ECONOMYNEXT — Six consecutive quarters of negative economic growth in Sri Lanka has led to lower wage rates and discouraged workforce participation and skill development, lowering productivity levels and creating a low productivity trap, the Institute of Policy Studies (IPS) said.
Real wages also decreased after high inflation following the 2022 currency crisis.
At a recent discussion, IPS researchers said the negative growth recorded up to the third quarter of 2023 which had a direct impact on the labour market and the resultant “low productivity trap” has hampered further economic recovery.
The discussion held at the launch of the institute’s State of the Economy 2024 report focused on issues within three key aspects of Sri Lanka’s economy: the education sector, labour market, and public sector.
IPS Research Officer Suresh Ranasinghe noted that, between 2018 and 2023, Sri Lanka’s labour force participation rate fell from 51.8 percent to 48.6 percent, while the employment-to-population ratio dropped from 49.5 percent to 46.3 percent. According to Ranasignhe, some of the main issues within Sri Lanka’s labour market include rising labour market inactivity, declining labour productivity and employment growth, and declining high-skilled employment.
“While all three sectors – agriculture, industry, and services – observed negative average labour productivity from 2018 to 2023, the ICT sector stands out, with the highest output per worker.”
IPS said in a statement on Tuesday October 15 that the discussion had focused on the need to invest in technology, infrastructure, and skill development, particularly within the agriculture sector. Given the ICT sector’s high productivity, recommendations included offering VAT exemptions and bridging the existing skill gap within the sector through targeted interventions.
“Only 20 percent of the total workers held high-skilled jobs in 2023, a decline from 23 percent in 2018, mainly due to a decrease in the share of Managers, Senior Officials, and Legislators,” said Ranasinghe.
One potential reason for this decline was the emigration of high-skilled workers during the pandemic and economic crisis, as they sought better wages abroad due to declining real wages in Sri Lanka. To retain the remaining high-skilled workers, the importance of providing competitive salaries and benefits was pointed out by speakers at the event.
“In the long term, expanding knowledge-based industries, supporting persistent professional development, and revising public sector policies are important to foster high-skilled employment.”
Rationalising public sector employment was also a point of discussion at the event.
Sri Lanka’s public sector accounts for 15 percent of total employment and 35 percent of formal employment, while it consumes 26 percent of public expenditure and 5 percent of GDP, said IPS. Notably, public sector employment has increased by about 60 percent since 2005. However, “Sri Lanka’s government performance is considered ‘poor’ as per the Worldwide Governance Index (WGI), with the government effectiveness being negative 0.65.”
“The rise in inactivity, particularly among youth, is likely linked to education disruptions. To tackle this, the session highlighted the importance of promoting and improving the quality of Technical and Vocational Education and Training (TVET), focusing on access for vulnerable youth and improving public perceptions, as well as supporting entrepreneurship initiatives to create sustainable employment opportunities,” IPS said in its statement.
IPS Research Fellow Lakmini Fernando discussed the importance of improving public sector efficiency. She noted how government expenditure has a declining trend (47 percent decline from 1990 to 2023) while spending on wages remains stable (5 percent). While high government expenditure crowds out investments, it lowers prospects for growth. Fernando recommended introducing a new public management approach, which provides an immediate pay rise while ensuring the right size of the public sector. An effective public sector is essential for improving education planning and enabling strategic interventions in the labour market, she said.
Overall, Fernando noted that improving administrative operations, downsizing the sector, and addressing barriers that lead to policy failures were important. A debate ensued during the Q&A session on downsizing the sector and whether or not the public sector deserves a pay rise. “The minimum monthly wages of all types of public employee levels are below the expenditure benchmark of LKR 68,056,” said Fernando, suggesting that to ensure successful policy implementation, the government needs to create an environment that supports adopting changes.
The institute also noted that education equips individuals with the knowledge and skills necessary for a productive and competitive workforce and fosters creativity and problem-solving abilities essential for driving innovation and technological advancements.
A well-educated population can contribute to higher productivity levels and higher economic growth, the institute said. IPS Director of Research Nisha Arunatilake said education “is a catalyst for skills, jobs, wages, and overall development,” yet Sri Lanka’s education sector faces several critical challenges.
Education participation drops off significantly beyond the compulsory age (15-19) and among the youth (20-24). “As many as 65.1 percent of the youth are not in any form of education, with only 7.5% participating in vocational training and 11.4% in university.” Although students are in school, their learning outcomes, especially in the English language and mathematics, fall below international standards, IPS has found.
Inconsistent policymaking and implementation are another major obstacle, the statement said.
There have been eight ministers of education over the past eight years, leading to stop-go policymaking, said Arunatilake, resulting in incomplete reforms, disparities in resource allocation, insufficient fund allocation, and issues with the flow of funds, among others.
“Inequitable distribution of resources, particularly the allocation of trained teachers among schools, is another reason.”
The need for legal reforms and proper data collection to support evidence-based policies rather than stop-go policymaking was also brought up at the discussion, as was the fact that the education ordinance of 1939 had yet to be modernised.
For one, there are glaring disparities in access to education. While 97 percent of children at the compulsory school age (5-14) are enrolled, around 25 percent of the disabled children aged 5-14 are not in education, Arunatilake said, adding that gaps in access also exist for children in rural areas and low socio-economic backgrounds. The discussion highlighted potential solutions, such as leveraging the innovative utilisation of EdTech (Education Technology) with reference to several successful models from other South Asian countries, such as Pakistan’s WonderTree programme and India’s OLabs. Strengthening school nutrition and welfare programmes and improving disaster risk management capability were among other solutions highlighted by Arunatilake. (Colombo/Oct16/2024)