Tag: Ukraine
The Charity of the Extremely Wealthy
Analyzing data from the Giving Pledge (a public pledge to give away at least half of one’s fortune during one’s lifetime, launched by Bill Gates and Warren Buffett in 2010) and the Forbes billionaires’ list, I find that self-made billionaires are substantially more likely to give away large amounts of money, than do billionaires who inherited their money. Policy makers in many emerging markets with ‘new’ billionaires thus better quickly modernize their charity laws.
In 2010, two billionaires Bill Gates and Warren Buffett launched the Giving Pledge, a public pledge to give away at least half of one’s fortune during one’s lifetime (http://givingpledge.org/), which by now has been signed by 114 people. 114 are not much, you might think, and you might want to add your own name to the list. But, unfortunately, not everybody is invited to make this pledge. Gates and Buffet focus only on the extremely wealthy people: 85 of the signatories of the pledge are among the 1426 billionaires identified by Forbes in 2013, and most of the others were on Forbes’ billionaire list in earlier years. Of these 1426, 135 billionaires come from Central and Eastern Europe or the Former Soviet Union (see table I)
Worldwide, about 6% of billionaires (85/1426) have made this pledge. Among the signatories is one Russian billionaire, Vladimir Putanin, and one Ukrainian billionaire, Victor Pinchuk, which makes Ukraine score above average, with one out of ten, or 10% of Ukrainian billionaires signing.
Table 1. Number of 2013 Forbes Billionaires from the Former Soviet Union|
# 2013 Forbes Billionaires |
# of Selfmade |
Giving Pledge |
Name of Signatory |
|
|
Russia |
110 |
110 |
1 |
Vladimir Potanin |
|
Ukraine |
10 |
10 |
1 |
Victor Pinchuk |
|
Kazakhstan |
5 |
4 |
0 |
|
|
Czech Republic |
4 |
4 |
0 |
|
|
Poland |
4 |
4 |
0 |
|
|
Romania |
1 |
1 |
0 |
|
|
Georgia |
1 |
1 |
0 |
In my most recent working paper, Claire Monteiro of Georgetown University and myself investigate whether it is possible to explain why these 6 % have signed, and the other 94% have not (yet) signed the Pledge. Or to put it in a more interesting way, why Putanin and Pinchuk signed but the other CEE/FSU oligarchs have not.
We investigate this question by analyzing whether generous billionaires have specific characteristics in common, characteristics that not so generous billionaires do not have. Doing this is possible because Forbes publishes not only a ranking of billionaires, it also provides background information about each billionaire like the billionaire’s education, age, how many children (s)he has and so on.
My analysis shows that three factors have a significant effect on the chance that a billionaire will be generous. First, a billionaire who is self-made is about three to four times more likely to sign than a billionaire who inherited his/her billion(s). This finding that how one earned one’s money affect how one spends this money is consistent with University of Chicago professor Richard Thaler’s ‘mental accounting’ theory and with earlier research showing that the propensity to consume is bigger if income received is framed as a bonus rather than if it is framed as a rebate, and the research showing that windfall gains (money won in a lottery) is more readily consumed than non-windfall gains (money for which one had to work). Note that all but one billionaire from the CEE/FSU are categorized by Forbes as self-made.
Second, billionaires with more money are more likely to sign the Giving Pledge and promise to give away half their fortune – for example, compared to an average billionaire who has about 4 billion dollar in estimated net worth (like Victor Pinchuk), a billionaire with an estimated net worth of about 15 billion dollars (like Vladimir Potanin) is roughly 50% more likely to promise to give away half of her/his fortune. Third, billionaires whose fortune comes from the technology/telecommunications industry are about twice as likely to announce that they will give away at least half of their fortune, compared to billionaires from other sectors.
The influence of other factors is small and less precisely estimated: older billionaires tend to be more likely to sign (possibly because being closer to the end of one’s life makes one think more about what one wants to leave behind), as do those who have more children (maybe because having more children makes it more likely that the inheritance will lead to fights among family members) or those having a Ph.D. Moreover, billionaires from the food and retail industry tend to be less likely to sign than those from the metallurgy industry.
Taken together my model predicts for Ukraine that Victor Pinchuk is the Ukrainian billionaire who is most likely to sign (4% probability), being 10 times more likely to sign than Yuriy Kosiuk (the Ukrainian billionaire who is least likely to sign with 0.4% probability). The difference in estimated net worth (3.8 billion versus 1.6 billion), age (52 versus 44), the number of children (4 versus 1) and education (Ph.D versus bachelor), and the sector in which they are active (metals and mining versus food and retail) explain this difference in probability. Victor Pinchuk is also about 30% more likely to sign than Rinat Akhmetov – while the latter has a higher estimated net worth (15.4 billion versus 3.8 billion), the effect of education (bachelor versus Ph.D), age (46 versus 52) and children (2 versus 4) play in favor of Victor Pinchuk, outweighing the wealth effect.
While it is definitely fun to do these kinds of computations, my research also has serious implications. The fact that inherited billionaires are much less charitable than the self-made billionaires means that academics should not assume that ‘all money is equal’ as they typically do – how you acquire money affects what you will do with it. It also implies that the countries from CEE/FSU with lots of ‘new’ wealth should modernize their charity laws quickly – once the self-made billionaires pass their wealth on to their children, it will become much more difficult to turn this massive wealth into charity.
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References
- Tom Coupé and Claire Monteiro, The Charity of the Extremely Wealthy, Kyiv School of Economics, Discussion Papers 51.
* A version of this policy brief has been published in Russian at Forbes.ua.
Academic Inbreeding in Ukraine
In Ukraine, having a university degree only provides a noisy signal of one’s productivity, which means social ties and personal relations play a relatively more important role in the Ukrainian economy in general. Therefore it should not come as a surprise that inbreeding is very common in Ukrainian academia; for example, about 50% of faculty obtained their university degree from the university that employs them. Given the absence of clear “quality signs” for fresh university graduates, inbreeding can be viewed as a second-best option for hiring decisions. Our econometric analysis shows that inbred faculty does not differ in its (observable) quality from non-inbred faculty. At the same time, ceteris paribus, inbred faculty has somewhat lower salaries. We also find that the extent of inbreeding is slightly higher in universities with a “national” status and lower in very small universities (of less than 1000 students).
Academic inbreeding is the practice of universities hiring their own graduates to academic positions. Inbred faculty is thus faculty employed at the same university from which they graduated. Inbreeding implies a low level of competition for faculty vacancies possibly resulting in low quality hires. However, inbred faculty can be cheaper, reduce the chance of a mismatch between university and faculty member, and can be better “tailored” to the needs of a certain university or discipline. For some specific narrow disciplines inbreeding can be the only way to hire faculty (for example, if only one university in a region provides courses in a certain discipline, teachers of that discipline most probably will be inbred). In research, inbreeding can help to pass on tacit knowledge but it can also prevent “fresh blood” and new ideas from entering into the university. In developed countries, universities usually try to limit inbreeding in order to first, “disseminate” their graduates and earn a good reputation, and second, hire the best graduates on the market through an open competition. In less developed countries, inbreeding is more common because of the higher role of personal relations in hiring decisions in general.
Although very widespread, academic inbreeding in Ukraine has received little or no attention from researchers or policy makers. Data on inbred faculty is similarly scarce. There is only one recent exception – in the summer of 2013, the Centre for Social Research surveyed about 400 university professors. The survey contains information on a wide range of aspects of faculty employment, such as working hours, publications, participation in conferences, income size etc., including the question on whether a person works at the same university from which (s)he graduated. We used this data to do an econometric analysis of the factors that determine inbreeding and the impact of inbreeding. We complemented the survey data by data from an online questionnaire we distributed among KSE graduates whom we know work in academia, their acquaintances and among the network of KSE partners who work in academia (a total of 59 responses).
Causes of Inbreeding
Besides providing a person with knowledge and skills necessary for a white-collar job, education has several other functions. One of them is signaling, i.e. people who successfully graduate from an educational institution should have higher abilities (ceteris paribus) than those with lower grades or dropouts. This function of education is almost entirely lost in Ukraine because of widespread corruption. In Ukraine, good students can obtain good skills and knowledge together with good grades. However, “bad” students can obtain the same grades for money: besides paying professors for exam grades, students can buy a course paper, a diploma thesis and even a doctoral dissertation. Cheating and plagiarism are also very widespread; not only in students’ work, but also in academic research. Hence, based on the diploma alone, a potential employer will have difficulties telling apart a “good” student from a “bad” one. Therefore, other screening mechanisms are relatively important in Ukraine.
Many private-sector employers, for example, will pay more attention to previous work experience and personal recommendations than formal education. For example, the ULMS-2007 survey shows that from 48% to 68% of people found a job through relatives or friends, which is comparable to the extent of inbreeding found by this study in academics (48.6% in the CSR-2013 survey, 68% in our online survey). This situation pushes students, who do not expect to be hired by relatives or friends, to find a full-time job already in the first or second year of studies, providing them with both incentives and funds to “buy” a diploma. This creates a “vicious circle” – the low value of a diploma makes employers looking at previous work experience, and the need to gain that experience further devalues diplomas.
