Location: Russia
The crisis in Ukraine and the Georgian economy
We analyze how the crisis in Ukraine will likely impact the Georgian economy and distinguish between short-run and long-run effects. We argue that the short-run effects are transmitted through trade and capital flows and that they are rather negative for Georgia and can hardly be bolstered. In the long-run, however, the crisis could improve the competitiveness of the Caucasus Transit Corridor, an important trading route between Europe and Central Asia Georgia participates in. We give recommendations how political decision makers could support such a development in the wake of an impairment of the northern Ukrainian transit routes.
Introduction
When Ukrainian President Victor Yanukovich decided not to sign the association agreement with the European Union and instead opted for a Russian package of long-term economic support, many Ukrainians perceived this not to be a purely economic decision. Rather, they feared this to be a renunciation of Western cultural and political values, and – to put it mildly – were not happy about this development.
The Russian political system, characterized by a prepotent president, constrained civil rights, and a government controlling important parts of the economy through its secret service, is not exactly the dream of young Ukrainians. Russia can offer economic carrots, but these do not count much against the soft power of Europe that comes in the form of political freedom, good governance, and economic development to the benefit of not just a small group of oligarchs.
Hence, it was all but surprising when many young Ukrainians took their anger about Yanukovich to the streets. After protests that lasted for nearly three months, President Yanukovich fled the country, a temporary government took over, and chaos broke out on the Crimean peninsula.
The dispute about the Crimea has the potential to impede the relations between Russia and the West for a long time to come, in particular if Russia enforces an annexation of the territory. Moreover, the tensions could quickly turn into a military conflict. The aircraft carrier USS George H.W. Bush was moved into an operational distance to the Crimea, accompanied by 20 smaller U.S. warships, and 12 additional fighter planes will be stationed in Poland. Yet even if there will be no direct confrontation between official Russian and U.S. forces, Ukraine could become the battleground of a proxy war, a kind of conflict that was common in the Cold War era. In this respect, one can already read the writing on the wall: the new Ukrainian government begs the U.S. for supplying arms and ammunition, and while the Obama administration is still reluctant to give in to such requests, the call is supported by hawkish U.S. congressmen who might finally prevail.
Ukraine is a country that is geographically close to Georgia and, like Georgia, has vital economic stakes in the Black Sea area. Georgia will not be unaffected by whatever happens in Kiev and Simferopol. In this policy brief, we will inform policy makers about the likely short-run and long-run economic consequences of the turmoil in Ukraine, discuss the challenges and opportunities that may arise, and derive some policy recommendations.
Short-run economic consequences
The crisis in Ukraine will almost instantaneously affect trade and capital flows between Georgia, Ukraine, and Russia. The effects will likely be negative and hit Georgia in a situation of economic recovery.
The Georgian real GDP growth rates were 6.3% in 2010, 7.2% in 2011, and 6.2% in 2012, and the real GDP per capita evolved from about 2,600 USD to about 3,500 USD in this time, but the upsurge discontinued in 2013 (if no other source is mentioned, figures presented in this policy brief (including those in the graphs) come from the Georgian statistical office GeoStat). ISET-PI, in its February 2014 report on the leading GDP indicators for Georgia, estimates the GDP in 2013 to be 2.6%, while GeoStat, the statistical office of Georgia, believes it to be 3.1%.
The unsatisfactory performance of the Georgian economy in 2013 was arguably caused by political uncertainties resulting from the government change that took place in late 2012, and as these uncertainties are largely overcome, most economists believe that Georgia will get back to its remarkable growth trajectory in 2014. The IMF, in its Economic Outlook, predicts a real GDP Growth of 6% in 2014, and the government of Georgia expects this number to be 5%. With an escalating crisis in Ukraine, it is questionable whether these rosy forecasts are still realistic.
Effects on imports
In 2013, Ukraine and Russia were the 3rd and the 4th largest importers to Georgia, respectively. Graph 1 shows the top five importers to Georgia, which together make up about 50% of total imports. The imports from Ukraine and Russia are mainly comprised of consumption goods: of all goods that were imported between 2009 and 2013 from Ukraine and Russia, about 30% were foodstuff. The ten main import goods in this time (in order of monetary volume) were cigarettes, sunflower oil, chocolate, bread, cakes, meat other than poultry, poultry, and sugar.
If the supply of these goods would be reduced through a breakdown of production and logistics, roadblocks, damaged infrastructure etc., the consequences for Georgia would not be utterly severe. From Ukraine and Russia, Georgia receives few goods that are (1) needed for investment projects and (2) cannot be produced domestically (an example of sophisticated investment goods that need to be imported would be ski lifts for tourism projects). Moreover, as Ukraine and Russia supply primarily standard goods that are produced almost everywhere, it is unlikely that a cutback in their imports would lead to sharp price rises in Georgia. Very quickly, increased imports from other countries would close any supply gaps. In addition, many imported consumption goods, like Ukrainian orange juice, are but luxury for ordinary Georgians, who buy their food in cheap domestic markets that sell almost exclusively local products.
Effects on exports
A small anecdote may illustrate the status of Georgian products in the Russian market. In the late 1940s and early 1950s, Stalin used to invite his comrades to his Kuntsevo dacha almost every night. At these occasions, he drank only semi-sweet Georgian red wine. His clique, usually preferring Russian vodka, adopted this habit out of fear to displease the dictator. Yet the real highlight of these nightly gatherings took place after midnight, when an opulent feast began, featuring all the delicacies of the Georgian cuisine. Through Stalin (and the fact that Georgia was a preferred destination of Soviet tourism), Georgian food obtained an excellent reputation in most countries of the former Soviet Union, and, to the dismay of Georgians, some younger Russians even do not know that Khinkali is not an originally Russian dish.
As can be seen in Graph 2, Russia and Ukraine are among the top 5 destinations for Georgian produce, together absorbing about 14% of total Georgian exports in 2013. In 2006, two Georgian products that are traditionally highly popular in Russia, namely wine and mineral water (the famous “Borjomi” brand), were banned from the Russian market. Yet in the wake of the diplomatic thaw that set in after the new government assumed power last year, this ban was lifted, and in 2013, the export of these goods regained momentum. In 2013, 68% of all wine exported from Georgia was sold in Russia and Ukraine (44 and 24 percentage points, respectively). In both countries, Georgian wines are sold at the higher end of the price range and are typically consumed by people with middle and high income. It is likely that these exports, in particular those to Ukraine, will be affected considerably by the crisis. This may happen through decreased demand for luxury foods and through a possible depreciation of the Ukrainian hryvna and the ruble vis-à-vis the Georgian lari.
Another sector that may be affected by the situation in Ukraine is the car re-export business. Georgia imports huge numbers of used cars from the U.S., Europe, and Japan, and passes them on to countries in the region. While this business hardly yields potential for real economic progress, it accounts for roughly 25% of Georgian exports! Of these 25%, about 7 percentage points go to Russia and Ukraine. Moreover, many cars are imported to Georgia on the land route from Europe through Ukraine and Russia (often driven by private, small-scale importers). If it will become more difficult to cross the border between Russia and Ukraine, this business, providing income to many low-skilled Georgians, may be at risk.
It should also be noted that Ukrainians and Russians make up an ever-increasing share of the tourists coming to Georgia (though the biggest group of tourists are Israelis). Also through this channel, an economic downturn in Ukraine and Russia will have unpleasant consequences for Georgia.
Effects on capital flows
According to the National Bank of Georgia, in 2013 a total of 801 mln USD was flowing in from Russia (see Graph 3). Ukraine contributed 45 mln USD to the money inflows, still significant for an economy as small as Georgia’s. An economic downturn in Russia and Ukraine would hit many Georgian citizens, often pensioners and elderly people, who depend on remittances of their children and other family members sent from these countries. This may aggravate a trend that already exists: in January 2014, money inflows decreased by 4% from Russia and by 5% from Ukraine (compared to January 2013).
Long-run economic consequences
Most of the economic dynamics Georgia experienced since 2003 was “catch up growth”. A country permeated by corruption, with a dysfunctional police and judicial system, without protection of property rights and contract enforcement, will grow almost automatically when the government restarts to fulfill its basic functions. Yet once this phase of returning to normal economic circumstances is over (Georgia probably is already in this situation), high growth rates can hardly be achieved without a strong export orientation of the economy, in particular when an economy is as small as Georgia’s. Most economists concerned with Georgia are therefore struggling to identify economic sectors where Georgia is in a good position to develop export potential. The National Competitiveness Report for Georgia, written in 2013 by the ISET Policy Institute on behalf of USAID, therefore extensively discusses the question what Georgia can deliver to the world. Though not related to export in a classical sense, the report points out that one of the advantages Georgia has is its geographical location, providing for possibilities to transform Georgia into a logistics hub.
There are three main routes to transport goods from Europe to the Central Asian countries (e.g. from Hamburg to Taraz in Kazakhstan). One route goes via the Baltic ports of Klaipeda or Riga, and then through Ukraine and Russia, and another route goes overland through Ukraine. A third one, the so called Caucasian Transit Corridor, has the Georgian port city of Poti and Turkey as its Western connection points, then goes through Georgia, Azerbaijan, and the Caspian Sea, and further east it splits up into a Kazakhstan and a Turkmenistan branch.
