Common economic problems for Sri Lanka.

University Degree Business and Administrative studies

Introduction

There are two common economic problems for Sri Lanka, one would be that the increasing and unmanageable debt problem. And the other one would be the terrorist problem. Sri Lanka was considered as a lower-middle income developing country, but now it’s been pushed down to poorest countries in the world. One quarter of the population in Sri Lanka lives in poverty. Twenty years of civil war between the government of Sri Lanka and the Liberation Tigers of Tamil Eelam (LTTE) will be the main cause of this problem. This war has claimed more than 50,000 lives. Even The governments of Sri Lanka been changed but the problem remains unchanged.

More than 50% people in Sri Lanka still live in rural areas and still living with traditional agricultural base lifestyle. The government process of developing these rural areas was quite slow. However the health and education systems are good compared to other regional countries in Southeast Asia, but now their quality is getting verse because of less government investment.

“In developing countries the major concern is that economic liberalization, motivated by the desire to benefit from the growth of the world trade and investment flows, will generate high transitional unemployment and cause an increase in inequality.”

(Globalization and Employment: Is Anxiety Justified?” Article by Eddy Lee on November 26, 1996)

“When the current account is liberalized, foreign firms can sell their products in the local market. This situation confronts local firms with foreign competition. Consequently, domestic competition may drive a firm to reduce employment in order to be more competitive in the market."

However Sri Lankan economy is in a recession because of the main problems of this economy left unsolved. In this case we can resolve any economic problems but not the ethnic conflict. For this ethnic conflict there is one solution which both parties of this conflict clearly understand. That would be the diplomatic solution. It is going to be so vital for the future of this country to find this solution as quickly as possible. Because of this conflict and the resent tsunami has draw back the economic growth. One of the main foreign incomes in Sri Lanka was tourism, because of the terrorist threats in the country the tourism seems to be falling down. So that many hotels been closed down, and unemployment increases steadily.

Resolve an economy in recession

1. How can Sri Lankan government attempt to resolve an economy which is in recession? Recession occurs when the economy experiences two consecutive quarters of falling Gross Domestic Product (GDP).

GDP = consumption + investment + (government spending) + (exports − imports)

. Recession shows how economic activity slows down and falls over a period in time. The decrease in GDP is shown in (figure 1) where the real GDP goes below the potential GDP.

THE SRI LANKAN GDP GROWTH (www.economist.com)

FIGURE 1

During this period the people may face these problems

Unemployment,
Decreased output,
Decreased consumption

The reason for this recession

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FIGURE 1

During this period the people may face these problems

Unemployment,
Decreased output,
Decreased consumption

The reason for this recession

A decrease in the elements of aggregate demand (AD) such as consumption, investment and government expenditure as well as an increase in the elements of aggregate supply (AS) such as the price of labour and price of inputs would be the reason of recession. So to get out of this recession, a government of that economy can make changers to the elements of aggregate demand (AD) and aggregate supply (AS). In order to implement this expansionary facial policy the government can apply the aggregate supply (AD) in two time scales. One would be long run aggregate supply (LRAS) and the other would be short run aggregate supply (SRAS).

According to the figure below a government can move the (AD) curve by decreased taxation and increased government spending. A decrease in tax would increase consumption because of an increase in income and would therefore increase (AD). This is shown in (FIGURE 2) as a shift from AD1 to AD2 and would be in line with the long run potential output. An increase in government spending which could be spent on new roads or on education would lead to an increase in AD. And also this would increase the price level to (P2) TO (P1)

FIGURE 2

Rising Unemployment (An International Perspective on Economic Education)

The first step for the government before considering reducing unemployment is to make sure the levels don’t rise anymore. The main reason for unemployment of this country is that not enough investors coming to Sri Lanka. And also the regional competition to get foreign investment to their country will also be quite high. So that the unemployment rate has risen in recent years and it is placed at 6.5% in 2006.

Economic growth

“Economic growth is defined as an increase in economy’s ability to produce goods and services.”

(www.bized.co.uk/learn/economics/notes/features.htm)

Economic Growth is stabilised by improving the quality and the quantity of the factors of production in a country. The key factors for the economic growth would be land, labour, capital and enterprise. If the quality and the quantity of any of these factors falling apart would damage the production process of any country.

Improvement in Land Resources

By increasing the quantity of land available for agriculture in Sri Lanka will help the economic growth. The main agricultural product in Sri Lanka would be tea. Tea plantation is mainly done in hill country side; however hill country sides would be limited recourses for any economy. And also this resource have an opportunity cost. The limited resource of land and growing resource as population means that the law of diminishing returns might also become relevant. “Increasing the amount of labour to the fixed land factor will decrease the marginal productivity of labour”. This was the argument put forward by Reverend Thomas Malthus. To prevent this decrease of marginal productivity, the government can improve the quality of the land. This could be done by applying better technology through improved irrigation, fertiliser and pest control.

