Columns - The Sunday Times Economic Analysis

Tilting towards import substitution

By the Economist

Several critics have characterised the budget as one which was leaning towards socialism. This view was largely based on the budgetary measures to control imports, add new taxes and impose cesses on some imports.

The government continues to insist on the policy of not privatising any state enterprises, though it persists in investing in the loss making non viable Mihinair for non economic reasons. Returning to socialism is a far cry today as it would be near impossible to gain ownership of the commanding heights of the economy. It would move the country from economic crisis to economic collapse. What is more likely is the adoption of some aspects of bad economic policy such as import substitution on a wider scale.

It is strange that after the contrasting lessons of the Sri Lankan economic performance with import substitution and under a liberalised economy, there should be doubts as to which economic system is best suited for Sri Lanka, if not for all economies. It is incongruous that after nearly three decades of liberalisation here and almost the entire world, including the Soviet Union and China, veering away from socialism, we have to restate the case for economic liberalisation and freer trade.

The rationale for liberalisation is on sound economic principles: facts, figures, logic and experience. It is also contextual in that one has to take into consideration the character of the economy. The size, availability of raw materials and limitations of the small domestic market are important facts and considerations for Sri Lanka. This does not imply that the state does not intervene or that no controls whatsoever are placed on the economy. It is the total range of policies and the economic framework that matters.

We discuss the current budget proposals in the light of these considerations. Fiscal policies appear to have been instituted for irreconcilable objectives. The President when introducing the Budget said the cesses and increases in several import duties were to encourage local production of these commodities or substitutes for them, as is the case of milk, sugar, wheat and maize imports. The economic logic is that higher prices for these goods would raise domestic prices for them or substitutes and be an incentive for domestic production. Therefore the increase in prices is needed for this incentive effect. However the Minister of Consumer Affairs and other government parliamentarians are saying these increases in duties would not raise prices.The Minister of Consumer Affairs, an Economics teacher is on the contrary taking steps to control prices of these commodities. If prices do not rise then there is no way in which the measures taken by the budget are incentives for domestic production.

On account of this there is some confusion as to whether the government in trying to follow an import substitution strategy or what it says is protection for local industry is in fact a mere revenue collection for the government. When faced with the prospect of prices of such commodities such as wheat products, milk and sugar rising in price, the government is attempting to control prices.

The move to control prices certainly smacks of socialism. Such attempts at bureaucratic control of prices generally lead to shortages, corruption and often result in higher costs to the consumer. Cesses, as pointed out by the President in the Budget Speech, were meant to be used for the development of local industry. This could happen if the cess funds are ear marked for the development of the specific industry and released for this purpose. Recent experience has been that cess funds have not been fully released by the Treasury but utilised as general revenue collection. It is unlikely that the treatment of the new cesses would be any different. In actual fact revenue measures are being concealed in various respectable garbs.

It has been pointed out time and again that agriculture faces a number of serious constraints such as the lack of land, inadequate technical advisory or extension services, inadequate good seed material, problems in marketing, shortages of labour and credit. None of these problems have been adequately addressed. That is the reason for low productivity in agriculture and the consequent high costs of production of many agricultural produce. At present most crops have adequate price Contd. from page 12
incentives but lack other resources and services to enable a productive agriculture. These issues require to be addressed but they are not likely to be resolved by the proposed fiscal measures.

The particular measures in the Budget may not have much effect on changing the open economy, but the outlook behind these moves could in the fullness of time blossom into a cancerous growth of bad economic policies. Some parties are rather contradictory in their policy stance. On the one hand, they have for quite sometime advocated high tariffs on many imports so as to develop local industries or even ban imports. This policy stance is also described as the development of the national economy with a cry to self-sufficiency in food. These politicians have now said that these measures of imposing cesses and increasing duties would have the effect of raising the cost of living and ushering in a period of shortages like in the 1970-77 era. Have they changed their policies or is it another instance of finding a means of attacking the government? We suspect it is the latter rather than a change from their inward looking economic policies.

If Sri Lanka does not follow liberal economic polices it would not be able to enjoy the standard of living that we currently enjoy. It is because our industries cater to world markets that we can produce items at a comparatively low cost and export these. From these export earnings we are able to purchase far more goods and services than if we had tried to produce all our requirements of goods.

This is the essence of the theory of comparative advantage on which international trade is carried on for mutual advantage. Sri Lanka is particularly disadvantaged if we are not geared to export trade as we do not have the resources for industrialisation: no cotton, no iron, no coal, no petroleum and very few chemicals. We can only industrialise on the basis of imported raw materials even to produce commodities like tyres that require canvas, metal and chemicals. If we restrict ourselves to the production of commodities for our local market then the costs of production would be very high as we would not have economies of scale when producing for the small Sri Lankan market. These are some of the reasons for a liberalised economy.

Hopefully the small incursions into protection will not grow into a departure from the liberalised economy. We could be entering a period of scarcities, if we follow protectionist policies to any great extent.

Top to the page  |  E-mail  |  views[1]
Other Columns
Political Column
Rajapaksa calms down India
5th Column

America, change we can! Lemme show you the door to Paradise!

Situation Report
Fall of Pooneryn: Crushing blow to Tigers
Thoughts from London
Linking arms in fight against terrorism
The Economic Analysis
Tilting towards import substitution
Focus on Rights
Not issued with this week
Inside the glass house


Reproduction of articles permitted when used without any alterations to contents and a link to the source page.
© Copyright 2008 | Wijeya Newspapers Ltd.Colombo. Sri Lanka. All Rights Reserved.| Site best viewed in IE ver 6.0 @ 1024 x 768 resolution