Transcript FROM DISINTEGRATION TO REINTEGRATION: EASTERN

FROM DISINTEGRATION TO REINTEGRATION
EASTERN EUROPE AND THE FORMER SOVIET UNION
IN INTERNATIONAL TRADE
Harry G. Broadman
Economic Advisor
The World Bank
Washington, DC
[email protected]
February 2006
Coming ‘Full Circle’?
For many centuries, the Eurasian continent participated in—indeed
at the center of—international commerce
Events of 1917 (and those decades thereafter) an ‘interruption’ in
the long history of Eurasian international integration
 Eastern Europe and the Former Soviet Union an isolated
trade bloc
The Region’s isolation from the world marketplace ended with:
 Fall of the Berlin Wall
 Dissolution of the Soviet Union
 Demise of CMEA
 Breakup of Yugoslavia
Today, many of the Region’s countries have ‘reintegrated’
internationally and actively trade with the rest of the world
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Main Questions
I. Why—and how—have some countries in the Region
internationally integrated more—and in different ways—
than others, and what do the current trends portend for
the medium term future?
What are the implications for the Region’s
competitiveness and prospects for growth?
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Main Questions (cont’d)
II. How does trade performance in today’s Region
compare with that of others of the world?
What factors are most important in conditioning the
relationship between greater trade, geography, policy
reforms, and development?
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Main Questions (cont’d)
III. Going forward, which policy reforms are likely to be
most effective in using trade as a lever to enhance
growth in the Region?
What are the priority policy issues that all
stakeholders—policy-makers in the countries,
developed countries and the international
community—should focus on?
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Summary of Main Messages
 Without international trade, there would not have been a transition:
open trade an engine for growth in the Region
 Two ‘new’–yet uneven–trade blocs emerging: a rich ‘Euro-centric’ and a
poor ‘Russia-centric’, latter risks being frozen out of the modern
‘international division of labor’; the blocs’ boundaries are soft
 A way out? Yes: behind-the-border reforms critical for trade to leverage
and enhance development; trade policy is necessary, but not sufficient

Some countries need basic trade reforms; most need BTB reforms
 Who needs to do what? Bulk of needed reforms in the Region’s
countries’ hands; actions also needed by developed countries and the
international community (donors and IFIs)
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Contours of the Region’s Reintegration
In the last ten years:
 Exports tripled

Imports increased two and a half times

Since 1995, the Region’s trade has grown at a faster
pace than any other in the world
Today:

Trade comprises two-thirds of the Region’s output

Open trade now an important characteristic of many of
the Region’s economies; sharp contrast to post-1917
period
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Contours of the Region’s Reintegration (cont’d)
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Two Emerging Trade Blocs
Direction of Global Trade Flows

While EU8 and SEE global exports to EU15 increased, CIS global
exports to EU15 changed little

EU8 and SEE global exports to the Region decreased; but CIS global
exports to the Region increased
Direction of Intra-Regional Trade Flows


CIS intra-Regional trade flows are more (sub-) regionalized and
concentrated: most (not all) CIS countries trade more with themselves
EU8 and SEE intra-Regional trade flows more diffused; still, most EU8
and SEE countries trade more with EU8 & SEE and less with CIS
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Two Emerging Trade Blocs
(based on intra-Regional trade flows)
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Two Emerging Trade Blocs (cont’d)
Not only do the two blocs coalesce around differences in:
 direction of trade flows…
…but also in terms of differences in:
 commodity composition of trade: diversified manufacturing vs
continued concentration in natural resources and agriculture

factor Intensity: capital/skilled labor intensive vs unskilled labor
intensive

domestic inter-enterprise competition; sound governance

trade in services: e.g,.,banking; telecoms; business services

transport & trade facilitation infrastructure & institutions: customs
modernization & reform; IT utilization; port development
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Two Emerging Trade Blocs (cont’d)
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Two Emerging Trade Blocs (cont’d)
Qualifiers to this stark 2-bloc dichotomy:

A sizeable difference in scale between the two
blocs: EU8 and SEE trade flows are twice the
size of CIS trade flows

