Home > Uncategorized > A modern revival of import substitution is the needed solution

A modern revival of import substitution is the needed solution

from Trond Andresen 

1. A story from Norway

In the late 80’ies I cooperated with a colleague and former engineering student mate who at that time was the director of Norway’s largest non-university research corporation. We were trying to formulate an industry program for Norway — a modern country already industrialised in many ways. This was during the ascendancy of the country’s petroleum adventure. That was admittedly not the best time to discuss policies for a diverse manufacturing sector, because the expanding petroleum sector led to demand for all sorts of new service and supplier activities anyway.

At that time I was inspired by — among other things — a debate in Scientific American between econ professors Herman Daly (against free trade and for capital controls) and Jagdish Baghwati (for free trade and capital controls). This was a period when there actually was a debate about the merits of free trade, compared to the merits of national industrial policy with import substitution. I was especially struck by Herman Daly’s slogan (quoted after memory here): “Exchange recipes instead of goods!”

The idea that there are alternatives to free trade that can give better economic outcomes — especially in less industralised countries — is today completely left out of the debates. One is allowed to discuss some sort of capital controls, like the Tobin tax, but alternatives to “free trade” is off the table. It has long time ago been “proven” that any alternative — lumped under the derogatory term “protectionism” — gives a worse outcome regardless of country.

My colleague and I wanted policies that exploited the rise of automation, and we asked ourselves: why can’t we competitively make furniture or washing machines in Norway in spite of our high wage level, using robotics and computers? (It turns out that now — 25 years later — we still have succesful furniture production, highly automated, with a large share of production being exported.)

We wanted the government to formulate a program inspired by the Keynes view:

“I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel — these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. ” [National Self-Sufficiency, The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-769.]

There is — however — an important change since  Keynes’ days, and that is the (merciless) fact that the average product today is  much more complicated and diverse in components and origin(s), and is much more knowledge-based. To apply Keynes’ term somewhat differently, production is (for simple technical reasons) much more “entangled” today, than at his time. But we may use Daly’s “recipes” and license production for a modern solution. Our program proposal suggested the following tasks for a hypothetical well-staffed and -funded government agency:

  • charting the domestic share of production of different categories of goods, whether they could be made domestically instead,  the import content of these, and whether the import content could be easily reduced.
  • checking where the imports came from, and what could be possible concerning negotiating renewed agreements with foreign producers (see below).
  • checking the current state and further potential for automation in the product category.
  • researching the possibilities for cooperative agreements with well-reputed and global suppliers, so that that they could help set up manufacturing plants for domestic manufacture of their products, and as payment they could for instance receive a license fee for every unit sold. The agreement could also contain clauses prohibiting exporting of the same product. The main point of the idea is import substitution, but not by inventing the wheel anew and forcing an inferior “people’s tractor no. 1” on an unwilling population. Instead this would mean that a modern, high-quality product that the domestic market already desired, was mainly made domestically. Part of the picture could be that intermediate goods and components for the plant could be supplied by the foreign partner.
  • charting where in the regions the need for new employment was largest, and locating plants there.
  • planning for and building energy, transport and communications infrastructure to service these new manufacturing plants.
  • informing the public about, and creating enthusiasm for, such a national program for comprehensive and automated manufacturing.

This was what we tried to get into the public debate, but there was hardly any response. Norway was into petroleum euphoria, and to the degree there were reactions, it was of the usual neoliberal pundit type, ridiculing “failed and outmoded socialist planning dogma” — “it was not a government’s task to decide what should be produced”, etc. One of the few parliamentary representatives who liked and supported our ideas in public, was ridiculed as “the politician with the washing machines”.

There was also the argument that that our proposed government agency would “distort competition”. I tried to reciprocate by pointing to the fact that Norway already and for a long time had had a big and very well-funded government agency with the only task of promoting Norwegian exports, something that — to the degree this agency succeeded — would occur to the detriment of producers in other countries. I then asked: why is the symmetrical proposal of also having an agency that promotes import substitution somehow worse than that?

But that didn’t impress anyone with power to to do something. So during the early nineties we gave up on the whole thing. The Norwegian econonomy grew strongly anyway, mostly due to the petroleum boom, which by today however has started its slow decline due to most of the resources already having been extracted.

But Norway still is very rich, industrialised and with an advanced infrastructure. So let us turn to the less fortunate countries.

