By Ameer Ali –

Dr. Ameer Ali

A targeted tariff war declared unilaterally by the Trump administration while disrupting the free flow of global trade and destabilizing currency markets, may, quite inadvertently, provide a new lease of life to import substitution (IS) as strategy for economic development for smaller nations. Sri Lankan policy makers may well be advised to consider this possibility, not as perfect substitute to export promotion but as partner in the free market model.     

When IS was promoted as an alternative model by ECLA (Economic Commission for Latin America) in the early 1960s, to counter the inequities of free market capitalism, it unfortunately earned a socialist tag and came under intense criticism from free market economists and export promotion strategists. No doubt, the Soviet-Mao-Castro triumvirate at that time coloured IS with a revolutionary brush. In fact, there was nothing revolutionary about IS but simple common sense especially for smaller economies that were struggling to earn sufficient foreign exchange to meet the rising cost of importing manufactured products. Economic diversification and reduction of domestic unemployment were other targets which they wished to achieve through IS. In fact, the so called South East Asian economic miracle touted by the World Bank actually emerged out of a sensibly utilised IS strategy by those economies. Yet, that strategy in general got enmeshed with Cold War geo-economics and geo-politics and began to lose its lustre from the last quarter of the 20^th century. 

With the end of Cold War and collapse of the socialist regimes, economic liberalism became the global universal mantra for growth and development and developing nations like Sri Lanka had no choice but to join the bandwagon. Yet, after more than three decades of its unchallenged reign economic liberalism has not delivered the promised Valhalla to a number of developing economies. In the name of level playing field globalization actually created many humps and dips and widened the gap between a few Goliaths and many Davids. For Sri Lanka, the situation was worsened by a costly civil war financed by borrowed funds. Increasing foreign debt and falling export revenue has forced the government to mortgage and even sell part of the country’s assets to foreigners. At the same time uncontrolled corruption has aggravated the financial woes. Is there a way out under the current economic model?    

The Prime Minister recently called for an export drive through increased foreign investment to improve the nation’s foreign balances. At the same time his Finance Minister, in the wake of a price hike on kerosene fuel, promised launching a gamperaliya to ease the economic difficulties of the rural poor. Foreign balances can be improved through a mixture of increased exports and decreased imports. While the Prime Minister talked of exporting he seems to have has forgotten the import side of the balance. A recent complaint by the Governor of Central Bank that import of motor vehicles are taking undue toll on foreign exchange is only part of the story. Reducing imports and improving the condition of the rural sector can be achieved through selective use of the IS strategy.                   

What went wrong with IS in the nineteen seventies was that it was driven more by a fanatical commitment to ideology rather to use it rationally and selectively towards achievable targets. If such targets could be identified and promoted the finance minister can realise his gamperaliya and Prime Minister his positive foreign balance.   

Liberal economics has come to a dead end after nearly four decades of unchallenged reign. Dissatisfaction over its unfulfilled promises is heard from all corners. This ideology and its economic model were promoted by the big powers not to benefit the poor but the rich. Just as Britain in the 19^th century advocated Laissez-faire when that country was the economic hegemon, so also did US and her agencies after 1980 preach open economies and free trade when they were in a dominant potion. As a result the world is now ruled by big capital and mega companies. Small nations like Sri Lanka are mere pawns in the chess board of big players.       

IS is no substitute to the market but can be a partner in achieving growth with equity. In fact, the so called East Asian Tigers achieved their ‘economic miracle’ by starting with IS-based industries.

The current tariff war and attack on currencies through sanctions by the US is a wake-up call to smaller nations to go back to the drawing room and reassess their economic strategy of an open economy. Export promotion and import substitution can go hand in hand without sacrificing one for the other. Sri Lanka, having foolishly got entangled in the Indo-China geopolitical mesh, in which US also has a stake, may well be warned of possible negative consequences were the super power to target economic sanctions on either of the regional powers.