According to the Almaty based company Comprehensive Logistics Solutions, the fastest and cheapest route is the one through the Baltic ports. The transport from Hamburg to Taraz takes around 33 days and costs 6,220 USD per standard container. The overland transport via Ukraine takes around 34 days and costs 7,474 USD. Finally, transport through the CTC currently takes the longest time, namely around 40 days, and costs 6,896 USD.
Unlike many other economic activities, competition for transportation is more or less a zero-sum game played by nations. If transport through Ukraine and Russia will be restrained due to closed borders and political and economic instability, the total transport volume will not change substantially. Rather, instead of going through the northern routes, the goods will flow through the CTC. A similar development could be observed when the embargo against Iran was tightened and shipping goods through Iranian ports became increasingly difficult for Armenia and Azerbaijan. As a result, Azerbaijan, traditionally importing through Iran and exporting through Poti, now facilitates both its imports and exports through Poti.
This is a great chance for Georgia if it wants to become serious about transforming into a logistics hub. In our policy recommendations, we will speak about how to utilize on this opportunity.
Policy recommendations
Georgia can do little to bolster the short-run effects that are transmitted through the trade and capital flow channels. Political decision makers should be aware of problems that might arise for particularly vulnerable groups in the population, like pensioners who lose income in case remittances from Russia and Ukraine run dry, and help out with social support if necessary.
Regarding the long-run impact, Georgia should use this opportunity for gaining ground in the competition with northern transit routes. The Caucasus Transit Corridor can become much faster and cheaper if (a) a deepwater port and modern port facilities with warehouses will be built in Poti, (b) the road and train infrastructure will be improved, and (c) it will be easier to bring cargo over the Caspian Sea. Regarding the latter point, it would be important to assist Azerbaijan in improving the port management at Baku (in particular reducing corruption), and in reforming the monopolistic Azerbaijani State Caspian Sea Shipping Company.
Azerbaijan invests 775 mln USD into the Georgian part of the Baku-Tbilisi-Kars railway, proving their serious interest to upgrade CTC. Given this impressive commitment of Azerbaijan, Georgia should not stand back.
Conclusion
The crisis in Ukraine yields short-run risks and long-run opportunities for the Georgian economy. While there is little that can be done about the risks, the opportunities call for courageous steps to improve the Caucasus Transit Corridor. If the countries that hold stakes in the CTC are now further reducing the cost of transportation and make the route faster and more customer-friendly, the CTC may establish itself as the main trading route connecting Europe and Central Asia. Once critical investments have taken place, CTC’s advantage could be sustained beyond the current crisis. It is a competitive route that simply needs upgrading, which can happen now as a fallout of the conflict between Ukraine and Russia.
References
- Leading GDP Indicators for Georgia, The ISET Policy Institute, February 2014, http://www.iset-pi.ge/index.php?article_id=711
- The National Competitiveness Report for Georgia, The ISET Policy Institute, 2013, http://www.iset-pi.ge/index.php?article_id=713
- World Economic Outlook, The International Monetary Fund, October 2013, http://www.imf.org/external/pubs/ft/weo/2013/02/
The Application of Composite Leading Indicators on the Single Economic Space Economies
This brief is based on a CEFIR research project aimed at the short-term forecasting of socio-economic development of the member-countries of the Single Economic Space (SES), conducted for the Eurasian Economic Commission in 2013. This project focused on compiling composite leading indicators that could allow policymakers to identify phases of a business cycle and to forecast its turning points. We suggest a methodology for the selection of components of the Composite Leading Indicators (CLIs) for industrial production, and apply this methodology to predict industrial production in SES member states. Our methodology performs well for Russia and Kazakhstan, and slightly less so for Belarus.
Green Energy: A Solution For Climate Change?
This brief discusses the economic and political problems of so called green energy, a topic discussed at the 7th Energy Day recently organized by SITE. Green energy may be the only credible and feasible way to reduce carbon dioxide emission in the near future. However, a shift to a “greener” energy mix poses economic and political challenges which may impair the needed investments. This problem is further exacerbated by free-riding mechanisms associated with green energy investment. We suggest that investing and consuming renewable energies at the local level may be a way to internalize some the costs of the green energy.
There is a pressing need to cut pollution and the emission of greenhouse gases in the face of climate change and environmental damage. Since 1950s, global greenhouse gas emissions grew more than 5 times, and per capita emissions more than doubled.
Figure 1: Global CO2 Emissions from Fossil-Fuel Burning, Cement Manufacture, and Gas Flaring.
Source: Boden, T.A., G. Marland, and R.J. Andres. 2010. Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge
A substantial part of this growth in emissions, and associated global warming, is driven by human activity. In particular, the model experiments aimed at reproducing the dynamics of temperature change fail to consistently predict the recent years of temperature increase unless anthropogenic influence on the greenhouse emissions is taken into account.
Figure 2. Separating Human and Natural Influences on Climate.
The blue band shows how global average temperatures would have changed due to natural forces only, as simulated by climate models. The red band shows model projections of the effects of human and natural forces combined. The black line shows actual observed global average temperatures. Source: Global Climate Change Impacts in the United States, T. R. Karl, J. M. Melillo, and T. C. Peterson (eds.). Cambridge University Press, 2009.
With this perspective, it is not surprising that in the last decades investment in environmentally friendly energy has become one of the most common ways to address this issue around the world. However a shift to a “greener” energy mix is inevitably costly. The objective of this brief is to discuss economic as well as political costs of green energy. We do so by summarizing and extending the discussion that took place during the SITE 7th Energy Day which took place in November 2013 and was devoted to the challenges of green energy.
The Kaya Identity: Green energy, one of many possibilities
A frequently used approach when analyzing drivers of emissions is the so called Kaya Identity, originally developed by energy economist Yoichi Kaya. It relates global carbon dioxide emissions (CO2) from human activity to the level of economic activity (GDP), total world population (Pop), the energy intensity of economic activity and the carbon intensity of that energy use. The relationship can be summarized as the following identity (see Bradshaw (2013) for a detailed discussion on this topic):
CO2 emission = carbon intensity (CO2/E) * energy intensity (E/GDP) *GDP per capita (GDP/Pop) * Pop
The impact of these “Kaya” factors on the world carbon dioxide emissions varies, both across factors and over time. Figure 3 gives the International Energy Agency’s estimates for the period 1990-2035.
Figure 3. Impacts of four Kaya factors on world carbon dioxide emissions, 1990-2035 (index: 2007 = 1.0).
Source: International Energy Outlook IEA 2010
As is evident from the Kaya identity, greener energy represents only one possible solution to tackle environmental damage. The decomposition of the different components shown in figure 3 suggests that most of the future growth of emissions is predicted to come from increased output per capita and an increasing population. But taking actions to reduce these are not on the policy agenda in most countries. The two remaining alternatives then seem to be reducing energy intensity or the carbon content of economic activity.
Reducing energy intensity is often prescribed as the key solution and it is easy to see why this would be a preferred alternative for policy makers. It suggests that we need not cut back on standard and at the same time we would not have to alter the energy mix because increased efficiency in energy use will take care the needed reductions. It does indeed seem plausible that energy efficiency will continue to develop, in particular based on technological innovation, but there are problems with relying on this solution alone. First, as can be seen in figure 3, projections already include an optimistic development for this factor. Second, reducing energy intensity requires changing consumer behavior. Research suggests both that inducing such change is surprisingly difficult and also that changed behavior has a tendency of not lasting in the longer term (see for example Hunt and Rogers, 2013).
Taken together this suggests that reducing carbon intensity, that is, investing in “green energy”, may be the most important change when trying to cut CO2 emissions in the near future. This solution may also bring additional benefits. For example, once up and running, renewable energy production would not require a supply of inputs, thereby ensuring long-term sustainability. Renewable energy would allow the countries to diversify their energy portfolio, positively contributing to their energy security. Finally, renewables are geographically more dispersed than carbon-based fuels. This could contribute to strengthening user countries’ energy security.
The multiple dimensions of the green energy costs
There are, however, various costs associated with green energy. These are direct and indirect as well as economic and political. An obvious direct cost comes from the installment of a new technology, and modification of the existing network. In addition, investing in green energy is usually considered riskier than investing in conventional energy. As a consequence, government subsidies or guaranties to attract private investors (such as a feed-in tariff for the wind energy providers) have to be (and have been) provided by the state. Another concern with many types of green energy, especially wind power, is that the power generation can be highly intermittent. As a result, such renewable power generation requires backup technologies (such as open-cycle gas generation which have high carbon emissions), to be on stand-by to real-time match demand and supply. All of this may contribute to an energy price increase for the final consumers. Another component of massive green energy promotion and subsidization by the state is that it lowers the market share of the traditional energy providers, leading to costly (and likely unpopular) reallocation of labor and capital.
