Innovation-Based Import Substitution
The National Academy of Sciences of Belarus (NASB) has adopted a system-based approach to substitute imports and boost exports
The National Academy of Sciences of Belarus (NASB) has adopted a system-based approach to substitute
imports and boost exports
Areas of Focus
During the implementation of the government import substitution program, the import-intensity of Belarus’ GDP shrank insignificantly: by merely 0.7% in comparable prices from 2005 to 2010. However, taking into consideration a significant price rise for imported products, the import intensity even increased compared with 2005 if calculated in actual prices.
The recent five years can be divided into two periods. The first one, from 2005 to 2008, witnessed an increase in the share of imports in GDP both in comparable prices (by 7.8%) and actual prices (by 9.4%). The second one, from 2009 to 2010, when the country ramped up import substitution efforts, the import intensity of GDP dropped from 66.9% to 58.4%. However, as imports were growing increasingly expensive in the post-crisis period, import substitution could not compensate for the increase in global prices and the figure returned to the pre-crisis level of 68.1%.
The industries that made the greatest progress in implementing the import substitution program include the light industry that managed to reduce the share of imports from 37.4% in 2005 to 30.3% in 2009 due to a greater dif-
Import substitution should be approached systemically taking into consideration all factors and peculiarities of Belarus. Import substitution should make sense from economic, social and strategic perspectives. Foreign trade balance is essential for stable supplies of resources; hence it is crucial for economic security of the country.
ference between selling prices and prices for imported raw materials. The situation is quite challenging in the industries directly depending on imported energy: the share of imports rose from 31.1% to 50.5% in the power engineering and from 59.3% to 74.4% in the oil industry.
The import substitution efforts were more successful in the finished products segment. The share of imports on the country’s consumer market shrank from 24.4% in 2005 to 19% in 2010, although in actual prices it has stayed at about 25% since 2007.
This means that as real household incomes were growing and customer preferences shifting towards better and hence more expensive products, people preferred to buy expensive imports.
The trend of switching to more expensive imports appeared to be most pronounced in the nonfood consumer goods segment. Consumption of non-food products made domestically outstripped that of imports in 2006-2010; therefore, the share of imports in the segment fell from 30.3% in 2005 to 22.2% in 2010 in comparable prices.
As for the remaining imports, customers’ preferences switched to more expensive products. It explains why the share of imports remained the same in actual prices (32.7% in 2010).
Over the five-year period, the share of imported products in capital investments declined both in comparable and current prices from 23.3% in 2005 to 18.7% in 2010.
The increasing trade deficit of Belarus is attributed mainly to the reduction of exports in 2009-2010. This was caused by the encouragement of the domestic demand in order to support the national GDP growth.
The share of exports of goods and services in GDP sharply dropped in 2009-2010 from 30.1% in 2008 to 25.2% in 2009 to 26.2% in 2010. There was no dramatic increase in the import/output ratio: it rose from 29.8% in 2005 to 33.8% in 2008 to 32.7% in 2010.
Production of goods with high value added is top on the import substitution agenda in Belarus. Besides oil products, transportation services and foodstuffs, Belarus’ biggest imports include the products of the chemical industry (4.5%), machines and equipment (3.8%), metal products (3.5%), vehicles (3.4%), rubber and plastic goods (2.2%), electronic and optical equipment (2.1%).
Following the government’s instruction the National Academy
of Sciences has worked out a systematic approach to the organization of work to promote import substitution and boost export. The NASB specialists have also formulated proposals regarding bigger contribution of science to increasing export potential and ramping up the manufacture of import substitution products.
In 2006-2010 the NASB scientists developed a scheme to substitute goods imported to Belarus in 20082010. These efforts bore fruit.
However, the problem of import substitution should be approached systemically taking into consideration higher efficiency, production output, and export. It should also take into account global market trends and the competitiveness of Belarus-made goods as part of the new national industrial policy.
The academy has put forward proposals to the law on industrial policy in the Republic of Belarus. It also makes sense to work out the national import substitution program. Industry-specialized programs are not enough, the NASB believes. It is essential to use systemic and macroeconomic instruments in a more efficient way.
The NASB specialists have compared industrial policies of Russia and Belarus and the production efficiency in Belarus, Russia and the EU member states. Before the crisis, the share of Belarusian exports on the global market and the competitiveness of our goods had been increasing. However, when analyzing the documents that define the industrial policy of our largest trading partner, the NASB experts came to the conclusion that Russia does not think it necessary to expand cooperation and trade with Belarus. They seek to fully satisfy the domestic demand by means of creating new, mostly joint ventures. As a result of this policy, over the last ten years the share of Belarusian goods in Russia’s import fell two times from 8.1% to 3.9%.
