Industrial Development Needs Smarter Policies

This article was written to coincide with the visit of the UNIDO Director General Li Yong to Sri Lanka, and originally appears in the DailyFT of 5th February 2015

Key Points:

  • Visit of UNIDO Director General offers opportunity to push ‘ISID’ approach, focussing on ‘inclusivity’ and ‘sustainability’
  • Coherent and holistic policy framework needed
  • 95% of industrial establishments in Sri Lanka are small and medium-sized. 61% of industries are still concentrated in the Western and North-Western provinces
  • Food and beverage products can be a industrial growth sector, as the highest number of industries across every district is in this sector. Must push them to export-orientation. 59% of food exports by middle-income countries are processed (manufacturing) foods

Today, Sri Lanka sees the visit of the highest-ranking UN official since the new government took office, and indeed since 2010. That this official, Li Yong, is the head of the UN’s industrial organization – UNIDO – at a time when Sri Lanka is aiming to boost its economy through growth of its real sector, is particularly noteworthy. Director General Li’s visit offers a wonderful opportunity to marry Sri Lanka’s objective of boosting economic growth across the country together with UNIDO’s new ‘Inclusive and Sustainable Industrial Development’ framework.

Sri Lanka certainly has had a history of industrialization, albeit a relatively lackluster one compared to many Asian peers. The island-wide garment factory programme, the BOI Export Processing Zones, state-owned industries (with mixed success), etc., have helped grow light manufacturing in the country. Yet, the examples of modern and high-tech manufacturing are few and far between. In fact, even the recent growth of the industrial sector (at least in terms of the numbers) has largely been due to the construction sub-sector (growing from 7% to 8.7% over the last decade) and not really the manufacturing sub-sector (growing from 16.3% to 17.1%). However, although it is not widespread yet, a handful of competitive and highly competent Sri Lankan industries have emerged on the global stage through innovation as well as environmental leadership.

Industry AND (not OR) Services

In the last decade or so, the Sri Lankan economy has certainly gone through structural transformation, away from agriculture (declining GDP share from 20% to 11%), towards industry and services. Industry’s share grew by just under 4% (reaching 31%) and services share grew by just over 5% (reaching 58%) over this period.

Together with its high share in GDP, employment in the services sector has been the most prominent feature of the recent structural change; employment in the sector now reaches nearly 45%, far ahead of the 26% in industry. A prima facie reading of these numbers may suggest that Sri Lanka’s economic future lies in services and services alone. Yet, this apparent prominence of services must be looked at beyond the headline numbers. Much of the services sector in the country consists of domestic non-tradables like wholesale and retail trade (nearly a quarter of GDP), and transport, storage and communications services (over 14% of GDP). These are not particularly dynamic sub-sectors in the economy, are not export revenue generating, and do not necessarily capture high-income shares for those employed in it. So, we cannot assume that a larger services share in the economy will necessarily bring catalytic impacts in terms of export growth, productivity, and higher incomes. So, there still is a strong role that industrial development has to play. As the UNIDO Director General has asserted, “there is not a single country in the world that has reached a high stage of economic and social development without having developed an advanced industrial sector”.

Industries and services aren’t mutually exclusive either. A great example is the revolution that is taking place in the apparel industry. Firms like MAS and Brandix are increasingly positioning themselves as providers of apparel industry solutions, rather than just makers of garments. It is the advent what economists call ‘the servicification of manufacturing’ – the embedding of technology-based services into the manufacturing process. The point being made here is that growing the industrial sector doesn’t simply mean setting up more and more factories; it is about enhancing manufacturing value-added in the domestic economy and finding a lucrative role for related services.

‘ISID’ and Sri Lanka: Inclusivity

Recent growth in Sri Lanka hasn’t worked for everyone. While GDP data suggests monthly per capita GDP is LKR 35,300, household data suggests that rural per capita income is just LKR 11,003 – one-third of per capita GDP. So, UNIDO’s new framework for promoting shared prosperity through industrial progress – ‘Inclusive and Sustainable Industrial Development’ (ISID) – resonates well with Sri Lanka’s new priorities. The ‘Social Market Economy’ policy ideology of the new UNP-led government is keen to promote market-oriented economic growth, but in a manner that does not compromise on social and economic justice for all. This is the cornerstone of ‘inclusive growth’. Within this, inclusive industrial development can play a strong contributing role in this. What better way to promote inclusivity in the industrial sector than through Small and Medium Industries (SMIs)? According to the Annual Survey of Industries, over 95% of all industrial establishments in the country have less than 20 employees. Moreover the lack of geographical dispersion of industries still remains a challenge, with 61% of all industrial establishments still being concentrated in just two provinces – Western and North Western.

‘ISID’ and Sri Lanka: Sustainability

It is now firmly established that choosing between industrial growth and environmental sustainability is no longer an option. Even in China – the most rapidly industrializing economy with the strongest impacts on pollution – are recognizing that promoting cleaner and more resource-efficient pathways to production cannot be ignored. For a smaller economy like Sri Lanka, too, this becomes important; probably not because our industrial carbon footprint will be very large, but because we can use it to position our industrial sector globally. In fact, several Sri Lankan apparel brands have shown that this approach is helping to enhance their brand appeal globally, in the eyes of international merchandisers and consumers who are becoming ever more ‘green conscious’.

