When governments pick industries, industries start picking governments

By Dhananath Fernando

Originally appeared on The Morning

I had a friend who got three A passes for his A/Levels in Biology. Then he sat for the A/Levels again, this time in Mathematics, got three A passes again and entered the Engineering Faculty.

I once asked him why he did his A/Ls twice. He said the first time his parents wanted him to become a doctor. So he studied Biology. But what he really wanted was to become an engineer. So he did his A/Ls again and followed what he actually wanted.

I was reminded of this story with the renewed discussion on industrial policy. Governments, economists, and multilateral agencies are once again talking about industrial policy as a way of developing economies.

At the surface level, there is nothing wrong with it. Everyone wants more industries, more exports, more investment, and better jobs. The real question is how we get there. One school of thought believes the government should identify certain industries that have future potential and actively support them. The government can provide subsidies, tax concessions, cheap loans, tariff protection, and infrastructure.

The other school of thought is that the government should create the right environment for industries to grow, without deciding which industries should become winners.

These two approaches may sound similar, but they are very different. For example, imagine the government spending $ 1 billion to build research laboratories, testing facilities, and common infrastructure that can be used by all exporters. Now imagine the government selecting three industries and giving those industries a subsidy package of $ 1 billion.

Both may be called industrial policy. But the outcomes are very different. The first creates a public good. The second creates a group of beneficiaries.

The problem for Sri Lanka 

This debate has become more relevant with the World Bank itself taking a more open position towards industrial policy in its recent work. The World Bank was traditionally associated with the view that governments should avoid picking winners and focus more on markets, competition, and openness.

That view has now changed to some extent. But the change should not be misunderstood. The new thinking is not that every government should suddenly start choosing industries and writing subsidy cheques. The argument is that governments already intervene in economies, and in some cases there can be legitimate reasons to do so.

The problem for Sri Lanka is what happens after the Government decides to pick an industry. Let us say the government identifies a few ‘strategic industries’. The first request will be protection from imports. Then they will say they cannot compete because electricity is expensive. Then they will ask for cheaper loans. Then tax holidays. Then special land concessions. Then further protection because they still need more time to become competitive. What started as industrial policy can quickly become permanent protection.

This is where the problem really starts. Initially the government picks the industries. Then the industries become dependent on the government. Finally, the industries become powerful enough to influence the government.

At that stage, industries start picking governments. They will support politicians who promise to maintain tariffs. They will lobby against competition. They will oppose trade agreements. They will argue that removing protection will destroy jobs.

A temporary subsidy becomes permanent. A temporary tariff becomes a permanent wall. The so-called infant industry never really grows up. This is not because businesses are bad. Businesses respond to incentives. If the easiest way to make profits is by becoming more productive, they will invest in productivity.

If the easiest way to make profits is by influencing government policy, they will invest in lobbying. That is the danger. Sri Lanka has seen this many times. We introduce protection to support local industries. But while one industry benefits, thousands of consumers and other businesses pay higher prices.

For example, if a tariff is placed on an imported raw material to protect one local producer, every downstream industry using that raw material becomes less competitive.

The protected company wins. The rest of the economy pays. 

The other problem is information. How does the government know which industry will succeed in 10 years? Can any ministry predict future technology, global demand, energy prices, or consumer preferences?

Entrepreneurs cannot predict these things perfectly either. But there is one major difference. Entrepreneurs normally take risks with their own money or investors’ money. Governments take risks with taxpayers’ money. This takes me back to my friend who did his A/Levels twice. His parents knew him better than most people. They had his best interests at heart. Yet even they could not make the perfect decision on which career suited him.

The need for a careful approach 

That does not mean parents should have no role. They can provide education, guidance, and opportunities.

But there is a difference between creating opportunities and deciding the outcome. The same applies to government. Government can create the conditions for industries to succeed. But it should be very careful about assuming it knows in advance which industry should become the next national winner.

When a private business makes a bad decision, it eventually runs out of money. When a government programme fails, very often the answer is another budget allocation.

This does not mean the government has no role. Sri Lanka definitely needs a policy towards industry. But policy towards industry is different from picking industries.

