Even before the independence, most Sri Lankan political leaders believed that industrialisation was the solution to stand up as an advanced nation and create gainful employment for its citizens. To this end, the Industrial Corporation Act was passed by the State Council in 1944. Mr J R Jayawardena had moved a motion in the State Council requesting to prepare a Comprehensive Development Plan to industrialise the Country. These initiatives show that Sri Lankan Political leaders had conceived the idea of industrialisation and realised its importance for economic modernisation much before other developing countries. Most Asian countries, including the Indian Sub-Continent, imported a significant share of industrial goods from the West. As industrialisation was initiated much before other developing countries, Sri Lanka could have replaced the imported goods in this region with “Made in Ceylon.” At that time, Sri Lanka had potential and comparative advantages, such as a solid foreign exchange reserve to import machinery and technology, locational advantages, including the best international seaport, relatively good physical infrastructure, educated labour force, and professionals etc., to industrialise
The Journey Towards Industrialization
The initiative for industrialisation paralleled the independent movement. British planters probably were not interested in diversifying their investment in Sri Lanka due to the uncertainty created by the independent movement. Most Sri Lankan capitalists had invested heavily in the plantation sector, a lucrative and well-secured investment. Also, the local capitalist class did not have much experience or exposure to industrial ventures. However, most members of the state council and the first parliament were from the capitalist class, favouring private sector ownership of properties and business ventures. The left-wing politicians, who were very active in Sri Lankan Politics, had exposure to the industrial economic environment in Europe. But they supported the idea of state ownership or the communal ownership of industries. Under these circumstances, private capital was not readily available for the industrial sector. Hence, the first-generation industries, such as the Kankasanturai cement factory (1950) and the Valachchanai paper mill (1955), were started under government ownership during the UNP government, though they advocated for private ownership. Whatever the reason, since the inception of industrialisation, the establishment of large-scale enterprises has become the government’s responsibility.
Though industrialisation was on the national economic and political agenda, D. S. Senanayake, the first prime minister’s vision was to revitalise the glory of the golden era of the ancient Sinhala civilisation in the dry zone, based on agriculture, especially paddy cultivation. Therefore, the industrial sector and industry-related infrastructure did not receive much attention. And a significant share of resources was diverted to the Dry zone-colonization program and consumption subsidies. Dudley Senanayake, and Kothalawala, the successors of DS Senanayake, also did not change the above policy and continued along the same line till 1956.
In 1956 S W R D Bandaranaike became the prime minister who advocated for a middle path and a mixed economy. He believed in a planned development with the state ownership of major enterprises. Accordingly, a Ten-year Perspective Plan was formulated with the assistance of local experts and world-renowned economists, such as Garner Myrdal and Joan Robinson. Mr Bandaranaike’s Government’s upper echelon was a mixture of different political ideologists; the majority consisted of a breakaway group from the United National Party, who believed in capitalism, Members of Mahajana Eksath Peramuna, who believed in communism, and various other patriotic groups. As such, his party had no consensus on many policy matters. Though Bandaranaike advocated for a socialist economic policy, the left-wing parties in the opposition considered him a traitor for trying to weaken the left-wing political movement. They did not cooperate with the government programs. Trade unions backed by left-wing parties were a pain in the neck for him. Due to his patriotic and racialist policies, minorities were also kept away from him. Against this backdrop, he confronted many issues between the groups of the ruling party and the opposition parties.
Also, after 1957, the plantation sector could not generate adequate foreign exchange, and the trade deficit increased and started depleting the foreign reserves limiting the import capacity, which hindered the implementation of the ten-year plan. Ethnic tension was also amplified simultaneously. Under these circumstances,10 Year Development plan was not implemented as envisaged. With the assassination of Bandaranaike in 1959, the development plan found its natural death. However, in line with the state ownership concept, the Colombo seaport, airport, and Passenger transport were nationalised.
If not for the problems created by trade unions, left-wing parties, and ethnic conflicts, implementing the 10-year plan and the industrialisation process could have taken off the ground as the local and world economic environment was conducive for that. This seems a significant loss of opportunity in our industrialisation and economic advancement journey. However, it has not been discussed much by politicians and economists.
