Economy-Wide and Sector Effects of Russia s Accession to the WTO

Transcription

1 Economy-Wide and Sector Effects of Russia s Accession to the WTO by Jesper Jensen, Copenhagen Economics Thomas Rutherford, University of Colorado and David Tarr, The World Bank I. Introduction We believe it is important to assess the impact of WTO accession on labor markets, on the social situation (especially the poor), on different sectors of production and on different regions of Russian. As a first step in that process, it is important to obtain an assessment of the aggregate or macroeconomic effects of WTO accession, as well as the impacts on the productive sectors in Russia. In this discussion, we present our preliminary results. We present results on the aggregate effects, discuss which sectors will expand or contract and why, and we discuss the labor market effects by sector. Our principal results are that, overall, the Russian economy will gain about eight percent of the value of Russian consumption from WTO accession in the medium term. We expect wages to rise. The potential gains in the long run are much larger. Despite these gains, there are sectors that we estimate will lose from WTO accession. We find that export intensive sectors are likely to gains, while highly protected domestic sectors that do little exporting are the most likely losers. Labor in the business services sectors will likely gain from foreign direct investment, even if capital owners in these sectors lose. Prepared for the Ministry of Economic Development and Trade International Labor Organization conference in Saint Petersburg, Russia, February 21-22, The views expressed are those of the authors and do not necessarily reflect those of the World Bank. 1

2 II. Principles of Sector Analysis The following are some basic principles that will help understand which sectors should expand and which should contract: Not all sectors can expand in the medium term The economy has a limited amount of labor and capital. If labor and capital expand in some sectors, they must contract in others. Thus, some sectors contract or lose, relative to others. Not all sectors can contract Some commentators 1 fear WTO accession because they believe it will lead to widespread unemployment. The argue that reduction of tariff protection will lead to a surge of imports that will throw Russian workers into widespread unemployment. To this allegation, we pose a fundamental question: how will Russia pay for the imports? Foreigners will demand hard currency for their goods and services. Thus, the Russian economy will have to pay for the imports with hard currency. This means that Russia will have to export in order to pay for the imports. Tariff reduction leads to an increased demand for imports, but this increases the demand for hard currency, which depreciates the real value of the ruble. A depreciated ruble makes exporting more profitable. The ruble will depreciate so that Russia will be able to pay for the imports through increased exports; otherwise Russia won t be able to import more goods. The value of industry output will expand. We estimate that the economy gains from WTO accession overall. Thus, although some sectors will contract output, overall the value of output of all industries (GDP) and the payment to labor and capital will increase. III. Why does the economy gain and how much? We believe Russia will gain from WTO accession from four effects: Improved Market Access Russia has already negotiated most-favored nation (MFN) status on a bilateral basis with most of its important trading partners, 2 so Russia s exporters will not see an immediate reduction in the tariffs they face and this effect may not be expected to be large. But Russia will have improved rights under antidumping and countervailing duty investigations in the 1 Although Russia has a trade surplus and is investing capital abroad, the present investment decisions are not likely to be altered by WTO accession. That is, as long as Russians continue to invest abroad, that capital is not available for imports. 2 Poland and the Baltics are an exception. 2

3 export markets of WTO members, which is the source of the improved access we model. But given bilateral MFN status, improved access is not the main sources of gains. We estimate that the gains to Russia from improved market access are only about 0.5 percent of the value of Russian consumption, or slightly more than 5 percent of the total gains to Russia from WTO accession. Russian tariff reduction 3 Tariff reduction in Russia will lead to improved domestic resource allocation since tariff reduction induces the country to shift production to sectors where production is valued more highly based on world market prices. This impact, know as the gains from trade is the fundamental effect from trade liberalization is often stressed by international trade economists in the literature. In addition, Russian businesses will be able to more easily import modern technologies and this will increase Russian productivity. We estimate that the gains to Russia from tariff reduction are about 2.5 percent of the value of Russian consumption or about 30 percent of the total gains from WTO accession. Liberalization of barriers to foreign direct investment in services. Russian commitments to multinational service providers will encourage them to increase foreign direct investment to supply the Russian market. Russian businesses will then have improved access to the services of multinational service providers in areas like telecommunication, banking, insurance, transportation and other business services. This should lower the cost of doing business and increase productivity of Russian firms using these services. We estimate that the gains to Russia from liberalization of barriers to FDI in services are about 5.5 percent of the value of Russian consumption or almost 70 percent of the total gains to Russia of WTO accession. Potential growth effects Long run improvement of the investment climate should expand the capital stock. This could lead to much larger gains than we have described above. IV. The Model and Data We construct a computable general equilibrium model of the Russian economy. There are 35 sectors, expanded from the 22 sector Russian input-output table by S.P. Baranov. Primary factors include capital, skilled and unskilled labor, and sector-specific workers. Tariff data and trade data are taken from the Customs Committee of Russia and official publications available on the Russian government websites. Barriers to foreign direct investment have been estimated in key sectors by Russian experts. 3 After taking into account exemptions to the tariff, the collected tariff is about seven percent of the value of imports. 3