Government should focus on the problems faced by almost every business. Expensive and unreliable energy, complicated taxes, unpredictable tariffs, difficulty accessing land, Customs delays, poor transport, policy uncertainty, and skills shortages.

Instead of giving cheap electricity to a selected industry, fix the electricity market. Instead of giving tax holidays to selected companies, create a predictable tax system. Instead of protecting selected producers from imports, reduce the cost of raw materials and intermediate goods for all industries. Instead of trying to predict the next winning sector, allow thousands of entrepreneurs to discover it.

There is also a valid role for government in areas such as climate change, research, and common infrastructure. But even there, government should be careful.

Suppose the government decides that solar panel manufacturing is a strategic green industry and places high tariffs on imported solar panels. We may create a small protected solar panel industry. But we will also make solar panels more expensive for every hotel, factory, and household. We may protect a green industry while slowing down the green transition. That is why the question is not whether government should do anything. The question is what government should do.

The lesson for industrial policy

Sri Lanka cannot compete with the United States, China, or Europe by offering bigger subsidies. We do not have that fiscal capacity. Our advantage should be different.

Simple regulations. Competitive energy. Fast approvals. Open trade. Efficient ports. Better skills. Strong property rights. Predictable policies. Those are the areas where government should be active.

In the end, my friend became an engineer not because his parents stopped caring about his future, but because they eventually allowed him to choose the path that suited him.

That is perhaps the better lesson for industrial policy as well. Government should create the opportunities, remove the obstacles, and provide the common infrastructure. But it should be careful about choosing the career of the economy. Because once governments start picking industries, industries may eventually become powerful enough to start picking governments.

Economics of education reform

By Dhananath Fernando

Originally appeared on The Morning

Sadly, education reform has been reduced in the public conversation to one narrow question: sex education, and what should or should not appear in the school curriculum. That debate matters, but it is not the debate we should be trapped in. While we argue about a small corner of the syllabus, the real architecture of education remains untouched.

Every economy runs on incentives. Education is no different. What students learn, how they learn, what teachers are rewarded for, what principals are promoted for, and what the system measures as ‘success’ are all incentive problems before they become curriculum problems.

On top of that, we have powerful perceptions shaping decisions. In primary and secondary education, the user and the decision-maker are not the same person. The child is the user, but the parent is the buyer. That gap changes everything.

It gets more complex in higher grades and tertiary education, but the market dimension never disappears. Education is ultimately about skills, competencies, and ethics needed for a globally competitive world, whether we like that framing or not.

If we take competitiveness seriously, what matters is not only what is taught but how it is taught, and whether the system has the governance and accountability to improve it. Monitoring performance, rewarding excellence, fixing weaknesses, and updating content are not ‘nice-to-have’ reforms. They are the minimum conditions for a modern education system. A real reform agenda has to be holistic.

But we also need to be honest about constraints. Sri Lanka is still climbing out of an economic crisis and a debt restructuring. Large-scale investments and expensive redesigns are difficult. That is precisely why reform must focus first on incentives, productivity, and institutional design, not only on spending more.

Core components

When we look at the education delivery ecosystem, there are three core components.

First, the content setters, the institutions that decide what should be taught. In Sri Lanka, that role largely sits with the National Institute of Education.

Second, the execution arm, the teachers who deliver learning in classrooms.

Third, school administration, principals, and support staff who manage teachers, students, infrastructure, and the daily operations of the system.

In Sri Lanka these three streams are often intertwined in a way that weakens all three. Many teachers want to become principals for reasons that include salary structure and career progression. But when we turn a good teacher into a principal, we may lose both a potential great principal and a great teacher, because teaching skill and school leadership are not the same skill set.

In other cases, teachers move into curriculum-setting roles on the assumption that the execution arm alone knows what is best for students. Teacher input is essential, but treating it as the only criterion is also a mistake. Content design requires multiple perspectives, including pedagogy, labour market needs, child development, and global benchmarking.

Building a better system

A better system would treat teaching as a profession you can master without needing to escape the classroom to earn more. Teachers should have a salary and career structure that rewards excellence in teaching, not only movement into administration. Principals should have a separate professional track with a distinct salary scale, and training focused on leadership, student welfare, staff management, and operational efficiency.

