Сергей Афонцев: Integration Dilemmas of the Common Economic SpaceНазад
Сергей Афонцев: Integration Dilemmas of the Common Economic Space
By S.A. Afontsev[1]
The paper addresses key political economy dilemmas associated with the formation of the Common Economic Space (CES) by Russia, Belarus, and Kazakhstan. The analysis is focused on alternative integration strategies, prospects of the CES enlargement, and elimination of trade and investment barriers. Unification of regulatory norms and technical standards using the EU experience as well as free trade agreements with the EU and countries of the Asia-Pacific are shown to be crucial for the future of the CES project.
Deeper economic integration on the post-Soviet space is a keynote priority of the Russian foreign policy crucial for playing more importnatimportant role in global affairs. Significant progress has been made in this area over the recent years: the Customs Union of Russia, Belarus and Kazakhstan was established in 2010 and the Common Economic Space was founded on its basis with an array of supranational institutions. The political will displayed by the leaderships of these three countries allowed to successfully overcome "the integration inertia" that had lingered on in the CIS region for long. Still further development of the CES integration project inevitably requires solution of some substantive questions with due account of
international experience of forming regional integration unions (RIU) and political economic interests of major integration actors, including governments of member states and prospective candidates for membership in the CES, as well as economic actors from respective countries. Yet traditionally studied dilemmas of integration processes - such as the contradiction between deepening and broadening of integration or the choice between the unified integration and the strategy of "mixed-speed integration" - are secondary in the CES case while others, no less politically acute dilemmas come to the forefront.
EU model or "new regionalism"?
Before the mid-1990s the majority of researchers and experts had proceeded from the existence of a single RIU model characterized with the dominant role of political drivers of integration and a high degree of institutionalization related to the transfer of a broad range of economic regulation functions to the supranational level. It was presumed that comparable levels of economic development and many common interests would provide steady progress of each newly formed RIU along kind of "an integration ladder": from a free trade zone, through a customs union and a common market, to an economic and currency union or even, possibly, political integration.
Ascent to every new "step" of integration implies the transfer of a broader range of functions to the supranational level in logical development of the previous stage of integration and creation of prerequisites for the transition to the next higher stage.
It became obvious in the second half of the 1990s that the only RIU consistent with the traditional "integration ladder" model was the European Union. On the contrary, the majority of RIUs, both newly formed and operating for a long time, clearly failed to fit the formula. The most significant distinction was that the majority of efficient RIUs resembled free trade zones either by their official or actual status, but showed no real signs of moving up the "integration ladder"[1]. Besides, economic rather than political factors shaped up regional groups. Political decisions were not an independent integration locomotive but responded to economic problems and integration initiatives coming directly from representatives of business communities.
The model dubbed "new regionalism" was developed further in the 2000th. On the one hand, there is a steady drift of free trade agreements towards the FTA Plus format, which is characterized not only by liberalization of trade between member countries but also liberalized movement of capitals, direct foreign investment in the first turn. On the other hand, the "new regionalism" model shaped up both RIUs and regional systems of bilateral and multilateral free trade accords (for instance, with participation of regional RIUs as full-fledged sides to the agreements). The process has been particularly active in the Asia Pacific region, which witnessed such landmark events as the free trade zone set up between the PRC and the ASEAN group in 2010 and the initiative of Free Trade Area of the Asia Pacific (FTAAP) supported by the APEC Vladivostok Summit Declaration in September 2012[2].
