Georgy Ostapkovich
Import Substitution Cannot Be Done with Money Alone – Here We Also Need the Knowledge Economy
In Russia, a turning point has come, and the process of restructuring the economy has begun, says Georgy Ostapkovich, Director of the Center for Market Studies at the Higher School of Economics. In an interview with Capital Ideas, he told what Russia’s security depends on today, whether we should grow bananas ourselves, and whether a technological breakthrough can be made alone.
It seems that “import substitution” has become one of the most commonly used phrases in Russia this year. Why?
This is because the security of Russia – national, economic, food – depends on whether we will be able to competently implement import substitution in the next few years. But to be precise, we did not begin talking about import substitution only today. It was first discussed ten years ago, in 2012 – that is, even before the Crimean events. Then decent money was allocated for it, but the return was quite low.
Why was that?
It is difficult to say – either there were not enough knowledgeable people found, or the money went to other areas which were more important at that time.
But as far as I understand, the country took up import substitution seriously in 2015, just after the Crimean events, when the West began to impose its sanctions against Russia, correct? In any case, according to official data, 3 trillion rubles have been allocated for this process over the past 7 years – and what is to show for it?
Frankly speaking, today there is nothing to brag about. Some progress has been made – but in general, unfortunately, little of significance has been done. The main problem is that we have not been able to create a management apparatus that would be deeply involved in all the processes related to import substitution in Russia.
It is generally accepted that we have achieved particular success in substitution for all this period – that is, since 2015 – in agriculture. For example, we have begun to produce agricultural products that are not inferior to Western examples. Some of our cheeses have even been praised by French cheesemakers. This is the truth – but not the whole truth. In fact, not everything here is as good as it seems. Let’s take, for example, Tambov potatoes. They are really ours, right? But the seed material comes from the Netherlands, and various equipment necessary for its cultivation (potato planting and watering machines, tractors) is also imported (albeit partly from Belarus). The packaging materials are also imported. What is left of “our” Tambov potatoes? Sun, air, earth and the hands of farmers …
This year, due to unprecedented sanctions by the United States and the EU, and the closure by a number of Western companies of their production facilities in Russia, the situation has worsened further. After Danone and Nestle left the country, for example, we had big problems with infant formula. The fact is that 80% of it was produced at the enterprises of these giants – not to mention the fact that the formula produced is simply difficult for us to get onto a store shelf, because we do not have the jars to pour it into, nor the foil with which these jars need to be closed. What problems!
And there’s such a terrible situation in many areas. This is not surprising, because until recently, 70% of the country’s economy depended on imported products from Western countries – and in some industries this dependence reached 90%! In other words, in many areas of the economy, we need to start import substitution from scratch.
It became known in early October that the Government of the Russian Federation has formed a pool of projects in critical areas of import substitution with a total cost of 5.2 trillion rubles through 2030.
Yes, this suggests that today this direction has already been given more fundamental importance. We have to admit – the West has to some extent complicated our lives with its sanctions.
At the same time, I would like to stress that import substitution should not become an end in itself. It should take place selectively and within reason. It is not possible to replace absolutely everything. It’s unrealistic. No country possesses sovereign technology – except maybe North Korea, which has been trying to isolate itself from everyone for decades. But the only thing they have done well is the atomic bomb. Mercedes, by the way, are assembled in about 30 countries. The iPhone is made in 17 countries, from South Korea to Hungary – which produces, among other things, the packaging and instructions for the smartphone, as they have good paper there.
In general, import substitution should take place in such a way that it is cost-effective. Everyone knows that pineapples, bananas, and kiwis do not grow in Russia. No one would even think of starting to grow them here, as did one eccentric Irish millionaire who created a banana mini-farm in his homeland. Yes, he has achieved his goal; now he harvests up to 40 kilograms of these fruits annually on his plantation. But each banana turned out to be literally made of gold, as he was forced to invest millions of euros in his exotic production! This is a vivid example of worthless import substitution.
This story, one must admit, is easily projected onto any other industry.
Absolutely! In Russia, unfortunately, there are a lot of critical imports, some manufactured things that are really very difficult to replace even in five or maybe ten years. It’s very expensive, for example, to establish the production of microchips. This requires a lot of money, investments to build a plant and to conduct scientific research. Without paying enough attention to microelectronics for years, we launched this business in a “fabulous” way.
Therefore, it is now easier and cheaper to buy these chips in Taiwan or China. You can negotiate with them and it will be much more effective. As was explained by Adam Smith and David Ricardo, the classics of the science of economics, it is necessary to use comparative advantage. Each country has some knowledge and production of products that it does best.
As we know, the Lord allocated the entire periodic table, and we are rich in raw materials. Yet we can sell these raw materials, and with the proceeds buy those products that are difficult for us to produce at today’s level of knowledge. That is, there is no need to isolate, go into autarky, and make everything ourselves. A technological breakthrough cannot be made in this way. Whatever sanctions we are under, we need to constantly look for partners in friendly countries. There is China, there is India, there are Asian games, again Taiwan, Singapore, Indonesia, Brazil …
You said that Russia’s national, economic and food security depend on how correctly we carry out import substitution. What should be the percentage of domestic products in each of these categories?
I think that within the context of national, economic and food security on our territory, it would be good for us to produce at least 75%, maximum 80%, of the output in key industries and agriculture. Again, it is not necessary to have 100% your own food supply. We can buy some necessary products much more cheaply in Egypt, Azerbaijan, or Turkey. But turbines, nuclear plants, machine-building equipment, and tower cranes – these must be our own, produced ourselves.
What does this require?
First of all, we need knowledge. You see, import substitution cannot be done just with money. Today, the knowledge economy should work here. There should be people who know how and what to do – to make the same chips! In my opinion, the head now should not be the Minister of the Economy, but the Minister of Education, who will ask the Minister of the Economy and the Minister of Labor: “How do you see the domestic economy? Where and how should it move and develop? How should the labor force be redistributed within the country? Give me your list of necessary specialists.”
It is clear, for example, that the demand for oil and gas which has existed until now, will no longer exist. If so, it is necessary, apparently, to reduce admission to oil and gas universities – and to increase admission to those which train, for example, specialists in rare earth metals. We need specialists; we need competent people – not so much money, but people. Even if everything is covered with gold, nothing will grow. Goods, products and GDP are created by people – not the Ministry of Industry, not the Ministry of the Economy, nor the Central Bank. It is necessary to educate the people who can do everything necessary. At the same time, it is necessary to look for professionals abroad, to invite them to Russia for good money. Let’s not forget that many of the great “projects of the century” in the USSR were successfully completed thanks to the help of foreigners.
But to prepare your highly qualified specialists, you need at least 5 years. Do we have so much time for everything?
Look, China has gone from being a semi-agrarian country to the second largest economy in the world in 15-20 years. Of course it will be incredibly difficult for all of us in the near future. Of course we will have to give up a lot to which we have recently become accustomed. But I’m sure we’ll make it. In Russia, a turning point has come. The innovation process, the process of restructuring the economy is now getting going.
