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increase in terms of the GDP during this period. To the contrary, they even fell in 2008-09 to 0.8 percent of the GDP.<sup>6</sup> Thus, one has to look for explanations in policies shaping investment climate as well as those affecting external interaction of businesses. While policies are addressed in Section 2 of this paper, we note below that Sri Lanka’s export basket has displayed rather remarkable stability over the last forty years with exports of garments growing at roughly the same rate as those of other manufactures and that the nature of Sri Lanka’s plugging into global markets for goods did not substantially change over the same period. Both suggest Sri Lanka’s exports basket having been frozen in time.

# **1.4. In defiance of global trends: Continued dominance of exports of garments**

Ever since the First Industrial Revolution, developing production of garments was the first step towards industrialization. Garments towered over other products in England’s exports in the early 19<sup>th</sup> century. They did so also more recently in exports of countries that graduated to the core of highly developed economies such as Japan or South Korea. But as countries move up the development ladder, their exports become more diversified with other manufactured exports expanding much faster. As a result, clothing as the share of manufactured exports would be falling. For instance, the share of exports of clothing in total exports of successful transition economies that joined the EU in 2004-07 peaked in 1993-2001 and then fell although exports continued but no longer limited to simple assembly of basic garments for exports (Javorcik and Kaminski 2006).

Although Sri Lanka’s exports of clothing in percent of manufactured exports peaked very early in 1984, their share in manufactured exports of 63 percent in 2010 has remained remarkably high. The peak came eight years before India and almost two decades earlier than in Pakistan and Bangladesh. Interestingly, this also happened earlier than in more developed comparators—Malaysia, Mauritius, and Thailand (Table 3). Yet, Sri Lanka’s exports of other manufactured products relative to clothing grew relatively slower than those of other countries. The largest increase of other manufactured goods was for Korea, Thailand, and Malaysia: the share of clothing in 2010 in manufactured goods exports was respectively 2 percent, 12 percent, and 32 percent of their peak levels.

**Table 3: Exports of clothing in terms of value and percent of manufactured exports in peak years over 1980-2010 and in 2010 (in millions of US dollars and percent)**

||Peak export<br>Year|s in terms of s<br>Value|hare**/<br>Share|Exports in 2<br>Value|010<br>Share|Index 2010, p<br>Value|eak=100<br>Share|
|---|---|---|---|---|---|---|---|
|Bangladesh*/|2003|5,067|85|9,392|81|185|95|
|India|1992|3,106|21|11,250|8|362|40|
|Pakistan|2000|2,213|28|4,037|25|182|89|
|Sri Lanka|1984|294|75|3,493|63|1,190|85|
|**_Memorandum:_**||||||||
|Malaysia|1988|831|9|3,881|2.9|467|32|
|Mauritius|1987|764|89|663|59|87|66|
|Thailand|1987|1,500|25|4,352|3.1|290|12|
|Korea,Rep.|1981|3,868|20|1,627|0.4|42|2|

Note: */the last year data available is 2007; **/ share of exports of clothing in total exports of manufactured goods. Source: Own calculations based on data reported to the UN COMTRADE database.

6 Data on foreign currency revenue from tourism come from the website of the Sri Lanka Tourism Development Authority at http://www.sltda.lk/annual_statistical_reports, accessed on February 2 2012.