Information about Asia and the Pacific Asia y el Pacífico
Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
December 1983
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Information about Asia and the Pacific Asia y el Pacífico
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Hazards of import substitution

I was interested to read Anne O. Krueger’s article, “The effects of trade strategies on growth,” in your June 1983 issue. As a practicing trade economist who has worked on commercial policy issues in a number of developing countries in Africa and Asia, I found myself in complete agreement with Professor Krueger’s main conclusions.

However, in my view, in conventional economic analysis, insufficient attention is paid to some important socioeconomic factors which tend to exacerbate the problems generated by import substitution policies. Such policies tend to be self-perpetuating because of the power of the vested interest groups they help to create. One such interest group will comprise all those having a direct financial stake in the protected domestic industries (and these may include leading figures in the political and commercial life of the country). Another significant interest group is composed of the bureaucracy charged with the administration of the numerous regulations and controls associated with an import substitution policy. Any move by the government toward trade liberalization could lead not only to a loss of jobs within the administration, but, no less significant, to the loss of valuable income arising from the “emoluments” received from the public for the approval of import licenses or for speeding up the notoriously slow bureaucratic process.

Recommendations for policy changes in the area of trade strategy which fail to take into account the above-mentioned factors may have little chance for acceptance and implementation by the governments concerned.

Ben Bardan

Raanana, Israel

Anne O. Krueger replies:

Mr. Bardan’s point is quite correct, although it is hardly accurate to say it is neglected in conventional analysis. It is widely recognized that one of the major problems of liberalizing restrictive trade regimes lies in the opposition that comes from those who gain from receiving import licenses and selling behind a wall of protection and who would lose by liberalization.

Prosper the plough

The article, “Managing oil wealth” by Jahangir Amuzegar (September 1983) is very much to the point. Mr. Amuzegar obviously speaks from experience.

From observation in Iran, before the revolution, I would add only one suggestion: more attention to agriculture. New industries, supported by petrodollars, drew people to the cities. Food became in short supply and prices rose. To avoid unrest the government imported food and imposed price controls. At the same time inflation cut the real income of the peasant farmer. Without incentives, the farmers produced less and dependence on imports increased. Rice, a staple food in Iran, was imported, as were apples, oranges, mutton, and white cheese, although Iran produces all these products.

Efforts to improve the lot of the peasant, although well meaning, were ill-managed. Land from the large states was redistributed to the farmers, but the cooperatives, which were supposed to supply the services such as fertilizer, seeds, and maintenance of the underground irrigation canals (qanats), formerly provided by the great landowners, were not adequately supported.

Too often aid to the farmer was confused with protection of government-owned infant industry. For example, a government-owned nitrogenous fertilizer plant forced dealers and cooperatives to take their fertilizer in place of imports, but did not make deliveries when fertilizer was needed and a year later dealer and cooperative warehouses were full of fertilizer hardened in the bags and totally useless. The fertilizer factory, which had no salesmen on the road, could not understand the reluctance of the peasants to use the fertilizer and complained that the factory was forced to dump products in the export market. Concurrently, farm-to-market roads were neglected and little effort was made to improve distribution beyond periodic campaigns against profiteering.

There were some exceptions to the neglect of agriculture. A large-scale sugar industry, based upon both beets and cane, was established; poultry-raising was underway near the cities; and there was a good agricultural experiment program. In general these successes were in heavy industry, such as sugar refining, which could be managed from offices in Tehran, or new enterprises, such as battery raising of poultry, which had little connection with traditional agriculture and were run by businessmen. Educational limitations prevented the peasants from taking full advantage of the experiment stations.

Nothing gave the peasant farmer what he most needed: easy access to supplies and to markets.

George Gibson

New Jersey, USA

Jahangir Amuzegar responds

Agriculture has been the Achilles’ heel of economic development in almost all developing countries—oil or non-oil—and not exclusively a pre-1979 Iranian problem. A new World Bank report on Africa’s farm problems and recent press accounts of food shortages, increased food imports, and rationing indicate that an ideal “managing of oil wealth” involves a lot more than mere “more attention to agriculture.”

What is aid?

I read your quarterly with great and sustained interest; its articles, graphs, and tables are always well done in every area, and they are easy to read—which is not always the case with other publications.

The complaint I should like to make in this letter is not a direct one, for as you mention in an article, “ODA from developed countries” (June 1983), you use the data from each country…as you receive them. In Table 2, p. 29, France, my country, appears—with the exception of the Netherlands and Sweden—to be by far the most generous. Fortunately, you do mention in the text that the ODA percentage of GNP quoted for 1981 included the ODT (Overseas Departments and Territories)!

For 20 years I have been urging in France and in Portugal that the following not be included as assistance to developing countries: assistance to colonies (this is the result of an historic process) and assistance to the ODT, which are regarded as départements (and I am far from wanting these countries to separate from France). A distinction should be made between grants and loans. Although some progress has been made in this respect, it is not enough.

I feel that an institution such as yours should have made an effort to include in this table, not a little footnote which most people will not read, but a separate heading for the figures, even if only approximate, for: ODT (which accounted for 40 percent of ODA in 1981) and assistance to foreign countries.

Naturally, every country tends to favor its former territories, or countries to which it is close; this is normal but it should not be represented as ODA.

A. Nordon


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