The Peradeniya Journal of Economics Vol. 2, No.

1&2, 2008

The Relationship between Poverty and Trade Liberalisation in Sri

Lanka: An Overview

Anoma S. P. Abhayaratne1

Introduction
There is ample theoretical and empirical evidence to justify the
claim that trade liberalisation has a positive impact on growth rates
of income and output (see Sachs and Warner 1995, Dollar 1992,
Edwards 1993 and 1998, among others). Also, in cross-country
investigations (Dollar and Kraay 20022) and in individual country
investigations (Srinivasan 2000), rapid and sustainable economic
growth has been recognised to be the key foundation for poverty
reduction in developing countries.
The poor in developing countries can benefit from direct and
indirect effects of trade liberalisation through the changes in
domestic prices and incomes. However, it is possible that trade
liberalisation affects domestic prices and incomes differently across
income groups and economic sectors, hence producing diverse
outcomes on different households.
Sri Lanka is the first country in the South Asian Region to initiate
liberal trade policies. In 1977, Sri Lanka adopted liberal trade and
exchange rate policies based on market oriented, export-led
development strategies3 in the hope that greater global integration
of the economy would lead to faster poverty reduction through
accelerating economic and productivity growth. As expected, with
the opening up of the economy, economy grew much faster than
the pre-1977 period. This growth was mainly driven by growth of
manufacturing, services and construction sectors. Since 1977, poverty
in Sri Lanka, as measured by head count index, has declined.
However, sectoral level measures show that improvements are not
seen in all sectors and all socio economic groups. Further, income
distribution as measured by the Gini coefficient has worsened in the

1 Department of Economics & Statistics, University of Peradeniya, Sri Lanka

Email for correspondence is aspa@pdn.ac.lk. The author would like to
gratefully acknowledge anonymous referees for providing comments and
suggestions.
2 This study has shown that incomes of the poor rise one-for-one with overall

growth.
3 These policies included reduction of import tariff, elimination of import

licensing, provision of incentives to foreign investors and removal of price

controls and government subsidies.
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initial phase of trade liberalisation and has shown some improvement

in the last two decades.
The main objective of this study is to present an overview of
poverty impact of trade liberalisation in Sri Lanka focusing particularly
on income poverty and inequality. This paper is organised in six
sections. Second section provides a review of literature on the impact
of trade liberalisation on poverty and third section provides a brief
overview of trade policy regimes in Sri Lanka since independence.
Fourth section presents consequences of trade policy changes on
country’s economic structure, external integration and labour
markets. Fifth section analyses the impact of trade liberalisation on
poverty and equity. Finally, last section of this paper presents
conclusions and policy implications.

Trade Liberalisation and Poverty: Review of Literature

Beneficial effects of trade liberalization on growth of economies
have been thoroughly discussed in the development literature [see
the surveys by Findlay (1984), Smith (1984) and Frankel and Romer
(1999)]. However, previous research that adopted neo-classical
framework does not analyze dynamic effects of international trade
on growth, technological progress and welfare. These studies do not
provide a very good framework for analyzing long-run growth.
Theoretical literature on the relationship between trade and long-run
growth has only begun to build up with the development of new
growth models during the late 1980s (i.e. Romer 1986, Lucas 1988,
Grossman and Helpman 1989).
A number of recent studies that examine the links between
international trade and economic growth provide evidence that
trade does, indeed, increase growth (for example see, Grossman and
Helpman 1989, Romer 1990, Rivera-Batiz and Romer 1991, Dollar and
Kraay 2002, Greenaway et. al 2002). Analyzing the dynamic effects
of trade in terms of growth, Rivera-Batiz and Romer (1991) emphasize
that reduction in trade barriers has a positive effect on income
through integration. A number of recent studies suggest that the
performance of more outward oriented economies is superior to that
of those countries pursuing more inward looking trade policies
(Greenaway and Nam 1988, Santos and Amelia 2005).
Economic growth is often seen as a key foundation for achieving
poverty reduction (Dollar and Kraay 2002, Lipton and Ravallion 1993,
Ravallion and Chen 1997, Thorbecke and Hong Sang 1996). However,
other studies argue that higher incomes generated by the growth
process do not necessarily raise the living standards of the poor due
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to factors such non-existence of appropriate employment

