Wednesday, May 19, 2010

Sri Lanka - Quick and Dirty Growth Diagnostic?

From a recent economic update of Sri Lanka (World Bank);
Raising the long-term growth rate in Sri Lanka to 8 percent would require a comprehensive policy agenda. The government has committed itself to raising the long-term growth rate of the Sri Lankan economy. A standard growth-accounting framework illustrates how this can be achieved. Within this framework, growth can increase by any combination of: (i) accelerated human capital accumulation, either through increase labor force participation and employment or improvements in the quality of labor (more or better schooling); (ii) accelerated physical capital-accumulation through higher investments, or (iii) higher “total-factor-productivity” (TFP), which is the catch-all residual for structural improvements affecting the efficiency of use of human and physical capital. TFP improvements can happen in many ways (e.g., as a result of efficiency gains at the level of the individual business or factory or, e.g., as a result of sectoral shifts in the economy, from lower- to higher-productivity sectors, such as from agriculture to industry or services).

The scenario takes as starting point that growth will gradually accelerate to 8 percent by 2013—broadly in line with the Government’s medium term targets. It then asks, what are the requirements to the three underlying drivers of growth to achieve this target? It is clear that all factors—the input of labor, the level of investments, and the rate of overall productivity growth—would have to increase well beyond the levels of the past year. Specifically, the labor-force participation rate would have to gradually increase from its current level of around 49 percent, to 52-53 percent—equivalent to 500,000 jobs created in the next decade, over and above the number of jobs necessary to absorb the underlying population growth. In terms of capital accumulation, an increase in the ratio of investments-to-GDP from the current level of about 25 percent, to around 30 percent, would be required. Some of this increase may be financed by foreign direct investment (FDI), but it would also probably require an increase in national savings. Finally, TFP would have to increase to around 3 percent per annum—about 1 percentage point higher than its average level during the recent high-growth period from 2004-08, and well above its historical average since 1980

PREM Note 42: Measuring growth in total factor productivity

What use is sources-of-growth accounting?;
So here is a contest for economist (or wannabe economist) readers of this blog: can you come up with an interesting question to which a sources-of-growth decomposition is the answer?

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