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Europe and Central Asia after the May 2004 EU enlargement: A brief synthesis
Economic Systems 29 (2005) 1–5 www.elsevier.com/locate/ecosys
Europe and Central Asia after the May 2004 EU enlargement: A brief synthesis§ John P. Bonin * Department of Economics, Wesleyan University, Middletown, CT 06459, USA Received 4 February 2005; received in revised form 6 February 2005; accepted 6 February 2005
Abstract This introduction provides a synthesis of the three papers in this symposium and its conclusion focusing on the potential trade between the Central Asian countries and the EU and highlights the impediments to achieving this potential. We argue that institutions matter and that, given the current level of institutional and infrastructure development in Central Asia, government intervention is necessary to establish a viable economic partnership. # 2005 Elsevier B.V. All rights reserved. JEL classification: C1; P2 Keywords: EU; Central Asia; Trade; Energy
1. Introduction By including countries in Eastern Europe, the May 2004 enlargement of the European Union (EU) has important economic consequences not only for these acceding countries but also for the Central Asian countries. The potential benefits of increased trade between the EU and Central Asia are large. In particular, the energy requirements of the enlarged EU suggest a natural economic partnership with the countries of the Caspian Sea region. The challenges posed by these developments and the policies required to reap these potential benefits are the focus of the papers in this symposium. § Symposium—EU–Central Asia: Economic Partnership; Guest Editor: Yelena Kalyuzhnova. * Tel.: +1 860 685 2353; fax: +1 860 685 2301. E-mail address: [email protected].
0939-3625/$ – see front matter # 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.ecosys.2005.02.001
2
J.P. Bonin / Economic Systems 29 (2005) 1–5
Understanding the development of trade in Central Asia evokes the literature on customs unions; a custom union provides a net benefit to its members if trade creation dominates trade diversion. Historically, the Central Asian countries belonged to the Soviet Union, which was an extreme example of a customs union organized to benefit mainly the Russian Federation. The Commonwealth of Independent States (CIS) is the successor of this trade arrangement linking the Central Asian countries to their Western neighbors. Broadly construed, these three papers address two related issues for the Central Asian countries. First, is the membership in the World Trade Organization (WTO) compatible or irreconcilable with regional trade associations (RTAs), especially among the Central Asian countries? Second, does a partnership between the EU and the Central Asian countries generate more trade creation than trade diversion? Regarding the first issue, membership in the WTO implies the multilateral destruction of barriers to trade leading to free trade without preferential treatment of neighboring countries. Of the Central Asian countries, only the Kyrgyz Republic belongs to the WTO. Richard Pomfret’s paper provides a detailed analysis of the tensions between WTO membership and the multifarious array of RTAs signed in Central Asia. Pomfret reports that foes of the WTO in the region point to the poor economic performance of the Kyrgyz Republic since joining the WTO in 1998. However, Pomfret argues that the problem was a failure on the part of Kyrgyz negotiators to make transitional arrangements. He concludes that China’s accession to the WTO in 2001, in which the Chinese negotiators were successful in winning transitional concessions even after 16 years of discussions, and Russia’s expected imminent accession make membership in the WTO more pressing for the Central Asian countries. Pomfret also seeks explanations for the lack of progress in actually implementing the numerous RTAs ratified among the Central Asian countries. Rather than the traditional explanation that trade diversion exceeds trade creation, Pomfret focuses on rent seeking behavior and the internal competition for leadership in the region as the primary reasons for the failed RTAs. If impediments prevent the implementing of RTAs in Central Asia, do similar constraints prevent these countries from realizing the potential benefits of trade with the EU? Babetskaia-Kukharchuk and Maurel (2004) use a gravity equation to demonstrate that current trade between the CIS countries and the EU is between 36 and 58% of its potential. Moreover, intra-CIS trade ranges from 722 to 2912% of gravity equation predictions. Furthermore, these authors measure current trade between the CIS countries and the rest of the world to be between 18 and 37% of its potential. These estimates indicate that trade diversion dominates intra-CIS trade and the potential benefit of trade with both the EU and the rest of the world are considerable for these countries. Babetskaia-Kukharchuk and Maurel conclude that institutions matter. They demonstrate that institutional convergence of the CIS countries to EU standards would lead to a potential increase in trade with the EU of 89%. These authors attribute about half of the current deficiency to the existence of rent seeking on black markets in the CIS countries. Sulamaa and Widgren (2003) use a computable general equilibrium model to contrast the recent EU enlargement to 25 countries (EU25) to the hypothetical integration of the EU and the CIS. These authors demonstrate that the expansion to the EU25 is beneficial to all regions in the EU and to all new members. In contrast, they show that a necessary condition
J.P. Bonin / Economic Systems 29 (2005) 1–5
3
