Tag: Russia

Non-Tariff Barriers and Trade Integration in the EAEU

Posted on February 29, 2016 | Policy Brief

It is a commonly held view that the Eurasian Economic Union (EAEU) is a political enterprise (Popescu, 2014) that has little economic meaning other than redistribution of oil rents (Knobel, 2015). With a new reality of low oil prices and reduced rents, a legitimate question is how stable this Union is, or whether there is any hope for mutual economic benefits that can provide incentives to all the participants to maintain their membership in the Union? Our answer is yes, there is hope, but only if countries, especially Russia, make progress on deep integration such as services liberalization, trade facilitation, free movement of labor and especially in the reduction of the substantial non-tariff barriers (NTBs). NTBs are hampering trade both within the Union (World Bank, 2012; Vinokurov, 2015), as well as against third country imports. Our research shows (see Knobel et al., 2016) that all the EAEU members will reap benefits from a reduction of NTBs against each other, but they will obtain considerably more substantial gains from a reduction in NTBs against imports from the EU and China.

Since the early stages of creation of the Customs Union (CU) between Belarus, Kazakhstan, and Russia back in 2010, the economic benefits of the CU have been questionable. The main reason for this in Kazakhstan was the increase in its import tariffs in order to implement the common external tariff of the CU, which initially was Russia’s external tariff (Tarr, 2015). Kazakhstan almost doubled its average tariff from 5.3% to 9.5% (Shepoltylo, 2011; Jondosov and Sabyrova, 2011) in the first year of its CU accession. Belarus did not increase its average tariff, but the structure of its tariffs shifted toward a protection of Russian industry.

In 2015, the CU was transformed into the EAEU, and Armenia and Kyrgyz Republic have joined the EAEU. These two countries are WTO members; Kyrgyzstan entered the WTO in 1998, and Armenia in 2001. In 2014, the simple average most-favored nation (MFN) applied tariff rate in Armenia was 3.7%, and 4.6% in the Kyrgyz Republic. Due to differences between Armenia and Kyrgyzstan’s WTO commitments and the EAEU tariff schedule, the new members of the EAEU are not implementing the full EAEU tariff schedule. That is, they have numerous exemptions. However, they have started a WTO commitments modification procedure.

Despite adverse impacts from the higher import prices from implementing the common external tariff of the EAEU in Armenia and the Kyrgyz Republic, there are potentially offsetting gains. Given the importance of remittances to the Kyrgyz Republic, the benefits coming from the right of workers to freely move and legally work inside EAEU likely dominate the tariff issues. Armenia also benefits from the free movement of labor, receives Russian gas free of export duties, and wants to preserve the military guarantee granted by Russia through the six-country Collective Security Treaty Organization.

In the case of Belarus, it receives Russian oil and natural gas free of export-duties, which, when oil prices were high, tended to dominate their calculus. Kazakhstan hopes for more FDI as a platform for selling to the EAEU market; but President Nazarbaev has expressed concerns that the EAEU is not providing net benefits to his country.

To date, the members have judged participation to be in their interest, but with the plunge in the price of oil and gas, the calculus could swing against participation in the EAEU. That is why it is so important to achieve progress with deep integration in the EAEU. One of the most important areas of deep integration for the EAEU is the substantial reduction of non-tariff barriers in goods trade, both between the EAEU members and against third countries. Estimates by the Eurasian Development Bank (Vinokurov et al., 2015) reveal that NTBs account are 15% of the value of intra-union trade flows.

In our paper, Knobel et al (2016), we estimate substantial gains to all the EAEU members from a reduction of NTBs. We employ a global computable general equilibrium model with monopolistic competition in the Helpman-Krugman style based on Balisteri, Yonezawa, Tarr (2014). Estimates of the ad-valorem equivalents of NTBs were based on Vinokurov et al (2015) for the EAEU member countries and Kee, Nicita, Olarreaga (2009) for non-members.

We find that the effects of deep integration are positive for all countries of the EAEU. Armenia’s accession to the EAEU will have a strong positive effect only if coupled with a decrease of non-tariff barriers. Armenian accession is associated with an increase in external tariffs, which causes a negative economic impact and decrease in output.