In a meritocracy, a great teacher should be able to earn more than an average principal. That is how you keep talent where it creates the most value.

Curriculum also needs openness and competition. In practice, we already have a version of it. At a certain point many parents choose between Edexcel, Cambridge, or the local syllabus. That choice signals something important: parents want global standards and credible pathways.

A system that is open to competition is forced to benchmark itself, update itself, and respond to outcomes. At the same time, this does not mean we abandon local identity. Subjects like history, geography, language, and culture matter. The point is not to import a foreign syllabus blindly, but to ensure our local syllabus can stand confidently alongside global standards.

There is also a productivity question we rarely ask: how well do we use the infrastructure we already have? Schools typically operate for only part of the year, and even on a school day, the infrastructure sits idle for a large share of the total time. This is expensive infrastructure, much of it built with borrowed money.

We cannot afford underutilisation. Improving the productivity of school facilities through better scheduling, shared use, community learning programmes, and structured after-hours activities is not a cosmetic reform. It is a fiscal and economic reform.

Demography makes reform even more urgent. Sri Lanka’s population is ageing and overall numbers are not growing the way they used to. Popular schools are expanding catchment areas, while many others will eventually have to reduce classrooms or rethink capacity. A system designed for a different demographic era cannot remain unchanged.

Then there is the admissions system, which urgently needs digitisation. It is difficult to clean up malpractice when processes are manual, opaque, and dependent on documents that are easy to manipulate.

Consider one common criterion: distance from residence to school. We do not have a fully reliable digital land registry to authenticate addresses and property details at scale. That gap creates space for corruption and abuse.

Education reform, in other words, is linked to broader economic reforms like digitisation, land administration reform, and better public sector data systems. If we pretend education sits in isolation, we will keep treating symptoms instead of fixing causes.

Preparing children for the real world

On the flip side, new subjects such as Entrepreneurship have been added to the curriculum with good intentions. But the reality is uncomfortable. Entrepreneurship cannot be taught only as a subject and graded like a textbook chapter. In many ways, real entrepreneurship is about challenging assumptions, taking risks, and learning through failure, which often clashes with how school systems are designed.

A stronger foundation would be economic education: helping students understand incentives, markets, trade-offs, and how the real world works. Then those who want to innovate, break patterns, and build can do so with clearer thinking and better tools.

Education reform has a strong economic angle, but we keep reducing it to the loudest cultural argument of the moment. Meanwhile, the deeper reforms on incentives, professional pathways, productivity, digitisation, and governance get delayed or quietly put on hold.

If we want a system that prepares Sri Lankan children for the world they will actually live in, we need to stop debating only the content of one chapter and start redesigning the system that delivers the whole book.

Economic Recovery in the North: Moving From Aid to Entrepreneurship

By Anushka Wijesinha

This article originally appeared in the Daily Mirror on 27 May 2015.

Last week, Sri Lanka marked the six-year anniversary since the end of the armed conflict in May 2009. In the aftermath of the war, there was an impressive reconstruction and public infrastructure effort, with around 10% of all budget expenditures during 2009-2013 being spent directly on reconstruction in the Northern and Eastern Provinces. Two large ‘Marshall Plan’-type programmes – Uthuru Vasanthaya in the North and Neganahira Navodaya in the East – aimed to kick-start growth through an infrastructure and public works drive. The major connective infrastructure in these provinces – roads, bridges, fishery harbours, etc. – are now of a standard rivaling many other parts of the country. However, the shift from reconstruction, to true economic recovery through industrialization, job creation, and entrepreneurship, has been much slower – particularly in the North. While this article does not take a comprehensive look at all the reasons for this, it points to some key issues that need attention by donors, public officials and the private sector.

