A commodity exporting economy under financial and trade restrictions: Aggregate and structural changes

Abstract

We study the situation when a commodity-exporting economy is under sanctions and cannot use its accumulated fx-reserves or attract new fx-debt to smooth import restrictions amid slower decline of income flow from a commodity-export. Our study attempts to determine the adequate response of the economy, depending on assumptions about the possibilities of import substitution within a structural dynamic general equilibrium model calibrated on Russian data. We use a modified version of the Ramsey–Cass–Koopmans’ model to evaluate aggregate and structural changes in the economy in the shorter and longer run. We consider several scenarios with different assumptions about the efficiency of import substitution, which is defined along two dimensions (for consumers as well as for producers). The results show that trade restrictions make import substitution optimal, but only in those sectors where such substitution is relatively more effective. Limited labour resources in the economy are compensated with higher capital intensity of production in the optimistic and neutral scenarios. Reallocation of resources to build up the necessary capital intensity calls for temporarily higher saving rates. As a result, GDP may be higher, but consumption may be lower comparing to the baseline. The results mean that effectiveness of import substitution should be taken into account in decision making on industrial policy. If efficiency of import-substitution is asymmetric and biased to goods for final consumption relative to goods for investments, the structure of imported goods becomes biased to the latter. The results imply higher relative price of consumer goods.