W A Wijewardena: Sustainable socio-economic security - some lessons
from the experiences of Sri Lanka
Speech by Mr W A Wijewardena, Deputy Governor, Central Bank of Sri Lanka, at the
International Conference on "Universalizing Socio-economic Security in South Asia",
organized by The Institute of Social Studies (ISS), The Hague, and the Institute for Human
Development (IHD), New Delhi, 17-20 February 2008.
This paper is based on the personal experiences of the writer as Director of Small Farmers and the Landless
Credit Project, dubbed in Sinhala as "Isuru Project", when he was the Director of Rural Credit of the Central Bank
of Sri Lanka from 1993 to 2000 and Deputy Governor in charge of this portfolio since then. The credit for the
achievements of Isuru Project is shared equally by all the stakeholders involved in the Project. The views
expressed in the paper are those of the writer and should not be construed as those of the Central Bank of Sri
Lanka.
* * *
Introduction
History is abundant with numerous initiatives taken by mankind, both through state action
and personal enterprise, to ensure socio-economic security, or in layman's language,
opportunity for all the people to enjoy the benefits of economic prosperity without
discrimination or reservation. In ancient times in Sri Lanka, the kings took it upon themselves
the responsibility for creating such a society which was considered as a just society1. This
trend of state functioning as the main promoter of growth and fair distribution has continued
even to the present day. In Sri Lanka, during the last lap of the British rule, the country
converted itself into a model welfare state following the example set by the colonial master in
the post-war period2. Accordingly, education and health care were universalised and made
free of charge, a wide range of food subsidies were introduced and state led development
initiatives, in social and physical infrastructure, industry and agriculture, were started. All
these pro-poor policies were intended to ensure socio-economic security for a wide spectrum
of population, allowing the unprivileged to have social mobility through state support and
intervention. The model yielded some results such as higher human development, but,
economically pushed the country behind many late starters like Singapore or South Korea.
Both these countries which were ranked very much below Sri Lanka at the time of
independence have graduated to the status of developed countries within a period of just
three to four decades reducing their poverty levels from around 50% of the population in
1950s to below 5% by the turn of the century. The creation of "a super welfare state" in this
manner without the backing of a proper resource base by Sri Lanka has been criticised by
many as an unsound and unsustainable policy compared with that pursued by
superperformers in the region.
In this backdrop, some aspects of the welfare state were done away with in late 1970s when
Sri Lanka moved to an open economy policy in which growth objectives were pursued
through private sector participation and emphasis on export orientation. To facilitate the new
growth strategy, economy was liberalised and a flexible exchange rate regime was followed.
In the initial decade following the adoption of the new policy, economy responded positively,
but at the same time, incidence of poverty too increased to a significant level3. By mid 1980s,
it was felt that, unless an effective strategy is adopted to alleviate poverty among those who
could not get integrated to the market economy policies, the country was within sight of
another socio-economic explosion similar to the one which it experienced in 1971 in the near
future4. As a counter strategy, several poverty alleviation schemes were initiated by the
government with focus on the poor. Along with these schemes, the Central Bank too entered
the foray by implementing some pilot projects based on microfinance and support services
so that it could develop microfinance techniques and systems for others to emulate. One
such project, funded by the International Fund for Agricultural Development (IFAD) and
Canadian International Development Agency (CIDA) was implemented by the Central Bank
in four districts where the incidence of poverty was the highest under the title "Small Farmers
and the Landless Credit Project (SFLCP) or Isuru Project. To supplement this project,
another initiative was taken to introduce a Forward Sale Contract Scheme for agricultural
produce to facilitate farmers to obtain a pre-agreed price for their major agricultural crops.
This paper will cover the strategy, methodology and the techniques adopted in these
initiatives so as to develop a sustainable socio-economic security system in Sri Lanka.
The paper is organised into four parts. Part I will critically review some aspects of the current
theoretical knowledge on socio-economic security systems from the point of view of
costeffectiveness and sustainability. Part II will present the techniques, methodology and the
way-forward strategy of the Isuru Project implemented by the Central Bank as a poverty
alleviation project. Part III will discuss the methodology and the future of the Forward Sale
Contract Scheme as a price discovery and price-stabilising mechanism for main agricultural
produce. Part IV will be devoted to the presentation of a summary and conclusions.