2. A modern revival of import substitution is the needed solution

Looking at especially Africa, but also big parts of Latin America and Asia, we observe that a very large share of the increasing urban populations is unemployed or underemployed, or that they are “employed” in unproductive “informal sector” activity, selling trinkets in the streets or similar. Furthermore, populations are very young. The need for meaningful employment is enormous.

Now, a progressive government issuing its own currency may employ its whole population — it is “only” a question of political will and understanding of monetary systems. But if you want living standards to increase — and not only distribute current insufficient resources fairly but thinly over the population —
there is no other way of solving these problems than government policies that ensure the productive employment of those large masses!

How about comprehensive government policies resembling those some of us discussed in 1989 for Norway, but with an important distinction: Let the manufacturing plants be less automated. Exploit the abundance of manual labour and lower wage levels, and circumvent the problem of a lower average level of education, by setting up plants producing goods with machinery and methods which were used in — say — Germany, Sweden, Norway five to ten years ago. Could one for instance take over functioning equipment cheaply from partners (described above in the Norwegian program), that are planning to discard it anyway due to modernising their production?
And/or can we make such agreements with technically advanced  companies in BRICS countries, to avoid dependence on the neoliberalism-obsessed US/EU block?

In the next phase workers  will educate themselves and be educated while working in these plants, and may thus gradually catch up with the more advanced countries.

Concerning free trade agreements which many countries already have been conned or subjugated into: it seems to me that voluntary bilateral cooperative agreements  with specific global suppliers, as described above, need not be in breach of such agreements. To use the “white goods” case: If one has an agreement with Bosch (or perhaps better, a BRICS-based company) to assemble their models of washing machines, fridges and kitchen appliances domestically, but you still allow imports of similar products from other global suppliers, it is — as far as I can see — not in breach of WTO/GATT rules.

  1. March 15, 2016 at 11:40 pm

    Your story is very interesting. For some countries, with some exporting commodities which turn enough forex this could be attainable. The problem is, I undestand, with most underdelovoped countries one of foreign exchange scarcity. In spanish we call it “restricción externa”. You must import a lot so as to be able to create an industrial infrastructure. Then you must import raw materials. If you do not export the produced goods you do not have the necessary monies, mean dollars, to do so. As for BRICS I don’t see them, at least now, as something more than an empty acronym of very different and with conflicting interests countries. Argentina, Uruguay and Brazil could do something similar to what you are proposing. In fact they did in the last century. Sad to say these policies were abandoned when imperialism achieved they target: to keep us underdeveloped and dependant.

  2. March 16, 2016 at 1:34 am

    The foreign exchange problem that Resonando brings up is a killer. Yes, Bosch might likely be attracted to selling 100,000 washing machines for a per-unit license fee rather than 1,000 washing machines outright, assuming the per-unit fee is greater than 1% of what they would clear by selling a Bosch unit outright. The problem is, they want that fee in EUROS, not in QUATLOOS.

    The net result is that you’re going to have to export something in order to get those Euros that Bosch wants, since printing Quatloos is not a solution (Bosch has no need for Quatloos, Quatloos buy nothing that Bosch wants). And once you’re forced to export something, unless you’re a petro-state, you’re forced to participate in one of those free trade agreements, otherwise your goods get tariffed out of the marketplace.

    In short, if you are going to pay a license fee, you’re going to need Euros (or dollars), and you’re going to need to export something to get those Euros (or dollars). And the neoliberal consortium has pretty much forced you to be part of a free trade agreement to do so. Which means you’re fscked good and hard….

  3. March 16, 2016 at 7:54 am

    In all haste, will be back: This is an extremely important issue. To the degree commnenters think that my proposals are unrealistic, please suggest alternative solutions.

    • March 16, 2016 at 9:10 am

      Your story from Norway was viable because Norway had sufficient exports to fund it and those exports were not subject to tariff embargo because of the way crude oil markets work. The question is what do we do about, say, Zimbabwe? Zimbabwe’s major exports are nickel and tobacco. Pretty much everything else is imported. Zimbabwe is in no way a major exporter of nickel and tobacco — the world economy suffers not at all if they stop exporting those items — so the neoliberal elites can just come in and say, “you will participate in WTO/GATT or we will impose 100% tariffs on your exports” (i.e., basically shut down your foreign exchange), and well. And once you’re in WTO/GATT, your foreign exchange ends up going for imported goods, not for machine tools and factory equipment and raw materials to build stuff locally.

