Cognizant of the fact that import substitution can potentially protect local manufacturers from undue competition; the Ethiopian government has initiated such stances to support domestic and small-scale businesses.
The Ethiopian Herald recently approached Mekonnen Birara, an economist graduated from Jimma University, to have a piece of information about the significance of import substitution for economic growth and development. He said, “The primary goal of import substitution is to protect, strengthen, and grow local industries using a variety of tactics, including tariffs, import quotas, and subsidized government loans. Countries implementing this theory have attempted to shore up production channels for each stage of a product development.”
As to him, import substitution runs directly counter to the comparative advantage concept that occurs when countries specialize in producing goods at a lower opportunity cost and export them. The success of import substitution policies has been facilitated by subsidizing prominent industries, such as power generation and agriculture, and encouraging nationalization and protectionist trade policies.
Import substitution would help attain total macro-economic balance, market adaptation, and achieving new levels of regional economic development as a constituent part of the national economy of the country. An effective strategy and goal management are the important forward-looking orientation points of the existence and development of the country.
According to Mekonnen, governments in various countries, irrespective of the country’s level of economic growth, seek to initiate macroeconomic policies to achieve better economic performance to advance their level of business activities and, ultimately, ensure a better quality of life for the people. To achieve this, various approaches and interventions are applied in the process, but the outcomes are always different. True, economic conditions and competitiveness are currently highly discussed issues and characterized by economic dynamics, economic growth, and the sustainability of economic development.
As to him, at the aggregate level, Ethiopian production is not highly dependent on imported inputs. Typically, smaller economies and economies that are more deeply involved in global value chains rely more on imported inputs.
Import substitution generally refers to the state’s policy that eliminates the importation of the commodity and allows for its production in the domestic market.
He further elucidated that though import substitution is a difficult experience for the country’s economy, its goal would create a competitive, sustainable, structurally balanced industry capable of effective self-evolution with integration into the global technological environment.
It also encouraged the development and application of advanced industrial technologies aimed at the formation and tapping of new markets for innovative products that would effectively ensure the economic growth and defense capacity of the country.
Simply, he said the main objective of the policy of import substitution is to encourage national production and to develop new products to stimulate demand and import restrictions. Factors contributing to the policy of import substitution include the large capacity of the domestic market, natural resources, and the ability to provide investments in the industry due to raw materials being exported.
The implementation of the import substitution strategy requires a trade protection policy like tariff protection, that is, high tariffs on imports of end-consumer goods and low tariffs or exemptions on tariffs on the means of production and intermediate goods necessary to produce final consumption goods, he added.
Import quotas limiting the import of various types of goods to reduce imports of non-essential goods and ensuring that state-supported industrial enterprises can receive imported capital goods and intermediate products and lower their production costs. Yes, appreciation of the national currency to lower the cost of goods and reduce the pressure of the deficit of foreign currency, but tariffs and quotas are important safeguards in an import substitution strategy.
Basically, he said import substitution is the most important element of the implementation of economic policy in Ethiopia. Besides, a systematic approach to import substitution should focus on stimulating the industrial base through government regulation and support, which is better than the present policy of maintaining a relatively unregulated domestic free market and relying on the import of foreign technology.
“Primarily, the development of environmental import substitution, integrating the resource availability of the economy and environmental imperatives and technologies for the careful use of resources and their recycling, determines the prospects for the sustainable development of the economy as a whole in the future.”
Import substitution must be an intermediate stage in the process of restructuring the country’s economy and oriented towards developing new directions in industry and modernizing producing processes, ensuring the transition to an export-oriented model of economic development, as to him.
Mekonnen stated having considered various approaches to import substitution policy, it is worth noting that its effectiveness is, in most cases, defined by the efficiency of state institutions—as they bring financial support to competitive economic agents—and the activity of economic agents, their interest, and business initiative in the presence of considerable technological import dependence.
It is important to note that maintaining agriculture and mining operations imposes tight restrictions on a region. What is more, the depreciation of the national currency led to an increase in the cost of imports, which played a considerable role in the production process, and the weakening of the national currency should have had a positive impact on mining and manufacturing as the most export-oriented sectors.
The policy of import substitution in Ethiopia is connected to an attempt to restore, modernize, and build the missing production elements of the national economy, that is, mainly a vertical one. However, it will be limited in terms of its useful application, and it will be systematically delayed, focusing mainly on price competitiveness to generate the expansion of an economy that is especially sensitive to exchange rate fluctuations in the absence of a connection with horizontal measures of certain critical technologies’ development, the formation of new knowledge areas, and recreation of the missing scientific competencies.
He said that there is a significant impact of industry modernization on the sustainable development of enterprises and the economy as a whole. The important role of import substitution in the economic security protection of the country and its regional states is untold, indeed! It is also significantly useful in upgrading its production in a timely manner, considering promising science and technology developments.
Mekonnen further said, “It is also necessary to distinguish two aspects in the structure of import substitution. The first one is common import substitution aimed at reducing dependence on foreign suppliers by using production technologies available in the country and/or copying foreign products. The second is innovative import substitution characterized by the constant monitoring of technology markets, analysis of scientific results, and development of advanced technologies; knowledge and experience gained are necessary for the timely upgrading of production facilities and creation of competitive alternative products and new technologies.”
Both aspects of import substitution are important for ensuring economic security; however, the innovative aspect is a priority for country’s lagging in technological development, he added.
Measures of import substitution are based on changes in the ratio of imports of specific products to their total domestic absorption. Thus not only is the domestic production of capital goods discriminated against by the tariffs and exchange control policies, but also by exchange rate policies that keep their imported costs below real costs.
Specific policies need to be appraised as to the extent to which they represent or misrepresent the system, encourage projects consistent with the other characteristics of the economy as well as encourage productivity growth.
Promotion policies involved both protections of newborn industries for imports and incentives to encourage capital and technology imports. Furthermore, tariffs were often used in addition to exchange controls, exchange-rate manipulation, and import licenses for particular products necessary for manufacturing, he added.
Producers of consumer goods may have been initially successful despite they had little incentive to support industrial expansion. This trend has to be improved and industries need to be well backed to come upon with capacity thereby successfully supply high-quality inputs that would potentially substitute importation.
BY MENGESHA AMARE
The Ethiopian Herald July 27/2023
