ON THE IMPORT INTENSITY OF IMPORT SUBSTITUTION

Abstract

This paper deals with several issues related to the impact of import substitution on a country's demand for imports. With the help of a simple model, it points out that once a given rate of growth has been reached and is maintained through time, the fact that investment expenditures have a high import component will not give rise to balance of payments difficulties, as the direct impact of this year's investment on the demand for imports should be more than offset by last year's investment in the import substituting industry now coming to fruition. The pressures on the balance of payments will arise during the transition period when a country is attempting to step up capital formation in the import substituting sector. The paper also emphasizes the need to take into account all direct and indirect repercussions of an increase in investment on the demand for imports when estimating the foreign exchange savings to be realized from a given investment project. The second part of the paper considers the likely effects of a change in the relative prices of imports on the manufacturing sector producing goods previously imported, but which still relies on imported raw materials and intermediate products, and on the demand for imports. Several reasons are given for a presumption against a high price elasticity in the demand for imports, based on the derived nature of a large component of such demand. Given these structural conditions the alternatives open to a policy maker in a semi-industrialized country facing the need to cut back imports are likely to be quite grim.

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