THE LEGATUM PROSPERITY INDEX™ 2018

Creating the Pathways from Poverty to Prosperity

Sri Lanka

Despite ongoing political turbulence, over the last decade Sri Lanka has seen increases across all nine pillars. The largest rise has come in the Safety and Security pillar, following the end of a nearly three-decade long civil war in 2009. The country has risen 23 places in a decade and is now ranked 67th in the global rankings. The conclusion of the civil war has enabled significant reinvestment in health, education and infrastructure, and has provided a more stable environment for commerce and investment.

This has facilitated improvements to the Business Environment and Economic Quality pillars which is reflected in increased GDP growth rates. Improved Safety and Security has allowed tourism, a major source of income for Sri Lanka, to flourish again.1 However, Sri Lanka’s impressive progress over the past 10 years remains fragile. It declined in prosperity last year and future prosperity could yet be undermined by a return to instability.

Improving Safety and Security

The ending of the Sri Lankan Civil War in 2009 went against the global trend of worsening Safety and Security and has been the catalyst for Sri Lanka’s rise from 147th at the height of the conflict to 83rd this year. Despite both sides of the conflict committing human rights violations towards the end of the war, as reported by the UN, the resolution was a watershed moment for Sri Lanka. The defeat of the Liberation Tigers for Tamil Eelam (LTTE) by government forces stopped the further destruction of lives and infrastructure, with Sri Lanka rising from second worst rank for national security to 108th. Despite this integral component of Safety and Security having improved, the other two aspects, personal safety and security of living conditions, have not yet seen a sustained rise following the end of the civil war.

Improving Sri Lanka’s Governance pillar will be an ongoing challenge. Concerns remain over the progress of key reforms that followed the end of the conflict, designed to improve judicial transparency and integrity and to make Sri Lanka a fully demilitarised nation by the end of 2018. However, tentative progress has been made, with the 2017 Right to Information Act granting citizens the right to request information from the state. It remains to be seen whether this improves Sri Lanka’s poor rank for transparency of policy-making, which is currently 113th.

The formal and informal aspects of the Personal Freedom pillar have yet to see similar reform, it being the country’s lowest position. Sri Lanka ranks at 130th in our social tolerance sub-pillar, evidenced by ongoing tensions between Buddhist, Muslim and Christian communities. Attempts have been made to ease tensions between ethnic and religious groups, for example, by making the singing of the national anthem in Tamil legal and recruitment into the civil service bi-lingual, although this target is not comprehensively met.

Improving citizen’s welfare

Sri Lanka is in the top 50 for our Health pillar rankings. The healthcare system managed to function during the civil war, and during the conflict the government did not abandon healthcare centres and hospitals in rebel-held areas. This has helped contribute to an efficient present day health system with infectious diseases under control.

Education in the country generally retained its structure throughout the civil war, with a few exceptions. Prior to the civil war, places for Tamils at university had been restricted, and the conflict further limited access to higher education for the Tamil population, as well as causing dips in school completion rates during spikes in the fighting. The human capital of the population has not been significantly affected, with the average secondary schooling of almost five years per worker. This was made possible by the introduction of free education, from kindergarten through to university in 1945 and is the cause of current primary completion rates being at 100%. However, attainment levels are poor, with the country ranking 136th globally for education quality.

The Economic Environment

Economic growth in Sri Lanka managed to persist throughout the conflict, with stronger growth coming during a lull in the conflict in 2001. It remains strong today; average GDP per capita growth over the last five years has been 3.2%, ranking it 37th in the world. This growth in a time of conflict stemmed from government efforts in the late 1970s and early 1990s to liberalise the national economy. The latter set of reforms re-energised the domestic economy, privatising state-owned enterprises and reducing regulation. These reforms also provided a boost to Sri Lanka’s efforts to integrate itself into global supply chains, reducing tariffs, simplifying customs procedures, allowing the repatriation of profits, and investing in major infrastructure projects (in partnership with the Chinese government). These reforms have helped to develop Sri Lanka’s competitive advantage in the garment and textile industries as well as placing the country 25th globally and 3rd highest in the Asia-Pacific region for entrepreneurial environment. However, the regional disparities of this success should be noted, with the western and northwestern provinces accounting for more than half of national productive output.

In spite of these reforms, business infrastructure, labour market flexibility, and ability to access credit remain major challenges for those trying to do business in Sri Lanka. The civil war damaged infrastructure and the renationalisation of road, rail, and electricity provisions by the state in 2005 resulted in the disruption of the infrastructure network. The centralisation of financial institutions and private equity firms has led to low numbers of Sri Lankan SMEs reporting access to credit, despite making up over 80% of businesses. Recent policy has tried to address this with the founding of the Credit Information Bureau in 2016 to develop a framework through which firms can apply for loans with assets as collateral. The termination of the Employee Workmen’s Act of 1994 is an example of a policy the Sri Lankan Government has been working on to repeal, since 2015, in an attempt to reduce labour market rigidity. However, while its unemployment figures are relatively good, labour force participation is poor. This is an area that matters for individual prosperity, and should be an area of concern for the government.