Liberalization and industrial transformation: Lessons from the Sri Lankan experience

Economic Development and Cultural Change

Volumn 48, Issue 3, 2000, Pages 543-572

  Athukorala, Prema Chandra ^a   Rajapatirana, Sarath ^b  

^a AUSTRALIAN NATIONAL UNIVERSITY   (Australia)

^b AMERICAN ENTERPRISE INSTITUTE   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

INDUSTRIAL POLICY; INDUSTRIALIZATION; LIBERALIZATION; PROTECTIONISM; TRADE POLICY;

SRI LANKA;

EID: 0034083077     PISSN: 00130079     EISSN: None     Source Type: Journal    
DOI: 10.1086/452610     Document Type: Article

References (59)

1. See, e.g., Jagdish Bhagwati, "Free Trade: Old and New Challenges," Economic Journal 104 (1994): 231-46; Anne O. Krueger, "Trade Policy and Economic Development: How We Learn," American Economic Review 87 (1997): 1-22; I. M. D. Little, "Trade and Industrialization Revisited," Pakistan Development Review 33 (1994): 359-81.
2. See, e.g., Jagdish Bhagwati, "Free Trade: Old and New Challenges," Economic Journal 104 (1994): 231-46; Anne O. Krueger, "Trade Policy and Economic Development: How We Learn," American Economic Review 87 (1997): 1-22; I. M. D. Little, "Trade and Industrialization Revisited," Pakistan Development Review 33 (1994): 359-81.
3. See, e.g., Jagdish Bhagwati, "Free Trade: Old and New Challenges," Economic Journal 104 (1994): 231-46; Anne O. Krueger, "Trade Policy and Economic Development: How We Learn," American Economic Review 87 (1997): 1-22; I. M. D. Little, "Trade and Industrialization Revisited," Pakistan Development Review 33 (1994): 359-81.
4. Alice H. Amsden, "Editorial: Bringing Production Back In: Understanding Government's Economic Role in Late Industrialization," World Development 25 (1997): 469-80; Gerald K. Helleiner, "Introduction," in Trade Policy and Industrialization in Turbulent Times, ed. Gerald K. Helleiner (London: Routledge, 1994); Dani Rodrik, "Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives 6 (1992): 87-105.
5. Alice H. Amsden, "Editorial: Bringing Production Back In: Understanding Government's Economic Role in Late Industrialization," World Development 25 (1997): 469-80; Gerald K. Helleiner, "Introduction," in Trade Policy and Industrialization in Turbulent Times, ed. Gerald K. Helleiner (London: Routledge, 1994); Dani Rodrik, "Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives 6 (1992): 87-105.
6. Alice H. Amsden, "Editorial: Bringing Production Back In: Understanding Government's Economic Role in Late Industrialization," World Development 25 (1997): 469-80; Gerald K. Helleiner, "Introduction," in Trade Policy and Industrialization in Turbulent Times, ed. Gerald K. Helleiner (London: Routledge, 1994); Dani Rodrik, "Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives 6 (1992): 87-105.
7. John Williamson, "Sri Lanka's Search for the Right Economic Policies" (keynote address delivered at the conference "Independent Sri Lanka: Economic Development [1948-1998] and Prospects," Kalutara, Sri Lanka, March 1998).
8. Sri Lanka's postindependence policy history has been well documented. See, e.g., Prema-chandra Athukorala and Sisira Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri Lanka, 1969-1990 (Washington D.C.: World Bank, 1994); Andrew G. Cuthbertson and Prema-chandra Athukorala, "Sri Lanka," in Liberalizing Foreign Trade: Indonesia, Pakistan, and Sri Lanka, ed. D. Papageorgiou, M. Michaely, and A. M. Choksi (Oxford: Blackwell, 1991), pp. 287-414; Deepak Lal and Sarath Rajapatirana, Impediments to Trade Liberalization in Sri Lanka, Thames Essays no. 51 (Aldershot: Gower, 1988); Sarath Rajapatirana, "Foreign Trade and Economic Development: Sri Lanka's Experience," World Development 16 (1989): 1143-57; and Donald R. Snodgrass, "The Economic Development of Sri Lanka: A Tale of Missed Opportunities," Discussion Paper no. 673 (Harvard Institute for International Development, Cambridge, Mass., 1998).
