Saving and Growth in Sri Lanka

Saving and Growth in Sri Lanka

In the aftermath of its long-standing civil war, Sri Lanka is keen to reap the social and economic benefits of peace. Even in the middle of civil conflict, the country was able to grow at rates that surpassed those of its neighbors and most developing countries. It is argued, then, that the peace dividend may bring about even higher rates of economic growth. Is this possible? And if so, under what conditions? To be sure, Sri Lanka's high growth rate in the past three decades did not come for free. It took an increasing effort of resource mobilization in the country, with a rise in national saving from 15 percent of gross domestic product in the mid-1970s to 25 percent in 2010. This rise in national saving was fundamentally fueled and sustained by the private sector. In the future, however, the private saving rate is likely to decline because the demographic transition experienced in the country is bound to produce higher old dependency rates in the next two decades. However, the public sector has much room for reducing its deficits and increasing public investment. Similarly, external investors are likely to encounter attractive and profitable investment projects in the coming years in a reformed and peaceful environment. The government of Sri Lank has two goals regarding these issues. First, increasing public saving to 1.5 percent of gross domestic product by 2013; and second, increasing international investment in the country by letting the current account deficit increase to 4-5 percent of gross domestic product in the coming years. If these goals are achieved, what can be expected for growth of gross domestic product in the country? To answer this question, this paper presents a neoclassical growth model with endogenous private saving, calibrates it to fit the Sri Lankan economy, and simulates the behavior of growth rates of gross domestic product and related variables under different scenarios. In what the authors call the Reform Scenario, total factor productivity would increase from 1 to 1.75 percent per year. This would produce a gross domestic product growth rate of about 6.5 percent in the next 5 years, 4.6 percent by 2020, and 3.5 percent by 2030, the end of the simulation period. This robust growth performance would be supported at the beginning mostly by capital accumulation but later on mainly by productivity improvements.

