An empirical analysis of Sri Lanka's Manufacturing Productivity slow-down

Abstract

This paper analyses empirically the changes in Sri Lanka's manufacturing productivity during a period of regime shift from import substituting industrialisation to export-oriented industrialisation. We have used a varying coefficients stochastic production frontier model on a balanced panel data set to shed light on the effects of trade liberalisation on Total Factor Productivity which incorporates both changes in Technical Efficiency and Technical Progress. The results of the empirical validation of the stochastic production frontier model reveal that there were two distinct phases of output and productivity growth under each of the two trade liberalisation episodes that occurred during 1978–88 and 1988–97, respectively. The analysis carried out in this paper decomposing Total Factor Productivity into Technical Progress and Technical Efficiency also reveals that during early years of each episode, perspiration or factor inputs was the driving force of increased output growth giving way to ‘inspiration’ or technical progress as each phase matured. The stochastic production frontier empirics reported in this paper together with negative feedback effects emanating from the political turmoil and the prolonged ethnic conflict virtually brought the growth of foreign direct investment to a grinding halt in late 1980s, when the election of new right-wing government appears to have given a shot in the arm to overcome the paralysis of technical progress that seem to have contributed to the productivity slow-down in Sri Lanka's manufacturing sector in the eve of the new millennium.