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.