      Without breaking up the WTO cartel, I don’t see a way. This is like the ending of George Orwell’s “1984” — a foot pressing down on the face of the peasantry, forever. Unless some external power changes the situation, I see no circumstance under which nations like Zimbabwe will be allowed to create their own industrial infrastructure to achieve some level of high employment and self-subsistence for their people.

  4. March 16, 2016 at 9:36 am

    If poor countries are not allowed a planned and somehow protected development of production for domestic needs, they will remain poor and with enormous unemployment.

    Comments until now indicate that progressives within economics seem completely resigned to this.

    • March 16, 2016 at 10:05 am

      The reality is that you cannot create foreign exchange out of thin air, and that’s the problem with your proposal — it requires creating foreign exchange out of thin air. You haven’t provided a solution, you’ve merely waved your hands and said “abra cadabra!”. But wishful thinking isn’t a solution.

      Do I have a solution? Not within the framework of the current economic system, no, I don’t. Short of a dinosaur event that completely overturns the current WTO regime I have no solution. What that implies is that the solution is completely outside of the countries who are current victims of the WTO regime, and lies in politics, not in economics.

      • March 16, 2016 at 10:24 am

        You can borrow and buy advanced technology, like Ecuador for instance does from China. They are because of this currently becoming close to a 100% hydropower-supplied country, while until now being fossil-powered. They also btw do license production of cars in Quito. Building infrastructure and production for domestic needs (or even and possibly for exports) with FDI or loans, enables the country to service its loans and pay its investors. And license production is not in breach of WTO rules, which in fact was an important point in my paper.

        The so-called populist right is gaining support from the working class both in the US and Europe, calling for jobs by reviving production for domestic needs. As long as there is large-scale unemployment, create jobs by giving priority to domestic production. This is the main basis for Mr. Trump’s success in the US, not racism. And Marine Le Pen’s success in France.

        While the economics heterodoxy (and “the left” in Europe, mostly broken) spend their time and energy pouring cold water on attempts to find solutions to problems. Sadly it seems that the late Ms. Thatcher has support in this thread, “There Is No Alternative”.

  5. March 17, 2016 at 8:02 am

    Russia is now “allowed” (in fact, they are forced to, due to sanctions) to do import substitution on a large scale. So here we have an accidental laboratory experiment. Even if Russia is big and econimically diverse, some interesting conclusions applicable to other countries may emerge from this. Richard Werner and Vladimir Y. Yakunin asks “Are Sanctions Saving Russia?”, here: http://www.project-syndicate.org/commentary/are-sanctions-helping-russia-by-richard-a–werner-and-vladimir-i–yakunin-2015-10

  6. March 18, 2016 at 1:28 am

    Yes Trond Andresen – the “can’t do”, TINA attitude one sees everywhere is the real killer. It is factually & logically incorrect, – e.g. tarriffs would not price a country out of the market – they would just decrease the amount of imports that the exports would buy. “The most potent weapon in the hands of an oppressor is the mind of the oppressed.” That cannot be repeated often enough.

    Keynes’s essay is one of my favorites; few read it today, fewer understand it.

    there is no other way of solving these problems than government policies that ensure the productive employment of those large masses!

    Right. And it really isn’t rocket science. Ensuring that everyone who wants to work – to the person – 0% unemployment – is productively employed is a very easy task.

    Free trade doesn’t really have much to do with it. For most countries, as long as the free trade agreement doesn’t have some crazy intrusion into domestic matters (like TPP etc), and really is just about free trade, it is not an obstacle to domestic development. If anything it is a minor aid. Floating the currency automatically “protects” the development well enough. Abba Lerner is still the one to read on this; fitting very well with, developing that Keynes essay.

    For Norway, Arno Mong Daastøl, Michael Hudson and Øystein Stray Spetalen proposed similar ideas. I collected some relevant links as “Some Guy” here. What is noteworthy is that the Norwegian people have seen basically none of the oil wealth – what they have gotten was “Keynesian”, “multiplier” indirect effects from it. The direct oil wealth just was thrown into the sovereign wealth fund hole and much was then squandered on Wall Street – losing tens of billions of dollars in one year!

