Industry, including manufacturing, mining, energy, transportation, and construction, accounted for around 38 percent of GNP in 1986. The most important products included refined oil, textiles, gems, and processed agricultural products. Construction and tourism both grew rapidly in the late 1970s and early 1980s, but contracted after the onset of ethnic violence in 1983. State-owned corporations accounted for over 50 percent of total industrial output. An investment promotion zone was established in 1979 with the goal of attracting foreign capital; textile factories accounted for a large proportion of investment there in its early years. The island's electricity supply was mainly fueled by hydropower.

Changing Patterns

Sri Lanka developed little industry under British rule, relying instead on the proceeds from agricultural exports to buy manufactured goods from other countries. Most industry during the colonial period involved processing the principal export commodities: tea, rubber, and coconut. Although these sectors remained important, in the 1980s there was a much greater variety of industrial establishments, including a steel mill, an oil refinery, and textile factories.

Industrial diversification began in the 1960s with the production of consumer goods for the domestic market. This trend was a consequence of government measures aimed at saving foreign exchange, which made it difficult to import many items that had previously been obtained from overseas. Heavy industries were established in the late 1960s, mostly in the state sector. During the 1970-77 period the state assumed an even greater role in manufacturing, but after the economic reforms of 1977 the government attempted to improve prospects for the private sector. The fastest growing individual sector in the 1980s was textiles, which made up approximately 29 percent of industrial production in 1986. The textiles, clothing, and leather products sector became the largest foreign exchange earner in 1986. Over 80 percent of the manufacturing capacity was concentrated in Western Province, particularly in and around Colombo.

Industrial Policies

The enactment of the State Industrial Corporations Act of 1957 provided for the reconstitution of existing state enterprises as well as the establishment of new corporations to promote the development of large-scale and basic industries. The period 1958 to 1963 witnessed the first phase in the rapid growth of state industrial corporations. By 1963 fourteen such corporations were engaged in such fields as textiles, cement, sugar, paper, chemicals, edible oils and fats, ceramics, mineral sands, plywood, and leather. By 1974 there were twenty-five state corporations, including such major undertakings as a steel mill and an oil refinery.

Despite the 1977 policy shift in favor of the private sector, in early 1988 government-controlled enterprises continued to play a major role in industry. State-owned corporations accounted for nearly 60 percent of total industrial output. The most important public company was the Ceylon Petroleum Corporation, which accounted for about 55 percent of all public-sector production.

From the beginning, many industrial corporations in the state sector were troubled by such problems as management inefficiency, technical deficiencies in planning, overstaffing, and defective pricing policies. These difficulties contributed in many undertakings to poor economic results. Moreover, public sector enterprises were associated with objectives that reflected both growth and welfare considerations for the economy as a whole. They became the chief instruments furthering state ownership and social control in the economy, and they were expected to promote capital formation and long-term development. At times they were also looked upon chiefly as major sources of employment and enterprises providing goods and services to the public at relatively low prices. As a result, a number of the state industrial corporations have lost money. In 1987 the debts of state-owned corporations were Rs19 billion, of which Rs15 billion were owed to foreign sources and Rs4 billion to the two state-owned banks.

The liberalization of the economy in 1977 was largely prompted by the perceived inefficiency of the public sector, not by any ideological commitment to free enterprise. As a result, the government let private enterprise compete with the state corporations but took few steps to dismantle the state sector. Instead, it attempted to improve its efficiency. One major state venture, the National Milk Board, was dissolved in 1986, however. It had been established in 1953, but had never succeeded in developing the milk industry. In 1987 it was reported that consideration was being given to transferring to private control several state-run industrial enterprises. These included the four government textile mills, the State Distilleries Corporation, the National Paper Corporation, the Mineral Sands Corporation, Paranthan Chemicals, Sri Lanka Tyre, and Union Motors. In early 1988, however, doubts remained about the extent of the government's commitment to this program. Although the plan to sell the textile mills was expected to be implemented within two years, some of the government's economic advisers reportedly were urging the government to proceed cautiously in its privatization policy, in view of the limited capital markets, the concentration of private wealth, and the weak regulatory framework.

Manufacturing

The share of manufacturing in the economy declined from 21 to 15 percent of GDP between 1977 and 1986. This fall is somewhat misleading because it resulted in large part from the rapid growth in the service sector and the decline in output of the state-owned Ceylon Petroleum Corporation. The latter accounted for as much as one-third of the value of manufactured goods in some years and thus strongly affected aggregate manufacturing statistics. These statistics fluctuated along with changes in the value of the output of the oil refinery, which in turn varied with oil price levels and the extent of plant closings for maintenance. Some manufacturing sectors grew rapidly during this period.

Manufacturing was dominated for most of the twentieth century by the processing of agricultural produce for both the export and domestic markets. The most important industries were engaged in preparing and packaging for outside markets the principal export commodities--tea, rubber, and coconuts--for which Sri Lanka is noted. Such preparation generally involved low technology, comparatively modest capital investment on machinery, and uncomplicated, sequential procedures. Tea leaves, for example, follow a four-part process of withering, rolling (to extract bitter juices), fermentation, and heating (or roasting), before being packed in chests for export.

The processing of coconut and of rubber also were important industries, although their ratio in proportion to all manufacturing fell in the 1970s and early 1980s. The processing of the latter two commercial crops generally involved refining the basic commodities into a range of semi-finished products to be used in manufacturing finished goods at home or abroad. Coconuts, for example, are transformed into copra, desiccated coconut, coconut oil, fiber, poonac (a meal extract), and toddy. Copra and desiccated coconut are used as oils or as ingredients in food such as margarine; coconut oil is used to make soap; coconut fibers such as coir are used to make yarn, rope, or fishnets, while poonac is used as food for livestock. The coconut palm flower is also used in the production of alcoholic beverages.