The effect of deep integration in the EAEU will be even greater if any spillovers effect reducing NTBs for EAEU’s major trading partners are present. Knobel et al. (2016) simulate a 50% decrease in “technical” NTBs inside the EAEU and a 20% spillover effect of reduction NTBs toward either the EU and USA or China. Reduction of NTBs in trade with the EU and the USA dominates the comparable reduction of NTBs with China for all countries of the EAEU in terms of the welfare gain. Armenia’s welfare gain with a spillover effect towards the EU is 1.1% of real consumption compared to 1.02% with a spillover effect towards China. Growth in welfare in Belarus will be 2.7% with a EU spillover versus 2.5% with a spillover effect towards China. Kazakhstan’s gain in real consumption is also greater in the first (EU+USA) case: 0.86% versus 0.66% (with spillover towards China). Russia’s gain in real consumption in the case of a spillover effect with the EU is 2.01% versus 0.63% in the case of China.

Summing up, our findings suggest an answer to the recent concern about stability of the EAEU. We think that eliminating NTB, hampering mutual trade, and decreasing NTBs in either European or Chinese direction could provide mutual economic benefits that could tie countries of the EAEU together, thereby giving a much needed solid economic ground for the Union.

References

Did Russian Migration to Russia Affect the Labor Market?

Posted on January 25, 2016 | Policy Brief

20160125 FREE Network Policy Brief Featured Image

As a result of the collapse of the Soviet Union, five million Russian and Russian-speaking people repatriated to Russia during 1990-2002. I use this natural experiment to study the effect of a large migration wave on the employment and wages of the local population. Taking into account the non-random choice of location by migrants within Russia, I find a negative effect of the inflows of immigrants on the local population’s employment but not on wages. The initial negative effects on employment are particularly large for local men, but they disappear after about ten years from the peak of the migration wave.

The effect of migration on the labor market of the host country is a long-standing question within economic literature and in public debate. In many cases, researchers try to estimate this effect using the data on large and unanticipated migration movements. The most famous study of this kind is probably Card (1990). Another case is the Russian migration to Russia resulting from the collapse of the Soviet Union. According to the 2002 Russian Census, 5.2 million of the people living in Russia in 2002 resided outside the country in 1989. That is, 3.6 percent of the 2002 population immigrated to Russia after 1989. Almost all of them (94.4 percent) immigrated from the former Soviet republics, most notably Kazakhstan, Ukraine and Uzbekistan.

The existing literature on migration flows in the former Soviet Union (fSU) since its collapse has emphasized the socio-political factors of migration. Locher (2002) finds that ethnic sorting was a major determinant of migration among the fSU countries, with the countries’ stage of transition and wealth level playing a minor role. Yerofeeva (1999) shows that ethnic repatriation was one of the main reasons behind migration from northern and eastern Kazakhstan.

In Lazareva (2015), I study two sides of the labor market effects of the immigration from fSU countries to Russia. The first side is the process of assimilation of migrants in the Russian labor market. The second side is the effect that inflows of immigrants had on the labor market position of the local population in Russia. Data used for estimation span a long period of time, which allows for tracing dynamic long-term effects of the influx of immigrants. This is the first comprehensive study of the labor market effects of one of the largest migration waves in Europe in recent history.

Method

In order to estimate the effects of the inflow of immigrants on the employment and wages of the local population, I exploit variation in the share of immigrants across Russian regions. According to the Census in 2002, migrants were quite dispersed over Russia’s vast territory; their share in population varied from 0.42% in the Tyva region to 8.5% in the Kaliningrad region. A relatively large share of migrants is observed along the border to fSU countries as well as in the oil-rich regions of Western Siberia.

A major problem when using regional variation to estimate labor market effects is that the migrants’ choice of region may be affected by the condition of that region’s labor market. Naturally, migrants tend to choose locations with higher wages and more employment opportunities. If this is the case, the estimates of the labor market effects will be biased.