9. Sri Lanka's postindependence policy history has been well documented. See, e.g., Prema-chandra Athukorala and Sisira Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri Lanka, 1969-1990 (Washington D.C.: World Bank, 1994); Andrew G. Cuthbertson and Prema-chandra Athukorala, "Sri Lanka," in Liberalizing Foreign Trade: Indonesia, Pakistan, and Sri Lanka, ed. D. Papageorgiou, M. Michaely, and A. M. Choksi (Oxford: Blackwell, 1991), pp. 287-414; Deepak Lal and Sarath Rajapatirana, Impediments to Trade Liberalization in Sri Lanka, Thames Essays no. 51 (Aldershot: Gower, 1988); Sarath Rajapatirana, "Foreign Trade and Economic Development: Sri Lanka's Experience," World Development 16 (1989): 1143-57; and Donald R. Snodgrass, "The Economic Development of Sri Lanka: A Tale of Missed Opportunities," Discussion Paper no. 673 (Harvard Institute for International Development, Cambridge, Mass., 1998).
10. Sri Lanka's postindependence policy history has been well documented. See, e.g., Prema-chandra Athukorala and Sisira Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri Lanka, 1969-1990 (Washington D.C.: World Bank, 1994); Andrew G. Cuthbertson and Prema-chandra Athukorala, "Sri Lanka," in Liberalizing Foreign Trade: Indonesia, Pakistan, and Sri Lanka, ed. D. Papageorgiou, M. Michaely, and A. M. Choksi (Oxford: Blackwell, 1991), pp. 287-414; Deepak Lal and Sarath Rajapatirana, Impediments to Trade Liberalization in Sri Lanka, Thames Essays no. 51 (Aldershot: Gower, 1988); Sarath Rajapatirana, "Foreign Trade and Economic Development: Sri Lanka's Experience," World Development 16 (1989): 1143-57; and Donald R. Snodgrass, "The Economic Development of Sri Lanka: A Tale of Missed Opportunities," Discussion Paper no. 673 (Harvard Institute for International Development, Cambridge, Mass., 1998).
11. Sri Lanka's postindependence policy history has been well documented. See, e.g., Prema-chandra Athukorala and Sisira Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri Lanka, 1969-1990 (Washington D.C.: World Bank, 1994); Andrew G. Cuthbertson and Prema-chandra Athukorala, "Sri Lanka," in Liberalizing Foreign Trade: Indonesia, Pakistan, and Sri Lanka, ed. D. Papageorgiou, M. Michaely, and A. M. Choksi (Oxford: Blackwell, 1991), pp. 287-414; Deepak Lal and Sarath Rajapatirana, Impediments to Trade Liberalization in Sri Lanka, Thames Essays no. 51 (Aldershot: Gower, 1988); Sarath Rajapatirana, "Foreign Trade and Economic Development: Sri Lanka's Experience," World Development 16 (1989): 1143-57; and Donald R. Snodgrass, "The Economic Development of Sri Lanka: A Tale of Missed Opportunities," Discussion Paper no. 673 (Harvard Institute for International Development, Cambridge, Mass., 1998).
12. Sri Lanka's postindependence policy history has been well documented. See, e.g., Prema-chandra Athukorala and Sisira Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri Lanka, 1969-1990 (Washington D.C.: World Bank, 1994); Andrew G. Cuthbertson and Prema-chandra Athukorala, "Sri Lanka," in Liberalizing Foreign Trade: Indonesia, Pakistan, and Sri Lanka, ed. D. Papageorgiou, M. Michaely, and A. M. Choksi (Oxford: Blackwell, 1991), pp. 287-414; Deepak Lal and Sarath Rajapatirana, Impediments to Trade Liberalization in Sri Lanka, Thames Essays no. 51 (Aldershot: Gower, 1988); Sarath Rajapatirana, "Foreign Trade and Economic Development: Sri Lanka's Experience," World Development 16 (1989): 1143-57; and Donald R. Snodgrass, "The Economic Development of Sri Lanka: A Tale of Missed Opportunities," Discussion Paper no. 673 (Harvard Institute for International Development, Cambridge, Mass., 1998).
13. Anne O. Krueger, Economic Policy Reform in Developing Countries (Oxford: Blackwell, 1992); Henry J. Bruton, "A Reconsideration of Import Substitution," Journal of Economic Literature 36 (1998): 903-36.
14. Anne O. Krueger, Economic Policy Reform in Developing Countries (Oxford: Blackwell, 1992); Henry J. Bruton, "A Reconsideration of Import Substitution," Journal of Economic Literature 36 (1998): 903-36.
15. Williamson.
16. This was a loose coalition of the Sri Lanka Freedom Party that ruled the country during most of the closed-economy era and a number of other left-wing parties and a splinter group from the United National Party.
17. Sanjaya Lall, Kishore Sharma, Ganeshan Wignaraja, Sabrina Di Addano, and Gokhan Akinci, Building Sri Lankan Competitiveness: A Strategy for Manufactured Export Growth (Colombo: National Development Council, 1996).