Rubber is also processed in various ways, including latex or scrap crepe and ribbed or smoked sheet, which together account for much of Sri Lanka's export of this commodity. Processing methods for rubber are outdated, however, and Western consumer countries have protested against the hardness, high moisture content, and inconsistent quality of the Sri Lankan product.

Manufacturing received a boost in the early 1960s when import controls, which were the result of shortages in foreign exchange, made it difficult for consumers to obtain or afford foreign products. The result was a protected and profitable ready-made home market. This situation led to an expansion of both privateand public-sector manufacturing, with the private sector concentrating on consumer goods. These new enterprises, however, depended heavily on imported raw materials, and when the country's balance of payments difficulties became even more serious in the early 1970s, industry suffered from the lack of foreign exchange. In 1974 it was estimated that only 40 percent of the capacity of the industrial sector was used. After the 1977 liberalization, raw materials were more freely available, and in 1986 capacity utilization was estimated at 78 percent.

In 1978 the government established the Greater Colombo Economic Commission primarily to serve as the authority for the free trade zones to be set up near the capital. The first investment promotion zone consisted of a large tract that was established in 1979 at Katunayaka, near the Bandaranaike International Airport. A second zone was inaugurated in 1986 at Biyagama, in Colombo District. Foreign companies that built factories in the zones received generous tax concessions. The commission succeeded in attracting some foreign investment, especially from Hong Kong and other Asian countries. At the end of 1985, a total of 119 enterprises had signed agreements with the commission, but only 7 were signed in 1986, when there were 72 units in production. The total number of people employed was nearly 42,000. Gross export earnings from the investment promotion zones in 1986 were around Rs5.5 billion, up 43 percent from 1985. Foreign investments outside the free trade zones were coordinated by the Foreign Investment Advisory Committee.

The principal change in manufacturing in the 1980s was the rapid growth of the textile sector, from 10.5 percent of output in 1980 to 29.2 percent in 1986. In the mid-1980s, the government was attempting to diversify foreign investment away from textiles. Most textile factories were located in the investment promotion zones.

During the July 1983 riots, 152 factories were destroyed, but there was little long-term effect. Some observers expressed the view that the equipment destroyed was inefficient, and that modernization was long overdue.

Construction

Total expenditure for construction was estimated at 7.7 percent of GDP in 1986. The sector was given a boost by the ambitious public investment program of the government that came to power in 1977. Between 1977 and 1980, construction expanded at an annual rate of 20 percent in real terms. It stagnated in the 1980s as the number of new projects dwindled and the early ones were completed.

The largest construction project of the post-1977 period was the Mahaweli irrigation program. Conceived in the 1960s as the Mahaweli Ganga Program, the project originally was expected to bring approximately 364,000 additional hectares of land under irrigation and to provide an extra 540 megawatts of hydroelectric power to the national grid. Completion of the program was to require thirty years. Construction of the first two dams was completed in 1977 and opened about 53,000 hectares of new land to irrigation in a general area south of the old capital of Anuradhapura in the dry zone. When the United National Party swept into power in 1977, the project was given renewed impetus and renamed the Accelerated Mahaweli Program. Construction work was undertaken at five new sites between 1979 and 1982, with the intent of increasing the hectares under irrigation and generating an extra 450 megawatts of hydroelectric power for the national grid. By the end of 1987, new dams and reservoirs had been completed at Kotmale, Randenigala, Maduru Oya, and Victoria. The operational power stations at Randenigala and Victoria together generated 330 megawatts of power, with an additional 147 megawatts expected when the Kotmale station came on line. All construction related to the Accelerated Mahaweli Program was scheduled for completion by 1989. The total cost of the entire project was estimated at US$1.4 to 2 billion.

The Urban Development Authority was established in 1978 to promote integrated planning and development of important urban locations. Its responsibilities have included the new parliamentary buildings and the reconstruction of St. John's fish market in Colombo. Total expenditure of the Urban Development Authority was Rs529 million in 1986, well under its annual budget in the early 1980s. The Million Houses Program was established in 1984 to coordinate both public and private housing construction. In early 1988 the government's policy was to subsidize private housing rather than undertake extensive public housing programs.

Mining

Mining is carried out in both the public and private sectors. The most valuable products are precious and semiprecious stones, including sapphires, rubies, cats' eyes, topaz, garnets, and moonstones. Official exchange earnings from gems were negligible in the first two decades after independence because most of the output was smuggled out of the country. The setting up of a publicly owned State Gem Corporation in 1971 and export incentives for those exporting through legal channels brought a marked improvement. In 1986 legal exports were valued at Rs755 million, but many observers believed that a considerable quantity was still being exported illegally. In the late 1980s, Japan remained the most important market for Sri Lanka's gems. The Moors traditionally have played an important role in the industry.

Graphite also is of commercial significance. Almost the entire output is exported as crude graphite (plumbago). Ilmenite, a mineral sand used in the manufacture of paint and the fortification of metals, also is exported. Salt is produced by evaporation for the domestic market. Thorium deposits have been reported in Sabaragamuwa Province and in the beach sands of the northeast and southwest coasts. Exploration also has disclosed the presence of apatite (source of phosphate), dolomite (fertilizer component) and small pockets of economically extractable iron ore.

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Source: U.S. Library of Congress