For universities, “previous work experience” is the student’s performance during their studies. Hence, by inbreeding their own students, universities reduce uncertainty, which they would be facing if they looked for needed candidates on an open market. As the academic career of a person develops, (s)he can develop additional signals of his/her “quality”; first of all, scientific degrees (Candidate of Sciences, Doctor of Sciences) and/or ranks (Docent or Professor) and connected to them publications in Ukrainian and foreign journals (with the last ones being much more valuable). Therefore, as we show, younger and less distinguished faculty (with shorter teaching experience and without a Doctor degree or Professor rank) is more likely to work at a university from which they graduated.
Estimation Results
Our econometric estimation showed that the extent of inbreeding does not depend on the quality of a university as measured by its rank in Ukraine. Inbreeding is less common in very small universities (of less than 1000 students), and is independent of the university size after this threshold. Universities with a “national” status have slightly higher level of inbreeding.
We also show that inbred faculty does not differ in “quality” (measured as the number of publications in Ukrainian and foreign journals and the probability to get a foreign fellowship) from other faculty, although, ceteris paribus, inbred faculty do get lower salaries.
Results from both the CSR-2013 survey and our online questionnaire indicate that personal connections are very important both for entering a university and for further promotion. Usually an academic career starts when a person begins his/her Ph.D. studies; at the same time, (s)he starts working as an assistant or a lecturer (when admitting students to Ph.D. studies, universities prefer their own MA graduates). To move up the career ladder, a person should earn scientific degrees or ranks, have certain duration of teaching experience and a minimal required number of publications (all the formal requirements for certain academic positions are stipulated in a Decree of the Cabinet of Ministers). According to the law, currently there is no tenure system, and faculty is hired with one- three- or five-year contracts (the longest contracts can last up to seven years, but only in the universities with a “national” status).
Hiring Procedures at Universities
When a vacancy is open (e.g. a contract expires), a university should make an announcement in a pedagogical journal and/or on its website; then candidates should be interviewed at a chair meeting, and a selected candidate should be approved by the faculty dean. A candidate should have a required teaching experience and publications. There are about 1500 journals on the list of Higher Attestation Commission (the body that organizes the dissertations defense), which means that practically all universities issue at least one journal, and very few of them are refereed. This means that publishing in the home university’s journal is the cheapest and easiest way for a faculty member to get the needed number of publications. Therefore, publications are very often of very poor quality and do not contain any real research, especially in social sciences. To mitigate this problem, the Ministry of Education and Science introduced a new requirement for scientific degrees – since 2013, 20% of publications should be in foreign-refereed journals.
When hiring, all formal requirements and procedures are typically observed – a competition is announced, the chair meeting held, the candidate has the required duration of work experience and the number of publications (their quality is discussed above). However, in reality there is very often just one candidate “for” whom the vacancy is opened, and outside people, even if they apply for a vacancy, are ignored. Usually a chair meeting supports the opinion of a chair head, but either way, a dean could overturn a chair meeting decision, so despite seemingly open procedures, in reality a person’s employment depends on his/her relations with a chair head and/or a faculty dean. Studying at a university is the most common but not the only way to establish these relations. A person can get acquainted with a chair head or a faculty dean at a conference, be his/her relative or friend, or be recommended by his/her relative or friend.
Such a widespread reliance on personal connections is a legacy from the Soviet times when personal ties replaced market mechanisms, and students were allocated to their first workplaces rather than hired on a competitive basis. Since universities were situated in cities, staying at a university implied a better living environment, and salaries were also good. Therefore many students tried to stay at their alma mater by establishing good relations with a chair head or a faculty dean. Nowadays, university salaries are not competitive so students staying at universities are not necessarily the best ones. However, they are not the worst ones either because otherwise they would not be offered a position.
Concluding Remarks
In Ukraine, academic inbreeding provides universities with a relatively cheap and well-prepared workforce. On the other hand, it also fosters isolation of universities and conservation of existing “traditions” – whether good or bad. Given low academic mobility of both students and professors, this situation prevents dissemination of knowledge and lowers competition, which necessarily leads to degradation.
Currently, inbreeding is not on the agenda of either researchers or policy makers. In fact, no one seems to have considered it as a problem. Perhaps, it will not be discussed as a problem any time soon because there are many other “bigger” problems in Ukrainian higher education. To name a few, these are:
- high centralization and insufficient level of university autonomy;
- low salaries and high teaching workload of professors;
- low extent of university research and very low quality of the existing research, especially in humanities and social sciences;
- high corruption and low standards of studying and research work (ubiquitous cheating and plagiarism);
- low sensitivity of educational programs to the needs of modern economy.
Perhaps, introduction of formal limits on inbreeding (setting a quota for both MA graduates admitted to Ph.D. programs and for Ph.D. graduates hired to teaching positions at the same university) could bring some “fresh air” into the system. This measure would extend the pool of candidates available to a university and introduce an element of competition between them. It would also create incentives both for universities to improve their Ph.D. programs and for students to put greater effort into studies.
References
- Bilyk, Olga and Iuliia Sheron (2012) Do Informal Networks Matter in the Ukrainian Labor Market? EERC Working paper No 12/11E.
- Coupe, Tom and Hanna Vakhitova (2010). Recent Dynamics of Returns to Education in Transition Countries, KSE/KEI Working paper.
- Osipian, Ararat (2009). Corruption and Reform in Higher Education in Ukraine, Canadian and International Education, vol. 38, pp. 104-122.
- Shaw, Marta, Chapman, David and Nataliya Rumyantseva (2011). The Impact of the Bologna Process on Academic Staff in Ukraine, Higher Education Management, vol. 23, pp. 71–91.
- Stephens, Jason, Romakin, Volodymyr and Mariya Yukhymenko (2010). Academic Motivation and Misconduct in Two Cultures: A Comparative Analysis of US and Ukrainian Undergraduates, International Journal for Educational Integrity, vol. 6, pp. 47–60.
Trade Policy Uncertainty and External Trade: Potential Gains of Ukraine Joining the CU vs. the Signing Free Trade Agreement with the EU
This policy brief summarizes the results of recent research which predicts gains in Ukrainian exports from signing a deep and comprehensive free trade agreement with EU, and compares these gains with predicted gains from joining the Customs Union of Belarus, Kazakhstan, and Russia. We argue that the gains would be mostly due to elimination of uncertainty in trade policy of Ukraine with the CU and the EU countries. We find that European integration brings higher potential for export growth, and that it also shifts the structure of Ukrainian exports towards capital goods, reducing the share of raw materials in total export.
Trade Policy Uncertainty and Export
Trade policy uncertainty (TPU) is a powerful negative factor that prevents economy from the realization of its export potential. In a recent paper, Handley and Limao (2012) argue that since the exporting decision involves substantial fixed costs, TPU significantly affects investment and entry decisions in international trade. In particular, they show that preferential trade agreements (PTAs) are important even when the pre-PTA tariff barriers are low. Comparing pre- and post-EU accession patterns of Portuguese exports, they find that Portuguese trade increased dramatically after 1985. The increase was the largest towards the EU partners, suggesting that it was caused by the accession. Export expanded through considerable entry of Portuguese firms into EU markets, even in industries where applied tariffs did not change. Handley and Limao estimated that the tariff reduction, which averaged 0.66 percentage points, has been responsible for only 20 percent of the increase in exports to EU10 after the EU accession, while 80 percent of the increase was due to resolving TPU.
Handley and Limao further argue that the Portuguese example should be highly relevant for any small open economy, facing important trade policy choices. In this regard, Ukraine is facing a very hard choice of selecting its regional integration strategy – towards the EU or the Customs Union (CU) with Belarus, Kazakhstan and Russia, resulting in severe TPU. The options are mutually exclusive since the CU trade policy is not compatible with neither the WTO commitments of Ukraine, or with the parameters of the deep and comprehensive free trade agreement (FTA) between Ukraine and the EU, finalized in 2012. Average tariff protection within the CU in 2012 was 10 percent (Shepotylo and Tarr, 2012), while the average WTO binding tariff rates in Ukraine were only 5 percent; the parameters of the FTA with the EU are even less protective, which would cause even stronger disagreements regarding the tariff schedules. Moreover, technical and phyto-sanitary standards in the EU and the CU are different; therefore, it would be extremely hard to harmonize the Ukrainian standards with both of them.
Despite low tariff protection, uncertainty on the parameters of the long run trade policy of Ukraine with the CU and EU countries is extremely high. It is crucial for both foreign and domestic investors to understand in what direction the regional integration will proceed before making decisions on investing or exporting, since these decisions can incur substantial sunk costs. Suppose that a large European multinational firm were interested in including Ukrainian companies in its production chains only if Ukraine signs the FTA with the EU (integrate vertically). If Ukraine instead joined the CU, this presumed European company would rather be interested in horizontal integration and invest by building a plant for final assembly of products to serve the Ukrainian and CIS markets. For Russian companies the situation would be the reversed. They would be interested to integrate vertically if Ukraine is a member of the CU and integrate horizontally if Ukraine signed FTA with EU. However, since vertical and horizontal integration are quite different strategies, neither European nor Russian companies invest in Ukraine before the uncertainty is resolved. The same holds true for domestic companies which would like to extend their export activities to new markets. Since entrance to new markets is costly and requires some irreversible investment, it is optimal to wait until the policy uncertainty is resolved.
