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 develop...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/01/17136611/saving-growth-sri-lanka http://hdl.handle.net/10986/12206 |
| 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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