All of the above suggests that costly green energy decisions are difficult to “sell” to voters who face substantial instantaneous costs of green energy transition, but do not (immediately) enjoy future benefits of cleaner environment. This, coupled with the potentially short horizon of politicians (as compared to the horizon for the green energy benefits), risks undermining the political incentives to invest in the green alternatives. Moreover, green-motivated politicians are likely to face resistance from significant counter-lobbying by affected energy-intensive industries as well as by incumbent energy providers, which further increases the direct political costs of green energy.
There are also some indirect costs, or negative externalities, associated with green energy, some of which are not immediately obvious. For example, due to electricity network interconnection across countries, the intermittency of wind power affects the energy supply security not only locally but also at the regional level. A local congestion problem may thus become a regional costly problem. Furthermore, it is not obvious that investing in greener energy in some parts of the world, such as EU, would reduce aggregate world carbon dioxide emissions. Indeed the reduced demand for “dirty” carbon energy in Europe would reduce its world price, making it more affordable for countries with weaker environmental standards, which may respond by increasing their “dirty” energy consumption. Last, but not least, adopting a green policy may also have indirect political costs at intergovernmental level. For example, recent research shows that being the first country to adopt green energy policy may weaken its position in case of a collective agreement to reduce pollution (see Harstad, 2012).
The local solution
Summing up, lowering carbon intensity seems like an important component in reducing CO2 emissions with large benefits in terms of being long-run sustainable and low cost once the initial investments have been made. But there are also clear costs to governments, especially in the short-run, and also technological constraints with integrating green alternatives into a centralized electricity grid. Some of these problems make it especially difficult to agree on governmental and intergovernmental levels.
An interesting alternative possibility comes from facilitating the introduction of green alternatives on a smaller scale and on a more local level. It may seem paradoxical but the easiest way of introducing green alternatives may be in places that for various reasons are not yet connected to a centralized system or where gradual, initially small scale, introduction is possible. There are several examples of successful projects of this type (e.g., at SITE 7th Energy Day such projects were discussed by Fredrik Svinhufvud, in case of Ukraine, and Grigory Dudarev, in case of Russia).
The main challenge seems to be how to deal with the unevenness of energy production from sources such as wind or solar. In general, development of storage capacity seems to be of crucial importance, but this does not necessarily need to rely on advancements of battery technology. There are other ingenious examples of green storage technologies that have successfully been tried out in small scale. One such solution is using excess capacity when conditions are good to pump water into an elevated basin that acts as a reserve hydro-source of energy when wind or solar do not produce enough. The extent of the impact of such local solutions on reducing CO2 emissions is yet to be investigated.
References
- Hunt Allcott, and Todd Rogers, 2013, The Short-Run and Long-Run Effects of Behavioral Interventions: Experimental Evidence from Energy Conservation, NBER Working Paper 18492
- Mike Bradshaw, 2013, Global Energy Dilemmas, Wiley Publishing
- Bård Harstad, 2012, The Dynamics of Climate Agreements, mimeo
Putting the “I” Back in Team: The Rise of International Teams in Science
In this policy brief, I discuss the increasing prevalence of international teams in the production of scientific knowledge. I outline several potential factors that may explain these trends and discuss recent evidence from an original survey of coauthors on scientific papers regarding their collaboration behavior. Finally, as a notable example of increased international collaboration, I discuss the increase in scientific collaboration between Russia and the US after the end of the Cold War.
The Increase in Collaboration and Internationalization of Teams
Teams are becoming more prevalent in science. Both the share of papers produced by teams and the number of scientists working on scientific papers has increased in recent decades (Wuchty, Jones and Uzzi, 2007). Economic theory suggests that scientific research is becoming increasingly collaborative since the frontier of scientific knowledge has become more complex and specialized so that more researchers are needed to combine their expertise to make advances (Jones, 2009). Team members are also becoming more geographically dispersed: the share of papers resulting from international collaborations has increased, and within the US, scientists today are more likely to have coauthors located in a different city than before (Freeman, Ganguli and Murciano-Goroff, 2014).
These trends can be seen clearly in the graph below from the National Science Board’s Science and Engineering Indicators 2012. It shows the share of both world papers and US papers from 1990-2010 that are coauthored, coauthored with domestic coauthors only, and coauthored with at least one international coauthor. Collaboration in general and international collaboration have been increasing steadily since 1990 both in the world and in the US. However, for the US, the share of domestic-only collaborations has plateaued, while it is increasing in the rest of the world. In a recent Nature article, Adams (2013) shows that this trend similarly holds for other Western countries (United Kingdom, Germany, France, the Netherlands, Switzerland), while for emerging economies (China, India, South Korea, Brazil, Poland), domestic collaborations are also increasing.
Figure 1. World and US Trends in Scientific Collaboration, 1990-2010
Source: From National Science Board (2012)
Why has Science Become More International?
There are many potential reasons for the recent increases in international collaboration. An important factor has likely been the spread of the scientific workforce and R&D activities throughout the world (Freeman, 2010). The growing number of science and engineering PhDs in developing countries, some of whom are international students and post-docs returning to their home countries has expanded the supply of potential collaborators around the world (Scellato, Franzoni, and Stephan, 2012). Another factor is funding that has shifted scientific production towards international teams, as increased government and industry R&D spending in developing countries and grant policies by the European Union and other countries have supported international cooperation.
The lower cost of travel and communication in recent decades has also reduced the cost of collaborating with people in different locations. For example, Agrawal and Goldfarb (2008) show how the expansion of Bitnet, the precursor to the Internet, led to increased collaboration between institutions within the US. Finally, the location of scientific equipment and materials, such as the CERN Large Hadron Collider, telescopes, or climatological data available only in certain parts of the world, have increased international collaboration, and in some fields, has made international collaboration a necessity.
Survey Evidence on Scientific Collaborations
In a recent paper, my coauthors and I present the results of an original survey we conducted of scientists regarding collaboration (Freeman, Ganguli and Murciano-Goroff, 2014). In August 2012 we conducted a web-based survey of the corresponding authors of scientific papers with at least one US coauthor published in 2004, 2007, and 2010 in the fields of Nanotechnology, Biotechnology, and Particle Physics.
We customized each survey to ask the corresponding author about the collaboration and individual team members. The survey questions asked about how the team formed, how it communicated and interacted during the collaboration, the contribution of each coauthor, types of research funding, and the advantages and disadvantages of working with the team. We received 3,925 responses, so that our response rate was approximately 20%.
The survey also asked the respondent which country each coauthor was “primarily based in during the research and writing” of the article. This gives us a more accurate measure of whether teams are international than can be typically gleaned from publication data, which are based on author affiliations at the time of publication. Defining international teams from author affiliations alone can produce errors if affiliations change between the time the research was undertaken and the time of publication, or because some people have affiliations from more than one country.
Our analysis of the survey data uses the respondents’ information to define US collocated, US non-collocated and international teams. One of our key results is that face-to-face meetings continue to play an indispensible role in collaborations: most collaborators first met while working in the same institution. Teams also reported that while carrying out the research, they communicated often through face-to-face meetings, even with coauthors from distant locations.
Figure 2 below displays how the corresponding author responded about how they first met their team members. It shows that former colleagues play a very important role in the formation of international teams, followed by former students, conferences and institution visits, which equally contribute. The graph also shows the similarity between international teams and US non-collocated teams in how coauthors met. For other survey questions, our analysis also shows similarities between international teams and US non-collocated teams, suggesting that the salient issues are more about geography in general rather than necessarily about national borders.
Figure 2. How Coauthors First Met
Source: From Freeman, Ganguli and Murciano-Goroff (2014)
Another key finding from our survey is that the main reason for most collaborations, whether domestic or international, is to combine the specialized knowledge and skills of coauthors. We also asked the corresponding authors their views of the advantages and challenges of their collaboration. The most often cited advantage for all types of collaborations was “Complementing our knowledge, expertise and capabilities” and “learning from each other”. For the challenges, US non-collocated and international teams tended to agree more that there was “Insufficient time for communication”, “Problems coordinating with team members’ schedules”, and “Insufficient time to use a critical instrument, facility or infrastructure”, but international teams did not report these problems more often than US non-collocated teams. Where international teams differed is that these teams were the most likely to agree that their “research reached a wider audience”.
International Collaboration After the End of the USSR
A small but significant part of the increase in international collaboration since the 1990s can be attributed to the end of the Cold War. In “Russian-American Scientific Collaboration” (Ganguli, 2012), I examine trends in international collaboration by Russian and US scientists since the end of the USSR. Given the nature of the Cold War and restrictions on travel and communication with the West, I show that there was a dramatic increase in the number of publications with at least one Russian and a US coauthor from 1985 to 2005.
In addition to the lifting of travel and communication restrictions, there are several factors that contributed to the surge in collaborations between American and Russian scientists after the end of the USSR. First, at the level of the Russian government, there was a switch to a more open and collaborative approach to science. Part of this effort included establishing international centers for research in Russia aimed at integrating Russia into the global science community. Another important factor facilitating collaborations with Western researchers were foreign grant programs. The large increase in the emigration of Russian scientists in the 1990s to the West also contributed to international collaboration. After emigrating, many Russian scientists maintained close links to their colleagues in Russia, and coauthored papers with their former colleagues, which are counted as internationally coauthored publications.