However, the immigrants’ choice of location was not completely unconstrained due to the costs of migration related to the distance and access to information. Given these constraints, there is a relative crowding of immigrants in the regions of Russia that are closer to the border with fSU countries. Hence, I use the variation in the share of migrants across regions, which depend on the geographical distance from the source countries. In other words, I obtain the estimates from the comparison of regions that are similar in all their characteristics except for the distance to the border with fSU.

Data and Results

I use panel data on households from the Russian Longitudinal Monitoring Survey for the period 1995-2009. In the 2009 survey, the respondents were asked since what year they live in the Russian Federation. I define as immigrants, people at the age of 18 and above who moved to Russia after 1989. Note that the RLMS sample, which consists of people residing in the same dwelling units in each round, is unlikely to include illegal migrants or temporary (seasonal) labor migrants. Rather these are mainly people who settled in Russia permanently at some point during the 1990s and 2000s.

In the RLMS sample, 3.6 percent of the respondents moved to Russia after 1989. This is consistent with the national-level statistical data on immigration flows. A majority of the immigrants arrived to Russia in the early and mid-1990s. Immigration peaked in 1994 when almost 1.2 million people moved to Russia. After that, immigration steeply declined; during the 2000s, the registered level of immigration was at about 200,000 people per year.

A majority of the immigrants (71.7%) in the RLMS sample are of Russian ethnicity, and there is a slightly higher share of males. Importantly, migrants are not significantly different from the locals in terms of their education levels. The statistics on marital status show that a higher share of migrants compared to locals have families and children. Apparently, family migration was a large part of this migration wave.

Using the methodology described above, I obtain an insignificant effect of the share of immigrants on the wages of the local population over the period of 1995-2009. The effect of immigrant share on the unemployment of the local population is also insignificant. In contrast, estimates for the labor force participation (LFP) show a significant negative effect of immigration on the LFP of the local population. The size of the effect is non-negligible: a one-percentage point increase in the share of immigrants in a region reduces the probability for a local person to be in the labor force by 0.6 percentage points. Thus, over the whole period of 1995-2009, Russian immigration is estimated to have had some displacement effect, but only in terms of the labor force participation of the local population.

Since the inflow of immigrants was mostly concentrated in the first half of 1990s, I estimate my model for three sub-periods: 1995-2000, 2001-2004, and 2005-2009. The results for the wages remain insignificant in all sub-periods. Immigration is shown to increase the unemployment among locals in the first half of 2000s, but this effect dissipated in the second half of 2000s. The effect of immigration on the labor force participation is negative and highly significant for the late 1990s, still negative and significant but smaller in magnitude in the early 2000s, and disappears in the late 2000s. This analysis suggests that the immigration wave had a quite significant displacement effect for the local population in terms of unemployment and labor force participation, but not in terms of wages. This effect slowly declined and had disappeared by the second half of 2000s. My results also suggest that the negative labor market effects were more significant for men than for women.

Conclusion

The results of this study have implications for the debate on the effect of immigration on local labor markets, in particular on wages and employment opportunities for the native population. The majority of existing studies find only minor negative effects of migration on the labor market position of locals. My results suggest that immigrants who are close substitutes to the local labor force, due to the common language and similar education, have more significant effects on the labor market outcomes of the local population.

The finding that displacement effects in Russia dissipated quite slowly may be related to the very low migration rates of the local population in Russia throughout the transition. In order to reduce negative labor market effects of large influxes of immigrants, policy measures are needed that improve labor mobility across regions. These may include moving or housing subsidies, retraining programs and policies ensuring equal access to jobs and public services for internal migrants across the regions of Russia.