Part I
A critical review of poverty alleviation strategies
A continuous high economic growth over a few decades has been recognised as the main
solution for the problem of poverty. While high economic growth reduces the incidence of
poverty, it also raises the absolute income of those who still remain in poverty thereby
ameliorating their living standards to some extent5. Hence, many developing countries in
1950s and 1960s pursued high growth policies as a way out for the poverty stricken masses
of their respective countries. When an economy grows and the overall income level
increases, it provides opportunities for the poor to secure gainful employment and raise living
standards. As an economy proceeds along this path, if investments are made to raise the
educational and health standards of the poor, the economy would get into an auto-pilot
system moving to still higher levels of output, income and employment. Hence, there is no
better alternative than a continuous high economic growth to eradicate poverty on a
sustainable basis. However, such growth strategies should perforce provide economic
opportunities for the poor to earn income and participate in the development efforts of their
respective nations as responsible citizens. This growth strategy, known as inclusive growth,
would enable a country to universalise the availability of income earning opportunities to all
citizens alike.
There are certain prerequisites which have to be satisfied for a country to gain the best
results out of such pro-poor growth policies6. Since the main asset which the poor possess is
their own labour, it is these labour services which they could transform into income earning
opportunities. Hence, the new job opportunities which the pro-poor growth should create
should harness these labour services in full in self-employment and in wage employment.
Successful poverty alleviation should focus equally on both these types of labour
engagement. When the poor are to be provided with self-employment opportunities, they
should have access to land, credit, infrastructure, technology and productive inputs so as to
keep their labour services continuously and gainfully employed7. Similarly, when the poor are
to secure wage employments, both industrial and agro-based enterprises should be
promoted in rural as well as urban centres. Any concentration of such enterprises in urban
areas would result in an undesirable migration of the poor to urban centres and an uneven
development across different regions of a country8.
The pro-poor growth strategy in Sri Lanka, as has been the case in other countries pursuing
this strategy, has placed heavy emphasis on developing the rural agricultural sector9. The
reasoning behind this policy would have been the belief that agriculture is the main stay in
the economy and the development of labour intensive agriculture as against capital intensive
industry would enable the rural population to increase their income levels. However, this rural
bias in growth strategy poses several problems for the sustainability of the policy. First, the
policy is urban-neutral and, hence, if the incomes of the urban sector do not increase
correspondingly, the rural folk would find it difficult to market their products. This is because,
due to the narrowness of the income base, the output of the rural sector cannot be absorbed
by the rural sector itself. Hence, the sustainability of the rural poor will depend on active
internal trading which they could do with those in the urban sector. Second, the current
tendency of the rural population, especially the youth, has been to prefer more lucrative and
convenient occupations in the urban sector and not the rural agricultural sector in which their
fathers and fore-fathers had been engaged for generations10. It has also been found that
when the rural poor move from low paying jobs in agriculture to high paying jobs in industry
or services in the urban sector, they could conveniently escape poverty. When this internal
migration to industry and services is supported by a high level of educational competencies
acquired by the poor, the reduction in poverty levels too becomes noticeably greater11. As a
result, investments made in the rural agriculture sector would go unused without the support
from the segment of people for whom they were really meant. Third, rural agriculture suffers
from both a growth limitation and a capacity limitation. Agriculture is not a high growth
contributor and, over the last two centuries, world's agricultural output has risen, on average,
by less than two percent per annum12. Hence, agriculture, despite the heavy volume of
investments made, cannot raise rural incomes to a level sufficient to push its population out
of poverty. In addition to this growth limitation, there is a capacity limitation too affecting the
growth in the agricultural sector. Two main inputs used in agriculture, viz., cultivable land and
water, are in short supply inhibiting an effective limitation on its growth. Further, agriculture in
7
Ibid,
p 56.
8
For instance, in Sri Lanka, slightly more than a half of the national income is earned by people living in three
main districts that make up the more lucrative Western Province. See, Economic and Social Statistics of Sri
Lanka 2007 Table 41.
