From Stability to Transformation: What Sri Lanka’s Industrial Policy Experience Teaches Us
“The best way to predict the future is to create it.” — Peter Drucker
By Prof. Asoka S.Seneviratne
Introduction
Sri Lanka has never been without industrial policy.
For decades, successive governments have attempted, in different forms, to promote manufacturing, protect domestic industries, attract foreign investment, develop exports, create employment and move the economy towards higher value-added production. Yet the country has struggled to transform these individual initiatives into a sustained process of industrial upgrading.
This raises a fundamental question: why has Sri Lanka found it so difficult to convert industrial policy into industrial transformation?
A recent International Monetary Fund working paper provides a particularly useful framework for examining this question. Rather than viewing industrial policy simply as a collection of subsidies, tariffs, tax concessions or government programmes, the IMF paper focuses on the institutional capacity required to make industrial policy work. Its central framework is the “4A” model: Ambition-Agency, Autonomy, Accountability and Adaptability.
This framework provides an opportunity to look at Sri Lanka’s industrial experience through a different lens.
The issue is not whether Sri Lanka had industrial policies. It clearly did. The deeper issue is whether the institutions implementing those policies possessed the characteristics required to learn, coordinate, discipline, experiment, and adapt.
This question has become particularly important today.
Sri Lanka has spent the past several years dealing with an extraordinary economic crisis. Macroeconomic stabilisation, fiscal consolidation, debt restructuring, reserve accumulation and monetary discipline have been necessary foundations for recovery. But stability is not the same thing as transformation.
The next stage must therefore be different.
Sri Lanka now needs to move from stabilising the economy to transforming its productive capacity. This is why the 2027 Budget should not be regarded merely as another annual exercise in taxation and expenditure. It should become a Budget for Economic Transformation, with industrial policy at its centre.
The IMF’s 4A framework helps explain both Sri Lanka’s past difficulties and what institutional changes may be required for the future.
Sri Lanka’s Industrial Policy Has a Long History — But Not a Continuous Transformation
Sri Lanka’s industrial-policy experience can broadly be understood through several different phases.
Before 1977, the country followed a strongly interventionist development model. (i) Import substitution, (ii) quantitative restrictions, (iii) state enterprises, (iv) licensing, and (v) protection were used to encourage domestic production and reduce dependence on imports.
The objective was understandable: build domestic productive capacity. But protection alone does not necessarily create international competitiveness.
An industry can survive behind tariff walls without becoming productive enough to compete internationally. Domestic firms may acquire production capacity while remaining dependent on imported technology, protected markets and administrative support.
The economic liberalisation that began in 1977 represented a major change. Sri Lanka moved towards greater openness, private investment, export orientation and integration with international markets.
This created important successes.
The development of the apparel industry is perhaps the clearest example. Export-oriented manufacturing, foreign investment, the free-trade-zone model and integration into global production networks created employment and foreign-exchange earnings.
Yet another question emerged: why did this success not generate a much broader transformation of Sri Lanka’s industrial structure?
The country developed internationally competitive pockets of production, but industrial diversification remained limited. Manufacturing did not generate the scale of technological upgrading seen in some successful East Asian economies such as S. Korea & Japan.
The lesson is therefore not simply that protection failed and liberalisation succeeded. That would be too simplistic.
The more important lesson is that neither protection nor liberalisation, by themselves, constitute an industrial strategy.
Successful industrialisation requires institutions capable of (i) identifying opportunities, (ii) coordinating investment, (iii) encouraging technological upgrading, (iv) demanding performance and (v) changing policies when they do not work.
That brings Sri Lanka directly to the IMF’s 4A framework.
Ambition and Agency: Does Sri Lanka Know What It Wants to Become?
The first question for an industrial policy is not how much money the Government should spend. It is: what kind of economy does Sri Lanka want to become?