Modeling Trade Policy Options of Ukraine
In Shepotylo (2013), we investigate which integration scenario is more preferable for Ukraine under the assumption that TPU is fully resolved and Ukraine trades up to its potential. Based on export data in 2001-2011, we estimate the gravity model by Helpman, Melitz, and Rubinstein (2008) method, adjusted for panel data case and endogeneity of a decision to sign a PTA. Using this model, we predict bilateral exports of Ukraine under three counterfactual scenarios: a) Ukraine joined the Customs Union in 2009 (CU); b) Ukraine signed the FTA with the EU in 2009 (EU FTA); c) Ukraine joined the EU in 2009 (EU). The model predictions take into account the level of economic development, geographical location, industrial structure, and quality of government and regulatory agencies. It also accounts for macro trends, including the global trade collapse of 2008-2009.
The results are not intended for a short-term forecast, but should be rather used as indicators of the long-run effects. Their interpretation is as follows. Suppose that Ukraine has signed the FTA with the EU in 2009. Taking into account all observable characteristics of Ukraine, what would be the level of Ukrainian export of product k to country j, if Ukraine, in all other respects, would behave as a typical country-member of the FTA EU? That would involve removal of the trade policy uncertainty, stronger integration of domestic companies into the global supply chains, and increase in foreign direct investments from the EU countries.
Unlike the studies based on the Computable General Equilibrium (CGE) method, which assumes that the policy choice affects the economy only marginally through reduced tariff barriers, and that the underlying economic structure and expectations of the economic agents remain intact, the gravity model captures all changes that occur in the economy over the investigated period and extract the differences in export flows between any two counterfactual scenarios, given all background economic changes.
Results
Our main results are as follows. First, the actual exports of Ukraine are far below their potential, compared with performance of both the CU countries and the FTA EU countries. The expected long run gains in Ukrainian exports to all countries under the CU scenario are equal to 17.9 percent above the export level in 2009-2011. The corresponding number for the FTA EU scenario is 36 percent, and for the full EU scenario, 46.1 percent. Based on 2011, the export of Ukraine would have been 98 billion US dollars under the EU scenario, 91 billion US dollars under the FTA EU scenario, and 72 billion US dollars under the CU scenario. All these numbers should be compared with the actual 68 billion US dollars of Ukrainian export in 2011.
Figure 1. Ukrainian Export under the Different Scenarios
Second, any scenario predicts that Ukraine severely underperforms in its trade with both CIS and EU countries, while its export to the rest of the world is in line with the predictions of the model. These results are consistent with the theory that unresolved TPU in relationships with the CIS and EU countries severely hurts the Ukrainian export potential to these countries.
Table 1. Ukrainian Export under the Different Scenarios
Note: CIS – Commonwealth of Independent States; EU12 – countries that joined EU after 2003; EU15 – countries that joined EU before 2004; RoW – rest of the World
Third, CU integration would be more beneficial for the Ukrainian agriculture and food industry, while FTA EU or full EU integration would be more beneficial for textiles, metals, machinery and electrical goods, and transportation. Conditional on not worsening its market access to Russia, Ukraine would expand its trade in these sectors to all countries, including Russia and other members of CU.
Figure 2. Expected Increase of Ukrainian Export under the Different Scenarios 
Finally, the CU integration would lead to a small increase in the share of capital goods from 17 percent to 20 percent of total exports. FTA EU would increase the share of capital goods to 28 percent, while full EU integration would increase it to 29 percent. In all scenarios, the share of raw materials would decline from 16 percent to 10-12 percent. The share of intermediate goods would decline from 48 percent to around 40 percent under the two EU scenarios and would only marginally decrease under the CU scenario. The share of consumer goods would remain stable around 20 percent.
Conclusions
Ukraine would be better off by signing a deep and comprehensive trade agreement with the EU and integrate into its production chains than joining the CU. Right now, Ukraine severely underperforms by exporting far below its potential. Evidence shows that high trade policy uncertainty plays a large role in Ukraine’s poor performance, since the gap between actual and potential exports are mainly due to low levels of export to the EU and CIS countries. Moreover, Ukraine should be interested in moving the integration process even further, because EU accession would bring even better results.
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References
- Handley, K., & Limão, N. (2012). Trade and investment under policy uncertainty: theory and firm evidence (No. w17790). National Bureau of Economic Research.
- Helpman, E., Melitz, M., & Rubinstein, Y. (2008). Estimating trade flows: Trading partners and trading volumes. The Quarterly Journal of Economics,123(2), 441-487.
- Shepotylo, O., & Tarr, D. (2012). Impact of WTO accession and the customs union on the bound and applied tariff rates of the Russian federation. World Bank Policy Research Working Paper, (6161).
Recent Dynamics of Returns to Education in Transition Countries
While, in an international comparison, transition countries spend a relatively large share of their GDP on education, and the population in transition countries is fairly highly educated, the returns to education in transition countries have been found to be relatively low, especially in comparison to other developing countries. In our paper, ‘Recent Dynamics of Returns to Education in Transition Countries’, we investigate whether the economic boom that transition countries experienced up to the 2008 financial crisis, increased the returns to education in these countries. Theories of skilled-biased technical change typically predict that periods of fast economic growth go together with an increase in the relative demand for skilled labor and hence an increase in the returns to education.
Using data from the 2007 wave of the International Social Survey Program (ISSP), the estimated return to an additional year of schooling in transition countries varied between a low 5.2 percent in Ukraine to a high of about 10 % in Poland (see Figure 1). Returns in transition countries were relatively low compared to developing countries in the ISSP sample, and on average not unlike OECD countries.
Figure 1. Returns to Education by Countries, 2007 Wave – Basic Specification
Note: Coefficients of the years of schooling variable in earning regressions. Dependent variables are monthly earnings. Specification includes: potential experience (linear and squared), dummy for gender. Source: Ukraine – ISSP 2008, all other countries – ISSP 2007.
The estimated dynamics in returns to education in the period 2002-2007 further suggest that the economic boom that took place in that period did not affect people with different amounts of education in different ways. Returns to education increased slightly in some transition countries and decreased slightly in others, but overall returns to education remained relatively moderate. More specifically, from table 2 we can see a decrease in returns in Bulgaria, Latvia and Poland, and an increase in the Czech Republic, Russia, Slovakia and Slovenia. Both increases and decreases are small in size however.
Table 1. Dynamics of Returns, Basic Specification
Note: Coefficients of the years of schooling variable in earning regressions with few controls as specified in the text.Source: Estimates for 1991-2002 are from Flabbi et al. (2008); estimates for 2007 and for Ukraine are by the authors.
A more detailed analysis for Ukraine using data from the Ukrainian Longitudinal Monitoring Survey, confirmed that economic growth did not have a major impact on the returns to education. The analysis for Ukraine however does suggest that, while in 2003 a secondary degree resulted in a somewhat higher wage, just having secondary education was no longer a differentiating factor in 2007.Moreover, only academic education made a difference, possibly because less and less people were paid very small wages (i.e. less than the official minimum wage).
The relatively limited importance of education for success on the labor market does not only show itself in the low estimated returns to education, it is also clear from the opinions people express about the factors that are important to get ahead. Table 3 gives the percentage of people who say a given factor is essential, important or fairly important to get ahead in a given country (based on the 2009 ISSP).
Table 2. To get ahead, it is essential, important or fairly important to
In most transition countries in the sample, most people think that hard work and ambition is the key to get ahead. Ukraine is no exception with hard work being thought to be essential, important or fairly important by about 94 percent of the respondents. Having a good education is thought to be at least fairly important by only about 73 percent of the respondents, with four other factors, besides hard work, scoring better on this criterion: having political connections, having ambition, having a wealthy family and knowing the right people. Also for the other transition countries in our sample, good education ranks only 5th, 6th or 7th.
Optimists could interpret these results as implying that at least education does not create the same social inequalities in the transition countries as it does in some other countries. Pessimists, on the other hand, who see education as an important driver of economic growth, will argue that low returns to education mean there is a low incentive for people to invest in education and that it is better to have education as a source of inequality rather than political or social connections, or having a wealth family.
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The Effect of Municipal Strategic Planning on Urban Growth in Ukraine
Authors: Denys Nizalov and Olena Nizalova, KEI.
In a downturn, the pressure is especially high on governments to produce sensible and effective development strategies to generate needed jobs and increased earnings. A large number of economic development tools were used in the past by local and national governments around the world, designed to facilitate regional and local economic growth. This brief presents the preliminary results from the evaluation of a program implemented in Ukraine.
