• Macrocenter - Macroeconomic Research Center
  • 23/08/2019

Authors:

Leonid ZLOTNIKOV

Candidate of Economic Sciences, Associate Professor

U. Alex AKULICH

Candidate of Economic Sciences, Associate Professor

Annotation. The article gives an assessment of the GDP change under different options of integrating Belarusian economy into the international division of labor based on the developed optimization model using inter-industry balance data. The objectively determined estimates have been calculated for each version of the decision. The results of modeling show that  many years of import substitution policies in Belarus have accumulated a significant potential for improving the efficiency of the economy by reducing the level of protection from imports, attracting the private sector to foreign trade, and reducing administrative control over foreign trade operations.

Key words: economic growth, import substitution, inter-industry balance, model of linear programming, objectively determined estimates.

  1. Introduction

Some improvement of economic conditions for small and medium-sized businesses in Belarus solves the problem of a better use of available production resources, but yet does not solve the strategic task of re-industrializing the country and increasing the competitiveness of Belarusian goods in foreign markets.

Among other things the solution of this task requires attraction of foreign investments, new technologies and arranging of production, inclusion of Belarusian manufacturers in global chains of added value production.

It is necessary to expand the formats of cooperation and integration with high-tech economies. Only in this case it is possible to increase and diversify exports to offer the world market competitive products” [1].

However, Belarusian government intends to continue its long-term import substitution policy: “… an annual increase in the production of import-substituting products is planned …” [2].

Such policy was carried out, for example, in Poland in the early 1980s. “Then it turned out that in most cases it was inefficiently used or lost money” [3].

As follows from the theory of comparative advantages of D. Ricardo, trade is always beneficial to each of the countries, even when the costs of social labor for the production of goods in one country are much higher than these costs in another country. This theory is anti-intuitive and even difficult to be perceived by specialists. According to the theory, even in case the prices for any two goods in two countries are not proportional, mutually beneficial inter-country trade is possible regardless of the level of development of the considered countries.

Practice confirms theory. After the World War II, only a few of 100 countries that wanted to catch up with the developed countries, succeeded. One of the main factors of their success was opening of the economy [4]. Of all the post-Soviet countries, Estonia achieved the greatest success in the economy, which, after gaining independence, abolished almost all limits on exports and imports. Today, Estonia is the most developed country of the former Soviet bloc (39th  in the world in terms of GDP per capita).

  1. Model and data description

In order to assess how a greater degree of inclusion in the international division of labor can influence the development of Belarusian economy, we developed an economic-mathematical model of country’s economy. This model uses the data of the inter-industry balance (hereinafter referred to as the “IIB”) of the country, the only available regular data for calculations at the macro level.

Belarusian economy is represented by 31 branches in the IIB. Recommendations on the volume of production in the industries, that follow from calculations using the classification of industries in the IIB, have no practical value for managers. For example, they need to decide whether it is worth allocating loans for the development of production not to the “agriculture” sector as a whole, but to some kind of sub-sector of a specific product, for example, marble beef. But such aggregated information can be useful to satisfy the curiosity of scientists.

For example, as a result of the calculations, it may turn out that the country should not be engaged in the  production of A-sector products, and sector B should be specialized for  both meeting the needs of its country in the production of this sector, and to obtain export revenue directed for the import of goods for A-sector, and so on. Such conclusion can be received on the basis of industry average indicators. But all industries have a large number of goods, so the indicators of costs-results may deviate from the average branch in any direction. If zero production is obtained for a certain industry as a result of calculations, this will mean that more than half of the industry’s production should be delivered for imports.

We can not know what specific products of the industry will be imported. But we assume that the private sector will be developing and entrepreneurs will decide what is profitable to trade, and what is more profitable to produce in the context of a detailed product range.

When forming the mathematical model of the problem, the matrix of direct costs factors (A) of the inter-industry balance sheet for 2015 was transformed into an input-output matrix (E-A), we also added blocks of export and import variables in the context of the same balance sheet industries, we  set restrictions on the use of labor and currency resources.