Ambition means having a clear development objective. Agency means having an institution capable of translating that ambition into coordinated action. Sri Lanka has often had ambitious policy statements.
There have been plans for export development, industrialization, investment promotion, technology development, regional industrialization and value-added production. More recently, the Government has articulated objectives to raise manufacturing’s contribution to GDP, increase merchandise exports and strengthen industrial competitiveness.
The National Export Development Plan 2026–2030, for example, places export expansion, diversification and integration into global value chains at the centre of the country’s trade strategy, with a stated ambition of total exports of US$36 billion by 2030, including US$28 billion in merchandise exports.
The Ministry of Industry has separately set a target of increasing manufacturing’s contribution to GDP from 16.4% in 2024 to 20% by 2030 and merchandise exports from US$12.7 billion to US$28 billion.
These are significant ambitions.
But ambition becomes meaningful only when accompanied by agency.
The IMF’s argument is important here. Successful industrial policy requires a leading institution capable of accumulating sector-specific knowledge, learning from markets, coordinating policies and continuously experimenting with different approaches. This is precisely where Sri Lanka’s institutional fragmentation becomes important.
Industrial development involves finance, trade, taxation, energy, ports, customs, skills, land, technology, infrastructure, research and development and foreign investment. If each ministry and agency operates independently, an industrial strategy can become a collection of disconnected programmes.
Sri Lanka therefore needs more than another policy document.
It needs an institutional agency capable of implementing the policy.
The proposed Industry Transformation and Innovation Authority is potentially relevant to this institutional question. The Government has been working towards consolidating existing industrial and enterprise-development institutions into a more integrated authority.
But establishing an institution is only the beginning.
The real test will be whether it has the authority, expertise and institutional independence to coordinate policy across government and to learn from the private sector and international markets.
Autonomy: Industrial Policy Must Serve the Economy, Not Individual Interests
The second “A” is autonomy.
This is one of the most important lessons for Sri Lanka.
Industrial policy necessarily involves government intervention. But intervention can produce two very different outcomes.
In one case, government works with firms to solve genuine coordination failures, develop infrastructure, promote technology, and enter new markets.
In another, policies become instruments for protecting inefficient firms, distributing privileges or maintaining politically connected interests.
The difference is institutional.
Autonomy does not mean that policymakers should operate without democratic accountability. It means that an industrial-policy institution must have sufficient professional independence to make decisions based on economic evidence rather than short-term pressure from individual firms or interest groups.
Sri Lanka’s historical experience demonstrates why this matters.
Protection can sometimes be necessary during the early development of an industry. But protection without performance requirements can become permanent.
The crucial question should therefore be: What does an industry have to achieve in return for government support?
If a firm receives assistance, should it increase exports?
Should productivity rise?
Should local value addition increase?
Should technology be transferred?
Should workers acquire new skills?
Should the firm penetrate new markets?
Should the support expire after a defined period?
These are not merely technical questions. They determine whether industrial policy becomes a mechanism for productive transformation or permanent protection.
A future Sri Lankan industrial policy should therefore be conditional, transparent and measurable.
Government support should not be regarded as an entitlement.
It should be regarded as an investment by the nation in productive capacity.
Accountability: Industrial Policy Must Be Judged by Results
The third “A” — accountability — may be the most important lesson of all.
Sri Lanka has historically produced numerous plans, institutions and incentives. But the country has not always maintained a sufficiently rigorous mechanism for asking whether those interventions actually delivered the intended results.
An industrial policy should therefore establish measurable performance indicators from the beginning.
The question should not be:
How much did the Government allocate?
The question should be:
What economic transformation resulted from the allocation?
This changes the entire philosophy of policymaking.
For example, an industrial programme should be judged by whether it increases:
productivity;
exports;
investment;
technological capability;
domestic value addition;
skilled employment;
research and development;
foreign-exchange earnings; and
real household incomes.
This approach is directly connected to the broader argument I have made about Sri Lanka’s 2027 Budget.