Bradshaw and Blakely (1999) distinguish three historical waves of popularity for different tools used in economic development, with reference to the US states’ development policy:
- 1st wave – Incentive-based competition for industrial location, so called smokestack chasing (direct incentives to firms, reimbursement of relocation and infrastructure costs, tax-breaks);
- 2nd wave, from the early 80s – Cost-benefit-based assistance, focusing on internal growth (business incubators, start-up funds, trainings);
- 3rd wave, over the last two decades – Building of a “soft infrastructure” (institutions) conducive to economic growth (strategic planning, marketing, public-private partnerships, financing, regulation, intergovernmental collaboration).
While the effect of the first two waves on various growth outcomes was studied extensively (for reviews, see Bartik 1991; Fisher 1997; Wasylenko 1997; Goss and Phillips 1999; Buss 2001) the effect of the policies representing the third wave is less known. There are several reasons for that. These policies were developed relatively recently, they are hard to measure and compare and are most likely to have a long run effect.
A unique example of a third-wave policy was recently evaluated in Ukraine. The Local Economic Development (LED) Project in Ukraine, started by the USAID in 2004, introduced a process of municipal strategic planning into the practice of local government decision making. This Strategic Planning process involves setting goals and priorities for community economic development and coordination of activities in different areas of community life. It also allows the establishment of partnerships among various stakeholders and interest groups, and the mobilization of public and private resources to facilitate economic development.
Until recently, the effect of municipal strategic planning has been assessed exclusively by case-studies. See for example, the cases of Randstad (Priemus, 1994), Lisbon (Alden and Pires, 1996), London (Newman and Thornley, 1997), Hong Kong (Jessop and Sum, 2000), Guangzhou (Li, Yeung, Seabrooke, 2005; Wu and Zhang, 2007), and Hangzhou (Wu and Zhang, 2007). Although the above mentioned cases describe the planning process and the perceived benefits in great detail, they do not address the question of whether the Strategic Planning causes a higher rate of community economic growth or not. There are several reasons for these limitations. The procedure of planning, beyond general similarities, differs greatly in the implementation details from case to case, which makes any comparisons complicated. Moreover, the decision to start the planning process in those cases is thought to be endogenous since cities that are more likely to benefit from strategic planning are also more likely to get involved in this.
The LED example is much more suitable for evaluation. The implementation of the strategic planning system in the participating cities has been performed using a standardized procedure with the help of LED advisors. With one exception, the implementation took from 4 to 12 months. Also, the selection of the participating cities was done by LED personnel based on clear participation rules. Altogether, the LED activities targeted the same goal in each city – FDI growth and creation of new jobs. Moreover, a relatively large number of communities – 74 cities from all regions of Ukraine – were involved in the project by mid-2008.
Internal reports point to a great success of the project. More than 30 cities had by mid-2008 reported an increase in FDI. Collectively, the partner cities reported $700 million of inflowing investment and an addition of about 12,000 jobs.
The impact of the LED project on the following outcomes was evaluated using more rigorous statistical procedures:
- Number of businesses per capita;
- Fixed capital investment per capita;
- Number of jobs per capita;
- Unemployment rate; and
- FDI per capita.
It was found that the LED project had a positive overall effect on the number of businesses, fixed capital investment, and the number of jobs. In absolute values, the introduction of strategic planning lead to 6 to 12 new jobs per 1,000 of population, 18 to 50 new businesses per 100,000 of population, and 5 to7 million USD of investments in fixed capital per 100,000 (controlling for other factors of influence). However, differences in the project effect among the cities were found. The reasons for these differences in impact include:
- the effect was observed at different points of time after the implementation of planning (1 to 45 month by Dec. 2008);
- the cities had different implementation teams (composed of 6 advisors); and
- the municipalities had different administrative subordination (58 cities and 16 small towns of rayon subordination);
The project effects on the number of businesses, fixed capital investment, number of jobs, and the unemployment rate increased each month. The administrative subordination affects only the effectiveness of investments and job creation: the effect is larger for cities than for rural towns. Team-specific differences are evident on all outcomes. This confirms that the implementation have a significant impact on the success of this intervention.
Finally, the effect of LED was compared to the effect of a similar project implemented in Ukraine by UNDP. Provided that the results presented above are robust, it turns out that the effects of the two projects introducing strategic planning are very similar in magnitude and significance.
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References
- Bartik, T.J., 1991. Who Benefits from State and Local Economic Development Policies? Upjohn Institute for Employment Research: Kalamazoo, MI.
- Buss, T.F., 2001. “The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: An Overview of the Literature,” Economic Development Quarterly 15(1), 90-105.
- Fisher, R.C., 1997. “The Effect of State and Local Public Services on Economic Development,” New England Economic Review March/April, 53-67.
- Goss, E. and J. Phillips, 1999. “Do Business Tax Incentives Contribute to a Divergence in Economic Growth?” Economic Development Quarterly 13(3), 217-228.
- Wasylenko, M., 1997. “Taxation and Economic Development,” New England Economic Review March/April, 37-52.
Can the Baby- and Woman-Friendly Maternity Wards Save Lives?
Improving the health and well-being of mothers, infants and children has been an important public-health goal for many countries, which is reflected in the Millennium Development Goals (4 and 5), set by the United Nations. The well-being and health of mothers, infants and children determine future population health and thus public health challenges as well as economic development prospects. Although Ukraine and the other countries of the Former Soviet Union have fared well compared to the less developed countries of Asia, Africa and Latin America, their maternal and infant mortality and morbidity rates are 3 to 5 times higher than those in the European countries (including those of the Former Socialist block). There are many factors behind this situation. Nevertheless, a lot can be done to improve maternal and infant health by simply changing the way labor and delivery services are provided. New evidence-based medicine (EBM) standards introduced by the Mother and Infant Health Project (MIHP) are more baby- and woman-friendly and include: partner deliveries; avoidance of unnecessary C-sections, amniotomies and episiotomies; use of free position during delivery; immediate skin-to-skin contact; early breastfeeding; and the rooming-in of mothers and newborns. The impact of the Project culminates with 3 mothers’ and 11 newborns’ lives saved every two years in an average participating region.
Infant mortality/morbidity has often been a focus of health economics and medical research as a major indicator of a country’s well-being. In contrast, maternal health outcomes have been much less investigated. There are several potential reasons for such negligence. One is that the rates of maternal deaths are quite low in developed countries. The second is attributed to the difficulty of measuring maternal health outcomes in developing countries where the rates of maternal mortality are particularly high. Nevertheless, the issue of maternal health attracts considerable attention from society due to the fact that most of maternal deaths and health deteriorations are preventable. Moreover, recent evidence demonstrates that improvements in health outcomes for mothers and infants are not as much related to the availability of care (structural quality), as to the way this care is provided (process quality) (Barber and Gertler, 2002). Furthermore, some studies find that access to low quality providers in fact contribute to higher child morbidity and mortality (Sodemann et al., 1997).
Although the population health in Ukraine compares favorably to the situation in the developing world, it is still lagging far behind the developed countries in terms of maternal and infant mortality and morbidity. During the latest years, the level of anemia among pregnant women has increased 4.5 times, maladies of genital urinary system about 3 times, and diseases of blood circulation system 2 times. The average maternal mortality ratio fluctuates around 18-22 women per 100,000 live births, which is 3.5 times higher than in the EU. At the same time, infant mortality (9.5/1000) is two times higher than that in the EU, while the rate of stillbirth (16.89/1000) is four times higher. Additionally, the incidence of congenital anomalies of newborns has increased over time and reached the number of 2878 per 100,000, which is 77% higher than the EU average.
Another alarming problem related to maternal health is persistently high rate of abortions, which most likely originates from ignorance in modern family planning methods. In contemporary Ukraine, 71% of pregnancies end up in abortions. Although the number of abortions decreased twice between1991 and 2003 (from 1532/1000 live births to 728/1000 live births respectively), the incidence is still 3.5 times higher than that in the EU (Center of Medical Statistics of Ukraine 2007).
Mother and Infant Health Project Description
The Mother and Infant Health Project is an eight-year project advocating evidence-based medical practices aimed to improve women’s reproductive and newborns’ health. With funding from the USAID and private sources, and with the support from the Ministry of Health of Ukraine, the project has been implemented by the JSI Research and Training Institute. The first phase of the project was initiated in September 2002 in four regions of Ukraine, but the first four maternities joined the Project in mid-December 2003. By the end of 2006, the Project had expanded to 20 maternity hospitals in twelve pilot regions.
Following the Millennium Development Goals (MEU, 2005), the MIHP pioneers to introduce new evidence-based medicine (EBM) standards: partner deliveries; avoidance of unnecessary C-sections, amniotomies and episiotomies; use of free position during delivery; immediate skin-to-skin contact; early breastfeeding; and the rooming-in of mothers and newborns. In addition, the Project actively supports the provision of training on effective perinatal technologies for the staff of the MIHP maternities, development of “centers of excellence” that serve as models in training/education of medical practitioners of the corresponding oblast, and organizing a health awareness campaign on healthy lifestyles. The MIHP also aims to reinforce liaisons with local governmental institutions.