9
For instance, Ten-yea Horizon Development Framework 2006-16 has enunciated the vision, inter alia, of
transforming traditional subsistence agriculture to a commercially oriented and productive sector. See, Annual
Report of the Central Bank of Sri Lanka, 2006, p 17.
10
Lanka Business Online, provider of an internet based business and economic analyses, has reported results
of a survey on the job preferences of the youth in two remote villages off Anuradhapura where none of the
youth have selected agriculture as their future job preference. Visit www.lbo.com.
11
World Bank, Global Economic Prospects 2007, pp 81-3.
12
Sri Lanka's case in this context is more disappointing with only an annual average growth rate of 1.1% during
1990-2005. See, World Development Report 2007.
BIS Review 22/2008
certain areas such as the Western Province has now become commercially unviable on
account of ever falling yield levels and rising costs of production13. Hence, the
overconcentration on agriculture in pro-poor growth strategies appears to be principally supply
driven and there are no demanders who actually wish to utilise them to derive benefits.
Hence, the continuation of providing state support for rural agriculture, however much it is
well intentioned, would trap an unwilling rural population in agriculture, thereby delaying the
adjustment which has to take place by way of transferring the excess labour to other gainful
areas of the economy and improve the productivity and efficiency of the agricultural sector of
the country. This means that the growth strategy should focus on providing gainful
employment to the rural poor in other growing areas such as the services sector and
integrate it with the global economy so as to ensure income sustainability14.
Two main issues have been present in Sri Lanka's state sponsored poverty alleviation
programmes in the past. One was the moral hazard problem and the other was the adverse
selection problem. Since the poverty alleviation programmes anticipated providing benefits to
selected poor individuals free of charge, those individuals did not have to work hard to
receive such benefits. Hence, the schemes did not provide any incentive for participants to
work hard and get out of poverty. As a result, individuals who were taken into the schemes
preferred to be in the scheme forever, thereby perpetuating poverty and raising the cost of its
eradication significantly15. A further problem that has plagued the credit schemes meant for
poverty alleviation has been the tendency for providing loans at subsidised interest rates.
Such subsidies have been prompted by the belief that they would allow the poor to obtain the
required credit facilities at affordable costs. However, when credit is subsidised, borrowers
would flock around such credit schemes, not because they want to use the funds for gainful
self-employment projects, but to enjoy the subsidy and use the funds for other uses. Hence,
borrowers of such subsidised credit have the pre-intention of misusing the funds and
eventually defaulting the loans thereby passing a cost on the lending institutions. As a result,
such borrowers are adversely selected right at the beginning and those credit schemes are
doomed to failure. Hence, the more important requirement for sustainable poverty alleviation
is not subsidised credit, but the rectification of impediments such as lack of physical, human
and financial infrastructure and absence of competition and efficiency16.
Part II
Sustainable poverty alleviation: lessons from the Isuru Project
As mentioned above, mid-1980s became a crucial period in the history of Sri Lanka with
rising poverty levels at both the national level and in isolated pockets. It, therefore, became
necessary for Sri Lanka to address this issue on a priority basis. Accordingly, supported by
IFAD and CIDA with funding, Central Bank of Sri Lanka (CBSL) pioneered a model poverty
alleviation project in four selected districts17 in 1989. The Project, titled Isuru Project, had as
its objective, uplifting the economic and social conditions of the poorest of the poor with a
13
The yield ratio of paddy between the Western Province and more productive areas has been around 1:3.
14
In an earlier paper, the writer argued that Sri Lanka's future depends on the services sector well integrated to
the global economy. See, Professor Sirisena Thilakaratne Memorial Lecture, 2006.
15
Moral Hazard is not a new problem. According to the Buddha, the king in a kingdom found his citizens getting
engaged in all types of thefts and robberies. On finding that they did so because they did not have any capital
to start a livelihood, he gave funds to them from his treasury freely. People finding that, if they got into thefts
more they could get more free funds from the king, committed more robberies and thefts. Chakkavatti
Seehanada Sutra, Anguttara Nikaya.
16
Fernando, Nimal A, Understanding and Dealing with High Interest Rates on Microcredit, (2006), ADB, p 13.
17
Districts involved were Galle, Matara, Kandy and Puttalam where the incidence of poverty was considered the
highest in the country.
