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II. RESEARCH COMMENTARIES
John Gafar*
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140 II. RESEARCH COMMENTARIES
for import substitution is that such a policy will conserve scarce foreign
exchange reserves.
Import substitution industrialization has been encouraged and pursued
behind a wall of generous protectionist policies such as negative lists,
discriminatory tariffs and quotas. Incentives legislation has been enacted
to provide exemptions from income tax, duty free raw materials and
capital goods imports, and accelerated depreciation allowances.5 The
pattern and form of industrial policy adopted in Jamaica as well as in
other Caribbean countries is similar to that of the Latin American
countries.6
Import substitution began in the easiest area?the assembly of
consumer goods. This form of industrialization has led to the establish
ment of a number of screw-driver type industries which are in some
instances subsidiaries of transnational firms. In subsequent stages import
substitution industrialization proceeded to intermediate goods (for
example, chemicals). The tendency of import substitution is to concen
trate on non-essential, luxury type goods. This tendency arises from the
fact that quantitative controls imposed on imported non-essential goods
make production of these goods profitable. The relative profitability of
investment in non-essential goods is a result of direct government policies.
Import substitution industrialization based on the production of
consumer type goods poses severe problems for economic planning. In the
first place, domestic production of consumer goods replaces only part of
the value added of those goods that were previously imported. Conse
quently, there is a derived demand for imports of raw materials, capital
goods and other inputs, which increases rapidly and exerts tremendous
pressure on the available foreign exchange and on the balance of payments.
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CARIBBEAN STUDIES / VOL. 18, NOS. 3 AND 4 141
. . .the excess cost of import substitution may be high, appreciably higher than
is implied by the tariff rates or the excess of domestic over foreign prices.8
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142 II. RESEARCH COMMENTARIES
the case of India, thta because of such a policy by the firms the c.i.f. cost
of importing a Fiat car exceeded that of a locally finished one. We do not
have any evidence, but on the basis of casual observation we suspect that
such a situation prevails in the Caribbean. Fourth, the phenomenon of
negative value may result because components which account for a high
value of the finished product may cost more to import c.i.f. due to the
extra handling and shipping costs. Thus, negative value added demon
strates that investments have been unproductively employed. Finally, the
phenomenon of negative value added may result because of'explicit
subsidies on exports. In this case the f.o.b. price of manufactured goods
may well be below the cost of production when the subsidized inputs are
evaluated at competitive world prices. In such a situation it is prudent to
remove the subsidies thus forcing the industry to use different techniques
of production to enable it to be economically viable.
From the foregoing discussion it follows that if import substitution
continues to operate behind protected markets-national and regional-it
would result in an inappropriate structure of industrial growth charac
terized by high costs, inefficiency and misallocation of investment
funds.11
This article aims at presenting some quantitative evidence to evaluate
the performance of import substitution in Jamaica during the period
1954-1972. It is hoped that the results of this study will provide a basis
for evaluating import substitution within the Caribbean Community
(CARICOM).
I. IMPORT SUBSTITUTION AND INDUSTRIAL GROWTH
11. Soligo & Stern, "Tariff Protection." Soligo and Stern found that the implicit
rate of protection exceeded the value added which is higher for the consumer goods
industries and that the protection exceeded the contribution to value added.
12. Brown, "The Import Substitution Process."
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CARIBBEAN STUDIES / VOL. 18, NOS. 3 AND 4 143
TABLE 1
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144 II. RESEARCH COMMENTARIES
because new goods are imported and old ones are replaced with domestic
production. Table 2 presents details of this.
As is shown in Table 2, imports have undergone structural changes.
The composition of imports has affected the internal relative prices which
in turn have influenced the agricultural and industrial development of the
country. The share of consumer goods has been declining because import
substitution is concentrated in the production of consumer goods type
industries. Raw materials and intermediate imported goods share has
remained constant because some of these inputs are non-competitive and
also because the low tariffs on these goods make it more profitable to
import them than to import substitutes. The share of scarce capital goods
imports have been rising because of investments in industrial sites, import
substituting industries and in the export industries of tourism and bauxite
alumina.
The import coefficient has remained constant, averaging 48% for
1954-1972. This result should not be viewed with alarm for, as Winston
points out, "the results in 'Chenery's Patterns' show that there is no
significant change in aggregated M/GNP despite the very real changes in
similar ratios disaggregated for industries and sectors among the countries
studied."14 Without claiming to disprove the success or failure of the
import substitution in reducing the dependence on foreign trade, the stable
import coefficient may be due to capital expansion, inflows of foreign
investment, loans or grant's.
Exports are highly concentrated in a few commodities: bauxite
alumina, sugar, bananas and citrus. Concentration of commodity exports
can lead to instability in export earnings; fluctuations in government
revenues, investment and employment, unstable export prices and
deterioration of the terms of trade. The percentage contribution of
exports of the traditional primary commodities (sugar, bananas, pimento,
coffee and citrus) has been declining rapidly, from 70% in 1954 to 25% in
1972. Exports of crude materials (mainly bauxite-alumina) have domi
nated the economy. The percentage contribution of exports of manufac
tured goods has been uneven and insignificant; hence, this indicates that the
industrial strategy pursued did not diversify appreciably the structure of
commodity exports. This failure reflects the fact that either locally
manufactured exports are not competitive on the world market, or that
the import substitution process is concerned mainly with production for a
highly protected local market The export coefficient (X/GNP) grew from
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>
_M
-_?- p
-.-.-?? ?