While many of these factors have aided international cooperation after the end of the USSR, there have also been significant challenges that made cooperation difficult. Some of these challenges in the early 1990s included the political instability, organizational turnover making long-term funding agreements difficult to implement, difficulty transferring funds due to the underdeveloped banking system, high taxation and customs duties, lack of effective intellectual property rights, poor infrastructure, lack of a shared language (both linguistic and cultural), and external regulations (see further discussion in OECD, 1994). However, many of these challenges have now been overcome, leading to the continued increase in international collaboration between Russian and US scientists.
My analysis in Ganguli (2012) shows that the increase in Russian-American collaboration was more pronounced in some fields of science versus others, particularly in Physics. Figure 3 shows that the bulk of the articles published with Russian and American coauthors were Physics articles, with a sharp increase occurring immediately after 1991.
Figure 3. Russia-United States Publications By Field, 1985-2005
Source: From Ganguli (2012)
While some of the differences across the fields can be attributed to the number of scientists active in these fields, there are also other potential contributing factors. For example, it may be that there was greater emigration of scientists from certain fields abroad, and links between emigrants and those who remained in Russia persisted. Graham and Dezhina (2008: 24) suggest that over 50 percent of emigrants were physicists and mathematicians. Another reason may be that international collaboration was more important in some fields due to the knowledge or resources needed to conduct research during the economic crisis of the 1990s. As Wagner Brahmakulam, Peterson, Staheli, and Wong (2002) point out, physics research received significant amounts of US government funding for international collaboration, partly because expensive equipment that is needed and through collaboration, countries could share costs. Also, physicists from many countries often meet and work together at international research centers like CERN. Moreover, in some fields, the US and Russian governments shared priorities in funding international cooperation, like biomedical and health sciences, energy, physics, while there were gaps in some areas where Russia devoted resources and the US did not, like chemistry (Wagner et al. 2002: 24). Graham and Dezhina (2008: 141) also discuss how Western colleagues benefited from working with Russians especially in fields like zoology, botany and the earth sciences, since the Russian colleagues provided access to data from unique regions not available previously.
Support for International Teams?
This policy brief has discussed some reasons for the increase in international scientific collaboration and related empirical evidence, including insights from collaboration after the end of the USSR. The growth in collaboration and the geographic dispersion of teams is likely to continue; the frontier of scientific knowledge will become more complex and specialized, so that an even greater numbers of researchers will be needed to combine their expertise, and they are likely to be spread across increasingly distant locations.
These trends raise many complex issues for policymakers. For some countries, international collaboration may be the only way to sustain the science sector as the frontier of knowledge becomes more complex and resource-intensive. For some, international collaborations may increase the emigration of home-grown talent to wealthier countries. To what extent international collaboration should be supported, and how, will be important policy questions going forward. Typically, funding for international projects has been the main policy lever, and the Russian experience suggests that grant programs did play a critical role in that case. As our survey evidence in Freeman, Ganguli and Murciano-Goroff (2014) suggests, face-to-face meetings are especially important in forming and sustaining international collaborations. Thus, funding mechanisms that include provisions for research stays and face-to-face meetings may be the most effective means for fostering international collaborations.
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References
- Adams, J. (2013). “Collaborations: The Fourth Age of Research.” Nature, 497(7451), 557-560.
- Agrawal A, Goldfarb A (2008). “Restructuring Research: Communication Costs and the
- Democratization of University Innovation,” American Economic Review, 98(4):1578-1590.
- Freeman, Richard B. (2010). “Globalization of Scientific And Engineering Talent: International Mobility of Students, Workers, and Ideas and The World Economy.” Economics Of Innovation And New Technology, Volume 19, issue 5, 201 pp. 393-406.
- Freeman, Richard B., Ina Ganguli and Raviv Murciano-Goroff (2014). “Why and Wherefore of Increased Scientific Collaboration,” NBER Working Paper No. 19819, Issued in January 2014.
- Ganguli, Ina (2012). “Russian-American Scientific Collaboration” in Y.P. Tretyakov (ed), Russian-Аmerican Links: Leaps Forward and Backward in Academic Cooperation. St. Petersburg, Russia: Nestor-Historia, pp. 120-135.
- Graham, Loren and Irina Dezhina (2008). Science in the New Russia: Crisis, Aid, Reform. Bloomington and Indianapolis: Indiana University Press, 2008.
- Jones, Ben (2009). “The Burden of Knowledge and the ‘Death of the Renaissance Man’: Is
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Tajikistan Joining the Customs Union of Russia, Belarus and Kazakhstan: Pros and Cons
Authors: I.A. Densiova, A.M. Malokostov, and N.A. Turdyeva, CEFIR
In this brief we summarize the results obtained in a CEFIR research project on the economic impact of Tajikistan joining the Customs Union of Russia, Belarus and Kazakhstan conducted for the Eurasian Development Bank in 2013 (EBD, 2013). We argue that integration has to be comprehensive to be mutually beneficial: indeed, trade effects are marginal, and the highest stakes are at migration regulation in the CU member-countries and the investment opportunities in Tajikistan.
Integration Formations in the Monetary Sphere: the Possibility and the Necessity for Monetary Integration in the Post-Soviet Region
This policy brief addresses the possibility of monetary integration in the post-Soviet region. It provides a short overview of the literature devoted to the formation and development of the monetary unions, and argues that, based on this literature and real-world experiences, monetary integration can be of substantial value for the CIS states. However, such monetary union is not feasible in the near future due to weak economic integration of the national economies of the CIS countries, significant difference in their development level, and imbalances in allocation of bargaining power between the states. This policy brief suggests that a first step towards monetary integration could be an adoption of a supranational unit of account on the territory of the Customs Union between Russia, Belarus and Kazakhstan.
The modern world has observed formation of a number of economic and monetary integration communities. Their performance varies greatly: some of them are developing successfully, others, on the contrary, are stagnating. Questions concerning the possibility of economic and monetary integration in the post-Soviet space are constantly addressed both by policymakers and by academic economists. Taking into account theoretical concepts and international experience, this brief addresses the possibility and desirability of the integration of the monetary sphere of the post-Soviet region. Based on Luzgina (2013a,b), this brief proposes a form of representation of monetary integration on the early stages of its development. In this case, an early form of monetary integration may be achieved via adoption of a single supranational unit of account on the territory of (a subset of) countries; the national currencies would continue to coexist with the new supranational currency. This approach to integration would allow preserving the independence of economic policy for the involved member states. At the same time, countries would benefit from a reduction in transaction costs and increasing convergence of national economies.
Background: Theoretical Concepts and World Experience of Monetary Integration
Ideally, the monetary union should have the form of an optimum currency area (OCA), a territory of one-currency domination with high level of integration and unification in different economic spheres. Modern economic science provides two main approaches considering the possibility of constructing an optimal currency zone on the territory of several states. The first suggests that optimality should be determined on the basis of implementing a specific group of criteria by countries. Among the main criteria, freedom of goods movement, labor and capital, openness and diversification of the economy, the synchronization inflation rates as well as integration in the financial sector can be mentioned. The second approach is based on a comparison of the benefits and costs in terms of the monetary union formation of the country with the highest economic potential. In practice, when studying the effectiveness of monetary integration, a synthesized approach is used. It includes evaluating by criteria, as well as taking into account costs and benefits that a country accrues in case of entering a particular monetary group. The main benefits of a monetary union include a reduction of transaction costs, trade relations enlargement, improving the discipline in the monetary sphere, and a reduction of the rate of international reserve sufficiency for every country-member. At the same time, there are some negative aspects of deep integration, such as loss of monetary policy independence, economic imbalances in case of weak convergence of national economies, loss of (part of) seigniorage income, and a possible negative public reaction to the adoption of a single currency.
When discussing the concept of monetary integration, it is important to understand the distinction between a monetary union and an optimum currency area. A monetary union is one of the most developed forms of a currency area, which implies a rigid anchor of national currencies to each other with a possible further transformation into the currency of the leading country, or to a single supranational currency (as in the case of the European Union). In this case, a monetary union can be formed of asymmetrical economies. Instead, the optimum currency area requires mandatory implementation of the main convergence criteria, and thereby, more symmetry/alignment among the members. Thus, a monetary union does not necessarily have to be an optimum currency area, while the optimum currency area has every opportunity to be transformed into a full-fledged monetary union [1].
Historically, there have been several examples of monetary union formations. The Italian monetary union (1862-1905), which was formed through the merger of disparate Italian lands, is among them. We can also identify the Scandinavian Monetary Union, which united Norway, Denmark and Sweden (1875-1917). The Austro-Hungarian monetary union existed in the period from 1867 to 1914. Currently, we observe formations of monetary unions in Africa, Latin America and the Arab states.
