The Government has focused on the need to improve industries to boost growth, increase jobs and facilitate the recovery of the economy from COVID-19. However, what must be remembered is that insular policies will only get Sri Lanka so far, and it is important to encourage companies to be export-oriented and connect with global value chains.
It is likely that COVID-19 will reword some of these value chains, and Sri Lanka has to increase its trade facilitation measures to tap into new opportunities while adapting itself to be more competitive.
In such a situation, the implementation of a comprehensive national industrial policy with emphasis on improving competitiveness and ensuring the continuity of national policies are essential for Sri Lanka to increase its growth potential.
With the successful implementation of industrial policy measures at the inception of the development process, countries such as Hong Kong, China, South Korea, and Singapore have rapidly transformed their economies to generate higher gross value addition in the industry sector and moved towards an advanced level of development.
However, industrial policy experiments carried out by successive governments in Sri Lanka fell short of producing positive and sustained outcomes, partly due to the abandonment of such efforts before the benefits were realised. Industrial activities in Sri Lanka are dominated by four subsectors: construction, mining and quarrying, manufacture of food beverages and tobacco, and manufacture of textiles, wearing apparel and leather products. However, a large amount of such manufactured goods is intended for the domestic market, except for textiles and garments and a few consumer and intermediate goods.
Although some Sri Lankan manufacturers in industries such as tea, rubber and apparels were able to achieve global excellence standards, Sri Lanka still lags behind its Asian peers due to subdued performance in merchandise exports. The low degree of diversification in industrial production and industrial exports highlights the sluggish progress in the manufacturing sector compared to success stories from around the world. Industries such as the capital goods sector largely remains untouched.
However, as Sri Lanka tends to gradually lose the low-cost labour advantage to its competitors, the country needs to diversify its industrial exports from labour intensive products to more value added and technology driven products, possibly niche product categories, in order to connect with GVCs. These highlight the need to develop a coherent industrial development strategy, coupled with a trade regime that is capable of facilitating businesses and promoting investment opportunities and factor market reforms to cater to the needs of identified industries.
Many countries, which own a well-developed industry sector, began by identifying priority industries within their industrial policy agenda by considering factors such as high value addition, potential for increasing export revenues, employment generation, and minimising income disparities in the country.
These issues need to be resolved in a national industrial policy, and it needs to be formulated with due consultation among all stakeholders to ensure consistency and continuity of the industry development agenda, irrespective of changes on the political front, as such policies are likely to have long gestation periods. Without such holistic approaches manufacturing everything from “brooms to medicine” as encouraged by President Gotabaya Rajapaksa will not resolve Sri Lanka’s economic challenges, especially in view of its serious debt dynamics. The way forward has to be with exports and investments.