18. According to the Population Census of 1981, the ethnic composition of the Sri Lankan population of 15 million (18.6 million in 1997) was as follows: Sinhalese, 74.0%, Ethnic (Sri Lankan) Tamils, 12.6%; Indian Tamils (descendants of plantation workers who were brought to the country during the colonial era and who are still confined predominantly to the plantation sector), 5.6%; Muslims, 7.1%; and other minor ethnic groups, 0.7%. For details on the ethnic conflict in Sri Lanka, see James Manor, ed., Sri Lanka in Change and Crisis (London: Croom Helm, 1984); Stanley J. Tambiah, Sri Lanka: Ethnic Fratricide and the Dismantling of Democracy (Chicago: University of Chicago Press, 1986); Rober Rofberg, ed., The Political, Economic, and Social Reconstruction of Sri Lanka (Cambridge, Mass.: Harvard Institute for International Development, 1999).
19. According to the Population Census of 1981, the ethnic composition of the Sri Lankan population of 15 million (18.6 million in 1997) was as follows: Sinhalese, 74.0%, Ethnic (Sri Lankan) Tamils, 12.6%; Indian Tamils (descendants of plantation workers who were brought to the country during the colonial era and who are still confined predominantly to the plantation sector), 5.6%; Muslims, 7.1%; and other minor ethnic groups, 0.7%. For details on the ethnic conflict in Sri Lanka, see James Manor, ed., Sri Lanka in Change and Crisis (London: Croom Helm, 1984); Stanley J. Tambiah, Sri Lanka: Ethnic Fratricide and the Dismantling of Democracy (Chicago: University of Chicago Press, 1986); Rober Rofberg, ed., The Political, Economic, and Social Reconstruction of Sri Lanka (Cambridge, Mass.: Harvard Institute for International Development, 1999).
20. According to the Population Census of 1981, the ethnic composition of the Sri Lankan population of 15 million (18.6 million in 1997) was as follows: Sinhalese, 74.0%, Ethnic (Sri Lankan) Tamils, 12.6%; Indian Tamils (descendants of plantation workers who were brought to the country during the colonial era and who are still confined predominantly to the plantation sector), 5.6%; Muslims, 7.1%; and other minor ethnic groups, 0.7%. For details on the ethnic conflict in Sri Lanka, see James Manor, ed., Sri Lanka in Change and Crisis (London: Croom Helm, 1984); Stanley J. Tambiah, Sri Lanka: Ethnic Fratricide and the Dismantling of Democracy (Chicago: University of Chicago Press, 1986); Rober Rofberg, ed., The Political, Economic, and Social Reconstruction of Sri Lanka (Cambridge, Mass.: Harvard Institute for International Development, 1999).
21. Saman Kelegama, "The Economic Dimensions of the North-East Conflict in Sri Lanka," in Rofberg, ed.
22. World Trade Organization (WTO), Sri Lanka Trade Policy Review (Geneva: WTO, 1995).
23. The available estimates of effective protection (Ministry of Finance and Planning, Report of the Presidential Commission on Tariffs and Trade, 1994 [Colombo: Ministry of Finance and Planning, 1995]) suffer from two serious data limitations. First, the data on manufacturing output and cost structure are based on a survey of non-FTZ firms conducted in 1981. This data base has become less and less representative of the manufacturing industry over the years with the rapid expansion of FTZ firms and the extension of FTZ incentives to all export-oriented firms in 1990. Second, the tariff rates used are the gazetted rates-the tariff rates published in government notifications. These naturally overstate the actual tariff incidence in the presence of various tariff exemptions. The overestimation bias arising from the use of gazetted rates is likely to have been exacerbated over time with the significant increase in the share of dutyexempted imports (table 2).
24. Prema-chandra Athukorala and Sarath Rajapatirana, Liberalization and Industrial Transformation: Sri Lanka in International Perspective (Oxford and London: Oxford University Press, 2000), chap. 6.
25. R. Weerakoon, The Evolution of Labor Law in Sri Lanka: Tea Plantations to Free Trade Zone (Colombo: Ceylon Federation of Labor, 1986).
26. Martin Rama, "Labor Market Flexibility in Sri Lanka," Policy Research Working Paper no. 1262 (World Bank, Washington, D.C., 1994).