Despite the implementation of a number of integration projects within the various groups of countries over the past century, only the European states were able to achieve the highest form of monetary integration. It took them more than 50 years to do this, and the integration processes in the economic and monetary fields are continuing with new Member States joining the European Union. However, despite the detailed development plans for the implementation of a monetary union, the Eurozone countries face a number of difficulties and obstacles on the path of economic development. European monetary integration brings not only benefits, but also some costs. For example, the loss of independence of monetary policy creates obstacles in regulations of economic processes.
This discussion suggests that an assessment of the potential formation of a monetary union – that is, of desirability, feasibility and level of monetary integration within a particular group of countries – should be based on relating theoretical concepts and features of the countries in question, as well as a in-depth research of the experience of other currency unions.
Integration Processes in the Post-Soviet Space
At the territory of the former Soviet Union, integration projects have been implemented for more than 20 years. After the collapse of the Soviet Union, such integration formations as the Commonwealth of Independent States and the Eurasian Economic Community were created. Belarus, Kazakhstan and Russia have built a Customs Union (CU) and a Common Economic Space (CES). There is also a possibility of making a transition to the highest form of integration – a monetary union. However, this raises a number of questions: which CIS countries should join a monetary union, when should this be done, and what is the optimal form of monetary union for integrating countries.
Luzgina (2013b) shows that, within the framework of the CIS countries, that there are significant differences in many of the macroeconomic indicators. Countries differ in terms of GDP and the growth rates of investment and prices. For example, Belarus has the highest inflation in the post-Soviet region. The source of growth also differs: for example, a number of countries, such as Azerbaijan, Russia and Kazakhstan, owe a significant part of their economic growth to the availability of natural resources, but this is not universally true within the CIS. Dynamics of population income is also significantly different among the countries. Here, Russia occupies the leading position with its average wage at the beginning of 2012 reaching 780 USD. At the same time, in Tajikistan, the average wage amounts to only 110 USD.
Another concern is that the formation of an economic and monetary union implies free movement of labor and capital. However, at this stage of development, it can lead to some negative consequences. Free movement of labor could involve a massive flow of labor from depressed areas to regions where incomes are much higher. This may create pressure on health and social services in the latter regions. In turn, free movement of capital may cause speculative attacks on the financial markets. At the same time, the CIS countries, except Russia, Kazakhstan and Ukraine, do not have large gold reserves. Therefore, the free movement of capital flows without additional support may cause a crisis within the national financial systems. Out of all the gold reserves of the CIS countries, more than 85% of the total volume is owned by Russia. In the case of an abolition of restrictions on capital flows, countries that are exposed to speculative attacks are likely to ask Russia for help. Such a situation would require Russia to use its own financial resources, which would create an additional pressure on its international reserves.
Table 1. International reserves in the CIS countries, (million US dollars)|
Country |
2008 |
2010 |
2012 |
|
Azerbaijan |
6467,2 |
6409,1 |
11277,3 |
|
Armenia |
1406,8 |
1865,8 |
1799,4 |
|
Belarus |
3063,2 |
5025,4 |
8095 |
|
Kazakhstan |
19883,1 |
28264,7 |
28299,4 |
|
Kirgizstan |
1225,1 |
1720,4 |
2066,7 |
|
Moldova |
1672,4 |
1717,7 |
2515 |
|
Russia |
426278,8 |
479222,3 |
537816,4 |
|
Tajikistan |
163,5 |
403,1 |
630,7 |
|
Ukraine |
31543,3 |
34571,3 |
24552,8 |
Russia is leading among the CIS countries in terms of population and territory, with other countries lagging substantially behind. For example, Belarus owns less than 1% of the total territory of the CIS countries and less than 4% of the population.
Relying on the above quantitative indicators it is natural to expect that in case of a formation of a monetary union with a single emission center, the distribution of votes in the decision-making of the development and implementation of monetary policy is likely to be unequal. The leading role would likely belong to Russia, which has the largest economic potential. However, other countries in this case may be in a less advantageous position as Russia’s decisions may lead to undesirable consequences for the economies of other countries, given the lack of a sufficient degree of synchronization of national economic systems.
Thus, a weak degree of economic integration of the national economies of the CIS countries, different levels of development, as well as the superiority of the economic potential of Russia over the other states gives reason to argue for a non-feasibility of monetary integration within the CIS countries in the short term.
On the other hand, it may be reasonable to consider the possibility of integration in the monetary sphere on the basis of the most economically integrated countries, namely Russia, Belarus and Kazakhstan. These countries have created a Customs Union and are implementing a project of forming a Common Economic Space. There are plans of creating the Eurasian Economic Union. In addition, based on the experience of European countries, it might be easier to start the integration within a limited number of participants, which satisfy the required convergence criteria. Later, more countries may enter the monetary union.
Prospects for Monetary Integration of Belarus, Kazakhstan and Russia
Taking into account the experience of the European Union, we note the need for close trade and technological relations, as well as a market type of economy, and unification of the legislation in the economic sphere. Some of these elements of monetary integration are observed within the CU. After the collapse of the Soviet Union, economies of the former Soviet states switched to paths of market reforms. In addition, the CU countries have rather close trade relations; they have restored the old and created new means of communication. At the same time, there is a weak degree of diversification of exports and imports. A large part of export and import are represented by raw materials.
The second important point of the monetary integration is the comparability by size of the emerging economies. In the framework of the Customs Union, Russia is the only leader. Harmonization of relations between the alliance partners would be easier in the case of smaller countries coordinating their efforts, which would allow them to defend their interests along with the large member-states.
Finally, obligatory condition of monetary integration is the fulfillment of convergence indicators (certain values of macroeconomic indicators) by all association members. In Luzgina (2013b), we compare a range of such indicators, as based on the experience of the European Union. We use indicators such as the inflation rate, public debt, budget deficit, and the dynamics of exchange rates for comparison. The study reveals that the main differences lie in the monetary indicators, namely the rate of inflation and exchange rate. In addition, there are certain differences in the structure of the economy and the share of private ownership in GDP.
Figure 1. Exchange Rate (average for a year), as % of the previous year
Figure 2. Industrial Producer Price Index (average for a year), as % of the previous year
Source: Data of the Interstate Statistical Committee of the Commonwealth of the Independent State
The persistence of significant differences in the values of convergence indicators at the macro level makes a full-fledged monetary union highly unlikely in the short term, even within the framework of the three most economically integrated states. At the same time, it is appropriate to consider the option of monetary integration in its mild form, i.e. in the form of monetary integration on the basis of a single unit of account. A single unit of account is usually calculated on the basis of the basket of national currencies, and is mostly used for international payments and credits.
The attractiveness of monetary integration in the form of monetary union on the basis of a supranational unit of account is motivated; first of all, by the preservation of the economic sovereignty of all countries. Circulation of the unit of account would take place in parallel with national currencies. Member states would retain the possibility of implementation of independent monetary and fiscal policies. Furthermore, the unit of account may fulfill the role of a training tool. The supranational payment unit can be used on the national level. Using this unit of account, legal entities may carry out transactions and individuals may hold their savings. It can also be actively implemented in the inter-state calculations. A part of gold and forex reserves of member countries can be held in the supranational unit of account. Inter-state loans can be issued in this unit as well. This type of monetary union would reveal the feasibility of further deepening of integration in the monetary sphere and determine the timing of the formation of a full-fledged monetary union. In case of serious problems, the dismantling of the currency union will not cause major adverse changes in national economies, unlike in the case of a collapse of a monetary union with a single currency. In addition, the operation of a single unit of account allows for the anticipation of potential problems associated with the functioning of economies under a single monetary system, and a solution before the introduction of a supranational currency.
Last, but not least, this form of integration seems to be a relatively feasible option as the process of convergence on the territory of the CU countries in the monetary sphere has already begun. There is an increased use of national currencies in bilateral trade, harmonization of national legislation is taking place in the monetary sphere, and international agreements in the monetary sphere are ratified. These activities are gradually building a base for the realization of the monetary integration project of the union countries.
Conclusions
Economic and monetary integration allows the countries to get the maximum benefit from mutual cooperation. However, the deepening of the integration process is usually accompanied by certain difficulties. Convergence of economic systems requires transformation of economic institutions, changes in legislation and principles of management, all of which are costly to achieve. The better the preliminary harmonization is performed, the easier the process of adaptation of national economies to function within a particular economic and monetary union will be.
The post-Soviet countries are implementing several projects of economic integration. However, their economies have major differences according to a number of macroeconomic indicators. The greatest degree of convergence is reached only by three CIS states, namely Belarus, Russia and Kazakhstan. Rather high level of economic integration, as well as a continuation of the process of unification and harmonization of national economies allows us to study the feasibility of realizing the lightweight form of a monetary integration based on a single supranational unit of account on the territories of Belarus, Kazakhstan and Russia.
