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Import Substitution

The Sunday Leader business pages on its 16.9.12. issue carried an article about a leading beer manufacturer substituting rice for the seemingly traditional malt in its beer manufacturing process, thereby making a Rs. 800 million foreign exchange (forex) saving.
This saving is all the more important, as, ipso facto, the heavy import expenditure the company would otherwise have had incurred, by importing the more expensive malt, was directly connected to the recently depreciated rupee, which, under a period of a year has had gone down in value by nearly 20%, thereby resulting in the cost of imported goods such as malt (as in this case), to rise phenomenally.
The article which was based on an interview this reporter had with a company source, also saw the claim being made that there however was no depreciation in the quality of the beer thus manufactured, ie by substituting rice for the seemingly traditional malt.
The interviewee had further said in that article, that, because of this substitute, the company has been able to keep beer prices stable, meaning that if it had continued to use the more expensive imported malt in its beer manufacturing process, the price of the end product would have had skyrocketed.
And, additionally, according to that source, the buying of paddy/rice grain, locally, also helped to stabilise paddy prices,  in a situation where the island harvested a record paddy crop last Maha (see The Sunday Leader business pages of 6.5.12.).
A prefect case of import substitution?
In this era where imports have had been made expensive due to a heavily depreciated rupee, import substitution appears to be the name of the game.
Sri Lanka did have an era of import substitution, especially during the 17 year period from1960-1977, so, import substitution is not something new to the local economy.
That was an era where the exchange rate was kept artificially low through controls, by banning certain imports or allowing them into the country after being subjected to phenomenally high duties, coupled with restricting the taking out of foreign currency when going abroad to a bare minimum, by law.
It was also a period of rationing, because most imported items like rice then and sugar even now, were, and are, still essentials, and were also sold to the consumer at controlled prices then.
The period of import substitution was particularly painful to the consumer during the 1970-77 era, when the government elected to power in the 1970 elections, an election where incumbent President Mahinda Rajapaksa first entered parliament as an elected government MP from Beliatta, found much needed foreign currency more harder to come by than its predecessor government, which was pro West and investor friendly.
That was also the cold war period and the newly elected government of the time, as a matter of policy, distanced itself from the West and forged close ties with the  then USSR, China and the Arab countries (at the expense of Israel) instead.
It was an era where nationalization was the order of the day as the government of that time practised socialist/communist policies which were followed by its new and powerful friends, the then Soviet Union and China, but a practice which was anathema to the West, especially to the USA, which believed (and still believes) in free market economics instead.
All of those  actions resulted in Sri Lanka being virtually cut off from aid from the West, as the West, as it also is now, was the world’s cash cow, despite the massive economic inroads made by China in the past 40 years since.
As a result, the government of the day was hard pressed for the much needed US dollars to make the necessary imports, both for consumption and for investments, an environment which has seen little or no change, at least as far as the power of the greenback is concerned, despite the lapse of 40 years or two generations, since that day and age.
it was a period of import substitution practised by Sri Lanka in virtually the true sense of the word, where rationing, controls, shortages, queues and the permit and chit system held sway even to obtain the basic essentials, an era that was also wreaked with corruption and where joblessness swelled to over 20%, a period where Sri Lanka had its first youth insurrection which resulted in the deaths of 13,000 young men and women, cut off in the prime of life, who took up arms against the then government in vain, to try to make a better world for themselves.
That was an era where the cooperative store dispenser and his manager, the grama sevaka niladhari and their likes held sway, because their approvals were needed even to buy a piece of cloth.
There are some striking similitudes between that era and now at least from an economic and political perspective, though the island is yet to fall in to the brink of shortages, rationing, queues, joblessness, nationalization (though the necessary legislation for this too is in place!), the chit and permit system and a high rate of joblessness, as was the case then.
The current regime too like its predecessor of 1970 has distanced itself from the West, this time over human rights issues (and not necessarily due to an ideological divide as was the case then) revolving round the closing stages of its war against the LTTE.
Aid from the West now has been virtually reduced to a trickle.
However, the Government and the West (probably for diplomatic reasons) like to say that this is because Sri Lanka has graduated to lower middle income status, yet, there are a host of other countries which too have had reached middle income status and beyond, but  still receive sizeable chunks of Western aid, despite troublous economic times that the world, not least Europe, still Sri Lanka’s number one export market is going through, primarily due to the euro zone crisis and its cascading effects felt, both near and far.
Is then the reason why Western aid to Sri Lanka, which however some of the island’s peer countries still enjoy, in large quantities, being denied to this country by a similar magnitude, due to something or things which goes/go beyond “middle income” status?
In this context, it may therefore be good for Sri Lanka’s economic health, if its policymakers make an honest appraisal of the current situation and do the necessary adjustments if there is a need for such, though such changes from a political perspective may not be judicious, and may even probably be suicidal.
However that may be, the brief here is about “import substitution,” though economics per se doesn’t operate in a vacuum, but is connected to the politics of the time, especially the politics of that particular country  in question and its relationships, mainly with its key global economic players, in this post, cold war era.
The era of import substitution in the 1970-77 period was also an era of “dangerous” matches, where the powder from the lighted match stick tended to fly off the stick and land on the shirt of the user, threatening to engulf him in flames.
It was also a period that the trouser one stitched from the rationed cloth thus purchased with the greatest difficulty, used to be smelling of kerosene!
That was the “import substitution” that was practised then.  Part of the problem being that era also created private sector monopolies, as was the case of the match industry then, which was unhealthy from at least an economic and environmental perspective.
The matches then were made from wood, as opposed to the more environmentally friendly wax matches of the present.
The advent of wax matches may also have been made possible due to the opening up of the economy in 1977, which, ipso facto resulted in the import of much needed capital goods, such as probably machinery required for the manufacture of those new type of matches, “unheard” of in the local economy prior to 1977.
Another detriment caused by the closed economy of 1970-77 is that it also kept away valuable and much needed capital/investment goods from the economy, goods that were needed to enhance both production, productivity and quality of the end product manufactured here, so that it could withstand competition in international markets.
But due to various policy actions that have been introduced recently in the fiscal front by the Government of Sri Lanka currently, that have been elaborated on these pages in the past, in order to protect the country’s forex reserves, by making imports more expensive, that too has  resulted in the deterioration of investment goods imports by 21% year on year in July (see The Sunday Leader business pages of 16.9.12.).
Those are issues that policymakers should be cognizant of to ensure that history doesn’t repeat itself.
However that may be, the Sri Lankan consumer, since the opening up of the economy 35 years ago in 1977, has become increasingly fastidious.
As such it’s seemingly unimaginable that the island’s 21st century consumer would take things lying down as his predecessors did some two decades ago, who were “content” to forgo the bare essentials of life, or who otherwise were compelled to be happy with second rate substitutes, due to little or no choice available to him then.
The government also may seemingly be aware of this change in consumer behaviour over the years. Therefore if import substitution is the way out, incentives should be given at the” expense” of cutting down on waste and corruption to come up with substitutes, probably through investments in research and development (from savings made from clamping down on waste and corruption), that are on par in quality and price with those of its imported peers.