▪

References

  • Card, David, 1990, The Impact of the Mariel Boatlift on the Miami Labor Market, Industrial and Labor Relations Review, Vol. 43, No. 2, pp. 245-257.
  • Lazareva O. Russian Migrants to Russia: Assimilation and Local Labor Market Effects //IZA Journal of Migration. 2015. No. 4:20
  • Locher, Lilo, 2002, “Migration in the Soviet Successor States,” Applied Economics Quarterly, 48 (1), 2002, 67-84
  • Yerofeyeva, Irina, 1999, “Regional aspects of Slavic migration from Kazakhstan on the basis of examples from North Kazakhstan and East Kazakhstan provinces”. In: Vyatkin, Anatoly, Kosmarskaya, Natalya, Panarin, Sergei (Eds.), V Dvizhenii Dobrovoljnom i Vynuzhdennom [In Motion—Voluntary and Forced]. Natalis, Moscow, pp. 154–179

Does Social Media Promote Protests?

Posted on November 23, 2015 | Policy Brief

 Author: Ruben Enikolopov, CEFIR.

Despite a lot of speculations about the role of social media in recent political protests throughout the world, there is still no persuasive empirical evidence to support these claims. We fill this gap by providing evidence that social media indeed played an important role in promoting political protests in Russia in 2011-2012. Using data on the dominant Russian online social network, VKontakte, we show that higher penetration of the social network across cities increased the likelihood of protest occurrence and the number of participants in these protests. Additional evidence suggests that reducing the costs of coordination is a mechanism behind social media influence.

Environmental Implications of Russia’s Accession to the WTO

Posted on October 26, 2015 | Policy Brief

Authors: David G. Tarr, NES and Natalia Turdyeva, CEFIR.

We investigate the environmental impacts of Russia’s World Trade Organization (WTO) accession with a computable general equilibrium model incorporating imperfectly competitive firms, foreign direct investment and endogenous productivity. The WTO accession affects CO2 emissions through technique (−), composition (+) and scale (+) effects. We consider three complementary policies to limit CO2 emissions: cap and trade, emission intensity standards, and energy efficiency standards. With imperfectly competitive firms, gains from WTO accession result with any of these policies.

Russia: Increasing Concentration of the Economy and Low Investment

Posted on October 12, 2015 | Policy Brief

Author: Oleg Shibanov, New Economic School and Corporate University of Sberbank.

The Russian economy became more concentrated in 2014. The new RBC-500 rating shows that the 643 largest companies in Russia produce 77% of the country’s GDP. Moreover, 94% of the net profit of these companies was generated in the oil and gas sector. This is up from 71% in 2013. This increasing concentration appears unstable at times of huge external shocks on commodity prices.

Urban Land Misallocation and Markets in Russian Cities

Posted on June 8, 2015 | Policy Brief

Authors: Paul Castañeda Dower, CEFIR and William Pyle, Middlebury College.

Former socialist countries inherited factory-dominated cityscapes since planners made industrial location decisions in relative ignorance of land’s opportunity costs. Drawing on unique survey evidence and policy variation across territorial units within Russia, this brief discusses the relationship between land tenure reforms and land reallocation. The evidence points to land privatization as an important factor in the reallocation of land in Russian cities.  

Expected Effects of Tobacco Taxation in Five Countries of the Former Soviet Union

Posted on May 18, 2015 | Policy Brief

20150518-Expected-Effects-of-Tobacco-1

Authors: Irina Denisova and Polina Kuznetsova, CEFIR.

In this policy brief, we discuss the results from a study of different dimensions of tobacco taxation policy in five former Soviet Union countries: Belarus, Kazakhstan, Kyrgyz Republic, Russia and Ukraine. We find that the increase in budget revenue from raising excises on filter cigarettes is high in all studied countries. Furthermore, due to a low elasticity of the demand for cigarettes, the increase in excise taxes needs to be substantial to lead to a noticeable improvement in public health.  

New Light on the Eastern Front – Contributions from Russia to the 70th Anniversary of the Victory in Europe in World War Two

Posted on May 4, 2015 | Policy Brief

Author: Lennart Samuelson, SITE.

Interesting results of the post-Soviet research on the Second World War are now presented in 12 imposing volumes, Velikaia Otechestvennaia Voina 1941 –1945 (Great Patriotic War 1941–45) written by specialists in military, political, international and economic history. Each chapter reflects the research frontier. Their style contrasts positively against Soviet works during the Cold War, and also against renewed anti-Russian historical campaigns in the West in recent years. Open archives, abolition of censorship, freedom of print as well as joint projects with Western scholars are the preconditions for progress in the historiography of Russia in the 20th century in general and of the Eastern Front during World War Two in particular.