27. Prema-chandra Athukorala, Labor Productivity in the Manufacturing Sector in Sri Lanka (Colombo: Department of National Planning, 1997).
28. The number of unions registered with the Commissioner of Labor declined from about 1,600 in 1977 to a historical low of 900 in 1987. The number of union members (excluding the plantation-sector workers) declined from over 1.8 million (about 30% of the nonplantation labor force) in the early 1980s to less than 1.2 million (20% of the nonplantation workforce) by the end of the decade (Rama).
29. Athukorala and Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri Lanka (n. 4 above), pp. 79-81.
30. A real exchange rate index was also constructed for total (export-oriented plus import competing) manufacturing. The time pattern of this index was remarkably similar to that for export-oriented manufacturing. The discussion in this section focuses only on the latter, given the emphasis on export promotion under the new policy orientation.
31. Prema-chandra Athukorala and Sisira Jayasuriya, Macroeconomic Policy and Export Competitiveness in Sri Lanka (Colombo: National Development Council of Sri Lanka, 1996).
32. Donald R. Snodgrass, Ceylon: An Export Economy in Transition (Homewood, 111.: Irwin, 1966).
33. Government of Sri Lanka, Department of Census and Statistics, Statistical Abstract, 1982 (Colombo: Government Publication Bureau, 1982). It is pertinent to note that describing the population as "rural" is somewhat misleading in the Sri Lankan context. Thanks to a well-developed (by developing country standards) and cheap transport system, large numbers of workers commute to paid employment in urban centers while living in rural areas.
34. There are no data to assess the impact of manufacturing growth on urbanization. The decennial population census due in the early 1990s was postponed indefinitely because of the continuing ethnic conflict in the country. 24. The correlation coefficient between two annual growth rates for the period 1986-96 is 0.67, compared with 0.35 for 1960-96.
35. Firm- or industry-level time series data for the econometric estimation of production functions are not available for Sri Lanka. Therefore, the estimates reported here are based on the index-number approach that provides for the use of data for discrete intervals. The particular index used is the Tornquist formulation (see note to table 4), which is perhaps the most intuitive formulation of productivity growth. The only assumption required to justify its use is that firms pursue profit maximization or cost minimization, and hence that market return is a good approximation to the marginal product of a factor. No assumption about the properties of the underlying production function is required: production parameters are taken to be subsumed in expenditure (input) and revenue (output). See Arnold C. Harberger, "Reflections on Economic Growth in Asia and the Pacific," Journal of Asian Economics 7 (1996): 365-92.
36. Graham Pyatt and Allan Roe, Social Accounting for Development Planning with Special Reference to Sri Lanka (Cambridge: Cambridge University Press, 1977).
37. United Nations Commission on Trade and Development (UNCTAD), Trade and Development Report, 1995 (Geneva: UNCTAD, 1995).
38. For a discussion on the methodology used in this decomposition, see V. Bulmer-Thomas, Input-Output Analysis in Developing Countries: Sources, Methods and Applications (Chichester: Wiley, 1982), chap. 5. The methodology captures both direct and indirect effects (operating through sectoral input linkages) of final demand expansion on output. Input-output tables (unpublished) are from the Ministry of Finance and Planning.
39. Edward Learner, "Paths of Development in the Three Factor n-Good General Equilibrium Model," Journal of Political Economy 95 (1987): 961-99.
40. Sirimal Abeyratna, "Trade Strategy and Industrialization" in Dilemmas in Development, ed. W. D. Lakshman (Colombo: Sri Lanka Association of Economists, 1996), pp. 341-85; Romesh Adhikari, "Policy Reforms and Export Performance in Sri Lanka: Some Observations," in Industrial and Trade Policy Reform in Developing Countries, ed. R. Adhikari, C. Kirkpatrick, and J. Weiss (Manchester: Manchester University Press, 1993), pp. 186-97; Ganeshan Wignaraja, Trade Liberalization in Sri Lanka: Exports, Technology and Industrial Policy (London: Macmillan, 1998); and Lall et al. (n. 8 above).
