Unleashing Sri Lanka’s Potential

1
Rocio Castro and Shantayanan Devarajan

June 2006

1
With contributions by Rajatha Wijeweera. Castro is Lead Economist, Poverty Reduction and Economic
Management Unit, and Devarajan Chief Economist, of the South Asia Region of the World Bank. This paper is
the subject of a Public Lecture by Devarajan at the Central Bank of Sri Lanka on June 29, 2006. We are grateful
to Terrence Abeysekera and Uthum Herat for comments on an earlier draft. The views expressed in this paper
are the authors’ own, and not necessarily those of the World Bank.

1
 Unleashing Sri Lanka’s Potential
Rocio Castro and Shantayanan Devarajan
June 2006

I. Introduction

Following substantial, market-oriented reforms, the Sri Lankan economy has grown at
over 5 percent a year for the past twenty years. Between 1990 and 2002, per-capita GDP
grew at over 3 percent. Yet during this same period, the share of people living in poverty fell
by only 3 percentage points. The reason is that Sri Lanka’s growth was mostly concentrated
in one province, the Western Province, which is also the wealthiest region in the country.
From 1997-2003, the Western Province grew at 6.2 percent annually, while the rest of the
country grew at only 2.3 percent. Since the mid-1990s, the Western Province’s share of Sri
Lankan GDP has increased by six percentage points.

It appears therefore that Sri Lanka’s experience confirms the worst suspicions of those
opposed to globalization and market reforms. Despite growth, the rich got richer while the
poor’s incomes stagnated. Inequality went up. While the incidence of urban poverty fell by
half, rural poverty declined by only 6 percent and estate poverty rose by 50 percent. Overall,
the number of people living in poverty increased.

In this paper, we show that this reasoning is incorrect. A closer look at the evidence
reveals that poverty declined substantially where markets were allowed to prosper. The
market-oriented reforms that Sri Lanka has been undertaking since the late 1970s, such as
liberalizing trade, deregulating industry and promoting private investment, directly benefited
the Western Province which, thanks to its location and infrastructure, was able to take
advantage of the opportunities from globalization. Poverty in the Western Province is now
near single-digit levels. Meanwhile, the rest of the country has seen very little reform. In
agriculture in particular, reforms in land markets and paddy cultivation, as well as policies to
improve the marketability of agricultural produce, have been elusive. As a result, rural
incomes have stagnated. In short, Sri Lanka is almost a textbook example of how market-
oriented policies can unleash economic growth and prosperity, and how the lack of such
policies can lead to economic stagnation and persistent poverty.

To investigate how the rest of the country can achieve the Western Province’s
success, so that Sri Lanka can achieve its true potential, we examine, in section II of the
paper, the regional variations in growth, poverty and inequality in Sri Lanka. We find that,
not only did the Western Province have the fastest growth and poverty reduction in the
country, but it also saw the smallest rise in inequality during the 1990s. Growth in the
Western Province has been pro-poor. We link this impressive performance to the policy and
institutional reforms of the 1980s and 1990s, and show how the province was able to generate
a “supply response” that capitalized on these reforms. We also show that a more open
economy enabled the Western Province to adjust more quickly to adverse external shocks.

Next, in section III, we ask how the rest of Sri Lanka could achieve the growth and
poverty reduction of the Western Province. We turn to the reforms that could generate a

2
similar supply response—reforms in agriculture, labor and land—and ask why they have
been so difficult to achieve. The reasons have to do with the contentious politics in Sri
Lanka, and a historical legacy of state intervention in the economy. However, here too we
see a potential success story, whose lessons may be transferred to other reform areas. Few
topics in Sri Lanka are more contentious than education reform. And the education sector is
heralded as a case where the state has succeeded in providing a service. Nevertheless, in the
past few years, with the support of both sides of the political divide, Sri Lanka has undertaken
major reforms in the education sector, giving more power to communities and schools in
management, and re-introducing English as the medium of instruction. We analyze how
education reform was achieved in Sri Lanka, and suggest lessons for the process of reforms in
other areas.

Section IV provides some concluding remarks.

