By Garvin Karunaratne, Ph.D.(Michigan State University)

Dr. Koshi  Mathai, the outgoing IMF  Country Representative for Sri Lanka has voiced himself that “Import Substitution is not in Sri Lanka’s best interest.” He is of the opinion that we should develop our exports further and continue to import all our requirements. He states that import substitution cannot succeed.( “Budget 2014: Import Substitution may derail economic growth”: Sunday Times, 15/12/2013)

Going on the path of free market-liberalization, that he upholds as an ideal economic system, which Sri Lanka has closely followed  for three and a half decades where import substitution is not approved, Sri Lanka that had a foreign debt of $ 750  million in 1977 had to face a debt of $ 9.7 billion by 1995, which debt level meant that Sri Lanka had to borrow foreign exchange to service its debt annually. It is in that process that Sri Lanka has now come to have a debt of over $ 22 billion. Leaving around some $ 6 billion of this debt to buy arms and ammunition to defeat the LTTE, the rest was incurred in the rotten process of importing everything, and liberalizing the economy to enable the rich to live a life of luxury with imported luxury items and sending their children abroad for studies, and go on unlimited foreign travel all of which increased the debt as we had to borrow further to meet that spending spree. At the initial days in 1977 the countries were offered loans at 2% interest, with long grace periods of no payment. Now we are compelled to raise dollar funds at 9%, a high interest rate. Sri Lanka’s  currency,  the Rupee slumped from Rs. 15.52 in 1977 November to Rs 215.00 today(Jan 2014).

The Pathfinder Foundation  has also opined that import substitution was a total failure:
“The dirigiste inward looking policies consigned this country to a low investment/low growth/ high unemployment/ high inflation(black market) syndrome. It was a period of shortages and queues even for basic goods”
Further they state:  ”  the genuine but misguided District Development Project of 1970-1977  vividly demonstrated the folly of indiscriminate import substitution.  This was an era where misguided beliefs led many policy makers and politicians to imagine that Sri Lanka can produce anything and everything for the local requirements from joss sticks, mammoties, tractors to motor vehicles”(Pathfinder Foundation:”Export Promotion and Import Substitution” in  Daily Mirror;10/12/13)

For the information  of the Pathfinder Foundation  I have to state that the DDC Programme never attempted to make tractors or motor vehicles. This itself indicates  the  fact that the researchers were misinformed and did not know what they were writing about.

Economist Nimal Sanderatne too has come to support the suggestions made by Dr Mathai. (“Budget 2014: Import Substitution may derail economic growth” in Sunday Times,15/12/13)

If the IMF policies of free market-liberalization introduced in 1977 had succeeded Sri Lanka would not be toiling with  an overly large foreign debt where we have to borrow further to service the loan,  and a budget deficit  that defies bridging, where our youth cannot find employment and are forced to scoot into other countries to find employment as outcasts doing menial jobs and send remittances of foreign exchange for the sustenance of their loved ones back in the country.

The writing on the wall is clear, the IMF should come up with a better paradigm for development, but Dr. Koshi Mathai instead tries to justify the free market liberalization path of the IMF and makes Sri Lanka proceed further to ruin.

In his words,
“Trade restrictions and import substitution have consistently failed elsewhere” and emphasizes that ” it is not a matter of opinion; it is not a matter of IMF doctrine; it is simply a matter of fact”
“Import substitution policies would harm exports by an appreciation of the exchange rate”
“Import substitution  failed hopelessly in the 1970-1977 era of import controls.”

Dr Mathai as well as the Pathfinder Foundation are definitely  wrong when they state that trade restrictions and import substitution strategies have failed. There is no relationship between import substitution and an appreciation in the exchange rate. Import substitution  industries succeeded but were forced to close down due to sabotage by multinationals and the freemarket/liberalization measures forced by the IMF on Third World countries including Sri Lanka.