A Russian Sudden Stop Still a Major Risk

Posted on April 27, 2015 | Policy Brief

Image from central Moscow with red traffic lights representing Russian sudden stop of the economy

The Russian economy is facing serious challenges in 2015 even after the currency and stock market have strengthened on the back of (expectations of even) higher oil prices. Policy makers that ignore these challenges may be in for a rude awakening when more statistics on the real economy are now coming in. It is time that actions are taken to deal with Russia’s structural problems, mend ties with its neighbors that are also important economic partners, and refocus political priorities towards generating growth and prosperity for its population. In the long run, this is what creates the respect and admiration a great nation deserves.

Recent developments

The value of Russian assets, including shares and the currency, was more or less in free fall in the second half of 2014 and into the beginning of 2015. The annexation of Crimea and continued fighting in Eastern Ukraine and the associated sanctions contributed to a general loss of confidence in Russian assets, but the fall in international oil prices was an even more decisive factor (for a detailed account of the sanctions, see PISM (2015)).

Figure 1 shows how the stock market first took a big hit at the time of the invasion of Crimea, but then recovered before the massive downturn in mid-2014 as oil prices collapsed. The ruble followed a similar path, but with less volatility than the stock market, which is not too surprising given that the Central Bank of Russia (CBR) intervenes to stabilize the currency. However, the ruble had a short time of extreme volatility in mid to end-December when the uncertainty about the impact of financial sanctions was very high.

Figure 1. Oil price, Ruble and Stocks

fig1Sources: CBR, US EIA, MICEX

Financial sanctions were particularly troubling since Russian companies, both private and state owned, have significant external debt that became increasingly hard to refinance. The magnitude of this external debt is also such that it is not a trivial matter for the government or central bank to handle despite the fact that public external debt is very low and international reserves are among the largest in the world. As a matter of fact, external debt was around $250 billion more than then the value of CBR’s international reserves at the peak, but the difference has come down somewhat to around $200 billion as external loans had to be paid back when new external funding was not available at attractive terms.

Sudden Stops

Before turning to the outlook for the Russian economy, a short discussion of sudden stops is warranted. “Sudden stops” is short for sudden stops or sharp reversals in international capital flows. Sudden stops and its effects on the real economy have been analyzed for some time now (see Calvo (1998) for an early contribution). Becker and Mauro (2006) concluded that sudden stops have been the most costly type of shock for emerging market countries in terms of lost GDP in modern history. In their study the average country that experienced a sudden stop had a cumulative loss of income of over 60 percent of its initial GDP before recovering back to its pre-crisis income level.

Sudden stops in capital flows have such large effects on the real economy because of the adverse effects reduced external funding has on imports. A first look at the accounting identity for GDP (GDP=Y=C+I+G+X-M) makes it hard to see how reduced imports can be a problem since imports (M) enter with a negative sign. This in itself suggests that reduced imports should increase GDP. However, imports are used for domestic consumption (C) or investment (I), two factors that enter the same identity with positive signs, which means that when they fall so does GDP. If this were the full story, the net effect on GDP from falling imports would be zero since the positive direct effect from imports would be exactly offset by reduced domestic consumption and investment.

Unfortunately the accounting identity does not make clear the dynamics that follow from this reduction in consumption and investment. For example, the foreign car (or machine) that is no longer imported and will not be sold, will also not require a domestic sales person, annual service, a parking space etc., so the eventual decline in consumption (or investment) will be much larger than the first round effect that is captured by a static accounting relationship. This is one reason why “improvements” in the trade balance stemming from the sudden decrease in imports is not necessarily a good thing for the economy.

Russia is also part of the international financial system with important capital flows both in and out of the country. As such, it is also subject to the risk that changes in sentiment and large capital outflows can affect imports and the real economy. For a time before the global financial crisis, net capital flows to Russia tended to be positive. However, this changed in 2009 and since then most quarters have been showing outflows.

