This paper quantifies the contributions to poverty reduction
observed in Sri Lanka between 2002 and 2012/13. The
methods adopted for the analysis generate entire counterfactual
distributions to account for the contributions of
demographics, labor, and non-labor incomes in explaining
poverty reduction. The findings show that the most
important contributor to poverty reduction was growth in
labor income, stemming from an increase in the returns
to salaried nonfarm workers and higher returns to selfemployed
farm workers. Although some of this increase
in earnings may point to improvements in productivity,
defined as higher units of output per worker, some of it
may simply reflect increases in food and commodity prices,
which have increased the marginal revenue product of labor.
To the extent that there have been no increases in the volumes
being produced, the observed changes in poverty are
vulnerable to reversals if commodity prices were to decline
significantly. Finally, although private transfers (domestic
and foreign) helped to reduce poverty over the period, public
transfers were not as effective. In particular, the reduction
in the real value of transfers of the Samurdhi program
during 2002 to 2012/13 slowed down poverty reduction.