Sri Lanka Human Development Report 2012.pdf

CHAPTER
6
Bridging
Governance Gaps: State Capacity and People’s Participation
As Sri Lanka works to sustain peace, accelerate growth
and ensure inclusiveness in the post-conflict era, citizens
need confidence in governance structures. Some people
may still contend that better and inclusive governance
is a cosmetic element in the process of growth, but this
report argues that it is an intrinsic component of human
development. Good governance strengthens employment
creation through enterprise growth, better provision
of government services and inclusive participation in
governance processes.
The previous chapters drew attention to a number of human
development challenges and the critical public policy
choices to meet them. This chapter discusses elements of
governance important to current development challenges,
with a focus on an environment enabling inclusive growth.
For more people to seize new economic opportunities,
education and skills must be improved, productivity and
efficiency boosted, and innovation and creativity spurred.
These challenges are not merely about resources. They
also underscore the centrality of the Government in the
complex choices that influence private economic activity
across the country, a key element for accelerating growth
and sharing it more equitably.
One important caveat is that the lack of data on various
governance dimensions severely limits any extended
quantitative analysis. This constraint is especially binding
when it comes to spatial disparities. With that in mind, the
report considers the following dimensions: taxation and
state capacity to bridge human development gaps, along
with implications for governance and accountability; the
creation of an enabling environment for business; stronger
local governance and people’s participation.
The State Capacity to Finance Development
The Sri Lankan state continues to be the primary provider
of social services, such as education and health. Funding
depends heavily upon government finance through tax
revenues. Strengthening the financial capacity of the state,
and thus its ability to provide these services, is vital.
The public education system remains the predominant
provider of general education, as discussed in Chapter 4.
Strong public investment has enabled Sri Lanka to attain
high levels of human development. Yet wide disparities
exist in access to, and the quality of, education across
the country, particularly at higher levels. And public
investment in education has declined steadily over time,
remaining low compared to similar countries.
In the health sector, similar issues prevail. As discussed in
Chapter 3, investment in health, both public and private,
is low. Out-of-pocket expenditure by citizens is high and
rising, which has negative implications for equitable access
to care. Meeting increasing and changing health demands
requires greater state capacity.
To address education and health needs, improving tax
revenue becomes ever more important, particularly as
Sri Lanka moves towards upper middle-income country
status and has less access to concessionary aid. However,
it has not raised tax revenues in line with economic
growth in recent decades. The fiscal system, on the other
hand, has been changed by several ad hoc tax measures
that have excessively complicated the tax system. It is
uncertain whether these complexities are related to weak
performance in raising revenues.
Tax revenue as a share of GDP dropped to around 15
percent during 2003-2008, compared to about 19 percent
before 1995. The benchmark tax-GDP ratio for a lowincome
country is 18 percent, and is 25 percent for a
middle-income country. 293 Sri Lanka’s tax ratio was just
12.4 percent in 2011, having declined from a peak of 24
percent in 1987 (Figure 6.1). Its tax-GDP ratio compares
poorly with those of Ghana, Malaysia, Singapore, South
Africa, Thailand and Vietnam, although it is better than
for South Asian neighbours such as Bangladesh, India and
Pakistan, and marginally better than for Indonesia and the
Philippines (Figure 6.2).
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