Author: Haiyang Zhang, HKS MPA/ID student
In a poetic reference, Sri Lanka is often described as “a teardrop of the Indian Ocean.” The island country is endowed with some of the world’s most scenic landscapes, a diverse culture, and a documented history that spans across three millennia. For a country that recently emerged from a 26-year-long civil war, Sri Lanka faces the challenge for transforming its short-lived “peace dividend" into sustainable growth.
Following the end of the civil war in 2009 and the presidential election in 2015, Sri Lanka has made impressive progress in social and economic development. The country has seen poverty reduction in large parts of its geography. The government has made commendable efforts towards health and education delivery, as measured by life expectancy and adult literacy, respectively.
Meanwhile, the challenge for Sri Lanka is to sustain, and potentially accelerate, the current economic growth and to reduce its vulnerability to macroeconomic shocks that could potentially threaten the hard-won progress in social and economic development.
Both its achievements and challenges are reckoned by the Millennium Challenge Corporation (MCC), an independent U.S. foreign aid agency. At the end of 2016, MCC selected Sri Lanka as an eligible country for the assistance program, after the country had met the standards on 13 of the 20 policy indicators on MCC’s comprehensive scorecard. MCC made a special note on the improvement of democratic rights and the control of corruption, restoring Sri Lanka’s image as one of the oldest democracies in Asia. Since the first Parliament of Sri Lanka (then Ceylon) was elected and formed in 1947, the democratic institutions have been functioning in the island for over 70 years.
In the summer of 2017, through the Center for International Development at Harvard University, I had the opportunity to work in the Central Bank of Sri Lanka in Colombo.
The Central Bank of Sri Lanka, by law, is the advisor to the Government of Sri Lanka on economic affairs. During my time with the Central Bank, I had the opportunity to work on some most interesting assignments that are relevant to addressing the binding constraints to Sri Lanka's long-term growth.
The complexity and uncertainty around tax policies have been a major impediment for Sri Lanka's long-term economic growth. At the Central Bank, I took part in the discussion of an early draft of the proposed Inland Revenue Act, which would establish a broad-based tax system that also simplifies tax liabilities for foreign investors. The Act aims to create an investor friendly environment to attract more foreign investments. It is exciting to learn that the Act was adopted by the Parliament soon after my departure.
Transportation is a second bottleneck for sustainable economic growth. Sri Lanka faces the dual problem of congestion in cities and a lack of transportation infrastructure between many regions of the country. While the Western Province, where the capital is located, suffers traffic congestion, the rest of the country experiences the slow movement of people, goods and services. Interestingly, Sri Lanka has a high density of roads, compared to countries at a similar stage of development. But the lack of expressways and logistics centers prevents Sri Lanka’s exporting firms from accessing rapid and temperature-controlled transportation that is necessary for the transport of products like fish and perishable fruits. At the Central Bank, I was tasked to identify locations for planting cold chain logistics to facilitate exports from inland regions of Sri Lanka. It was a rewarding experience to take up important responsibility and contribute to solving a binding constraint.
A lack of access to state-owned land by private firms is yet another obstacle to accelerate economic growth. Multiple Export Processing Zones (EPZs) are set up to house manufacturing firms, but these zones are mostly at capacity in the Western Province, which accounts for 42 percent of the country’s GDP. Outside the EPZs, however, there exists a classic coordination failure where multiple government agencies share jurisdictions over the state-owned land. Land transactions are often costly and opaque. Thus, the lack of access to land becomes a binding constraint for private firms to invest and formalize. While in Sri Lanka, I had the opportunity to not only interact with policy experts on land issues, but also observe firsthand the inefficiencies in land markets that hinder the formalization of private firms outside the EPZs.
The opportunity to involve oneself in the inner functions of the central bank in a developing country is both exciting and challenging. And the potential to leave a tiny positive mark on its people’s pursuit of sustainable growth is a truly rewarding yet humbling experience. Nothing makes me happier than the slight possibility to contribute to the common aspiration of economic and social development of a beautiful nation with a poetic reference as "a teardrop of the Indian Ocean."
Sri Lanka Growth Diagnostic Executive Summary (2018). Harvard Center for International Development.
Sri Lanka Growth Diagnostic Analysis (2018). Harvard Center for International Development.
Congressional Notification on Sri Lanka 609 (g) CN (2017). Millennium Challenge Corporation
Congressional Notification on Sri Lanka 609 (g) CN – Phase Two (2017). Millennium Challenge Corporation