opportunities, structure of relative prices, and the nature of social and
legal rights (Dreze and Sen 1989, Deninger and Squire 1996, Khan
1999).
Recently, a number of studies examine the impact of trade
liberalisation on poverty (for a survey see Mathur (2003). Findings of
the cross country regressions provide evidence that trade
liberalisation can reduce poverty (Dollar and Kraay (2001), Hertal et
al. (2001), Mathur (2003)) through changes in prices and income.
Studies that focus on a single country provide that although trade
liberalisation is beneficial in reducing poverty, the impact is complex
and varies substantially by households. Some studies find that the
gains from trade liberalisation tend to be higher in the urban
households than the rural household and higher in rich households
than poor households (Cockburn (2001), Friedman (2000), Harrisson
(2000)). Devarajan et al. (2000) has found that some households in
South Africa have benefited from trade liberalisation while some
others were made worse off. Nicita (2004) suggests that trade
liberalisation affect domestic prices and incomes differently both
across income groups and economic sectors hence producing
diverse outcomes on different household. These findings suggest that
the impact of trade liberalisation on the poor households depends on
how the benefits are spread across the households and the
characteristics of these households and therefore, should be
examined keeping the country context in view.
Winters (2002) provides a comprehensive review of literature of
the impact of trade liberalisation on poverty. They identify several key
channels through which trade liberalisation can influence poverty.
Understanding these channels assists in understanding the effects of
trade liberalisation on income and poverty. According to Winters
(2002), the main channels through which trade influences poverty
are: (a) change in prices and availability of goods, (b) changes in
factor prices, income and employment, (c) government transfers
influenced by changes in government revenue, (d) incentives for
investment and innovation, which affect long run economic growth,
(e) external shocks, in particular changes in terms of trade, and (f)
short run risks and adjustment costs. The poor may not benefit from
the increasing growth rates, if growth leads to increase inequality of
income (Mathur 2003, Nicita 2004)). However, the findings of
Deninger and Squire (1996) and WIDER (2000) show that there is no
change in income distribution which is defined as the share of bottom
40 percent. This implies that poor have gained equally from
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increasing growth. Dollar and Kraay (2000) also provide evidence

that economic growth enhanced by trade openness affects all
income groups proportionately including the lowest quintile. They also
find that openness has no direct impact (positive or negative) on
income distribution other than through growth.
However, there is no evidence of a general trend in inequality in
countries that adopted trade liberalisation. Examination of individual
countries that reduced trade barriers and participated more in
international trade over the past 20 years such as China, India,
Thailand and Vietnam have been able to realise rapid growth rates.
These rapid growth rates have been translated into dramatic declines
in absolute poverty while there have been large increases in
inequality of income. Dollar and Kraay (2001) argue that it would be
misleading to attribute it entirely to trade liberalisation as these
countries have undergone dramatic changes in their entire
economic system over the past two decades.
A number of studies including Lakshman (1986) and Kakvani
(1986) examined the distribution of income in Sri Lanka under
liberalised economic policies adopted in 1977 concluded that these
policy reforms have resulted an increase in income inequality.
However, contrary to the widely held view, Glewwe (1986, 1988) that
examined the impact of economic liberalisation policies found that
though Sri Lanka has achieved higher rates of economic growth since
the adoption of policies, it did not lead to greater inequality.
Ravallion and Jayasuriya (1988) commenting on the findings of
Glewwe (1986,1988), argue that a sound basis remains for the
contention that the policy reforms of 1977 increased inequality.
A better understanding of the impact of trade liberalisation on
welfare of the poor households is very useful in policy formation in a
country where poverty alleviation is a key priority of the government
and the economy is mainly depending on outward oriented
development strategy.

