Dissecting the proposed National Policy for Industrial Development of Sri Lanka: Part 1

The transformation of the local industrial sector from what it is today to a robust, globally competitive and export focused one will no doubt be a daunting and challenging task. A strong commitment by the Government and a change of the direction of the NaPID to something similar to what is proposed above viz. “to design our industrial policies with a view to integrating our industrial sector with global industry” will enable the Government to play the lead role in securing the commitment of the organised local industrial community to accept this challenge

A draft National Policy for Industrial Development of Sri Lanka (NaPID) prepared by a Task Force (TF) led by the eminent Economist Prof. Sirimal Abeyratne, has been released recently. The policy prescriptions proposed in the draft paper are based, inter alia, on a comprehensive ‘Industry Diagnosis Report’ (IDR), which was also released simultaneously.

The important role that the industrial sector plays in promoting overall economic growth in a country needs no particular emphasis. The industrial sector, in addition to making its own contribution to economic growth, also triggers growth in the other two sectors. Agro processing industries encourage the increased production of raw materials resulting in additional investment in the agricultural sector. A significant percentage of projects in the services sector exists to meet the demands of the industrial sector.

For these and other reasons an Industrial Policy Statement by the Government deserves serious attention. The Policy Statement is an official pronouncement by the Government of the measures it proposes to take to promote sustainable industrial development and augment industrial production. A great majority of the industrial output in a country are tradeables. Thus, trade and industrial policies complement each other. Accordingly, policymakers strive to achieve a great degree of congruence between a country’s trade policies and its industrial policies. Together they have the potential of being and are often referred to as the twin engines that drive economic growth in a country. In fact, in countries such as Singapore trade and industry are under one ministry and consequently under the purview of one minister.

It is not my intention, nor is it practical, to engage in a clause by clause analysis of the draft policy document. What I wish to do is to comment on two matters. Firstly, on some critical conceptual issues, central to the designing of an Industrial Policy and how those critical issues have been dealt with by the Task Force (Sections 2 to 5). Secondly, I intend commenting on some specific provisions in the draft NaPID. (Section 6) 

1. FOR WHOM IS THE POLICY STATEMENT?

 A constructive approach to analysing the Policy Statement may be to firstly, answer the question, “To whom is the Policy Statement addressed?” An Industrial Policy Statement is addressed to the stakeholders of the sector. Who are these stakeholders? 

The two main stakeholders will obviously be the Government and the industrialists. The lead role for the Government will in this instance be played by the Ministry of Industries while a key supporting role will be played by the Ministry of Trade. The industrialists will be represented by their accredited Chambers and by leading industrialists with years of experience. Since the performance of the industrial sector will greatly influence the overall performance of the Economy, the informed Public too will be indirect stakeholders. 

What will both groups want to see in the report? 

While existing and potential industrialists, and officials who will be directly involved in implementing the policies and monitoring progress, will be interested in the detail, stakeholders who are looking at the big picture, will I believe, be more interested to find out the broad direction in which the sector is expected to grow, with the implementation of the new policies. In other words, what changes to the sector’s present characteristics, its composition, role and positioning would the framers of the new set of policies want to bring about via the implementation of the new policies? 

2. THE DIRECTION OF SRI LANKA’S INDUSTRIAL POLICY

The Task Force, prior to settling down to the actual task of drafting the set of policies, would have asked themselves, and perhaps some other key stakeholders, the question: What do we want the sector to be, after implementing the new policies? In what direction should the policies we frame drive the sector as a whole, given the critical contribution expected of the sector? What is the audacious goal we have for the sector? Can we propose a set of policies that is likely to lead the sector towards that goal? 

The Task Force appears to answer these questions in Section 2.1 of the Industry Diagnostic Report as follows;

“The Direction of Sri Lanka’s Industrial Policy. For Sri Lanka’s industrial policy to succeed in the 21st century, it must adjust to new national, regional and global contexts, including digitalisation and growing sustainability challenges. These are among the considerations that have informed the approach taken in the process of drafting this draft report for the National Policy for Industrial Development (NaPID), which is based on the objectives set out in Sri Lanka’s National Policy Framework for 2020-2025: ‘Vistas of Prosperity and Splendour,’ the Fourth Industrial Revolution, and the “Sustainable Development Goals” (SDGs). In addition, a key development that cannot be ignored in Sri Lanka’s NaPID is the impact of COVID-19.”

It appears that the Task Force have themselves identified the need for the industrial sector, not only to grow statistically in terms of the usual performance measuring ratios, but to grow in terms of playing a wider and decisive role dictated by national needs. The report in Section 2.1 of the IDR cites three sources whose priorities ought to set the direction of growth of the sector. These sources are:

(1) The ‘Vistas of Prosperity and Splendour’ document,

(2) The Sustainable Development Goals, and

(3) Changes required to conform to Green industry and Fourth Industrial Revolution.

