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ECONOMYNEXT – Six consecutive quarters of negative economic growth in Sri Lanka have led to lower wage rates and discouraged labor force participation and skill development, reducing productivity levels and creating a low productivity trap, he said the Institute of Political Studies (IPS).

Real wages also declined following high inflation following the 2022 currency crisis.

In a recent discussion, IPS researchers said that the negative growth recorded until the third quarter of 2023 that had a direct impact on the labor market and the resulting “low productivity trap” has hindered further economic recovery.

The gathering held at the launch of the institute State of the Economy 2024 The report focused on issues within three key aspects of the Sri Lankan economy: the education sector, the labor market and the public sector.

IPS Research Officer Suresh Ranasinghe noted that between 2018 and 2023, Sri Lanka’s labor force participation rate fell from 51.8% to 48.6%, while that the employment-to-population ratio fell from 49.5% to 46.3%. According to Ranasignhe, some of the main problems in Sri Lanka’s labor market include increasing labor market inactivity, declining labor productivity and employment growth, and declining highly skilled employment.

“While all three sectors (agriculture, industry and services) saw negative average labor productivity between 2018 and 2023, the ICT sector stands out, with the highest output per worker.”

IPS said in a statement on Tuesday 15 October that the discussion had focused on the need to invest in technology, infrastructure and skills development, particularly within the agricultural sector. Given the high productivity of the ICT sector, the recommendations included providing VAT exemptions and reducing the existing skills gap in the sector through targeted interventions.

“Only 20 percent of all workers held highly skilled jobs in 2023, down from 23 percent in 2018, mainly due to a decline in the share of managers, senior officials and lawmakers,” he said Ranasinghe.

One potential reason for this decline was the emigration of highly skilled workers during the pandemic and economic crisis as they sought better salaries abroad due to declining real wages in Sri Lanka. To retain the remaining highly skilled workers, speakers at the event emphasized the importance of offering competitive wages and benefits.

“In the long term, the expansion of knowledge-based industries, support for persistent professional development and the review of public sector policies are important to foster highly skilled employment.”

The rationalization of public employment was also a point of discussion at the event.

Sri Lanka’s public sector accounts for 15% of total employment and 35% of formal employment, while consuming 26% of public expenditure and 5% of GDP, IPS said. In particular, public sector employment has increased by around 60 percent since 2005. However, “Sri Lanka’s government performance is rated ‘poor’ according to the World Governance Index (WGI) , with negative government effectiveness of 0.65”.

“The increase in inactivity, especially among young people, is probably related to the interruptions in education. To address 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 young people and improving public perception, as well as supporting entrepreneurship initiatives to create sustainable employment opportunities.” IPS said in its statement.

IPS researcher Lakmini Fernando spoke about the importance of improving the efficiency of the public sector. He pointed out how public spending has a downward trend (47% decrease between 1990 and 2023), while spending on wages remains stable (5%). Although high public spending overwhelms investment, it reduces growth prospects. Fernando recommended introducing a new approach to public management, which would provide an immediate pay rise while ensuring the right size of the public sector. An effective public sector is essential to improve educational planning and enable strategic interventions in the labor market, he said.

Overall, Fernando noted that it was important to improve administrative operations, reduce the size of the sector and address the barriers that lead to policy failures. During the question session, a debate arose about the downsizing of the sector and whether or not the public sector deserves a pay rise. “The monthly minimum wages of all types of public employees are below the expenditure benchmark of LKR 68,056,” Fernando said, suggesting that to ensure successful implementation of the policy, the government must create a environment that supports the adoption of changes.

The institute also noted that education equips people with the knowledge and skills needed for a productive and competitive workforce and fosters the creativity and problem-solving skills essential to driving innovation and technological advancements.

A well-educated population can contribute to higher productivity levels and higher economic growth, the institute said. IPS Research Director Nisha Arunatilake said education “is a catalyst for skills, jobs, wages and overall development”, but Sri Lanka’s education sector faces several critical challenges .

Participation in education declines significantly beyond the compulsory age (15-19) and among young people (20-24). “Up to 65.1% of young people do not attend any type of education, only 7.5% participate in vocational training and 11.4% in university.” Even though students are in school, their learning outcomes, particularly in English language and maths, fall below international standards, IPS has found.

Inconsistent policy making and implementation is another major obstacle, the statement said.

There have been eight education ministers in the last eight years, leading to policy-making stalling, Arunatilake said, leading to incomplete reforms, disparities in resource allocation, insufficient allocation of funds and problems with the flow of funds, among others.

“The uneven distribution of resources, especially the allocation of trained teachers among schools, is another reason.”

The need for legal reforms and adequate data collection to support evidence-based rather than stop-gap policy-making was also raised in the discussion, as was the fact that the Education Ordinance of 1939 still had to be modernized.

On the one hand, there are obvious disparities in access to education. While 97% of children of compulsory school age (5-14) are enrolled, about 25% of children with disabilities aged 5-14 are not in school, Arunatilake said, adding that there is also a lack of of access for children from rural areas and low socio-economic environments. The discussion highlighted potential solutions, such as leveraging the innovative use of EdTech (Educational Technology) with reference to several successful models in other South Asian countries, such as Pakistan’s WonderTree program and OLabs in the india Strengthening school nutrition and wellness programs and improving disaster risk management capacity were among other solutions highlighted by Arunatilake. (Colombo/16/10/2024)

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