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.