Liberalization and Industrial Transformation - Lessons from the Sri Lankan Experience

Abstract

This article aims to contribute to this debate using a case study of Sri Lanka. During the first decade after independence in 1948, Sri Lanka continued with a liberal trade regime until growing balance-of-payments problems induced a policy shift toward protectionist import-substitution policies starting in the early 1960s. By the mid-1970s, the Sri Lankan economy had become one of the most inward-oriented and regulated economies outside of the group of centrally planned economies. In 1977, Sri Lanka responded to the dismal economic outcome of the closed-economy era by embarking on an extensive economic liberalization process, becoming the first country in the South Asian region to do so. Despite major macroeconomic problems and political turmoil, market-oriented reforms have been sustained and broadened for more than 2 decades. Following these policy reforms, Sri Lanka is now classified (together with Chile, Argentina, and Uruguay) as one of only four countries outside East Asia that have achieved a clear policy shift from import-substitution-based industrialization (ISI) to export-oriented industrialization (EOI). Given the decisive policy shift in 1977 and policy continuity during the ensuing years, Sri Lanka provides a valuable laboratory for the study of the impact of a policy transition from inward orientation to outward orientation on industrial growth and adjustment.