Pakistan Institute of Development Economics



Tariff Protection, Import Substitution, and Investment Efficiency: A Comment

The Soligo and Stern article [6] renders a major service, in attempting a quantitative measure of the efficiency of the allocation of investment to different industries. By substracting the net subsidy provided to domestic industry (through tariff protection) from the value added in each industry, Soligo and Stern estimate the social contribution to the economy (or “social value added”) of investment in a particular industry. They reach the conclusion that “the pattern of investment has been wastefully biased towards consumer goods industries.” If correct, this conclusion should have important consequences for tariff policy and investment planning. However, a number of questions can be raised about the methodology of their study. A different set of assumptions and methods might have led to different conclusions. The major adjustments which could be made are: 1. Soligo and Stern calculate value added at factor cost. This may introduce a bias in theif analysis since indirect taxes are very largely imposed on con¬sumer goods. It can and has been argued that indirect taxes largely determine only the distribution of value added between government on the one hand and wages/profits on the other since they are not passed on to the consumer to any significant degree [3;5]. If the bulk of indirect taxes impinge on factor payments (primarily profits), calculating value added at factor cost results in understating value added in the production of goods which bear the heavier indirect taxes. Table |I shows figures for value added at factor cost and indirect taxes for a few representative industries derived from a sample survey [4]. It is clear that if Soligo/Stern had calculated value added at market prices rather than at factor cost, the value added in consumer goods industries would have been increased much more than value added in the other two categories.

Gustav Papanek

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