Beyond FDI and FTAs: How demographic fracking can boost Sri Lanka’s growth

By Daniel Alphonsus

Ruchir Sharma recently argued that population expansion’s role in economic growth is often overlooked. Instead, he argues economists place excessive emphasis on productivity improvements. If he is right, then Sri Lanka – with its ageing population and poor development – should seriously worry. But there is a little hope. Unlike much of the industrialised world, Sri Lanka has two major underutilised demographic pockets it can mobilise – women and migrant workers. 

Population growth matters

Sharma’s argument is that much of the 20th Century’s unprecedented growth can be explained by demographic expansion. High-birth rates combined with long-life expectancy led to rapid population growth. He finds that a 1% increase in the population roughly translates to a one percent increase in growth. 

Janet Yellen, former Chair of the US Federal Reserve, observed a similar effect. She argues that “women’s incorporation into the economy contributed importantly to the rapid rise in economic output and well-being over the 20th century. Between 1948 and 1990, the rise in female participation contributed about half a percentage point per year to the potential growth rate of real gross domestic product.”

The implications of this diagnosis are profound. If the 20th century’s growth was indeed significantly population driven, then as birth rates fall growth will be much dearer in this century. The potential effects are beginning to show in some developed countries – especially those that have refused to boost their populations through immigration – lower growth and poorer living standards. 

Sri Lanka’s case is particularly dire. We have almost exhausted our demographic dividend. But the real problem is that dividend never materialised. That once-in-history growth spurt which should have laid the foundations for moving us from the Third World to First eluded us. As a result, current strategies for seeking growth may not be enough.

Market access, investment and infrastructure will spur productivity and growth. But, if Ruchir is right, without a concurrent demographic boom, Sri Lanka is unlikely to experience the consistently rapid growth the East Asian Tiger economies enjoyed for decades. The diagnosis is grim but there is a silver lining. Tapping two major demographic wells could, for the time being, stave off the immediate effects of demographic decline. 

Women and migrant workers

Increasing female-labour force participation is likely to have the highest impact. Adding Sri Lanka’s already educated women to the workforce is similar to adding school-leavers or university-leavers. They leave low-productivity sectors, e.g. most domestic work, and join higher-productivity ones. This transition shouldn’t be too difficult. Sri Lankan women outside the labour force are often highly educated. Sri Lanka also has a long history of women working, including at the highest levels.

Despite this positive history, Sri Lanka has the lowest female labour force participation rate in South Asia. And South Asia, with the exception of the Middle East-North Africa region, has the world’s lowest female labour participation rate. In addition to short-term growth benefits, addressing low female labour-force participation has longer term rewards too. Once a culture of women working is established, it is unlikely to reverse significantly. 

Higher female labour force participation is also likely to have significant social dividends through its empowering effect on women. Although the challenge has been identified among policy-makers, little effort has been made to actually address it. That must change and there are some interesting initial ideas. 

The second prize is bringing back our 1.5 million workers in the Gulf. These migrant workers play an Atlas-like role in holding up Sri Lanka’s balance of payments. But in the long run they help perpetuate Sri Lanka’s unsustainable economic model where all Sri Lanka does is consume. The work is done in the Middle East, the goods are made in India or China and all that remains to be done in Sri Lanka is transporting, marketing and consuming. 

The economic costs of migrant workers – especially the more skilled – are also profound. Their absence creates labour shortages, such as in the garments sector, and some of their income is spent abroad contributing to the growth of host countries. In fact, for every three Sri Lankans working in Sri Lanka there is one working in the Gulf. 

Of course, the though largely unaccounted social costs, e.g. separation of children from parents, need to be considered too. A further concern is the vulnerability of remittances. The Middle East – including Saudi Arabia, where 600,000 Sri Lankans work – is becoming increasingly precarious due to a mix of terrorism, state instability and regional rivalry. 

Research shows that Sri Lankans often choose to work in the Gulf for non-wage reasons. There are often better paying jobs in hotels, households and factories at home. But the cultural stigma associated with such labour at home drives people overseas. It is in breaking these sexist cultural artefacts that the Government can play a role. And it can use regulation to discourage (not compel or coerce) workers from going overseas. 

The diaspora

In addition to these two big prizes, there are two smaller demographic pockets that can be harnessed. First is tapping the over 1.2 million persons of Sri Lankan origin living in the industrialised world. According to the OECD, at least a third of them are highly-educated professionals. Although the absolute numbers of these returnees is unlikely to be high, they have highly-developed skills, capital and connections. These are urgently needed to help Sri Lanka plug into global production networks and build the economic, regulatory and political structures that underpin growth.

Second is Sri Lankan refugees living in India. India is home to nearly 200,000 Sri Lanka refugees, most of whom are more highly educated that their Sri Lankan counterparts. As a result, they can play a critical role in boosting growth, especially in the significantly under-developed north and east. They can also help accessing the rapidly growing South Indian markets. Unlike their brethren in the industrialised world, they have been unable to gain Indian citizenship and face extensive discrimination in the labour market. Therefore, persuading them to return to Sri Lanka is likely to be considerably easier. 

Right-sizing the Army

Finally, demographic reallocations can provide the economy with additional productive labour. Despite the defeat of all conventional threats, the security forces remain approximately 250,000 strong. These numbers are geared to fight a conventional war – even though no threat assessment considers this likely. 

Reducing the man-power of the security forces will free tens of thousands of trained young men into the labour force providing a quick fillip to growth – especially to the construction sector which is suffering from major labour shortages. And, as a bonus, Sri Lanka’s security will also be improved. The defence budget can be used for intelligence, maritime-surveillance, training, cyber-security and winning hearts and minds. All of which are under-funded. 

Demographic fracking

Post-2016 Sri Lanka is getting some of the fundamental framework for growth right. But as our demographic dividend runs dry, Sri Lanka will have to mirror the oil industry, and exploit difficult to extract demographic reserves. FTAs and FDI are absolutely necessary. But so is demographic fracking. 

(The writer is a Fulbright scholar at Harvard’s Kennedy School of Government.)