Furthermore, the Project works on integration of the EBM standards into a package of perinatal practices throughout Ukraine. It also targets revision of the current curricula for medical universities and colleges in order to increase the evidence base of educational programs for medical students and health care providers.
The MIHP in Ukraine belongs to a family of maternal and infant health improving initiatives throughout the world and builds upon their experience, JSI Mother Care (1998-2000) being the largest among them. However, the MIHP in Ukraine is unique both with respect to the institutional setting and to its scope and length, which allows for rigorous evaluation. Most of the earlier projects implemented by the JSI have mainly focused on specific issues (e.g. pregnancy of adolescent girls in Uganda and Zambia, anemia in Malawi) and have been short-term (the longest have been two-year projects in Egypt, Pakistan, and Zambia).
The Impact of the Mother and Infant Health Project
The evaluation of the impact of the first phase (2002-2006) of the Mother and Infant Health Project in Ukraine allows for an identification of improvements in the maternal and infant health outcomes due to enhancements in the quality of labor and delivery services. The identification of the quality improvement effect has been possible for two reasons. First, the basic perinatal and obstetrics care is universally available in Ukraine. Hence, the estimated impact of the small region participating in the MIHP can be attributed to the improvement in medical technologies rather than the availability of the services per se. Second, the variation in the project participation over time and across regions allows for control of the overall population health trend in the country.
Taking into account the effect of the other maternal health programs and personnel training outside the Project, Nizalova and Vyshnya (2010) find that the MIHP impact is in general health improving. Decreases in both maternal and infant mortality and morbidity in participating regions are more pronounced after the start of the Project. Among the infant health characteristics, the MIHP impact is observed for stillbirths and infant mortality and morbidity resulted from deviations in perinatal period and congenital anomalies.
Concerning maternal health, the MIHP is most effective in combating anemia, blood circulation, veins, and urinary-genital system complications, and late toxicosis. The analysis suggests that the effects are due to early attendance of antenatal clinics, lower share of C-sections, and greater share of normal deliveries.
For some outcomes (maternal mortality, normal deliveries, and anemia) there exists a significant effect of the MIHP trainings (without joining the Project), although it is about twice as small in magnitude for normal deliveries and anemia than the direct MIHP impact.
Cost-Benefit Considerations
A comprehensive cost-benefit analysis of the MIHP project is limited, since the majority of maternal and infant health indicators are hard to assess in monetary terms (e.g. increase in early neonatal visits of mothers; decrease in the number of cases of late toxicosis and complicated deliveries; decrease in infant morbidity due to various reasons etc.). Therefore, the focus is on the most “tangible” cost effectiveness indicators: (i) average annual per maternity cost of the Project and (ii) average annual per maternity “tangible” benefits.
The average annual per maternity cost is about 60,000 USD and it is calculated as an overall cost of the first phase of the project – 6 million USD – distributed over 20 treatment sites during 2002-2006, including the first year of the Project setup. Set of “tangible” benefits includes savings due to (i) a switch from C-sections to vaginal deliveries (cost savings of around USD 2,500 per maternity per year), (ii) a switch away from medicine-intensive ways of leading both C-sections and vaginal deliveries (around USD 65,000 per maternity per year), and (iii) saved lives of mothers and infants due to the implementation of the MIHP practices (around USD 5.8 million per maternity per year ).
Overall, the project cost to benefit ratio is 1 to 97 (60 to 5,847 thousand USD) if one takes into account the value of lives saved and it is 1 to 1.08 (60 to 65 thousand USD) if one considers only cost savings due to change in C-section and vaginal delivery practices and the switch away from C-sections to vaginal deliveries. The latter represents the lowest bound of the Project’s benefits since it does not take into account any health-improving impact of the MIHP. Although the range is quite wide and this preliminary calculation suffers from several limitations, it seems unlikely that given the estimated impact the true costs would exceed the true benefits.
References
- Barber, Sarah L and Paul J Gertler. 2002. “Child Health And The Quality of Medical Care.” University of California-Berkeley Working Paper .
- Giergiczny, Marek. 2008. “Value of a Statistical Lifethe Case of Poland.” Environmental and Resource Economics 41 (2).
- MEU. 2005. “Millennium Development Goals. Ukraine.” Ministry of Economy of Ukraine .
- Olena Y. Nizalova & Maria Vyshnya, 2010.”Evaluation of the impact of the Mother and Infant Health Project in Ukraine,” Health Economics, John Wiley & Sons, Ltd., vol. 19(S1): 107-125.
- Sodemann, M., M.S. Jakobson, I.C. Molbak, I.C. Alvarenga, and P. Aaby. 1997. “High mortality despite good care-seeking behavior: a community study of childhood deaths in Guinea-Bissau.” Bulletin of the World Health Organization 3 (75):205–12.
Does Service-Sector Liberalization Increase Productivity in the Manufacturing Sector?
Authors: Oleksandr Shepotylo and Volodymyr Vakhitov, KEI.
This policy brief summarizes the results of recent research on the effect of service-sector liberalization in Ukraine, 2001-2007, on productivity in the manufacturing sector. We use a sample of manufacturing firms and construct a firm-specific index of service-sector liberalization. We find that the manufacturing firms which more intensively use liberalized services, on average, have gained 9 percent in total factor productivity (TFP). The service liberalization is associated with increased foreign presence which also has a positive and significant effect on TFP. The effect is stronger for domestic and small firms.
Multidimensional Approach to the Energy Security Analysis of Belarus – Part 2: Economic and Geopolitical Trends
Author: Mykhaylo Salnykov, BEROC
Energy security is a complex phenomenon incorporating a variety of economic, social and environmental aspects of a country’s life. Building on a previous FREE policy brief, published on September 5, which dealt mainly with the situation up until today, this text deals more with the future. It takes a detailed look at existing trends and discusses potential positive effects and challenges to energy security in Belarus. It also provides potential measures for addressing adverse effects of these trends on the country’s energy security.
When evaluating energy security consequences of external and internal factors, a decision maker is advised to view energy security as a complex phenomenon. The main components of Belarusian energy security identified in the first part of this paper published in the FREE Policy Brief Series September 5, 2011, include (i) primary energy source distribution (diversification of energy sources, especially away from natural gas as well as reducing the economy’s energy intensity), (ii) international trade considerations, (iii) the geopolitical context (with a special focus on diversification of energy suppliers and an optimal use of the country’s gas- and oil- transporting systems), and (iv) environmental considerations of the energy use (related to both actual and the perceived impact of the energy production and consumption on the environment).
Other dimensions of energy security also include the social impact of energy production and consumption, as well as the sustainability of energy use.
Below, I provide a detailed look at these and other existing trends. Potential positive effects and challenges in the context of energy security of Belarus will also be discussed. Finally, potential measures of addressing adverse effects of these trends on the country’s energy security will be suggested.
Main Energy Security Challenges for Belarus in 2011-2020
The following components of the energy security of Belarus are considered to be of primary importance:
- Reducing energy intensity of the economy;
- Diversification of energy sources used in heat and power generation, especially diversification away from natural gas consumption;
- Diversification away from Russian fuel imports;
- Securing stable operation of gas and oil pipeline systems close to full capacity;
- Reducing impact of energy production and consumption on the environment.
The main trends in Belarusian and regional policy and economy, as well as their impacts on the aforementioned components of energy security are the following:
- Natural shale gas and liquefied natural gas revolution in Europe;
- Launch of the Nord Stream gas pipeline system in 2011-2012;
- Construction of nuclear power plant station in Astravets;
- New suppliers of hydrocarbons to Belarus.
I will purposefully not discuss important topics as carbon-free technologies development in Belarus, participation in the international carbon-reduction dialog, etc., since these trends are unlikely to become anything close to significant determinants of the Belarusian energy security puzzle within the next decade.
Natural Shale Gas and LNG Revolution in Europe
Recent developments in the technology of natural shale gas extraction in Europe and elsewhere, bring a lucrative prospect of boosting the world’s natural gas supply. Several of the European countries, including Austria, Germany, Hungary, Poland, Sweden, Ukraine and United Kingdom have announced plans to study fields with shale gas extraction potential. This could secure European gas supplies, drive gas prices in Europe down, and diversify European imports away from Russian natural gas. The natural shale gas extraction development factor will be further reinforced by the increased volumes of the LNG imports to Europe from the Americas and Northern Africa.
Contraction of gas prices in the European market will positively affect Belarusian economy as natural gas imports from Russia will become less expensive even if no active steps by the Belarusian government are undertaken. Nevertheless, the natural shale gas and LNG revolution will also widen the body of potential importers of natural gas via pipelines from Poland and Ukraine and by sea freight from seaports in the Baltic States. Specifically, in the summer of 2010, the Belarusian government announced having plans of negotiating a possible construction of a Belarusian LNG terminal in Lithuanian Klaipeda. This terminal is projected to have an annual capacity of five to eight billion cubic meters of natural gas which would be transported to Belarus via the pipeline system.
