IMF argues against import substitution

The Inter national Monetary Fund (IMF) last week warned against the populist policy of import substitution as it has often proved ineffective in accomplishing economic prosperity.

IMF Resident Representative in Colombo Dr. Koshy Mathai said that import substation is a very tricky strategy and unless practiced efficiently, it could even disadvantage the exports.

“I think we have to be very careful about import substitution,” Mathai told a recent forum organised by LBR-LBO, under the theme ‘The impact of economic landscape on enterprise future’.

In recent times, Sri Lanka has seen a strong wave in support of import substitution and the situation was particularly evident in the recently failed attempt to ban milk powder imports over speculative contamination allegations.

“It is all well and good trying to produce goods and not having to import things. But you have to do it efficiently. And it may not be the case that your country cannot produce some of these goods most efficiently.

May be better to import those things at lower cost at the benefit of the economy and focus on resources that we can produce more efficiently for the rest of the world,” Dr. Mathai said.

Drawing from the global examples on the practice of import substitution as a panacea to reduce external current account deficit, he said no country in the world could see the light of day pursuing such a strategy.

“There was only one country that really adopted import substitution strategy and that was Brazil up to year 1980.

And beyond 1980 they were not able to sustain that,” he remarked.

Even the former World Bank economic advisor and an independent international trade and development professional, Sarath Rajapatirana, has repeatedly pointed out the promotion of import substitution implicitly leading to disadvantaging exports.

And also, according to Lerner theorem in economics, channelling all the factors of production in an economy into sectors of import substitution will leave less resources for export industries.

Economic policy think tank Pathfinder Foundation also recently questioned the wisdom of import substitution excluding food security.

In this backdrop, the only way out for Sri Lanka according to Dr. Mathai, as he repeatedly tells the Lankan enterprises, is to boost exports in order to reduce high level of current account deficit and to achieve a high level of economic growth on a consistent basis.