Figure 2. Private Sector Capital Outflows Continue (Q1 2015 in red)

fig2Source: CBR

The speed of outflows picked up dramatically in 2014, reaching more than $150 billion for the year. The general picture of outflows has continued in the first quarter of 2015, with outflows of around $35 billion (which for comparison is twice the $17.5 billion IMF package that was agreed for Ukraine in March 2015). Although Russia still has resources to support a high level of imports, the more capital that leaves, the less money there is to spend and invest in the country.

The Outlook

Everyone knows that Russia generates most of its export revenues from natural resources in general and from oil more specifically. The fact that the health of the economy is closely related to international oil prices is no secret either and Figure 1 showed the tandem cycle of oil prices, the ruble and the stock market. But how important is oil prices as a determinant of GDP growth? This is of course a big question that requires sophisticated thinking and modeling to figure out at a more structural level. But if we are just looking for a back of the envelope estimate, a simple regression of growth of oil is potentially interesting. Perhaps somewhat surprisingly, oil price growth has very high explanatory power: regressing annual changes in GDP per capita in real dollar terms on annual changes in real oil prices (and a constant) for the period 1998 to 2014 generates an R2 of 0.64! Not bad for a one variable macro “model” of the Russian economy. The coefficient on real changes in oil prices is estimated to be 0.15 and hugely significant and the intercept, which could be interpreted as the underlying growth rate in this “model”, of 2.4%.

Using the same IMF data on the real oil price for the first three months of 2015 and comparing that to the average oil price for the full year 2014 implies a drop in the real oil price of 46 percent. Using this oil data as the forecast for all of 2015 and plugging this into the estimated equation suggests that the oil price drop in itself would be associated with a decline in income of almost 7 percent. Adding back the underlying growth rate of just over 2 percent still means a negative growth rate of almost 5 percent in 2015, without even starting to think about sanctions, capital flows or structural problems.

However, there is more data that points in the directions of the economic troubles that lay ahead in 2015, which is trade data. We just discussed the importance of sudden stops and associated drops in imports in explaining large drops in output in emerging markets. Figure 2 already showed the continued capital outflows, and Figure 3 provides a scatter plot of changes in imports and GDP growth. Over the years, Russia has displayed a strong positive correlation between import growth and GDP growth that is in line with the description of sudden stop dynamics.

Figure 3. Imports and GDP Growth (Q1 2015 in red)

fig3Source: Author’s calculations based on CBR and the Federal State Statistics Service (GKS) data

Figure 3 shows the import change in Q1 2015 (i.e., Q1 in 2015 compared to Q1 2014) as a red diamond and puts it on the linear regression line of past observations to get the implied GDP growth number for Q1 2015. First of all, the 36 percent drop in imports is at an all time high for the decade and at roughly the same level as in the worst quarter of 2009 in the global financial crisis. The implied drop in GDP is 10.5 percent (compared with a drop of 9.5 in the worst quarter of 2009). Again, this is not a formal model to generate GDP forecasts, but it is certainly a signal that suggests that the Russian economy has problems to deal with.

Concluding Remarks

The IMF (2015) just released its latest forecast for Russia together with the other countries of the world. The projection for 2015 is a decline of real GDP of 3.8 percent, which is not a great growth number by any means but less negative than what was discussed at the end of 2014. The Economist (2015) in its latest issue is also quoting a banker who says that the situation is not as bad as was previously imagined. The upward revisions have also led to statements among policy makers that seem to suggest that the problems for the Russian economy are behind the country.

Although the free fall associated with the sharp drop in oil prices is halted, recent data on capital flows and imports suggest that the problems for the Russian economy are far from over. If oil prices stay at current levels, capital outflows continue, and imports remain as suppressed as they were in the first quarter, the fall in GDP may be in the same order as in 2009. At that time GDP declined by 8 percentage points, or more than twice the recent forecasts for 2015.