The shortcoming of the lower prices for natural gas and diversified body of importers in Europe is a reduced demand for Belarusian natural gas transit capacity as Russian exports to Europe contract. Moreover, potential transportation of shale gas from Poland via the pipeline system (see Figure 1) is likely to conflict with the Russian gas transit going into the opposite direction. From an economic perspective, it is very likely that benefits for Belarus obtained from lower gas prices will overweight potential losses from the reduced transit of Russian natural gas to Europe.
Figure 1. Natural gas and oil pipeline systems in Eastern Europe.
Source: http://www.eia.doe.gov/emeu/cabs/Russia/images/fsu_energymap.pdf
From a political perspective, Belarus losing its role as a transit country would substantially weaken its position in foreign relations with both Russia and Europe.
A possible side effect of the lower prices for natural gas is reduced incentives for the Belarusian government to reform power and heat generating sector and contract the energy intensity of the economy. While the former outcome may be economically justified by lower gas prices and diversified sources of natural gas in the new economic environment, the latter raises serious concerns over the pace of economic modernization in the country.
On the other hand, the environmental impact is mixed. While lower incentive to modernize the economy could result in a slower progress of lowering the pollution intensity in energy use, increased incentives to use natural gas, one of the environmentally friendliest hydrocarbons, would play a positive role in ensuring that the intensity of pollution reduces.
Launch of the Nord Stream Pipeline System
Dubbed by the Belarusian President, Aliaksandr Lukashenka “the silliest Russian project ever”, the Nord Stream pipeline system will allow Russia to redirect 55 billion cubic meters of natural gas (nearly 33% of the current Russian gas exports) via this more direct route to the final consumers. Thus, if European demand for Russian gas stays unchanged, the gas transit through Belarus and Ukraine will drop to nearly 100 billion cubic meters from the current 158 billion cubic meters. The 100 billion cubic meters figure is close to the capacity of the Ukrainian gas pipeline system alone. Therefore, one may hypothesize that in the worst case scenario Belarus may suffer a complete loss of its gas transit revenues.
In fact, even optimistic scenarios of the distribution of the residual transit demand between Ukrainian and Belarusian pipeline systems, imply both a substantial reduction of volumes transferred via Belarusian pipeline system, and a decline in transit tariffs triggered by strong price competition between Belarus and Ukraine. As a result, profits from the gas pipeline system in Belarus are likely to diminish.
This negative outcome is reinforced by the above mentioned trends of increased extraction of natural shale gas in Europe as well as prospective development of the LNG trading routes with Northern Africa and Americas. A conservative estimation of the reduction of European demand for Russian natural gas indicates that it can be reduced by 28 billion cubic meters (17% of the current Russian imports). Coupled with the launch of the Nord Stream, the decline of transit volumes through Belarus and Ukraine can be nearly 75 billion cubic meters annually, which is more than a 50% reduction from current levels.
Notably, these 28 billion cubic meters is an equivalent of the natural gas consumption by Poland and Hungary alone, the European countries currently most dependent on Russian gas imports.
Thus, the launch of the Nord Stream presents a substantial threat to the stable operation of the Belarusian gas pipeline system and requires careful policy steps (which will be discussed further ahead).
The fact that Belarus loses an important lever of its transit capacity may lead to lower negotiation power in fuel prices dialog with Russia, thus, leading to the smaller subsidies for the Russian oil and gas imports. However, a reduction of the world gas prices due to the growing European production of natural gas and LNG trade is likely to at least partly offset this effect.
Reduced profits received from the natural gas transit is likely to lead to a decrease of budget funds available for technological modernization of the Belarusian economy, which, in turn, may lead to an inadequate pace of changes in energy efficiency and pollution intensity of energy use as well as slower modernization of the power and heat generating sector and diversification away from the natural gas use.
On the other hand, the launch of the Nord Stream and reduced negotiation power towards Russia could increase incentives for Belarus to diversify away from Russian fuel imports as subsidies for the Russian oil and gas imports will contract.
Construction of Astravets Nuclear Power Plant
Although the launch of the Astravets nuclear power plant is unlikely to happen before 2017-2018, debates around this controversial project and its rationale requires a discussion of its energy security implications long before the plant is constructed.
The projected two-reactor nuclear power plant has an operating capacity of 2.4 GW. Unadjusted for load fluctuations in demand, this figure is an equivalent of 63.5% of the electricity consumption in Belarus. A rough seasonally unadjusted estimate of the Astravets nuclear power plant electricity production is a 35-40% of the daily peak load electricity consumption in the country – a usual figure for the baseload demand figure. Therefore, it is expected that once in full operation, Astravets plant could provide for the entire baseload demand on electricity in Belarus.
Some opponents of the Astravets plant construction note that the plant’s capacity may be excessive as several other nuclear power plants are being constructed in the region, including a plant in Lithuania and Russia’s Kaliningrad oblast. It is suggested that it may be optimal for Belarus to purchase electricity from these plants rather than constructing its own. This view, however, does not take into consideration two important issues. Firstly, it is highly unlikely that anything but the excess baseload electricity production will be traded (i.e. limited volumes of energy at night for approximately 5 to 6 hours per day); at all other time Belarus would need to rely entirely on its thermal power plants to generate electricity. Secondly, shifting from the dependence on hydrocarbon imports to the dependence on electricity imports will not cause a substantial improvement of the country’s energy security.
Current production of electricity by fossil fuel operated power plants in Belarus is an equivalent of 18 TWh, 55% of the total electricity consumption in the country. A launch of the Astravets nuclear power plant would allow reducing fossil fuel operated power plants’ utilization to virtually zero level. In addition, nearly 15% of the combined heat and power plants may operate as heat plants only.
Yet, it is unlikely to lead to the substantial changes in the usage of the existing heat plants: while nuclear power plants can provide heat, Astravets is located far from densely populated regions of Belarus, which makes heat delivery to the final consumer close to impossible because of the high losses in transfer.
As a result of decreased utilization of power plants and CHP plants, demand for natural gas from the heat and power generating sector will be reduced by 38%. Thus, the share of natural gas in the sector’s consumption balance will shrink to nearly 50% from the current 91% figure. The Astravets plant launch will also lead to nearly 25% reduction of the sector’s demand for petroleum products.
Therefore, the economy-wide TPES of natural gas is likely to contract by 28.5% and TPES of crude oil and petroleum products by nearly 2% once the Astravets plant is in full operation. The estimated annual benefit from the reduced imports of hydrocarbons is likely to reach USD 1 billion at current fuel prices.
Overall, Astravets power plant launch is expected to have strongly positive effect on diversification of energy sources in heat and power generating sector as nuclear power will gain the second largest share among the energy sources used in the sector and the natural share will reduce to nearly 50% of the total consumption by the sector. The plant construction is also likely to have a positive effect on the energy intensity by reducing losses from the power generating sectors and by closure of obsolete plants.
Moreover, the effect on diversifying fuel imports away from Russia is two-fold. Although Belarus will be able to reduce its Russian gas imports by almost a third of its current level, nuclear fuel for the Astravets station is likely to be imported from Russia. Nevertheless, given positive shifts in Belarusian regime’s relations with the West, it is highly likely that by the time of the power plant launch, the current suspicion of the Belarusian government by the international community will have vanished and alternative importers of uranium would then become an option.
Overall, the Astravets plant will have very limited impact on Belarus’ role as a transit corridor for Russian hydrocarbons.
Environmental consideration is probably the most controversial issue with respect to the projected plant. The issue becomes even more uncertain when one takes into account not only objective environmental costs and benefits, but also subjective factors, such as suspicion of Belarusians to nuclear power – a legacy of the Chernobyl accident.
A nuclear power plant will undoubtedly lead to a reduction of pollution intensity in the Belarusian economy. Yet, there are a number of factors that may offset the seeming gains. Firstly, a low probability of technological disaster at the power plant, mean that most Belarusians consider the plant as an environmentally but dangerous project for the country. Secondly, Lithuanian environmentalists have expressed their concerns over the proximity of the projected plant to the Lithuanian capital, Vilnius (only 40 km), especially as the Neris (Viliya) river that flows through Vilnius will be the main water source for the Astravets plant. Thirdly, international environmental experts rarely consider nuclear power plants considerably greener than their fossil fuel operated counterparts as uranium extraction and enriching produces substantial amounts of polluting substances at their fuel producing facilities. Finally, spent nuclear fuel treatment still remains one of the issues without a sustainable technological solution. Belarus is likely to export its nuclear waste to either Russia or Ukraine that have spent nuclear fuel storage facilities.
Therefore, from an environmental perspective, while Belarus will enjoy most of the benefits of the cleaner power generation, it is likely to create substantial trans-boundary environmental risks mostly for Lithuania, Russia and Ukraine.
New suppliers of hydrocarbons
Belarus currently attempts to diversify its oil supply by shipping Venezuelan crude to Black Sea and Baltic Sea ports. In addition, there exists a sound potential of diversifying Belarusian natural gas imports by gaining access to Ukrainian and Polish natural shale gas deposits as well as through constructing an LNG terminal at the Baltic Sea.
While the perspectives of these recent international advancements are not certain, in the case of sustainable progress they are likely to have important implications for the energy security of Belarus, which are closely interrelated to the implications of the shale gas and LNG revolution.