A Brief Discussion of Trade Policy Regimes in Sri Lanka

Since independence, Sri Lanka has gone through a series of
trade policy regimes4. Just after the independence it continued with
a liberal trade regime until growing foreign trade and foreign
exchange problems forced the government to adopt import
substitution policies in 1960. During the period 1960-65, the
government placed a greater emphasis on import substitution

4 For details see Abeyratne (1997)

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industrialization by providing incentives and increasing protection for

domestic industries.
In 1965, the government placed greater emphasis on export
promoting industries within a general import substitution
industrialization policy framework. Several incentives were offered to
foreign investors in order to encourage foreign capital inflows for
industrial development. The most significant aspect of the industrial
policy was its attempt to promote industrial exports while pursuing
closed economic policies. While the export promotion policy aimed
at reducing the country’s heavy reliance on traditional exports of tea,
rubber and coconut, closed economic policies aimed at
developing manufacturing industries behind protective barriers.
During 1970-77, the government adopted an inward oriented
and regulated economic policies which were the most stringent
restrictions ever to be introduced in Sri Lanka with massive
interventions in all areas of economic activity. The period under
these policies recorded the poorest performance ever in respect to
economic growth. During the period 1970-77, the average annual
growth rate was 2.9 percent. In addition to low growth rates the
economy was faced with the problems of deterioration of provision of
social services, rising unemployment, shortages and severe rationing
of consumer goods. Further, these policies did not provide solutions to
the country’s longstanding problems of economic stagnation,
unemployment and foreign exchange crisis.
In 1977, the government responded to them by introducing
economic liberalization policies that marked a complete turn around
in the economic policy. These policies which aimed at export
oriented industrialization in an open economy to foster rapid
economic growth included liberalisation of import trade and
exchange payments, incentives for export promotion, measures to
encourage foreign private capital and reduction of government
interventions.
These liberalised policy reforms resulted in high growth rates
since 1978. During the period 1978-83, the average annual growth
rate was 6.2 percent. However, the economy was not able to
maintain these high growth rates in the subsequent years. The growth
rate declined to 4.1 percent during the period of 1983-89. Also the
government was faced with foreign exchange and external debt
problems. Under these conditions, in 1989, the government
implemented a second wave of liberalisation-cum-adjustment
package. This policy initiative was aimed at providing an economic

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environment conducive to the growth of industry with minimum

regulations and controls, and economic and financial incentives.

Structural Changes and Resource Allocation

Growth of the economy

Before 1977, the Sri Lankan economy was basically a closed

and controlled economy. During the period 1960-77, the Sri Lankan
economy grew by an annual average of a 3.95 percent. The growth
rate of the economy declined to 2.9 percent per annum during 1971-
77 when there was increased intervention by the government in
economic activity. With the introduction of liberalized economic
policies in 1977, the economy recorded 8.2 percent rate of growth in
1978. In the next 10 years the economy grew at an annual average
rate of 5.4 percent in 1990s. During the last six years, the average
annual growth rate was 4.5 percent. However, this was not an
achievement. This growth rate has been inadequate to raise the
country’s per capita income to a level of even an upper middle
income country. We have just moved into the World Bank’s category
of a lower middle income country with per capita income of $ 1355 in
2006.

Table1: Average Annual Growth Rates 1960-2006

Period Average annual growth rate

1960-70 4.64
1971-77 2.90
1978-85 6.32
1986-90 3.40
1991-95 5.38
1996-2000 5.02
2001-2006 4.50
Source: Annual Reports, Central Bank of Sri Lanka

Structural Transformation
During the last 30 years, economic structure of Sri Lanka has
undergone a significant transformation to meet the emerging needs
of a developing economy. The economy experienced a structural
transformation from an agricultural based economy to a modern
manufacturing and services sector based economy. Prior to the
introduction of trade liberalising policies in 1977, the agriculture sector
played a dominant role in the economy contributing to 38 percent of
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the GDP in 1970. However, since 1977, the significance of the

agriculture sector has declined while the shares of industry and
services sectors rose significantly (Table 2).