Technological advances are offering new opportunities to make production processes cleaner and greener and make energy use in industry more efficient. With more technology being developed in Asia, the dependence on expensive climate-friendly technologies coming exclusively from the West is no longer a constraint. Through collaborations with these economies, Sri Lanka too can find the right technologies at a better price, and UNIDO can play a strong supportive role in this.

Coherent and Holistic Industrial Policy

Promoting industrial development sits in the wider remit of a government’s industrial policy. Sound industrial policy-making remains a top priority among governments around the world, particularly in the aftermath of the global recession in which traditional views of taking a laissez-faire approach to industrialization was supplanted by more interventionist approaches. Whether it was subsidies for the growth of the Chinese clean-tech sector, the American auto bailout, or the grants for youth entrepreneurship across Europe, industrial policy has made a come back and it is taking different forms in different country contexts. While ‘industrial policy’ is no longer seen as a protectionist endeavor, the new incarnation of industrial policy however (unlike that practiced in East Asia) isn’t about ‘picking winners’ or protecting infant industries either. The new breed of industrial policies is more nuanced.

Government’s (probably with the exception of some in East Asia) are notoriously bad at successfully ‘picking’ which industrial sectors to promote. Yet, this rarely stops many governments from doing it anyway! In Sri Lanka today, with less leeway on public finances available now than a decade ago and with competitiveness and market dynamics evolving faster than public sector institutions and officials can keep up with, any government interventions with regard to industry (promotional policies, subsidies, tax and other incentives) must be carefully conceptualized and well targeted. As Luis Moreno, the chief of the Inter-American Development Bank has said of Latin America, Sri Lankan policymakers too must answer the following questions before pursuing such policies – 1) Is there a clear market failure that justifies government intervention?; 2) Will the proposed policy be effective in remedying the market failure?; 3) Does the country have the institutions necessary to execute the policy?. Without assessing these, interventions by the government could potentially waste public funds without having the desired impact, distort markets, and even have perverse results.

Education, Innovation, Doing Business

Industrial policy cannot be taken in isolation of other economic policies of the country. It must be intertwined with considerations of human capital (education and skills), innovation (science, technology, entrepreneurship), and doing business (institutional and regulatory issues). In a field visit today, Li Yong will visit the Sri Lanka Nanotechnology Centre (SLINTEC). SLINTEC offers a wonderful opportunity for leveraging private-public cooperation in scientific research to impact the next phase of Sri Lankan industry and structural change in the economy. It could have catalytic impacts across several industrial sectors – apparels, rubber, agriculture, minerals, petroleum, etc. Meanwhile, as part of twinning industrial policies with human capital development, the education and skills challenge must also be tackled. Developing new industrial competencies will not be possible without building the requisite skill base domestically, and possibly attracting a complementary talent pool from overseas (whether Sri Lanka Diaspora or foreign nationals). Meanwhile, the role of getting institutional and regulatory systems in order, in a way that doesn’t hinder industrial progress but facilitates it, cannot be overstated. Across the gamut of public sector interaction with industry – licenses and permits in starting up an industrial undertaking, to complying with regulations while running it and closing it down – streamlining is needed. In regulating industries, government officials should move from a culture of suspicion, to giving the benefit of the doubt. This requires a complete mindset shift in the public service. A mindset that recognizes industries not as targets for intrusive regulation, but rather as sources of job creation and growth that need to be supported.

Way Forward

In the next 3-5 years, Sri Lanka must take at least one new sector out of mediocrity and into the international arena, and a possible candidate is processed foods. Across all districts in the country, it is the ‘manufacture of food products and beverages’ sub-sector that has the most number of firms, especially among the SMI category. This coupled with the immense agricultural potential in the country means that the potential for growing this sector and making it export-oriented is certainly there. Processed food exports have now emerged as a dynamic export product line for developing countries. Middle-income countries grew their share of processed food exports in total food exports from 38.5% in 1991 to 59% in 2011 (Ahtukorala, 2013). While in Sri Lanka is it just over 15%, in Vietnam it is 75% and in Thailand it is 45%.

The focus on transparency, good governance, etc., offers an excellent opportunity to both build trust between government and industry – by bringing private sector in for genuine consultations in the policymaking process – and also to begin refocusing on industrial development to drive prosperity and economic growth in this decade. Policies to promote industrial development aren’t just beneficial to firms in the industrial sector – they are necessarily linked to broader objectives of job creation, poverty reduction, productivity, entrepreneurship, innovation, balanced intra-country development, etc.

The visit of the UNIDO Director General, then, is very timely. The twin pillars of ‘inclusivity’ and ‘sustainability’ of UNIDO’s ISID approach make a lot of sense in the Sri Lankan context too, and can easily be adopted in a new industrial drive of the country. While UNIDO is not a donor agency that provides generous grants for government programmes, it has a unique ability to help Sri Lanka refine it’s industrial development approach, foster collaborative links with global partners, and guide the country’s move towards inclusive and greener industry.

References:

Kelegama S. (2015), ‘Towards the 2020 Vision of US$ 20 Bn Exports and Beyond’, presentation at NCE AGM, 19th January 2015.

Department of Census and Statistics, Annual Survey of Industries (various years)

Department of Census and Statistics (2014), Household Income and Expenditure Survey 2012/13

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2 thoughts on “Industrial Development Needs Smarter Policies

  1. Better to concentrate for food industries, but to reach upper income level needs to concentrate for High Tec industries.Generally the well developed countries have big share of high tec industries in GDP.

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