Emergence of new suppliers of hydrocarbons will have a positive impact on diversifying away from Russian fuel imports, but will also reduce incentives for the energy intensity and pollution intensity reduction as well as the modernization of the heat and power generating sector as economic stimuli for technological modernization fade away.
Diversification of hydrocarbon suppliers presents risks for the usage of Belarusian gas and oil pipeline systems. If oil would be transported from either Black Sea or Baltic Sea ports, this oil would compete with the Russian oil transport routes headed into the opposite direction to either Ukrainian Odesa seaport or Baltic refineries (see Figure 1). Pipeline transportation of shale gas from Poland would compete with Russian natural gas going in the opposite direction. At the same time, reduced revenues from transit of Russian hydrocarbons may be overweighed by benefits incurred from lower prices for hydrocarbons from the alternative sources.
Table 1 provides a summary of the reviewed trends and their impact on the energy security challenges faced by Belarus.
Table 1. Summary of the existing trends and their impact on energy security of Belarus
Policy recommendations
Table 1 suggests that the most of the vital energy security components will experience both positive and negative shocks in the nearest future. Nevertheless, it is possible to undertake a number of policy measures to enhance positive effects and secure against risks.
Reducing energy intensity of economy
All possible negative effects on the energy intensity reduction will be a result of either lowering incentives to modernize the existing technologies due to lower hydrocarbons prices or a reduced capacity to modernize due to drop in budget revenues. Yet, as discussed above, improving energy efficiency may become an important driver of economic growth in the foreseeable future.
Besides already existing Energy Efficiency Department of the Committee for Standardization and construction of the Astravets power plant having a positive impact on the energy intensity of the economy, the Belarusian government may also consider the following options:
- Establishing a Research and Development (R&D) program on energy efficiency;
- Creating a special energy efficiency fund to be used for the modernization and energy intensity reduction measures;
- Imposing standards of energy use, especially in energy intensive sectors;
- Introducing taxation schemes on energy use with industry-specific energy intensity reference values in order to provide additional incentives for businesses to undertake modernization and reduce energy intensity;
- Issuing a mandate requiring gradual replacement and rehabilitation of obsolete equipment, especially in heat and power generating and energy intensive industrial sectors.
Heat and power generating sector diversification away from gas
Similarly, to the energy intensity challenge, the HPG sector diversification away from gas will be negatively affected by the reduced incentives to modernize and the lack of budget funds to impose these modernizations. Hence, the following measures may be considered:
- Ensuring adequate progress of the Astravets power plant construction;
- Imposing standards and taxation schemes of energy use by the sector;
- Study options for electricity imports, especially in off-peak hours;
- Gradually replace and rehabilitate obsolete equipment.
A number of steps to encourage use of specific fuel sources can be undertaken:
- Study possibilities of expanding production and/or imports of coal;
- Transfer some smaller-scale heat plants to coal and/or wood as environmental conditions permit;
- Integrate production of fuel wood into conventional forestry and industrial timber procurement;
- Assure quality standards and efficient use for forest chips.
While not being directly related to the sector’s diversification away from natural gas, the following measures will allow improving financial performance of the sector and, thus, providing additional resources to undertake modernizations in the sector:
- Separate commercial operation of the sector’s state-owned companies from the government’s conflicting position as an owner, policy setter and regulator;
- Imposing reporting standards, such as IFRS standards, in the sector in order to improve financial management of the companies and attract possible financiers;
- Adopt and implement OECD 2005 Guidelines on corporate governance of state-owned enterprises. While a number of the guidelines are not applicable to the Belarusian noncorporatized companies such as Belenergo and Beltopgas, general principle allow for more effective management of the companies.
I purposefully omit an option of the ownership change of the heat and power generating sector’s companies in our policy recommendations, since this option is not consistent with the existing economic and political environment in Belarus.
Diversification away from Russian fuel imports
While all of the trends analyzed will have positive effect on diversification away from Russian fuel imports, this seeming progress is largely due to the fact that up until recently Belarus has been totally dependent on Russia’s fuel imports. Yet, a number of steps can be undertaken to further augment the diversification progress:
- Ensuring adequate progress of the projects enhancing the diversification away from Russian fuel supply, namely LNG terminal in Kaunas, Astravets power plant and search of alternative suppliers of hydrocarbons;
- Exploring possibility to access and explore Polish and Ukrainian shale gas fields with a possibility to operate some of the extraction facilities;
- Studying an option to create a coal-bed methane extracting consortium with Ukraine to develop technology and extract coal-bed methane in coal-rich Eastern Donbas region;
- Researching and developing biomass as a source of energy to replace a share of oil and gas usage.
Usage of pipeline system up to full capacity
It is next to certain that the configuration of the hydrocarbon routes in Eastern Europe is about to go through fundamental changes in the nearest future due to both reduced demand for Russian hydrocarbons from Europe and the launch of the Nord Stream pipeline system. Still, there exist a number of steps to ensure that Belarusian pipeline system is in operation and is enhancing the country’s energy security:
- Creating a gas-transporting consortium with Ukraine to gain an additional market power to ensure adequate transit tariffs and share of volumes of the residual Russian gas exports to Europe after Nord Stream is launched;
- If Russian hydrocarbons transit volumes fall below critical level, transfer to the reverse direction to make the best use of the Polish shale gas and Baltic seaports’ ability to receive oil for Belarus. By doing so, Belarus will ensure both hydrocarbons imports diversification and adequate operation of its pipeline systems;
- Continuing search for alternative suppliers of oil and natural gas (including LNG) in order to assure adequate usage of the pipeline systems in the reverse direction.
Environmental effect
Similarly to energy intensity considerations, most of the negative effects of the current trends on the environment are related to either reduced incentives to modernize or reduced funds available for modernization projects. The following measures are intended to reduce pollution intensity of energy use:
- Establishing a Research and Development (R&D) program on environmental effects of energy use;
- Imposing environmental standards and taxes on energy use, especially in energy intensive sectors and bringing these policies closer to international standards;
- Issuing a mandate requiring gradual replacement and rehabilitation of obsolete equipment, especially in heat and power generating and pollution intensive industrial sectors;
- Establishing emission trade relations with the Kyoto Protocol Annex B countries to collect funds for the environmental modernization of equipment.
The following steps should be undertaken to minimize both actual and perceived environmental risks of the Astravets nuclear power station:
- Working with the general public to educate them about modern technologies that guarantee nuclear power safety as well as inform them of virtually accident-free record of civil nuclear power besides Chernobyl disaster;
- Establishing relations with the stakeholders that might be affected by the environmental impact of the projected power station, especially, local communities along Neris river;
- On early stages, study the possibilities for the spent nuclear fuel treatment and reach the preliminary international agreements over the potential nuclear waste storage if needed;
- Ensure compliance with the international standards of the power plant construction and operation and advertise this compliance strategy to the stakeholders.
Concluding remarks
Currently Belarus enters a completely new stage of its development as the old economic growth factors vanish, the political situation both within and outside the country transforms, and the geopolitical context changes. This new stage of the country’s development presents new challenges and new opportunities for Belarusian energy security, the key for any country’s independence. Careful consideration of the most critical energy security challenges coupled with professional and effective policy measures to tackle them is a vital task for securing Belarus’ economic growth, political sovereignty and quality of life improvement.
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Between East and West: Regional Trade Policy for Ukraine
Given Ukraine’s geographical location between Europe and Russia, the country often has to make difficult choices in its foreign policy. Trade policy is not an exception. In particular, Ukraine is currently negotiating a comprehensive free trade agreement with the EU, which is fostering hopes of joining it in the near future. However, at the same time, Russia is ‘inviting’ Ukraine to join the Customs Union it has created together with two other former Soviet Republics; Belarus and Kazakhstan. Since Ukraine cannot be part of both regional agreements simultaneously, it will again have to choose between the EU and Russia.
Over the last decade, the European Union has become the most important trading partner of Ukraine. The share of Ukraine’s exports of goods to the EU is now around 25-30 percent, while its share in Ukraine’s exports of services has increased twofold from 17 percent in 1994 to 34 percent in 2008. The share of Ukraine’s imports from the EU is even larger: around 35 percent in goods and more than 50 percent in services. This growth in trade shares has occurred despite the fact that there are still substantial barriers, both tariff and non-tariff, to free trade between Ukraine and the EU. The Free Trade Agreement (FTA) which Ukraine and the EU are currently negotiating is intended to remove many of these barriers.
The EU-Ukraine FTA is part of the so-called New Enhanced Agreement between the EU and Ukraine and consists of a set of provisions stipulating the liberalization of trade in goods and services, capital movement and payments, and government procurement.
A big part of the agreement is devoted to the trade in goods. This is perhaps not surprisingly so given that trade in goods accounts for 80 percent of their total bilateral trade in goods and services. Tariffs that Ukraine currently applies to the EU non-agricultural imports vary from 0 to around 20 percent. Under the new agreement, the tariffs on many of these goods will be reduced.