Table 2: Sectoral Contribution to GDP (Rs. Mn)1960-2004

Agricultural Industrial Service
Year GDP Sector Sector Sector
1960 148519 61900 (42) 29627 (20) 65716 (44)
1970 229186 86610 (38) 57238 (25) 100451 (44)
1977 279430 99768 (36) 60013 (21) 129691 (46)
1980 340209 110606 (33) 81593 (24) 161702 (48)
1990 516153 145908 (28) 122966 (24) 256178 (50)
2000 857035 175317 (20) 236347 (28) 445371 (52)
2004 979955 175182 (18) 259286 (26) 545487 (56)
Note: Given in the parenthesis are the sectoral shares.
Source: Central Bank of Sri Lanka, various years.

In 1977, the share of agriculture in GDP was 36 percent. This has

declined over the years to 18 percent in 2006 while the share of
industry has increased from 21 percent in 1977 to 26 percent in 2006.
The services sector remained as the largest contributor to GDP while
its share in GDP increasing from 46 percent in 1977 to 56 percent in
2006 in line with the normal trend that has been observed in the
development process of the country. During the period, services
sector activities such as trade, transport, telecommunication, banking
and other financial services have expanded rapidly.
The increase in the share of industry in GDP is mainly due to the
growth of manufacturing sector. The share of manufacturing, which
is the largest contributor to the industrial sector, grew rapidly
overtaking agriculture for the first time in 1995. In 1995, the share of
manufacturing in GDP was 21 percent. This sector became growth
oriented, increasing its share in overall production, total employment
and export earnings of the economy.
There was also a structural change within the manufacturing
sector. The relative shares of agricultural export processing industries
and cottage and small industries have declined while factory
industries have become dominant. During the period the importance
of the traditional sector of processing tea, rubber and coconut in
manufacturing contracted from 33 percent in 1977 to 9 percent in
2006. The factory industry sector, which was dominating the
manufacturing, grew rapidly increasing its contribution to GDP from
53 percent in 1977 to 83 percent in 2006.

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Greater Economic Integration

During the 1960s and 1970s the economy was characterised
by inward looking policies and trade was not allowed to play the role
of an engine of growth. During this period, the annual growth rate of
exports was low as 3.4 percent while imports grew by 5.7 percent
annually. Sri Lanka’s export market share in the world economy
declined from 0.39 percent in 1956 to 0.07 percent in 1977. The
export structure of Sri Lanka was characterised by a heavy reliance
on a limited number of primary commodities. In 1977 the share of
agriculture in exports was about 80 percent while the share of
manufacturing goods in exports was only 6 percent.
The situation changed dramatically with the introduction of
liberalised policies in 1977. These policies have resulted in a substantial
increase in exports and imports (Figure 1). Exports increase from Rs
6638 billions in 1977 to Rs. 715525 million in 2006. The volume index of
exports rose from 57.2 in 1977 to 194.8 in 2003. Similarly, imports
jumped from Rs. 6007 million in 1977 to Rs. 1065902 million in 2006. The
volume index of imports displayed an increase from 40.9 in1977 to
278.1 in 2003. The trade sector became a dynamic force in the
economy encouraging growth of income and employment
opportunities.

Figure1: Exports and Imports 1977-2006

700000
600000
500000
400000 exports
300000 imports

200000
100000
0
1975 1980 1985 1990 1995 2000 2005

Source: Central Bank of Sri Lanka, various years.

With the increase in both exports and imports in value and

volume terms, their composition has changed to meet the needs of
the diversified economy. Until 1977, agriculture exports constituted for
about 80 percent of total exports. Since 1977, the dominant role of

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agriculture decreased while the share of industrial exports rose

significantly.