In July 1960 general election, Mrs Bandaranaike led the Sri Lanka Freedom Party. She secured the required majority in the parliament to form a government without the support of the left-wing and other minor parties. But she also faced numerous issues with the trade union actions supported by left-wing political parties, hampering the performance of state-owned enterprises. As a compromise, in the latter part of her tenure, she formed a coalition government with left-wing parties, but it could not survive for long as the right wing of her party broke away from the government. However, during tenure, some of the activities included in the 10-year plan were carried forward, and Mr Bandaranaike’s’ pro-socialist vision and the policy of nationalising important ventures were continued. The nationalisation of the petroleum industry is one of the challenging activities during this period. Several new industries were also established with the assistance of the USSR and Socialist countries. Sugar, Steel, and tire are a few of them. Nationalised ventures, as well as newly established industries, were brought under state ownership. People’s Bank and Insurance Corporation were also found to fill the significant gap in financing facilities in the local economy. While large-scale industries and financial services were state-owned, assistance was extended to privately owned small and medium enterprises in this industrialisation phase. In 1964, a national-level industrial exhibition was held in Colombo to celebrate and demonstrate the achievements of industrialisation targeting the 1965 general election.
Ups and Downs
However, the 1965 General Election did not give the required majority to Mrs Bandaranaike to form the government. Mr Dudley Senanayake formed the UNP government with the support of seven minor parties. During the period, ventures such as Ceylon Electricity Board and Sapugaskande Oil Refinery were commenced as state-owned enterprises. By this time, state ownership of large-scale commercial ventures had become an accepted norm and no debate on private vs public ownership. Even the UNP, the party that advocates for the capitalist mode of production, complied with this norm. However, Dudley Senanayake’s government’s highest priority was agriculture, especially paddy farming. In addition to the smallholder farming system, he attempted to bring wealthy individuals and the corporate sector into agriculture by alienating large blocks of land and supporting to import of agricultural machinery. This program was greatly influenced by the international movement of the green revolution. However, his government did not make significant structural changes in the economy and continued the industrialisation process with a low profile.
With the collision of left-wing parties, Mrs Bandaranaike came into power again in 1970 and introduced a significant and far-reaching shift in the overall economic policy. Her government prepared a 5-year development plan focusing on the agriculture and industry sectors. However, before implementing the 5-year plan, the world price hike of petroleum and staple foods created a foreign exchange crisis. It compelled the introduction of import restrictions, much more than the usual tariff protection. Except for most essentials, all other imports were banned or restricted. It aimed to produce almost everything locally to substitute imports and save foreign exchange. This created a void in the market for essential food items and consumer durables such as electronic items, clothes, building materials, agriculture and industrial tools, toys, communication items, and many more. Although the government had followed the industrialisation policy for over a decade by that time, the country did not have the capital, technology, preparedness, and capacity to shift into a rapid industrialisation phase to keep abreast with the vacuum created by import restrictions. Also, it did not have sufficient foreign exchange to import modern machinery and plants to produce quality goods to fill the void.
In addition to the global economic crisis, ever-increasing youth unrest also reached its climax in 1971 and revolted against the new government without giving a breathing space. In response, the government hurriedly launched several reforms and high-priority programs. One was the “Divisional Development Council” program to employ youths. Capitalising on the scarcity created by import restriction and tariff protection, this program implemented many small and medium-scale enterprises as cooperative ventures to produce consumer goods based on local raw materials endowments. This program did not benefit from modern technology and produced high-cost inferior goods.