▪
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Managed Competition in Health Insurance Systems in Central and Eastern Europe
This policy brief summarizes common trends in the development of health care systems in the Czech Republic, Slovakia, and Russia in late 1990s–early 2000s. These countries focused on regulated competition between multiple health insurance companies. However, excessive regulation led to various deficiencies of the model. In particular, improvements in such quality indicators of the three health care systems as infant and under-five mortality are unrelated to the presence of multiple insurers or insurer competition.
A number of transition countries in Central and Eastern Europe and the former Soviet Union introduced health care systems with compulsory enrollment, obligatory insurance contributions unrelated to need and coverage according to a specified package of medical services. This so-called social health insurance (SHI) model (Culyer, 2005) is regarded as a means for achieving universal coverage, stable financial revenues, and consumer equity (Balabanova et al. 2012; Gordeev et al., 2011; Zweifel and Breyer, 2006; Preker et al., 2002). While most transition countries chose to only have a single health insurance provider on the market, the Czech Republic, Slovakia, and Russia allowed competitive (and often private) insurers in the new system. However, the evidence from the three countries shows excessive regulation of health insurers and limited instruments for insurer competition within indebted post-reform health care systems (Naigovzina and Filatov, 2010; Besstremyannaya, 2009; Medved et al., 2005). Consequently, the three countries may have been over-enthusiastic in putting large emphasis on market forces in the reorganization of health care systems in economies with a legacy of central planning (Diamond, 2002).
This brief addresses the results of Besstremyannaya (2010), which assesses the impact of private health insurance companies on the quality of health care system. While various performance measures reflect different goals of national and regional health care systems (Joumard et al., 2010; Propper and Wilson, 2006; OECD, 2004; WHO, 2000), aggregate health outcomes directly related to the quality of health care are commonly infant and under-five mortality (Lawson et al., 2012; Gottret and Schieber, 2006; Wagstaff and Claeson, 2004; Filmer and Pritchett, 1999). Consequently, Besstremyannaya’s (2010) analysis regards mortality indicators as variables reflecting the overall quality of health care system.
The estimations employ data on Russian regions in 2000-2006. The results indicate that regions with only private health insurers have lower infant and under-five mortality. However, given the low degree of competition on the social health insurance market in Russia, we hypothesize that this effect is mostly driven by positive institutional reforms in those regions. Indeed, incorporating the effect of institutional financial environment, we find that the impact of private health insurers becomes insignificant.
Development of a Social Health Insurance Model in the Czech Republic, Slovakia, and Russia
At the beginning of their economic transition, the Czech Republic, Slovakia, and Russia established a model for universal coverage of citizens by mandatory health insurance (Balabanova et al., 2012; Medved et al., 2005; Sheiman, 1991). The revenues of the new SHI system came from a special payroll tax and from government payments for health care provision to the non-working population. The main reason for combining certain features of taxation-based and insurance-based systems was the desire to establish mandatory health insurance as a reliable source of financing in an environment with unstable budgetary revenues (Lawson and Nemec, 2003; Preker et al., 2002; Sheiman, 1994). The insurance systems instituted in the three transition countries correspond to the major SHI principles implemented in Western Europe: contributions by beneficiaries according to their ability to pay; transparency in the flow of funds; and free access to care based on clinical need (Jacobs and Goddard, 2002).
The Czech Republic, Slovakia, and Russia placed emphasis on regulated competition, decreeing that SHI should be offered by multiple private insurance companies with a free choice of the insurer by consumers. Managers of private insurance companies were assumed to perform better than government executives (Lawson and Nemec, 2003; Sinuraya, 2000; Curtis et al., 1995), so an intermediary role for private insurance companies was seen as a key instrument for introducing market incentives and improving the quality of the health care system (Sheiman, 1991).
However, the activity of health insurance companies in the three countries was heavily regulated, since the content of benefit packages, size of subscriber contributions, and the methods of provider reimbursement were decided by government, and tariffs for health care were frequently revised (Lawson et al., 2012; Rokosova et al., 2005; Zaborovskaya et al., 2005; Praznovcova et al., 2003; Hussey and Anderson, 2003). In particular, Russian health care authorities enforced rigid assignments of areas, whose residents were to be served by a particular health insurance company (Twigg, 1999) and imposed informal agreements with health insurance companies to finance providers regardless of the quality and quantity of the health care (Blam and Kovalev, 2006). As a result, the three countries experienced an initial emergence of a large number of health insurance companies, followed by mergers between them, resulting in high market concentration (Sergeeva, 2006; Zaborovskaya et al., 2005; Medved et al., 2005).
In Russia, the Health Insurance Law (1991) specified that until private insurers appeared in a region, the regional SHI fund or its branches could play the role of insurance companies. Therefore, several types of SHI systems emerged in Russian regions in the 1990s and early 2000s: the regional SHI fund might be the only agent on the SHI market; the regional SHI fund might have branches, acting as insurance companies; SHI might be offered exclusively by private insurance companies; or SHI might be offered by both private insurance companies and branches of the regional SHI fund (Figure 1). The variety of SHI systems reflects the fact that many regions opposed market entry by private insurance companies (Twigg, 1999). Indeed, the boards of directors of regional SHI funds usually included regional government officials (Tompson, 2007; Tragakes and Lessof, 2003) who were reluctant to reduce government control over SHI financing sources (Blam and Kovalev, 2006; Twigg, 2001). The controversy with health insurance legislation created a substantial confusion at the regional and the municipal level (Danishevski et al., 2006).
Figure 1. Health insurance agents in Russia in 2000-2006, (number of regions) 
This context suggests that Russian regions provide an interesting study field to address the impact of private health insurance companies on the quality of health care system. In particular, the wide variety of SHI systems across Russian regions, as well as the gradual introduction of the health insurance model in Russia provide a sufficient degree of variation in practices and outcomes to allow for a well-specified empirical analysis.
Data and Results
In our analysis we use data on Russian regional economies between 2000 and 2006 (as based on data availability). Our measures of health outcomes are given by the pooled regional data on infant and under-five mortality. Our key explanatory variable is the presence of only private health insurers in the region. Arguably, the coexistence of public and private health insurance companies does not enable effective functioning of private health insurers owing to their discrimination by the territorial health insurance fund. Therefore, in the empirical estimations we focus on the presence of only private health insurers in the region, regarding it as a measure of effective health insurance model. The analysis also employs a variety of important socio-economic and geographic variables influencing health outcomes (per capita gross regional product (GRP), share of private and public health care expenditure in gross regional product, share of urban population, average temperature in January).
The results of the first set of our empirical estimations demonstrate that the presence of only private health insurers in a region leads to lower infant and under-five mortality. Furthermore, an increase in the share of private health care expenditure in GRP leads to a decrease in both mortality indicators. The result is consistent with numerous findings about the association between personal income and health status in Russia (Balabanova et al., 2012; Sparling, 2008).
Prospective reimbursement of health care providers is associated with a decrease in infant and under-five mortality. The finding suggests the existence of a quasi-insurance mechanism in the Russian SHI market. Operating in an institutional environment where provider reimbursement is based on prospective payment, private insurance companies in effect shift a part of their risk to providers (Glied, 2000; Sheiman, 1997; Chernichovsky et al., 1996).
Table 1. Factors leading to decreased infant and under-five mortality in Russia
Although our analysis shows that the presence of only private health insurers is statistically associated with improvements in infant and under-five mortality, we believe that the influence is indirect. Namely, the overall positive institutional environment in the region may result in both a decrease of mortality indicators and a lower coercion of regional authorities towards the presence of private health insurance companies.
To test this hypothesis, we use financial risk in a region as a measure of institutional environment and incorporate it in the analysis through an instrumental variable approach. (We measure financial risk by an expertly determined rank ordered variable by RA expert rating agency; this variable reflects the balance of the budgets of enterprises and governments in the region, with lower ranks corresponding to smaller risk.)
In line with our hypothesis, the results suggest that the presence of private health insurance companies now becomes insignificant in explaining infant and under-five mortality.
Discussion
The existing literature suggests that the improvement in infant and under-five mortality in the Czech Republic, Slovakia, and Russia can be attributed primarily to an increase of health care spending (Gordeev et al. 2011; Besstremyannaya, 2009; Lawson and Nemec, 2003) rather than being an effect of the social health insurance model with multiple competing insurers. It should be noted that insufficient government payments for the non-working population and a decline of the gross domestic product in the early transition years left SHI systems in the three countries indebted (Naigovzina and Filatov, 2010; Sheiman, 2006; Medved et al., 2005), which undermined the development of the managed competition in the health care provision.
In Russia (and also in the Czech Republic and Slovakia) there is little competition between insurers, and surveys show that the main factors causing consumers to change their health insurance company are change of work or residence, and not dissatisfaction with the insurer (Baranov and Sklyar, 2009). The fact that law suits on defense of SHI patient rights are rarely submitted to courts through health insurers (Federal Mandatory Health Insurance Fund, 2005) may also be evidence of the failure of Russian health insurance companies to win customers on the basis of their competitive strengths.
