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Redistribution Instead of a Breakthrough: Why Counter-sanctions Doom Russia to Technological Lag
November 28, 2019 02:28


(Source: https://img3.akspic.ru)

The model of external threats and maximum import substitution may stimulate the growth of some Russian industries, but the question is at what cost will it be possible to build a self-sufficient economy in the context of globalization?

The Ministry of Industry and Trade of Russia regularly proposes to limit the access of foreign manufacturers to the Russian market or to its individual segments. The ministry substantiates its recommendations with the desire to form competitive technological manufactures in Russia. However, certain features of these proposals suggest that the result may be the emergence of even technologically advanced, but hardly competitive industries.

Protectionism


To begin with, it is worth noting that protectionist measures in themselves are neither harmful nor useful. They are an instrument of industrial policy. Restrictive measures can be applied for the formation of export industries. In this case, the companies subsequently undertake to scale the production of products falling under the protection and enter the most diverse geographical markets - developing and developed. In other words, their release becomes competitive, and temporary protectionist measures serve as one of the tools to accelerate economic growth. East Asian success stories are associated precisely with the state's active use of various industrial policy measures, including protectionist ones.



However, if protectionism is applied for the purpose of import substitution, which is not associated with subsequent export expansion, or assigns export to no more than a peripheral role among the results of industrial policy, then it is more difficult to expect the emergence of competitive industries from such measures. If protectionism is not aimed at the company's subsequent competition in the global market, then how will its ability to compete be tested? What is the starting point in the competitiveness of a certain company? But in this case, competitiveness ceases to be a measure of quality. On the contrary, companies oriented to the domestic market can produce simplified and / or insufficiently high-quality versions of goods, because they work for poor consumers, such as individuals, manufacturers, regional administrations of catch-up economies. Formed in this way production can face serious restrictions on the scale of production due to the small size of the domestic market. And as soon as domestic demand is satisfied, the output of such companies will decrease markedly.

If the implementation of protectionist plans implies the further development of exports, then the plans should clearly indicate this. The key targets of such plans clearly reflect the export priorities of their authors. If export is not mentioned in the plan, then most likely the authors suggest an import substitution scenario. Alas, many proposals of the Ministry of Industry and Trade regarding protectionism do not make export the main goal of state policy.

Import substitution


In addition to the fact that the implementation of such measures is associated with the risks of establishing a long-term import substitution policy, it is also capable of provoking retaliatory measures on the part of Russia’s trading partners. Industrial policies restricting imports can be perceived as an unfriendly move by global technology corporations with significant reserves of know-how, access to a wide variety of geographical and commodity markets, connections within global value chains and other benefits.



The latter does not mean that global companies will be offended and will leave the Russian market. The point is different. Rather, they will not have incentives for those forms of interaction with Russian manufacturers that allow the transfer of new technologies to Russia. It is worth noting that it is access to the national market that often becomes a payment for the transfer of technology to national producers. Such policies are often practiced by the Chinese authorities, with the result that Chinese companies ultimately become competitors to their technology donors. The Russian market is noticeably smaller than the Chinese, and with the restrictions of the Ministry of Industry and Trade, it becomes even smaller.

A catch-up economy will not be able to rely on its own forces in the matter of technological development - this contradicts the ideas about the diffusion of technologies existing in science and the expert community. Own scientific research is associated with high uncertainty and impressive costs. It is highly doubtful that Russian companies will be able to afford the multi-billion dollar research budgets that global corporations manage. And even if one imagines that Russian corporations will find such money, they will immediately encounter another limitation - an acute shortage of human capital necessary for R&D.

Thus, isolation of the Russian economy threatens with technological stagnation. As a result, protectionism is more likely not so much to help Russian companies climb the technological ladder, but to make money from existing, perhaps even outdated, know-how. We emphasize once again that when discussing the last argument, industrial policy alone does not guarantee any harm or benefit. You can use it to try to intensify the process of technology transfer from global companies to Russian ones, to include Russian companies in global value chains and enter new markets. And you can take steps to de-globalize, potentially reducing the ability to replenish the technological stock.

Benefits

Protectionist measures often exploit mercantilist argumentation. Although in the expert environment mercantilist approaches are mentioned mainly in connection with the demonstration of the advantages of open trade, their main purpose is different. As Harvard economist Dani Rodrik notes in his new book, Frank Talk About Trade, trade liberalism improves the consumer’s position, but consumers also participate in some way or another in the release of goods and services. And the better economic agents feel in the second role, the better they manage and the first. The policy of mercantilism, conducive to the formation of new export industries, makes the role of an economic agent as a producer more sustainable and successful.



However, details are important in such an argument. It has already been mentioned that the sectors formed within the framework of protectionism policy can focus not on the global, but on the domestic market. Another thing is important: in conditions when there are no institutions in the economy responsible for reducing income inequality, protectionist policies are mainly in the interests of company management, and not in the interests of a median employee. In this case, such measures do not correct the problems that globalization creates. In reviewing the relevant studies, Rodrick himself points out that the US benefits from participating in NAFTA were extremely small. Within the United States itself, globalization has created entire regions of the losers, and not only workers of the corresponding industries, but also the residents of the respective cities suffered from imports and industrial offshoreization: a decrease in the income of a key industrial enterprise also led to a decrease in income of other local sectors, for example, the services sector.

It would seem that protectionist measures should help solve the problem of the losers. However,  in reality it depends on many circumstances. In particular, on how competitive the labor market is and whether institutions operate on it that help strengthen the employee’s negotiating position. If the labor market has established monopsony, and neither labor unions, nor federal authorities play legislative roles in determining the minimum wage that allows employees to earn incomes that are well above the cost of living minimum, then protectionist measures have little effect on the position of the vast majority of those who risk losing from globalization.

It seems that various segments of the Russian labor market are characterized by the high market power of the employer, the absence of trade unions and the insufficient support of workers from the state. Under such conditions, protectionist measures will mainly work for owners and directorates of companies subject to protective measures.

Thus, the restriction of imports by the Ministry of Industry and Trade seems to a greater extent aimed at establishing an import substitution policy. International experience indicates that industries formed for the sake of import substitution do not become locomotives of economic growth. Such a policy also does not protect the interests of workers if institutions are not formed in the economy that strengthen the negotiating position of wage labor. In this form, protectionist proposals look more like a redistributive measure, from which the directorate of companies wins and consumers lose.
 




Author: Anna Dorozhkina

Tags: Russian business Russian economy    

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