Russian policy makers need to make serious structural reforms and mend ties with its important economic partners near and far to put the country on a more healthy growth trajectory. Simply praying for increasing oil prices is not enough; it is time that Russia becomes the master of its own economic faith.

▪

References

  • Becker, T., and P. Mauro (2006), “Output drops and the shocks that matter”, IMF Working Paper, WP/06/197
  • Becker, T. (2014), “A Russian Sudden Stop or Just a Slippery Oil Slope to Stagnation?”, BSR Policy Briefing 4/2014, Centrum Balticum
  • Calvo, G. (1998), “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops,” Journal of Applied Economics, Vol. 1, No. 1, pp. 35–54.
  • Economist, The (2015), “Russia and the West: How Vladimir Putin tries to stay strong”, April 18-24 issue
  • IMF, (2015), World Economic Outlook, April
  • PISM, (2015), “Sanctions and Russia”, Polski Instytut Spraw Międzynarodowych, (The Polish Institute of International Affairs)

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Export Costs of Visa Restrictions

Posted on March 30, 2015 | Policy Brief

20150330 Export Costs of Visa FREE NETWORK Policy Brief Image 01

We study the role of visa restrictions in determining export flows between firms and countries, and find a significant negative impact of visa restrictions. Our results indicate that visa costs not only diminish the value of export, but also the probability of new firms to enter visa restricted foreign markets. We interpret these results as evidence that visa restrictions contribute to trade costs faced by exporting firms.

There is no doubt that policy decisions in the area of foreign relations influence economic links between countries. However, quantifying these effects is usually very difficult – not least because visa regimes are relatively stable over time, not allowing for sufficient variation to estimate the effect of a regime change. As a result, decision-making is often based on very limited quantitative grounds, and mostly driven by qualitative intuition and strong political preferences. However, these decisions might have very important redistributive effects and create unequal access to markets for producers from different countries. For example, while WTO emphasizes a nondiscrimination clause to be one of the main principles of trade policies for member countries, foreign policy might become a very important source of discrimination in international trade.

An example of such policy decisions is visa requirement for foreign visitors. The channel of the effect is rather intuitive – visa requirements on foreign nationals might affect the intensity and costs of business visits needed to establish trade relations between firms in different countries.

In Kapelko and Volchkova (2015) we test the impact of foreign visa requirements on the international trade based on the Russian case. The Russian economy represents a unique setting to study the effect of visas on trade flows. Over the first decade of 2000, there were more than 30 visa regime changes between Russia and foreign countries. Thereby, there is sufficient variation for quantifying the export costs of visa restrictions.

Evidence

Economists observe that when a pair of countries has visa restrictions – both bilateral and unilateral – their bilateral trade flows, tourist exchanges, and FDI flows are smaller compared to pairs of similar countries without these restrictions (Neumayer, 2011). The anecdotal evidence also indicates that business meetings, conferences and other interactions which involve people from different countries are often cancelled or delayed due to the failure of some participants to obtain visa stamps on time. Therefore, we can assume that costs of visas for international transactions include not only simple monetary costs associated with the visa fee but also less predictable components such as the risk of refusal, time costs, etc.

Economic research often relies on some intrinsic features of goods or industries as a way to test the hypothesis. Namely, if the extent of the studied effect depends on these features then one would compare the effects across goods or industries controlling for the features. In our case, if the effect of visas is due to risks associated with the inability of businessmen to attend meetings or negotiations, then we can expect a negative effect of visa restrictions on trade flows, which will be stronger for goods trade since it requires more interactions between the buyer and seller. For this study, we rely on Rauch’s (Rauch, 1999) definition of relation specific goods and compare the effect of visas across goods with different degrees of sensitivities to the relations.

Method

The recent developments in trade theory and empirical research provide a specification of structural relations between country-level bilateral costs of trade and firm level decision to export. The heterogeneous firms approach brought by Marc Melitz (Melitz, 2003) to the international trade framework emphasizes that fixed costs of exporting play an important role in shaping patterns of exports. The literature distinguishes between fixed and variable costs of exporting, but the empirical evidence on cost composition is very limited and very little is known so far about the fixed costs of exporting. We proxy both these costs with visa restrictions, and use heterogeneity in firms’ decisions whether to export or not, to various destinations, to estimate the effect of visas on market access and trade flows.

