The novelty of technologically regressive import substitution
In the next decade or so, the history of economic policy will be enriched by a new, never imagined, experiment: how to accomplish technologically regressive import substitution? This is the problem that Russia will have to face and that is entirely new. To explain why it is new, consider first what is import substitution. It was originally, at the time of Alexander Hamilton and Friedrich List, a policy whose objective was the technological catch-up of less developed countries through the use of high tariff barriers to enable local production of things that were previously imported. The policy was imitated by many other countries, including the Imperial Japan after the Meiji Restoration and Czarist Russia under the Prime Minister Sergei Witte. Soviet industrial policies in the 1930s and even after World War II were also in the same mold. And, finally, domestic policies in Brazil and Turkey in the 1960-80s defined the meaning of import substitution for several generations of economists.
In all these cases, not surprisingly, the aim of policies was technological modernization. No one has ever tried to implement import-substitution policies with the objective of going backwards in the development chain. Neither would Russia were she not under the pressure of Western economic sanctions. Why does it have to go backwards? The reason is that Russian “inclusion” in the world economy over the past thirty years has left the country fully dependent on foreign technologies, as Russia has specialized in the production of raw materials, food and relatively unprocessed products. The industrial areas that are normally the backbone of traditional (predigital) development were well developed in the Soviet Union, but have been abandoned, left to deteriorate and, even if existing, are today technologically obsolete. Almost all of what is technologically advanced was produced, or was dependent in part, on Western-made technologies.
In the next decade Russia will try to revive these “old” domestic industries (e.g. machine building for petroleum and gas exploitation, avionics, car production) on the basis of technologies that have been left rusting for thirty years. For sure, Russia would prefer to catch up with Boeing and Airbus, but an endeavor of that kind requires years and years of development and tens of thousands of specialists. Instead, as the Russian Ministry of Transport’s just published plan for the period up to 2030 envisages, in order to (re)create domestic aviation industry Russia will have to go back to the Tupolev-like technologies and that of the rather unsuccessful Sukhoi Super Jet. Even if Russian regressive import substitution is successful in terms of output, which is very doubtful as the document projects the increase of production from 18 domestic aircrafts in 2022 to almost 200 in 2030 (the rate of growth of 35% annually!), once the Russian market gets reopened and sanctions lifted, all that effort will be shown to have been in vain because the new and created-from-scratch Russian models would be less efficient than Western. Thus, in the year X when sanctions are removed, Russia will be, under the most optimistic scenario, in the same position that the USSR was in the 1980s: it will have an industrial base but that base will not be internationally competitive.
To further complicate the matters of technologically retrograde import substation, we need to take into account the labor force. In past import substitution episodes, workers were relatively low-skilled and import substitution policies were supported by policies of improved education in order to have workers able to “man” the new and more sophisticated machinery. In the Russian case now, the problem is exactly the reverse. Russia has a labor force that is highly educated and tends to move towards post-industrial areas, like in other advanced economies. But here it would have to go down in its skills levels to be adequate for the operation or (re)creation of the technologically regressive import substitution. To put it in graphical terms: while the original import substitution required that semi-literate peasants learn a bit of arithmetic in order to “service” the machines, here we would expect software engineers to become metal-bashing workers or foremen in large factories. This is because the demand for their (advanced) kind of skills will be reduced as Russian economy is cut off from the global market, and domestically there will be few similarly advanced sectors that would employ them.
There will be thus a mismatch between the skill level of the labor force and the skill level technologically needed. Suppose that workers of high skill level (HW) are needed to work with highly sophisticated machines, say robots (HM). But if HM are unavailable because previously they were all imported and they cannot be produced at home, the technological level of home-produced machines will be medium, call it MM. For MM however, one does not need HW workers but medium skilled workers MW. Thus, one needs to proceed to the deskilling of high-skill workers or just simply to ignore their level of education and “allocate” them to the jobs for which they are over-qualified. It is hard to believe that workers would find such repositioning attractive whether in terms of income, or challenge of, or interest in, the work they do.
From the economic point of view this forced experiment will be interesting to observe since, as I mentioned, nothing similar in modern history has ever happened, but I do not think that it will be very much fun for the participants.
For highly skilled workers working in jobs requiring a lower level of skills, there is labor migration from Eastern Europe, HK, etc. where postgraduates are working in factories, entry-level service, or menial jobs, due to the same mismatch between their skill level and available employment. The wage differential more than compensate the loss of status, tho.
There are also intentional communities (Kibbutz, back-to-the-land) where middle class residents pick up farming or artisanal work as a cultural and social statement.
What is apparently novel about this experiment is that the effects of microeconomic downward mobility will appear on a macroeconomic scale as a regression in the value chain. But still, similar regressions at a lower base also occurred whenever external trade failed, such as the collapse of Western Roman Empire. Both of those are adaptational responses to unfavorable economic conditions, and the economic transition from Late Antiquity to the Early Middle Ages succeeded with the economic reorientation to localized feudal economics.
Moreover, this may also provide a good study to compare with possible applications of degrowth theories, and to debate whether there will be an intentional reduction of economic complexity in Russia.
p.s. It is also very unlikely for the Russian market to be reintegrated into the global one precisely due to the reemergence of economic nationalism and concurrently alternative forms of economic development that will render global economic integration less rewarding, e.g. 4IR, Green transition, degrowth, etc. The Russian economy will be among those developing regions which are left behind on the coming economic consolidation, something that may be partially mitigated by increasing integration with the Chinese technological complex.
Not sure I see the distinction between earlier import-substitution efforts, which had the *objective* of modernization, with Russia's deindustrialization, which will have the *effect* of substituting less efficient local production for imports. When Hamilton wrote his Report on Manufactures, US manufacturing was technologically backward compared with British -- that's precisely why industrial policy was needed!