The success of Budget 2027 should not be judged solely by revenue collection or expenditure control. Those are important instruments of fiscal management. But the ultimate test must be whether public policy increases the economy’s productive capacity. A country cannot tax its way into prosperity.
Nor can it borrow its way into prosperity. Nor can monetary stability by itself create a productive economy.
The sustainable answer must ultimately be higher productivity, greater investment, stronger exports and higher real incomes.
This is why industrial policy belongs at the heart of the transformation agenda.
Adaptability: Sri Lanka Must Learn From What Does Not Work
The fourth “A” is adaptability.
This may be the most difficult characteristic for a government bureaucracy.
Industrial development takes place in an uncertain world. Technologies change. Consumer preferences change. Global supply chains change. Trade agreements change. Energy prices change. Artificial intelligence is changing production itself.
A policy that was appropriate ten years ago may be completely inappropriate today.
Therefore, successful industrial policy cannot be a five-year document that remains unchanged regardless of circumstances.
It must be a learning system. If a programme fails, government should be able to modify it. If an industry does not become competitive after receiving support, assistance should be reconsidered. If a new technology creates an opportunity, policy should respond quickly.
If a global value chain becomes accessible to Sri Lankan firms, infrastructure and skills policy should adjust accordingly. This is where the IMF’s institutional approach becomes particularly relevant.
The IMF paper argues that successful industrial-policy institutions accumulate knowledge through continuous experimentation and feedback from markets. Sri Lanka needs precisely such a mechanism.
The private sector should not simply be treated as a recipient of government policy. It should become an important source of information about international markets, technology, production costs, skills shortages and emerging opportunities.
Government, in turn, must retain the capacity to distinguish between genuine information and requests for permanent protection.
That is the institutional challenge.
. From Industrial Policy to Economic Transformation: The 2027 Budget Test
This brings Sri Lanka to the most important question.
What should industrial policy achieve in the next stage of Sri Lanka’s economic development?
The answer cannot simply be to increase the number of factories.
Sri Lanka needs a transformation in the quality and productivity of production.
This means moving from relatively low-value production towards higher-value manufacturing and services; from imported technology towards greater domestic technological capability; from fragmented small enterprises towards globally connected SMEs; and from dependence on a narrow range of exports towards diversified and sophisticated export production.
The Government’s own 2026 Budget has recognised the importance of productivity, innovation, private-sector investment, export diversification and global value-chain integration, while setting an objective of sustained growth above 7% within the next few years.
The challenge is now implementation. This is where Budget 2027 becomes critical. The Budget should connect macroeconomic stability with a coherent national transformation programme.
The first mission should be raising productivity.
That requires investment in technology, automation, artificial intelligence, energy efficiency, logistics, digitalisation, research and development and workforce skills.
The second mission should be mobilising investment.
Macroeconomic stability is essential, but stability alone does not automatically produce investment. Sri Lanka needs predictable regulation, faster approvals, better infrastructure, deeper capital markets, stronger public-private partnerships and a genuine single-window investment mechanism.
The third mission should be improving living standards.
Industrial transformation is ultimately about people.
If productivity increases but real wages do not improve, if exports increase but employment quality does not improve, or if growth is concentrated without broader income gains, transformation remains incomplete.
The objective must therefore be an economy capable of generating higher productivity, higher real wages and higher household incomes. But this transformation cannot be meaningful to ordinary households if the cost of living continues to rise faster than their incomes. Keeping the cost of living manageable must therefore be a fundamental objective of economic policy, so that higher productivity and incomes translate into genuine improvements in living standards.
The above assertion is fundamentally important for policymakers.
Sri Lanka’s New Industrial Policy Must Be Different From the Old One
Sri Lanka should therefore avoid two extremes.
The first is a return to indiscriminate protectionism.
The second is the assumption that markets alone will automatically generate the industrial transformation the country needs.
