Bakhrom Radjabov: What would economic liberals say about free trade in post-Soviet region?

20 марта 2014

Introduction

During the times of globalization intensification of global and regional trade relations is a usual trend both for developing and developed countries. Former post-Soviet space is not an exception from this trend. However, integration of post-Soviet republics into global trade system was uneven. For instance, Georgia, Kyrgyzstan, Tajikistan, Moldova, Ukraine and Russia are the members of WTO. Besides this Russia, Belarus and Kazakhstan have established Customers Union so as left within Free Trade Agreement of Commonwealth of Independent States (CIS) consisting of nine post-Soviet republics. Some post-Soviet republics such as Azerbaijan and Turkmenistan seem yet uninterested in any type of trade integration. Undoubtedly, deep analysis of the implications of different trade agreements on CIS countries requires exploration of tons of trade documents and detailed expertise of such implications on various sectors of domestic economies of the post-Soviet republics. This is not the ultimate goal of this work.

My initial goal is to answer to the following question: ‘Is free trade an effective tool beneficial for the economic development in post-Soviet republics?’ using theoretical approach of economic liberalism. While analyzing and interpreting the data as well as applying theory to particular cases I am going to focus on post-Soviet republics members of WTO (except Russia). I am not considering Russia for this analysis because I believe that Russian case requires separate research. I claim that free trade had diverse effects on post-Soviet republics and raised the need for political, economic and institutional changes in these countries to be better off from implementing free trade mechanisms.

Free trade system: increase in production, creation of better living conditions and national welfare

From the liberal perspective better living and working conditions should not be legislated but would be the natural outcome of free trade system. In this context, the liberal approach considers free trade system and free market as the tool to provide better living (and working) conditions as an outcome from the specialization in the sphere were country has comparative advantage. With specialization countries are able to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production. In the system of free trade that will lead to exchange of the goods and services produced with less opportunity costs. Thus, free trade creates positive conditions for developing countries to specialize in the sectors were they have higher relative efficiency. Subsequently, in the situation of free trade the welfare gains from the trade contribute to the national welfare. This of course does not mean that everybody will benefit from trade. However, overall, the national welfare will grow. This is also true according to Bhagwati, who argues: “The national formulation of the case for free trade is the one that predominantly shapes the policy debate. It posits national welfare as the objective of policy and proceeds to demonstrate that free trade will maximize national welfare” (Bhagwati, 1993: 18).

Free trade as anti-corruption measure

Free trade may be also designed to promote good democratic governance and fight corporate and government corruption among trading partners, through some transparency and anti-corruption standards and institutions for enforcement of transparent trade system. Such system will positively effect on political and economic reforms in developing countries, contribute to democratization of political system, rise of human freedom and human development. Thus, Free Trade Agreements as one of the prior instruments of free trade can promote political and economic reform by having strict conditions for establishing and enforcing anti-corruption laws and ensuring a basic level of political rights and civil liberties in developing countries. Without stricter anti-corruption and good democratic governance standards, the free trade agreements would lower import tariffs but fail to introduce greater transparency and competition into these country's economies and politics. This would effectively raise the profit margins for ruling elites, strengthening the power monopoly these elites have and creating less incentive for political and economic reform in the country.

Benefits of consumers from free trade

In free trade system, consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. Moreover, with more trade domestic firms will face more competition from abroad therefore there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices what will be an impetus to increase the competitiveness and decrease prices for goods on market. Thus, consumers importing goods (as well as producers exporting goods and having comparative advantage) will benefit from the free trade.

Free trade as a tool for economic development

The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, and efficiency and production levels. One more argument for free trade is that through free trade developing countries will have access to the markets of developed countries and benefit from free movement of technologies and investments from the developed countries what is definitely on the benefit of developing countries. In the practical dimension this means that the support of the free trade and Free Trade Agreements (FTA) makes trade a real developmental tool for developing countries.

Experience from post-Soviet republics

After the brief theoretical analysis let us look at several post-Soviet republics and their economic performance after joining WTO. Obviously, within this research it is absolutely impossible to give full picture of the trade impact on the economic development of the post-Soviet republics after joining WTO. Therefore, it was found sufficient to give some snapshots withdrawn from the reviewed literature.

For instance Irina Kolesnikova analyzing experience of post-Soviet countries newly acceded WTO argues the following regarding Moldovan economic performance: “we can conclude about the ambiguity of effects of the decision on accession of Moldova to the WTO. The country had every chance and tools to achieve more liberal conditions of its accession to the WTO. It would have been highly desirable to agree on better conditions both in terms of tariffs and timeframes of transition of the national economy to the WTO system. At the same time, there is evidence of positive economic development of Moldova in the WTO: the growth of GDP, FDI and trade” (retrieved February 14, 2014 from http://www.case-research.eu/sites/default/files/WTO%20Accession%20and%20Economic%20Development%20Experience%20of%20Newly%20Acceded%20Countries%20and%20Implications%20for%20Belarus_1.pdf).

Indeed, case of Moldova takes us to the possibility of both positive and negative impacts from joining WTO and following liberal approach. Actually, after joining WTO it became clear that national economy of Moldova was not completely ready for transition to WTO system so as to opening up without sufficient economic and institutional preparedness.