Figure 2: Composition of Exports 1977-2004

90
80
70
60 agri
Exports

50
industry
40
30 other
20
10
0
1975 1980 1985 1990 1995 2000 2005
Year

Source: Central Bank of Sri Lanka

In 1977, the share of industrial goods in total exports constituted

no more than 15 percent as the industrial sector was still inward
looking. Since 1977, the share of industrial exports increased
drastically surpassing the share of agriculture exports in 1986. By 2006,
the share of industrial exports was 78.3 percent (Figure 2). In industrial
exports, manufacturing emerged as the most dynamic element.
During the period since 1977, manufacturing sector grew at an
annual average rate of 32 percent and by 2006 its share in total
exports was over 70 percent.

Table 3: Composition of Imports 1977-2003

Consumer Intermediate Investment
goods goods goods
Year percent percent percent
1977 42.2 44.1 12.4
1980 29.9 45.7 24
1985 19.4 54.3 19.2
1990 26.4 51.8 21.7
1995 18.5 54.6 22.4
2000 17.3 53.5 23.6
2003 20.1 59.2 19.8
Source: Central Bank of Sri Lanka

The composition of imports also displayed a significant change

over the period (Table 3) from consumer goods to growth oriented
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intermediate and investment goods. The relative shares of

intermediate goods and investment goods in total imports rose over
time to displace the consumer goods as the main component of
imports. The share of consumer goods in total imports declined to 19.3
percent in 2006 from 42.2 percent in 1977 while that of intermediate
goods and investment goods rose from 44.1 percent and 12.4
percent in 1977 to 58.1 percent and 21.9 percent in 2006 respectively.

The changing structure of the labour market

By 1977, unemployment was one of the major economic
problems faced by the government of Sri Lanka. One of the
objectives of introducing liberalised economic policies in 1977 was to
create employment opportunities for the growing labour force. In Sri
Lanka, agriculture has been the largest provider of employment. The
share of agriculture in total employment stayed around 50 percent till
the introduction of liberalised economic policies in 1977. However,
since then it has been declining while the shares of industrial and
services sectors has been rising (Table 4). However, in terms of
numbers employed, agriculture continued to be the dominant sector
in providing employment.

Table 4: Share of Employment by Economic Activity

Sector 1953 1977 1995 2005
Agriculture 53.0 51.96 36.71 30.67
Industrial 13.0 18.76 21.69 24.52
Services 37.0 29.26 41.59 44.79
Source: Department of Census and Statistics, Central Bank of Sri
Lanka.

The share of agriculture in total employment declined from 52

percent in 1977 to 37 percent in 1995 and to 31 percent in 2005.
During this period in line with the structural change of the economy,
industrial and services sectors recorded significant increases of their
shares in total employment. The share of the industrial sector
increased from 19 percent in 1977 to 25 percent in 2005 while the
services sector share increased from 29 percent in 1977 to 45 percent
in 2005. The increase in the share of industries in providing
employment was mainly due to the growth of labour intensive export
oriented industries, especially in textiles and garments, footwear,
leather products etc. The increase in services sector employment is a
direct result of the expansion of service sector activities such as trade,
transport, telecommunication, banking and other financial services.
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Although the agriculture sector still occupies a dominant

position in the economy as a source of employment, it contributed
only 16.5 percent to the GDP in 2006. In this year, the contributions of
the industrial sector which provided 25 percent of the total
employment to the GDP was 27 percent while the services sector
which provided 45 percent of the total employment contributed 56.5
percent to the GDP. This indicates the productivity differentials of the
sectors.
Before 1977, the public sector remained as the main source of
employment opportunities. The importance of the public sector
declined gradually since 1991. In 1991, the public sector provided
employment for 26 percent of the total employed labour force. This
share has reduced to 13.6 percent in 2003 while that of the private
sector increased from 39.5 percent in 1991 to 43.9 in 2003 keeping in
line with the private sector led economic development strategy of
the country. This was mainly due to the expansion of the private
sector industries and services and the privatisation of state enterprises.