II. How did the Western Province Grow So Rapidly?

2.1 Poverty and Growth Outcomes

A closer look at recent growth and poverty trends reveals sharply uneven outcomes
across Sri Lanka’s regions, with most of the gains being concentrated around Colombo and
neighboring districts in the Western Province. During 1997-2003, the Western Province GDP
grew by an average of 6.2 percent annually, while the rest of country grew on average by
only 2.3 percent. With population growth of about 2 percent annually in the Western
Province, this translated into a significant increase in per capita incomes and consumption,
averaging 4 percent annually over the period.2 As a result, the per-capita income of the
Western Province by 2002 was two to three times higher than in the rest of the country.
Table 1: Poverty Headcount by Province, 1990/91-2002

Province 1990/91 2002

Western 19 11
North Central 24 21
Central 31 25
North Western 26 27
Southern 30 28
Sabaragamuwa 31 34
Uva 32 37
Sri Lanka 26 23
Source: Department of Census and Statistics

Not only has it been the fastest growing region in Sri Lanka, but the Western Province
has also experienced the steepest reduction in poverty (from 19 to 11 percent between
1990/91 and 2002). 3 As illustrated in Figure 1—which shows variations in poverty
headcount, consumption per-capita, and the Gini coefficient based on household data for
1990/91 and 2002— the poverty headcount in the Western Province decreased by over 40

2
Population growth in the Western Province reflects the impact of internal migration. It should be noted
population growth in most other provinces either declined or remained stagnant during the period.
3
Poverty headcount does not cover the North and East.

3
percent alongside a similar proportional increase in real per-capita consumption.4 Moreover,
the sharp reduction in poverty occurred despite an increase in income inequality over the
period, as measured by an increase in the (consumption) Gini coefficient which, for a given
level of growth, has an off-setting impact on poverty reduction.5

Furthermore, it is noteworthy that the Western Province— the richest region in the
country—had the lowest proportional increase in the Gini coefficient (12 percent) while Uva
Province— the poorest region— recorded the highest proportional increase (53 percent). 6 As
a result of these variations, the Gini coefficients for the richest and the poorest regions in the
country in 2002 stood at about the same level (0.4).
Figure 1: Regional Variations, 1990/91-2002
Growth rates of Poverty, GINI, and
Expenditure
60
40
20
0 PCEXP
%

-20 POV
GINI
-40
-60
Western

Central

Sourthern

North-West

North-Central

Uva

Sabaragamuwa

Source: Staff calculations based on HIES 1990-91 and 2002

Notes: “PCEXP” refers to “real per capita consumption expenditure (at 2002 prices); “POV” refers to “poverty
headcount rates”; “GINI” refers to “Gini coefficients of real per capita consumption expenditure”.

2.2 Underlying Factors for Growth Differentials

The sharp differences in growth performance (and per-capita income) between the
Western Province and the rest of the country cannot be explained by differences in human
capital endowment. For example, while literacy rates and education attainment indicators are
somewhat better in the Western Province, they are not that far-off from those in other
provinces7. The relative homogeneity in human capital indicators is not surprising given that
public education and health policies in Sri Lanka have been by and large quite equitable.
4
It should be noted that income levels in 2002 are likely to have been depressed relative to the historical trend
as the Western Province was just recovering from a significant contraction in real GDP the previous year.
5
These findings suggest that the elasticity of growth to poverty reduction in the Western Province is
significantly higher than one.
6
From 1990/91 to 2002, the (consumption) Gini coefficient for the Western Province increased from 0.356 to
0.4, while the Gini coefficient for the Uva Province increased from 0.257 to 0.392.
7
To be sure, the educational attainment indicator does not capture differences in the quality of education across
regions—see section 3.

4
Table 2. Human Capital Indicators by Province: 2003
WP South Sabara Central Uva East NW NC North All
Literacy rate 96 93 92 89 88 87 94 93 93 93
Educ. Att.
No schooling 4 8 9 11 12 14 7 8 8 8
Primary 24 32 31 32 36 38 30 31 32 29
Secondary 46 38 43 40 39 31 42 44 32 41
Tertiary 27 22 17 18 14 17 21 17 29 21
Source: Central Bank Annual Report

Although regional gaps in terms of access to economic infrastructure would seem to

be more acute, the extent of these differences do not seem to explain the sharp differences in
growth performance either. For example, while over 90 percent of households in the Western
Province have access to electricity, the coverage in other regions ranges around 60-80
percent, Uva being the least endowed province with only 57 percent coverage. In terms of
access to markets, the accessibility index8 for the Western Province is only 25 percent higher
than that of Uva, which has the worst accessibility index in the country.

