Revival of Inward-Orientation and its Impact on Sri Lanka’s Performance in Global Markets

Bartłomiej Kaminski and Francis Ng
WSIiZ Working Papers
No 2.
Sri Lanka’s external performance defies global trends on two counts: first, the level of openness as measured by the ratio of trade in goods and services after a strong increase in 1987-95 and stagnation in 1996-2004 sharply fell in 2005-10 to the levels experienced during the era of import substitution; and second, the share of clothing in manufactured exports remained largely unchanged over the last 25 years. Had there been no economic growth, this would not have been puzzling. Considering, however, that GDP growth performance during this period was respectable, this raises a question; what explains this unusual pattern of external performance? The study argues that duality of Sri Lanka’s economic regime—the legacy of unfinished structural reforms of a socialist economic regime—combined with high and growing in the 2000s protectionism seems to be responsible for idiosyncrasies of Sri Lanka’s external performance. Sri Lanka’s experience shows that the lack of stability in trade policy combined with recently expanding protectionism and state’s micromanagement of investment does not create an institutional/policy setting conducive to rapidly evolving composition of exports and their fast growth.
Keywords: Sri Lanka’s trade policy, foreign trade performance, trade liberalization and reform, import substitution, protectionism, business environment, economic growth, global markets
JEL classification: F10, F13, F14, F15, F18, F43
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