If Dr. Koshi Matahi, economist Nimal Sanderatne  and the Pathfinder Foundation want to know of a time when import substitution strategies were  a success in Sri Lanka they have to look into the pre 1970 period when many import substitution commercial ventures like the Marketing Department, the Powerlooms and Handlooms of the Small Industries Department manned by the Governments Agents of the Districts worked in an efficient  manner. Sri Lanka became self sufficient in all Jam, fruit juice and textiles due to this effort.  In the 1970-1977 period too these strategies were successful and not the cause of  the shortages of essentials etc which were entirely  due to sanctions enforced by the Western countries,(more later)

Though Dr Mathai states that it is not a matter of IMF doctrine, the policies laid down in the Structural Adjustment Programme(SAP), which was imposed by the IMF, include on a mandatory basis, the removal of restrictions on imports, the removal of import tariffs, the disbanding of national planning and allowing the market forces- .i.e. the banks, multinationals and businesses and their salesmen to decide what has to be imported. This meant that the sovereign country  was no longer in charge of the foreign exchange income of the country.  These measures imply literally a ban on import substitution as a definite policy of the IMF though the IMF does not admit it directly.  What the IMF has done in the SAP is to lay down the conditions which when complied with  automatically rules out any import substitution.

As I have repeatedly mentioned, the SAP in actuality, structures the economies  of the Third World countries to contribute towards the economic prosperity of the Developed Countries and this  is their hidden agenda.

The SAP was imposed as a condition when countries fell into financial distress. This commenced when the oil sheiks increased the price of oil threefold in the early Seventies and the countries were taken blindfolded. The countries were given the impression that they would succeed. In fact in his budget speech Ronnie de Mel, our Finance Minister even said that Sri Lanka need not  go on with the begging bowl any more and that the currency will never depreciate. The fact remains that within a few months our currency depreciated by over 100%( Rs, 15.52 in 1977 November to Rs. 31.64 by 1978, to Rs.42.66).

Ronnie de Mel is a close asspociate of mine, I knew him as a senior colleague in the Administrative Service and he was a Member of Parliament in the Matara District, where I worked as the Government Agent. He has a very sharp intellect but was totally bluffed by the IMF. The IMF employs the most articulate and erudite professors at princely salaries- those that can sell ice to the Eskimos and no one ever dares or can  argue with them.

 I would contest Dr Mathai’s statement  that import substitution was a failure in the 1970-1977 period. In actual fact it was a grand success. It has become commonplace to blame the bread queues and the shortages of essential  goods in the 1970-1977 period to the import substitution policies. The fact is that the shortages and the bread queues were due to the sanctions that were imposed on the 1970-1977 Government due to the leftist policies of nationalization that were followed.  The difficulties suffered by people- shortages etc were due to the following reasons:
1.    Britain and the Superpowers resented the policies of nationalization of estates over 50 acres. Sri Lanka decided that payment will be in bonds to be cashed at a future date, but Britain warned Sri Lanka that unless the foreign estate owners were paid in foreign exchange they would impose sanctions. Sri Lanka had to pay the owners of foreign companies in hard currency- in foreign exchange. That partly depleted our coffers.
2.    The USA for a long time had been selling flour at concessional rates and this was stopped because Sri Lanka nationalized estates and followed  other leftist policies . This meant that we had to purchase flour at commercial rates and when we were short of funds supplies had to be curtailed, causing bread queues. It was the sanction of withdrawing flour at concessional rates that caused the bread queues..
3.    The price of oil increased threefold in 1973, and that expenditure  additionally strained our reserves.
4.    ” Between 1973 and 1974   the CIF price of flour increased from Rs. 1144 to Rs. 2132 and the price of rice from Rs. 807 to Rs. 2462  per ton. There was no world shortage but this was manipulated by the multinationals”( From: How the IMF Ruined Sri Lanka: pg192)
These are the facts that shook the economy in 1970 to 1977 and caused food shortages and bread queues.

 It  is to the credit of the 1970-1977 United Front Government that it could meet all this expenditure and did not have to resort to foreign borrowing for this purpose.  Dr Mathai has to know that all import substitution industries were a success and saved foreign exchange.