 The draft report submits that the priorities identified in the first two documents mentioned above, are relevant and must be taken into account in drafting Sri Lanka’s Industrial Policy. The first named document was the election manifesto of the ruling party published prior to the last Presidential Election. The IDR on page 9 lists the priorities extracted from the ‘Vistas’ document. They are the following

i. Priority to national security 

ii. Friendly, non-aligned, foreign policy 

iii. An administration free from corruption 

iv. New Constitution that fulfils the people’s wishes

v. Productive citizenry and a vibrant human resource 

vi. People-centric economic development

vii. Technology-based society 

viii. New approach in national spatial system 

ix. Sustainable environmental management

x. Disciplined, law abiding and values

A table on page 10 of the report, attempts to set out the relevance of these priorities, to the Industrial sector. It lists out some specific Objectives and Strategies arising from those priorities, in columns one and two of the Table. Column three states in which way they are relevant to Sri Lanka’s Industrial Policy. 

Section 2.1.2 deals with the second source. Seventeen priorities or specific goals have been identified from the second source, viz the Sustainable Development Goals, which many readers may be familiar with. They include; 1. End poverty, 2. End hunger and achieve food security, 3. Ensure healthy lives, 4. Ensure inclusive and equitable quality education, etc.

Table 2 attempts to show the relevance of the SDG goals and its specific objectives, in guiding the formulation of the Industrial Policy.

With regard to the third source viz. the transition to Green Growth and the influence of the Fourth Industrial Revolution, Section 2.2 of the IDR, explains the importance of local industry complying with these new realities. The Industrial Policies proposed must result in an Industrial sector that is compliant of these requirements.

None of the above priorities are objectionable in themselves. But the relevant question is: Can any of them provide direction in the formulation of the Industrial Policy? The priorities identified from the first two documents are laudable objectives and no doubt of relevance in the context of the purposes for which they were initially prepared. However, their influence in directing the shape and content of the Industrial Policy appears to be remote. The industrial sector needs to comply with many of them. But can they be the directional force behind the Industrial Policy? 

The attempt to connect up the priorities identified in these documents to the approach in formulating the Industrial Policy and its contents, it is respectfully submitted, looks contrived and unreal. A review of the first two items in Table 1 alone, will make one realise how tenuous the link is between the priorities identified in the ‘Vistas’ document and the particular aspect selected from the Policy Statement. 

For instance, what is the likelihood or relevance of developing a strategic trade relationship with a country, for the purpose of maintaining a non-aligned foreign policy? How relevant will the removal of tariff charges to enhance technology imports be on maintaining people-centred economic development or vice versa?

The priorities identified in the ‘Vistas’ document are mostly good governance concerns and not directly related to the industrial sector. Recognising them individually or collectively as a directional force that will shape the future Industrial Policy needs a stretch of one’s imagination. Page 15 of the IDR states quite correctly that “Industrial Policy must direct social inclusion, environment protection and economic growth”. Industrialists must of course conform to them. One can even envisage prescribing compliance with same. On the other hand they may be the result of implementing a sound Industrial Policy. But they cannot be the driving force of the Industrial Policy. 

Further, the ‘Vistas’ document was the Election Manifesto of the ruling party, at the last Presidential Election. Adopting priorities arising from that document as one of the directional sources for shaping the Industrial Policy is a near certain way of ensuring that the document will be abrogated, if and when there is a change of the governing party. 

Similar comments apply to the choice of the Sustainable Development Goals, as a force, setting the direction of the Industrial Policy. There is no doubt that the growth in the industrial sector will contribute to the eradication of poverty, or in ensuring inclusive and equitable quality education. However, by what stretch of imagination could one imagine that those laudable goals will be focused upon when the Industrial Policy is being formulated? For the above reasons, it is submitted with respect, that the direction presumed to be provided (in fact the absence of it) by the two documents referred to above, are inappropriate.

2.1. How should one pick an alternate direction?

Setting the right policy direction for the sector, in today’s context, requires one to understand and appreciate the present state of the sector, viz its strengths and weaknesses, constraints to growth, and where the greatest potential for growth lies, given the trends that are clearly discernible both locally and globally. 

The industrial sector in Sri Lanka is inward looking and faced with the limitations of size and purchasing power of the local market. The strong lobby for protection that is becoming louder by the day is a definite sign of the sector being uncompetitive in the global market, both in terms of price and quality. Most local industries are at a low level of technology and the local value added is also at a low level. Wage increases during the last few years has significantly eroded the cost advantage the country enjoyed as a low-cost location. The direction in which the future growth of the sector be driven, and its end destination, should address most of the weaknesses identified above. 

