Sri Lanka’s economic policy strategies radically moved away from inward-looking
import-substituting industrialization to outward-looking export-oriented industrialization
(EOI) in 1977. The EOI strategy was implemented through a broad agenda of reforms
including trade liberalization, privatization of state owned enterprises and financial
deregulation. These reforms had a profound impact on productivity in the export oriented
production sector (primarily manufacturing) and laid the foundation for rapid growth and
structural change. This study empirically analyzes the impact of policy reforms on the
total factor productivity (TFP) of manufacturing industries in Sri Lanka. A balanced panel
data set of all 27 manufacturing industries over 21 years is used. The industry
heterogeneity effects are taken into account through the validation of a fixed effects
model. The empirical results confirm, in general, that post 1977 pursuit of the EOI
strategy has resulted in TFP growth. However, in an uncertain investment and economic
climate due to the ethnic conflict that has engulfed Sri Lanka, TFP growth has reversed
dramatically since 1994. The findings reinforce the view that in order to increase
productivity and growth in developing countries in this era of Globalization the pursuit
of open economy policies alone is insufficient. Fostering of a stable political
environment is also necessary.
AthukoralaP. (1996). Labour productivity in the manufacturing
sector in Sri Lanka. Colombo, Sri Lanka:
Department of National Planning, Ministry of Finance and
Planning.
2.
AthukoralaP. (2007). Outward-oriented policy reforms and
industrialisation in Sri Lanka. Economic Papers,
26(4), 372–391.
3.
AthukoralaP.JayasuriyaS. (1994). Macroeconomic policies, crises, and growth in
Sri Lanka, 1969–90. Washington D.C.:
World Bank.
4.
AthukoralaP.JayasuriyaS. (2004). Complementarity of trade and FDI
liberalisation in industrial growth: Lessons from Sri Lanka. 10
Years of ASARC an International Conference. University House,
Canberra, Australia: The
Australian National University.
5.
BaltagiB.H. (1995). Econometric analysis of panel data.
West Sussex, England: John Wiley &
Sons.
6.
BandaraY.M.W.Y (2004). Trade liberalization and the
productivity imparative in manufacturing industries of Sri Lanka.
PhD Thesis, University of Queensland,
Brisbane, Australia.
7.
BandaraY.M.W.Y.KarunaratneN.D. (2010). An empirical analysis of Sri Lanka’s
manufacturing productivity slow-down. Journal of Asian
Economics, 21(4),
391–403.
8.
CavesR.E.BartonD.R. (1990). Efficiency in US manufacturing
industries. Cambridge, Massachusetts:
The MIT Press.
9.
Central Bank
of Sri Lanka (1998). Economic progress of independent Sri
Lanka-1948–1998. Colombo:
Central Bank of Sri Lanka.
10.
Central Bank of Sri Lanka,
Annual Report (Various Issues).
Colombo.
11.
ChandS.SenK. (2002). Trade liberalization and productivity
growth: Evidence from Indian manufacturing. Review of
Development Economics, 6(1),
120–132.
12.
Department of Census and
Statistics, Annual Surveys of Industries (Reference years 1978–1999).
Colombo: Ministry of Finance and
Planning.
13.
DeraniyagalaS. (2001). The impact of technology accumulation
on technical efficiency: An analysis of the Sri Lankan clothing and agricultural
machinery industries. Oxford Development Studies,
29(1), 101–114.
14.
EdwardsS. (1998). Openness, productivity and growth:
what do we really know?Economic Journal, 108(447),
383–398.
15.
FernandoL. (1997). Development planning in Sri
Lanka: In LakshmanW. D. (Ed.), Dilemmas of development, fifty years of economic change in
Sri Lanka (pp.101–126). Sri
Lanka: Association of
Economists.
16.
FerreiraP.C.RossiJ.L. (2003). New evidence from Brazil on trade;
liberalisation and productivity growth. International Economic
Review, 44(4),
1383–1405.
17.
GreenawayD.MorganW.WrightP. (2002). Trade liberalization and growth in
developing countries. Journal of Development Economics,
67(1), 229–244.
18.
GreeneW.H. (2002). Limdep 8.0; Econometric modelling
guide. New York: Econometric
Software Inc.
19.
GrossmanG.M.HelpmanE. (1991). Innovation and growth in the global
economy. Cambridge, MA: MIT
Press.
20.
GrossmanG.M.HelpmanE. (1994). Endogenous innovation in the theory of
growth, Journal of Economic Perspective,
8(1), 23–44.
21.
HarrisonA.E. (1994). Productivity, imperfect competition,
and trade reform: Theory and evidence. Journal of International
Economics, February, 36(1–2),
53–73.
22.
HarrisonA.E. (1996). Openness and growth: Time series,
cross-country analysis of developing countries. Journal of
Development Economics, 48(2),
419–47.
23.
