Despite Sri Lanka being held-up as the first country in South Asia to open up to the rest of the world by liberalizing its foreign trade regime, trade as a share of GDP has declined steadily over the years, cautions a top regional economist. Speaking at the inauguration ceremony of the Sri Lanka Economic Summit 2012 held last week, Dr Kalpana Kochhar, Chief Economist - South Asia Region of the World Bank (WB) said that Sri Lanka, which is losing ground in global markets will need to create conditions for faster productivity growth to get onto a trajectory of sustained, faster growth.
“In the decades that followed the opening up, trade as a share of GDP increased to over 80 percent of GDP in 2000, with tea and high-end apparel exports leading the way. However, since that peak trade as a share of GDP has steadily declined to 44 percent in 2010,” Kochhar analyzed.
Pointing out that an enduring result in the empirical growth literature is that long-run per capita growth is driven eventually by total-factor productivity (TFP) growth, a key element in creating those conditions will be how well exporters and importers connect to global markets.
“The Growth Commission (a group of eminent economists from around the world) finds that in all cases, the elite high growth countries absorbed know-how and technology from the rest of the world. They did not originate much of this knowledge, but they did have to assimilate it at a tremendous pace,” the regional economist said.
She, therefore, noted that importers play a critical role in this regard as they are the ones that will be the conduit for the technology and knowledge transfers and moreover, it is typically the case that those who develop or acquire frontier technology become successful exporters.
“Foreign direct investment remains at 1 percent of GDP three years since the end of the armed conflict. The dramatic decline in openness and stagnating FDI took place at a time when the rest of the world was integrating more strongly and global trade was accelerating. Taken in this global perceptive, Sri Lanka is smaller and less open today than it has been for most of the last 30 years,” Dr Kochhar highlighted.
Meanwhile, the WB economist said that the total nominal protection rate on imports is increasing to rates not seen since 1977 and this has led to the trend that export-led growth has given way to domestic demand driven growth, meaning that Sri Lanka has not fully tapped the opportunities offered by the unprecedented expansion in world trade since the beginning of the Millennium.
“A second observation is that the role of garment exports in total manufacturing exports has been remarkably steady over the years. Their average share in manufactured exports was 65.6 over the period 1980-2010 and 66.1 percent over the period 2001-10. This contrasts starkly with the ark of garments exports in total exports in other developing countries and implies very little dynamism in Sri Lanka’s exports,” the Economist further highlighted.