Time to break from flawed industrial policy
by Sumanasiri Liyanage
(August 21, Colombo, Sri Lanka Guardian) The first bus that was assembled in Sri Lanka by Micro Cars Limited was presented to President Mahinda Rajapaksa . The relevant spare parts were imported from China in accordance with the agreement entered with the business community in China during the tour of China of President Mahinda Rajapaksa in 2006. Ministry of Industrial Development supervised the assembling process of the bus that can accommodate 102 passengers. The bus assembling factory is setup at Polgahawela and another factory will also be setup in Hambantota shortly.
Micro Cars Ltd was set up sometime back and has started supplying to the Sri Lankan car market about six models of cars, mini-vans and jeeps. If my information is correct this is the second effort that a Sri Lankan entrepreneur has made to enter into an industry that is of great importance from the perspective of economic development. The first attempt was made about four decades ago by late Upali Wijewardene, but he was not supported by the industrial policies of the government. Micro company’s entrance into assembly of buses is commendable. Besides what is available at their website, I have no detailed information about the Micro Car Company. This article is not about Micro Car Ltd per se but about the local industrial sector in general.
The industrial policy that has been adopted since 1977 by both the UNP and the SLFP-led governments are basically flawed. Since growth is everywhere and every activity specific, a conscious industrial policy that favours activities characterized by increasing returns and synergy is sine quo non to economic development. Although it is now too late, the country should at least now focus on developing a new industrial policy not following the advice of developed countries and international financial agencies like the World Bank, IMF and WTO but following the trajectories that advanced countries had followed in their early phase of development.
As many countries’ experiences have demonstrated, an automobile industry is one of the key growth specific activities since it is characterized by increasing returns, continuous technological change and synergy and cluster effects. Hence, many countries at certain stages of their development took conscious efforts to promote automobile industry. A key objection a conventional economic theorist would raise against such promotional industrial policy in the case of Sri Lanka would be the size of the market. However, many countries have promoted such industries primarily because of their cluster effects and growth augmented properties with the objective of catering to a bigger market. So we have to look at these arguments not from a static perspective but from a dynamic perspective. The same negative arguments were put forward by the World Bank when South Korea initiated its steel industry as a state economic venture in the 1960s. Today, POSCO stands as one of the major steel producers in the world. It is same with the Japanese car industry. . There is no doubt that Sri Lankan market for automobiles is still small; but in 1977 when market was freed nobody would have anticipated that there would be such a big demand for automobiles in Sri Lanka.
My argument will hold for other industries that are characterized by three growth augmented effects, increasing returns, technological growth and cluster effects. Micro has shown that it has the growth potential and also it can be expanded and moved beyond just assembling if the government adopts correct industrial policy. In long term development, market alone cannot regulate the development process.
I would suggest that as a first step the government should stop the import of used cars to Sri Lanka and even think of raising import duties on new cars. The government can also adopt the policy of buying Micro jeeps for its use and government assistance to public employees to purchase cars should be limited only to locally assembled cars. Such measures to ensure a stable market for local production are of great importence. In addition to the provision of a stable market for its products, the government should assist it to expand its production capacity by offering low interest loans and other facilities.
I do believe some of the economic policies of 1977 are correct and necessary, but the entire policy package as it was articulated within the framework of flawed neo-liberal theory was wrong and detrimental to industrial development. Both the UNP and SLFP led governments have so far failed to address the development issues of the country and to learn from the development experience of other countries.
Hence, protection and support should be linked with performance tests that should entail the percentage of local components in the final production (this should gradually increase), the magnitude of cluster effects (growth of subsidiary industries not necessarily owned by Micro Car Ltd), the potential for exports, and managerial and technological advancement. In short, the government’s assistance and protection are to assist Micro Car Ltd to stand by itself at some stage by facing global competition. Pretty ambitious, but doable!!
The market forces are to be complemented by industrial policies of the government. As Dani Rodrick puts it: “The right model of industrial policy is not that of an autonomous government ..., but of strategic collaboration between the private sector and the government with the aim of uncovering the most significant obstacles to restructuring and determining what interventions are most likely to remove them” (One Economics, Many Recipes, Princeton University Press 2007).
We live in a period in which strategic collaboration between public and private sector in removing obstacles for industrialization created by both the state and market is critically important.
