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Why import substitution does not lead to a full-fledged strategy

For many years, possibly since obtaining independence, the issue of high imports has been extensively debated. It follows logically that the state should prioritise import substitution policies. Furthermore, these discussions are common not only in Kazakhstan, but in many post-Soviet and developing countries. Is everything so horrible in Kazakhstan with imports?


1) The share of imports in domestic consumption has declined significantly over 20 years.


If converted to of current pricing, imports supplied half of Kazakhstan’s domestic consumption in 2000. Between 2008 and 2014, the figure fell to 30% and has subsequently remained stagnant.


This shows, at the very least, that the economy is not becoming more reliant on imports. It’s more about staying the same.


2) Kazakhstan is an “average” in terms of the share of imports in comparison with others.


Is the figure of 27% in 2021 so critical? In general, there is no clear dependence of the import dependence of economies on the level of development of countries – with low incomes it is 27%, with medium incomes – 22%, with high incomes – 28%.


If we consider the countries in the region, then in Belarus the figure reaches 61%, in Uzbekistan – 33%, in Russia it is lower – 22%. In territorially large and rich countries it is also ambiguous: 13% in the USA and 31% in Canada.


Against the backdrop of all this, Kazakhstan does not stand out because of its “catastrophic” dependence on imports.


3) Import in Kazakhstan is not directly related to citizens.


If we are to fight imports, then definitely not consumer ones – they accounted for only 23% of the 18.7 trillion imports in 2020. 40% is the intermediate consumption of enterprises during creation of goods and services, another 37% is “gross capital formation” or investments. Actually, therefore, half of the country’s imports are from the engineering, metalworking and chemical industries.


4) Imports are not so critical even within household consumption.


Only 13% of the final consumption of citizens is associated with imports, which is 4.3 out of 34.3 trillion. Of course, in household appliances, cars, clothing, furniture and similar goods, the share of imports can reach 90%. But on the scale of all expenses of 19 million Kazakhstanis, this is only 5-10%, or several billion USD.


The largest expenditure items for households remain agricultural goods and foodstuffs – about a quarter of the “money” basket. But here the share of imports is more modest – only 17%. Then why is this issue such a sensitive topic?


It’s all about individual goods that are often consumed, and therefore – on the “radar” of the media, experts and government agencies. For example, in the sale of sugar on the domestic market, this is 58%, poultry meat – 40%, sausages – 44%, juices – 46%, processed vegetables – 83%. On the other hand, the share of imports is low in dairy products – 15%, in eggs – 6%, in flour – 1%, in cereals – 8% and in many others.


How does this affect public policy?


Undoubtedly, the poor are suffering from fluctuations in the exchange rate, ill-conceived foreign trade policy and the subsequent rise in prices for a number of food products. There is palpable pressure on their basket, especially those of large families.


But on the scale of the economy, these are changes by tenths and hundredths of a percentage point. Despite this, attempts to connect these two stories do not stop.


For example, four years ago, when developing industrial policy, along with stimulating the export of technologically complex goods, import substitution of basic consumer goods began to move forward. The controversy did not embarrass government agencies and grew into the “Economy of Simple Things” programme, although the food, light and furniture industries did not occupy even 10% of imports into the country.


In 2022, import substitution is already called “in-country value.” It is planned to allocate a record 4.3 trillion KZT to the new program. Private projects are also included in the parallel program to increase the income of the population, which is also explained by the goal of “100% import substitution” for a number of goods, especially food.


The vitality of the topic of import substitution can be viewed from different angles. Politicians may suffer from the so-called home bias – prejudice among investors to overestimate the attractiveness of the domestic market and underestimate the external one. The local economy seems to be more understandable and “under control,” simply because we exist in it.


Another more prosaic explanation is opportunism. De facto, any production in the country is import substitution. Therefore, under this flag, everyone can become a priority for state support, in contrast to competitiveness in foreign markets. Moreover, the share of imports is not important – even if it is low, then food and other types of national “security” can serve as justification.


And yet the numbers are inexorable. Import substitution is good as a tactical tool for a very limited range of strategic goods, for example, for military purposes or to prevent mass starvation.


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