FROM DISINTEGRATION TO REINTEGRATION EASTERN EUROPE AND THE FORMER SOVIET UNION IN INTERNATIONAL TRADE

1
FROM DISINTEGRATION TO REINTEGRATIONEASTERN
EUROPE AND THE FORMER SOVIET UNION IN
INTERNATIONAL TRADE

• Harry G. Broadman
• Economic Advisor
• The World Bank
• Washington, DC
• hbroadman_at_worldbank.org
• February 2006

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Coming Full Circle?

• For many centuries, the Eurasian continent
  participated inindeed at the center
  ofinternational 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 Regions 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 Regions countries have
  reintegrated internationally and actively trade
  with the rest of the world

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Main Questions

• I. Whyand howhave some countries in the Region
  internationally integrated moreand in different
  waysthan others, and what do the current trends
  portend for the medium term future?
• What are the implications for the Regions
  competitiveness and prospects for growth?

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Main Questions (contd)

• II. How does trade performance in todays 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 (contd)

• 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
  stakeholderspolicy-makers in the countries,
  developed countries and the international
  communityshould 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 newyet uneventrade 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 Regions countries hands actions also
  needed by developed countries and the
  international community (donors and IFIs)

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Contours of the Regions Reintegration

• In the last ten years
• Exports tripled
• Imports increased two and a half times
• Since 1995, the Regions trade has grown at a
  faster pace than any other in the world
• Today
• Trade comprises two-thirds of the Regions output
• Open trade now an important characteristic of
  many of the Regions economies sharp contrast to
  post-1917 period

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Contours of the Regions Reintegration (contd)
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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 (contd)

• 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 (contd)

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Two Emerging Trade Blocs (contd)

• 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 (contd)
Qualifiers to this stark 2-bloc dichotomy
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How Open Are the Regions 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.

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How is this Openness the Result of the Region
Liberalizing its Trade Policies?

• Much liberalization done unilaterally by the
  countries themselves through lowering tariffs,
  among other reforms
• 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
• 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 Regions tariff rates compare
  favorably with those of LDCs at similar income
  levels

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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 incentivesespecially
  competition and governanceled 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 allocationlabor
  and capitalwere created and the higher import
  levels exacerbated poverty

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How Has Trade Been Propelling Growth? (contd)

• 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
Source IMF DOT Statistics and EBRD

• 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-the-Border 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/SEEat mostintegrated 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
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

Softer budget constraints in CIS prevents
value-subtracting 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
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 Regions 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 ChallengesClosed/
Over-Regulated Services Sectors
Econometric evidence on the Regions services
sector reform leveraging the growth effects of
increases in investment
Note Coefficients and t-values in brackets,
asterisks stand or significance at 10, 5 and 1
level
Number of observations 23 for all equations
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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
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 RecommendationsI. 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
  enforcement prior to liberalization of services
  

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Action Plan for StakeholdersThe 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
• Regions Governments Themselves
• Rest of policy agendalargely behind the border
  reformsin the Regions 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