per capita income when compared to Sri Lanka. But after that, during the 1970s these countries have surpassed Sri Lanka in terms of per capita income. Therefore it is worth to study why Sri Lanka has been led back during the period being considered.

Indonesia

Before 1965 Indonesia’s economic condition was not satisfactory. However, after 1965, GDP has been growing throughout the study with a positive growth rate. During this period, the share of industry has increased, and both agriculture and service sectors have decreased. This implies that the industrialization has mainly contributed to economic growth during this period.

Industrial growth was mainly based on the employment of new imported production technology (in capital goods such as machinery and equipment) and the enhancement of education and skill level of employees has enhanced the productivity of the country. More people entered the labor force, and more capital was invested in the reconstruction and expansion of the stock of capital goods. Therefore the increase of the labor force and the capital stock describes 60 percent of GDP growth. Moreover Educational achievement grew at a very significantly and the demand for educated workers increased according to the changes of labor market. Both exports and imports increased in a short time. After the liberalization period, there was a nationalist recovery because Indonesia was a net exporter of oil therefore they could acquire great benefits from the two oil shocks of 1970s. As a result of that, they could reduce dependence of external investment in many segments of the economy. Government tried to encourage FDI for this purpose they introduced Foreign Direct Investment Law, No. 1 in 1967 and providing concessions for foreign investors and attracted more foreign investments. They promoted domestic investments by giving tax incentives. Because of these reasons Indonesia could achieve continuous GDP growth and thereby Indonesia managed to enjoy an average annual growth rate of GDP per capita 5.18 percent.

South Korea

In 1960 Per capita income of the country was similar to Sri Lanka’s Per Capita Income. However, after 1960s Korea was into a fast development track than of Sri Lanka resulting per capita income of US$ 3491 in 1977.

South Korea's economy proliferated because of several reasons. South Korea established The Economic Planning Board in 1961. The development plan was focusing on export-led industrialization and has been successful yielding a higher economic growth in South Korea after the 1960s. Their policies encouraged private entrepreneurs. Private saving was stimulated by rising interest rates, and funds were borrowed from abroad. Exports also were supported by direct subsidies. Further foreign exchange earnings improved as export, and international receipts rose.

Substantial successes were achieved under the first two, five-year economic development plans. The manufacturing sector grew by 15 percent and 21 percent during these development plans. Domestic savings rates increased, and exports extended significantly. A new economic strategy emphasizing diversification in production and trade proved successful in the 1970s. Under the third plan, the government made a move to expand South Korea's heavy and chemical industries, investing in steel, machinery, shipbuilding, electronics, chemicals, and nonferrous metals. Their capability for steel production and oil refining has significantly increased.

Thailand

During the 1960s, Thailand experienced one of the most rapid growth rates among developing countries, more than 10% per year in GNP. There were three development plans executed in the period between 1960 and 1977. The US supported Thailand to achieve a higher economic growth rate compared to other countries during the period. There is a substantial income difference between farm and non-farm sectors due to differences in skill levels and differences in supplies of inputs and productivity. Thailand achieved higher economic growth because of better technology, human capital, and focusing on FDI. During the 1960s per capita GDP was $570.86 while the figure was $1225.15 in 1977 showing relatively high economic growth in the country due to the development plans undertaken. In Sri Lanka per capita GDP was US$ 582.66, and in 1977 the figure was US$ 824.14. (Figures are based on constant US$ 2010). Therefore Per capita growth rate of Sri Lanka is less than Thailand during the period being concerned.

Conclusion

According to the facts mentioned above in 1960, Sri Lanka’s per capita income was higher than Indonesia and Thailand and similar to South Korea. But in 1977, it could be observed that Sri Lanka’s per capita income is relatively lower than those countries due to lower per capita growth rate in Sri Lanka. Main reasons for this were lack of sound economic development policies, smaller savings and investments standards, and higher contribution to social welfare activities.

Appendix

Table 1 - Comparison of per Capita Income

Country	GDP Per Capita Income (constant 2010 US$)
	1960	1977
Sri Lanka	582.66	824.14
Indonesia	422.00	1050.00
South Korea	580.00	3491.00
Thailand	570.86	1225.15

Source: World Development Indicators

         

Table 1 – Gross National Product, Growth Rates, Population and Per Capita Growth

                    from 1960 - 1977

Year	GNP  (at constant prices) Rs. Mn	Annual Growth Rate (%)	Per Capita Income		Population (‘000)	Annual Population Growth Rate (%)
			Rs.	Percent
1960	6,289	6.6	636	3.9	9,896	2.8
1962	6,710	4.3	643	1.7	10,443	2.7
1964	7,363	6.3	675	4.2	10,903	2.5
1966	7,818	3.5	683	1.0	11,440	2.5
1968	8,901	8.4	742	5.9	11,992	2.5
1970	9,686	4.1	774	2.4	12,514	2.1
1972	10,030	3.1	770	0.5	13,020	2.0
1974	10,731	3.4	801	1.9	13,393	1.6
1976	11,443	3.0	835	2.0	13,717	1.6
1977	11,952	4.4	855	2.6	13,942	1.6

Source: Central Bank of Ceylon