How has Northern Province economy fared since the end of the war in 2009?

by R.M.B.Senanayake

At a recent seminar on the peace dividend, the speaker Dr Muttukrishna Sarvanandan drew attention to the fact that the share of government services which includes defense services is a high of 53% in the Northern Province.

R.M.B.Senanayake, Senior Economist-pic courtesy of: YATV

He was quoting from the Provincial GDP data prepared by the Department of Census & Statistics and published by the Central Bank given below.

He said more than half of the northern provincial economy was accounted for by “Government Services” in 2009 which was referred to as “Public Administration, Other Government Services, and Defense” until 2007. The latest composition of the provincial GDP data is available for 2010.

In fact, the share of Public Administration, Other Government Services, and Defense in the northern economy has increased from 38% in 2003, to 49% in 2006, 2007 and 2008, and further to 53% in 2009,” he said. I could not find this data quoted by Dr Sarvanandan.

GDP of the Northern Province

I give below the Provincial Data for GDP in money terms (not real terms) published by the Central Bank. According to this data the GDP of the Northern Province is 3.4% of the national figure. The growth in money terms in 2010 over 2009 was 22.9% whereas the national growth was 15.9%. So there has been a higher rate of growth in money terms, higher by 7%. Agricultural production was up by 7%. But fish production grew by 57% in 2010 over 2009.

The value of the agricultural output in the Northern and Eastern Provinces are the lowest of the provinces. It’s the same for Industry although in industry the Eastern Province has done better than North Central, Uva and Sabaragamuva Provinces. But Industrial production in the Northern Province increased by 86.7% in 2010 over 2009. In Services the Northern Province has ranked above the NCP and Uva provinces perhaps due to the services contributed by the larger presence of the Armed Forces.

Provincial data collection is necessary

Gross Domestic Product (GDP) is the most important variable in analyses of economic growth. But unless there is a provincial data base, the department could only have disaggregated the national GDP figures. The basis of such disaggregation is not published either by the Central Bank or the Department of Census & Statistics.

As of 2011, we had a gross domestic product (GDP) of Rs 6,543 billion or $ 58 billion. This value can be further divided into the provincial levels, providing an outlook of how much value each province contributes to the national GDP. The Department of Census & Statistics seems to follow a “top-down” approach in its analysis of economic development; that is, authorities have scarcely attempted to break up national GDP statistics into provincial statistics and have focused more on the nation as a whole. Thus, the accounts of provincial GDPs that do exist have been projected estimates, based on the likely percentage of contribution of the respective province to the national GDP which have not been disclosed in any published document.

GDP alone is not a satisfactory measure of people’s welfare improvement

The conceptual problems in defining GDP, let alone using it as a measure of welfare, are the stuff of introductory economics courses. Just as serious, however, is the problem that GDP itself is often badly measured in our country.

There are three ways to calculate the Gross Domestic Product and we use mostly the expenditure approach supplemented by using production figures for the plantations and the industrial sector and agricultural sector. Other countries use at least two different methods such as Income and Expenditure or Output. The largest contribution to our GDP is from the Service sector which contributes 60% of the GDP.

According to the Central Bank figures of Gross Domestic Product the GDP per capita for 2011, is Rs 313,511 per annum. The Central Bank then converted this figure at the average exchange rate for the year and came up with a figure of GDP per capita as US$ 2,804. But if we go by the Household Survey of Incomes & Consumption published by the Department of Census & Statistics the average monthly household income is Rs 9,410 and if we annualize it, it is Rs 109,248 for the mean and not the Rs 313,511 computed from the GDP data. GDP per capita is not a proper measure of incomes and most countries use national Income and disposable Income figures instead. Some countries like India use the national income instead of the Gross Domestic Product. India also deducts depreciation from the Gross Domestic Product to arrive at Net National Product.

Relative to developed countries, a much smaller fraction of economic activity is conducted within the formal sector, the degree of economic integration between provinces is less and price equalization across provinces is lower, and, most significantly, the government statistical infrastructure is weaker in the provinces.

These factors make the calculation of nominal GDP (total value added, in domestic prices) in the provinces difficult; besides measuring nominal GDP requires the construction of reliable domestic price indices. If, in addition, we wanted to compare real GDP levels across provinces, that would require GDP deflators for the provincial GDPs as well.

Proxies for assessing increases in income levels

In response to the problems of measuring GDP, there is a long tradition in economics of considering various proxies that cover periods or regions for which GDP data are not available at all or not reliable. For example, until the year 2005, the Federal Reserve Board based its monthly index of industrial production in part on a survey of utilities that measured electricity delivered to different classes of industrial customers.

Similarly, an IMF study examining electricity consumption in Jamaica over the decade of the 1990s concluded that officially measured GDP growth, which averaged 0.3% per year, understated true output growth.

Electricity consumption is a good proxy for industrial growth. As per table below the number of electricity accounts in the Northern Province is the lowest among all the provinces. The figures for 2010 are not available to compare the increase in this figure with the GDP increase. Similarly the sale of electricity in the Northern Province is the lowest of all the provinces. If we consider the generation of electricity, again it is one but the last and only the Uva Province is below it. Jaffna town still does not have uninterrupted power supply.

The same situation emerges in the availability of telecommunication services. The availability of telephones, both land as well as wireless, and public phones are lowest in the Northern and Eastern Provinces.

Similarly by using microeconomic data in the Demographic, Education and Health Surveys it is possible to compare how the different provinces are faring in terms of economic welfare. Economic historians have also employed a variety of proxies for studying economic outcomes in the period before the creation of national income accounts and in order to examine growth and living standards in sub-national units.

The war ended in May 2009 and people expected what is called the ‘peace dividend’. There are various ways of looking at the peace dividend. In a narrow sense it refers to the saving in the expenditure on the war which could be used to fund development. But the government has not reduced the expenditure on defense and hence there is no peace dividend in this narrow sense. Of course the government claims to have spent money on developing the Northern Province.

The government says that has taken steps to expedite the development of Northern and Eastern province especially through programmes like “Uthuru Wasanthaya” and “Nagenahira Navodaya. Most of this money has been spent on repair and reconstruction of roads and highways including the A9.

The restoration of the infrastructure damaged or destroyed by the war is necessary. But the use of the military and labor and contractors from the South has deprived the people in the North from benefiting from such development expenditure.

The expenditure would not create the multiplier effect normally present since the money would go to the South. Because of free and peaceful atmosphere that emerged after the ending of the war, there should have been a noticeable improvement in the economic activities of these provinces.

Since normal conditions were not prevalent during the war, the private sector entrepreneurs would not have invested in the province. Nor could the people engage in their traditional farming activities owing to the war.

Irrigation tanks were destroyed and there was no conservation of water to carry out agriculture. Fishing, another traditional occupation in the Northern Province, was also curtailed because of the restrictions imposed by the Defense Forces.

The people’s complaint was that despite the end of the war the people still required permits from the military to engage in fishing. There were complaints that the people did not have the freedom of movement so essential to economic development for resources including labor must move to areas where there is work.

It is true that the state and private banks opened up new branches in these areas and the Central Bank offered subsidized credit schemes. People in these areas would be able to obtain loan facilities through these newly set up banks. But private individual initiative requires economic freedom which is measured by the World Bank and the Fraser Institute. But this essential feature seems to be lacking according to spokesmen for the Tamil people in the Province. There is said to be excessive domination of civilian activities by the military although the government denies it.