Improvement in Human Resources

By increasing the labour supply and its quality would help the economic growth of Sri Lanka. Sri Lankan population growth was quite high for the past few years. This increase the number of young people entering the labour force every year. Because of this unemployment rate shoots up in the country.

When it comes to the quality of the labour in Sri Lanka, more than 90% of the population have the ability to read and write. This would be a key element for the countries economic growth. And also comparing the south East Asian region Sri Lanka would hold the highest educated population. For the education of this country, the government have to allocate quite a lot of money. And also there will be an opportunity cost for this educated labour. We can also see some disadvantages for countries like Sri Lanka. Professionals like doctors and accountants can migrate form their country to another country because of better income and a good life style.

Improvement in Capital Resources

This can be also defined as investment. You can divide this element in to two

Directly productive capital
Indirectly productive capital

The amount of investment and the quality of that will directly affect the level of the economic growth of the country. This is an important factor of economic growth because the efficiency of labour and other factors of production will depend on the amount and quality of the investment. The opportunity cost of this factor would be the current consumption foregone. And also if production is mainly done by capital intensive and less labour intensive then unemployment and poverty increases.

Improvement in Enterprise resources

For an economical growth inventions and innovations must be encouraged. Sri Lankan education will be a vital element for this factor. Multinational enterprises also can provide training in management skills. Sri Lankan government have given the local and foreign investors quite a lot of support for there investment in garment factories. This may encourage the investors so that unemployment would ease up in the country.

Production Possibility Frontier

“A production possibility frontier (PPF) is a curve or a boundary which shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources efficiently".

Diminishing returns come in to play because not all factor inputs are equally suited to producing different goods and services.

Combinations of output of goods Tea and Garments lying inside the PPF means that there are unemployed resources or when the economy uses resources inefficiently. In the diagram above, point X is an example of this. The Sri Lankan government could increase total output by moving X towards the production possibility frontier and reaching any of points A, B or C in order to improve the productivity.

FIGURE 3

The point X moving to B would help producing more garments than tea, or moving to C would help producing more Tea.

Point D is unreachable at the moment because it lies beyond the PPF curve. A country would require an increase in factor resources, an increase in the efficiency of factor resources or should get hold of a new technology to reach this combination of Tea and Garments. If this been achieved then output point D may become reachable.

Producing more of both Tea and Garments would represent an improvement in Sri Lankan economic welfare. Because of this we can find allocative efficiency. The PPF does not always have to be drawn as a curve. If the opportunity cost for producing two products is constant, then we can draw the PPF as a straight line. The gradient of that line is a way of measuring the opportunity cost between two goods.

The production possibility frontier can be shifted when these elements occur in the economy. If there are improvements in productivity and efficiency, then the introduction of new technology in to the country is successful.

Expanding the factor resources like labour force or an increase in the amount of capital equipment available for businesses will improve the productivity.

On the figure below will define that the improvement in technology shifts the production possibility frontier outwards. As a result of this, output of the country has increased and we can suggest that there is an improvement in Sri Lankan economy.

FIGURE 4

Improvement in technology should bring market prices more affordable so that the consumption of it would grow high. A good example for this would be personal computers and digital appliances. Expanding and improving in production technology has brought prices down for consumers and businesses.

External Costs

Not only Sri Lanka most of the developing countries and devolved countries faces this challenge. Because of production activities, the air pollution has become an external cost to society because of contamination of our air supplies. External costs are those costs faced by a third party for which no compensation is been given.

The Phillips curve

This would be a problem in the 20th century for a developing country. Unemployment and inflation are the main elements that been described as the Phillips theory. The bottom line of this theory would be that the level of unemployment caused the level of change in wages to be what it was in Sri Lanka

However there are barriers to Sri Lankan economic growth. If highlight the main barriers of this economy

This is a small island which is insufficient land factor.
New investors are hard to find because of the economic problems of the country and the labour is been exported from the island. Because of this it’s hard to find the quality employers in the country.
War has cost a lot of money, because of this the basic infrastructure of the country is not been rehabilitated for a long time. So that the roads looks in bad conditions.

Conclusion

As a country in recession Sri Lanka can make the way through to developed country. However it’s going to be a long and hard process because of the corruption in Sri Lanka.

To stabilise the economy, the government have to take some steps which can lead to an economic growth. The government have to concentrate on the foundational structure that is suitable for a stable economy. And also bringing Sri Lanka as a potential industrial country is the key factor for economic growth. If these been put to right then the rising demand for the industrial countries would help more investors in to Sri Lanka.

As a country in war it should find its path for peace as soon as possible. So that government’s expenditure on war can be diverted in to countries development process, such as developing roads and education. This means the tourism industry will bloom up and unemployment rate will go down which directly effect on the economic growth. Encouraging investment would be another area that the government have to look into. In terms of textiles the government can give tax free zones to start garment factories which investors will have the opportunity to make more profit. The government can encourage more exports by reduced taxation and discourage the unnecessary luxury goods by increased taxation. This can help GDP growth in Sri Lanka. And mainly this would be a path for a developed Sri Lanka.