Rethinking Sri Lanka's Industrialization Strategy: Achievements, Lost Opportunities and Prospects

Abstract The purpose of this paper is to contribute to the contemporary policy debate on the industrialization strategy in developing countries by analyzing policy regime shifts and outcomes in Sri Lanka during the post-independence era. The analysis is guided by the received body of knowledge relating to the challenges faced by a small economy that takes world prices as given and is unable to affect world demand and supply in designing national industrialization strategy in this era of economic globalization. The findings demonstrate that the backlash against liberalization reforms in the contemporary Sri Lankan policy debate is largely based on ideological predilections rather than factual analysis. The comparative analysis of Sri Lanka's industrialization experience during the state-led import-substitution era and that of the post-reform era (in particular during the first two decades) makes a strong case for reconsidering the merit of the emerging emphasis on combining import substitution with export orientation with a sector specific focus. Selective policies to promote import substitution essentially impose a “tax” on export producers.