The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Growing diversification of industrial exports
The dominance of garment exports was a cause of anxiety. The question was asked as to whether we had exchanged the vulnerability of the economy owing to the dependence on primary commodities, especially tea, for a new and even more serious vulnerability owing to the dominance of garments in our exports. Export data reveal that there has been a growing diversification in industrial exports in recent years.

This diversification is also a part of the overall diversification of the country's exports that has been going on for the past 25 years, from a predominance of plantation crop exports to a lesser dependence on agricultural exports.

Agricultural exports dominated the export structure from the time of independence and till the 1980s, when a significant diversification of exports occurred. By 1990 agricultural exports had declined to about 35 per cent of exports. By 2000 it had declined further to 21 per cent. And in 2004 it was only 19 per cent. In fact agricultural and industrial exports have exchanged their positions of importance over these years. In 1977 agricultural exports accounted for 79 per cent of exports. In 2004, agricultural exports had declined to only 19 per cent. Conversely, Industrial exports that were only 14 per cent in 1977 increased to 78 per cent of exports.

Such a diversification was a healthy development for several reasons. The dependence on low value primary agricultural exports whose prices tended to fluctuate created serious instabilities. The dependence on these agricultural exports was the reason for the serious deterioration in terms of trade in the 1960's and 1970's. Industrial exports brought in more foreign exchange earnings and employment opportunities. Much of the economic growth in the post 1978 era could be attributed to export-led growth based on light industrial exports. However, there was anxiety and criticism that industrial exports were dominated by a single export-- garments.

Fortunately, industrial exports have diversified over this period and for the first time garments contributed less than 50 per cent of total exports in 2004. Other industrial exports accounted for 27 per cent of total industrial exports. These other industrial exports are a wide range of products. However, garments still dominate both industrial exports and total exports. They constituted 53 per cent of total exports. The rest of industrial exports are a diversified portfolio consisting of rubber-based products (3.5 per cent), leather and footwear (4.4 per cent), ceramics (1.1 per cent), and machinery and equipment (4.4 per cent). The exports in the first five months of this year have confirmed this diversified portfolio.

These structural changes in the export structure are of importance in ensuring a greater stability of export incomes. This is especially so as garments are an export whose competitiveness could be quickly eroded by other countries. Fortunately even where this is concerned the diversification within garments to a greater share in up-market clothing has made these exports more reliable. Sri Lanka appears to enjoy a good reputation and have a comparative advantage in these garments.

This trend in diversification should gain momentum for the export-led strategy to ensure steady and sustainable growth in the economy. The further diversification of industrial exports is dependent on several factors. Increased foreign direct investment is one such factor. A satisfactory law and order situation, political stability, predictability of policies, improvements in infrastructure, lower costs of production and availability of skilled personnel, are among the pre-requisites.

Although industrial diversification cannot be superimposed, either by the government or private sector organisations, a study of potential areas of developing comparative advantage should be a mission of the government, as well as trade chambers. Market surveys abroad and market links with marketing chains would be part of that strategy.

Once industries with export potential are identified, they could be given support in their initial years. What we urge is a policy thrust that would encourage further industrial diversification. Much of future economic growth would depend on the successful diversification of exports.

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