Table 3: Access to Economic Infrastructure

Provinces Average % of % share of % of firms % of firms
accessibility households firms with with a land located in a
index with electricity line/mobile community
electricity phone with a bank
Western 3.8 92 79 24 70
Central 3.1 73 80 7 47
Southern 3.1 78 68 18 62
North Western 3.1 69 61 15 70
North Central 2.9 66 61 8 75
Uva 2.8 57 62 23 78
Sabaragamuwa 3.3 62 76 15 70
Source: World Bank (2006), Sri Lanka: Poverty Assessment (forthcoming)

The argument put forward in this paper is that the Western Province’s favorable
growth and poverty outcomes have resulted from its greater integration to global markets, in
response to economic reforms adopted since the late 1970s. In the first three decades of Sri
Lanka’s independence, most economic activities such as manufacturing, trade, transport,
telecommunications and financial services were dominated by state monopolies and subject
to state controls. But in the 1980s and 1990s liberalization reforms paved the way for
increased private investment in trade-related industry and services (Box 1). The Western
Province has benefited the most from these economic reforms by rapidly developing export-
oriented manufacturing and related services, with little reliance on agriculture. By contrast,
agriculture has continued to dominate economic activity and employment outside the
Western Province, which remains predominantly rural. The reason why growth has not
picked up in rural areas is largely because of the limited scope of agricultural reforms and
consequently the lack of functioning, efficient markets for key commodities and inputs,
including land.

8
The accessibility index measures at each point the sum of the population totals of surrounding cities and towns,
inversely weighted by the road network travel time to each town.

5
 The Western Province houses around 60 percent of Sri Lanka’s industry and service
activities and absorbs about 30 percent of total employment in the country. Due to the rapid
expansion of industry and services, the share of the Western Province in national GDP has
increased from 44 percent in 1996 to 50 in 2002.

Box 1. Economic Reforms in the 1980s and 1990s

The initial phase of reforms that lasted from 1977-82 focused mainly on liberalization of the trade and
investment regimes. Quantitative restrictions on imports were removed and a more uniform tariff structure
established. A highly overvalued currency, which was largely the result of trade suppression, was aligned in
1978. On the investment front, several impediments to foreign direct investment (FDI) were relaxed. The
Greater Colombo Economic Commission (GCEC)—the forerunner to the BOI—was established in 1978 to
promote investments into export-oriented activities. The GCEC, while establishing several export
processing zones (EPZ’s) in various parts of the country, was also responsible for formulating and
implementing an incentives package for foreign investments.

The benefits of these early reforms were manifested in higher economic growth and the transformation of
the country’s export base from agricultural to manufacturing products. Although the country was riddled
with the civil conflict since 1983, the benefits of reforms continued and growth was sustained during the
1980s.

The 1990s witnessed another wave of reforms spanning two successive governments. Notably, the
administration taking office in 1994 continued and deepened reforms initiated by the previous
administration. Key reforms under this administration included the removal of exchange control restrictions
on current account transactions (i.e. the opening up of the current account in Sri Lanka) and the
privatization of large SOEs in the plantation, insurance, telecom, and airlines sectors. Steps were also
taken to further lower and simplify the tariff structure and strengthen the policy framework for FDI and
portfolio investment. Perhaps the most important feature of the reforms was their continuity despite
changes in government—a major departure from the “stop-go” policies that characterized Sri Lanka in the
first three decades of independence.

The results of these initiatives were considerable. The country’s industrial exports expanded rapidly and
gained market share, particularly toward the end of the 1990s. By 2000, garment exports had reached $3
billion, contributing 50 percent of total exports. In addition, the increased privatization efforts saw Sri
Lanka attracting much FDI. The year 1997, saw the largest ever FDI inflow into the country of US$430
million.

Consequently, the economic structure in the Western Province is dramatically

different from that in the rest of the country. Notably, agriculture accounts for less than 5
percent of provincial GDP and about 8-9 percent of employment—with fishing, coconut and
other food crops as the main activities.