Ever since Sri Lanka  accepted the free market/liberalization  policies of the IMF she has  had to resort to deficit budgeting and now that deficit has ballooned to around a billion dollars a year. In the 1970-1977 we balanced our budget. It would be good for Dr Mathai, the IMF and the Pathfinder Foundation to realize that the pre 1977 period was the last time when Sri Lanka  managed its  budget without a deficit. For their information at that time there was less poverty and more incomes for the people than in the post 1977 period. A daily wage earning labourer drew only Rs. 3.50 a day and an Assistant Commissioner’s salary was only Rs 550.00 a month. These salary levels enabled them to live a far better life than today. The salary of an Assistant Commissioner was a princely salary that enabled them to live and even save to buy a house over a period of about ten years. This was possible because there was a price control over essential commodities, re imported essentials done by the  Cooperative Wholesale Establishment(CWE) importing essential goods  in competition with the Private Sector and sold at cheap rates keeping a fair margin and the Vegetable and Fruit Marketing  Scheme of the Marketing Department competed with the Private Sector purchasing at Producer Fairs and selling at Fair Price Shops in the Cities. This was an unofficial price control that ensured that the Private Sector could not charge fat profits. The  Marketing Department was abolished by the Jayawardena Government of the United  national Party(UNP) and with that the Private Sector  charges fat profits and so far the Marketing Department has not been established. The CWE was abolished by the UNP during the days of Prime Minister Ranil Wickremasinghe. Though re established by the present Government it is yet in its infancy. Dismantling this development infrastructure for controlling inflation was done at the instance of the IMF.

I can understand why Dr  Mathai has to support the IMF. He is an employee of the IMF and if he does not support IMF policy will face the same plight that Professor Joseph Stiglitz  faced when he advised the IMF to change its policy on Indonesia. Stiglitz was immediately sacked from his position as the Chief Economist of the World Bank.  The Pathfinder Foundation conclusions have no foundations whatsoever and has been written by researchers who do not know the economy during that period.

It so happens that I have worked on import substitution projects  during my service in Sri Lanka from 1955 to 1973 and later in Bangladesh in 1981-1983. The fact remains that import substitution was a grand success, in providing employment, increasing the incomes of the people, obviating imports and saving foreign exchange that would have been spent on the imports.

Perhaps the following details of the projects and programmes I worked on will convince anyone that import substitution is  successful.

I worked as Assistant Commissioner for Development of Agricultural Marketing from 1955 to 1960. The import substitution programmes that I worked on were:
The Vegetable and Fruit Marketing Programme
Canning Fruits and Vegetables
The Guaranteed Price Scheme for Paddy and Cereals
In the Vegetable and Fruit Marketing Programme the Department attended to the purchase of vegetables and fruits from producers  at all major Producer Fairs and selling them in connurbations in small sales depots. The guiding principle was to purchase from producers at a price higher than what was offered by traders and to sell at low prices in the conurbations keeping a margin of only 10 to 15% for losses in handling and transport costs. The benefits were to ensure that reasonable prices were paid to producers as otherwise they may opt to get out of production  and at the consumer level to ensure that goods were available at reasonable cheap rates. While the Department kept a margin of 15 % at most the Private Sector kept a margin of 100%. This was a means of controlling inflation, entirely done by ensuring that the Private Sector  merchants had to be satisfied with a low margin of profit.

I was neck deep involved in this. As Assistant Commissioners of Districts our duty was to ensure that producers got a fair price. Traders generally  work in a ring and offer low prices and vegetables and fruits being perishables producers have to sell at whatever price. The Marketing Department did not allow this to happen. It was a full fledged Department at work 24 hours a day, with a fleet of over a hundred lorries hauling produce every day. Then my day started at four in the morning on my way to supervise purchases from producers. At the Fairs that commenced at six in the morning.

I worked a year in charge of  the Tripoli Market in Colombo the headquarters for the Project and I fixed the buying prices for the entire island based on reports of prevalent prices at the Colombo Wholesale market. This Scheme was a grand success. After this Scheme was abolished on the advice of the IMF,  producers even resorted to stop production; there were shortages and Sri Lanka had to import vegetables and fruits.
“Under this Scheme, the Marketing Department was actually unofficially controlling the prices at which the producers sold as well as the prices at which the produce was sold in the cities”(Karunaratne: “Papers on the Economic Development of Sri Lanka”: Godages). We successfully staved off inflation.

In 1955 the Marketing Department established a Canning Factory and commenced manufacturing Tomatoe Sauce,  Tomatoe Juice, Fruit Juice from melon, oranges etc. Floor prices. i.e. prices at which the entire produce would be purchased by the Department were offered and the produce was purchased, kept when necessary in cold rooms and processed.  Similarly floor prices were offered for Red Pumpkin, Ash Pumpkin and  these were turned into Golden Melon Jam and Silver Melon Jam. With this move Sri Lanka became self sufficient in all Fruit Juice, Jam, Tomatoe Sauce etc. A floor price was offered for pineapples and we built up an export market. Once the Canning Factory was privatized no floor prices were offered and producers do not know what to do with their produce at times and farmers in Hanguranketa had to destroy tomatoes. Even pineapple goes waste today and we now import these products.  The Canning factory enabled cultivators to reap a fanciful profit and the foreign exchange saved was immense.