41. Sirimal Abeyratna, "Trade Strategy and Industrialization" in Dilemmas in Development, ed. W. D. Lakshman (Colombo: Sri Lanka Association of Economists, 1996), pp. 341-85; Romesh Adhikari, "Policy Reforms and Export Performance in Sri Lanka: Some Observations," in Industrial and Trade Policy Reform in Developing Countries, ed. R. Adhikari, C. Kirkpatrick, and J. Weiss (Manchester: Manchester University Press, 1993), pp. 186-97; Ganeshan Wignaraja, Trade Liberalization in Sri Lanka: Exports, Technology and Industrial Policy (London: Macmillan, 1998); and Lall et al. (n. 8 above).
42. Sirimal Abeyratna, "Trade Strategy and Industrialization" in Dilemmas in Development, ed. W. D. Lakshman (Colombo: Sri Lanka Association of Economists, 1996), pp. 341-85; Romesh Adhikari, "Policy Reforms and Export Performance in Sri Lanka: Some Observations," in Industrial and Trade Policy Reform in Developing Countries, ed. R. Adhikari, C. Kirkpatrick, and J. Weiss (Manchester: Manchester University Press, 1993), pp. 186-97; Ganeshan Wignaraja, Trade Liberalization in Sri Lanka: Exports, Technology and Industrial Policy (London: Macmillan, 1998); and Lall et al. (n. 8 above).
43. Donald B. Keesing and Sanjaya Lall, "Marketing of Manufactured Exports from Developing Countries: Learning Sequences and Public Support," in Helleiner, ed. (n. 2 above), pp. 176-93.
44. Saman Kelegama and F. Foley, "Impediments to Promoting Backward Linkages from the Garment Industry in Sri Lanka," World Development 27 (1999): 1445-60.
45. James Riedel, "Factor Proportions, Linkages, and the Open Developing Economy" Review of Economics and Statistics 57 (1976): 637-43; and Prema-chandra Athukorala and Bambang H. Santosa, "Gains from Indonesian Export Growth: Do Linkages Matter?" Bulletin of Indonesian Economic Studies 33 (1997): 73-95.
46. James Riedel, "Factor Proportions, Linkages, and the Open Developing Economy" Review of Economics and Statistics 57 (1976): 637-43; and Prema-chandra Athukorala and Bambang H. Santosa, "Gains from Indonesian Export Growth: Do Linkages Matter?" Bulletin of Indonesian Economic Studies 33 (1997): 73-95.
47. Prema-chandra Athukorala, "Foreign Direct Investment and Manufacturing for Export in a New Exporting Country: The Case of Sri Lanka," World Economy 18 (1995): 543-64.
48. See Gerald K. Helleiner, "Transnational Corporations and Direct Foreign Investment," in Handbook of Development Economics, ed. Hollis Chenery and T. N. Srinivasan (Amsterdam: North Holland, 1989), 2:1142-80 and the work cited therein.
49. As in Lall et al. (n. 8 above).
50. Prema-chandra Athukorala and Hal Hill, "Foreign Investment and Economic Development in Developing East Asian Economies," Asian-Pacific Economic Literature 12 (1999): 23-52.
51. Athukorala and Rajapatirana (n. 13 above), chap. 7.
52. Ibid.
53. D. Wheeler and Ashoka Mody, "International Investment Location Decisions: The Case of U.S. Firms," Journal of International Economics 33 (1992): 57-76.
54. The term "organized manufacturing" is used here to refer to firms established under the approval of the Ministry of Industries and other relevant government bodies. The Census of Industry, 1983 (conducted by the Department of Census and Statistics, Government of Sri Lanka, Colombo) enumerated total manufacturing employment in 1982 at 587,000. Based on this figure, the data reported in table 7 seem to cover about 35% of total manufacturing employment.
55. Cuthbertson and Athukorala (n. 4 above), chap. 5.
56. Kelegama and Foley (n. 32 above).
57. Based on records maintained by the Board of Investment, Sri Lanka.
58. Lall et al. (n. 8 above); Wignaraja (n. 30 above).
59. As Snodgrass (n. 4 above) points out, one can get a sense of what might have been the outcome if the electronics multinationals had stuck to Sri Lanka by looking at the experience in Malaysia, where, by the mid-1990s, electronics multinationals accounted for about 30% of total manufacturing employment of over 2 million.