Let us now look at the same experience of Georgia. Again, Kolesnikova in her research finds that: “the experience of Georgia’s accession to the WTO shows that joining the WTO and simple trade liberalization can give impetus to economic growth only if they are complemented by strong and high-quality institutions” (retrieved February 14, 2014 from http://www.case-research.eu/sites/default/files/WTO%20Accession%20and%20Economic%20Development%20Experience%20of%20Newly%20Acceded%20Countries%20and%20Implications%20for%20Belarus_1.pdf).

Actually, Georgia was the first post-Soviet country member of WTO. Due to political will and clear liberal approach in economy and politics Georgia accessed WTO relatively fast and could benefit from the accession. But, in reality institutional challenges became a problem for this republic.

In case of another post-Soviet republic – Kyrgyzstan, things look different. Thus, Deputy Director of the National Institute of Strategic Studies, Dr. Chinara Esengul argues that: “Accession of Kyrgyzstan to WTO did not help but completely buried the concept of “local producer” (retrieved February 14, 2014 from http://fraza.ua/interview/05.12.13/181309/chinara_esengul_vto_ne_pomogla_naoborot_polnostju_pohoronila_ponjatie_mestnyj_proizvoditel.html). One of the reasons for that could be relatively poor implementation of WTO standards in Kyrgyzstan combined with institutional challenges in the country. Not to mention overwhelming political tensions in this post-Soviet republic that was not fixed after accession to WTO.

Kolesnikova points out completely different situation in the Ukraine. She tells that: “It should be noted that prior to the accession to the WTO, the economy before the crisis grew by an average of 7% annually. The year of accession to the WTO coincided with the crisis, which does not let us adequately assess the consequences of this step in economic terms. However, accession to WTO also indicate that the competitiveness of Ukrainian producers is still low and it is also necessary, in addition to trade liberalization, to take targeted steps to improve the competitiveness of the economy, taking into account the need for its restructuring. Otherwise, import growth will outpace exports, which will lead to significant macroeconomic imbalances” (retrieved February 14, 2014 from http://www.case-research.eu/sites/default/files/WTO%20Accession%20and%20Economic%20Development%20Experience%20of%20Newly%20Acceded%20Countries%20and%20Implications%20for%20Belarus_1.pdf).

It is fairly assumed that the case of Ukraine is simply incomparable with Moldovan, Georgian and Kyrgyz cases due to fundamental dissimilarities in the structure of domestic economy and structure of Ukrainian trade. Even within Soviet Union the Ukraine had much bigger share in trade and production (both industrial and agricultural) than Moldova, Georgia and Kyrgyzstan. However, as it was mentioned above domestic economy of the Ukraine still requires support and restructuring to improve its competitiveness.

Conclusion

To sum up, it is important to emphasize that free trade per se cannot be considered as panacea for economic development. Actually, theoretical overview and lessons learnt from case studies demonstrate that free trade in combination with economic and political reforms as well as institutional changes can be efficient instrument in the arsenal of macroeconomic measures for economic development in post-Soviet republics. Also, in the analysis of the impact of free trade on case study countries the structure and size of the domestic economies should not be disregarded. Answering to the question of the current analysis: ‘Is free trade an effective tool beneficial for the economic development in post-Soviet republics?’ the response would be ‘yes, if economic, political and institutional changes are also in place’.

By Bakhrom Radjabov, Master of Arts in Global Political Economy of the University of Kassel

Bibliography

Bhagwati, N. Jagdish. (1993): Fair Trade, Reciprocity, and Harmonization: The Novel Challenge to the Theory and Policy of Free Trade, in: Dominick Salvatore (ed.): Protectionism and World Welfare, Cambridge University Press, 17-53.

Brown, D. K. (2000): “International Trade and Core Labour Standards: A Survey of the Recent Literature”, OECD Labour Market and Social Policy Occasional Papers, No. 43, OECD Publishing.

Chang, Ha-Joon (2003): Kicking away the Ladder: Infant Industry Promotion in Historical Perspective, Oxford Development Studies, Vol. 31, No. 1, 21-31.

Scherrer, Christoph. (2007): International Workers’ Rights and Competitiveness. Labour, Capital and Society, 40 (1&2). 135-159.

Wahl, Asbjorn (2007): Labour and Development. What can be learnt from the Nordic Model?, in: Labour, Capital and Society Volume 40.

Woolcock, Stephen (2007): European Union policy towards Free Trade Agreements: ECIPE working paper.

WTO Accession and Economic Development: Experience of Newly Acceded Countries and Implications for Belarus. Retrieved February 14, 2014 from http://www.case-research.eu/sites/default/files/WTO%20Accession%20and%20Economic%20Development%20Experience%20of%20Newly%20Acceded%20Countries%20and%20Implications%20for%20Belarus_1.pdf

ВТО не помогла, наоборот — полностью похоронила понятие «местный производитель» Retrieved February 14, 2014 from http://fraza.ua/interview/05.12.13/181309/chinara_esengul_vto_ne_pomogla_naoborot_polnostju_pohoronila_ponjatie_mestnyj_proizvoditel.html
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