Post-war Economic Dynamics

It is clear that the post-war growth spurt is having a tangible effect on the Northern economy, particularly in key cities like Jaffna and Vavuniya. Consumption has picked up sharply, and a lot of the big brands from the South – in consumer electronics and agricultural equipment – are now operating here. There is even a branch of the Colombo-based men’s hair salon, La Passion!. Meanwhile, years of donor interventions have also distorted economic incentives. A local civil society leader I met with on a recent visit remarked that, “A hand-out mentality has been rooted in, and there is a need to promote entrepreneurial effort”. The steady inflow of foreign remittances is also having an economic effect in Jaffna, skewing the incentives to work. Young people who would otherwise be joining the labour force seeking employment are opting to stay out and live off remittance income instead. Locals complain of sharp rises in alcoholism and drug abuse among youth. But the picture is not the same across the peninsula. In Point Pedro, for instance, young people are keen to look for jobs and eager to see new industrial activities start up.

Supporting Industrialization

Atchuvely Industrial Zone is one such activity. This estate, which had been derelict and shut down during war, has now been revamped by UNOPS with funding from the Indian government. Twenty-five acres are now ready for occupation, but the inflow of investment has been rather slow. When I visited here earlier this year, I met with the owners of the few factories that have commenced operations, including a manufacturer of hardware items and a recycled paper producer. Several factories have received American donor support for their equipment and machinery, but are having difficulty finding the local skilled labour required to install and operate these machines. I also noticed that while several other projects had been given approval, the slots allocated to them were empty. Many local entrepreneurs are having difficulties with obtaining project finance to set up. This must be tackled, and local bank branches must play a better role in financing enterprise growth here. There is plenty of opportunity for, and interest among, indigenous entrepreneurs to expand into Atchuvely, professionalize their operations, expand and employ more people.

Beyond Donor Aid to Accessing Better Markets

In the immediate post-war period, there has been a high dependence on day labour for income – manual labour on farms and civil works projects. But the availability of work is often uncertain, leaving people vulnerable to fluctuations in income. Donor projects have identified this and attempted to support income diversification. These projects have funded training centers for job training and livelihood development and gifted people and households machinery and equipment. But during recent visits to the North, I witnessed in several instances where these facilities lay abandoned. I observed how successive rounds of donor projects have “gifted” assets to people, but paid little attention to help them make productive use of these assets. While these have been built and gifted with all the right intentions, there has been less focus on ensuring that these can sustainably support entrepreneurship. Little attention has been paid to helping them access markets. One local government official in the North remarked to me, “Many NGOs are providing training for people to produce various things in Kilinochchi and Mullaitivu, but the peoples marketing knowledge is weak and so they cannot sell what they make.”

From ‘Cow-Dropping’ to ‘Dairy Entrepreneurship’

Diary projects have similar problems. A colleague I was travelling with jokingly called this the “cow-dropping syndrome”. So many donors have “dropped” free cows on families and hoped that this would improve livelihoods and incomes. Yet, little attention had been paid to help them become ‘dairy entrepreneurs’ instead; helping them maintain healthy animals, improve milk quality, and link up to stable markets and lucrative value chains. In some cases, women of female-headed households who received free cows had simply sold them off, either because they did not have a way of plugging in to a profitable milk supply chain, or even because it became too expensive to maintain owning them (feed, veterinary costs, etc), in the absence of sustainable revenue generation. Amidst this, however, a project by Cargills and Tetra Laval, was different. Supported by GIZ, they built up a group of dairy entrepreneurs who now regularly supplying large volumes of milk at better prices, to the national supply chain. With advice from Tetra Laval’s global ‘Food for Development’ programme, Cargills has been able to learn best practices in dairy farming and milk production. This in turn has boosted Northern dairy farmer’s knowledge in maintaining better milk production. Similar efforts by ILO’s LEED project have also adopted an integrated approach, where local producer groups are closely linked to national value chains.

Next Phase

More of these approaches are needed to boost entrepreneurship to support the growth of indigenous enterprises here, not just support an influx of brands from Colombo. Helping micro-producers link up with supply chains can certainly boost incomes in the North. It is already six years on, and once the dust settles on donor support it is entrepreneurship of the people that will boost the Northern economy more sustainably. The next phase of economic recovery must shift from ‘aid’ to ‘entrepreneurship’.

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Anushka Wijesinha is a development economist and a consultant to a host of governmental and non-governmental organizations in Sri Lanka.  He has previously worked at Institute for Policy Studies, The World Bank and the presidential commision on taxation.  His writings on economics are found on his blog -- The curionomist.  You can follow him on Twitter @anushwij