As an alternative to the direction proposed in the NaPID, and given the present state of the sector as described above, in what direction should the proposed Industrial Policies drive the industrial sector? It should drive the sector to where the greatest potential for growth lies. 

In selecting the direction of growth, we should also not be constrained by any particular ideology. The sole criterion should be: “What is good for the sector and the country?” Several research studies have focused in identifying the factors that helped Singapore reach the pre-eminent position it occupies today. One among four factors that have been identified by several studies is a principle which has been consistently followed by all governments that ruled the country, since it broke away from the confederation. Viz National Policies were decided on the single criterion of “what was best for the country”. The Government was indifferent as to which ideology or “..ism” the particular policy subscribed. In the popular words of that great leader Deng Zia Peng, “It matters not whether the cat is black or white, as long as it catches the mice.”

A direction which will meet the aforementioned criteria, but one that is at the same time challenging, is to direct the Sri Lankan industrial sector, to integrate itself with the global industrial sector. Transforming the local industrial sector, from an inward looking, State led, import substituting posture to one that is outward looking, export oriented and globally competitive would be a formidable challenge. But it is a challenge lesser countries have taken on and achieved much progress. 

The transformation of the local industrial sector from what it is today to a robust, globally competitive and export focused one will no doubt be a daunting and challenging task. A strong commitment by the Government and a change of the direction of the NaPID to something similar to what is proposed above viz. “to design our industrial policies with a view to integrating our industrial sector with global industry,” will enable the Government to play the lead role in securing the commitment of the organised local industrial community to accept this challenge. 

If the above is accepted as the direction in which the industrial sector should grow, then the Industrial Policy document should contain policies that encourage and incentivise all stakeholders to move in that direction. For instance, the policies proposed must offer assistance to the sector players to overcome their present weaknesses, and to acquire new skills. They must become globally competitive. Our industrialists must be encouraged to follow the trends in the global industrial sector. They must be encouraged and assisted in visiting regular global fairs and exhibitions which focus on new technologies. 

The policies must promote ways and means of our industrialists establishing joint ventures and alliances with global players. We should install policies that will not leave room for developments in the global industrial sector, such as the phenomenal growth achieved by the Global Value Chain (GVC) business, to ever bypass Sri Lanka. The Global Value Chain business today is said to account for 70-80% of global trade. The current account surplus of $ 12.5 b achieved by Vietnam in 2019, is largely attributed to its success in attracting GVC business.

Sri Lanka has limited manufacturing capability unlike countries that can boast of advanced manufacturing capability. It has been found that in countries with limited manufacturing capability, technology transfer and the linking up with Global Value Chains takes place mostly via Foreign Direct Investment (FDIs). Thus, our policies must encourage FDIs and incentivise our industrialist to identify suitable Joint venture partners and approach them directly. Our embassies overseas should help them schedule one to one meetings with the decision makers of the target companies. 

It has been reported that disruptions and delays caused by COVID recently have highlighted the susceptibilities of GVC arrangements and how a delay in the supply of one component can force companies to breach supply contracts for delivery of the finished product. This may be the opportunity for Sri Lanka to enter the fray. It has also been pointed out that instead of marketing the country as a low wage and therefore a low-cost country we should strategise on marketing cleaner production, environment friendly processes, etc. for industries such as dyeing in the textile industry.

While there may be good reason to classify ‘small’ and ‘medium’ industries together as one category named ‘Small and Medium Scale Industries,’ there are also circumstances when the two categories ought to be treated differently. There are many medium scale industries which are owner operated, set up by professionals who have returned to the country after studying and working overseas for a number of years. They are generally well organised, profitable ventures producing quality goods serving local demand. There is much potential in encouraging these establishments to focus on the export markets. If 50 of these establishments can be identified for a start, and assisted to explore overseas markets there is good prospect of success in the short to medium term. The Policy Statement must initiate promotional activities of this type in collaboration with Banks and other promotional agencies.

A concerted effort must be made to equip all bankers with the tools that enable them to evaluate a request for finance from an industrial outfit, based on the risk inherent in the proposal, rather than on the security offered. Every investment project has its own risk. The purpose in evaluating a project is to assess that risk and to take steps, together with the project proponent, to lower that risk. Project evaluation is not an adversarial process. Engaging the potential borrower in a joint effort to reformulate the project to reduce the risk and make it more viable can be a rewarding experience. Security is not a substitute for viability. 

(To be continued.)

(The writer is former Secretary to the Ministry of Industrial Policy, Investment Promotion and Entrepreneurship Development and former Director/CEO of the National Development Bank of Sri Lanka.)