This thesis focuses on the 'productivity imperative' or the enhancement of productivity for the sustainability of manufacturing exports in Sri Lanka. In the context of loosing international competitiveness thus far gained through low cost labour, the improvements in productivity of export promoting industries emerges the strategy for manufacturing competitiveness.
The first part of the thesis reviews: (a) Sri Lanka's economic development from a political perspective and discusses the regime shift from import substitution industrialisation (ISI) to export oriented industrialisation (EOI); (b) both trade liberalisation and its economic consequences and the theoretical rationale underpinning trade liberalization; (c) the impact of trade liberalization on the structural transformation of the manufacturing sector. Based on the impact of trade liberalisation on the manufacturing sector and taking into account the emerging global competitive environment, it is concluded that productivity enhancement is the pivotal policy issue for the sustainability of the manufacturing industries' export-led growth momentum in the near future.
In part two, an in-depth analysis of productivity of Sri Lanka's manufacturing sector is undertaken. First, the concepts and methods of measuring productivity are reviewed. Second, the stochastic frontier production function (SFPF) model is applied to a panel data set to obtain optimal frontier coefficients for each year. Then using those coefficients in a sequential procedure, the decomposition of total factor productivity (TFP) into technical efficiency (TE) and technical progress (TP) is undertaken to shed further light on the impact of TE and TP on TFP. Third, the decomposition of output growth into input growth and TFP growth also enables us to elucidate the on-going debate on whether the 'trade growth miracle' in Asian economies was the result of intensive factor inputs rather than total factor productivity. Sri Lanka's manufacturing sector experience does not provide strong evidence to support the proposition. During the early years of the two policy reforms, the output growth appeared to be fuelled by intensive factor inputs, but during the subsequent years of consolidation, TFP growth emerged as the major driving force of export-led growth. The dominance of TFP over factor inputs in the latter part of each policy reform periods is related to TE rather than TP. However, Sri Lanka's experience on the whole appears to be consistent with the Krugman's (1994) proposition that Asian industrialisation was driven by 'perspiration rather than inspiration' or by intensive factor inputs rather than technological progress. In this context, the export-led growth engine fueled by perspiration would run out of puff due to the operation of the law of diminishing returns, and Sri Lanka is not at all immune to this possibility. Hence this thesis identifies the importance of the 'productivity imperative' to countermand the drag from the operation of law of diminishing returns.
Fourth, to further analyse the productivity imperative, the computable general equilibrium (CGE) framework is used to simulate the effect of manufacturing TFP shocks. The manufacturing productivity simulation reveals that the existing productivity growth performance in the manufacturing sector is inadequate for the sector to sustain its export competitiveness. This part concludes with a discussion of the policy recommendation to implement the strategy of productivity enhancement for manufacturing. It also presents the agenda for further research.