Economists of the Central Bank evaluated the options for import substitution in the "new reality"

The very need for import substitution reduces the standard of living in the country, even if it is effective, a study by economists from the Bank of RUSSIA showed. But the worse import substitution goes,

Even with full and effective import substitution in a country that needs to replace foreign goods, living standards are declining due to the need to divert labor to import substitution and maintain the capital intensity of GDP at a higher level. Maria Lymar, Alexander Reentovich and Andrey Sinyakov, economists of the Research and Forecasting Department of the Bank of Russia, came to this conclusion.

They modeled scenarios for the development of the economy depending on the effectiveness of import substitution of investment and consumer goods - neutral, pessimistic and optimistic. The results of the study are presented in the article “The Economics of a Raw Materials Exporter in the “New Reality”: Quantitative and Structural Parameters”, published in the December issue of the scientific journal “Economic Issues” (RBC reviewed the material). The article reflects the personal opinion of the authors.

The experts revealed an asymmetry in the effectiveness of import substitution of consumer and investment goods (the latter are needed for the production of other goods - equipment, machinery). As a rule, the production of consumer goods is relatively more efficient, and the costs of production of capital goods delay the restoration of living standards even in the optimistic scenario, economists conclude. If import substitution is ineffective in both sectors, then the economy “eats away capital” and degrades, they state.

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Model of "new reality"

The calculations use the parameters of the Russian economy, and 2019 was taken as their baseline, when the economy was fully open and its structure was not distorted by the impact of the pandemic. Further, the authors build a stylized model of the "new reality", not calling it Russian, because the model cannot take into account all the variety of factors that can affect the real dynamics of the economy.

Before the “new reality”, the economy in the model is arranged in such a way that there is no need for domestic production of import-substituting goods: resources from exports (mainly raw materials) are directed to the purchase of imported consumer and investment goods, and it is inefficient to produce them domestically.

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With the advent of the "new reality" everything changes under the influence of two shocks. First, it is the cessation of the movement of capital due to the closure of the financial account, as a result of which the financing of imports is only possible directly from EXPORT proceeds. Secondly, it is the inability to use the accumulated net foreign assets of the economy (including gold and foreign exchange reserves) to finance consumption or investment. The article mentions asset freezes as one of the reasons for the shocks (Western countries have blocked about $300 billion of Russia's international reserves. -).

The model takes into account the physical restriction of all imports by 50% from the level of 2019 taken as a base, as well as a decrease in the value of exports - first by 10% from the level of 2019, and within three years - by 50%. The resulting positive trade balance is not spent on consumption and/or investment, which is associated with the difficulties of increasing imports.

To build scenario models, variables such as the volume of net foreign assets, the number of labor force, the depreciation rate of goods, the price of exports and imports, loss of productivity, as well as the comparability of the quality of substituted goods and their imported originals, are used as variables.

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Options for the effectiveness of import substitution

The optimistic scenario characterizes the ease of creating complete analogues of retired imports and the absence of productivity losses when import-substituting goods are used in production.

Calculations show that GDP in this case first decreases, but then slowly recovers over 15 years and exceeds the base level by that time. In the economy, the production of original domestic goods is decreasing and the production of import-substituting goods is increasing. Workers engaged in the field of original domestic production or import packaging (for example, assembling cars of foreign brands) are reoriented to the production of import-substituting goods (for example, auto components).

Limiting consumption becomes the optimal strategy at the macro level in light of the need to increase the production of import-substituting goods. Thus, this scenario assumes a temporary "sacrifice" in the form of reduced consumption, which should ensure the accumulation of capital, and the restoration and improvement of living standards is postponed to a more distant perspective. If the economy were not in financial autarky with frozen assets, then capital accumulation to increase output with limited labor resources could be financed by borrowing (or by spending the National Welfare Fund). But an economy that does not have this capacity must move labor to the investment sector and accumulate capital. This strategy proves to be justified in the long term,

The neutral scenario assumes incomplete import substitution, when the quality of domestic goods is not guaranteed, and there is an asymmetry between the two types of imports: consumer goods are easier to replace than investment goods (the latter require more labor and capital).