The experience of the CES integration project (an integration association in the form of a customs union with accelerated shift towards higher integration levels, establishment of duly authorized supranational institutions and the dominant role of political drivers in integration decisions) and statements of political leaders unambiguously indicate the wish to repeat the European Union "success story". Everything shows that the EU model is the main guideline for integration on the post-Soviet space. At the same time, there is a number of factors pointing to the urgent need to supplement the CES integration model with mechanisms typical of the "new regionalism" model:
- first of all, the scale of internal trade between CES member countries (approximately 15%) significantly lags behind the EU indices (over 60%) or even South American MERCOSUR[3]. Still an analysis of foreign trade of CES member countries shows that actually only Belarusian trade with Russia and Kazakh imports from Russia are crucial for foreign trade relations between relevant countries[4];
- secondly, present-day data does not indicate an outrunning growth of trade between member countries in the CES integration project. For instance, the pace of restoration of exports of Russia and Kazakhstan to CES partners in 2010-2011 was noticeably lower than the pace of restoration of aggregate export of Russia and Kazakhstan[5]. Belarus displayed maximal rates of growth of export to CES countries but trends were mixed even in that case. The growth of Belarusian exports to Russia and Kazakhstan in 2010 (43.4 and 35.9% respectively) appeared to be smaller than that of Belarusian exports to non-CES countries, Ukraine (63.0%), Moldova (47.0%) and Azerbaijan (42.7%)[6];
- thirdly, despite the considerable potential of investment and technological cooperation between CES member countries, economically developed countries that significantly surpass them in terms of technology and investment capacities will remain their main partners in this sphere in the foreseeable future. Against this backdrop cooperation in the "new regionalism" format between the CES and the EU (with the attainment of the goal of a free trade zone "from Lisbon to Vladivostok" proposed by V. Putin in 2010 and reaffirmed in the election campaign of 2012[7]), as well as with Asia Pacific countries will be a primary foreign economic objective. Negotiations on free trade zones involving Vietnam and South Korea may become pilot projects of paramount importance and that experience may later apply to CES interaction with other regional states.
Expansion rates: to hurry or not to hurry?
The question if there will be an expansion with new members (and if there s one, when and in what format will it be) has a crucial significance for the CES future. As of now, Ukraine, Kyrgyzstan and Tajikistan are being eyed as real candidates for joining the CES. Although these states objectively have a high potential for deepening cooperation with current CES members, there is a number of circumstances that make one cautious about the possibility of their accelerated accession to the CES:
1) WTO members Ukraine and Kyrgyzstan have a lower average level of import customs duties than CES countries. Pursuant to the WTO accession terms, Russia shall reach the average level of import duties at 7.1% upon the end of the interim period, which by far exceeds current indicators of Ukraine (less than 4%) and Kyrgyzstan (roughly 5%). Being the WTO countries, Ukraine and Kyrgyzstan cannot reconcile their import duties with the rates of the CES unified customs tariff (even after it is adjusted to Russian commitments to WTO) without facing sizable fines or even expulsion from that organization, which would cause irreparable reputation losses;
2) opinions about economic consequences of the CES broadening do not indicate a possibility of gaining tangible advantages both for current and potential member states. For instance, positive effects of Ukraine`s accession to the CES (excluding presumptions of an increase of the economy`s technological level) will have not exceeded 1% of GDP[8] by 2020. Optimistic forecasts of Ukrainian benefits from the entry into the CES published by the media (approximately $8-10 billion) are based on estimated effects from the reduced price of energy imports (as it has been done for Belarus). It must be remembered though that Ukrainian gains will be accompanied with equivalent losses of Russia, i.e. there will be no integration gains but pure transfer of wellbeing of Russian citizens to Ukrainian citizens[9]. Feasibility of this transfer causes questions, at least, from the point of view of Russian citizens interests;
3) there are significant political factors curbing down rates of possible expansion of the CES:
- in Ukraine this factor is the clear-cut orientation of a substantial part of the political and economic elites at closer cooperation with the EU substantiated with estimates of possible economic benefits from taking this step[10];
- applicably to Kyrgyzstan and Tajikistan, there is an additional risk that possible incorporation of these countries into the common customs space of the CES may greatly complicate Russia`s suppression of drug trafficking. Abolition of customs clearance for cargo from Kyrgyzstan and Tajikistan in the case of their affiliation to the CES will mean an increase in drug trafficking to Russia while a stricter "non-customs" regime (including police measures) to control cargo from these countries will create a breeding ground for corruption and Russia`s accusations of discriminating Kyrgyzstan and Tajikistan.
A combination of the aforesaid circumstances curbs one`s enthusiasm about prospects for broadening the CES with careful weighing of political benefits and risks of interaction with particular candidate countries and providing a positive balance of economic benefits from integration for all the participating states.
Integration areas: trade, what else?
