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Saving and growth in Sri Lanka

  • Hevia, Constantino
  • Loayza, Norman

In the aftermath of its long-standing civil war, Sri Lanka is keen to reap the social and economic benefits of peace. Even in the middle of civil conflict, the country was able to grow at rates that surpassed those of its neighbors and most developing countries. It is argued, then, that the peace dividend may bring about even higher rates of economic growth. Is this possible? And if so, under what conditions? To be sure, Sri Lanka's high growth rate in the past three decades did not come for free. It took an increasing effort of resource mobilization in the country, with a rise in national saving from 15 percent of gross domestic product in the mid-1970s to 25 percent in 2010. This rise in national saving was fundamentally fueled and sustained by the private sector. In the future, however, the private saving rate is likely to decline because the demographic transition experienced in the country is bound to produce higher old dependency rates in the next two decades. However, the public sector has much room for reducing its deficits and increasing public investment. Similarly, external investors are likely to encounter attractive and profitable investment projects in the coming years in a reformed and peaceful environment. The government of Sri Lank has two goals regarding these issues. First, increasing public saving to 1.5 percent of gross domestic product by 2013; and second, increasing international investment in the country by letting the current account deficit increase to 4-5 percent of gross domestic product in the coming years. If these goals are achieved, what can be expected for growth of gross domestic product in the country? To answer this question, this paper presents a neoclassical growth model with endogenous private saving, calibrates it to fit the Sri Lankan economy, and simulates the behavior of growth rates of gross domestic product and related variables under different scenarios. In what the authors call the Reform Scenario, total factor productivity would increase from 1 to 1.75 percent per year. This would produce a gross domestic product growth rate of about 6.5 percent in the next 5 years, 4.6 percent by 2020, and 3.5 percent by 2030, the end of the simulation period. This robust growth performance would be supported at the beginning mostly by capital accumulation but later on mainly by productivity improvements.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6300.

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Date of creation: 01 Jan 2013
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Handle: RePEc:wbk:wbrwps:6300
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  1. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Department of Economics, Working Paper Series qt7g18546z, Department of Economics, UC Santa Cruz.
  2. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  3. Constantino Hevia & Norman Loayza, 2012. "Saving And Growth In Egypt," Middle East Development Journal (MEDJ), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1250002-1-1.
  4. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May.
  5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
  6. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  7. Ben S. Bernanke & Kenneth Rogoff, 2002. "NBER Macroeconomics Annual 2001, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number bern02-1, August.
  8. Francesco Caselli, 2004. "Accounting for Cross-Country Income Differences," NBER Working Papers 10828, National Bureau of Economic Research, Inc.
  9. Francesco Caselli, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 3567, London School of Economics and Political Science, LSE Library.
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