Import substitution – Why resurrect a failed policy? | By Farrukh Saleem

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Import substitution – Why resurrect a failed policy?

India adopted import substitution-and failed. Argentina adopted import substitution-and failed. Brazil adopted import substitution-and failed. Mexico adopted import substitution-and failed. Tanzania adopted import substitution-and failed.

Zambia adopted import substitution-and failed. Nigeria adopted import substitution-and failed. Madagascar adopted import substitution-and failed. Ghana adopted import substitution-and failed.

Why is Pakistan now planning to resurrect a failed policy? Import substitution industrialization (ISI) is an economic policy that “advocates replacing foreign imports with domestic production.” The premise behind ISI is that a “country should attempt to reduce its foreign dependency through local production.”

India, Argentina, Brazil, Mexico, Tanzania, Zambia, Madagascar and Ghana all did one thing: they placed high tariffs on imports.

Three things happened in India, Argentina, Brazil, Mexico, Tanzania, Zambia, Madagascar and Ghana. One-industrial productivity went down. Two-technological progress slowed down. Three-there was little or no innovation.

ISI did meet some initial success but over the longer term four things happened in India, Argentina, Brazil, Mexico, Tanzania, Zambia, Madagascar and Ghana. One-goods produced locally were not competitive in the international markets.

Two-import substitution encouraged rent-seeking. Three-import substitution resulted in higher imports. Four-import substitution resulted in persistent current accounts deficits. For the record, almost all countries that had adopted import substitution in the early 1940s had abandoned the policy by the 1980s.

Why is Pakistan now planning to resurrect a failed policy? Hong Kong adopted export-oriented industrialization. Singapore adopted export-oriented industrialization. Taiwan adopted export-oriented industrialization.

South Korea adopted export-oriented industrialization (EOI). There are three powerful premises behind EOI: specialization, comparative advantage and free trade. For the record, Hong Kong, Singapore, Taiwan and South Korea became the ‘Four Asian Tigers’; courtesy export oriented industrialisation.

Pakistan’s goal is industrialisation. Pakistan has two choices: import substitution industrialisation (ISI) or export-oriented industrialization (EOI).

Pakistan’s wholehearted adoption of ISI will distort capital appropriation and prevent Pakistan from benefiting from its ‘comparative advantage in international trade’. ISI means protected domestic industries. ISI means economy-wide inefficiencies. EOI, on the other hand, stands for market-led industrial development. EOI means export-led growth.

Pakistan’s two big core competencies are textiles and Business Process Outsourcing (BPO). Pakistan must focus on her core competencies as opposed to resurrecting failed policy of import substitution industrialisation.

Pakistan needs to become part of the global textile value chain. Pakistan needs to become part of a global value chain whereby R&D and product designing is done in developed countries and production is done in Pakistan.

Why is Pakistan now planning to resurrect a failed policy? Yes, over the short term import substitution creates jobs but over the longer term import substitution results in lower GDP and lower growth.

The name of the game is specialization, comparative advantage and free trade-not import substitution. Import substitution impedes growth. Import substitution is unsustainable. Import substitution’s underlying assumptions have proven to be erroneous.

Imagine, according to the World Bank, Pakistan is the ‘world’s 7th most restrictive and protected economy’.

Imagine, import taxes are now 55 percent of our total tax collection. Our export competitiveness has spiraled down as a consequence of our protectionist policies. Pakistan’s high tariffs have kept Pakistan from becoming part of the global value chain.

Why is Pakistan now planning to resurrect a failed policy? India gave up import substitution in 1991-and has never looked back. Bangladesh became part of the textile global value chain-and has never looked back.

Pakistan must focus on producing products in which Pakistan has the greatest cost advantage over other countries. For Pakistan to produce products in which Pakistan has a cost disadvantage will be a bad, bad policy.

Protecting Pakistani industry from international competition is a bad policy. Bad for industrial productivity. Bad for technological progress. Bad for innovation. For Pakistan, export-oriented industrialization is the only proven path to success and prosperity.

advantage in international trade’. ISI means protected domestic industries. ISI means economy-wide inefficiencies. EOI, on the other hand, stands for market-led industrial development. EOI means export-led growth.

Pakistan’s two big core competencies are textiles and Business Process Outsourcing (BPO). Pakistan must focus on her core competencies as opposed to resurrecting failed policy of import substitution industrialisation.

Pakistan needs to become part of the global textile value chain. Pakistan needs to become part of a global value chain whereby R&D and product designing is done in developed countries and production is done in Pakistan.

Why is Pakistan now planning to resurrect a failed policy? Yes, over the short term import substitution creates jobs but over the longer term import substitution results in lower GDP and lower growth.

The name of the game is specialization, comparative advantage and free trade-not import substitution. Import substitution impedes growth. Import substitution is unsustainable. Import substitution’s underlying assumptions have proven to be erroneous.

Imagine, according to the World Bank, Pakistan is the ‘world’s 7th most restrictive and protected economy’. Imagine, import taxes are now 55 percent of our total tax collection.

Our export competitiveness has spiraled down as a consequence of our protectionist policies. Pakistan’s high tariffs have kept Pakistan from becoming part of the global value chain.

Why is Pakistan now planning to resurrect a failed policy? India gave up import substitution in 1991-and has never looked back. Bangladesh became part of the textile global value chain-and has never looked back.

Pakistan must focus on producing products in which Pakistan has the greatest cost advantage over other countries. For Pakistan to produce products in which Pakistan has a cost disadvantage will be a bad, bad policy.

Protecting Pakistani industry from international competition is a bad policy. Bad for industrial productivity. Bad for technological progress. Bad for innovation. For Pakistan, export-oriented industrialization is the only proven path to success and prosperity.

 

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