In 2006-2010 the average capital investments per one employee of the Belarusian industrial sector went up 2.4 times from $1,700 to $4,000. However, Belarus is still lagging behind Russia. In 2010 Russia’s processing industry raised $4,280
in investments per one employee; in the mining industry this figure totaled $46,700.
The country should deepen international specialization. Top priority is the diversification of the markets, not forms of economic activity. At the same time, the geographic structure of Belarus’ export remained virtually unchanged in 2005 and 2010. Diversification seeks not only to redistribute commodity flows, but also to create export infrastructure that is developing slowly in Belarus. Geographically, 80% of all commodities are exported to ten countries.
In this respect we think that the main way to raise competitiveness of Belarusian goods is to increase efficiency and labor productivity, and reduce prime costs.
The analysis has shown that in Q1 2011 the amount of value added per one person employed in agriculture made up 296.4 in Belarus. It was higher than in Romania (€83.8) and Bulgaria ( 120.2), but lower than in Lithuania ( 425.6). In the industrial sector this figure stood at the level of Bulgaria ( 951.7 and 967.3), in construction it was as in Lithuania ( 766.6 and 774.3). Thus, the amount of value added corresponds to the minimal level in the EU countries.
Efficiency also differs from industry to industry. Among the leaders are energy production and processing, chemical industry, and financial sector. Agriculture, woodworking, light industry, public services sector are lagging behind. Moreover, the share of value added is decreasing virtually in all industries as compared to the level of 2003.
We believe that the new industrial policy will help solve this problem. Development of industries with the highest potential growth of value added per employee should be made a priority. If we exclude energy and oil processing sectors that depend on the pricing environment, we will focus on the production of chemicals, pulp and paper, machinery and equipment.
These industries that rely on innovative solutions may seal Belarus a place among the most developed European countries.
The main conclusion from the analysis is that it is essential to reach the average European level of efficiency at leading enterprises and in the economy.
Belarus’ industrial sector is still one of the most import-intensive in Europe. As for the index of import intensity in industry, Belarus is among the top five import-intensive countries in Europe, namely Slovenia, the Czech Republic, Slovakia, Estonia. It is far behind Italy, Spain, Greece, Germany, and Poland.
The economic system cannot be changed overnight. The key issue here is the right use of investments. In January-august 2011 investment in the acquisition of machinery, equipment, and transport vehicles increased by 24% as compared with the same period last year (Br18.5 trillion), but still accounted for only 40.6% of the total investments (imported machinery, equipment and transport vehicles account for 57.7% of investments).
To address the problem there is a need to take stock of all government investment and innovative programs regarding the efficiency and currency return on the projects implemented under them. Belarus needs to reject projects with currency return exceeding 10 years.
Of course it is necessary to attract investments of multinational corporations. Belarus will benefit from their investments, technologies, raw materials, component parts, and sales markets. When negotiating with potential investors, the focus should be placed on Belarus’ membership in the Customs Union and the Single Economic Space, which means access to the markets of Russia and Kazakhstan. Belarus’ advantages over these countries should be emphasized: absence of corruption, reliable government guarantees, competitive workforce. A special emphasis, of course, should be placed on the national sci-tech potential.
When working with multinational corporations, we should understand that they will never allow competition against their products. Therefore, we need to use our own resources to establish a wide reproduction of innovations
on the basis of national sci-tech potential and the world’s best technologies.
For sustainable development the country needs to boost the production and exports and open up new large-scale facilities, first of all, in the high value added sectors with a big share of local content and a promising export potential. These might be pharmaceutical and chemical sectors as well as bio technologies, sophisticated household engineering, production of hightech components and other projects in line with the industrial policy concept of the Customs Union and the Single Economic Space. In particular, the National Academy of Sciences which is growing into a large scientific and production corporation plans to implement a number of projects of the fifth and sixth technological paradigms.
Weighty Contribution of Science
In 2006-2010 scientists of the National Academy of Sciences of Belarus developed 202 new technological items as part of the government import-substitution program. The sales of import-substituting products made up $169.7 million. Br1 allocated from the budget on the development of sci-tech goods resulted in the production of Br18.8 worth of import-substituting products.
Thanks to new malt barley varieties and cultivation technologies developed at the NASB, Belarus reduced the import of barley from 77,000 tonnes in 2008 to 400 tonnes in 2010 and saved $26.4 million. Barley production in 2010 (a total of 152,000 tonnes) fully met the needs of the national brewery industry.
In 2010, 50% of corn seeds consumed in Belarus were produced domestically. In the coming year this figure is expected to approach 75% with import reducing by another $25-30 million.
