Industrial policy versus decentralized innovation

Posted on October 23, 2014  /  2 Comments

Except for our work on agriculture, most of our activities contribute to the development of the service sector. This is partly because it is the sector that is most dependent on ICT services and because that’s where the investment and growth is, in the countries that we work in. But every so often, industrial policy, or the notion that governments should promote specific industries, including by spending taxpayer money on them, raises its head. I wrote on this topic:

It appears that the biggest barrier is capital. The existence of large conglomerates (e.g., John Keells Holdings) and the emergence of new ones (e.g., Softlogic) is prima facie evidence that the capital markets are inefficient. A true entrepreneur has difficulty raising capital. Those with access to capital appear to be oriented to low-risk, quick-return activities. So both gravitate toward services. This is not something government does. But it could be an outcome of wrong government policies.

If, after all this, no manufacturing activities commence, what should the government do?

Nothing. It could act to lower the various barriers that include, but are not limited to, infrastructure and access to capital. But under no circumstances should it venture into 1970s style direct investment in, and operation of, factories.

The uncoordinated reluctance of countless decision makers who are risking their money should tell us that Sri Lanka does not have a comparative advantage in manufacturing. Their reluctance should always trump the decisions of those who are recommending the risking of other people’s money.


  1. I always wonder if the private sector (including SMEs) is getting due recognition. It is very disappointing to see some politicians and public officials attempting to diminish and demonise the private sector.