Wednesday, 28 August 2013 00:00
-
- {{hitsCtrl.values.hits}}
Despite the rise of services in the Sri Lankan economy, there is increasing evidence that the industrial manufacturing sector needs to remain the backbone of an economy if it is to avoid the middle income gap.
In a special chapter of Key Indicators for Asia and the Pacific 2013, its flagship annual statistical publication, the Asian Development Bank emphasises that manufacturing is essential to a high productivity service sector, technological innovation, and modernising agriculture.
The report notes that one group of economies — Hong Kong, China; Japan; the Republic of Korea; Singapore; and Taipei, China — rapidly industrialised to become high income countries, while another group of economies, including the People’s Republic of China (PRC), Malaysia, and Thailand, are transforming more slowly.
Other developing Asian nations, such as Bangladesh, India, Pakistan or the Philippines, are changing even more slowly, have created few manufacturing jobs, and are shifting from agriculture into services. Industry does not lead the way in Asia, the report noted. Services are the largest share of developing Asia’s output and agriculture remains the largest employer, providing an income for 700 million people.
Regional diversity means Asia’s economies require different policy priorities to promote transformation. Modernising the agricultural sector is a key task in developing Asia, in particular for low income countries. For middle income economies heavily dependent on labour-intensive sectors or currently bypassing industrialisation, the focus should be on upgrading their industrial base. For these nations, good quality education is essential for industrial diversification and reducing the path-dependency nature of structural transformation.
Most of this seems to be basic common sense but Sri Lanka’s economy is in danger of veering off this path. The Central Bank estimates that industry makes up 30% of Sri Lanka’s economy with 17% allocated to manufacture but this data has remained static since 2010 while services have grown strongly to take over 50% of the economy.
The island’s exports especially industrial goods have taken a hit this year recording a four percent drop since January. The Government’s response has been to stifle imports through heavy taxation to reduce the trade deficit but has done little to boost exports. Moreover, import substitution has not really gotten off the ground despite a rallying call for the cause by Treasury Secretary Dr. P.B. Jayasundera.
The construction boom sweeping across Sri Lanka is a case in point for industrial manufacturers. Even with ports, airports, highways, hotels, resorts and multi-million dollar factories being constructed there is little local manufacturing being used. Surely Sri Lanka can provide more than sand and bricks.
Another area that requires massive reform is agriculture. Backward protectionist policies have to be balanced by export oriented, productivity driven and niche market products that can take generations of Sri Lankan expertise to the world. Research and development in these areas are woefully lacking, which coupled with increasing labour shortages will likely cause great headaches in the coming years.
Developing industrial manufacturing on a sustainable and well-planned structure needs the attention of both private sector and Government policy makers before Sri Lanka’s hopes get left in the dust.
For small island economies, industrialisation may not be cost effective, and the future lies in becoming competitive in certain service sector niche markets.