Industry accounts for one third of GDP and employment in the province. Much of the
dynamism of the sector reflects the rapid expansion of labor-intensive garment exports,
following the first wave of liberalization reforms in the late 1970s and subsequent
establishment of export processing zones (EPZs). Over 70 percent of garment factories are
located in the Western Province, mainly the Colombo and Gampaha districts, employing
about 200,000 workers (or about 65 percent of employment in the garment industry). This
concentration is partly explained by the easier access to the Colombo port and the availability
of related supporting services.

6
 The services sector dominates economic activity in the Western Province, accounting
for 65 percent of provincial GDP and over 55 percent of employment. The largest
contributors include wholesale and retail trade, banking, and transport and communications.
Particularly notable is the recent rapid expansion of the telecom sector following the opening
of the sector to competition and the privatization of Sri Lanka Telecom.

The sectoral composition of economic activity (and Table 4: Poverty headcount by

industry where household head is
employment) is closely linked with the relatively low employed (2002)
poverty incidence in the Western Province. According Agriculture/Fishing 40.4
to 2002 household data from the Department of Census Manufacturing/Construction 24.7
Statistics (DCS), poverty incidence in Sri Lanka is Service 9.6
lowest among households whose heads are employed in All households 22.7
the services sector (9.6 percent) and highest if the Source: HIES (2002)
household head is employed in agriculture (40.4 Note: Including paid employment only
percent). In the Western Province, the proportion of employees in the services sector amounts
to 57 percent, while in Uva Province this proportion is only 21 percent. By contrast,
employment in agriculture accounts for only 8-9 percent in the Western Province and 68
percent in Uva province. Interestingly, poverty incidence in households whose head is
employed in industry (manufacturing and construction) is relatively high (about 25 percent).

The differences in poverty incidence across sectors described above can be partly
attributed to differentials in income earnings by sectors. Mean income earnings in the
services sector are 2.2 times higher than those in agriculture and 40 percent higher than in
industry.9 Lower income earnings in agriculture reflect an equally low level of labor
productivity in the sector, which is half that of industry and services. 10 It is not clear
however why income earnings in industry are 30 percent lower than in services when labor
productivity in both sectors is similar. Moreover, it is not clear why poverty incidence in
industry-dependent households is more than twice than in service dependent households.

2.3 Vulnerability to External Shocks

Just as with countries that have liberalized their trade regimes, it can be argued that the
Western Province’s greater integration with global markets makes it more vulnerable to
external shocks (Rodrik [1998). Indeed, this proved to be the case in 2001 when provincial
GDP suffered a significant contraction (about 4 percent in real terms) largely as a result of the
global economic meltdown that followed the 9/11 terrorist attack in the United States 11.
However, it is also true that the Western Province was able to recover quite rapidly from this
severe exogenous shock, as shown in Figure 2.

Figure 2. Annual Growth Rates in Western Province and National: 1997-2004

9
See Central Bank of Sri Lanka, The Consumer Finances and Socio Economic Survey Report 2003/04.
10
See Central Bank of Sri Lanka, Annual Report 2005, Box 8: Labor Productivity and Underemployment.
11
The attack on Katunayake Airport in Colombo, an escalation of the civil conflict, a drought and rising oil
prices also contributed to the recession.

7
 14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
1997
- 2.0%
1998 1999 2000 2001 2002 2003 2004

- 4.0%

- 6.0%

National Growth Rates (Real) WP Growth Rates (Real)

While other positive factors— such as the immediate optimism that followed the signing
of the ceasefire agreement in early 2002— may have contributed to this outcome, there can
be no doubt of that greater openness contributed to the Western Province’s resilience to
external shocks, as demonstrated by the rapid pace of the recovery.

Figure 3. Annual Growth Rates of Non- Western Province and National: 1997-2004
14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
1997
- 2.0% 1998 1999 2000 2001 2002 2003 2004

- 4.0%

- 6.0%

National Growth Rates (Real) GDP growth (Non WP)

By contrast, the impact of the external shock was less dramatic in the rest of the
country, which is less integrated with global markets. Much of the slowdown in 2001 outside

8
the Western Province reflected the adverse impact of a drought on agricultural output. 12 As a
result, national GDP only contracted by an average of 1.5 percent in real terms. Nevertheless,
growth outside the Western Province continued to lag behind in subsequent years.13 In
general, growth patterns outside the Western Province appear to be very variable. Such
variability seems to be related to their small economic base and their greater dependence on
agriculture and agro-based industries—which are often subject to variations in weather
conditions.

