The development history is somewhat repeating now. In the post-Second World War period, many countries had pursued import substitution-led industrialization. For this, highly protectionist policies were adopted. A theory of centre and periphery was advanced especially in Latin America to justify such a policy course which is often called a structuralist approach. The notion of this is that unless a country termed as periphery is emancipated from the exploiter termed as centre, periphery always remains in the dependency trap with perpetuation of underdevelopment. A book named Nepal in Crisis written in the 1970s was based on similar premises.
It is, however, well-known that the protectionist policies became counterproductive from the beginning due to the way they were implemented. The facilities or protectionist policies were captured by limited urban elites having a nexus with ruling class leading to inefficiency in resource allocation and uses. The policies by ignoring required integrated strategies to expand internal domestic market, among others, led to aggravate industrialization problem with wide-ranging effect. Amidst these, there were two developments simultaneously. One, the Keynesian policy of state-led aggregate demand management broke down in the early 1970s as there was no easing of unemployment problem. This eventually led to a big recession in 1974 in the capitalist countries. The classical doctrine of the pre-Great Depression period was revived with certain modification based mainly on monetarism and rational expectation principles. Thereafter, free market, reduced state role, deregulation and privatization became the buzzwords which continued up to the financial crisis of 2008.
It was also a period when export orientation was contributing to augment growth and development in the East and South East Asian countries. These were cited as models of development. In this context, the instrumental factors like balanced role of the state and the market, strategic locations amidst global power rivalries providing especial market access, agrarian and institutional reforms, etc was often downplayed. Nonetheless, all these were used to create conditions that eventually led developing countries to vigorously pursue free market policies with added hope of export promotion. In the meantime, there were some counter developments in parallel.
In the process, despite expansion or creation of new markets worldwide, the crisis in the capitalist countries became quite frequent as a result of falling rate of profit in the real sector amidst huge capital accumulation. The newly industrializing countries and China also posed a big challenge. Even the innovation in the IT sector from the mid 1990s could not prevent the crisis for long as the big recession of 2001 and 2002 of US indicates. This means trade-based globalization could not work as expected even in countries like US. Then, since 2003, the financialization route of credit expansion was pursued more vigorously by the US that gradually created bubble in the real estate, commodity and stock market, leading to huge profits to the financial oligarchic and the brokers. But when the bubble was exposed by the credit rating agencies, Wall Street – the epicenter of the global financial capital – collapsed. The severity of impact was almost similar to the great depression of 1929 which is not yet over.
The point to be noted is that crisis cannot be prevented for long if there is a growing mismatch between production sectors and wealth is created artificially through stock market, etc. The crisis has proved that any artificial wealth creation without backing by production and productivity in the real sector will be misleading from the standpoint of economic soundness or sustainability. History proves that rapid structural transformation of any developed economy has taken place only through a process, which ensures rapid industrialization preceded by agrarian reforms and changes. In terms of direction of causality, infrastructure and services sector must grow and expand side by side for avoiding both supply- and demand-related constraints. The liberalism-led illusion of services being gradually the backbone, without advancement of agriculture and industry, has proven totally wrong. This is the big message given by the financial crisis of 2008.
From the same standpoint, the importance of import substitution-led industrialization has increased enormously. Although the same old protectionist policies will neither be feasible nor possible, the political economy aspect that changes the backward economic base facilitating more equitable production and social relations will be critically important to make that course sustainable or successful. To be precise, it is first all necessary to distinguish between import substitution and import competitiveness. Import competitiveness can be enhanced by reducing production and transaction cost to create a situation in which people have the preferred choice against imported products.
The citation of cement, vegetable or other few products as import substituting, that too as a result of deliberate policies, is misleading with wrong policy implications as well. They are import competitive. On the other hand, import substituting are those products, which by means of special policy incentives or safeguards amidst resource endowment and increased cost effectiveness could be made as preferred choices on the additional grounds of locally produced. This would create some discouraging environment to the imports of particular products. At the moment, we have cascading tariff structure with discouragement to the local products having high-value addition and more employment intensity. That means, a big restructuring of tariff system will provide new impetus toward import substitution. There is also a necessity for differential treatment to the imports of raw materials and finished goods. The emphasis on the use of local natural and human resources, local small capital, technology coupled with local market expansion strategy will enable in changing economic or property relations at the base, which will contribute to rapid industrialization as well in a new way.
Under the WTO also, the import surge adversely affecting capital account give space for policy manipulation. There are other policy spaces like countervailing measures through excise taxes, among others. The Least Developed Countries have added policy spaces. Indeed, cheap labor, huge energy sources and institutional reform-led policies amidst comparative advantages in many areas indicate that Nepal has an edge over many South Asian countries in many areas.
A recent study also shows that Nepal has comparative advantages in 19 areas. It is therefore necessary to replace failed neo-liberalism-led policy regime by a more balanced self-reliant one if we are really sincere about import competitiveness and substitution-led sustainable development that more than five decades of experience shows is the only alternative for us. This will need an integrated approach in development in which internal market expansion-led policies will be the key which, in turn, will need a development paradigm that ensures enhancing the purchasing capacity of the masses.
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