GDP initially declines, but then recovers only partially. There is no investment boom in such an economy, since an increase in the capital intensity of GDP in the context of the cost of import substitution is not able to ensure economic growth compared to the baseline scenario in the context of limited labor resources. The strong decline in imports of consumer goods is partially offset by the production of import-substituting consumer goods. To do this, it is necessary to reduce the production of original domestic goods. Therefore, overall consumption is reduced. Without imports or import-substituting goods, the consumption basket will be incomplete, and the standard of living of consumers will be lower than in the optimistic scenario.

Pessimistic scenario with low replacement rates in both sectors.

The inefficiency of import substitution in the production of consumer goods is the same as in the substitution of investment goods. It turns out to be so high that it is more profitable to start “eating away” capital without directing resources to its renewal.

Since this option shows low efficiency of import substitution in the consumer sector, the share of domestic goods in consumption is the smallest of all three scenarios. Limited export resources are directed to the purchase of imported, mainly consumer goods.

In this scenario, the economy cannot cope with rising costs due to inefficiency against the backdrop of reduced opportunities to finance consumption and investment. Against the background of reduced exports, GDP does not begin to recover and, as a result, decreases by a third of the baseline scenario, and its losses are due to three factors. Firstly, the forced direction of labor and capital for import substitution. Secondly, a reduction in export earnings, which reduces aggregate demand and income. Thirdly, the downsizing of the economy, which makes significant investments in capital non-optimal for business: gross investments do not exceed the disposal of depreciable capital.

The authors point out that the results of their study can be useful for "a realistic understanding of the options for the development of the economy in the new conditions", as, indeed, in the analysis of the consequences of the energy transition ("green transition") in resource-based economies.

Other assessments of import substitution prospects

Describing possible scenarios for the structural transformation of the Russian economy against the backdrop of sanctions, the Central Bank experts noted in the spring that at a certain stage, “reverse industrialization” could occur based on less advanced technologies. The production of machinery and technology will increase, but at a lower technological level. Employment in import-substituting industries will increase, and production will grow at a pace that is ahead of other industries. At the same time, an important consequence will be a decrease in the environmental friendliness of production, the Central Bank pointed out.

The article by economists of the Central Bank considers the situation when the missing imports are completely replaced by domestic production. At the same time, according to special reports by REUTERS and FT released in December, Russiacontinues to import some technological products that Western manufacturers have refused to supply to Russia voluntarily or due to sanctions. Thus, according to Reuters, in the seven months to the end of October, electronic and computer components worth $2.6 billion were imported into Russia, of which at least $777 million were products of Western companies. Russian business is also looking for ways to replace prohibited imports from Western countries in other countries. “We see how our borrowers, large companies, having not received European equipment — I won’t name the industries, there are many of them — place orders in CHINA and shift the project deadlines by a year, one and a half, two. In principle, there is a commitment (obligation. -) of Chinese enterprises for the manufacture of this equipment, ”said, in particular, in an interview with RBC, the HEAD of Otkritie Bank Mikhail Zadornov.

For a couple of centuries, the world has been living in an economic paradigm, where countries sell goods that they can produce well and in large quantities, and buy those that other countries produce well, and all attempts by states to completely replace imports ended in failure, states the DIRECTOR of the Center for Market Studies of the Institute for Statistical Research and Economics of Knowledge HSE Georgy Ostapkovich.

“It makes sense to replace critical imports: replacing them by 75-80% is enough to ensure food and technological security. The issue of technologies is especially critical for Russia, but they cannot be replaced only by direct cash injections: knowledge and competencies are needed, which are not available, ”the expert says.

According to him, the only country that has achieved technological independence is South Korea: due to the fact that it completely opened up the economy and attracted not only investments, but also qualified specialists from other countries. However, this option is obviously not suitable for Russia in the current conditions, concludes Ostapkovich.