The choice of production volumes and export – import of products of individual industries is determined by the criterion of optimization – the maximization of GDP produced in the amount for all sectors. At the same time, the consumption of the final production of each industry should not be lower than in 2015 (excess in some sectors possible). The cost of imports should not exceed the revenues from exports. The volume of export – import should not exceed the actual indicators of 2015.

Maximizing of GDP was ensured by deepening the specialization of Belarus in the international division of labor: in some sectors it was possible to observe an increase of the production volumes, in others – a decrease.

To formalize the model, the following designations of the parameters and variables of the model were adopted:

i, j, r – indices of industries of the IIB. If the industry is designated as a branch of production, the index “j” is used, if it refers to the distribution of the industry’s output – the “i” index . N is the number of industries of the balance. From 31industries of the IIB, production of 12 industries was referred to non-tradable, which means their products are not imported (these industries are indicated in the tables of the IIB sheet, starting with  20th industry – “production and distribution of electricity, steam and water”). They are denoted by the  “r” index.

In the adopted designations  the mathematical model of the task is described as follows:

Balance restrictions:

Restrictions for production of goods and services of non-tradable industries:

The volumes of export and import should not exceed adjusted level:

Labor  restrictions:

The objective function:

Using the described model, we carried out a series of calculation to optimize the created GDP with a gradual increase in the depth of the country’s specialization in the international division of labor.

  1. Key results of the analysis

Table 1 presents the results for the four calculation options. Unit of measurement of cost indicators – trillion. rub. For example, the gross output of agriculture in 2015 amounted to 140 trillion. rub.

For each version of the optimal plan, we obtained estimates that show a degree of influence of model restrictions  for a surplus of criterion function on the increase of the objective function (objectively determined estimates or abbreviated – o. d. estimates). In this case, o. d. estimate shows how much GDP can generate if some model restriction is increased / decreased by a unit. If changing some restriction doesn’t influence the change of indicators of the optimum plan, then o. d. estimate is equal to zero. (L. Kantorovich and T. Kupmans received the Nobel Prize in 1975 for argumenting the properties of o. d. estimates and developing of the simplex method)

Option 1 – this is the initial version, which establishes restrictions on production volumes in the sectors at the level of 2015 (in prices of 2015). The indicators of the original version were obtained by fixing the sectoral outputs at the level of 2015 by means of additional restrictions. Under such conditions o. d. estimates coincided with the added value created in the industries with the release of a unit of product in 2015 (see column 1 in Table 3). In this option the use of labor resources was 0.1% less than the adjusted restriction. Therefore, o. d. estimate  of the labor force equals to zero (Table 2).

The volume of GDP in option 1 is almost the same with the IIB data. The discrepancy with the actual GDP of 2015 (899 trillion rubles) is 1.8%.

In each subsequent version of the calculation, the restrictions on the volume of production for all sectors at once were weakened by the same percentage, which means we eased restrictions on specialization of production through external relations. In the first option the volume of production by industry was determined “in fact” in 2015 (for example at > = 140 trillion rubles for “agriculture”). In the second option the restriction for all industries from below was weakened by 33.3% (including 140- 0.333 * 140 = 94 for agriculture). Calculation options  are presented in Tables 1-3.

Objectively determined estimates were calculated for each version of the solution. For the first option, where the freedom of choice was excluded and there were no resources to increase production, they coincided with the initial indicators of added value per unit of the industry’s gross product. In subsequent versions of the calculations o. d. estimates for industries, where production maintenance constrains specialization and thereby constrains GDP growth in the country, receive a negative evaluation. If, for example, in the second option, the restriction on the volume of production in agriculture was increased by 1 trillion rubles, which equals to 95 trillion rubles, the volume of GDP produced in the country would be decreased by 1.58 trillion rub. (Table 3).

Remark. O. d. estimates of industries, production of which increases with the deepening of specialization, are equal to zero, since some limited production resources have already been fully utilized (in this model – labor and imports resources, set at the level of 2015). To release these resources for prospective industries, it is necessary to limit the volume of production in unpromising industries.

