This report provides an integrated viewof Sri Lanka's long term development challenges forsustainable growth and poverty reduction. Sri Lanka'ssubstantial achievements in human development are wellknown. In several dimensions - such as universal primaryenrollment, gender equality, infant and maternal mortality -the country is well positioned to meet the MillenniumDevelopment Goals (MDGs). In addition, housing conditionshave substantially improved, relative to the early 1980s, inparticular with respect to housing materials and access toelectricity, safe water and sanitation facilities. However,despite improved overall access to basic services, largedisparities remain in the access to, and quality of most ofthese services. Of particular concern is the fact thatpoverty reduction has been slow, while income inequality hasrisen in recent years. The disappointing trend in nationalpoverty incidence also reflects a long-term growthperformance significantly below the country'spotential. The core theme of this report is thus thefollowing: Sri Lanka must achieve a higher growth rate, butdo so in a manner that poor people, and the poor regions ofthe country can more fully participate in this growth. Thereport further analyzes early reforms and their impact, aswell as that of private sector participation. However,despite the increased role of the private sector, littleprogress was made in fundamentally redefining the role ofthe state, partly owing to Sri Lanka's strongattachment to a large public sector. An important message ofthis report is that much of Sri Lanka's skewed growthrecord and ensuing increased income inequality, spanningthrough alternate governments, is a reflection of theunfinished reform agenda. Recommendations suggest improvedpublic financial management, including public debtreduction, and the rationalization of public spending,linking it to the poverty reduction strategy. In addition,the performance of state-owned enterprises should beimproved, followed by fiscal consolidation and adequate taxpolicies. Policies for export growth should be accelerated,pursuing a competitive real exchange rate, and avoidingtrade policy reversals, but it is also important to notethat preferential trade liberalization, i.e., access tomarkets cannot substitute for needed improvements in laborproductivity, lead time, and cost effectiveness. The reportalso focuses on the importance of the impacts fromagricultural development, infrastructure development, andcertainly the impacts of improved education and health.
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