In Sri Lanka, imports often get a bad rep. Very often you hear people talking about how we must “cut down on our imports”, “imports are draining our foreign reserves”, “imports are hurting our balance of payments”. But these views are far too simplistic, and indeed misleading, as they fail to recognise the role that imports play in an economy. Worryingly, this fallacy is repeated by veteran economists as well; for example this article prescribing that to reduce the trade deficit we must “import less, export more”.
It’s a good time to highlight this, though. Next week (24th November) marks the 80th Anniversary of the Imports Section of the Ceylon Chamber of Commerce. To mark this, a colleague of mine in the Economic Intelligence Unit has written a commemorative article on ‘Why Imports Matter for a Trade-Oriented Economy’ – http://nation.lk/online/2015/11/06/why-do-imports-matter-for-a-trade-oriented-economy/. It’s well worth a read.
For Sri Lanka – small open economy dependent on international trade – imports matter as much as exports. In fact, the two are intrinsically linked. But how often I’ve heard top bureaucrats decrying imports. Dr. Razeen Sally captured it candidly at the Sri Lanka Economic Summit in August, when he called out the former Treasury Secretary for his view that Sri Lanka must double its exports while curbing imports at the same time:
“Exports and imports are Siamese twins. They are two sides of the same coin. Not only does it not work, but it’s stupid to say such things”
With the proliferation of global value chains, imports are now a vital element in international trade. Parts and components are imported and exported in countries at a dizzying pace, with the value chain spliced and diced into multiple layers across countries and continents. If East and South East Asian policymakers and economists took the view that imports must be curbed, they wouldn’t be the global value chain powerhouse that they are today. In fact, it would be impossible to imagine Asian value chains sans imports. As I highlighted in a previous blog,
…90% of GVCs are concentrated in just 10 Asian economies; 43% of global intermediate exports and 39% of global imports are from the region; and over 65% of GVC intermediate imports by countries in this region were sourced from each other.
But admittedly, Sri Lanka does have a problem. Imports of consumer items, in volumes that the economy cannot bear, does affect the balance of payments when it comes alongside sharply declining and low export income. It’s not unusual then that from time to time a government may take some measures to ‘stabilise’ the situation (as seen recently with motor vehicle imports). Yet, this is not a sustainable strategy. The greater focus instead should be on opening up the economy overall, encouraging greater trade, and promote trade-oriented FDI so that the economy benefits from the trade-investment nexus. The focus should be on growing exports and earning more export income, so you have to worry less about the cost of imports in the balance of payments. But the notion that overall ‘curbing of imports’ is a desirable economic policy objective to be pursued is a fallacy. And it must not be propagated.