In 1970 I worked as the Deputy Director of Small Industries. The Department guided small industries  to make what was imported. This  was a great success and we saved foreign exchange.

The Small Industries Department, earlier the Department of Cottage Industries and Rural Development had a major program to create handloom textiles. The Department imported yarn and other requisites and offered expertise in Textile Centres where Textile Demonstrators were in charge of training rural women. The Yarn was sold through Cooperative Unions which also marketed the sarees and textiles produced. That was a time when the elite ladies wanted sarees in particular designs and the handloomers produced elegant sarees.  The handloom industry was lost with the abolition of t hat section of the Small Industries  Department and today handlooms from India has crept in,  of course bought with foreign exchange.

The Small Industries Department established   PowerLooms in many districts and these turned out fabrics of all types. These were established on a cooperative basis and enabled rural youths to find employment in their home areas. Today these unemployed youths hog the cities in search of some employment. These  powerlooms were managed by cooperators guided by the Divisional Secretaries(the Divisional Revenue Officers) who as the Presidents of the Powerloom Cooperatives were held responsible for the smooth functioning. As the Additional Government Agent at Kegalla and the Government Agent at Matara I had to supervise these Powerlooms and ensure that they succeed. My Hakmana Powerloom was famous for its suiting and there was a demand from even residents in the UK, when they came on holiday. The Powerlooms were guided on technical matters by a specialist unit , Velona in Moratuwa. This great Powerloom programme which made Sri Lanka self sufficient in all fabrics was abandoned with the abolition of the Textile Section of the Department of Small Industries under IMF advice. Now we import fabrics. Are we not the loser  in our foreign exchange, in the loss of employment and also the loss of income from  value added in manufacture.  This was a great success story in import substitution killed by no other than the IMF.

Making paper was a highly successful import substitution till the LTTE destroyed the Valachenai Paper Factory and the removal of tariffs on imported paper forced the Embilipitiya Mill to closure. The Valachchenai Mill used straw as the base and the benefits were saving foreign exchange on imports as well as increasing the incomes of farmers as straw had to be purchased from as far as Hingurakgoda. Today we export waste paper to India- 3,000 tons a month and import paper.

In 1970-1977 the Divisional Development Councils Programme was meant to create employment opportunities for the youth. Though summarily dismissed as “misguided” and “indiscriminate” by the Pathfinder Foundation it is actually neither misguided nor indiscriminate. This Programme did create employment for the youth of the country in an array of vocations.
I can illustrate from some of the enterprises that were implemented during this period.

The DDC Programme got off to a great start by activising the Government Agents to set up Divisional Councils that were put in charge of creating employment for youths.  As the Government Agent of Matara District we got down to establish small industrial projects and agricultural farms which provided employment and brought about production which would have had to be imported otherwise.

We established a Cooperative Mechanized  Boatyard making 40 foot ocean going in board motor boats which were sold to cooperatives. I established this industry within three months. It was a grand success. This was stopped  by the UNP Government of President Jayawardena because every successful venture done by the earlier government had to be abolished and closed.  Travel anywhere in the coast  today and one will find wood workers making boats. The seas are full of fish and the youths are unemployed and we are forced to import fish. Import substitution in making fishing boats was a grand success.

We established garment making units, a batik making unit and many craft units bringing employment to youths , incomes to them and also obviating imports that saved foreign exchange.

At Baddegama in the Galle District and in Matara we had  a  Blacksmith Unit making mammoties and all sorts of  farm implements, a great success. There were similar units in many districts. Today we depend on imports of totally inferior implements and if one requires a sharp knife one has to get it from of the village smiths. The Kotmale Blacksmiths have made a name even today. Inferior imports have flooded the market and  they have destroyed the backsmith village industry.  We export odd iron pieces to India and earn a pittance and import knives and many iron goods which we manufactured ourselves earlier for which we payout our foreign  exchange.

