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International Monetary Fund. External Relations Dept.
Published Date:
September 1987
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In defense of import substitution

In Guy Pfeffermann’s article, “Economic Crisis and the Poor in Some Latin American Countries,” in the June issue he writes, “The countries of the region have made significant efforts to adjust” (to the economic difficulties of the 1980s). He continues, “… export and efficient import-substitution projects have been undertaken.” We all realize that import substitution is not popular among many World Bank and IMF authors, so it is to be welcomed that the possibility at least of “efficient import-substitution projects” is being recognized. However, even now there seems to be an imbalance in that export projects are welcomed without qualification, whereas import-substitution projects have to be “efficient.” Do not export projects also have to be efficient? Are there no inefficient export projects? To this reader at least the passage suggests an unjustified tipping of the scales against import substitution.

At the end of the same paragraph, the article displays a similar imbalance by stating, “… adjustment so far has been achieved largely through import cuts rather than through employment-creating export expansion.” Once again, the innocent reader may conclude that export expansion is employmentcreating whereas import substitution is not. Is there any justification for this implication? I would doubt it.

Perhaps I may be allowed to link my comment with the very interesting article by Mohsin Khan and Nadeem Ul Haque entitled “Capital Flight from Developing Countries” in the March issue. While this article relates its figures on capital flight to the international debt problem, one could also relate them to export earnings. Like debt service, capital flight seems to constitute a significant tax on export earnings of Latin American countries. Is it not an advantage of foreign exchange saving through import substitution that it lends itself less easily than export earnings to capital flight?

H. W. Singer

Brighton, England

Guy Pfeffermann responds:

I fully agree with Professor Singer that efficient import substitution is as desirable as exports as a means to achieve resumed economic growth. In fact, “exports” should be read as shorthand for “exports and efficient import substitution.”

In Latin America, however, the scope for further efficient import substitution may be limited. The Latin American share of world trade had already been halved between the 1950s and the debt crisis. There remains some scope for efficient import substitution in agriculture, and the World Bank has, in fact, been urging countries to eliminate “negative protection” in that sector.

Unfortunately, industrial import substitution is not often “efficient.” This is because in most countries, an array of import barriers makes inefficient import substitution far more profitable than exports. In such countries, trade policy reform aimed at putting production for export on an equal footing with that to substitute imports is the most effective way to achieve resumed growth and employment creation. Exports do not face the limits to growth inherent in small domestic markets, and can therefore generate sustained employment growth.

As for the suggestion that exports facilitate capital flight, this is hardly supported by evidence from Latin America. Brazil experienced rapid export growth during the 1970s and early 1980s without substantial capital flight.

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