An important feature of integration processes in the contemporary world is a combination of measures towards regulation of transboundary movement of goods, services, capitals and workforce and measures towards coordinated rules of economic regulation within national economies, including harmonization of technical standards, regimes of access to markets, tax systems and so on. The lack of such harmonization may become a factor slowing down cooperation to no less degree than "border" barriers (for instance, high costs of certification of imported products are a direct equivalent of import duties for importers).
. Currently, the CES has vast opportunities for making progress in both cooperation areas.
The fact that achievements in the harmonization of investment rules have been rather modest against the background of progress made in the development of unified mechanisms for regulation of foreign trade and labor migration[11] is critical for elimination of transboundary barriers. Therefore, it is necessary to give particular attention in 2013-2015 to the creation of a legal basis targeting liberalization and enhanced protection of mutual investments in CES member countries. At present, Belarus and Kazakhstan have ample investment options of interest to Russian companies. At the same time, problems with the access of Russian companies to assets on the territories of these states and, especially, protection of property rights to the acquired assets impede the use of these opportunities.
It is necessary to ensure maximal relaxation of procedures in mutual investment in CES member countries, in particular, in privatization of controlling stakes in state-run companies, and unconditional observation of investors` rights to the acquired assets (guarantees against nationalization, hostile takeovers and discriminative - applicable to particular companies - revision of regulatory terms). Any disputable situations concerning infringement of rights of investors, unless these are settled in court, should become a subject of public debates at the level of the Eurasian Economic Commission. It is of paramount importance to extend norms of liberalization and protection of mutual investments to all investor companies irrespective of their size and form of property (state companies shall have no priority over private companies).
Harmonization of national norms of economic regulation is an even thornier task. The establishment of the CES did not yield the anticipated rapid harmonization of national regulatory systems. The biggest hopes were pinned on Russian and Belarusian use of the positive example of Kazakhstan, which in the 2000th actively borrowed technical standards of EU countries and held an active policy towards improvement of the investment climate (elimination of administrative barriers, reduction of the tax burden, relaxation of the regulatory regime). Alas, the hopes have not come true. Even so, the CES formation created new barriers in a number of cases. For example, transit between Russia and Kazakhstan, which was earlier regarded as international travels, became a subject of VAT after the CES was founded. Therefore parts imported by Kazakhstan cost 12-15% more alongside higher transportation expenditures of Kazakh exporters[12]. The soonest elimination of these flaws, which compromise the very idea of profound integration, is a priority of the Eurasian Commission.
The next step towards harmonization of regulatory regimes of the three countries should be the soonest adaptation of technical standards of the European Union. In this context the Eurasian Economic Commission will need the authority to perform the following functions:
- firstly, direct borrowing (with possible grounded corrections, such as adjustment to other international standards) of EU technical standards in the areas where CES states have no technical standards;
- secondly, identification of areas where Russian and European standards and technical regulation parameters do not coincide and evaluation of expediency (or inexpediency) of applying EU standards in these spheres;
- thirdly, negotiations with relevant EU agencies with regard to mutual recognition of technical standards in the areas where harmonization of technical standards with EU standards is declared inexpedient.
Performance of these functions will bring positive results both for interaction between CES member countries, which may use time-tested experience of the European system of standards, and for development of cooperation with EU member states. The unified systems of standards will foster investment and technological cooperation and an increase in non-resource exports to EU countries. In the future harmonization of technical standards of the CES and the EU will be an important factor building up benefits of a free trade zone between the relevant integration blocs[13].
As to the development of more profound forms of integration linked with the transfer to the supranational level of certain functions in planning a macroeconomic policy or, especially, a shift to the common currency, such proposals should be mulled over very carefully. On the one hand, even current members of the CES differ significantly by the nature of macroeconomic challenges and macroeconomic policy priorities. The degree of macroeconomic heterogeneousness will grow in the case of further broadening of the CES. The eurozone crisis is a dramatic example of results of artificial application of unified macroeconomic policy standards in countries that objectively need different political instruments of response to different economic challenges. On the other hand, it is essential to concentrate integration efforts on the achievement of tangible and practical results to demonstrate CES benefits to the maximally broad range of economic entities. In other words, the emphasis should be shifted from the macro level to the micro level. Integration benefits must be felt in the first turn by businessmen and average consumers - in this case the CES integration project will enjoy broad support and have a possibility for sustainable development in the interests of the majority of citizens.
