Sri Lanka warned on negative effects of import substitution

Dec 06, 2013 (LBO) – Sri Lanka’s drive towards trade restrictions and import substitution may hurt the country, as autarky has consistently failed elsewhere, an International Monetary Fund official has warned. Mathai meanwhile warned that such policies will also ultimately hurt exports.

“It will be much more efficient – rather than from an accounting sense trying to reduce your imports in order to improve the balance of payments – much more important to promote exports in our areas of comparative advantages.

“And not provide artificial incentives for capital and labour and other factors of production to shift into import substitution when it may not be in the country’s best interests.”

Cheaper food would also raise overall living standards and reduce wage costs, helping boost export competiveness.

Economists have pointed out that higher salaries paid by profiteering import substitution businesses will also raise overall salaries and costs of production.

But workers themselves will not benefit due to higher overall price levels due to protection.

“It is not a matter of opinion. It is not a matter of IMF doctrine,” IMF resident representative Koshy Mathai told reporters in Colombo.