Apart from tariffs, the agreement stipulates an elimination of many non-tariff barriers to trade. This will be achieved by harmonization and simplification of the procedures related to customs and licensing, capital movement, government procurement, and intellectual property rights (IPR) protection, as well as competition policy, energy security and others. Ukrainian legislation must be standardized to conform to the respective European laws, with some procedures becoming more transparent (tenders), while others becoming more stringent (IPR). For example, Ukrainian producers will have to abide by the legislation on trademarks and geographical names. According to the Ukrainian deputy minister of Economy, the EU has offered a grace period of 5-10 years to Ukrainian producers to re-brand their products.
The FTA negotiation process between the EU and Ukraine started on February 18, 2008. Since then, more than fifteen rounds have taken place. Initially, there were hopes that the agreement would be signed before the end of 2010. However, in the fall of 2010, it became clear that this was not going to happen. Currently, the more pessimistic experts expect the agreement to be signed only in 2013.
In parallel with the EU integration processes, Russia, Belarus and Kazakhstan have created a customs union and are actively trying to involve Ukraine in their union. On the one hand, the Customs Union is attractive for Ukraine since it offers free trade with Russia, which is still one of Ukraine’s biggest trading partners, both in terms of imports and exports.
This union promises access to cheaper energy resources, which would be beneficial for Ukraine given its high energy dependence, especially in the exporting sectors like metals and chemicals. However, joining this Customs Union would jeopardize the FTA negotiations with the EU and would even endanger the WTO membership of Ukraine.
So far, the Ukrainian government has not taken a clear stance on whether Ukraine is going to become a full member of the Customs Union. Instead, it has cautiously offered a “3+1” arrangement.
In the light of the above discussion, the natural question to ask is then: what integration strategy would Ukraine benefit the most from?
Regional Trade Agreements
The idea that regional trade agreements (RTA) are beneficial to a country is best supported by the fact that such agreements have become increasingly popular over the last twenty years. As of July 31, 2010, there were around 400 RTAs reported to the WTO with 193 being in force. According to the World Bank, on average, a WTO member has regional agreements with more than 15 partner countries. RTAs exist predominantly as free trade agreements (FTA) and customs unions (CU). The former removes barriers to trade in goods and services among member countries but allows individual members to set their own tariffs against third parties. The latter type is a stricter arrangement since customs unions act as a single agent in the world markets and have a unified external tariff regime.
The analysis of RTAs and customs unions in particular, dates back to Viner in 1950 who introduced the terms trade creation versus trade diversion. Trade creation refers to a situation where member countries begin to trade goods and services with each other after the creation of an RTA, whereas previously they produced them domestically. Trade diversion, on the other hand, occurs when member countries shift their imports from outside partners to inside partners. Obviously, while trade creation is viewed as a good consequence of a RTA, trade diversion is undesirable. This, since the lower tariffs, make member countries shift away from the most efficient outside producer to an RTA partner.
There are two approaches in the literature to evaluate the impact of the RTAs: gravity models and general equilibrium (GE) models. Gravity models are estimated on the actual trade data while GE models are used for simulations. The typical findings on the effect of RTA’s are that: (a) excluded countries almost always lose, (b) there is a trade creation effect but it is rather small, and (c) the effect of the RTAs differs across their members, in particular, smaller countries tend to experience a larger increase in their exports (World Bank, 2005; Berthelon, 2004).
In addition, the so-called South-North RTAs (agreements between developed and developing countries), are found to be more beneficial for the latter than South-South agreements. Finally, the literature shows that on average FTAs are associated with lower levels of tariffs compared to customs unions.
Ukraine’s Choice of Trade Policy
The above presented empirical findings on existing RTAs, can offer guidance in which of the regional agreements Ukraine would benefit the most from. First, on the one hand, both of the FTA with the EU and the Customs Union with Russia are likely to lead to higher trade volumes (trade creation). On the other hand, the FTA with the EU can be regarded as a South-North agreement and could, therefore, be expected to have larger benefits for Ukraine than the Customs Union with Russia. Another argument in favor of the EU-FTA, is that Ukraine’s other trading partners are likely to face higher tariffs if Ukraine became a member of the Customs Union, than if she signed an FTA with the EU.
A recent study by Shepotylo (2010) addresses this issue and can be used as a benchmark for the analysis. Shepotylo uses a gravity model to compare potential export gains from deeper integration with the CIS countries to those from integration with the EU. Shepotylo’s analysis evaluates whether integration would be trade creating or not, leaving aside the issue of trade diversion.
Based on past experiences of Eastern European and CIS countries, Shepotylo builds two thought experiments. The first one is based on the scenario in which Ukraine would have become more deeply integrated into the CIS structure. That is, the experiment allows us to see what would have happened to Ukrainian foreign trade over the period 2004-2007 if Ukraine had developed closer ties with the CIS countries. The second experiment envisages what would have happened if Ukraine would have joined the EU in 2004.
According to the results, Ukraine would have benefited under both integration scenarios relative to the current situation of no integration. However, the benefits would have been twice as high under the EU integration strategy. Shepotylo’s results suggest that the EU integration could have increased Ukrainian exports in 2004-2007 by 10 percent, while the deeper CIS integration would only have increased exports by about 4 percent.
The highest expected benefits of Ukraine’s integration into the EU would have come from a substantial increase in export of various types of machinery and equipment, road vehicles and transport equipment, as well as apparel and closing accessories. These gains would have been virtually uniformly positive and economically large across all groups of countries regardless of the membership in EU. For example, export of road vehicles to the CIS countries would have been 88 percent higher under the EU integration scenario than under the CIS integration scenario, while their exports to the Western Europe would have been 82 percent higher. The export of raw materials, on the other hand, would have either declined (nonferrous metals), or remained relatively stable (iron and steel).
More importantly, gains under the EU scenario would also have come from a more diversified trade structure. A higher export diversification would be achieved because of the rapid expansion of manufactured exports, the share of which in total export would have been 26 percent under the EU scenario and only 16 percent under the CIS scenario.
In our view, diversification of trade flows is very important since a more diversified export structure with a high share of manufactured products can better protect a country from negative terms-of-trade shocks. For example, export diversification reduces the effect of idiosyncratic shocks. This was found by Koren and Tenreyro (2007). According to their findings, low-income countries which specialize in fewer and more volatile sectors, experience higher aggregate volatility in terms of GDP growth rates and trade volumes, etc. Another reason to why a more diversified trade flow (i.e. moving away from exports of primary goods to exports of manufactured products) is desirable, is the general trend of declining prices of primary commodities relative to the prices of manufactured goods. Also, a diversified export structure with a higher share of technologically advanced products has been found to be conducive for higher economic growth (Hausmann et al., 2007).
Conclusion
The above analysis suggests that signing a deep FTA with the EU would benefit Ukraine the most. This, given that it is likely to lead to a substantial increase in total exports and a favorable change in export composition towards a more diversified structure with a higher share of technologically advanced goods. These developments could in turn lower macroeconomic volatility and boost economic growth. Also, the EU integration scenario considered by Shepotylo (2010) did not allow for a substantial liberalization of trade in agriculture – an area where the large EU market is most protected. If the Ukrainian government manages to negotiate more open trade in agriculture, Ukraine may potentially gain much more than predicted in Shepotylo’s experiment.
On the other hand, joining the Customs Union with Russia would enhance the trade with its members and secure a lower price for energy resources. However, the benefits are likely to be outweighed by the potential losses of other markets and complications with the WTO due to the increased level of protectionism – an inevitable consequence of joining the Customs Union. In addition, the Ukrainian trade structure would become even more concentrated and skewed towards primary commodities, making the country even more vulnerable to shocks and slowing down its economic development.
Recommended Further Reading
- Berthelon, Matias (2004) “Growth Effects of Regional Integration Agreements”, Working Papers Central Bank of Chile No 278.
- Freund, Caroline and Emanuel Ornelas (2010) “Regional Trade Agreements“, World Bank Policy Research Working Paper No. 5314.
- Harrison, Glenn W., Thomas F. Rutherford and David Tarr (2003) “Rules of Thumb for Evaluating Preferential Trading Arrangements: Evidence from Computable General Equilibrium Assessments“, World Bank Policy Research Working Paper Series No. 3149.
- International Centre for Policy Studies (2007) “Free Trade between Ukraine and the EU: An impact assessment”.
- Hausmann, Ricardo, Hwang, Jason, Rodrik, Dani (2007) “What You Export Matters”, Journal of Economic Growth 12, No. 1, 1-25.
- Koren, Miklos, Tenreyro, Silvana (2007) “Volatility and Development”, Quarterly Journal of Economics 122, 243-287.
- Lederman, Daniel, Maloney, William F. (2003) “Trade Structure and Growth”, World Bank Policy Research Working Paper No. 3025.
- Shepotylo, O (2010) “A Gravity Model of Net Benefits of EU Membership: The Case of Ukraine”, Journal of Economic Integration, 25-4: 676-702.
- World Bank (2005) “The Global Economic Prospects 2005: Trade, Regionalism and Development”, Washington D.C.
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.