    • March 18, 2016 at 2:27 am

      To say that the situation of Russia and the situation of, say, Zimbabwe, are in any way similar is to be ridiculous. ZImbabwe has total exports of approximately $500M per year, consisting of tobacco and nickel. Any tariffs upon their exports by the WTO cartel will have the net effect of reducing the income from their exports by the amount of the tariff, because they must sell at market price, and their export volume is so tiny as a percentage of the world economy that other producers can increase production to make up the deficit if they cease selling. Even if the workers in their nickel mines are paid in Quatloos (or whatever the local currency is), the WTO cartel can place a 100% tariff on their nickel and then there’s no point to exporting nickel at all unless someone not part of the WTO cartel is willing to trade outside of the WTO framework. Right now that’s China, to a limited extent. And this isn’t even mentioning the fact that Zimbabwe is reliant upon $300M/year of foreign aid and food imports from those WTO states simply to feed its people, and changing that would require significant investment in the agricultural section that isn’t happening due to both political and economic reasons.

      Russia, on the other hand, continues to have significant (though seriously decayed) industrial infrastructure and significant intellectual and natural resources, and has natural resources such as natural gas where they can simply pass on tariffs to the buyers because the buyers (much of Europe) have no alternate source. Furthermore, Russia has *scale*. Not as much scale as the Soviet Union had, but certainly more than poor Zimbabwe with its entire exports bringing in less money than the budget of a medium-sized American city.

      If the smaller/poorer countries would pool their resources into a regional trade consortium with the power to take on the WTO cartel, they could perhaps create economies of scale similar to Russia that could basically give the middle finger to the cartel. But Bolivia continues to be in a state of war with Chile over land that Chile seized in the 19th century. Venezuela claims half of Guyana. And so forth. Think of the issues the EU is having over the political and economic differences between their member states, and turn it up to eleven. Brazil and Bolivia in an economic union would have similar problems to Germany and Greece in the same economic union, except Bolivia has no beaches (thus their issue with Chile).

      To break the WTO cartel in order to encourage import substitution within smaller states like Zimbabwe thus won’t happen via consortiums. It will likely require that major economies — looking at you, China — be willing to operate outside it. This appears to be happening. But China operates in their own national interests, not the national interests of ZImbabwe. They will cooperate insofar as it ensures their national access to resources, and not one bit more, because they have a vested interest in exporting consumer goods to those countries too. Those vested interests may still be sufficient. Or maybe not. I guess we’ll see.

  7. March 18, 2016 at 8:04 pm

    To say that the situation of Russia and the situation of, say, Zimbabwe, are in any way similar is to be ridiculous. Neither I nor Andresen said this.

    The WTO cartel can place a 100% tariff on their nickel and then there’s no point to exporting nickel at all As I said above, this is not true & I think that tarriff rate is higher than reality. It is a point of logic that it will lessen the point of exporting, not eliminate it. Depends how much the country has to export & how much the imports are needed.

    Frankly, I don’t know much about Zimbabwe, though I’ve read some stuff by Zimbabweans at Counterpunch a few years ago saying international figures are not trustworthy, and Zimbabwe was doing rather better than they indicated. But free trade, the WTO is not a bogeyman. As long as it really is a free trade agreement, it doesn’t really matter all that much. A great deal of the left & “heterodox” economists believe in illogical arguments that make free trade into a bogeyman. For an ordinary country – say one a bit richer than Zimbabwe like South Africa, there is nothing to fear from it. There is no “restricción externa” for a normal country like Norway or South Africa or Venezuela of the kind so many economists & others fantasize.

    What’s really important is not banding together, not forming unions, not free trade or protectionism, but running each individual country in a non-psychotic manner. Stop relying on the kindness of strangers. Stand up for oneself. Decide to have full employment. Float, not fix your exchange rate. Stop innumerately believing that high interest rates are anti-inflationary & support the value of your currency when they do the opposite in the not-very-long run.

    Two examples of such psychosis: Venezuela – which adopted a weapon of mass destruction against itself of fixed & multiple exchange rates, with predictable results. Greece, which won against the Eurocrats, with its population solidly behind the victorious leadership. When the other side gave in – Schauble offered a negotiated Grexit, the best outcome that was at all possible – Tsipras refused to accept victory and surrendered.

    The problem is that most discourse & behavior in international economics is based on people fooling themselves they understand incoherent illogic that sounds sorta right. With the result that people end up talking utter nonsense – like rocket science that forgets Rule #1 of Rocket Science: Pointy End Up.

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