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