for all CIS countries to benefit from integration with the EU is improved productivity through foreign direct investment and better institutions. Moreover, even if the necessary productivity improvements in the CIS countries are achieved, integrating the CIS with the EU would not result in net benefits for all EU regions. The last result may explain the motivation behind bilateral initiatives between an EU member and a Central Asian country in that cherry picking individual countries and certain commodities may be more beneficial than establishing free trade with the entire region. The remaining two papers in the symposium elaborate on these two themes, namely the impediments to the development of trade in CIS countries and the rationale for restrictive trade agreements between the EU and Central Asia. The paper by Raballand, Kunth, and Auty provides a detailed description of the salient features of trade both internal, within the CIS countries, and external, primarily between the EU and the CIS. First, after an initial jump following the dissolution of the Soviet Union, trade reorientation has stagnated for a decade in the CIS countries. Second, trade concentration is extremely high in the CIS as each country depends on only one or two commodities for more than half of its trade with the EU. Third, rent seeking impedes trade. Red tape and corruption at border crossings are impediments to trade within the CIS. Moreover, rail agencies act as rent-seeking monopolies in each country, e.g., exporters are required to ship large volumes on a regular basis and shippers are obliged to purchase the containers. Fourth, industrial policy favors certain commodities for export, e.g., metals. Raballand et al. point out that the overall low density of economic activity in the landlocked Central Asian countries makes scale-sensitive transport costs inordinately high. The authors undertake a careful and precise computation of transport costs, in terms of both money and time, and argue that transport costs are the main impediment to increasing external trade for these countries. In particular, they find a considerable spike in transport costs moving eastward from the EU at Warsaw and an even larger increase beyond Moscow. Hence, they conclude that expected trade enhancement for the Central Asian countries cannot be realized without policies designed to reduce transport costs. Although the authors offer this explanation as an alternative to institutional impediments, their analysis is complementary to the institutional argument. Their careful calculation of the time costs of transport indicates that institutions do indeed matter as they are the basis of the time impediments. Raballand et al. develop two interesting tangential themes. First, to avoid multiple border crossings, trade is diverted from land routes to sea routes. Their methodology affords an opportunity to compute the costs of this inefficiency to Central Asian trade. Second, varying densities of economic activity give rise to a growing urban/rural inequality gap in the Central Asian countries. As a large literature on this issue in China demonstrates, such regional poverty gaps can have significant public policy consequences. Wang (2004) provides a description of the hukou system that restricts labor migration in China to support and maintain the growing urban/rural disparities. Yelena Kalyuzhnova’s paper considers the benefits of a partnership between the EU and countries in the Caspian Sea region focused on energy exports to the EU. Kalyuzhnova presents the rationale for such an agreement by noting that the EU is the world’s largest energy importer, the main source of which is currently Russia, while the known oil reserves in the Caspian Sea basin are equal to those in the North Sea or the
4
J.P. Bonin / Economic Systems 29 (2005) 1–5
United States. In addition, oil production in the Caspian region has the potential to double over the next two decades, while oil consumption in the new expanded EU is greater. The structural problems preventing the Caspian Sea region from achieving its export potential in energy are documented in von Hirschhausen and Engerer (1999). Moreover, von Hirschhausen and Waelde (2001) discuss the impact of the growing institutional divergence between the East European economies and those of the former Soviet Union citing the possibility of the emergence of a Caspian State Economy. Kalyuzhnova identifies market failures in the energy sector that support government intervention in the form of bilateral agreements between the EU and the countries in the Caspian Sea region. However, the author also points out the transportation realities that require a multilateral approach to exporting energy from the Caspian Sea basin to the EU. Hence, she focuses on coordination problems that can be resolved by closer cooperation between the EU and the countries in the region. By drawing lessons from the North Sea experience for the Caspian Sea region, Kalyuzhnova demonstrates the importance of the government of a resource-rich country having the capability of responding to market failures. Hence, she concludes that the EU and the countries in the Caspian Sea basin are natural partners because of the energy match but that the private sector cannot arrange the necessary marriage by itself. Since sustainable growth and political stability in the region are at stake, government intervention is prescribed. Given its location, a rapid developing and perhaps equally suitable partner is waiting in the wings, namely China. Transportation costs and institutional issues would take center stage if a successful marriage were to be arranged in future with this partner. The symposium concludes with Watson’s overview focusing on the EU’s role in developing the necessary economic relationships with the Central Asian countries to promote sustainable growth in the region. Watson discusses the factors that retard the achievement of the trade potential between these countries and the EU, namely, institutional impediments, e.g., the lack of transparency and proper regulation, the slow development of the private sector, and infrastructure problems. He proposes regional strategies along an EU learning curve that begin to resolve these issues. Watson concludes by identifying the challenges that the EU faces in developing and maintaining economic relationships with the Central Asian countries. Although energy is a substantial inducement to attract EU initiatives in the region, institutional considerations are fundamental to building a solid foundation for a continuing mutually beneficial partnership. The papers in this symposium shed considerable light on these issues and draw useful policy prescriptions to advance this objective.
