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ESAU WP16: Estimating Russia's Impact
on the Economic Performance of the Commonwealth of Independent States
since 1991 - The Cases of the Kyrgyz Republic, Tajikistan, Armenia,
Georgia and Ukraine
Melinda Robson, May 2006, £8.00, ISBN 0 85003 789 0
Executive Summary
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Context of Research
The assumption that the economic policy and performance of Russia
have a strong impact
on economic growth and development in the rest of the Commonwealth
of Independent
States (The CIS includes Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan,
Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and
Uzbekistan). (CIS) is widely made. However, justification for this
assumption is often simplistic, mainly based on comparable periods
of economic contraction and recovery across the region since the fall
of the Soviet Union. Empirical analysis of the origins, relative importance
and evolution of the transmission mechanisms linking Russia's economic
policy and performance to those of the CIS is lacking. The aim of
this paper therefore is to provide an empirical assessment of 'Russia's
influence' on CIS economic growth since the collapse of the Soviet
Union in 1991 and the onset of transition.
It is clear that the transmission mechanisms linking Russia's economic
policy and
performance to CIS growth evolved considerably during the 1990s. Whereas
prior to 1991
the Soviet satellites were tightly bound to the centrally planned
economy, the dissolution of
the Soviet system and the gradual integration of the CIS into the
global economy have
changed the structure and strength of CIS economic ties with Russia.
It appears that the
clearest impact of Russia's economic performance and policy on CIS
growth occurred in the
immediate aftermath of the break-up of the Soviet Union when the collapse
of the trade and
payments system and the cessation of fiscal transfers from Moscow
led to substantial
decline in output throughout the region. Variations in economic performance
across the CIS
suggest that some countries and sub-regions have been more successful
in overcoming
inherited economic distortions than others. In many cases, the traditional
strength of
Russia's influence on CIS economic performance appears to be declining,
whilst new
linkages (such as economic migration and remittances and political
gains through CIS
dependence on Russian energy supply and transit) are emerging. New
growth hubs, such as
the EU and China are becoming, or are already, important trading partners
for many CIS
countries. Hence the perception of 'Russia's regional economic influence'
should become
more nuanced in order to reflect these new realities.
Research Questions
The question of the extent to which Russia's economic policy and performance
impact on
CIS growth is very broad and the analysis requires a set of key research
questions and tight
methodology in order to produce clear and robust conclusions. As it
is difficult to generalise
for the whole of the CIS, the analysis in this paper is centred on
five case-study countries
(the Kyrgyz Republic, Tajikistan, Georgia, Armenia and Ukraine). The
research questions
are as follows:
What were the main economic pillars of the Soviet system prior
to its collapse and how
and to what extent did they foster economic dependence of the Soviet
satellites?
How has the economic performance of the five case-study countries
evolved since 1991,
including the extent to which inherited Soviet structures have been
overcome?
What have been the key determinants of growth in the case-study
countries since 1991?
What has Russia's contribution been to these determinants? Specifically:
i. What was the impact of the collapse of the command economy on
the key growth
determinants?
ii. How has Russia's contribution to the determinants changed over
time?
To what extent is the persistence of strong economic linkages
to Russia a cause or a
consequence of economic performance in the case-study countries?
Methodology for the empirical assessment
A growth simulation model for each country case study is suggested
to assess the statistical
significance by country of the key determinants of economic growth.
The independent
variables in the linear formation are: investment, export performance,
the terms of trade,
remittances and various forms of external finance (including short-term
and long-term
concessional and non-concessional flows).
The approach is to observe actual GDP (1995$) outcomes during the
1990s for the five case
studies and compare this with GDP simulated through a linear relationship
in which the
coefficients on the determinants of growth are 'retro-fitted' to
the growth performance
actually observed. This calibration is done by trial and error as
there are not enough data to
estimate them econometrically. Only those models that produce a
correlation coefficient
above 90% are used. Robustness is tested by means of varying parameter
estimates,
including testing at extreme values.
Russia's influence is then calculated by identifying and quantifying
Russia's contribution to
the key determinants concluded via the simulation exercise, and
is then measured by
undertaking two counter-factual simulations, the first simulating
a scenario in which the
economic linkages with Russia are removed entirely from 1990 onwards,
the second a
scenario in which the economic pillars of the Soviet system (including
trade and external
finance) are assumed to remain unchanged throughout the 1990s.
Key Findings
1. Economic dependence during the Soviet era: Prior to 1991, economic
dependence
between Moscow and the Soviet satellites was fostered by means of
several measures, the
most notable of which were: the central economy-wide plan which
geared production in the
satellites towards the Soviet market; the construction of infrastructure
primarily to transport
goods, services and factors of production within the Soviet space;
dependence on interrepublic
fiscal transfers for investment and consumption in the satellites;
trade diversion to
serve the CMEA; price distortion to maintain exports above and imports
below world prices;
dependence on a mono-bank system and wide circulation of Russian
currency. Overall,
these measures meant that the institutions and structures of statehood
across much of the
CIS were underdeveloped at the time of the collapse of the Soviet
system.
2. Economic performance since 1991: All the case-study countries
experienced strong
economic contraction at the outset of transition, with negative
growth rates for some
persisting until late in the 1990s. From 1991 these countries endured
rising external
imbalance (as the volume and value of trade within the CIS declined
before new markets
opened up), a decline in domestic investment and internal imbalance
(as the gap between
domestic investment and savings widened). During the 1990s, their
economic structures
shifted away from industry and towards services and agriculture.
