The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Industrialising the villages: Let’s not repeat the mistakes
The President’s programme of establishing industry in the villages is an equity approach in development. Urban areas are the ones where industry is mostly located and where employment opportunities exist for the youth of the country. About 80 per cent of the country’s industry is located in the two districts of Colombo and Gampaha. There is a scattering of industries in other areas, but these too are mostly in urban centres.

The educated youth of the country want non-agricultural employment. Consequently a drift of population to urban areas is inevitable. However even urban industrial projects are not likely to be able to absorb these youth as the expansion in industrial employment opportunities lags behind the demand for them. Besides this there is the issue of whether these rural youth have the needed skills and abilities for such employment.

Therefore there is a strong rationale for establishing industries in rural areas. However, attempts to establish industry in remote areas have met with little success in the past. We have to understand the logic of industrial location, choose the appropriate industries for rural areas and develop the correct strategies if the programme of industrialising rural areas is to succeed.

The support measures must ensure the viability of the industries that are established. Good economic principles must guide the establishment of industries in rural areas.

In the past when the government controlled the commanding heights of the economy and considered the establishment of industry the responsibility of the state, industries were located in areas of political interest to the Minister of Industries. So when Mr. G.G. Ponnambalam was the Minister of Industries, he established industries in the North. That is an important reason why the cement plant was established in Kankesanthurai, Chemicals in Paranthan and the Paper Corporation in Vallenchaneai.

During Mr. Munasinghe’s short tenure as Minister of Industries, he established a few other industries in Madampe. When Mr. Philip Gunewardena was Minister he established a number of industries south of Colombo in the areas of political significance to him. So the economic principles of location of industry that relates industrial sites to ports, raw materials, transport costs, access to ancillary services and other comparative advantages of locations were flouted. Instead industrial location was highly correlated to political interests of the powers that be.

President Premadasa’s approach was different in that he was interested in establishing industries in the hinterland and his 200-garment industries project was with the intent of providing employment to youth in rural areas.

There were deficiencies in this approach as well in that the suitability of the locations from an economic point of view was often disregarded. Further the directions given by President Premadasa to industrialists turned some advantages of establishment of industries in these areas into disadvantages. Nevertheless there were merits in this approach of industrial establishment.

Had economic principles been followed the sustainability of the rural garment industries would have been much more assured. As it turned out this programme of rural industrialisation met with only partial success.
President Mahinda Rajapaksa appears to be following the policy approach of President Premadasa with an expected bias to establishing industries in the south. President Rajapaksa’s programme of Gamata Karmantha should be realistic about the ways and means by which rural industrialisation is pursued. If the wrong decisions are taken, then the programme could turn out to be a white elephant.

One of the most important considerations should be the infrastructure in the area of industrialisation. Are there uninterrupted supplies of electricity and adequate supplies of water? Are the distances to markets and ports too distant as to make transport costs too expensive? If raw materials are bulky and have to be transported long distances, then these add significantly to the costs of production. Similarly ancillary facilities are needed at convenient and nearby locations. Clusters of industry often occur as there is inter-industry dependence based on specialised services serving industries. If such a cluster is not developed the costs of transport could rise. The location of markets is once again an important consideration. These concerns are of different degrees of significance depending on the type of industrial product.

This discussion has assumed that the industries to be located in village areas are private industries. It is quite a different matter if industries are to be owned and run by the government. The objective of such industry may not be efficiency and profits, but a means of providing employment. Such industrialisation is counter-productive in the long run and is unsustainable. Sooner or later the fiscal burdens and the difficulties of selling the products in a competitive market would lead to their closure. The experience of state run industries provides adequate lessons to not venture on such a path of rural industrialisation. The government should not attempt to run businesses. It should leave business activities in the hands of private individuals. The government’s role in rural industrialisation is to provide the conditions that make private rural industry viable and profitable. The establishment of private industry would depend heavily on the availability of good infrastructure facilities and the economic appropriateness of the locations.

A further consideration would be the type of industry. An important focus should be placed on the selection of industries based on certain comparative advantages that particular locations have and perhaps boost those advantages with improved infrastructure and institutional development. Infrastructure figures high in the prerequisites for rural industrialisation. The lack of a dependable source of power is a serious obstacle. Apart from the fact that electricity costs are high, they are often undependable in rural areas. Consequently if rural industries have to install generators then the costs of electricity would burgeon further. Water supplies, roadways and communications are other important requisites. Vital to the success of rural industrialisation is the development of such infrastructure.

This is well recognised by the government but developing infrastructure is a costly exercise. When these have to be established in many locations the total costs could be prohibitive.

One of the important considerations in the selection of rural industry would be the availability of raw materials in the selected locations. Agro-based industry would be a logical type of rural industry. It is well known that agricultural produce has difficulties in marketing and storage. These are produce that could be converted to processed products. The canning of fruits and vegetables, the production of jams, cordials, chutneys and similar products would have a multiplicity of benefits to the rural economy and could be also developed into export items. Such industrialisation should also result in backward linkages to produce these commodities in a more systematic and larger scale.

Rural industrialisation is vital for providing employment to rural youth, absorbing disguised unemployment, supplementing and increasing incomes, reducing poverty and for overall growth and development of rural areas. Yet it cannot be undertaken casually. The programme requires understanding of the economics of industrial establishment, choice of the correct industry for specific locations, careful planning and the development of infrastructure. Will Gamata Karmantha be a serious economic thrust or a political facade?

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