Acknowledgements I am extremely grateful to Yelena Kalyuzhnova for inviting me to participate as a discussant in the ACES panel session at the meetings in Philadelphia that spawned this interesting symposium and for asking me to write an introduction. I am very grateful to the other participants in the symposium from whose papers and presentations I learned much about this subject.
J.P. Bonin / Economic Systems 29 (2005) 1–5
5
References Babetskaia-Kukharchuk, O., Maurel, M., 2004. Russia’s accession to the WTO: the potential trade increase. J. Comp. Econ. 32, 680–699. Sulamaa, P., Widgren, M., 2003. EU enlargement and beyond: a simulation study of EU and CIS integration. CEPR Discussion Paper 3768, London. von Hirschhausen, C., Engerer, H., 1999. Energy in the Caspian Sea region in the late 1990s: the end of the boom? OPEC Rev. 23, 273–291. von Hirschhausen, C., Waelde, T.W., 2001. The end of the transition: an institutional interpretation of energy sector reform in Eastern Europe and the CIS. MOCT-MOST: Econ. Policy Transitional Econ. 11, 91–108. Wang, F., 2004. Reformed migration control and new targeted people: China’s hukou system in the 2000s. Chin. Q. 177, 115–132.
Europe and Central Asia after the May 2004 EU enlargement: A brief synthesis§ John P. Bonin * Department of Economics, Wesleyan University, Middletown, CT 06459, USA Received 4 February 2005; received in revised form 6 February 2005; accepted 6 February 2005
Abstract This introduction provides a synthesis of the three papers in this symposium and its conclusion focusing on the potential trade between the Central Asian countries and the EU and highlights the impediments to achieving this potential. We argue that institutions matter and that, given the current level of institutional and infrastructure development in Central Asia, government intervention is necessary to establish a viable economic partnership. # 2005 Elsevier B.V. All rights reserved. JEL classification: C1; P2 Keywords: EU; Central Asia; Trade; Energy
1. Introduction By including countries in Eastern Europe, the May 2004 enlargement of the European Union (EU) has important economic consequences not only for these acceding countries but also for the Central Asian countries. The potential benefits of increased trade between the EU and Central Asia are large. In particular, the energy requirements of the enlarged EU suggest a natural economic partnership with the countries of the Caspian Sea region. The challenges posed by these developments and the policies required to reap these potential benefits are the focus of the papers in this symposium. § Symposium—EU–Central Asia: Economic Partnership; Guest Editor: Yelena Kalyuzhnova. * Tel.: +1 860 685 2353; fax: +1 860 685 2301. E-mail address: [email protected].
