Competitive industry policy for economic development in Sri Lanka: lessons from East Asia

Field: Economics, Econometrics and Finance (Social Sciences)

This study evaluates the current position of Sri Lanka in terms of Newly Industrialized Country (NIC) status, and explores the lessons which it can learn from the successful East Asian economies. Accordingly, it develops a policy strategy to enable Sri Lanka to converge into a more dynamic growth path leading towards the NIC status in the foreseeable future. This exercise was deemed useful because Sri Lanka had a superior position over many less developed countries (LDCs) including the East Asian NICs four decades ago, but having attempted various economic policy regimes over this period, it still remains a LDC. The study undertook a lengthy literature review of various economic policy regimes which can be used to achieve economic development. East Asian NICs are distinguished by their use of competitive industry policy (CIP)- a mixture of trade policy and industry policy. To examine the relation between CIP and economic development, two case studies were carried out on Taiwan and South Korea. While different processes and policy timing occurred in these countries, both emphasized the importance of outward orientation in their economic activities. Their experience is distinguished by the flexibility, coherence, and consistence of policy making with the state undertaking a role of a developmental state. The study considered the importance of identifying the key elements of their policy approach and the institutional context in which those elements have interacted when learning from their experience. Based on the literature review and the two country studies, the study developed an analytical framework highlighting a growth path to the NIC status. Under the framework, two types of economic policies were identified as useful for rapid growth: trade policy, and industry policy. It also emphasized two necessary conditions for its success: macroeconomic stability; and a developmental state. A statistical test was used to examine how the two types of policies have worked in Sri Lanka after the 1977 reforms. It was found that Sri Lanka has not used appropriate competitive industry policy measures as did by the East Asian NICs in the past. This was followed by a detailed analysis of Sri Lankas policy during the period after 1977. The study compared Sri Lankas post-1977 policy performance with those of South Korea and Taiwan in detail. The main thrust of the rapid industrialization and growth in these countries was identified as originating from the CIP strategy they used. Their superiority over other LDCs including Sri Lanka was attributed to the way they used policies such as sector targeting, directed credit, foreign investment, export processing zones, infrastructure development, human resource development, and R&D along with trade reforms. It was noted that Sri Lanka has shown some progress in implementing more or less similar policies, yet there is still an unfinished agenda for it to reach their level of achievement. The study identified the areas where Sri Lanka needs improvements to achieve the NIC status. First, it discussed a course of actions in order to create a developmental state and a stable macroeconomic environment. Secondly, it identified a few key industries to be targeted by using CIP measures such as credit allocation, FDI, R&D, and EPZs for rapid industrialization and growth. Other CIP measures such as human resource development, infrastructure development, trade and exchange rate policies can also be used to improve resource allocation in all sectors in the economy including the specific industries selected. It is assumed that the targeted industries would generate competitive advantage within a short period of time and, thereby, enhance economic growth though increased exports. While previous studies have examined the applicability of the East Asian model for other LDCs, few have attempted to assess its relevance to Sri Lanka. Besides filling a gap in the trade and industry policy literature, this study provides a comprehensive analysis of the development approach whereby Sri Lanka can become a NIC. It believes that given Sri Lanka�s superior position in terms of human development indicators compared to other LDCs, Sri Lanka is in a better position to become a NIC than many other LDCs in the foreseeable future.