Production economy; what exactly is it?

Many pundits are claiming that the economy in Sri Lanka is driven by debt and instead they advocate it should be transformed into a production-based economy. The enthusiastic National People’s Power (NPP) supporters are at the vanguard in terms of propagating this viewpoint across various platforms. Yet, when asked to describe what this Production Economy (nishpadana arthikaya) is, many of them fail to provide an answer.

The truth of the matter is that there is no term called production economy in the terminology of economics and this is not the first time NPP/JVP propagandists have presented concepts that contradict with the principles of economics. During the 2005 Presidential Election, when the JVP was leading the campaign of Mahinda Rajapaksa, the promise of creating a so called Balanced Economy was given to the public. 

It appears that what they are trying to convey is once they gain power, they would prioritise agriculture and the industrial sector to drive the economic activities of the country without giving much prominence to the service sector – which accounted for almost 60% of the country’s GDP last year. Even within the industrial sector, it seems they intend to focus extensively on the manufacturing sector. Those who espouse the production economy concept are not so fond of banking, insurance, hotel and leisure, logistics, IT and computer services, etc. They perceive services as not real production.

Production itself means the process by which factors of production – land, labour, and capital – are used to produce the outputs that include not only goods but services as well. Hence, considering services as not part of real production is conceptually flawed apart from being practically inappropriate as the service sector has been the largest contributor towards the nation’s GDP for such a considerable period of time.

The service sector represents almost 80% of the world’s largest economy – the US and no one in America laments about the lack of importance of agriculture and industries relative to services within their economic structure. The significance of the service sector in Sri Lanka increased considerably consequent to the adoption of liberal economic policies in 1977, with its contribution rising to more than half of the GDP from just 34% at the time of gaining independence. Due to the advancement in technology and transportation, services are no longer non-tradable and they can be exported across the borders. 

The growth of the Indian economy is primarily driven by services and today the Asian giant has become the largest exporter of services in the world. Many commentators point out that India had leapfrogged over the manufacturing sector and also made the view that the industrialisation is the only pathway towards economic development for developing countries invalid.

Services such as banking, insurance, and shipping are necessary to support and complement the production and sale of the outputs of the agricultural and manufacturing sectors. As Sri Lanka is located in the East-West trade route and close to India – which will become an economic powerhouse in the future, the Island has all the attributes to become a prominent logistics hub in the region and substantially increase its export income from the service sector. Those who belittle the service sector are ignorant of the dynamics of the modern, global economy apart from having a very poor grasp of economics.

Another aspect involved with the advocacy of this flawed concept is the glorification of trade protectionism. We always hear comments from small-minded islanders that J.R. Jayewardene destroyed the country’s production economy in 1977 by opening up the economy. Protectionism is nothing new to Sri Lanka, as it has been a tried and tested failure. It only favours a tiny proportion of industrialists/businessmen who would suck the blood out of masses by charging exorbitant prices in the absence of competition. Naive and conceptually unsound concepts cannot bring about meaningful progress to the country.