**13 |** P a g e

The share of clothing in Sri Lankan manufactured exports has not changed dramatically since 1975 but its share in exports of South Asia has significantly declined.<sup>7</sup> Sri Lanka was in the 1980s a region’s powerhouse: its exports accounted for 20 percent of Indian subcontinent’s aggregate exports in 1984. This share at 12 percent in 2007 is still impressive.<sup>8</sup> Its share in Indian subcontinent’s garment’s exports was falling in 1985-89 from 20 percent to 12 percent.

From the vantage point of 1989, Sri Lanka’s profile looked very much like that of any other developing country moving quickly from unskilled labor-intensive activities to more capital- and skilled laborintensive products. But this pattern was reversed in the 1990s: Sri Lankan producers of garments outperformed local competitors with their share shooting back to 19 percent in 1999 and other manufacturing sectors in Sri Lanka: their share rose from 60 percent in 1989 to 70 percent in 2002 and then began falling again to 63 percent in 2008 and 2010.

Hence, while other countries expanded exports of other manufactures much faster, Sri Lanka has not fared that well vis-à-vis countries that began transitioning from garments in either 1980s or 1990s. Thailand’s performance has been particularly impressive. Until 1987, garments were one of the main levers of manufactured exports growth. Subsequently, the growth shifted to other manufactured goods with the share of garments falling from 25 percent in 1987 to 20 percent in 1991, 8 percent in 2001, and 3 percent in 2010. The scope of change as measured by the fall in the share of garments was also smaller than in India’s and other more developed comparators.

# **1.5. Textiles & Clothing (T&C) network: Spectacular success story**

The clothing sector took off in 1977 following a bold liberalization of Sri Lanka’s economy and owed its initial expansion to quota-hopping, triggered by Multi-Fiber Arrangement (MFA) quotas, by East Asian exporters looking for countries with unfilled MFA quotas.<sup>9</sup> Together with the government’s actions creating very favorable business climate to the apparel sector (Kelegama 2009), their entry provided an incentive to local entrepreneurs to start apparel manufacturing activities. Hence, Sri Lanka, like a number of other developing countries, could develop its own domestic capacities in large part thanks to protectionism imposed by the MFA but, above all, to the availability of local entrepreneurial talent released by liberal reforms.

The dismantling of MFA quotas-based arrangements on January 1, 2005 removed protectionist shield and fully exposed apparel producers to fierce competition from the most cost-efficient sources in the world raising concerns about the ability of Sri Lanka’s T&C network to survive in a new much more competitive post-MFA environment. The 2000s witnessed declining apparel prices due to overcapacity and China’s rapidly expanding exports. While a full assessment of recent developments in Sri Lanka’s T&C network is beyond the format of this section,<sup>10</sup> the analysis below, based almost exclusively on foreign trade data, seeks to assess Sri Lanka’s response to new conditions in global markets. It corroborates many observations and conclusions derived from sectoral studies pointing to a significant functional upgrading of Sri Lanka’s T&C network over the last decade through moving to higher-value activities and developing specialized niches in specific product categories.

> 7 Sri Lanka’s exports of garments in percent of aggregate garments exports of Bangladesh, India, Pakistan, and Sri Lanka.

> 8 Since no data are available for Bangladesh in 2008-10, no estimate is available for more recent years.

> 9: In addition to East Asian producers who were the majority of foreign investors, European investors came as well attracted by rising production costs in their home countries and the liberal trade and investment regime. See Kelegama and Wijayasiri 2004, p. 158), quoted in Acevedo and Robertson (2011b).

> 10 For an in-depth study, see the chapter on Sri Lanka in edited volume by Acevedo and Robertson (2011b) and a paper by Kelegama (2009).