Regressive import substitution

Economist Branko Milanovic writes in his blog: “In the next decade or so, the history of economic policy will be enriched by a new experiment that no one could have imagined: how to achieve technologically regressive import substitution? This is a problem that Russia will have to face, and it completely new."

What is the novelty?

The United States under Hamilton, Japan during the Meiji era, Russia during the time of Witte, Brazil and Turkey in the 60s and 80s sought to carry out progressive import substitution. Their task was to carry out technological modernization, protecting domestic production from competition with imported goods through high tariffs on imports. Import substitution, which will inevitably cover the Russian economy, will be associated precisely with the primitivization of production, that is, with technological regression.

Why will everything be like this? In the last 30 years, Russia has actively integrated into the world economy. Considering the backwardness of the industrial and technological base of the USSR, technologies were actively imported (as were a number of high-tech consumer products). Almost everything that is produced in Russia today depends in one way or another on the world market.

In the next decade, Russia will try to revive a number of industries: mechanical engineering for oil and gas exploration, avionics, and the automotive industry. But this revival will be based on technologies that have been rusting for thirty years. Of course, Russia would prefer to catch up with Boeing and Airbus, but such an undertaking requires many years of development and tens of thousands of specialists.

Instead, as the just-published plan of the Russian Ministry of Transport for the period up to 2030 envisages, in order to recreate the domestic aviation industry, it will be necessary to return to Tupolev technologies and the rather unsuccessful Sukhoi Super Jet. Even if Russia’s regressive import substitution proves successful in terms of output growth, which is highly doubtful (the RF Ministry of Transportation plan predicts an increase in production from 18 aircraft to almost 200 in 2030), when (and if) the global market will reopen and sanctions will be lifted It turns out that all these efforts were in vain. The fact is that new and created from scratch Russian models will be less effective than Western ones. Thus, in year X of the lifting of sanctions, Russia, according to the most optimistic scenario, will find itself in the same position as the USSR was in the 1980s: it will have an industrial base, but this base will not be internationally competitive.

Here you also need to take into account the labor market and the labor force. Past episodes of import substitution assumed an increase in the average and general qualifications of workers. Regressive modernization suggests the opposite.

To work with very complex machines, say, robots (HM), highly skilled workers (HW) are required. But if HM is not available, because before they were all imported and could not be produced in Russia, then the technical level of domestic cars will be average - MM. However, MM does not need HW workers, but rather MW workers. Thus, it is necessary to move towards the de-qualification of highly qualified workers, or simply ignore their level of education and "distribute" them to positions for which they are over-qualified. It is hard to believe that workers would find such a change in position attractive in terms of income, complexity, or interest in the work they do.

Milanovic is ironic on this topic: if before it was necessary to teach peasants arithmetic so that they could manage equipment that was difficult for them, now, due to the gap between the skill level that the workforce possesses and that required by the state of technology, software engineers will have to become metallurgists or craftsmen in large factories.

Thus, we are waiting for a decline in productivity and a new transformation in year X. In general, regressive modernization is, of course, an interesting experiment. But it is unlikely that those who participate in it will be delighted.

Grigory Bazhenov 2022-05-18