TABLE 2
M/GNP(%)a
1. Consumer Goods 42.3 37.8 40.6 34.6 35.6 37.9 g 3. Capital Goods 25.3 29.8 26.1 31.1 32.2 29.9 -
Total Exports (X) 100.0 100.0 100.0 100.0 100.0 100.0 *
E. X/M (%) at Current Prices 77.5 74.8 85.6 66.8 59.7 71.0
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146 II. RESEARCH COMMENTARIES
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CARIBBEAN STUDIES / VOL. 18, NOS. 3 AND 4 147
Measure I (a)
Symbolically, this is
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148 II. RESEARCH COMMENTARIES
AO = EDD + EE + IS (7)
B = X/AO (8)
Eq. (8) can be written as
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CARIBBEAN STUDIES / VOL. 18, NOS. 3 AND 4 149
(Measure I), will indicate that the size or magnitude of import substitution
will not be the same because of differences in weights. In Measure III the
weight is 1/A O; in Measure II it is - Z1/m1; and in Measure I, - 1/Z2. It
follows, therefore, that not only the size but the rankings of different
industries according to import substitution will be different.
Empirical Estimates
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?
products 66.7 8.3 24.9 70.6 9.0 20.8 63.3 9.7 26.8
TABLE 3
articles of textiles -10.9 21.8 89.1 231.2 -23.3 -108.0 74.4 10.0 15.6 |
her paper
od and products
wood products90.4
44.20.6
0.4 8.9
55.4130.4
105.3 1.7
1.1 -32
-6. 1. Alcoholic beverages 60.9 11.4 27.6 104.2 48.5 -52.7 78.9 23.5 4.5 w
2. Non-alcoholic beverages 99.3 -3.1 2.2 98.2 8.8 -7.0 97.5 3.1 -0.6 M
7. Furniture and fixtures 34.1 -2.4 68.2 89.4 2.0 8.4 0.2 51.1 48.7 >
11. Cement and clay products 112.2 -5.4 -6.8 106.5 0.0 -6.5 110.0 -1.9 -8.0
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CARIBBEAN STUDIES / VOL. 18, NOS. 3 AND 4 151
24. M.E. Krein, International Economics: A Policy Approach, 2nd ed. (New
York: Harcourt Brace, 1974), p. 375.
25. N.A. Adams, "Import Structure and Economic Growth in Jamaica,
1954-1967," Social & Economic Studies 20, no. 3 (1971).
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152 II. RESEARCH COMMENTARIES
CONCLUSION
The conclusions drawn from this study must be viewed within the
context of a simplified model and available data. The quantitative evidence
presented is of sufficient importance to justify further investigation relating
to the area of investment strategy. Too often in the past decisions relative
to the inflow of direct investments were made on the simple yardstick of
how much it would temporarily ease the balance of payments and em
ployment problems. Concessions were often awarded without evaluating
the costs. Experience has shown that when there is a foreign exchange
crisis, it is the manufacturing sector which collapses because of its inef
ficiency and continued dependence on imported raw materials and capital
goods. If nothing else, the primary lesson to be learned from the 1977
balance of payments crisis is that for economic planning and investment
allocation, costs, cost-benefit analyses and the law of comparative advant
age assume crucial importance.
Jamaica's import substitution strategy and performance offered as an
illustration fits the case for the whole CARICOM. However, such a policy
offered as a prescription to the economic problems of less developed
countries leads to an inappropriate structure of industrial growth and does
not solve the problem of employment or reduce the dependence on
foreign trade.
Experience has shown that once the infant industry is established the
protection conferred is invariably difficult to remove and thus resort to
efficient economic policies. The argument of growth first, then efficiency
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50
-?- d
d products 12.0 (5) 15.5 (5) 11. Cement and clay products -3.6 (11) -5.9 (10) -8.0 (11) >
TABLE 4
8. Printing, publishing and other paper products -1.1 (10) -2.1 (9) -7.6 (10) ^
4. Textile and made up articles of textile 13.1 (4) 20.1 (4) 15.6 (7) ^
3. Tobacco and tobacco products 31.1 (2) 54.4 (2) 59.0 (2) |
10. Chemicals and chemical products 6.7 (6) 10.5 (6) 26.8 (6) ^
9. Leather andAverage
leather products 3.4 (7)for
4.4 (8) 36.8
all (4) O
2. Non-alcoholic beverages -0.3 (9) -24.0 (11) -0.6 (9) O
Note: The figures in brackets refer to rankings.
1. Alcoholic bevera
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154 II. RESEARCH COMMENTARIES
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CARIBBEAN STUDIES / VOL. 18, NOS. 3 AND 4 155
APPENDIX
Value added as % of
Industries Gross Output
Beverages 66.9
Tobacco 77.7
Textile & textile made up goods 47.7
Footwear 53.2
Wood and wood products 63.5
Furniture and fixtures 59.4
Paper products 59.3
Leather & leather products 5 5.2
Chemical and chemical products 46.1
Cement and clay 54.6
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156 II. RESEARCH COMMENTARIES
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