Financial Times

Macro economic picture
Economic models - industrialisation for Lanka
Sunil Karunanayake, our regular columnist on corporate and macro-economic issue, discusses the changing nature of Sri Lanka's economy and its quest for industrialization.

Malaysia is a country similar to Sri Lanka in many ways. Today it has built up a sizeable industrial export base to be among the world's largest exporters of semi-conductors, disk drives, telecommunication apparatus, audio equipment etc from modest beginnings as an exporter of rubber, tin and palm oil and latterly, low technology exports like garments, footwear and toys. Malaysia's advancement to high skilled areas was rapid, like Singapore. Some of the other Asian countries transferred their production facilities to Malaysia. Import substitution and the resultant growth in domestic industries was another feature of the Malaysian economy.

HICOM (Heavy Industries Corporation of Malaysia) was set up by the government to diversify manufacturing activity and promote small and medium enterprises. This was further pursued with technological advancements and investment in research & development. While the Malaysian government also launched a gradual process of privatization and restructuring, HICOM was retained under state control.

Here we see a similarity in Sri Lanka where the government has taken a conscious decision not to privatize certain state-owned strategic enterprises. However success of this policy will depend on government ability to fund loss making institutions such as the CEB and Ceylon Petroleum Corporation.

In Sri Lanka technological advancements and research have been below expected levels. CISIR (latterly renamed ITI) was set up during the early post-independence era to support industry through research and innovations.

It seems that this objective is now given low priority over commercial motivations. While certain large private sector entities undertake research on a limited scale it is the government who can take a lead in this area due to its access to global resources. Sri Lankan universities over the years have produced a large number of competent scientists; unfortunately today most of them are serving other countries. Today quality is uppermost in the minds of consumers in developed markets, therefore research and technology must play a key role in getting such market linkages.

Sri Lanka under colonial rule was essentially a plantation economy concentrating on export of agricultural produce and importing all consumption needs. In the late 1940s to the 1950s this economy did build up sizeable foreign exchange reserves benefiting from higher prices for its exports. Immediately after independence there was a drive towards industrialization. Thereafter, the country experimented with excessive government control, import substitution etc which did not work well for industrial development. The economic liberalization of the 1980s saw the emergence of export-led industrialization, which was partly successful but failed to go beyond low technology industries.

Research indicates that increased reliance on market forces as well as government led protectionism has adversely affected industrial development in Sri Lanka. Korea is an ideal example where both have worked side by side.

The Central Bank's recent consumer finances survey has clearly shown the disproportionate concentration of economic activity in the western province which has even been called a separate nation of its own. On the downside this unmanageable concentration has created a series of social, environmental and logistical issues for the government.

The alarming increase of dependency on private tuition and the expenditure on these by households and the continuing mismatch of skills is another matter of concern. This phenomenon obviously does not speak well of our free education policy. Equally disturbing is that even the poorer sections of society are now spending a disproportionate share of their income on private tuition.

It has been said that the real strength of an economy depends not on the workforce but on skilled competencies in areas such as engineers, accountants, chemists and financial analysts. These are the exact areas where government intervention on policy formulation and implementation could dictate the fortunes of an economy.

Back to Business