4 V. Results The actual tariff changes remain subject to negotiation. We assume that tariffs are reduced by 50% across the board, discriminatory taxes on multinationals service providers are removed, and seven exporting sectors 4 that have been subject to antidumping actions obtain improved export prices due to improved market access (from 0.5% 1.5%). The aggregate results have been discussed above. We now focus on the employment effects at the sector level. Sectors where employment will expand The sectors where we estimate employment will increase the most are ferrous metals, non-ferrous metals, chemicals, gas and telecommunications. The reason, for the first four, is that the real value of the ruble should slightly fall, which encourages exports. These are the sectors that export the most intensively and therefore gain the most from a fall in the value of the ruble. In addition, ferrous metals, non-ferrous metals and chemicals should receive improved treatment in antidumping actions. Sectors where employment will contract The sectors where employment is expected to contract the most are the food industry, light industry, construction materials and machinery and equipment. The reason is that these are the sectors in which the tariffs are relatively high (the first three are the only sectors with tariff over ten percent) and exports, as a share of output, are rather low in these sectors compared to the sectors we expect to see expand (so they benefit less from the fall in the real value of the ruble). 5 Services Sectors with liberalization of foreign direct investment barriers Some of these sectors expand employment, e.g., telecommunications and some transportation sectors. The demand for transportation services increases with an expansion of trade. In addition, Russian skilled workers may not have the same interests as the capital owners in these sectors, since new multinational entrants to the Russian market in these sectors will hire Russian workers. Although we estimate that employment will increase in most of these services sectors, the results for employment in these sectors are subject to a larger margin of error than in the other sectors because we need to obtain better information on how many expatriates multinational service providers use when they supply the Russian market. If multinationals use little Russian labor and mostly expatriates, then employment in these sectors could decline. We are obtaining expert estimates from Russian service institutes, which will allow us to reduce the margin of error in these estimates. 4 These are chemicals, ferrous metals, non-ferrous metals, light industry, food industry, other industries and other food producing industries. 5 Non-traded services also typically decline from the depreciation of the real exchange rate. 4

5 Summary of Employment Results In the figure, we summarize our central employment estimates and we also quantify the margin of error. For each sector, we show a line and a dark point. The dark point is the central estimate, or our best estimate. For example, we estimate that ferrous metals will increase employment by almost 20 percent. We run the model under numerous different assumptions about parameters in the model and produce a range of estimates. The bar represents the range of estimates. For example, our estimates of the percentage change in employment in ferrous metals ranges from 23 percent to 17 percent. The range of estimates is largest for the services sectors (for example, telecommunications ranges from 2 to 24 percent increase in employment). We have commissioned work to improve the parameter estimates in services sectors so that we can narrow the margin of error. VI. Conclusions Provision of national treatment to multinational service providers would provide very substantial gains to Russia from improved access to business services; this partly reflects the relatively protected domestic business services market. But tariff reduction can also provide significant gains. We estimate the Russian economy will gain about 8 percent of consumption in the medium term. Growth effects, form improving the investment climate in Russia, could produce gains several multiples of medium term gains we have estimated. On average we estimate that Russian industry and service providers will expand, but there are sectors that lose. A slightly depreciated real value of the Russian ruble and improved treatment in antidumping cases abroad are the primary reasons for expansion in industry. The sectors that depend on exports the most, gain the most and expand the most. This includes ferrous metals, non-ferrous metals, chemicals and gas. Sectors that do not export much and have relatively large tariff reductions decline the most. This includes light industry, food and machinery. Non-traded services also decline for the same reason. Interests in service sectors that compete with multinationals are diverse. Russian labor can work in the multinational firms, even if Russian capital owners lose due to increased competition from multinational service providers. 5

6 Unskilled Labor Impacts 6 Science and Science Servicing Food Industry Light Industry Other goods producing sectors Mechanical Engineering and Metal Working Administration and Public Association Pipelines Transportation Construction Materials Other industries. Post Agriculture and Forestry Geology and Hydrometeorology Education and culture and art Public health and sports and social security Maritime Transportation Timber and woodworking and pulp and paper industry Construction Other fuel industries Consumer services Oil extraction Oil processing Other transportation. Trade Public catering Railway transportation Financial services Air transportation Truck transportation Coal mining Chemical and oil chemical industry Gas Telecommunications Non ferrous metallurgy Ferrous metallurgy.