> Table **5** ). This is potentially linked to the growing average real wages in agriculture which, after a fall from 2002 to 2009, reached a 30 percent increase between 2009 and 2012, as found by an alternate survey conducted by the Central Bank (see Figure 11, panel A).

The problem with the finding of having most of the reduction in poverty being explained by the growth in average real wages is that it is very difficult to separate how much of this increase reflects improvements in productivity (measured as units produced per worker), and how much was simply due to a food price or commodity boom that led to the value of the same bundle of goods to grow. Indeed, value added per worker increased more in the services and industry sectors than in agriculture (Figure 12, panel A), while the intersectoral shift in employment away from agriculture and into industry and services also played a role in increasing value added per worker (Figure 12, panel B).<sup>9</sup> What the decomposition analysis seems to suggest is that this increase in value added per worker was reflected in higher real wages, which in turn was the main source of poverty reduction over the 2002-2012/13 period. However, to the extent that these measures do not reflect an increase in actual units of production per worker but rather an increase in the value of production, they may be easily reversible should commodity prices fall going forward.

In addition to changes in returns, other contributors to poverty reduction in Sri Lanka between 2002 and 2012/13 were demographic, and international remittances, each contributing 9.6 percent of the observed reduction in poverty. However, international remittances were increasingly more important in the 2009/102012/13 period than they were earlier in the decade, reflecting the fact that they made up an increasing share of incomes of the poor, even though it is still true that most remittances are concentrated in the top of the distribution (Figure 7). Similarly, the role of transfers in kind fell during the 2009/10-2012/13 period, possibly as a consequence of the end of hostilities and the closure of camps for internally displaced persons. Note that pensions contributed very marginally to poverty reduction (only about 1.6 percent of the observed reduction in poverty). This is no surprise given that most workers receiving pensions are public employees, who are generally not poor.

Most disappointingly, as mentioned earlier, Samurdhi/food stamps did not contribute to poverty reduction. Indeed, due to the downsizing of Samurdhi and its problems in targeting the poor (Figure 8, panel B), we find that if the Samurdhi program had remained unchanged from 2002 to 2012/13, poverty would have been 1.6 percentage points lower, leading to almost a 10 percent greater reduction in poverty (Table 4 and Figure 12). Most alarmingly, this was especially important for the extreme poor, those furthest away from the poverty line, as reflected in the poverty gap and the severity of poverty (Table 4). Indeed the decline in the severity of poverty would have been 25 percent greater had the real value of Samurdhi remained unchanged between 2002 and 2012/13.

Improvements in education of the workforce contributed about 9 percent to the decline in poverty, a higher contribution than those observed in Bangladesh (6 percent) and Peru (4 percent), but still less than in Thailand (14 percent) (see, Inchauste et al, 2013). However, the returns to education declined for all types of workers with the exception of self-employed non-farm workers, either because the supply of more educated workers outstripped the demand, or more likely because the demand for the kinds of workers that are available does not meet existing needs. The net impact of these opposing forces is a positive impact of higher levels of education on poverty.

Finally, while the decomposition approach shows that labor income was the most important contributor to poverty reduction, non-labor incomes were important contributors to the decline in the poverty gap and the

> 9 The findings in Bangladesh led to additional work which found that exogenous price increases, and not necessarily an increase in labor productivity (measured in physical terms), allowed agricultural workers to experience an increase in wages (World Bank, 2013).

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