Microeconomics of Russian Import Substitution

This paper discusses the economic mechanisms triggered by import substitution policies. With full employment economy, the growth of production in protected areas is possible only by dragging resources from industries, which are not covered by import substitution policies. Globally competitive Russian industries will be forced out due to import substitution policies, which favor ineffective industries. The inevitable result of this policy will be a decrease in the efficiency of the domestic economy. Numerical estimations of potential effects of current Russian import substitution policies indicate a decline in GDP, decrease in outputs of non protected sectors and welfare losses of consumers. The paper also discusses a role of import as a vehicle for competitiveness improvement and alternative modes of trade policies. The decline in imports of protected areas by 10% of the initial level corresponds to an increase in the output of protected sectors by 3.8% and decrease in output of all other sectors of the economy by 2.3%. At the same time GDP decreased by 0.05%, while the consumer price index rises by 1%. The paper also discusses the role of imports in enhancing the competitiveness of the Russian economy and alternative trade policy measures. Economic research clearly indicates that firms importing intermediate goods are more productive than those, which do not import. Over 60% of Russian imports account for intermediate goods, and it must be borne in mind that the decline in imports will turn into decline in productivity of Russian companies, which are importing components and equipment, and will adversely impact their competitiveness in the global market.