Significant intra-bloc heterogeneity: Some CIS
countries (e.g., Ukraine) are increasing non-CIS
trade; some SEE countries (e.g., SaM) share
features of CIS trade; and some EU8 countries’
exports are unskilled-labor-intensive
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Two Emerging Trade Blocs (cont’d)
Qualifiers to this stark 2-bloc dichotomy:
Change in Destination Export Shares by Select CIS Countries
1993-1998
1999- 2003
Export Destination
Export Destination
CIS Country
CIS
EU15
CIS
EU15
Belarus
Kazakhstan
Ukraine
Uzbekistan
52.7%
31.8%
32.4%
28.7%
-34.7%
-25.6%
-19.6%
-10.5%
3.6%
3.7%
-8.7%
8.9%
-2.2%
-5.3%
5.5%
-3.8%
Source: Author’s calculations using IMF DOT
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How Open Are the Region’s Economies
Compared to Others in the World?
 Actual openness ‘95-‘03 greatly increased for EU8 and SEE but
declined for CIS…
 … but compared to projected openness, CIS not “under-trading”;
while SEE is.
Actual vs. Theoretical Trade Openness in the Region
Merchandise Exports plus Imports to GDP in PPP US$
2003 realization ratios
Actual Openness (%)
(actual/predicted by the model)
1995
2003
Averages:
CIS
SEE
EU-8
20.6
21.5
36.8
19.9
26.0
54.4
0.96
0.77
1.33
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How is this Openness the Result of the
Region Liberalizing its Trade Policies?
1)
Much liberalization done unilaterally by the countries themselves
through lowering tariffs, among other reforms
2)
Substantial liberalization through global trade agreements:
•
reorientation of trade to the rest of the world, especially
toward the EU, through EU accession and SAAs
•
increasing participation in the multilateral trading system: 17
out of the 27 countries are WTO members
3)
Regional integration through many RTAs:
•
CEFTA, BFTA, SEE 29 BTAs, CIS FTA, Eurasia Economic
Community, Central Asian Cooperation Organization
•
manifested in “spaghetti bowls”
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How Has the Region Been Liberalizing Trade
Policies?
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Current Stance of Formal Trade Policies
in the Region: Tariffs
Today, the Region’s tariff rates compare favorably with those of
LDCs at similar income levels
18
Current Stance of Formal Trade Policies
in the Region: Non-Tariff Barriers
NTBs still
a problem in
several
countries,
especially the
CIS
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How Has Trade Been Propelling Growth in
the Region?
Early years of transition

Liberal import policies, but weak domestic market
institutions and incentives—especially competition and
governance—led to ineffective enterprise restructuring

Consequently the increased trade flows had limited
adjustment effects on enhancing productivity, growth
and reduction of poverty

Indeed, distortions in resource allocation—labor and
capital—were created and the higher import levels
exacerbated poverty
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How Has Trade Been Propelling Growth? (cont’d)
Later years of transition
Countries that:
 eliminated disincentives to export
 established basic market institutions, and
 facilitated restructuring of non-competitive enterprises
… benefited from:
 increased trade flows
 supply response where prices of tradeables rose
 business restructuring and creation of new jobs
 growth
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International Integration and Domestic Reform:
A “Two-Way Street”
90.00
Openness = -14.183 + 20.434Progress in Transition
R 2 = 0.3889
80.00
70.00
60.00
Openness
50.00
40.00
30.00
20.00
10.00
0.00
0.00
0.50
1.00
Source: IMF DOT Statistics and EBRD
1.50
2.00
2.50
3.00
3.50
4.00
Progress in Transision
Countries that have integrated the most have made more
progress implementing market-oriented institutional and
domestic policy reforms, and vice versa…..
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Which Are the Key ‘Behind-theBorder’ Reform Challenges?
 Weak competitive domestic business climate and poor governance: high
barriers to entry/exit; horizontal & vertical market dominance; state
involvement; corruption
 Underdeveloped trade and transport facilitation systems and institutions:
e.g., discretion in customs; weak regional cooperation
 Closed and over-regulated domestic services sectors: especially in
“network” sectors, constraining positive externalities
 Low levels of FDI participation in high value added global
production sharing: EU8 integrated in producer-driven network trade
(autos/IT); CIS/SEE—at most—integrated into buyer-driven network
trade (clothing, furniture, diamonds)
 Rigid factor markets: labor and capital cannot reallocate in response to trade
and reduce poverty
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Key ‘Behind-the-Border’ Reform Challenges:
Weak Competition
 Import competition induces efficiency; but less in CIS
 Region-wide, foreign firms more sensitive to import
competition
 Export levels are low where entry barriers are high
Importance to Businesses of Competition from Imports
CIS
SEE
EU8
Region
Domestic
27.1
37.6
30.5
31.3
Foreign
27.3
48.5
40.0
35.2
Percentage of surveyed firms in 2002 indicating that competition from imports is very or extremely important.
Source: BEEPS2
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Key ‘Behind-the-Border’ Reform Challenges:
Weak Competition
Evidence from enterprise-level survey
CIS
SEE
EU8
0
5
10
15
20
25
Avrg. subsidies, % of total annual sales
Softer budget constraints in CIS; prevents valuesubtracting firms from exiting the market and freeing up
capital for new investments
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Key ‘Behind-the-Border’ Reform Challenges:
Poor Governance
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Key ‘Behind-the-Border’ Reform Challenges:
Poor Governance
Share of Sales Made on a Pre-Paid Basis
CIS
SEE
EU8
0
10
20
30
40
avrg. share of sales
Source: BEEPS2
In countries where contract enforcement is weak, firms are adopting
risk-averting business practices.
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Key ‘Behind-the-Border’ Reform Challenges:
Limited Trade Facilitation Capacity/Institutions
Simulation results: raising Region’s TTF development to 50% of EU15
level, largest trade gains from improving ports and IT applications
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Key ‘Behind-the-Border’ Reform Challenges:
Closed/Over-Regulated Services Sectors
Econometric evidence on the Region’s services sector reform:
leveraging the growth effects of increases in investment
Dependent
Variable
Per-capita GDP
growth
Per-capita GDP
growth
Per-capita GDP
growth
Per-capita GDP
growth
EBRD Infrastructure EBRD Non-Banking Financial EBRD Banking
Adj. R2 Constant Gross Domestic Fixed
Investment (% of GDP) Reform Index
Sector Reform Index
Sector Reform
0.13
-11.3
0.41
0.28
(-2.7)**
-16.1
(2.1)**
0.32
0.32
(-3.8)***
-14.4
(1.73)*
0.1
0.42
(-3.8)***
-16.8
-0.46
0.22
(-4.5)***
-1.3
4.23
(2.3)**
5.65
(2.65)**
Note: Coefficients and t-values in brackets, asterisks stand or significance at 10, 5 and
1% level
Number of observations: 23 for all equations
4.74
(3.37)***
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Key ‘Behind-the-Border’ Reform Challenges:
Low Levels of FDI Restrict Opportunities for Trade
Trade and FDI flows are complements: in the globalized economy,
participation in high value-added network trade is limited if FDI is low
90.00
80.00
70.00
60.00
Openness = 19.922+ 0.0148FDI
R 2 = 0.5491
Openness
50.00
40.00
30.00
20.00
10.00
0.00
0.00
1000.00
2000.00
3000.00
FDI
Source: Export data based on UN COMTRADE Statistics and IMF DOT Statistics; GDP at market prices
(current US$), DDP World Bank; Net FDI Inflow World Bank, World Development Indicators through SIMA
and UNCTAD World Investment Reports 1995-2003
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Key ‘Behind-the-Border’ Reform Challenges:
Rigid Factor Markets Can Worsen Poverty
 Labor mobility constrained where administrative mechanisms
engender wage uniformity, health and pension payroll taxes are
high, social safety nets are underdeveloped, or employment
protection is excessive.