( The writer teaches political economy at the University of Peradeniya. Email: sumane_l@yahoo.com )
- Sri Lanka Guardian
by Sumanasiri Liyanage
(August 21, Colombo, Sri Lanka Guardian) The first bus that was assembled in Sri Lanka by Micro Cars Limited was presented to President Mahinda Rajapaksa . The relevant spare parts were imported from China in accordance with the agreement entered with the business community in China during the tour of China of President Mahinda Rajapaksa in 2006. Ministry of Industrial Development supervised the assembling process of the bus that can accommodate 102 passengers. The bus assembling factory is setup at Polgahawela and another factory will also be setup in Hambantota shortly.
Micro Cars Ltd was set up sometime back and has started supplying to the Sri Lankan car market about six models of cars, mini-vans and jeeps. If my information is correct this is the second effort that a Sri Lankan entrepreneur has made to enter into an industry that is of great importance from the perspective of economic development. The first attempt was made about four decades ago by late Upali Wijewardene, but he was not supported by the industrial policies of the government. Micro company’s entrance into assembly of buses is commendable. Besides what is available at their website, I have no detailed information about the Micro Car Company. This article is not about Micro Car Ltd per se but about the local industrial sector in general.
The industrial policy that has been adopted since 1977 by both the UNP and the SLFP-led governments are basically flawed. Since growth is everywhere and every activity specific, a conscious industrial policy that favours activities characterized by increasing returns and synergy is sine quo non to economic development. Although it is now too late, the country should at least now focus on developing a new industrial policy not following the advice of developed countries and international financial agencies like the World Bank, IMF and WTO but following the trajectories that advanced countries had followed in their early phase of development.
As many countries’ experiences have demonstrated, an automobile industry is one of the key growth specific activities since it is characterized by increasing returns, continuous technological change and synergy and cluster effects. Hence, many countries at certain stages of their development took conscious efforts to promote automobile industry. A key objection a conventional economic theorist would raise against such promotional industrial policy in the case of Sri Lanka would be the size of the market. However, many countries have promoted such industries primarily because of their cluster effects and growth augmented properties with the objective of catering to a bigger market. So we have to look at these arguments not from a static perspective but from a dynamic perspective. The same negative arguments were put forward by the World Bank when South Korea initiated its steel industry as a state economic venture in the 1960s. Today, POSCO stands as one of the major steel producers in the world. It is same with the Japanese car industry. . There is no doubt that Sri Lankan market for automobiles is still small; but in 1977 when market was freed nobody would have anticipated that there would be such a big demand for automobiles in Sri Lanka.
My argument will hold for other industries that are characterized by three growth augmented effects, increasing returns, technological growth and cluster effects. Micro has shown that it has the growth potential and also it can be expanded and moved beyond just assembling if the government adopts correct industrial policy. In long term development, market alone cannot regulate the development process.
I would suggest that as a first step the government should stop the import of used cars to Sri Lanka and even think of raising import duties on new cars. The government can also adopt the policy of buying Micro jeeps for its use and government assistance to public employees to purchase cars should be limited only to locally assembled cars. Such measures to ensure a stable market for local production are of great importence. In addition to the provision of a stable market for its products, the government should assist it to expand its production capacity by offering low interest loans and other facilities.
I do believe some of the economic policies of 1977 are correct and necessary, but the entire policy package as it was articulated within the framework of flawed neo-liberal theory was wrong and detrimental to industrial development. Both the UNP and SLFP led governments have so far failed to address the development issues of the country and to learn from the development experience of other countries.
Hence, protection and support should be linked with performance tests that should entail the percentage of local components in the final production (this should gradually increase), the magnitude of cluster effects (growth of subsidiary industries not necessarily owned by Micro Car Ltd), the potential for exports, and managerial and technological advancement. In short, the government’s assistance and protection are to assist Micro Car Ltd to stand by itself at some stage by facing global competition. Pretty ambitious, but doable!!
The market forces are to be complemented by industrial policies of the government. As Dani Rodrick puts it: “The right model of industrial policy is not that of an autonomous government ..., but of strategic collaboration between the private sector and the government with the aim of uncovering the most significant obstacles to restructuring and determining what interventions are most likely to remove them” (One Economics, Many Recipes, Princeton University Press 2007).
We live in a period in which strategic collaboration between public and private sector in removing obstacles for industrialization created by both the state and market is critically important.
( The writer teaches political economy at the University of Peradeniya. Email: sumane_l@yahoo.com )
- Sri Lanka Guardian
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