Industrialization Experience in Sri Lanka

Abstract On the whole, this paper gives an analysis on the impact of globalization on Sri Lanka and further examines the industrialization experience in Sri Lanka following the market-oriented policy transformation instigated in 1977, while emphasizing on the establishment of trade Policies including Foreign-Direct-Investments (FDI). Moreover, this paper recognizes that policy alterations have positively played a key role in converting a primary-product-exporting economy to an economy which manufactures & exports value-added goods.

The paper discusses different phases of Government policy towards international trade & private investment in Sri Lanka since the independence in 1948, with the objective of emphasizing the positive impact of globalization on the Textile and Apparel (T&A) industry in Sri Lanka while acknowledging negative impacts and provide strategic alternatives to endure the height of globalization in the post-MFA/ATC era. Furthermore, the paper acknowledges the dependence of the industry on trade flows instigated by globalization, through the identification of 46 per cent dominance of T&A exports in total exports in 2009.

Capital flows and technological transfers provide another linkage between the said industry and globalization. 1. 0 Introduction As a member of the international trading community, Sri Lanka has been on the focal point of Globalization from the early days. Historical evidence suggests that, in the 15th century Arab traders made Colombo, the hub of their trading activities in the Indian Ocean. A century later, the Portuguese secured Colombo (1505-1658) and improved its significance as the most popular emporium in the East.

Consequently, the Dutch came in to reign and further enhancements of Colombo’s significance were seen during the period (1658-1796). However, Colombo received the greatest impulsion for its rise to prominence in the Indian Ocean region under the British (1815-1948) with the extension of their dominion over the whole island. (De Silva, 2005, p. 1-60) At the time Sri Lanka gained independence from the British in 1948, Sri Lanka’s development indicators contrasted positively with those of other South Asian countries and most of the East and South-East Asian countries.

According to UNCTAD (2004, p. 3) Sri Lanka’s economic performance outshined that in several of today’s dynamic economies of East Asia till 1965. The World Bank (1992, 1995a) confirms this by stating that even as late as 1965; the per capita income of Sri Lanka was higher than those of Indonesia, the Republic of Korea & Thailand. Consequently, Sri Lanka’s economic performance lagged behind while the East Asian economies picked up the pace fuelled mainly by high growth in private domestic investments and FDIs. . 0 Impact of Globalization in Sri Lanka – Evolution of Government Policy on Trade Two discrete phases of Government policy towards International Trade & private investment can be recognized since Sri Lanka gained independence from the British in 1948. These explain much of the sluggish growth and low structural transformation in the country. 2. 1 First phase – Import Substitution As discussed by Athukorala and Jayasuriya (2004, p. ), the ‘Balance of Payment’ dilemma and the change in the political leadership in the country, escorted to the implementation of a state directed import substitution approach after Sri Lanka gained independence from the British in 1948. According to UNCTAD (2004, p. 6), the public sector captivated and controlled an increasing share of the country’s resources during the first phase from 1948 to 1977. Investment approvals and licensing and related formalities were rigid and were common.

