Globalization and Inequality in CIS Countries: Role of Institutions

The process of opening and integration into the world economy in the CIS countries has been part of a more complex process of transition from the planned to market economy. Over the last 10 years most of these countries have liberalized their trade regimes versus non-CIS countries, introduced their own currency, and to some extent liberalized flows of direct and portfolio investment. These and other reforms were accompanied by a pronounced output decline, an increase in poverty rates and inequality indexes. Of course, most of these changes in output and income inequality are attributable to the transition process. However, it is still interesting to know whether globalization and trade opening have enhanced or, on the contrary, decreased the negative effect of transition on incomes in transition countries. Comparison of outcomes in various countries suggests that trade policy per se was less important than the ability of governments to enforce it. Countries, where reforms were implemented slowly, but the government institutions did not collapse, experienced smaller overall output decline, and smaller increase in inequality. Countries with weak governments often performed as “passive globalizers”: the trade-to-GDP ratios in them were quite high, partly accounting for capital flight. In contrast to active globalizers, output in these countries declined, while poverty and inequality increased. However, the worst results were seen in countries cut off from international trade, because of being landlocked or at war or in bad economic relations with the neighboring countries.

The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect

Policymakers around the world introduce special policies aimed at attracting foreign direct investments (FDI). They motivate their decision by the spillover effect, which FDI have on domestic companies. Empirical literature so far has failed to find any robust evidence of this effect. In this paper, we make an attempt to explain this finding. Using data from Poland, Romania, Russia, and Ukraine, we demonstrate that not all FDI have positive spillover effects on domestic firms. Spillovers are positive only in the case of export-oriented FDI and, more generally, are driven by the more productive foreign companies. Moreover, effects of FDI on domestic firms are not limited to knowledge spillovers: exposure to foreign technologies alters the form of their production functions. Specifically, foreign entry is associated with higher capital intensity and lower labor intensity of domestic firms in relatively more developed countries, such as Poland, while the opposite is the case in the less developed countries, such as Russia. These results are subject to threshold effects: benefits are more likely to materialize once a relatively large stock of foreign capital is accumulated. Absorptive capacity of domestic firms plays a crucial role in reaping the benefits of FDI. Both, knowledge spillovers and production function changes, occur predominantly in the more educated and the less corrupt regions.

The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect

Policymakers around the world introduce special policies aimed at attracting foreign direct investments (FDI). They motivate their decision by the spillover effect, which FDI have on domestic companies. Empirical literature so far has failed to find any robust evidence of this effect. In this paper, we make an attempt to explain this finding. Using data from Poland, Romania, Russia, and Ukraine, we demonstrate that not all FDI have positive spillover effects on domestic firms. Spillovers are positive only in the case of export-oriented FDI and, more generally, are driven by the more productive foreign companies. Moreover, effects of FDI on domestic firms are not limited to knowledge spillovers: exposure to foreign technologies alters the form of their production functions. Specifically, foreign entry is associated with higher capital intensity and lower labor intensity of domestic firms in relatively more developed countries, such as Poland, while the opposite is the case in the less developed countries, such as Russia. These results are subject to threshold effects: benefits are more likely to materialize once a relatively large stock of foreign capital is accumulated. Absorptive capacity of domestic firms plays a crucial role in reaping the benefits of FDI. Both, knowledge spillovers and production function changes, occur predominantly in the more educated and the less corrupt regions.

Trade Liberalization, Foreign Direct Investment, and Productivity of Russian Firms

The paper studies the effects of liberalization of imports and foreign direct investment on Russian firms. Using the firm-level data from 1995-2001, this paper finds that competition with imports and with FDI exerts a positive effect on domestic firms. This effect is weaker in the case of firms located in complex industries. Increased availability of imported inputs help to improve productivity of domestic firms in the mid-1990s, although the devaluation of the ruble in 1998 temporarily made firms that relied on foreign-produced inputs less competitive. Finally, entry of foreign-owned firms in post-crisis period leads to improvement in TFP of their Russian suppliers.

Estimation of the Russia’s trade policy options with the help of the Computable General Equilibrium Model

The computable general equilibrium model was used in assessing different Russia’s trade policy options. The base experiment lying in the core of our investigation is simulation of the EU eastward enlargement. According to our calculations Russia does not loose in the resulting equilibrium. This is not a zero-sum process from a point of view of Russia’s social welfare. The other experiments are: simulation of Russia’s WTO accession and creation of the Common European Economic Space. Change in the tariffs associated with the possible WTO accession is so small relative to the existing level of tariffs, that it does not give a significant change in the Russian economic environment. Significant changes are associated with the creation of the CEES as a free trade area between Russia and the enlarged Europe. If an FTA agreement will cover all goods and services, this will give a negative effect on the Russian economy.CGE models, enlargement of the European Union, Russia’s WTO accession, Free Trade Area

Trade Liberalization, Foreign Direct Investment, and Productivity of Russian Firms

The paper studies the effect of liberalization of imports and foreign direct investment on Russian firms. Using the firm-level data from 1993-2000, the paper finds that competition with imports and with FDI exerts positive effect on domestic firms. Prior to the 1998 crisis, this effect is weaker in the case of firms located in complex industries. Increased availability of imported inputs or inputs produced by foreignowned firms helped to improve productivity of domestic firms in the mid-1990s, although the devaluation of the ruble in 1998 temporarily made firms relying on foreign-produced inputs less competitive. Finally, entry of foreign-owned firms in some cases leads to improvements in TFP of the firms that produce inputs for foreignowned firms. This effect also weakened after 1998, possibly because of the negative effect of devaluation on foreign-owned firms.