Distributional impact of growth: poverty and inequality

Changes in Poverty Incidence
Sri Lanka has achieved high indicators of health and
education which are almost on par with developed countries.
However, despite these improvements of non-income dimensions of
welfare, poverty remains a challenge for the country as 23 percent of
its population still lives in poverty.

Table 5: Poverty Trends in Sri Lanka (Head Count Index)

Year National Rural Urban Estate

1973 27.6 31.6 22.7 8.1
1979 22.7 23.8 24.4 8.9
1983 21.9 23.2 19.6 13.8
1985/86 30.92 35.55 18.38 20.53
1990/91 26.1 29.4 16.3 20.5
1995/96 28.8 30.9 14.0 38.4
2002 22.7 24.7 7.9 30.0
Sources: Data for 1973, 1979 and 1983 are obtained from Anand and Harris
(1985), 1985/86 from Gunewardana (2000) and 2002 from World Bank (2007).

In Sri Lanka, since independence, poverty as measured by the

Head Count Index showed a modest decline (Table 5). In 1973, 27.6
percent of the population lived in poverty. This percentage declined
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to 22.7 percent in 1979 and further to 21.9 percent in 1980/81. Since

then, the poverty index recorded an increase to 31 percent in
1985/86 and again declined by 43 percent to 26 percent in 1990/91.
Since 1990/91 the percentage of population that lives in poverty has
showed an increase by almost 3 percentage points to 1995/96 and
then fell by more than 6 percentage points from 1995/96 to 2002.
During this period, poverty reduction was not equal between
urban and rural sectors. The urban sector displayed a steady decline
of poverty from 23 percent in 1973 to 8 percent in 2002. Though not
rapid as the decline in urban poverty, rural poverty also has declined
from 31.6 percent in 1973 to 24.7 percent in 2002. In contrast to the
trends observed in urban and rural sectors, poverty in the estate
sector has increased by 50 percent during the last decade. The
percentage of the poor lives in the estate sector in 2002 was 30
percent.
Sharp differences in poverty incidence across sectors are
mirrored by regional patterns (World Bank, 2007). In 2002, the poverty
incidence in the Western Province which has the highest per capita
income and where most of the economic activities are concentrated
was only 11 percent while 35 percent of the population in the poorest
provinces of Sabaragamuwa and Uva were poor.
Poverty Incidence varies even more between districts. In 2002,
Colombo has the lowest poverty (6 percent) followed by Gampaha
(11 percent) and Kalutara (20 percent) while 37 percent of the
population in Badulla and Monaragala in Uva province live in
poverty. Except in the districts of Colombo, Gampaha and Kalutara,
poverty incidence in all the other districts for which data are
available are at below the national poverty level of 22.7 percent. This
indicates that bulk of the reduction in poverty during last three
decades was taken place in and around the capital of the country.

Income Distribution
Average income per month per spending unit in Sri Lanka has
increased from Rs. 311 in 1973 to Rs 1652 in 1978/79. Since
liberalisation, the average income has shown a rapid increase. It
increased from Rs. 2726 in 1986/89 to Rs. 12804 in 2002. During the
period, incomes of all income groups have increased considerably.
Though all the income groups enjoyed the increase in income,
increases in income has not evenly distributed among all income
groups.
Since independence, income distribution in Sri Lanka, as
measured by the Gini coefficient, moved towards lower inequality.
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However, since 1977, income inequality has worsened as the Gini

coefficient for spending units increasing from 0.35 in 1973 to 0.46 in
2003/04 (Table 6). As given in the table, since 1977, the share of
income of the poorest 40 percent of the spending units progressively
fell from 16.06 percent in 1978/79 to 14.14 percent in 1986/87 and
further to 14.8 percent in 1990/91 and 13.9 percent in 2003/04. During
this period, the share of income of spending units in the richest 20
percent increased from 49.87 percent in 1978/79 to 51.96 in 1981/82
and to 51.3 percent in 1990/91 and 52.8 percent in 2003/04.

