13 June 2023 12:00 am Views - 413
To shed light on these concerns, a comprehensive analysis was conducted, using a unique dataset comprising eight waves of import controls. These controls encompassed quantitative and price restrictions at a disaggregated product level, using a range of gazette notifications issued between April 2020 and September 2022.
Were import controls necessary? Unravelling policy objectives
The objective behind the successive rounds of controls remains unclear, with the government declaring different goals at different times. These ranged from reducing foreign currency outflows to promoting domestic production as import substitutes. As such, assessing their longer-term impacts in distorting the incentive structures is crucial. Interestingly, implementing import controls may have inadvertently encouraged import substitution, even without a protectionist intent. The complexity of the measures employed, including credit-based requirements, import licences, suspensions and bans, highlights the intricacies of controlling imports.
Several hypotheses prevail in determining the government’s import control preferences.
Our analysis revealed that the government’s import control policy preference favoured less complex products, consumer goods and food items. This unintentionally created an incentive structure for import substitution, even without a protectionist intent. Persistent import controls on food products and low-tech manufacturing products like consumer electronics inflate domestic prices and create opportunities for higher profit margins. As these products are within the set of products that are easily substitutable for a country like Sri Lanka, which has a comparative advantage in low-tech manufacturing and a significant labour force in agriculture, import substitution might happen even without a policy intent. The quantitative analysis identified eight waves of import controls, which tightened over time and increased in coverage. The government’s targeting of food products, consumption goods and less complex items was not always successful, particularly in the later waves of import controls. This can be attributed to a shrinking choice set available as control measures progressed. In some import control waves, the government extended import controls to encompass more intermediate and capital goods. The process of import substitution typically follows a sequential pattern, starting with substituting easily replaceable products before moving on to more complex ones. Therefore, irrespective of the policy objective, the distortions introduced to the incentive structure align with observations from import substitution scenarios seen in countries like Sri Lanka.
Recommendations for prioritising import control revisions
As Sri Lanka gradually eases the import controls implemented during the economic crisis, it becomes crucial to prioritise the revision process. The deciding factors may be influenced by lobbying from industries reliant on restricted imports and feedback from industry and consumers. Our analysis suggests that revisions appear to prioritise intermediate and exempted food products, reflecting a policy preference for exempting intermediate imports (Figure 2).
To foster innovation and enable participation in global value chains, it is economically sensible to phase out import controls on intermediate goods.
However, revisions should also target consumption goods, including food. Import controls inflate domestic prices, leading to the production of less complex consumer goods and food items for domestic consumption. This diverts resources away from export industries, impeding the country’s growth in the vital export sector. Revisiting import controls on food products is particularly important, due to their impact on urban and suburban households. These controls exacerbate food costs and shortages, burdening households, especially those with low incomes. More damagingly though, the distortion in incentives (the import-substitution incentive structure) perpetuates labour movement and retention in the agriculture sector.
More details on this study can be found in Wijesinghe, A., Yogarajah C., and Rathnayake N., (forthcoming) ‘Import Controls in Sri Lanka: Political Preference and Incentive Distortions’, International Economic Series, Institute of Policy Studies of Sri Lanka. Colombo.
(Asanka Wijesinghe is a Research Fellow at the IPS, with research interests in macroeconomic policy, international trade, labour and health economics. He holds a BSc in Agricultural Technology and Management from the University of Peradeniya, an MS in Agribusiness and Applied Economics from North Dakota State University and an MS and PhD in Agricultural, Environmental and Development Economics from The Ohio State University. He can be reached via asanka@ips.lk. Nilupulee Rathnayake is a Research Assistant working on macro, trade and competitiveness research at the IPS. She holds an MSc in Development Economics from the University of Nottingham, United Kingdom and a BA in Economics from the University of Colombo. She can be reached via nilupulee@ips.lk)