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How Much Evidence of Russia's Celebrated 'Import Substitution' Is There?

If Russian imports fell by 40% in 2015 - and Russian industrial production in 2015 also fell by 3.4% - then how is it possible to say that Russian plants are substituting imports? 

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Unless you’ve taken a survey course on the economic history of South America, Southeast Asia, Africa, or other parts of the “post-colonial” world you are unlikely to be familiar with the term “import substitution.” Before being surpassed by more neoliberal market-friendly theories of comparative advantage during the 1980s and 1990′s, import substitution was the dominant economic development paradigm across a very large portion of the global south.

Shorn of the political and ideological baggage that it has acquired over the past seventy-odd years  import substitution is a pretty straightforward idea: rather than buying expensive value-added goods from abroad, a country should promote their domestic manufacture. There are different ways of accomplishing this which range in the degree of their economic intrusiveness. Some countries preferred to simply erect tariff barriers, while allowing the domestic market to remain more-or-less free market. Others went much further towards socialism and actually had the state establish and run new companies.

Like lots of interventionist economic policies, import substitution sounds great in theory but is really, really hard to implement in practice. The state just isn’t very good at determining which sectors should be protected and which shouldn’t, much less how to build, staff, and run a sophisticated industrial operation. So, if a country suddenly embarked on a crash program of import substitution, we wouldn’t expect it to work very well.

Over the past two years, amid its escalating confrontation with the West,  the Russian government has dusted off “import substitution,” which as noted above was a relatively obscure academic term, and turned it into one of its most oft-repeated phrases. You now see it used by  high-level officials in an almost offhand, casual way, as when Vladimir Putin talked about the “2,500 import-substitution projects” and the roughly $38 billion being spent to support them. You also see Russian state-media enthusiastically trumpet any and all perceived victories in the battle against Western goods.

So, has Russia actually had any success in this campaign? It depends on how you define success. The answer to the question of “did Russian manufacturers make more stuff?” is a resounding no. Russia’s industrial production did not increase in 2015: over the course of the full year, it actually fell by 3.4%. Considering the enormous (almost 40%) decline in imports over that same timeframe, it is just simply not true that Russian enterprises rushed to fill the gap left by the reduced quantity of Western goods.

However, since Russia’s GDP fell by 3.7% I suppose it is possible to argue that since manufacturing performed less poorly than the economy as a whole the import substitution campaign not a total failure. That’s not a terribly convincing argument, but due to the obvious downturn across the industrial sector, it’s the only one that the authorities with even a minimum degree of credibility.

Over the longer term it’s possible that the situation outlined above will change. If the ruble stays as weak as it is now for any significant length of time, there will be a compelling economic rationale behind industrial development (with a much stronger ruble, Russia was simply not cost-competitive in most industries). But so far Russia’s experience with import substitution has been all talk and no action.



Source: Forbes
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