Vulnerable despite significant structural changes in economy

The Sri Lankan economy has undergone significant structural changes in the last three decades. The changes in the export import structure that we discussed last week are reflected in the changed structure of the economy, in as much as the changes in the economy are reflected in the import export structure.

The most significant transformation has been the lesser contribution of agriculture to the national output and the increasing importance of industry and services to GDP. Significant structural changes in the economy have occurred mostly after the liberalisation of the economy in 1977.

The economy has moved from a predominantly agricultural one to a more diversified economy in which agriculture contributes only 12 per cent to GDP. This is a fact that is not generally perceived by many. Agriculture is no longer the backbone of the economy even though a third of the population is involved in agriculture in one way or another, but the total contribution is small compared to manufactures and services.

Economic diversification

Economic diversification, which was very gradual till the late 1970s, gained in momentum in the last two decades of the twentieth century. The most notable characteristic of this structural change is the higher contribution of manufacturing to Gross Domestic Product (GDP) than agriculture. By 1999 manufacturing contributed 17.2 per cent of GDP, while agriculture, forestry and fishing contributed 21.7 per cent of GDP. Agriculture’s contribution had declined to 16.9 per cent. This is in sharp contrast to the structure of the economy in 1951, when agriculture’s contribution was 41 per cent and manufacturing (mainly the processing of tea, rubber and coconut) accounted for 16 per cent of GDP. The contribution of services had increased from 41 per cent in 1950 to 55.8 per cent of GDP by 1999.

Apart from their relative positions, there were qualitative differences in agriculture, manufacturing and services. In 1950 plantation crops not only contributed a large share of agricultural output, but most of the manufacturing and services were dependent on tea, rubber and coconut production, marketing and export. In fact the processing of these three tree crops accounted for over 60 per cent of manufacturing output. Other factory industry was negligible. Similarly, most of the services were ancillary, to and supportive of the plantation crops: transport of fertilizer, other inputs, and export produce by road, rail and ship. Banking and insurance services served mostly export agriculture.

The changes in agricultural policy from just prior to independence resulted in a different composition of agricultural output. In 1950 plantation crops accounted for about 70 per cent of agricultural output, while paddy and other food crops accounted for only 30 per cent of total agricultural output. This changed and by the late 1980s the share of plantation agriculture was only one-third of the average share in the 1950s, while the share of domestic agriculture had come to exceed that of export agriculture.

At the end of the century other agricultural food crops contributed 57 per cent of total agricultural output. In 2010, plantation crops contributed only about 2.5 per cent to GDP. Tea’s contribution was 1.4 per cent, while paddy contributed 1.8 per cent to GDP. The increased relative importance of manufacturing, and the qualitative changes in industrial output, were gradual till around 1980. In fact the relative position of manufacturing in national output even declined from 16 per cent in 1950 to 15 per cent in 1960 and to around 14 per cent by 1977. Since then it increased sharply to 20 per cent by 1990 and 23 per cent by 1997, and declined to17.2 per cent in 1999.

Qualitative changes

The qualitative changes in the sectors and sub sectors are as significant as the changes in their relative importance. Before 1970 industrial output consisted of tree crop processing and a few industrial products like cement, chemicals, glass and cottage industries. From 1970 to 1977 the country moved into an import substitution industrial strategy.

This strategy, which attempted to manufacture a wide range of consumer items, did not have a significant impact on changing the economic structure, even though a wide variety of industrial goods was produced. It was the post 1977 period of trade liberalisation and encouragement of foreign investment which led to both the expansion of the industrial sector and its diversification.

Factory industry replaced export crop processing in importance. Small or cottage industry declined. Factory industry now contributes about 90 per cent of industrial output, while export crop processing contributes about 4 per cent.

The contribution of small or cottage industry to national output is only 1.1 per cent. Factory industry itself has shown considerable diversification. Despite readymade garments holding a dominant position in industrial output, there has been a noteworthy diversification of industrial exports recently and a wide range of industrial items are produced for export.

Effect on export import structure

These structural changes in the economy are reflected in the country’s trade pattern. Agricultural exports dominated the export structure from the beginning of the plantation economy till the 1980s. In 1950, tea, rubber and coconut exports accounted for 94 per cent of exports. A significant diversification of exports occurred in the 1980s, and by 1989 agricultural exports had declined to about 35 per cent of exports. By 1999 it had declined further to 21 per cent. The diversified export structure consists 77 per cent of industrial exports with garment exports accounting for 53 per cent of the country’s total exports. Rubber based products, ceramics, leather and footwear, electrical goods and machinery and equipment are the other exports.

The import structure too changed significantly. In 1951 food imports accounted for 45 per cent of total imports, with rice imports alone accounting for 15 per cent of total imports. In contrast, food imports were only about 12 per cent of total imports in 2010, with rice imports being less than 1 per cent of total imports. The import structure has changed from over 50 per cent of imports being consumer items, to over 50 per cent being intermediate items. Consumer imports have declined to 21 per cent of total imports.

Continued trade dependence

Despite these compositional changes in exports and imports, Sri Lanka’s trade dependence (imports and exports as a proportion of GDP) remains high. In 1950 the country’s trade dependence was 70 per cent. It is only marginally less at about 68 per cent today. Yet the character of the trade dependence has altered significantly. The trade dependence is more industrial than agricultural. Manufactured goods dominate exports.

Raw materials and capital goods for industries account for a larger share of imports than food and other consumer imports. Despite this the vulnerability to global economic conditions has perhaps been enhanced rather than reduced. International prices for the country’s imports affect the livelihoods of people significantly. Therein lies the problem.

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