Belarusian scientists also helped expand the cultivation of oilseed rape. Domestically produced high quality varieties replaced the import of colza and considerably lowered the need to purchase protein concentrates.
In order to reduce the import of veterinary preparations that totaled $189 million in 2010, the NASB staff have developed 18 new vaccines that are currently produced at the Vitebsk Biofactory. Fourteen more vaccines will be on offer in 2012. Their total production will make up $160 million and reach 85% in import substitution.
To mechanize the crop production and cattle breeding, the companies of the Industry Ministry and Agriculture and Food Ministry have developed machinery that now meets 45% to 80% of the country’s needs in new equipment.
Due to the implementation of the government sci-tech program “Industrial Biotechnologies” in 2006-2010, the country laid down a strong foundation for the production of highly efficient bio-preparations for different purposes. According to the estimates, import substitution of biotechnological products made up $41.7 million. All products are export-oriented.
The government sci-tech program “Mechanical Engineering” yielded Br2.7 trillion in import substitution benefits, with export making up $1.3 billion.
The construction of two phases of the national range for testing and certifying portable equipment has been completed.
Belarus has created a supercomputer sub-sector. The country’s major industrial enterprises (BELAZ, MTZ, Vityas and others) use information tools that support the life cycle of sophisticated products. The economic effect amounted to $7.3 million.
Some 60% of computer technologies being implemented in the healthcare sector are innovations designed by the UIIP of the National Academy of Sciences of Belarus.
In 2010-2011, the design bureau of the National Academy of Sciences, together with the NASB center for LED and optoelectronic technologies produced Br4.3 billion worth of LED equipment for street lighting (the import substitution benefits made up Br3.1 billion).
The NASB Institute of Physics supplied more than 1,500 laser and LED lighting devices worth over Br16.5 billion to the healthcare sec-
tor to treat a wide range of diseases.
In 2009-2010 specialists of the Institute of Power Engineering of the National Academy of Sciences conducted energy audits at more than 60 plants in the country (BMZ, MTZ and others). Following these surveys, the target was set to save at least 450,000 tonnes of fuel equivalent per year, which in prices of 2011 was equivalent to about $100 million.
Belarus can explore CALStechnologies, “just in time” delivery systems and other modern management systems to reduce prime costs of products. For example, Cals-technologies have been implemented in the product life cycle support systems at the Minsk Tractor Plant, BELAZ, Vityas, which enabled these companies to significantly reduce the time and cost of paperwork, and to provide information support for the commodity distribution network.
We can improve efficiency by promoting international cooperation in science and technology. The first EURASEC interstate program “Innovative Biotechnology” (20112015) kicked off this year.
We must also continue to create large facilities of innovation infrastructure, such as Belbiograd, an industrial park and others.
Given high-skilled personnel, well-developed scientific and education systems, the country can master almost any high technology.
We need to implement a series of systemic measures to develop export-oriented import substitution through modernization of existing facilities and creation of new ones.
To this end, local budgets should be involved in concluding government procurement contracts. Priority should be given to importsubstitution goods with the localization rate of over 50%.
The National Academy of Sciences of Belarus believes that Belarus should start using again the indicator “growth in the production of consumer goods”. Now this term refers to consumer non-food products. It makes sense to monitor the production of consumer products. Although it involves “manual control”, this segment accounts for more than 16% of imports, has a high added value and is highly instrumental in controlling money supply.
To encourage import substitution the NASB offers to set out the targets regarding the reduction of GDP and GRP import intensity as the ratio of the growth in import and production. To do this, we will need to calculate the total volume of imports by type of economic activity by every region and department.
It is also possible to offset part of the interest rates on loans for producers who manufacture importsubstitution products providing the share of these products increases on the national market.
Import substitution is the strategy of the leader race. It is successful only in those countries that have cheap resources and are willing to follow the path of copying, imitation, and finally, counterfeiting. But later it becomes critically important to offer substantial improvements in the production of licensed and similar imported products to get them legalized on the world market.
Import substitution policies have been adopted by many countries, but in most cases they did not give tangible and lasting results. For example, most Latin American countries consistently adhered to the policy of import substitution. However, with the national markets closed to international competition, these policies led to the emergence of monopolies, reduction of competition and, as a result, to technology backwardness. Considerable costs to support the manufacturing sector caused serious macroeconomic imbalances, including budget deficits and hyper-inflation that in some countries reached 1,000% per year.
Therefore, our import substitution strategy should be aimed at promoting export growth, increasing specialization of the Republic of Belarus in the international division of labor in the high-tech, knowledge-based activities.
Today we can say that the country has sufficient scientific and technical potential to ramp up competitiveness and export of products, including scientific and technical ones.