23 September, 2014 / Ziqa'ad 27, 1435

Need for an import substitution policy

Published Oct 04, 2010 12:00am

In the absence of an effective import substitution policy and globally competitive export- oriented industrialistion, the economy continues to suffer from widening trade deficit.

While the export strategy has not been much of a success, it has been achieved by creating trade surpluses by depressing domestic demand, by providing all sorts of export incentives and keeping wages low, affecting the workers' productivity.

A skewed income-distribution system has denied prosperity to the domestic market, discouraging import substitution and allowing import bill to inflate.

The premature opening of the domestic market to global competition has resulted in an import-oriented economy. Merchandise accounts for $34.7 billion ( fiscal year 2010 figure) against export earnings of $19.3 billion. The gap of over $15 billion can be better closed by pushing exports as well as import substitution.

Only recently when it became clear to the policy-makers that export-led growth has ceased to be an option, it was supplemented by consumer financing by banks — a debt rather than income-driven consumerism — that was not sustainable. With savings rate low and incomes not rising fast enough, it was not a durable option, particularly when it was evident that the economic growth was not sustainable.

The growth bubble created by huge capital and financial inflows with lot of supposedly excess liquidity in the international market went burst following the recent domestic political turmoil and the Great Recession in developed markets. Immediately, the unsustainable volume of foreign trade shrank, exports remaining stagnant and imports falling sharply because of a huge depreciation of the rupee.

To make domestic market prosperous, first a more enlightened income-distribution policy must be pursued. Second, a review of the foreign trade policy is necessary to ensure that only trade surpluses created after meeting domestic demands are offered for foreign sales. Producing exclusively for export in selected areas is ceasing to be an option with “ free trade” being increasingly dovetailed with protectionism in the international market as indicated by the difficulty Pakistan is facing in getting easy access to the US and European markets for textile goods.

While nations seem to be committed to free trade within national frontiers, they selectively protect strategic industries/products in a variety of ways. The West-led globalisation -the most pronounced in the Anglo-Saxon financial model---has collapsed yielding place to a world order driven by multilateralism increasingly based on sovereign interests. This provides strategic pace to developing nations to tailor foreign trade so as to maximise economic development, through both import-substitution in production of capital goods and industrial raw materials, and to spur export growth to reduce foreign dependence. Initially, regional trade can help reduce cost of imports and provide alternative to the saturated Western markets. Foreign trade policy should target an overall balanced trade.

Traditionally, attempts have been made to cut imports by allowing the rupee to depreciate but this does help in boosting exports. This raises the cost of imported capital goods and industrial raw materials and sooner or later erodes global competitiveness of exportable products. Investments on imported capital goods are often made prohibitive. A stable national unit is necessary to protect its purchasing power, curb inflation and foster savings, investment and production.

Import substitution requires domestic investment and appropriate local technology to develop. The country has abundance of domestic resources which await to be harnessed for economic development. There is so much excess money locked up in speculative trading which needs to be diverted to productive activity if right import substitution policies are pursued.

Food security must receive the first priority followed by “ agriculture manufacturing.” There is much opportunity in processing of farm produce which has not been fully capitalised. In the first three quarters of the fiscal year 2010, food imports at $3.5 billion exceeded its export at $2.7 billion by some $800 millions.

Edible oil imports accounted for $1.2 billion. The focus on growing oilseed crop like sunflower in the coming Rabi crop can help reduce the import bill.

Nearly 45 per cent of the country's population lives in the countrywide. If the livelihood of the poor is improved and their purchasing power enhanced, the rural market for industrial goods would jump up. Similarly, a better price for farm produce can only be managed if the processing facilities for agriculture produce is enhanced. Currently, shortages of food push up prices and a good harvest reduces prices. Farmers' incomes suffer from fluctuations when they need to save and invest in modernising agriculture. In agriculture lies the potential for industrialisation particularly manufacturing. And agricultural development has to be industry-led.

Finally, there is a need for an import substitution policy along with an export policy to remove widening trade deficit.


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