The experience of successful Asian economies suggests a more sophisticated approach.
The state must create the conditions for private investment and competition, while actively addressing coordination failures that individual firms cannot solve alone.
That means infrastructure. It means reliable and competitively priced energy. It means efficient ports and logistics. It means modern customs systems. It means technical and vocational education linked directly to industry. It means research and development. It means access to finance for productive investment. It means export-market intelligence. It means integration into global value chains.
And it means institutions capable of continuously evaluating whether these interventions are actually working.
Sri Lanka’s geographical position provides an important opportunity. The country can combine manufacturing with logistics, maritime services, tourism, digital services, agriculture and knowledge-intensive exports.
But geography is an opportunity, not a strategy. A strategy requires institutions. That is why the 4A model is so relevant.
Sri Lanka needs ambition to define where it wants to go; agency to coordinate the journey; autonomy to prevent industrial policy from becoming captured by narrow interests; accountability to measure whether public support produces results; and adaptability to change course when circumstances change.
Conclusion: Stability Is the Foundation — Transformation Is the Destination
Sri Lanka’s economic crisis has taught the country a painful but important lesson: macroeconomic instability can destroy decades of development. The stabilisation process was therefore unavoidable.
Fiscal discipline, monetary stability, debt restructuring, reserve accumulation and stronger institutions provide the foundation upon which the next stage of development must be built.
But foundations are not buildings. Stability is necessary. It is not sufficient.
The next challenge is economic transformation.
This is why Sri Lanka’s industrial-policy debate should no longer be confined to the traditional question of whether the Government should intervene more or intervene less.
The more important question is:
Can Sri Lanka build institutions capable of making intervention smarter, more disciplined, more accountable and more adaptable?
The IMF’s 4A framework offers a valuable way of asking that question.
Sri Lanka’s historical experience suggests that industrial policy can create capacity without competitiveness, protection without productivity, and institutions without sufficient coordination. The experience also shows that openness can generate remarkable export successes without necessarily producing broad-based industrial diversification.
The lesson is therefore not to choose between the state and the market. It is to build a state that can work intelligently with competitive markets. That is the real challenge for Budget 2027.
Sri Lanka should not use the 2027 Budget simply to consolidate the achievements of stabilisation. It should use those achievements as the platform for the next stage — raising productivity, mobilising investment, diversifying exports, developing technology, upgrading skills and increasing real household incomes.
The country’s current industrial and export strategies already contain important ambitions. The National Export Development Plan seeks substantial expansion and diversification of exports, while the Government’s industrial strategy aims to raise manufacturing’s contribution to GDP and merchandise exports by 2030.
The decisive issue, however, will not be the targets themselves.
It will be institutional capacity to deliver them.
Sri Lanka therefore needs to move from an era of policies to an era of policy learning; from protection to performance; from isolated projects to coordinated transformation; and from short-term programmes to a sustained national productivity strategy.
The IMF’s 4A model provides a useful institutional lens.
Sri Lanka’s own experience provides the evidence. And Budget 2027 provides the opportunity.
The ultimate objective should be nothing less than a transformation from an economy that has repeatedly struggled to recover from crises into an economy capable of sustaining high productivity, competitive exports, productive investment and rising real living standards. That is the point at which stability becomes meaningful.
Stability should not be the destination of Sri Lanka’s economic journey. It should be the platform from which transformation begins.
As Peter Drucker reminds us, “The best way to predict the future is to create it.” For Sri Lanka, the time has come to create that future through a new generation of disciplined, accountable and adaptive industrial policy
(The writer served as the Special Advisor to the President of Namibia from 2006 to 2012 and was a Senior Consultant with the UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993). He can be reached via asoka.seneviratne@gmail.com.)
Reference:
IMF Working Paper, Institutions for Industrial Policy: The Foundation of Economic Development -Prepared by Reda Cherif, Fuad Hasanov, Gary Xie March. 2026