0939-3625/$ – see front matter # 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.ecosys.2005.02.001
2
J.P. Bonin / Economic Systems 29 (2005) 1–5
Understanding the development of trade in Central Asia evokes the literature on customs unions; a custom union provides a net benefit to its members if trade creation dominates trade diversion. Historically, the Central Asian countries belonged to the Soviet Union, which was an extreme example of a customs union organized to benefit mainly the Russian Federation. The Commonwealth of Independent States (CIS) is the successor of this trade arrangement linking the Central Asian countries to their Western neighbors. Broadly construed, these three papers address two related issues for the Central Asian countries. First, is the membership in the World Trade Organization (WTO) compatible or irreconcilable with regional trade associations (RTAs), especially among the Central Asian countries? Second, does a partnership between the EU and the Central Asian countries generate more trade creation than trade diversion? Regarding the first issue, membership in the WTO implies the multilateral destruction of barriers to trade leading to free trade without preferential treatment of neighboring countries. Of the Central Asian countries, only the Kyrgyz Republic belongs to the WTO. Richard Pomfret’s paper provides a detailed analysis of the tensions between WTO membership and the multifarious array of RTAs signed in Central Asia. Pomfret reports that foes of the WTO in the region point to the poor economic performance of the Kyrgyz Republic since joining the WTO in 1998. However, Pomfret argues that the problem was a failure on the part of Kyrgyz negotiators to make transitional arrangements. He concludes that China’s accession to the WTO in 2001, in which the Chinese negotiators were successful in winning transitional concessions even after 16 years of discussions, and Russia’s expected imminent accession make membership in the WTO more pressing for the Central Asian countries. Pomfret also seeks explanations for the lack of progress in actually implementing the numerous RTAs ratified among the Central Asian countries. Rather than the traditional explanation that trade diversion exceeds trade creation, Pomfret focuses on rent seeking behavior and the internal competition for leadership in the region as the primary reasons for the failed RTAs. If impediments prevent the implementing of RTAs in Central Asia, do similar constraints prevent these countries from realizing the potential benefits of trade with the EU? Babetskaia-Kukharchuk and Maurel (2004) use a gravity equation to demonstrate that current trade between the CIS countries and the EU is between 36 and 58% of its potential. Moreover, intra-CIS trade ranges from 722 to 2912% of gravity equation predictions. Furthermore, these authors measure current trade between the CIS countries and the rest of the world to be between 18 and 37% of its potential. These estimates indicate that trade diversion dominates intra-CIS trade and the potential benefit of trade with both the EU and the rest of the world are considerable for these countries. Babetskaia-Kukharchuk and Maurel conclude that institutions matter. They demonstrate that institutional convergence of the CIS countries to EU standards would lead to a potential increase in trade with the EU of 89%. These authors attribute about half of the current deficiency to the existence of rent seeking on black markets in the CIS countries. Sulamaa and Widgren (2003) use a computable general equilibrium model to contrast the recent EU enlargement to 25 countries (EU25) to the hypothetical integration of the EU and the CIS. These authors demonstrate that the expansion to the EU25 is beneficial to all regions in the EU and to all new members. In contrast, they show that a necessary condition
J.P. Bonin / Economic Systems 29 (2005) 1–5
3
for all CIS countries to benefit from integration with the EU is improved productivity through foreign direct investment and better institutions. Moreover, even if the necessary productivity improvements in the CIS countries are achieved, integrating the CIS with the EU would not result in net benefits for all EU regions. The last result may explain the motivation behind bilateral initiatives between an EU member and a Central Asian country in that cherry picking individual countries and certain commodities may be more beneficial than establishing free trade with the entire region. The remaining two papers in the symposium elaborate on these two themes, namely the impediments to the development of trade in CIS countries and the rationale for restrictive trade agreements between the EU and Central Asia. The paper by Raballand, Kunth, and Auty provides a detailed description of the salient features of trade both internal, within the CIS countries, and external, primarily between the EU and the CIS. First, after an initial jump following the dissolution of the Soviet Union, trade reorientation has stagnated for a decade in the CIS countries. Second, trade concentration is extremely high in the CIS as each country depends on only one or two commodities for more than half of its trade with the EU. Third, rent seeking impedes trade. Red tape and corruption at border crossings are impediments to trade within the CIS. Moreover, rail agencies act as rent-seeking monopolies in each country, e.g., exporters are required to ship large volumes on a regular basis and shippers are obliged to purchase the containers. Fourth, industrial policy favors certain commodities for export, e.g., metals. Raballand et al. point out that the overall low density of economic activity in the landlocked Central Asian countries makes scale-sensitive transport costs inordinately high. The authors undertake a careful and precise computation of transport costs, in terms of both money and time, and argue that transport costs