BIS Review 22/2008
view to helping them to cross the poverty line within a given period and establishing the
methods and techniques of sustainable poverty alleviation for emulation by other interested
parties. The poorest of the poor were identified as those whose income was below Rs. 3000
per annum, the minimum income necessary to buy the required daily calorie level of 2250
per adult in terms of the price levels in 1989. In order to bring about a gender balance in
sharing economic prosperity, the project envisaged to have, out of the total beneficiaries, at
least 40% as women beneficiaries. The project was to be closed at end-1997, but the project
agreement provided for its continuation for further 20 years by recycling the loan repayments
so that the project objectives could be continued to be realised on a long term basis. The
Project was a partnership among a number of stakeholders: government, banks, donors,
community based organisations and beneficiaries.
The project adopted a modified group lending mechanism with credit plus approach for
delivering its services to the target beneficiaries, selected under a self-selection process by
getting the target individuals to select their own group partners from among people of similar
conditions. As such, individuals in elitist groups were kept out from becoming beneficiaries of
the project, since they did not have incentives to move along with the poorest of the poor.
This system ruled out political, bureaucratic or elitist intervention in the selection process and
thereby ensured that only the deserving groups were mobilised to receive project benefits.
By using a trained field officer network that functioned as change agents, the self selected
beneficiaries were taken through a mandatory savings inculcation scheme and a social
mobilisation cum leadership development programme. The mandatory savings scheme was
intended to inculcate in the beneficiaries the value of thrift as an integral part of making any
sustainable livelihood18. This is because without learning how to save, an individual is unable
to learn how to spend wisely. Accordingly, each member of the group was required to save
per week a minimum of Rs. 519 in a group savings account which later served as an
insurance against unexpected future eventualities such as family illnesses or crop or
business failures.
Group members were encouraged to meet in rotation in one of the member houses at least
once a week so as to ensure group cohesiveness and facilitate member education
programme. At these meetings, they were encouraged, guided by the change agent, to
discuss among themselves freely why they were poor, what skills they were lacking for
gainful enterprise, the working of the free market system and how they could benefit by being
integrated to the market system. These meetings also gave them vital training on how they
could conduct meetings democratically and listen to each other without being offended or
having to embarrass others when a disagreeable opinion is made. Groups were chaired by a
member who was also selected by rotation and records of group meetings were kept by a
member who functioned as its secretary.
Once a group has completed about six months of mandatory savings and gone through the
essential elements of social mobilisation, its members would be provided with an opportunity
to acquire vocational skills as a prelude to preparing them to be future micro entrepreneurs.
With this training, members are also encouraged to select their own micro enterprise and the
change agents do not advise them what they should select. The only advice given to these
up and coming micro entrepreneurs is that they should select any business line where the
output could be sold within a radius of 15 km. from their homes. This way they were guided
to produce for the market and keep their selling costs at an affordable level. Many micro
enterprises fail within the first few years of operation, if the producers do not pay heed to this
vital requirement. The distancing of the project management from the selection of business
line is a well thought out process, because it forces the beneficiaries to make business
decisions and take responsibility for same. To build their capacity to make these decisions,
training was provided as to how they should conduct simple and quick market surveys and
how they could satisfy the quality requirements expected by their customers.
After the beneficiaries have selected their business projects, they are referred to the relevant
regional development bank for funding support. In view of the speciality and complexity of the
loan objectives, micro loans are granted to beneficiaries on the strength of a mutual
guarantee or an interse guarantee. If any member of a group defaults the loan, other
members of the group are called upon to repay the loan. This ensures credit discipline and
compels the members of the group to be constantly alert and vigilant on how a member of a
group is using the funds lent to him, because if he defaults, the other members have to bear
the burden of repaying the loan of the defaulting member. The peer pressure exercised by
members on each other is a better loan management and monitoring system than what the
mainstream bankers usually do through their branch network and local staff.