HavrylyshynO. (1990). Trade policy and productivity gains in
developing countries: a survey of the literature. World Bank
Research Observer, 5(1),
1–24.
24.
JICA &
MID (2000). Master plan study for industrialization and
investment promotion in the Democratic Socialist Republic of Sri Lanka, Phase
II. Colombo: Japan International
Cooperation Agency (JICA) and Ministry of Industrial Development (MID) of Sri
Lanka.
25.
KelegamaS.SamararatneP.Knight-JohnM. (1999). Productivity and labour cost in manufacturing
industries: Sri Lanka. New Delhi:
South Asia Multidisciplinary Advisory Team,
ILO.
26.
KoppR.J.SmithV.K. (1980). Frontier production function estimates
for steam electric generation: a comparative analysis. Southern
Economic Journal, 46(4),
1049–59.
27.
KruegerA.O. (1997). Trade policy and economic development:
how we learn. American Economic Review,
87(1), 1–22.
28.
KrugmanP. (1987). Is free trade passé?Economic Perspectives, 1(2),
131–44.
29.
KarunaratneN.D. (2000). The export engine of growth in
post-independence Sri Lanka. In LakshmanW. D.TisdellC. A. (Eds.), Sri Lanka’s development since independence: socio-economic
perspectives and analyses(pp. 171–186).
New York: Nova Science
Publishers.
30.
KarunaratneN. D.BandaraY.M.W.Y (2004). Technical efficiency of Sri Lanka’s
manufacturing industries, post-trade liberalisation. Sri Lanka
Economic Journal, 5(1),
3–36.
31.
LakshmanW.D. (1997). Dilemmas of development, fifty years of
economic change in Sri Lanka. Colombo:
Sri Lanka Association of Economists.
32.
LucasR.E. (1988). On the mechanics of economic
development. Journal of Monetary Economics,
22(1), 3–42.
33.
Ministry of
Employment and Labour (2001). Draft national employment
policy for Sri Lanka, 2001. Colombo, Sri Lanka:
Ministry of Employment and Labour.
34.
MundlakY. (1988). Endogenous technology and the
measurement of productivity. In CapalboS. M.AntleJ. M. (Eds.), Agricultural productivity: measurement and
explanation (316–331). Washington,
D.C: Resources for the
Future.
35.
National
Planning Council (1959). Papers by visiting
economists. Colombo: Ceylon,
Planning Secretariat.
36.
NeweyW.K.WestK.D. (1987). A simple positive semi-definite
heteroscedasticity and autocorrelation consistent covariance matrix.
Econometrica, 55(3),
703–708.
37.
NishimizuM.RobinsonS. (1984). Trade policies and productivity change
in semi-industrialized countries. Journal of Development
Economics, 16,
177–206.
38.
NishimizuM.RobinsonS. (1986). Productivity growth in
manufacturing. In CheneryH.RobinsonS.SyrquinM. (Eds.), Industrialization and Growth (pp.
283–308). New York:
Oxford University Press.
39.
RodrikD. (1992a). Closing the productivity gap: Does
trade liberalization really help? In HelleinerG. K. (Ed.), Trade policy, industrialization and development: New
Perspectives (pp. 155–175).
Oxford: Clarendon
Press.
40.
RodrikD. (1992b). The limits of trade policy reforms in
developing countries. Journal of Economic Perspectives,
1(1), 87–105.
41.
RodrikD. (1995). Trade and industrial policy
reform. In BehrmanJ.SirinivasanT. N., (Eds.), Handbook of Development Economics, Vol.
III, Part B, (pp. 2925–2982).
North Holland:
Elsevier.
42.
SharmaK.JayasuriyaS.OczkowskiE. (2000). Liberalization and productivity
growth: The case of manufacturing industry in Nepal. Oxford
Development Studies, 28(2),
205–222.
43.
SolowR.M. (1957). Technical change and the aggregate
production function. The Review of Economics and
Statistics, 39(3),
312–320.
44.
SyrquinM. (1986). Productivity growth in
manufacturing. In CheneryH.RobinsonS.SyrquinM. (Eds.), Industrialization and growth: A comparative
study. New York: Oxford University
Press.
45.
TilakaratnaW.M. (1994). Liberalization of the
economy. In DharmasenaK.JayawardenaA.S.KodithuwakkuK.KottahachchiD.B.VidanapathiranaU. (Eds.), Essays in honour of ADV de S Indraratne
(225–234). Kelaniya:
Vidyalankara Press.
46.
TyboutJ. (1992). Linking trade and productivity: New
research directions. The World Bank Research Observer,
6(1), 189–211.
47.
VerbeekM. (2000). A guide to modern econometrics.
London: John Wiley & Sons,
Ltd.
48.
World
Bank (1993). The East Asian miracle: Economic growth and
public policy. New York: Oxford
University Press.
49.
World
Bank (1995). World development report 1995.
Washington, DC: World
Bank.