are the main impediment to increasing external trade for these countries. In particular, they find a considerable spike in transport costs moving eastward from the EU at Warsaw and an even larger increase beyond Moscow. Hence, they conclude that expected trade enhancement for the Central Asian countries cannot be realized without policies designed to reduce transport costs. Although the authors offer this explanation as an alternative to institutional impediments, their analysis is complementary to the institutional argument. Their careful calculation of the time costs of transport indicates that institutions do indeed matter as they are the basis of the time impediments. Raballand et al. develop two interesting tangential themes. First, to avoid multiple border crossings, trade is diverted from land routes to sea routes. Their methodology affords an opportunity to compute the costs of this inefficiency to Central Asian trade. Second, varying densities of economic activity give rise to a growing urban/rural inequality gap in the Central Asian countries. As a large literature on this issue in China demonstrates, such regional poverty gaps can have significant public policy consequences. Wang (2004) provides a description of the hukou system that restricts labor migration in China to support and maintain the growing urban/rural disparities. Yelena Kalyuzhnova’s paper considers the benefits of a partnership between the EU and countries in the Caspian Sea region focused on energy exports to the EU. Kalyuzhnova presents the rationale for such an agreement by noting that the EU is the world’s largest energy importer, the main source of which is currently Russia, while the known oil reserves in the Caspian Sea basin are equal to those in the North Sea or the
4
J.P. Bonin / Economic Systems 29 (2005) 1–5
United States. In addition, oil production in the Caspian region has the potential to double over the next two decades, while oil consumption in the new expanded EU is greater. The structural problems preventing the Caspian Sea region from achieving its export potential in energy are documented in von Hirschhausen and Engerer (1999). Moreover, von Hirschhausen and Waelde (2001) discuss the impact of the growing institutional divergence between the East European economies and those of the former Soviet Union citing the possibility of the emergence of a Caspian State Economy. Kalyuzhnova identifies market failures in the energy sector that support government intervention in the form of bilateral agreements between the EU and the countries in the Caspian Sea region. However, the author also points out the transportation realities that require a multilateral approach to exporting energy from the Caspian Sea basin to the EU. Hence, she focuses on coordination problems that can be resolved by closer cooperation between the EU and the countries in the region. By drawing lessons from the North Sea experience for the Caspian Sea region, Kalyuzhnova demonstrates the importance of the government of a resource-rich country having the capability of responding to market failures. Hence, she concludes that the EU and the countries in the Caspian Sea basin are natural partners because of the energy match but that the private sector cannot arrange the necessary marriage by itself. Since sustainable growth and political stability in the region are at stake, government intervention is prescribed. Given its location, a rapid developing and perhaps equally suitable partner is waiting in the wings, namely China. Transportation costs and institutional issues would take center stage if a successful marriage were to be arranged in future with this partner. The symposium concludes with Watson’s overview focusing on the EU’s role in developing the necessary economic relationships with the Central Asian countries to promote sustainable growth in the region. Watson discusses the factors that retard the achievement of the trade potential between these countries and the EU, namely, institutional impediments, e.g., the lack of transparency and proper regulation, the slow development of the private sector, and infrastructure problems. He proposes regional strategies along an EU learning curve that begin to resolve these issues. Watson concludes by identifying the challenges that the EU faces in developing and maintaining economic relationships with the Central Asian countries. Although energy is a substantial inducement to attract EU initiatives in the region, institutional considerations are fundamental to building a solid foundation for a continuing mutually beneficial partnership. The papers in this symposium shed considerable light on these issues and draw useful policy prescriptions to advance this objective.
Acknowledgements I am extremely grateful to Yelena Kalyuzhnova for inviting me to participate as a discussant in the ACES panel session at the meetings in Philadelphia that spawned this interesting symposium and for asking me to write an introduction. I am very grateful to the other participants in the symposium from whose papers and presentations I learned much about this subject.
J.P. Bonin / Economic Systems 29 (2005) 1–5
5
References Babetskaia-Kukharchuk, O., Maurel, M., 2004. Russia’s accession to the WTO: the potential trade increase. J. Comp. Econ. 32, 680–699. Sulamaa, P., Widgren, M., 2003. EU enlargement and beyond: a simulation study of EU and CIS integration. CEPR Discussion Paper 3768, London. von Hirschhausen, C., Engerer, H., 1999. Energy in the Caspian Sea region in the late 1990s: the end of the boom? OPEC Rev. 23, 273–291. von Hirschhausen, C., Waelde, T.W., 2001. The end of the transition: an institutional interpretation of energy sector reform in Eastern Europe and the CIS. MOCT-MOST: Econ. Policy Transitional Econ. 11, 91–108. Wang, F., 2004. Reformed migration control and new targeted people: China’s hukou system in the 2000s. Chin. Q. 177, 115–132.