Growth and equity in developing countries : a reinterpretation of the Sri Lankan experience

LA 150 THE WORLD BANK ECONOMIC REVIEW, VOL. 1, NO. 1: 35-63 59L. 'qgS Growth and Equity in Developing Countries: A Reinterpretation of the Sri Lankan Experience Surjit S. Bhalla and Paul Glewwe In the important debate between the proponents of direct (basic needs) and indirect (economic growth) measures of promoting welfare, Sri Lanka has frequently been cited as one country which has successfully pursued the direct approach-it has raised living standards without much cost in terms of reduced growth. This conclusion, however, is based on analyses which do not accountfor the initial conditions of the countries being compared. After methodologically incorporating these concerns, neither the improve- ment in living standards nor the 2.0 percent per capita growth rate during the period of direct policy measures (1960-78) was exceptional. In contrast, during the period of more indirect growth-promoting policies (1977-84), (i) economic growth more than doubled to an average rate of 4.3 percent per capita per annum; (ii) expenditure inequality did not significantly change; (iii) consumption expenditures of the popula- tion, and the poor, generally increased; and (iv) several living standard indicators continued to improve. Growth and equity are two important goals of developing countries. Depending on the fashions of the times, development economists (and policymakers) have variously emphasized the complementarities or trade-offs between these twin objectives of economic development. While there is general agreement that in- creased equity means an improvement in the living standards of the poor, there is disagreement about the appropriate emphasis to be placed on this goal. This disagreement can be brought into focus by contrasting two opposing viewpoints. One point of view contends that an attack on poverty requires heavy reliance on direct measures to meet basic needs.1 An explicit assumption of this approach is that economic growth by itself is too slow to provide substantial 1. Since welfare has several components besides monetary income, economists have tended to look at several nonincome indicators of welfare, such as basic needs (Streeten and Burki 1978), physical quality of life (Grant 1978) and living standards (Isenman 1980, Sen 1981). Surjit S. Bhalla and Paul Glewwe are on the staff of the World Bank. This article stems from a joint World Bank-Central Bank of Ceylon research project entitled Evolution of Living Standards in Sri Lanka, the major funding for which was provided by the Swedish International Development Agency. The authors are thankful for this support and would also like to thank the Central Bank and the Department of Census and Statistics, Sri Lanka, for their generous cooperation. Copyright