III. Enabling Growth in the Rest of Sri Lanka

If the Western Province could grow so rapidly and reduce poverty to near-single
digits, what is stopping the rest of the country from doing so? Clearly, there are a host of
factors explaining growth differentials across Sri Lanka, but the previous section suggested
that the particular policy reforms undertaken by Sri Lanka in the 1980s and 1990s
disproportionately benefited the Western Province. These reforms were primarily in the
trade, industrial and investment areas. Thanks to its proximity to the port of Colombo and its
services and manufacturing base, the Western Province was able to take advantage of these
reforms, to unleash a private-sector-led boom that substantially improved the welfare of its
residents.

3.1 The Absence of Agricultural Reforms14

Conversely, one reason why the rest of the country has not grown as rapidly is the
absence of reforms that these regions could take advantage of. This point is clearest in the
case of agriculture where, as noted earlier, the poverty rate is 40 percent. The cause is slow
growth in agricultural GDP in general (barely 2 percent a year in the 1990s), and in rice value
added in particular, which has been negligible or negative over the past two decades (Table
5). Sri Lanka has a legacy of policies, such as land provisioning, fertilizer subsidies and
protective import tariffs, aimed at achieving self-sufficiency in rice. While they have helped
the country achieve self-sufficiency, the costs have been extremely high, especially for the
poor. Forcing farmers to continue growing paddy through the paddy land’s provision leaves
them undiversified and at the mercy of the weather. It also makes it difficult for them to use
highly productive, irrigated land to cultivate more lucrative crops. Fertilizer subsidies mainly
benefit rice farmers—and the richer ones at that—while undermining soil conditions and
apparently not having much impact on yields. In the 1990s, fertilizer application rates more
than doubled while average yields increased by only 8 percent. Finally, unpredictable and
frequent changes to agricultural tariffs heighten price risk to farmers and dampen incentives
to invest in storage facilities, for example. Furthermore, these import tariffs increase costs to
consumers, while encouraging farmers to stay in low-value crops such as rice15.
12
Agricultural value added declined by 3 percent in 2001, mainly reflecting the failure of the North-East and
South-West monsoons.
13
With the exception of the North which grew well above the national average during 2002-04, in the aftermath
of the cease fire agreement.
14
This section draws from World Bank [2004].
15
It could be argued that the central and eastern parts of the country lack the physical infrastructure, such as
ports and airports, to get exportable products to market and benefit from liberalization. However, farmers could
benefit from producing a more diversified set of products even for the domestic market, using the existing
infrastructure, as Sri Lankan tastes change with rising incomes. Furthermore, the constraints to improving
infrastructure elsewhere in the country also have their roots in public policy, including a low and declining tax-

9
 Table 5: Average Annual GDP growth rate (%)

1982-90 1991-00 1998-02

Agriculture 2.8 1.6 0.4
Tea 2.9 3.4 2.5
Rubber -1.2 4.3 -2.3
Coconut -3.8 2.5 -3.2
Rice -0.3 -0.7 0.6
Other 6.3 1.9 0.8

Source: Central Bank of Sri Lanka and staff estimates.

If these policies are undermining Sri Lanka’s agricultural performance, why do they
persist? With over 80 percent of the population and 90 percent of the poor living in rural
areas, it would seem reasonable that, in a democracy like Sri Lanka, a majority would vote
for reform. Of course, the real world is not so simple. First, while import tariffs may be
harmful to the poor, removing them leaves farmers exposed to unfamiliar competitive
pressures. There is also a possibility that, in the absence of complementary actions to lift
constraints on land, seeds, technology and water, the removal of tariff protection may not
lead to increased production in higher value added crops. Secondly, most of these farmers
are poor. Yet the reforms needed involve reducing subsidies or protection which, in the
short-run, may leave them worse off. But perhaps the most compelling reason is the nature of
electoral politics in Sri Lanka. With leadership changing hands at almost every election
between two dominant parties, each often in a fragile coalition with more extreme parties,
agricultural reforms can often become the lightning rod for the opposition. For instance,
farmers granted land through the Land Development Ordinance (LDO) cannot use the land as
collateral to access credit, nor can they lease or buy land. Relaxing any of these constraints
would benefit farmers and permit a more efficient allocation of land resources. Yet efforts at
introducing mortgage rights to farmers or a lease market for land are attacked as the first step
on a slippery slope towards privatization. A draft Land Ownership Bill granting full
ownership rights to farmers cultivating LDO land, which was submitted to parliament in
November 2003, was withdrawn due to court challenges.

