In­no­va­tion-Based Im­port Sub­sti­tu­tion

The Na­tional Academy of Sci­ences of Be­larus (NASB) has adopted a sys­tem-based ap­proach to sub­sti­tute im­ports and boost ex­ports

Economy of Belarus - - CONTENTS - Piotr VITYAZ, Sergei DEDKOV

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%).

Ex­port Ori­ented

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.

Fu­ture Chal­lenges

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.

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