Data

We combine annual data on exporters, volume of export of each exporter to each destination from the Russian Customs Transaction Database with data on all bilateral visa constraints for the period 2003-2010 between Russia and 180 foreign export destinations.

First, we test whether Russian firms export less to countries which impose strict visa restrictions compared to countries with less restrictive visa regimes or visa waiver programs, other things being equal. We test these effects separately for trade in goods which are more specific to the parties involved in the transaction (relation-specific goods, such as manufactured goods, and equipment with specific technical requirements on part of buyer) and trade in goods that depend less on the parties involved in the transactions (non-relation specific goods, such as more homogeneous, standard goods) (Rauch, 1999). Then, we estimate the effects of visa restrictions on the value of trade to chosen destinations.

The obvious concern is that visa decisions are dependent on trade. Politicians might facilitate visa negotiations if the country’s economic interests expand toward some destinations. It might for example affect visa waivers between countries. To deal with this issue we use tourist flows between countries as an instrument to allow for more accurate measurement of visa effects.

Our empirical strategy is to use the two-stage least squares approach with weighing in the second step to eliminate the potential bias due to selection into exporters to particular destination (Imbens and Wooldridge (2009)).

Results

Our results indicate that visas have a strong negative effect on market access, and it is twice as high for export of relation-specific goods as for export of non-relation specific goods. Controlling for the choice of destination, visas have a significant negative effect on the value of exports of relation-specific goods as well.

More specifically, our estimations indicate that:

  • the probability of the firm to export to visa-restricted destinations is below the probability of export to visa-free destinations. The probability gap is estimated to be about 36 percent for the overall sample, 40% for relationship specific transactions and 26% for non-relationship specific export.
  • the value of exports for relation specific goods is negatively affected by visa restrictions while there is no effect of visa restrictions on the export of non-relation specific goods. Our estimations indicate that the effect of visa is quite substantial so the value of relation specific export is twice as low to visa restricted as to visa free destinations.

These results emphasize the economic importance of visa restrictions and they are consistent with the assumption that visa restrictions do, in fact, contribute to the costs of market access. The negative effect of visa restrictions on the value of exports of relationship specific goods indicates that they also contribute to the variable costs of export.

Conclusions

The implications of this analysis may be very important. It demonstrates that visa regimes play a role as a non-tariff restriction or as a barrier, and can have significant effects on the development of trade relations between countries. The losses in trade due to visa restrictions are both extensive and intensive in nature: fewer firms are engaged in trade between countries with strong visa restrictions and they trade less in terms of more sophisticated goods. Therefore, we document at least two types of distortions in trade flows due to visas: visa distorts trade relations across countries with different visa requirements, and visa distorts trade flows across different types of goods to destinations with different visa requirements. Given the substantial negative effects of visas on trade relations, it is worth accounting for these economic costs when Ministries of Foreign Affairs engage in negotiations toward visa waivers.

References

  • Helpman, E., M. Melitz, and Y. Rubinstein. 2008. Estimating Trade Flows: Trading Partners and Trading Volumes. Quarterly Journal of Economics, Vol. 123 No2, 441-487.
  • Imbens, G., and J. Wooldridge . 2009. “Recent developments in the econometrics of program evaluation”. Journal of Economic Literature, 47(1) pp5-86
  • Kapelko, N., and N. Volchkova. 2015. “Export costs of visa restrictions”, CEFIR Working Paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2243136
  • Melitz, M. J. 2003. “The impact of trade on intra-industry reallocations and aggregate industry productivity.” Econometrica 71(6).
  • Neumayer, E. 2011. “On the Detrimental Impact of Visa Restrictions on Bilateral Trade and Foreign Direct Investment.” Applied Geography 31 (3): 901–907.
  • Rauch, J. E. 1999. “Networks Versus Markets in International Trade.” Journal of International Economics 48 (1): 7–35.