Consequently, workers will face disincentives from moving
out of weakening sectors to growing ones, potentially
increasing poverty.
 Capital allocation/mobility patterns distorted where creditor
rights are weakly enforced or corporate governance incentives
are blunted

Undermines investment in higher valued activities and job
creation
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Priority Policy Recommendations
I. Trade Policy Reforms
 Reduce and simplify structure of tariff rates; eliminate NTBs
 Eliminate bias against exports to promote product
diversification
 Reform EU CAP and other OECD agriculture protections;
revise ‘Non-Market Economy’ anti-dumping designation
 Pursue vigorously WTO accession, especially in light of Doha
Round
 Rationalize and harmonize existing RTAs; make WTO-
consistent; and incorporate “new” trade issues, especially
services into RTAs
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Priority Policy Recommendations
II. Behind-the-Border Reforms
NB: Detailed policy recommendations are outlined in the study
 Encourage inter-enterprise competition
 Improve incentives for better governance
 Modernize trade facilitation infrastructure and institutions
 Liberalize investment in, and regulatory reform of services
 Reform FDI policy regime to attract global production sharing
participation
 Foster flexible factor markets to reduce poverty impacts from
changes in prices/output engendered by trade
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Linkages Between and Sequencing of
Reforms
 Policy reforms can be mutually supportive and reinforcing: e.g.,
further tariff reform will enhance import competition, which in
turn improves efficiency and increases export penetration
 Some actions non-controversial and done in the short- to
medium term: e.g., TA for institutional capacity-building
 Other reforms face political economy challenges or marshalling
resources and done in medium- to long-term: e.g., exposing
vested interests to FDI in services sectors; modernizing ports
 Sequencing of reforms can be critical: e.g., enhancing labor
mobility/strengthening social safety nets prior to liberalizing
imports; regulatory reform and strong competition law
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enforcement prior to liberalization of services
Action Plan for Stakeholders:
“The Division of Labor”
Developed Countries:
 Change ‘non-market economy’ designation for AD; OECD reform of
agriculture policy; facilitate EU/WTO accession
International Community (Donors and IFIs):
 TA and institution capacity-building: customs reform; competition
policy; governance reform; WTO and EU application process;
harmonization of RTAs
 Prevent poor CIS countries from “falling through the TA cracks”
Region’s Governments Themselves
 Rest of policy agenda—largely behind the border reforms—in the
Region’s countries’ hands
 Trade policy: tariffs; NTBs; anti-export bias; WTO; RTA reform
 Implementation of full BTB agenda: competition; governance; services
liberalization; TTF; FDI; factor mobility
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