Interest rates charged from the borrowers were set deliberately at levels higher than the
normal going rates in the market to avoid any subsidy element20. This was necessary to
maintain credit discipline, keep undeserving groups away from the project and ensure the
long term viability and sustainability of beneficiaries who now have to reckon market costs
when preparing micro business plans. The failure of many microfinance projects to realise
their goals in many parts of the world can be traced to the failure of the promoters to adopt
market based interest rates when designing credit schemes. The objective of subsidising the
rates has been to make available low cost funds to the poor, but the subsidy itself generates
an excess demand for funds and leads to a higher transaction cost for the borrowers. The
transaction cost comes in the form of the opportunity cost of time, money and energy of the
borrowers who now have to spend days and days around bank branches to have their loans
approved and funds released. Hence, subsidised credit, instead of helping the poor, drives
the poor to a greater agony and does not serve its true purpose21.
Training, in both skills development and leadership, formed an integral part of the Isuru
Project. This is because training was necessary to convert an otherwise unbankable group of
poor people into bankable individuals with a high credit discipline and determination to take
effective lasting measures to come out of poverty. Since this category of people is unable to
pay for their capacity development at the initial period of their entry to the project, training
was provided in the form of a free grant. Since only the deserving poor people were admitted
to the project through the self-selection process, the misuse of this free grant by project
beneficiaries could be kept at a minimal level. Training of beneficiaries, an essential human
capital development initiative, was instrumental in developing a highly disciplined group of
men and women under the umbrella of the Isuru Project22.
In order to empower women in poverty and bring them to the mainstream of economic life,
the project envisaged to accommodate a minimum of 40% of poor women as beneficiaries.
However, when the project got started, it was immensely popular among women compared
to men. As a result, the overall women's participation in the project remained as high as 70%
throughout the project period. They played a very active role in all areas of project work
including training, saving, borrowing and taking leadership. It was observed that women were
better participants due to several reasons. First, they had the patience to go through the
hectic but the rewarding long process of beneficiary development laid down by the project.
Second, they had the best interest of their families throughout the period and did not waver
after they had begun their move along the prosperity path. Third, women were better savers
and also better borrowers with a pronounced reluctance to be branded as loan defaulters.
Fourth, their high academic standards enabled them to carry out different functions involving
accounts record keeping. Fifth, unlike men who got into social vices when the income level
went up, women remained permanently committed to the family and the project. Sixth, they
had the leadership ability dormant with them and the project was able to bring out that
competency to the fore. As a result, all the leading roles in the project were played by women
who formed the majority23.
The Isuru Project enlisted the expertise, experience and the capacity of grass root level
organisations in delivering the project services as retailers. Hence, the project was
instrumental in the capacity development of a large number of community based
nongovernmental organisations. This paved the way for the development of a large number of
microfinance institutions which formed the microfinance infrastructure of the country. Some
of these institutions operate at the national level and have the capacity to mainstream and
become national level formal financial institutions24.
It was necessary to assess the success of the project from the point of view of its main
objective, i.e., helping the poorest of the poor to cross the poverty line within a given period
of time. To assess this, two impact assessment surveys were conducted by the project office
by employing hired field workers specifically trained for this purpose25. The findings of the
two surveys are basically similar and have vindicated the cost incurred in financing the
project:
•
The head counting of the surveyed beneficiaries revealed that the percentage of
female participants was around 67%, thereby confirming the national average
(1997). This had increased to73% by 2005.
•
75% of the beneficiaries had attended schools and were able to read and write
(1997). This literacy rate was somewhat below the national average of 92%, but can
be explained as due to the abject poverty with which the group under reference was
afflicted and therefore had been disadvantaged. However, the literacy rate of the
project beneficiaries had increased to 97%, very much higher than the national
average, by 2005.
•
The Survey 1997 revealed that 80% had crossed the poverty line within 6-7 years of
joining the project, while a further 2% had increased income, but was still in poverty
(1997). By 2005, the poverty levels measured in terms of the threshold income used
by the Department of Census and Statistics of Sri Lanka had increased, but still
about 67% had crossed the poverty line with the support given by the project (2005,
p 34). The survey attributes the higher incidence of poverty to the higher income
level needed to be above poverty level due to the higher inflation during 1997-2005,
a fact which confirms that inflation harms the poor more harshly than the rich.