While we have focused on agricultural policies, a similar syndrome afflicts other

reform areas as well. Two of the more prominent are the power sector and labor regulations.
Sri Lanka has some of the highest electricity costs in Asia. Yet the Ceylon Electricity Board
loses about Rs. 50 million—the cost of one rural hospital—each day. The reasons have to do
with management weaknesses and problems with the tariff structure. But reforms such as the
introduction of corporate management principles to the CEB are resisted by some of the more
powerful unions, again on grounds that it will lead to privatization and job losses. Similarly,
Sri Lanka has some of the most restrictive labor regulations in Asia, including one of the
most generous severance pay clauses in the world. The consequence is that firms are

to-GDP ratio, and a wage bill and interest payments that consume almost all of domestic revenues, leaving little
room for public investment.

10
reluctant to hire workers, lest they have to pay large severance packages if they have to
dismiss them. Again, labor reform is resisted by unions on the grounds that it is “unfair” to
reduce severance packages to workers who, after all, belong to the lower-middle class of
society.

It may seem therefore that Sri Lanka (outside the Western Province) is “stuck” in a
low-level equilibrium, from which it is unable to emerge because of the political obstacles to
pro-poor reforms. Is there no hope for the country? On the contrary, the recent experience
with an even more contentious reform offers the prospect that some of these intractable
political problems could be resolved in the near future.

3.2 The Recent Experience with Education Reforms16

Sri Lanka’s education system has been celebrated around the world as one that has
achieved universal primary education, and high levels of literacy, at very low per-capita
incomes. Financed and provided almost exclusively by the public sector, the education
system has achieved these results with relatively low levels of education spending as a share
of GDP (2.9 percent in 2002), considerably lower than some other countries in South Asia
such as India, which have worse education outcomes. Towards the end of the 1990s,
however, it was becoming clear that Sri Lanka’s education system was facing serious
“second-generation” challenges. First, although schooling was compulsory up to grade 9, net
enrolment and survival rates in grades 6-9 were only at 81 and 78 percent respectively.
Second, despite universal primary enrolment, the learning outcomes of primary school
children were disappointing and highly varied across the island. Of the children completing
grade 4, only 37 percent had an average mastery of their first language (Sinhala or Tamil),
and 38 percent mastery of mathematics. Only 10 percent had the required mastery of
English. These figures varied substantially across regions, with the North Eastern provinces
faring the worst (Table 6, labeled as “Table 2.11” below). Third, in addition to the problems
of net enrolment and retention in secondary schools, the pass rate in the GCE O-level
examination was only 37 percent; two out of three students taking the examination failed.
Fourth, the quality of education services in poor areas was weak, with teachers refusing to be
deployed to remote areas. Among those deployed, absenteeism approaching 20 percent in the
poorer provinces, such as Uva and the North-Central provinces (Figure 4).

16
The material in this section derives substantially from World Bank [2005].

11
Table 6: Primary Education Learning Outcomes by Province, 2003

Figure 4: Teacher Absenteeism, by Province, 2002

Ironically, the problems facing Sri Lanka’s education system can be traced back to the
reasons for its success. Government financing and provision of education is usually
successful at achieving high enrolment rates because these are statistics that governments can
monitor easily. Quality on the other hand is harder to monitor, and often requires local

12
knowledge about the school’s and student’s circumstances to interpret—something which a
central-government ministry finds difficult to accomplish. Likewise, the abandonment of
English and introduction of Sinhala and Tamil as the medium of instruction in the late1950s
probably contributed to the universal access to primary and secondary education in the
country (when English was the medium of instruction, the English-speaking urban elites had
an advantage in education). But this same policy has meant gradual erosion in English
language skills among students—to the point where only 10 percent of 4th grade students
have a mastery of the language. To compete in the global marketplace, Sri Lankans are
finding that English language skills are essential—and there is a need to teach the subject
from grade 1, including re-introducing it as a medium of instruction. Finally, the poor quality
of education services in remote areas is also linked with the centralized nature of the
education system. Inasmuch as the central government (or even the provincial government)
cannot monitor teachers, the incentives to be absent are strong.