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Bibliographic Details
Main Authors: Hevia, Constantino, Loayza, Norman
Language:English
en_US
Published: World Bank, Washington, DC 2013-01
Subjects:ANNUAL CHANGE, ANNUAL GROWTH, ANNUAL GROWTH RATE, BENCHMARK, BORROWING, CAPITA INCOME, CAPITAL ACCUMULATION, CAPITAL FORMATION, CAPITAL INTENSITY, CAPITAL INVESTMENT, CAPITAL STOCK, CIVIL WAR, CONSTANT RATE, CONTRACT ENFORCEMENT, COUNTRY SPECIFIC, CURRENT ACCOUNT, DEBT, DEMOGRAPHIC, DEMOGRAPHIC CHARACTERISTICS, DEMOGRAPHIC FACTORS, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DEVELOPMENT RESEARCH, DIMINISHING RETURNS, DISPOSABLE INCOME, DIVIDEND, DOMESTIC CAPITAL, DOMESTIC SAVING, DOMESTIC SAVINGS, ECONOMIC ENVIRONMENT, ECONOMIC GROWTH, ECONOMIC REFORM, ECONOMIC REFORMS, EDUCATIONAL ATTAINMENT, EMERGING MARKET, EMERGING MARKET ECONOMIES, ENDOGENOUS VARIABLE, EXPENDITURES, EXTERNALITIES, FACTOR ACCUMULATION, FACTORS OF PRODUCTION, FINANCIAL SYSTEM, FOREIGN ASSETS, FOREIGN FINANCING, FUNCTIONAL FORM, GDP, GDP PER CAPITA, GROSS DOMESTIC PRODUCT, GROSS DOMESTIC PRODUCT GROWTH, GROWTH ACCOUNTING, GROWTH EQUATION, GROWTH MODEL, GROWTH MODELS, GROWTH PERFORMANCE, GROWTH RATE, GROWTH RATE OF OUTPUT, GROWTH RATES, GROWTH THEORY, HIGH GROWTH, HIGH GROWTH RATE, HUMAN CAPITAL, INCOME GROWTH, INCREASE GROWTH, INDEBTEDNESS, INSTITUTIONAL REFORMS, INTEREST RATE, INTERNATIONAL BANK, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL MARKETS, INVENTORY, INVESTMENT OPPORTUNITIES, INVESTMENT RATE, LABOR FORCE, LABOR INPUT, LABOR SUPPLY, LAGGED VALUE, LONG RUN, LONG-RUN GROWTH, MACROECONOMIC ANALYSIS, MACROECONOMIC STABILITY, MACROECONOMICS, MARGINAL PRODUCT, MARGINAL RETURNS, NATIONAL ACCOUNTS, NEOCLASSICAL GROWTH MODEL, NET EXPORTS, OPEN ECONOMIES, OPEN ECONOMY, OUTPUT GROWTH, OUTPUT PER CAPITA, OUTPUT RATIO, PER CAPITA GROWTH, PER CAPITA INCOME, PERFECT COMPETITION, PHYSICAL CAPITAL, POLICY INTERVENTIONS, POLICY MEASURES, POLICY OPTIONS, POLICY RESEARCH, POLITICAL ECONOMY, PRIVATE SAVING, PRIVATE SAVINGS, PRODUCTION FUNCTION, PRODUCTION PROCESS, PRODUCTIVITY GROWTH, PRODUCTIVITY OF CAPITAL, PUBLIC INVESTMENT, PUBLIC SAVING, PUBLIC SAVINGS, PUBLIC SECTOR, RATE OF GROWTH, RATE OF RETURN, REDUCED FORM EQUATION, REGIONAL INTEGRATION, RELATIVE CONTRIBUTION, REMITTANCES, SAVING RATE, SHARE OF OUTPUT, SOLVENCY, SOURCES OF FUNDS, STRUCTURAL CHARACTERISTICS, TFP, TOTAL FACTOR PRODUCTIVITY, VALUATION, VALUE OF OUTPUT, WEALTH,
Online Access:http://documents.worldbank.org/curated/en/2013/01/17136611/saving-growth-sri-lanka
https://hdl.handle.net/10986/12206
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Summary:In the aftermath of its long-standing civil war, Sri Lanka is keen to reap the social and economic benefits of peace. Even in the middle of civil conflict, the country was able to grow at rates that surpassed those of its neighbors and most developing countries. It is argued, then, that the peace dividend may bring about even higher rates of economic growth. Is this possible? And if so, under what conditions? To be sure, Sri Lanka's high growth rate in the past three decades did not come for free. It took an increasing effort of resource mobilization in the country, with a rise in national saving from 15 percent of gross domestic product in the mid-1970s to 25 percent in 2010. This rise in national saving was fundamentally fueled and sustained by the private sector. In the future, however, the private saving rate is likely to decline because the demographic transition experienced in the country is bound to produce higher old dependency rates in the next two decades. However, the public sector has much room for reducing its deficits and increasing public investment. Similarly, external investors are likely to encounter attractive and profitable investment projects in the coming years in a reformed and peaceful environment. The government of Sri Lank has two goals regarding these issues. First, increasing public saving to 1.5 percent of gross domestic product by 2013; and second, increasing international investment in the country by letting the current account deficit increase to 4-5 percent of gross domestic product in the coming years. If these goals are achieved, what can be expected for growth of gross domestic product in the country? To answer this question, this paper presents a neoclassical growth model with endogenous private saving, calibrates it to fit the Sri Lankan economy, and simulates the behavior of growth rates of gross domestic product and related variables under different scenarios. In what the authors call the Reform Scenario, total factor productivity would increase from 1 to 1.75 percent per year. This would produce a gross domestic product growth rate of about 6.5 percent in the next 5 years, 4.6 percent by 2020, and 3.5 percent by 2030, the end of the simulation period. This robust growth performance would be supported at the beginning mostly by capital accumulation but later on mainly by productivity improvements.

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