Integration Dilemmas of the Common Economic Space.
By S.A. Afontsev.
Summary: The paper addresses key political economy dilemmas associated with the formation of the Common Economic Space (CES) by Russia, Belarus, and Kazakhstan. Analysis is focused on alternative integration strategies, prospects of the CES enlargement, and elimination of trade and investment barriers. Unification of regulatory norms and technical standards using the EU experience as well as negotiating free trade agreements with the EU and countries of the Asia-Pacific are shown to be crucial for the future of the CES project.
[1] Sergey Alexandrovich Afontsev- Dr. of Economics, Professor of the MGIMO (U) of the MFA of Russia, Head of the Department of Modern Market Economy Theories of the Institute of World Economy and International Relations of the Russian Academy of Sciences. E-mail: afontsev@gmail.com
The article written during the research on International Political and Legal Aspects of Integration Processes Involving the Russian Federation done within the federal target program Scientific and Academic Personnel of Innovative Russia for 2009 - 2013. (Agreement No 8015).
Key words
Economic integration, Common economic space, new regionalism
Notes
[1] Afontsev S.А. From the Customs Union to the Common Economic Space: Possibilities and Risks // ЭCO. 2012,No 6. pp.94-112.
[2] 2012 Leaders` Declaration. Vladivostok Declaration - Integrate to Grow, Innovate to Prosper. Vladivostok, Russia, September 8-9, 2012 (http://www.apec.org/Meeting-Papers/Leaders-Declarations/2012/2012_aelm.aspx).
[3] Ivanter А. Surprises of Eurasian Venture // Expert, No 42(824), October 22, 2012 (http://expert.ru/expert/2012/42/syurprizyi-evrazijskogo-venchura);
[4] In 2011 Russia accounted for more than 30% of Belarusian exports, over 50% of Belarusian imports and more than 40% of Kazakh imports.
[5] In particular, Russian aggregate exports in 2011 stood at 110.3% as against 2008, while relevant indices of Russian exports to Kazakhstan and Belarus stood at 105.8% and 98%, respectively (www.cbr.ru; http://gtk.gov.by; http://www.stat.kz; http://www.tsouz.ru/db/stat/Pages/default.aspx).
[6] Results of Foreign Trade of the Republic of Belarus in January-December 2011 г. (http://gtk.gov.by/ru/stats/itogi_2011/jan_dek_2011).
[7] V. Putin: Russia and the Changing World // Moscow News, February 27, 2012.
[8] Ukraine and the Customs Union. Comprehensive analysis of macroeconomic effects of various forms of profound economic cooperation between Ukraine and member countries of the Customs Union and the Common Economic Space // Center for Integration Studies, Eurasian Development Bank, Report No1. 2012. pp.15.
[9] Importantly the positive influence of this transfer on the Ukrainian economy will be neutralized to a degree: Ukraine`s joining of the CES will mean an increase of the average level of import duties more than 2.5 fold and duties on investment goods more than 3.5 fold, which has to affect well-being of consumers and the investment process.
[10] Shepotylo O. A Gravity Model of Net Benefits of EU Membership: The Case of Ukraine // Journal of Economic Integration, 2010, v.25, no.4, pp.676-702.
[11] Labor migration in the CES: Analysis of economic effect and institutional and legal consequences of ratification of labor migration agreements // Center for Integration Studies, Eurasian Development Bank, Report No3. 2012.
[12] What problems are faced by businessmen from Customs Union states? // BNews.kz, 2 октября 2012 г. (http://www.bnews.kz/ru/news/post/103617).
[13] There is no research evaluating effects of a free trade zone between the CES and the EEC. Meanwhile, opinions about a free trade zone between Russia and the EU clearly show that the format would be beneficial for Russia, which gives a reason to say that a free trade zone between the CES and the EEC will meet Russian interests too. (Jarochinska E., Maliszevska M. and Scasny M. Modeling Economic, Social and Environmental Implications of a Free Trade Agreement between the European Union and the Russian Federation // CASE Network Reports no.93. Warsaw: CASE, 2010).