This situation seems like a blueprint for policy inertia. The apparently successful
public education system has created enough vested interests, such as teachers’ unions, that
will resist reforms. The reforms that are necessary involve changing the government’s role in
education, and giving greater power to local entities, including school districts and the
schools themselves. This could be interpreted as another slippery slope towards privatization
of education. And the re-introduction of English in the curriculum from grade 1, and
possibly as a medium of instruction, could be seen as a reversion to the elitist education
system of the pre-Swabasha era.

Despite these obstacles, Sri Lanka has embarked on a reform program, the Education
Sector Development Framework and Program (ESDFP), which involves many bold and far-
reaching initiatives. In particular, the program includes devolving managerial authority to
schools, enabling schools to forge links with local communities to improve resource
mobilization and public accountability. It also involves strengthening the teaching of English
at all levels, starting with grade 1, and introducing, in a phased manner, English as a medium
of instruction in government schools. The five-year program includes a series of monitorable
indicators which, if achieved, will leave Sri Lanka with a substantially changed education
system by 2010. Significantly, this reform program was initiated by the UNP-led coalition
government, but was continued and approved by the SLFP-led coalition government (which
included the JVP in the coalition) that came to power in 2004.

In trying to understand how this reform was achieved, at least two aspects of the
reform program should be highlighted. First, many of the accountability-changing reforms,
such as devolving responsibility to schools and local communities, included a major initiative
to enhance the training of and support to teachers. It would be difficult for teachers to oppose
a reform that offers them a scaled-up program of teacher development. Second, the process
by which this reform was introduced was somewhat unusual for Sri Lanka. The National
Education Commission (NEC), which consists of leading policymakers in education,
developed the reform framework by undertaking a widespread series of consultations,
including with civil society, the private sector, donors, teachers, parents and the general
public. These consultations resulted in the publication, Proposals for a National Policy
Framework on General Education in Sri Lanka, from which policies and the strategy of the
ESDFP were developed. The main point of the consultation was that opponents of the

13
reforms were heard, even if all of their views were not reflected in the final reform. As has
been the experience in other countries (Devarajan, Dollar and Holmgren [2001]), such
consultations increase the chances that reforms can survive political transitions and are
sustained.

The experience with education reform suggests possible ways to break the deadlock
on other pro-poor reforms in Sri Lanka, especially those in agriculture. One is that any
reform should include—prominently—compensation to farmers who may fear losses from,
say, a reduction in fertilizer subsidies or import tariffs. Another is that reforms should begin
with a systematic series of consultations with stakeholders. As there is an Agricultural Policy
Commission in Sri Lanka, it could be the driving force behind these consultations. The
consultations will take a while, and the resulting reform program may not be an ideal one, but
it will have the benefit of being adopted and sustained.

IV Concluding Remarks

The rapid growth and poverty reduction in the Western Province over the past twenty
years shows that Sri Lanka has the potential to sharply reduce, if not eliminate, poverty. The
reasons for the Western Province’s rapid growth, namely the trade and industrial reforms
undertaken in the 1980s and 1990s, indicate that Sri Lanka is a country where reform works.
These reasons also suggest how to get the rest of the country growing—by reforming
agriculture so that the same market forces that propelled industrial Sri Lanka can propel the
rural sector. However, the politics of reform are such that it is very difficult to build a
winning coalition that will support these reforms. Nevertheless, the recent experience with
education sector reforms show that it is possible to make progress with seemingly intractable
problems. One can only hope that the forces behind the trade, industrial and now education
reforms will rally behind the remaining reforms, thereby enabling Sri Lanka to achieve its
true potential.

References

Devarajan, Shantayanan; David R. Dollar and Torgny Holmgren, eds. 2001. Aid and Reform
in Africa. World Bank.

Rodrik, Dani. 1998. “Why Do More Open Economies Have Bigger Governments?” Journal
of Political Economy, vol. 106, no. 5, October.

World Bank. 2005. Treasures of the Education System in Sri Lanka. Human Development
Unit, South Asia Region.

World Bank. 2004. Sri Lanka Development Policy Review. Poverty Reduction and
Economic Management Sector Unit, South Asia Region.

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