•
11% of beneficiaries had acquired land after joining the project (1997). The total
land ownership had increased to 91% by 2005. 44% of land acquisition in 2005 had
been for residential purposes and 16% for both residential and commercial
purposes, indicating that the beneficiaries had moved to land owning status with the
support of the project.
•
The asset build-up among beneficiaries, an indicator of economic well-being of the
poor, has accelerated since they had joined the project. The types of assets include
agricultural and non-agricultural implements, draft and livestock animals, household
Survey 1997,
consumer durables and jewellery. According to 20% of the
beneficiaries had acquired agricultural and non-agricultural implements, 27% draft
and livestock animals and 72% consumer durables and jewellery since joining the
project. By 2005, the proportion of beneficiaries owning agriculture and
nonagricultural implements increased marginally to around 22%, but the acquisition of
consumer durables went up significantly to a fraction between 80 - 100%. This
confirms the general tendency that, with income increases, there is a greater
preference for consumption type durables than for investment type durables.
•
The housing stock of all the beneficiaries has improved significantly after they had
joined the project. Self-owned houses have increased from 76% before joining the
project to 88% after joining the project. But the quality of the house has improved
impressively: tiled roofs from 55% to 67%; cement walls and floors from 62% to
83%;pipe borne water from 9% to 24%;electricity from 46% to 78%;waterseal toilets
from 63% to 90% and no toilets from 5% to 2%.
With the beneficiaries showing a remarkable improvement in their income levels and living
conditions after participating in the project, it was necessary to plan for the sustainability of
the project activities. What was mostly necessary was the ability of the project to continue its
operations and the beneficiaries to mainstream after the central bank withdrew from the
scene. The project did not suffer at all when the donor funding ceased in 1998, because the
central bank continued with the work without interruption. However, the fate of the project
was not to be the same, when the central bank support would cease to be available to the
project. Hence, it was necessary to ensure that the beneficiaries are self-supporting and
selfreliant.
This was planned by the project management in three stages.
In the first stage, it was found that the small groups consisting of about 5 to 6 members did
not have the strength which a larger group of members would enjoy. So, clusters numbering
about 8 to 10 groups were set up by making informal arrangements for them to work
together. Separate cluster rules were prepared and the members were trained in keeping
cluster accounts and records. This process went on continuously for about 12 to 18 months
from the beginning of1999. When the newly formed clusters showed sufficient maturity of
being able to operate independently, the next move for the project was planned by the
project.
In the second stage, it was necessary to give legal status to the clusters. Many options like
registering them under the law relating to cooperatives or under the Companies Act were
considered, but finally, decision was made to incorporate the clusters under the Societies
Ordinance as limited liability societies under the name "Isuru Development Society Ltd", for
the simplicity it provided to the beneficiaries. The societies were registered with the Registrar
of Companies in terms of the Ordinance. The societies so registered had the objective of
realising a common goal of attaining economic well-being of the members with a mutual
support. The incorporation of societies as limited liability societies was completed within two
years by 2001.
The next phase was to further consolidate the limited liability societies into still larger
economic organisations. Such a consolidation was essential in order to permit this larger
organisation to effectively function as a strong economic entity. This goal was attained by
consolidating the common efforts of societies in a particular district into a district-wide limited
liability company. Since the registration of the consolidated societies as normal companies
was costly and inconvenient, it was decided to register the district-wide organisations under
the Companies Act as people's companies, a corporate device available for small
entrepreneurial spirit to enjoy both the limited liability status and common goal realisation
through restricted membership. The formation of these people's companies was an entry to a
new era by the beneficiaries of the Isuru Project, since it was not even in the remotest goal of
these beneficiaries at the time they joined the project. A that time, their sole objective was to
have some kind of livelihood arranged for them to overcome the abject poverty with which
they had been afflicted. However, after about 12 years of experience in microfinance and
having tasted the social value of being recognised as responsible citizens in the community,
they were now ready to move along the set development path and in a position to decide on
their own destiny. The four Isuru Development People's Companies in the four districts
began their operations as new people based microfinance institutions with formerly poor
women as directors at the helm. They issued shares to their own membership, raised funds
as bulk loans from development banks, retailed such funds among members, undertook
various economic enterprises, provided quick loans to membership at affordable marke