Table 6: Income Distribution

Item 1973 1978/79 1986/87 1990/91 2002
Average income per 311 1652 2728 3549 12,804
month, rupees per
spending unit
Mean income and - 183.5 514.75 1566.50 4446.50
income share of 19.29 16.06 14.14 14.8 13.9
lowest 4 deciles of
spending units (Rs.)
Mean income (Rs.) - 1638.50 5155.50 9136.00 33617.50
and income share of 42.95 49.87 52.30 51.3 52.8
highest 2 deciles of
spending units
Sources: Household Income and Expenditure Surveys-1990/91, 1995/96 and
2002, Socio-Economic surveys conducted by Department of Census and
Statistics since 1969/70.

Table 7: Gini Coefficient by Sector

Gini 1969/70 1980/81 1985/86 1990/91 1995/96 2002
Coefficient
All 0.34 0.43 0.46 0.47 0.48 0.47
Urban 0.40 0.44 0.48 0.62 0.46 0.48
Rural 0.31 0.38 0.43 0.42 0.48 0.45
Estate - 0.27 0.31 0.25 0.44 0.34
Source: Department of Census and Statistics, Various Years.

The data clearly shows that the disparities between the rich
and the poor have remained stagnant throughout the period from
1990/91 to 2003/04. The richest 20 percent has received more than 50
percent of the total household income in all three surveys during the
period while the share of the poorest 40 percent has remained
around 14 percent. However, average income per spending unit
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shows that all the income groups have benefited the increase in
income though they were not even across income groups. The
distribution of income suggests that most of the increased income has
accumulated in the hands of upper income deciles.
The Gini coefficient for the sectors shows that the distribution of
income is also uneven among sectors (Table 7). Urban sector
displayed the highest inequality while the lowest inequality can be
seen in the estate sector where socio-economic indicators are more
or less homogenous.
The increases in incomes of all income groups and changes in
income distribution increased after 1977 could be considered as the
results of wide range of economic activities generated by the
liberalised economic policies. However, it would be misleading to
attribute it entirely to trade liberalisation as the country has
undergone dramatic changes in the entire economic system over the
past two decades.

Conclusions
This paper examined whether the trade liberalisation policies
introduced in 1977 has produced desirable outcomes in reducing
poverty in Sri Lanka. Economic growth has increased rapidly just after
the introduction of liberalised policies. However, the economy was
not able to continue these high growth rates for a long period.
However, the economy was able to grow at an average annual rate
of 5 percent during the past decade.
With the introduction of liberalisation policies, the structure of
the economy underwent a significant transformation. The economy
experienced a structural transformation from an agricultural based
economy to a modern manufacturing and services sector based
economy. The manufacturing sector became a growth oriented
sector increasing its share in overall production, total employment
and export earnings of the economy.
The liberalised trade policies resulted large increases in the
volumes of exports and imports. Further, the composition of exports
and imports has changed to meet the needs of the diversified
economy.
In line with the changing structure of the economy, the labour
market also underwent a transformation. Since 1977, the dominant
role played by the agriculture sector in providing employment
declined while that of industrial and service sectors recorded
significant increases.

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National poverty in Sri Lanka has declined significantly during

the past three decades. However, there are large sectoral and
regional variations in declining poverty. Urban poverty has declined
largely while rural poverty declined at a slower rate and estate
poverty has increased. Regional variations in reduction of poverty
levels show that bulk of the reduction in poverty has been taken
place in and around the capital of the country.
During the period, incomes of all income groups have
increased considerably. However, these increases in income were
not evenly distributed among all income groups. Also, inequality
between urban and rural areas has been also widening with residents
in rural remote areas being left out of benefit from economic growth.
It seems that the dividends of reforms have by passed the poor while
the rich amassed the benefits.

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