Summary and Policy Implications
The above findings as well as the other mentioned literature suggest that improvements of infant and under-five mortality in the Czech Republic, Slovakia, and Russia are not associated with the positive role of managed competition in the social health insurance system. In particular, in Russia the decrease in infant and under-five mortality is likely to be related to financial environment, rather than the existence of insurance mechanisms or competition between health insurance companies. One possible explanation of this absence of effect may come from the excessive regulation of the private insurance markets, as well as the insufficient competition between insurers. Importantly, the health insurance reform, implemented in Russia in 2010, both addressed underfinancing (by raising payroll tax rates) and took a step towards fostering provider competition, by allowing private providers to enter the social health insurance market (Besstremyannaya 2013). However, insurance companies are still not endowed with effective instruments for encouraging quality by providers, which may greatly undermine their efficiency.
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- Sinuraya T. 2000. Decentralization of the health care system and territorial medical insurance coverage in Russia: friend or foe? European Jthenal of Health Law 7:15–27.
- Sparling AS. 2008. Income, drug, and health: evidence from Russian elderly women. PhD dissertation. University North Carolina at Chapel Hill, UMI Dissertations Publishing.
- Tompson W. 2007. Healthcare reform in Russia: problems and perspectives. Working Papers 538, OECD Economics Department
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- Twigg J. 1999. Obligatory medical insurance in Russia: the participants’ perspective. Social Science and Medicine 49: 371–382.
- Twigg, JL. 2001. Russian healthcare reform at the regional level: status and impact. Post-Soviet Geography and Economics 42: 202–219.
- Zaborovskaya AS, Chernets VA, Shishkin SV. 2005. Organizatsiya upravleniya i finansirovaniya zdravoohraneniyem v subjektah Rossijskoi Federatsii v 2004 godu (Organization of management and finance of healthcare in Russian regions in 2004)
- Zweifel P, Breyer F. The economics of social health insurance. In The Elgar Companion to Health Economics, Jones A. (ed.), Edward Elgar, 2006.
- Wagstaff A. 2010. Social health insurance reexamined. Health Economics 19: 503–517.
The Customs Union Between Russia, Belarus and Kazakhstan: Some Evidence from the New Tariff Rates and Trade Flows
Author: Arevik Mkrtchyan, European University Institute.
This brief addresses the Customs Union between Russia, Belarus and Kazakhstan that was established in 2010. It argues that the external tariff schedule reflects a compromise between the interests of its members rather than simple expansion of Russian influence on the CU partners, and that the reduction in trade costs due to elimination of internal borders, benefits both the members of the CU and their external trade partners. Moreover, the impact of alleviated non-tariff trade costs on trade flows is strong and significant, while the tariff impact is insignificant for all members.
The European Commission against Gazprom: Should Gas Contracting Arrangement Be Changed?
This policy brief discusses EC’s claim that Gazprom abuses its dominant position. I argue that parts of the claim, like denying Third Party Access, are warranted but others related to the contracts offered by Gazprom to different Member States need not be. In fact, major market players in Europe offer similar contracting forms. In this case, the literature on the competitive effect of long-term supply contracts have stressed that such effect depends on the exact contract arrangement. For example, offering multi-years contract may indeed increase the competition on one part of the market. Having a gas supply contract with a price fully linked to the price of a gas hub may on the other hand reduce the competition among big gas suppliers. Hence, the assessment of Gazprom’s abuse of dominant position should be based on a careful analysis of the many contracting forms that have been agreed between Gazprom and customers in the Member States.
On the 4th of September 2012, the European Commission (EC) opened a proceeding against Gazprom, investigating whether Gazprom has abused its dominant market position in Central and Eastern Europe’s gas supply (see http://europa.eu/rapid/press-release_IP-12-937_en.htm?locale=en). The allegation relies on two different points. First, Gazprom has been accused of denying access to its network pipeline when requested by competing gas supplier. Second, the contractual arrangement offered by Gazprom itself has been under scrutiny. A Gazprom contract usually includes a “destination clause”, that forbids any gas reselling by the buyer. Moreover, the typical Gazprom contract usually specifies a fixed quantity (with a take or pay clause) at a price indexed to the oil price (see Sartori, 2013 for a more extensive description of the EC’s proceeding.)
The objective of this policy brief is to discuss the EC’s claim of Gazprom’s abuse of dominant position. I argue that while the denial of Third Party Access appears as an obvious case of abuse of dominant position, the contractual arrangements offered by Gazprom need not be.
Characterization of Gazprom’s Abuse of Dominant Position
Denying access to Gazprom’s pipelines limits competition and thereby benefits Gazprom as controlling a pipeline constitutes a natural monopoly. This fact has been recognized for a long time with the requirement for a third party access to gas networks in the EU Gas Directive (Directive 2009/73/EC). The first part of the proceeding thus seems to be justified.
The EC proceeding also found that the contractual arrangements offered by Gazprom reflected an abuse of dominant position. The claim is that Gazprom locked in its customers. When signing a contract with Gazprom, buyers agreed on a fixed quantity irrespective of their “real” consumption (“take or pay” clause) and are not allowed to resale ex post excess quantity on the market (“destination clause”). Given that gas contracts usually are signed for many years, the lock-in period can be long. Moreover, the price of the gas contract is usually pegged to the oil price so that it reflects current supply and demand conditions for oil rather than for gas. One implication is that the contracted gas prices did not reflect the severe drop in the gas market price in 2008 (BP report, 2012).
The EC’s allegation that Gazprom has abused its dominant position is thus based not only on the fact that Gazprom is denying third party access to its pipelines but also on the long term contracts with a fixed quantity and an oil indexed price.
Next, I argue that the second part of the claim is questionable. Forcing Gazprom to propose contracts with flexible quantities, shorter contract lengths and no indexation to the oil price may not limit the abuse of Gazprom’s dominance. Depending on the exact contract arrangement (quantity, duration, and indexation), the abuse of dominant position could be more or less severe.
Contract Arrangement and Market Competition
It is important to stress that the major gas suppliers of Europe, like Sonatrach or Statoil, offer similar contract arrangements. So, are long-term supply contract arrangements pro or anticompetitive given that all major competitors use such contracts? The answer to this question typically depends on the contractual details. In what follows, I discuss briefly when contracts provided by major market players could alleviate the abuse of dominant position.
It has been shown that firms may have less incentive to exercise market power, if they have large contract positions (e.g. Allaz and Vila, 1993). Intuitively, a firm obtains a leadership position by selling contracts before going on the spot market. Motivated by this opportunity, all players participate in the contract market and as a consequence compete more aggressively overall. Offering long-term supply contracts may therefore enhance competition among gas suppliers.
The competitive effect of long-term supply contract may not always be present when suppliers and buyers repeatedly sign contracts. In a dynamic setup, it has been shown that allowing contracting for major players may reduce competition. Contracting could be used to reduce demand elasticity by increasing spot market exposure (e.g. Mahenc and Salanié, 2004). Contracting could also increase the likelihood and severity of collusion (Ferreira, 2003; Le Coq, 2004; Liski and Montero, 2006). The reason is that a collusive agreement is easier to sustain in a dynamic setup if firms offer contracts. A collusive strategy is sustainable provided that firms have no incentives to cheat, i.e. the repeated collusive profits exceed the immediate profit from the deviation and the price war following defection. The short run gains from cheating are reduced if all firms have signed contracts as the defecting firm will not capture the demand already covered by competitors’ contract sales. Compared to the case with no contracts, this reduces the gains from defection without changing the punishment path, and therefore makes collusion easier to sustain. In a dynamic setup, offering contracts may therefore increase the likelihood of collusion.
Green and Le Coq (2010) have shown, however, that the anti-competitive effect of contracts depends on their duration. The longer the contracts last, the more difficult it is to sustain collusion. Intuitively, a deviation from the collusive agreement will trigger punishments, which depend on the contract duration. The longer the contract lasts, the smaller would be the punishment profit, which would increase the incentive to deviate.
The contract price’s format also matters when estimating the anti-competitive effect of any contract arrangement. The stronger the degree of indexation to the spot price the easier it is to sustain collusion (Le Coq, 2013). In particular, if a contract price would be fully indexed on a gas spot (hub) price, irrespective of the contract’s duration, it is always easier to collude. The intuition underlying this result is two-fold.
First, given that the contracted quantities are not traded in the spot market, contracts reduce the size of the market that a deviator can serve when undercutting the rival’s price. Second, given that the contract’s price equals the spot price, the contract does not affect profit levels in the punishment phase. Consequently, profits in the punishment phase can be driven down to zero just as in the case when there is no contract market. Moreover, contracts with others forms of indexation have the same qualitative effects, provided that the indexation to the spot price is sufficiently strong. Interestingly, with full indexation, the anti-competitive effect of supply contract holds even if contracted quantities are flexible (can be renegotiated).
To conclude, changing the contract arrangement between Gazprom and European customers may not alleviate the abuse of Gazprom’s dominant position. A detailed analysis of the (many) contract arrangements offered by Gazprom needs to be conduct first to be able to make such claim.
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References
- Allaz, B., Vila, J.-L., 1993. Cournot competition, forward markets and efficiency. Journal of Economic Theory 59 (1), 1–16.
