Managing Regional Income Inequality in Sri Lanka: Lessons from Japanese Experience

Abstract

There are three main objectives of this study. The first is to measure the regional (provincial level) income inequality in Sri Lanka in recent past with a decomposable inequality measure. The second is to quantify the determinants of recent trends in regional income inequality in Sri Lanka. Since Japan is said to be one of the most egalitarian societies in their development path, third objective is set to review pattern of regional income inequality in Japanese development path and draw some policy implications for Sri Lanka. As the method of analysis, Theil's entropy measure “T” was computed by using provincial level GDP and employment data, and decomposed into wishin-region inequality and between region inequality in Sri Lanka for 1997 and 2003. Contribution made by agriculture, manufacturing and services into total inequality and regional inequality is also estimated for the same years. Regional inequality in per capita GDP as measured by the Theil T index increased from 0.2077 to 0.2313 by 11 percent from 1997 to 2003. However, as expected in the early stage of development, contribution made by between-sector component to regional income inequality has increased form 30 percent in 1997 to 56 percent in 2003. This situation may have generated through high growth in “employment-lacked” western province-based serviced sector in Sri Lanka and slow growth in manufacturing and services sectors in other regions. Even though regional inequality level was relatively high in Japan soon after the World War II, it has reached to the lowest in late 1970s owing to implementation of land reform policies, substantial government subsidies on agricultural sector, high government intervention in regional infrastructure development and promotion of export oriented enterprises in various regions. Finally, this study stresses the importance of role of government in planning, implementing and monitoring in regional inequality in the development path of SriLanka. Inherent multi-ethnicity of the society and unusual service sector growth in the urban economy highlight importance of government role in managing regional inequality in Sri Lanka.