Trade Policy Reforms and Industrial Adjustment in Sri Lanka Prema-chandra Athukorala and Sisira Jayasuriya 1. INTRODUCTION S RI LANKA has experienced a series of changes in its trade regime since attaining independence from British colonial rule in 1948. During the first decade after independence it continued with a liberal trade regime, until growing balance of payments problems induced a policy shift towards projectionist import substitution policies. By the mid-1970s the Sri Lankan economy had become one of the most inward-oriented and regulated outside the group of centrally-planned economies, characterised by stringent trade and exchange controls and pervasive state interventions in all areas of economic activity. In 1977, Sri Lanka responded to the dismal economic outcome of this policy stance by a sharp change in policy direction and embarked on an extensive economic liberalisation process, becoming the first country in the South Asian region to do so. Despite major macroeconomic problems, political turmoil and government changes, market-oriented reforms have been sustained and broadened over almost two decades so that Sri Lanka today stands out as one of the most open economies in the developing world. This basic policy orientation looks set to continue in the foreseeable future. Indeed, the most dramatic change in the Sri Lankan political landscape in recent years has been the convergence in broad economic policies among the major political parties and groupings; achieving greater openness and liberalisation is now a bipartisan policy in Sri Lanka. Given the decisive policy shift in 1977 and policy continuity during the ensuing years, Sri Lanka appears to provide a valuable laboratory for the study of the impact of foreign trade policy regimes in a developing economy. However, there are difficulties in isolating the impact of policy liberalisation on broader economic growth in Sri Lanka in the post-1977 period. Since the early 1980s, the country has been gripped by violent and protracted political conflict and a debilitating civil war, which has had a heavy impact on economic development. Therefore, in this paper we examine the Sri Lankan experience ß Blackwell Publishers Ltd 2000, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA. 387 PREMA-CHANDRA ATHUKORALA is from the Research School of Pacific and Asian Studies, Australian National University. SISIRA JAYASURIYA is from the School of Commerce, La Trobe University.