Let me finally tell the story of Coop Crayon of Deniyaya. My Planning Officer Vetus Fernando through experimenting with the aid of science teachers at Rahula College, Matara found the art of making crayons. I decided that this should be implemented in Deniyaya because that cooperative union was working with Sumanapala Dahanayake as the President. Sumanapala was the Member of Parliament for Deniyaya and could be trusted with any task. This handmade crayon factory was established and within a few weeks we manufactured crayons of superb quality to fill two large rooms. The sales were opened by the Minister for Industries Mr TB Subasinghe. The crayons were sold islandwide and during 1971-1977 it produced around a tenth of Sri Lanka’s requirements. It was a  great success. President Jayawardena sent a special officer Deputy Director of Cooperatives Mr Ariyaratna to find fault with this coop crayon in an attempt to close it down.  This officer however had to report that Coop Crayon was a great success and a commercially viable industry. However it was gradually axed due to political vendetta against the outgoing government by President Jayawardena who wanted to please the IMF.

The DDC Programme created employment for 33,000 youths. It was not a misguided programme as stated by the Pathfinder Foundation. I was myself a critic of that programme from within when I was the G.A, at Matara because the the Ministry did not give me approval to commence many projects I suggested. Coop Crayon was entirely due to my initiayive and entirely done by the kachcheri staff. That industry was a great success. If the suggestions I made for a Creamery at Deniyaya had been approved, the Government would not be facing the milk shortages of today.

A  successful import substitution industry today is the growing of flowers. During my years’ stay in Nuwara Eliya I drew a considerable  income from flowers. Good varieties grow wild in that climate. Growing flowers was encouraged by the Economic Development Ministry and today imports have been stopped. In that process local flower growers have found employment and incomes, all a saving on foreign exchange. In the Netherlands I saw for myself orchid growers working on a large scale and they bring in a considerable income to the country.  The Sri Lankan Government has encouraged the flower growers and the establishment of the Waters Edge Market in Colombo played a major part in the success of this industry. It is a success story that brings great credit to the Economic Development Ministry of today.  Close it down and one has to import flowers  with our foreign exchange. That is the mission of the IMF and of Dr Koshy Mathai as its head!

Today the largest and most successful Programme in  employment creation is the Youth Self Employment Programme of Bangladesh which has by February 2011 created employment for as much as 2 million youths. This was an import substitution programme where the Ministry of Youth undertook to establish a youth employment creation programme involving youths in vocational training to establish enterprises. A special extension service was established and the lecturers at the vocational training centers were charged with guiding the youths to draft their  own projects to be employed. Loans were also provided where necessary and the youths were guided to make what was required for the market. They made everything from garments to furniture to meat, eggs  and dairy produce.  Everything that was required for the people were done. This Programme was designed and directed by me when I worked there as a Consultant and was a total import substitution programme.

Import substitution for local requirements as well as for exports
One criticism leveled is that import substituion goes against exports. This is totally false. Import substitution industries should have as their goal producing for local consumption in the first instance and thereafter producing for export. The Cannery of the Marketing Department produced pineapple  products for exports.

The infrastructure for development has to be reestablished
However, I must mention that the effort at import substitution should not be half hearted. It has to be a consistent effort at setting up industries through both the private sector as well as the public sector, with the Government stepping in to provide the development infrastructure that is required to enable farmers and industrial enterprises to succeed.  This infrastructure existed in the pre 1977 period in Sri Lanka but was dismantled at the insistence of the IMF. I refer particularly to the closure of the Vegetable and Fruit Marketing Programme  which bought produce from farmers at rates higher than what was offered by traders at the Producer fairs, and also sold  at cheap rates at sales stalls in the cities, thereby achieving  good prices to producers as well as controlling inflation. This was done by the Marketing Department keeping a margin of only 15% for transport and handling, contrasted to the 100% mark up kept by traders. The Cannery established by the Marketing Department to offer floor prices for produce like pineapples, red pumpkin, ash pumpkin etc. to produce jam, and fruit drinks was privatized.  Two to three Canneries have to be established to produce all what we import. In textile manufacture the Small Industries Department bought yarn  and sold it to handloomers and Powerlooms to produce textiles. In addition the Department established a technical support unit callev Velona at Moratuwa that provided technical support for the Powerlooms.  The Industrial Development Board  technicians, experts and engineers have to be posted to every district and charged with the task of making project reports to develop import substitution industries using local produce. In 1970-1977  a Ministry of Plan Implementation was created headed by Professor HAdeS Gunasekera, the acclaimed professor of economics. The entire district administration headed by the Government Agents of the Districts was charged with this task. Agriculture has to be stepped up. The lost agricultural extension  system has to be re established immediately. Unfortunately our current experts fail to understand that the present agricultural extension system has no base at the village level. With the promotion of agricultural overseers as Grama Niladharis  there is no trained and knowledgeable  agriculturalist at village level and we also do not have a peoples institution like a cooperative or a peoples committee at the village level. Veterinary services has to be stepped up and massive training programmes have to be mounted in  agriculture and animal husbandry.  This  infrastructure has to be run by the Public Sector  which was relegated to the background by the IMF as the policy followed was that the Private Sector was to be the engine of growth.

