Untitled Document

The Sunday Times Economic Analysis By the Economist

The alarming decline in industry
The industrial performance in the past one and a half years is a matter of serious concern for the country. In 2001 industrial exports declined by 13.4 per cent reversing the growth trend of previous years. In the first half of this year industrial exports declined by as much as 20 per cent, compared with the first six months of last year. Since last year was a bad year for industrial exports, this comparison means that we are on a continuing slide. Industrial production has declined by around 5 per cent mainly owing to this export downturn.

All significant categories of industrial exports declined. The country's leading export, garments, which constitutes over two thirds of our industrial exports, and over one half of our total exports, has been mainly responsible for this. It is however noteworthy that in the first half of this year all our industrial exports declined. Although garment exports have been mainly responsible for the decline in industrial exports, in fact all industrial exports have fared badly.

While garments exports declined by 22 per cent, leather and rubber goods exports decreased by 26.5 per cent and the export of food and beverages items, including tobacco, decreased by 27 per cent and other industrial exports decreased by nearly 7 per cent. It was the decrease in all these exports, though primarily garment exports, that resulted in the first year's industrial export earnings falling by as much as 20 per cent in the first half of this year. The continuing slide in industrial exports is a very serious concern as manufacturing contributes 15 per cent to the country's national income.

No doubt the impact of the global recession continues to affect our industrial exports. The economic recovery in the US and Western Europe does not appear to have reached our shores as yet. There has been no discernible improvement in demand for our export items. What came about due to the global recession continues even after the global recovery. This raises questions regarding the competitiveness of our industries in world markets, as well as the structure of our industrial sector.

The global recession may have masked the possibility of our industrial cost structures having increased to an extent that has made our exports lose their competitiveness. This is especially so after the energy crisis that has raised production costs. Other problems besides high energy costs, are inadequate infrastructure, dumping, lack of regular supplies of raw materials, high interest costs and corruption of customs, among others.Sri Lanka may be losing its competitive edge especially with respect to low cost labour intensive manufactures. Countries like Vietnam, China and Bangladesh have lower cost structures owing to both lower wage rates and higher levels of productivity of their labour. Their higher labour productivity would also mean lower unit costs for industrial exports. Considerable improvements in infrastructure and a better investment climate to attract investors to establish higher value added industry is indeed necessary. The development of a higher skilled labour force is also needed to move upwards in the technological ladder of industry. These are not easy preconditions to meet when it appears our infrastructure is inadequate for even simpler industries. Yet we have to look to the future possibilities for developing a more skill-based industrial structure.

We cannot merely hope that the global recovery would enable our industrial exports to bounce back. Both macro economic conditions and the micro conditions must be improved to provide a climate for competitive industrial development. Overall management of the economy, especially fiscal management, has an important bearing on factors such as inflation and the rate of interest. Equally, adequate power at reasonable rates is vital for the industrial sector. Some industries that are not viable would have to be restructured or closed down. There is considerable amount of reforms that are necessary with respect to labour laws.A continuing downturn in industrial exports means a serious dent in our export earnings and a severe strain on our trade balance.

Unlike in the past Industrial exports account for the majority of our export earnings. A dip in our industrial exports means a significant dip in our export earnings. In a country that is also highly dependent on imports this is very serious. It will also have an adverse impact on other sectors especially the financial sector and other services related to trade. Since a large labour force is employed in manufacturing garments, in particular, the industrial recession is likely to lead to retrenchment and reduce future labour absorption. A comprehensive strategy is needed for the resuscitation of industry. Let us not be solely dependent on global conditions.

Back to Columns