The resulting business environment was very much unfavorable for private investments including FDI. By one approximation carried out by the World Bank (1995b, p. 4), as much as 70% of Sri Lanka’s economy was in the public domain in 1973. 2. 2. Second phase – Trade Liberalization The second phase of Government policy was distinctively marked by liberalization of trade. “The poor economic performance of 1971–1977 prompted a policy reorientation in 1977 to the pursuit of private-sector-led, export-oriented development, including a greater role for FDI. (UNCTAD, 2004, p. 7) Athukorala and Jayasuriya (2004, p. 5) states that the government of Sri Lanka back then, determined on a broad trade liberalization process in 1977 as a rejoinder to the depressing economic result of an inward-looking policy. Furthermore, by doing so Sri Lanka became the foremost country to establish a government policy of trade liberalization in the South Asian region as well. At the outset, a number of stern controls were eliminated for all investors. According to International Monetary Fund (1996, p. 0-45) these included reduction of tariff and non-tariff trade barriers, amalgamation of the exchange rate, modification of administered prices, restructuring of export taxes, liberalization of interest rates and diminished restrictions on pricing and investment by the private sector. In addition, during this phase, Sri Lanka experienced drastic diminution of restrictions on foreign investment with new trade incentives for export-oriented foreign investments under an attractive Free Trade Zone (FTZ) which is also referred to as an Export Processing Zone (EPZ) According to Kelegama (2002, p. 488) private investments responded well to these reforms, increasing by an average of 13% a year within four years. 3. 0 Textile & Apparel Industry 3. 1 Textile & Apparel Industry on a Global Setting ESCWA (2002, p. 1) defines Globalization as a multifaceted process identified as the increasing integration of economies around the world through trade and financial flows and, transfer of technology. Textile and Apparel Industry (T) stands out among many industries influenced by Globalization, and moreover the industry is often referred to as a characteristically global and footloose industry.

Dicken (1998, p. 283) notes that the T industry is in fact the foremost manufacturing industry to take on a global aspect and the most geographically dispersed of all industries across both developed and developing countries. As discussed by Adhikari & Weeratunge (2006, p. 109-120), T production is a facilitator for development for a country, and often is the typical starter industry for countries engaged in export-oriented industrialization due to its low fixed costs and prominence on labor-intensive manufacturing. As discussed by Knutsen (2003, p. 25), manufacture of textile and apparel moved from Europe and the USA to Japan in the 1950s; to South Korea, Taiwan and Hong Kong, in the 1960s; and to China, South East Asia, and Sri Lanka in the early 1980s. Moreover, according to the WTO (2009, p. 43) T industry accounts for a 4. 6 per cent share in global merchandise exports. 3. 2 Textile & Apparel Industry in Sri Lanka 3. 2. 1 Protectionism – Pre 1977 The T industry in Sri Lanka was instigated in 1950’s when the government back then took steps to promote the industry as an import substitution industry. At this stage Sri Lanka imported raw material and produced yarn, raw fabrics and finished fabrics mainly in a few large scale textile mills established under government ownership. The textiles produced in these industries were fully utilized in the domestic market. ” (Dheerasinghe, 2003, p. 37-38) Domestic T industry was exceedingly protected by the government by restricting the imports of finished products. Importation of raw material too was restricted by the government.

Accordingly, locally manufactured products were limited to a few standard items. 3. 2. 2 Free Trade – Post 1977 Economic liberalization policies in 1977 cemented the way for local T industry to enter the world market. According to Dheerasinghe (2003, p. 38), the pro-market economic setting shaped by liberalization and encouraging measures i. e. subsidy and duty rebate schemes, duty free import of raw material/machinery, lesser taxes and tax holidays as well as the implementation of the first EPZ in 1978 gave confidence to export led industries.

The introduction of the Multi-Fibre Arrangement (MFA) which provided opportunities to enter the world markets under the quota system was a key motive for the rapid development in the T industry in Sri Lanka. According to the Central Bank of Sri Lanka (2009, p. 103) as a percentage of composition of exports in the country, the T industry has reached 46 per cent in 2009 from 2 per cent in 1977. (Source: Central Bank of Sri Lanka – Annual report 2009, p. 103) Progressively, T sector has overtaken the other exports and has remained as the key contributor in the growth of exports in Sri Lanka.

The Central Bank of Sri Lanka (2009, p. 104) notes that the earnings from T exports, which is the main category of industrial exports in the country, stood at USD 3,274 million in 2009, reflecting a decline of 5. 6 per cent compared to 2008. T exports, which performed well during the first quarter of 2009, were affected by the global recession during the second quarter, as was expected by the industry. Nonetheless, Sri Lanka’s T sector was the least affected by the Global recession in 2009. (Source: Central Bank of Sri Lanka – Annual report 2009, p. 96)