Trade and Competition Policies: Implications for Productivity Growth in Sri Lanka

Trade liberalization is necessary but not sufficient to get the full return to trade reforms in the absence of liberalization of non-tradable goods through competition policy. Even if resources to augment factor growth are readily available, that too could fizzle out because of diminishing returns. Sri Lanka has made only limited progress on trade liberalization in the post-conflict era and at present has no competition policy to speak of. Sustained growth has to be based on total factor productivity (TFP) growth. Otherwise, Sri Lanka will have to keep raising savings to increase capital, assuming that labor growth sees a steady increase. However, as living standard increases, population growth declines, and labor supply does not grow fast. In fact, Sri Lanka is now past the demographic dividend phase and already in a situation where there is a steady decline in population. In this context, low average TFP growth means that the country has to keep on increasing saving and borrowing from abroad to raise GDP growth, based on factor augmentation. This leads to a difficult macroeconomic situation as excessive foreign borrowing is needed to augment domestic savings that Sri Lanka cannot afford to service in view of the fact that access to capital is more costlier than before. The study finds TFP growth in Sri Lanka to be low. It finds that trade and competition policies that would have raised TFP growth were not sustained after their initial introductions.