This time, the government’s policy did not encourage private sector investments in large and medium-scale industries or foreign private investment. It may be due to the influence of the left-wing parties of the coalition. Running Hotels and restaurants, importing building materials, textile vehicles, tractors, fibre, yarns, and many more commercial activities came under the government monopoly or ownership. Most of the Sri Lankan capitalist class were land-owned planters. Under the Land Reform Act, the government took over lands exceeding 50 acres. Very little compensation was paid much later, making them a capital-less class. Also, they feared the nationalisation of businesses. Despite the high demand, the local capitalist class have neither the capital nor the interest to invest in industries. As options were limited for luxurious life and lavish expenditure during that period, landowners could have invested in import substitution if; compensation was paid at market value immediately, a private sector-friendly policy was adopted, and the boundaries of nationalisation were explicit. Under this political and economic environment, the country lost the best opportunity for private sector participation in industrialisation.
Under these circumstances, mushrooming enterprises emerged in every nook and corner of the country as self-employment and small and micro enterprises, but many were unviable. These industries became highly inefficient, leading to low quality, high costs, scarcity and finally, misallocation of resources. These massive sacrifices of the producers and consumers could have been a long-lasting success if profit-motivated private sector participation was enlisted, and doors were opened for the technology transfer. Further, the support, including tariff protection, should have been limited to a specific period to selected industries with comparative advantages enabling them to pass through infancy without external competition. However above industrial policy created a greave dissatisfaction among the people, and the government lost the 1978 general election, rejecting the approach by most of the people.
Out of Gear- The Trade Liberalization
As discussed, the journey towards industrialisation in Sri Lanka commenced before independence, becoming a high priority from the 1960s to 1977. It got in top gear during 1970/77 but with poor strategies. Without using the lessons learned from that strenuous journey, the trade was liberalised entirely in 1978, making the three-decades journey into a U-turn. All investments and sacrifices made by the government and people to become an industrial nation became futile. Some of those industries did not have the scale of economies as they were targeting only the local market. Some industries could not meet the local demand as their scale of operation was too small. The technology was archaic, and the raw materials were of low quality. Therefore, most of those local products could not compete with the imported items in terms of price and appearance. Without killing the entire industrial sector, the government should have supported a few more years to some infant industries with the potential for success in a competitive environment. But in the trade liberalization, the government considered only the political interest, neglecting the interest.
After trade liberalisation, import and trading became prominent and popular economic activities in the country. Consumer preference changed from local products to imported, while investors changed their role from producing to importing and trading. Furthermore, the agriculture and industrial workforce shifted to trade and service-related activities. Small and medium entrepreneurs also moved to service sector activities such as transport, petty trading, restaurant management, personnel service etc. The banking system also changed its focus from industry and agriculture to imports, the service sector, and trade activities, which are less risky and more profitable. The industry and agriculture sectors lost policy support and human and financial resources.
Producing locally involves complicated issues such as trade union problems, land problems, technology issues, approvals, permits, paying bribes to authorities, ransoms to hoodlums etc. Some large-scale manufacturers converted their factory buildings and other assets into stores and showrooms of imported goods. Even the government-owned large-scale industries, such as tire, steel, textile, condensed milk and powdered milk, sugar, cement, paper, petroleum products, etc., also found it challenging to compete with the cheap, nice-looking imported items. Hasty and overnight import liberalisation killed not only the infant industries but also the traditional cottage industries, such as sleeping mats, mattresses, pottery, blacksmith, toys, handlooms, vehicle repairs, lorry bodybuilding, etc., which were there for many centuries. Those disappeared from the economy as cheaper, attractive alternatives/ substitutes were available.
Despite the trade liberalisation, the government followed the privatisation policy of state-owned enterprises. Furthermore, the government dismantled some ventures, such as the marketing department, paddy marketing board, paper corporation, steel corporation, Lanka-Loha, etc., which had been established to provide essential services and inputs to support local industries. If not for wilful dismantling, some of those ventures could have been sustained without government support, even after the trade liberalisation. If transparently done, privatisation could have been a good opportunity for the government to eliminate some nonessential enterprises established under the closed economy but could not run on a commercial footing under international competition.
But due to the various malpractices, privatisation became a horrendous exercise. It paved the way for some business cronies to loot public assets. Ownership of these assets was not transferred to genuine industrialists but to the hands of government supporters looking for some fortune to become rich overnight. Most of these factories were looted by new tenants/owners and abandoned. Even though a few became successful entrepreneurs, they acquired those assets without capital outlay or much below the market price. Some got running businesses for a nominal fee or rent and had access to free working capital such as stocks of raw materials and finished products ready for sale. Genuine entrepreneurs who were not fortunate enough to enjoy such free or cheap capital found competing with lucky investors challenging and discouraging.
