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Commentary>Development From Import SubstitutionBy Dennis Chung, Contributor |
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Currently there are various initiatives to build Jamaica through buying
Jamaican, including the 'Eat Jamaican' and the 'Buy Jamaican, Build Jamaica'
campaigns. These are welcome initiatives and are certainly not new to
Jamaica, as in the 1970s this was what Michael Manley attempted to do
through the 'Self-sufficiency' programme. At the time he also promoted
the production of Jamaican goods and services as substitutes for imports.
WEALTH CREATION
In my view, this is the best shot we have at creating wealth in the short
term. Wealth creation (as opposed to growth) can only be achieved when
total revenues are greater than total expenses, in either a company or
a country. In the case of a country this occurs when export values are
greater than that of imports, which includes goods and services. This
is not to be confused with cash flow, which is what as a country we have
been focusing on for years, but must include all expected future values
for revenues and expenditures as promulgated in generally accepted accounting
standards. A positive cash flow can only be a short term benefit where
the values of expenditures are greater than revenues.
Consequently, Jamaica has found itself in the unenviable position where
imports (expenses) are greater than exports (revenues) as evidenced by
our widening trade deficit. The Balance of Payments of a country is similar
to the Income Statement of a company, and so any trade deficit is equivalent
to a loss on a company's books. What has caused our deterioration is the
fact that this deficit position has been consistent for decades, thus
eliminating any capital value we might have had and forcing us to borrow
to cover our appetite for foreign goods. The trade balance is the only
real measurement of wealth creation and the only true guide as to Jamaica's
future position. If we continue to import more than we export then we
will always be caught in the spiral of increasing debts and a search for
new foreign investments to ease our cash crisis.
To solve this situation we have to (i) increase exports beyond imports;
(ii) reduce imports below exports; or (iii) increase exports while reducing
imports. The third option is the best solution as this will allow us to
create wealth at a faster rate. Probably the most significant move we
can make in the short term, however, is to reduce our imports through
local substitution. This will allow us to reduce expenditures (import
bill) while
at the same time build our local industries and hence increase
economic activity.
For the period January to June 2003 our exports stood at US$693 Million
and imports at US$2,156 Million. This created a six-month deficit of US$1,463
million up from US$1,322 million for the corresponding period in 2002.
This arose from imports growing at a faster rate than exports. This situation
is untenable and must be addressed. Import substitution could create a
positive effect by reducing imports through increased production. It is
necessary for us to do this from increased production and not merely using
current exports as there would be no added benefit. Table 1 shows
the effect of various percentage import substitution levels with local
produce. It shows that if we were to produce an additional amount to cover
20 per cent of our imports then we could have reduced our deficit over
the period to US$1,032 million and to US$385 million if we produced 50
per cent for import substitution. This shows the important direct impact
of import substitution on the trade balance in addition to jobs and other
economic activity.
While import substitution is good we need to carefully evaluate and monitor the effect of the policy on Jamaica. It is not as straightforward as buying Jamaican, as if not monitored correctly it can have a negative rather than the desired positive effect. Of course, it is always good to buy goods and services produced locally but this must be measured based on the value provided as opposed to the imports. This, for example, is one argument for bringing in foreign over local expertise, that is, the value per dollar to be gained from the services of a much more expensive but more experienced consultant is in many cases greater than the local counterpart.
MEASURING IMPORT SUBSTITUTION BENEFITS
Another more direct line I would like to focus on, however, is that buying
Jamaican can mean greater imports than buying foreign goods. Table
2 illustrates the point in a simplistic way. It compares a locally
produced good to a foreign one, where in the case of the local product
the price is $125, the foreign input is 80 per cent and the local input
is 20 per cent. In the case of the foreign good the price is $100 and
the foreign input is 100 per cent.
This is typical of many of the items produced locally where even though the product may say 'Made in Jamaica' it is quite possible that the great majority of the inputs are imported, such as ingredients, packaging, services etc. This simple example shows that in both cases the total import bill is $100. In the case of the local produce this is arrived at because 80 per cent of $125 is due to foreign inputs. This situation would even be further compounded if 1) the price of the local good is higher and the foreign input the same; or 2) the foreign input is greater than 80 per cent. The advantage of local produce it can be argued is the creation of jobs but if the local good causes greater imports then in the long term this may not be the best solution.
We must therefore carefully examine the advantages and disadvantages of import substitution on our present situation and the future impact. Of course, the analysis needed is much more than can be done in this article.
The question must be asked, how do we go about ensuring that "locally produced goods" are using mostly local inputs? This is where I think the Bureau of Standards plays a pivotal role. The Bureau's role is to ensure that standards are adhered to in terms of quality and advertisements in order to protect the consumer. Similarly I believe that the Bureau should develop a certification process for locally produced goods. The Bureau could issue a rating of goods stating what percentage of inputs are local or any forward thinking company could place the Bureau certification on their label.
By this certification process consumers will have the real choice of supporting local industries rather than foreign ones. In the past we have had so-called locally produced goods with significant imported inputs, while at the same time the prices are much higher than if imported, or in many instances are lower only because of high duty rates. In the end there is no real benefit to the economy and the consumer suffers from higher than necessary prices.
I am all for import substitution as a development tool and would encourage all Jamaicans to support these initiatives. As a practice when I go to the stores I always look for the locally branded products or products from Jamaican companies that I know support the local market. By doing this we encourage business and also contribute to our own employment. Similarly, however, Jamaican companies owe it to consumers to deliver the best value for money at the lowest price. This is what the needed partnership should be all about. While I support this, however, we need to take it a step further and ensure that our locally produced products do in fact support local industries.
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* E-mail: dra_chung@hotmail.com