The inadequacies in IMF policies which we yet follow can be expressed in the words of no other than Professor Jeffery Sachs, the official who furthered the IMF’s Structural Adjustment Programme in many countries.
“A free  market economy is not enough. A key lesson of economic theory of two centuries of experience with market economics is that a combination  of market forces and government action is needed to achieve the three goals of   efficiency, fairness and sustainability…… the market by itself  is not equipped to achieve the triple bottom line of efficiency, faiurness and sustainability. The market system must be complemented  with government institutions that accomplish these three things, provide public goods such as infrastructure, scientific research  and market regulation.(From: The Price of Civilization(2011)

Jeffery Sachs’s statement has sounded the death certificate of the IMF’s Structural Adjustment Policy which we yet follow. These policies have failed us since 1977 and unless we change it the economy of our country will  be totally destroyed.

Dr Mathai and the Pathfinder Foundation are challenged to refute any of the facts  given by me in this Paper. Mine is not based on textbook research. It is what I myself did and was myself personally aware.

The Role of the Public Sector
An important factor in the commercial ventures I have detailed is the role of the Public Sector in enabling the emergence of import substitution industries.

In directing these import substitution ventures the public servants at the helm, the Commissioner for Marketing Development, his Assistant Commissioners, Director of Small Industries, the Deputy Directors of Small Industries, the Government Agents, the Assistant Directors of Small Industries, the Divisional Secretaries and many other officials played a cardinal role. Among politicians the role played by Sumanapala Dahanayake the Member of Parliament for Deniyaya who was also the President of the Kotapola Cooperative Union who handled Coop Crayon stands out as an ideal for emulation by politicians.

All these officials and politicians were drawing their normal salaries as compared to the Deputy Chairmen of the Golden Key Company whose emoluments per month were as much as 2.75 million per month, plus perks like a free luxury house and a chauffeur driven car.  The role that Sumanapala  Dahanayake played directing Coop Crayon was easily equal to the work of any of these Deputy Chairmen but he got paid only for his travel, walked in his bata slippers even when accompanying me to meet Ministers Illangaratne and Subasinghe. His vehicle was so old that it often broke down on the road. I am told that some Sri Lankan multinationals paid a part of the salaries of their Deputy Chairmen in US dollars to a bank account in a foreign country.

Today many assail the Public Sector as inefficient and corrupt. This is not true.  The details I have stated of the workings of import substitution type of industries in Sri Lanka and Bangladesh meant that the Public Sector officials were very efficient. Had they been inefficient the Youth Self Employment Programme which has already guided over 2 million youths to be successful commercial entrepreneurs would not have been possible. It is a programme that has kept its imprint on the sands of time.

Finally let me conclude by making a statement that the tirade against import substitution by the IMF  is because the IMF wants our country to proceed further on importing our requirements mostly from the Developed Countries. The IMF looks after the interests of the Developed Countries like the USA that pays it. It is time that our leaders decided that enough is enough. Have we not seen Sri Lanka limp to become an overly indebted country because we yet follow the Import and consume/ liberalise foreign exchange motto of the IMF.  It is time we decided that the IMF has given us the wrong advice and has ruined our country. My book, “How the IMF Ruined Sri Lanka and Alternate Programmes of Success”(Godages) tells it all.

Garvin Karunaratne,Ph.D.(Michigan State University)
Former SLAS, Government Agent, Matara District,
30 th January 2014