Privatisation was an emerging concept to reduce the burden on the government budget, improve the efficiency and quality of products and introduce the latest technology and management style of the local and foreign private sectors. At that time, markets were not saturated for most products but were expanding rapidly due to the open economy. Therefore, the government should have encouraged and supported the private sector to establish new industries instead of haphazard privatisation of existing running businesses or importing cheap substitutes. Privatisation should have been done carefully and transparently without distorting the investment environment. The privatisation was mishandled so the country couldn’t achieve its expected benefits.
Ranasinghe Premadasa became the president in 1989 and was interested in poverty alleviation and rural housing. He identified the apparel industry as the most appropriate tool for sustainable (employment generation) poverty alleviation. His government launched the 200-garment factory program with an attractive support package to private sector investors to establish garment factories in rural and backward regions. This facilitated the rural women to be employed in their hometowns without migrating to Western Province. Hence real income increased, and their standard of living improved to a considerable extent. However, due to logistic problems, investors’ cost of production increased, and they lost the convenience and the timeliness of delivering finished goods and raw materials. The cheap labour could have compensated for high overhead costs in rural areas. But the labour regulation and the pressure from trade unions did not permit reaping from the cheap labour. Investors were forced to pay the same wages as in the western province. Further, finding suitably qualified managerial staff was also a constraint compromising productivity and quality.
As many developing countries entered the apparel market during this period, the competition was very high. Therefore, quality assurance and compliance with tight delivery schedules and production at competitive prices became a considerable challenge for manufacturers and exporters, losing the global market share. Some factories established in remote areas have now been closedown and concentrated again in the western province.
Countries like Thailand, Korea, Malaysia, and Indonesia used the apparel industry as a springboard to elevate as newly industrialised countries. They did not rely for many decades on the apparel industry. But even after 45 years, apparel remains Sri Lanka’s main export item because we have failed to use the apparel industry as the springboard to be a newly industrialised country. No other prominent industrial activity has emerged, at least to be on par with the appeal industry. Though many condemned it sarcastically, the dream of Mr Premadasa was for Sri Lanka to become a Newly Industrialised country by 2001. If not for the sudden assassination, he could have made a strenuous effort to achieve this goal.
Since then, except for the privatisation of state-owned enterprises and support packages for foreign investment, there has been no specific policy support or programs targeting industrialisation. From 1994 to 2004, Mrs Kumaratunga’s government concentrated on poverty alleviation through the Samurdhi Program, peace negotiations with Tamil Militants, booting out state-sponsored terrorism, re-democratise the governance, promoting foreign investment in general without targeting any specific sector or sub-sector, or industry etc. Several state-owned enterprises were privatised during this period to reduce the burden on the national budget. In between this period, Ranil Wickremasinghe’s government, from 2002 to 2004, attempted to make far-reaching structural changes in the economy through its policy outlined in Re-Gaining Sri Lanka. Re-gaining Sri Lanka did not focus specifically on industrialisation but the overall restructuring of the economy and governing institutions, thereby reducing the government’s economic role only to regulate. However, people were not ready to face this shock of structural adjustments. The president dissolved the government at the beginning of 2004, and the Wickremasinghe government could not continue the process.