Trade performance started
to pick up and there has been some export diversification to non-CIS
partners. However,
FDI inflows remain disappointingly low outside strategic sector
investments. Concentration
of exports in primary commodities raises questions about vulnerability
to external shocks
such as fluctuations in global prices. There is also a question
over whether these countries
are in fact moving towards realising their comparative advantage
by focusing on primary
commodities as their main exports, or whether this represents a
failure to diversify
successfully through the transition process. Furthermore, concentration
on primary
commodities makes diversification, which is required for employment
creation and poverty
reduction, more of an uphill struggle. From 2000 onwards, growth
performance across the
region has strengthened, although from a narrow export base and
limited domestic
diversification. Informal economic activity remains prevalent, particularly
in cross-border
activity such as shuttle trade and migration (reflecting regional
disparities in incomeearning
opportunities). Most of the case-study countries remain dependent
on flows of
concessional external finance from bilateral and multilateral providers,
with a sizeable part
of external bilateral debt still owed to CIS creditors.
3. Key determinants of growth: The factors influencing CIS growth
determinants appear to
have changed radically from the end of the 1980s to the present.
The case-study countries
underwent transition from a planning system, in which investment
and trade were
essentially politically determined, to a system based on market
signals. The respective
importance of key growth determinants was found, through the methodology
outlined
above, to vary between the country case studies. Investment and
exports were the key
determinants for all the case-study countries, but other variables
were found to be
significant in varying degrees for each case study. Remittances
were a significant growth
driver for Tajikistan and the South Caucasus, long-term counter-cyclical
concessional
finance for the South Caucasus and Central Asia, FDI for Armenia
and Georgia and shortterm
bilateral flows for the Kyrgyz Republic and the South Caucasus.
4. Russia's contribution determined: For all case-study countries,
with the notable
exception of Tajikistan, Russia's contribution to the key growth
determinants has declined
over time. Following the methodology outlined above, simulated GDP
under the
assumption that 1990 linkages with Russia remained constant produced
an estimated
cumulative difference with actual GDP as follows: Kyrgyz Republic
13.57%, Tajikistan 12.9%,
Armenia 27.69%, Georgia 7.7% and Ukraine 7.6%. In contrast, simulated
GDP under the
assumption of no economic linkages with Russia produced an estimated
cumulative
difference with actual GDP as follows: Kyrgyz Republic 7.27%, Tajikistan
19.8%, Armenia
14.8%, Georgia 2.4% and Ukraine 6.5%. Those countries inheriting
stronger economic ties
with Russia at the outset of transition (namely the Kyrgyz Republic,
Tajikistan and Armenia)
accordingly experienced the highest proportion of economic contraction
attributable to
Russia. Conversely, those that have undertaken robust policy and
structural reforms and/or
received large inflows of external finance from non-CIS sources,
have reduced their
dependence on traditional economic linkages with Russia.
Conclusion
The impact of the break-up of the command economy system appears
to represent the
clearest and strongest example of 'Russia's influence' on case study
country growth,
resulting in fiscal and terms-of-trade shocks that drove down domestic
investment rates and
export volume at the start of the transition period. The impact
was most severely felt in those
countries that were previously more tightly bound to the command
economy through fiscal
transfers, domestic production and export links (notably the Kyrgyz
Republic and
Tajikistan) and those sectors that were previously upheld by the
command economy (such
as military-related industrial production). Although the economic
linkage through interrepublic
fiscal transfers was relatively weaker in the other case-study countries,
they still
remained tightly bound to the Soviet economy through the inter-republic
trade system.
Their economic contraction was also exacerbated by civil conflict
(in the South Caucasus)
and absence of supportive institutions to manage the transition
to a market economy.
The methodology used in this paper suggests that, on the whole,
Russia's influence on casestudy
country growth appears to have declined over time, with the exception
of Tajikistan.
This appears to have been mainly the result of their trade diversification,
the structural
break in external finance from Russia, and their domestic investment,
plus the declining
proportion of debt to Russia in their total external debt. The ability
of the case-study
countries to overcome inherited economic ties with Russia has depended
on two main
factors: first, domestic policy, structural reforms and institutional
strengthening in enabling
them to achieve stabilisation and begin the transition to becoming
market economies, and
second, their ability to access non-CIS export markets, finance
and technology. Those
countries that are relatively more geographically isolated, have
weaker infrastructure links
and limited access to the outside world have been less successful
in diversifying away from
Russia than others.
New forms of economic linkage have evolved, particularly within
the informal sector
(economic migration, remittances and shuttle trade). Political economy
levers have become
a more mainstream form of Russia's influence, including through
strategic investment in
key sectors (particularly energy), debt-for-equity swaps or manipulation
of energy pricing
and supply. Russia would be able to influence case-study country
growth significantly
through these channels if it so chooses.
Overall, the methodology suggests that the strength and nature of
the economic linkages
between Russia and the case-study countries are still greater than
might be expected in
functioning market economies. The final question is whether this
is a cause or a
consequence of case-study country economic performance. The analysis
suggests that there
is no clear answer. On the one hand, the growth process in the case-study
countries depends
on the pace and nature of their domestic structural and policy reforms.
On the other hand,
Russia appears to influence the pace and nature of their reform
process both directly and
indirectly, particularly in those sectors of strategic importance.
In summary, traditional forms of Russia's influence on case-study
country growth have
generally declined during the transition. As a result, current economic
policy and
performance in Russia matter less, on the whole, than they did in
the early transition phase.
Those countries that have integrated into the global economy and
have undertaken robust
domestic policy and structural reforms have overcome inherited economic
distortions and
reduced their ties with the CIS and Russia to a greater degree than
the slower reformers.
However, for all the case-study countries new forms of economic
linkage with Russia are
emerging, most of which could have a significant impact on the key
determinants of their
economic growth.
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