- BP Statistical Review of World Energy June 2012
- Directive 2009/73/EC of the European Parliament and of the Council concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, OJ L 211.
- Ferreira, J.L., 2003. Strategic interaction between futures and spot markets. Journal of Economic Theory 108 (1), 141–151.
- Liski, M., Montero, J.-P., 2006. Forward trading and collusion in oligopoly. Journal of Economic Theory 131 (1), 212–230.
- Le Coq, C., 2004. Long-term supply contracts and collusion in the electricity market. Stockholm, SSE/EFI Working Paper Series in Economics and Finance 552.
- Le Coq, C., 2013 Supply Contracts and Competition on the Spot: How indexation and duration matter? Mimeo.
- Le Coq, C., R. Green, 2010 The Length of Contracts and Collusion International Journal of Industrial Organization 28(1), 21-29, 2010.
- Mahenc, P., Salanié, F., 2004. Softening competition through forward trading. Journal of Economic Theory 116 (2), 282–293.
- Sartori N., 2013. The European Commission vs. Gazprom: An Issue of Fair Competition or a Foreign Policy Quarrel? IAI working paper 13103
Alcohol Consumption and Mortality
Many studies have shown that alcohol consumption is the main cause of death among working age Russian males and, in particular, among those younger than 40 (see Bhattacharya et al., 2013, Brainerd and Cutler, 2005, Denisova, 2010, Leon et al., 2007, Triesman, 2010, Yakovlev, 2013a, 2013b). A noteworthy example that illustrates this point is the decrease in male mortality rates during the Gorbachev anti-alcohol campaign. During five years of this campaign, which restricted sales and increased the price of alcohol, alcohol consumption fell by 40%. During the same period, male mortality rates fell by 25%. Furthermore, this trend reversed at end of the Gorbachev anti-alcohol campaign with the liberalization of the alcohol market and surge in mortality by the end of 1990s and beginning of 2000s (see Triesman, 2010 and Bhattacharya et al., 2013). These trends appear to be consistent with the idea that access to more alcohol is related to higher rates of male mortality.
Despite recent regulatory measures imposed by the Russian government to end this trend, male live expectancy remains low: it is 4 years below world average and below poor countries, such as North Korea or Yemen.
The economic literature emphasizes several features of alcohol consumption that are important for policy makers. First, alcohol, and especially hard alcohol, is a relatively elastic good. This implies that an increase in the price of alcohol as well as other costs (such as time costs) will result in an even larger drop in alcohol consumption relative to the price drop. If they are linked, this should also be associated with a fall in mortality rates (see Cook and Moore, 2000, Leung and Phelps, 1993).
Second, alcohol is a “social” good (Kremer and Levy, 2008, Krauth, 2005, Yakovlev, 2013a). People like to drink with others. Drinking often takes place in groups of peers, and peer decisions on whether to drink or not affect personal decisions related to drinking. Peer effects are especially strong among younger generations. The presence of peer effects implies the presence of a so-called social multiplier: the effect of government policy (for example, alcohol taxation) will be higher in the presence of peer effects. A policy such as a rise in taxation will not only affect an individual by encouraging them to consume less, but also have a spillover effect on his or her peers resulting in them drinking less as well. This should, overall, generate a larger decrease in alcohol consumption than would be the case through the effect on individuals alone (i.e. if people choose to drink based purely on their own preferences without paying attention to their peers or social groups). As it was shown by Yakovlev (2013a), for males below age 30, the peer effect increases the price elasticity of alcohol consumption by 50%. This means that a government policy, such as an increased alcohol tax, should generate a 50% higher decrease in alcohol consumption for the younger generation. Furthermore, this should also lead to an even larger reduction of mortality rates.
A third aspect of alcohol consumption is that alcohol is a habit-forming good (see Cook and Moore, 2000). The consumption of alcohol, as well as consumption of certain types of alcoholic beverages, tends to form habits related to these goods. These habits are strong and they potentially affect personal consumption even decades later. If a person starts to consume alcohol in their youth, this means that they are likely to continue and be more likely to consume alcohol in later years simply because they have a past history of consuming this product.
These three aspects have several policy implications. First, due to habits and peer effects, government policies aiming to reduce mortality rates by decreasing alcohol consumption will potentially have greater impact on younger generations than on older. This is simply because peer effects tend to be stronger among youths, but also because decreased consumption earlier in life will reduce the chances of consuming alcohol later in life and have, as a consequence, even longer term effects on society’s level of alcohol consumption. Thus, policy makers should pay special attention on younger groups of the population, in particular, policy tools such as the restriction of alcohol sales near schools and other educational facilities if the goal is to reduce the negative impact of alcohol on life expectancy. Second, the effect of this policy could be long lasting: once habits form, patterns of consumption could be affected for many years afterwards. In other words, the full effects of a policy aiming to curb alcohol consumption to improve mortality rates will not be immediately observed. Instead, part of the change in the future would be attributed to past changes in alcohol consumption.
Another aspect of alcohol consumption of importance for mortality rates concerns the habits individuals form regarding what types of alcoholic beverages, such as beer or vodka (see Yakovlev, 2013b), they drink. This has policy implications since not all beverages have the same degree of harm. If an individual consumes beer during his or her teens, she or he would likely prefer beer ten (or even more) years later. If she or he starts with vodka, she or he will likely prefer vodka. Moreover, Yakovlev (2013b) shows that beer and vodka are substitutes: an increase in the price of beer will decrease the consumption of beer and increase the consumption of vodka, or vice versa. Because beer is a less harmful alcoholic beverage than vodka, an increase in the relative price of vodka with respect to beer should improve public health to the extent that people switch to consuming a less harmful form. In addition, this effect should be stronger in the long run with individuals forming habits toward beer consumption at the expense of the more harmful vodka and, overall, we should expect morality rates to be improved as a result, although not by as much as in the case when people stop or do not consume alcohol.
There are several other features of alcohol consumption worth mentioning but which will not be addressed in detail in this brief. Alcohol consumption is correlated with not only personal health and well-being, but also with the well-being of others: it is associated with negative externalities such as crime, violence, and traffic accidents etc. Alcohol consumption also exhibits several “non-fully-rational” features such as time inconsistency or myopia (Gruber and Koszegi, 2001). In this case, a restriction on the times when alcohol sales are permitted could be a possible effective policy tool to reduce heavy drinking. This happens because people tend to underestimate how much they would like to drink in the future or want to drink less in the future than they expect, and thus prefer not to store alcohol at home. Finally, alcohol consumption is a substitute for other activities, such as sports (Tsai, 2013). Promoting these activities could encourage people to switch from alcohol consumption to healthier behavior, and, conversely, reducing alcohol consumption could foster greater levels of participation in sports activities.
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Literature
- Bhattacharya, Jay, Christina Gathmann, and Grant Miller. 2013. “The Gorbachev Anti-Alcohol Campaign and Russia’s Mortality Crisis” AEJ: Economic Policy 2012
- Cook, Philip J. and Moore, Michael J. 2000. “Alcohol”, Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed. ), Handbook of Health Economics, edition 1, volume 1, chapter 3.
- Brainerd, Elizabeth and David Cutler, 2005, “Autopsy on an Empire: Understanding Mortality in Russia and the Former Soviet Union.” Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 107-130,Winter.
- Denisova, Irina. 2010. “Adult mortality in Russia: a microanalysis”, Economics of Transition, Vol. 18(2), 2010, 333-363.
- Gruber, Jonathan and Botond K˝oszegi. 2001. “Is Addiction ‘Rational?’ Theory and Evidence.” Quarterly Journal of Economics (2001), 116(4), pp. 1261-1305.
- Kremer, Michael, and Dan Levy. 2008. “Peer Effects and Alcohol Use among College Students.” Journal of Economic Perspectives, 22(3): 189–206.
- Krauth, Brian. 2005. “Peer effects and selection effects on smoking among Canadian youth.” Canadian Journal of Economics/Revue canadienne d’économique, Volume 38, Issue 3, pages 735–757, August 2005.
- Leon, David, Lyudmila Saburova, Susannah Tomkins, Evgueny Andreev, Nikolay Kiryanov, Martin McKee, and Vladimir M Shkolnikov. 2007. “Hazardous alcohol drinking and premature mortality”
- Leung S. F., and Phelps, C. E. “My kingdom for a drink…?” A review of estimates of the price sensitivity of demand for alcoholic beverages. In: Hilton, M. E. and Bloss, G., eds. Economics and the Prevention of Alcohol-Related Problems. NIAAA Research Monograph No. 25, NIH Pub. No. 93–3513. Bethesda, MD: National Institute on Alcohol Abuse and Alcoholism, 1993. pp. 1–32.
- Tsai, 2013, “Peer effects in physical training.” NES, mimeo
- Yakovlev, Evgeny 2013, “Peers and Alcohol: Evidence from Russia”, NES/CEFIR working paper
- Yakovlev, Evgeny 2013, “USSR Babies: Who drinks vodka in Russia”, NES/CEFIR working paper