Output indicators in industries 20-31 in all of the calculation options are fixed unchanged, as these industries are related to non-tradable. But their o. d. estimates vary depending on the calculation option. The o. d. estimate of the 27th industry “Real estate transactions” in the last version becomes the highest positive estimate. Within the framework of this industry, statistics take into account the revenues from the IT sector.

The maximum value of GDP made in the country is reached in case of removal of all restrictions for production volumes for tradable industries. At the same time, production in some industries is terminated (see column 4 of Table 1), intermediate and final consumption of products of these industries is entirely provided through imports. The GDP of the country reaches 188% of the 2015 level. In all versions the volume of imports or exports in the amount for all sectors did not exceed the indicators of 2015.

Obviously, in reality, trade transactions are conducted for specific goods. And even in the industry with a low level of efficiency, some products will not disappear. But in general, it can be considered reasonable to conclude that the rejection of the policy of import substitution leads to an increase in the welfare of the population. We believe that protection of domestic producers for 1-3 years is justified only if there is a formation of new production and there is hope that it will become competitive.

  1. Discussion

The calculations show that for many years of  import substitution policies Belarus has accumulated a significant potential to improve the efficiency of the economy by reducing the level of protection from imports, attracting private sector to foreign trade, and reducing administrative control over foreign trade operations. Foreign trade can accelerate the accumulation of initial capital.

But the decision making period of private companies does not exceed 5-6 years now, so many strategic decisions in the economy go beyond the planning of private sector agents and require participation of the government (implementation of infrastructure projects, the formation of effective clusters, the creation of large enterprises, the assessment of the impact of new technologies on development of the national economy, etc.). The methodology of solving these problems is known – systematic analysis. According to the methodology, we can identify the goals to be achieved, alternatives for reaching them and the following resource costs and  results, resource restrictions. All data are reduced to a single optimization mathematical model, through which effective alternatives and opportunities for achieving the set goals are determined.

Inter-industry balance can be the starting point for the formation of such model. But it should be more detailed. Today, it is realistic to develop the country’s IIB for 200-300 industries every five years. For example, in the USA in 2007, the IIB was designed for 389 industries, in Russia in 2011 – for 126 industries. In different years, the IIB for 100 or more industries was developed in Japan, Spain, Austria. Forming the IIB for 300 industries makes it possible to transform individual industries of the balance into several technological alternatives for developing of the industry. Gradually replacing non-alternative technologies of inter-industry balance for alternative technological methods for individual industry complexes, helps forming an extended optimization model for solving the problems of indicative strategic planning of individual complexes of industries first, then for the national economy as a whole.

This model allows to see behavior of the country’s economy as the behavior of an airplane in a wind tunnel, helps developing an understanding of the situation, finding estimates of the significance of certain types of resources to achieve the country’s development goals, and makes the development of draft strategic decisions possible.

The strategic planning model could become the core of the newly created Center for Strategic Studies. The tasks of this center could include monitoring, evaluation and promotion of promising alternatives for the development of production. In this case, the conclusions of scientists could be used in management practice.

References:

  1. Kadochnikov, P, Knobel A., Sinelnikov-Murylev S. Openness of the Russian economy as a source of economic growth. Voprosy EkonomikiEconomics issues, 2016. No. 12, p. 31. ( In Russian)
  2. Programma deyatelnosti pravitelstva respubliki belarus na 2016–2020 gody [The programme of activities of the government of the Republic of Belarus for 2016-2020].  (In Russian)
  3. Pokladak, V. Importozameshhenie v Belarusi segodnya – eto variant Polshi nachala 1980-h godov [The import substitution in Belarus today is a version of Poland in the early 1980s]. [In Russian)
  4. Elyanov, A.Y. Globalizaciya i rassloenie razvivayushhixsya stran [Globalization and stratification of developing countries]. Mirovaya ekonomika i mezhdunarodnye otnosheniya – World economy and international relations, 2000, No. 6, p. 12. (In Russian)

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