2 Comments for “Import Substitution”

  1. As if I care

    Hey writer everything you say is good experience to me – import substitution and export during those days as kid on my own and I had no qualms because I had the order and the CISIR library to read through my product- after year went over to study something different and now we have our own family enterprise etc etc but no buying and selling.
    First something different – when standardization was introduced by Badaudin the boys of the north grew the best red onions and chillies and what did that bitch Sirima do- its history you know.
    Read my comment of 16.9 regarding beer it is true- Rice is a cheap way of increasing the quantity of alcohol and in the west only 30% is used in all cheap beers. If you take a rice sake its about 51% alcohol so by using 70% is the manufacturer going to kill the public/send them to hospital soon because beer is more or less 10%alchol maximum. Grapes for wine needs very little water so rice exporter Australia has turned to wine and in 4 years is making some of the best consuming and exporting and making better money. Wine is very fashionable now even in the UK like coffee.The problem is the beer boys are shipping boys I know who sit like elephants than diversify they are not Ghanam who was respected by ADB/WB even during crisis 70/77 and even the 83 he ignored and advanced.
    You talk of matches now, its stone age just export the machines soon to Africa/Bangladesh. The refillable electronic lighter is sold at 2cents US to the EU by China and the EU wanted a child safety catch on it too at the same price which the Chinese said is unreasonable. We are a decade past 21st centenary you use/manufacture refillable lighters not wax that even cows won’t eat.
    I don’t like war or politics and dislike the northerner/southerner for all the shit they have thrown on our beautiful island. But Rajapakse Familiar Francoista (the triple gem) is more corrupt than Sirimavo regime so where do you go especially when he owns it all.
    I read the government has not set up even one industry after the war- pathetic after all this talk.
    Good luck solve the UNHCR peacefully because it’s not a Granada style in the making for the present but Diego Garcia is definitely for that purpose.

    • As if I care

      Sorry forgot this bit:
      29 September 2012 : Two clowns in conversation:
      Introducing Ceylon Cinnamon to Vice Minister Gan Lin, Minister Bathiudeen said: “We are also very keen to increase reception to Pure Ceylon Cinnamon in China’s market in the same way as Pure Ceylon Tea. We are looking to get Pure Ceylon Cinnamon trade mark in China and to this end, we need licensing authority SAIC’s assistance. “We like your products which are of high quality and we are looking for more and more tea and rubber from Sri Lanka,” Gan Lin said. “We at SAIC are focused on market development of our own Chinese products rather than foreign products.
      16/9 you spoke about poultry agent and corn. Corn fed chicken sells at double price- let sleeping dogs lye low.. Now US have lost Chinese market because of 100% tariff. The most expensive component of the chicken in the Chinese market is the feet you throw away. You should have been exporting them yesterday in 50 kilo bags by the tons. Speciality foods make happy and loving people Wakey Wakey!! I am not for shark fins (feel sorry)

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