Immediately after the Tsunami catastrophe, Mahinda Rajapakse’ became the president in 2005. Due to the prolonged civil war, economic growth was slow for many years. The power crisis was at the climax and road infrastructure was in very poor condition hampering industrialization. His immediate priority was finishing the civil war with LTTE and unifying the country. While fighting with the terrorists, he gave priority to resolving the power crisis and road infrastructure. Norochchoplai and upper Kothmale power plants projects commenced immediately and were commissioned to solve the power crisis. A comprehensive road program, based on a 10-year plan was implemented. Three major expressways, namely the Southern Expressway, Outer Circular Expressway and Katunayake Expressways were commenced and commissioned. Further, Hambantota Sea Port and Airport were completed. In addition to the provision of infrastructure, the Strategic Investment Act was passed in the parliament to encourage foreign investments in a strategic nature. The Board of Investment was involved actively in promoting foreign investments. However, these physical infrastructures, legal provisions and institutional support have not been adequately used by investors. Capacity utilization of some infrastructure is still at a low level. Those are yet to be stimulants for industrialization. This shows that general support like BOI incentives, tax holidays and physical infrastructure alone can’t stimulate investment and industrialization. There may be various other non-financial and non-physical constraints concerning the investment. Our position in the Ease of Doing Business index also needs to be improved.
Conclusion and Recommendations
During the 1970/77 period, the economic crisis and scarcity of goods generated a great enthusiasm to produce many things locally. Small and medium-scale industries emerged as self-employment and small and micro enterprises in every nook and corner of the country. In contrast, though the scarcity created by the 2020/22 economic crisis is much more severe than the above, there is not much attempt by the government or the entrepreneurs to commence industries or invest in the production economy. Consumers are interested in maintaining the same lifestyle as before the economic crisis, thinking it is a temporary issue. The business community is anxiously waiting till improves the foreign exchange situation to resume import business instead of diverting the excess liquidity for local industries. The government is also focusing its strategies on improving the foreign reserves through debt restructuring and controlling inflation by contracting the economy, which may give breathing space to continue with the consumption-oriented economy as usual.
The government’s strategy seems guided by the notion that this is a short-term problem of servicing external loans, which can be resolved by artificial and temporary measures to strengthen foreign reserves. Those immediate solutions are necessary for a breathing space to lay the foundation for structural adjustments. But it seems all stakeholders are pursuing an elusive path without considering the need for structural changes. Instead of believing in a single answer, we must adopt multi-faceted strategies to come out of the ramified economic, political, and social situation. The country needs strategies to have a positive trade balance and a balance of payment through export-oriented economic growth and higher purchasing power of the people, for which industrialisation, based on comparative advantages, is a must. Suppose the country does not embark on growth-oriented strategies during the breathing space. In that case, the country’s economy may get settled at a low equilibrium level (low production and productivity, low demand, low income, high degree of unemployment /underemployment, low imports, and exports etc.) It would be challenging to re-energise because the economic base, such as professional and qualified human resources, international business linkages, systems, procedures, and institutional arrangements, could become fragile over a long period.
Considering the limited land resources, Sri Lanka will not be able to produce essential food items such as grains, pulses, and lentils for mass consumption on the world market or agricultural/natural raw materials for large-scale worldwide industries. Therefore, exporting agriculture products and raw materials in large volumes has little prospect for exchange earning and employment generation. Our strategy should be: (a) gaining a higher value in the export market by adding a high degree of value to the limited supply of local raw materials. (b) Knowledge and skill-based industries. (c) high-value products for market niches. (d) tertiary sector activities targeted local and international markets, (e) Import substitution if the market is large enough to have the scale of economies. Otherwise, attempts to replace all imports with import-substituting industries will lead to high costs and low quality. It will deprive local customers of benefitting from the international comparative advantages and, finally, misallocate scarce resources (f) produce human resources of medium and high-level professionals for the global labour market. (g) Produce for the broader international market using imported agriculture and natural raw materials like the 200 hundred garment factory program. Four or five strategic industries/ thrust areas shall be identified for this program with due consideration to the following aspects: (1) industrial products with a wider local and foreign market (2) Internationally comparative advantages in terms of access to the market, raw material and other inputs, skills, expertise etc.
The Backward and forward linkages of selected industries must analyse and identify constraints at each point of linkages and design and implement necessary interventions including incentives, legal support, and tariff protection for a definite period. Perhaps, the electronic industry, leather products, jewellery, vehicle components, and cinnamon and coconut-based products would be good candidates. Sri Lanka has missed many buses from dawn to evening. However, a well-designed program without ups and downs for political gains would catch a late-night bus.