Liberalisation and Industrial Growth: Lessons from Sri Lanka

With India breaking out from the ‘Hindu rate of growth’ following the implementation of major policy reforms, the overall developmental outcome in Sri Lanka — the pioneer of policy liberalisation in South Asia — has been thrown into sharper relief. After a promising start, both in the immediate aftermath of the 1977 liberalisation and then again after the ‘second wave of liberalisation’ in 1991/92, economic performance in Sri Lanka has fallen well below expectations, though the economy has now become the most open in South Asia. There is a palpable sense of mass dissatisfaction and disillusionment with political leadership across the whole political spectrum, and the country veers from one major political and constitutional crisis to another. As Sri Lanka’s dream of emulating the East Asian tigers — the stated goal of successive post-1977 governments — has receded, concerns and questions about the efficacy and impact of policy reforms have re-emerged. In particular, the merits of trade liberalisation as a means of achieving industrial growth and employment generation are being called into question. The political climate has become more receptive to calls for more ‘nationalistic’ and protectionist policies with the growth of popular disenchantment with the mainstream political parties, both of which have (despite occasional backsliding) implemented progressive trade liberalisation. Though major domestic and international constraints make it unlikely that there will be a sharp reversal of policies to embrace more closed-door policies, a backlash against liberalisation can not only make further progress in this direction more problematic but, more importantly, lead to misleading policy prescriptions that can perpetuate and aggravate current problems. In this context, understanding the causes of Sri Lanka’s developmental failure, at least in terms of its inability to match expectations, through a systematic, in-depth assessment of past policies and strategies is certainly both necessary and welcome.