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Sequencing in Customs Union Formation: Theory and Application to Eurasian Economic Union Gerald Pech based on joint work with Aidos Alimbekov and Eldar Madumarov Sequencing as a Problem • • • • Why do economic unions not form in one go? Historical coincidence? – Eastern Europe Evolving nature of union? Increasing attractiveness over time – could bring in a “strategic” motive behind the sequencing A “Strategic” Explanation of Sequencing • Aghion-Antras-Helpman, J Internat Econ (2007): “equilibrium sequencing” • An “agenda setter/formateur” can form union at once or start with a core union • Assume that forming the core union has a “negative externality” on an accession candidate • It should be willing to join under conditions more favourable to the formateur • Prediction: The country which is most negatively affected joins last Kyrgyzstan’s delayed entry • Signatory of the 1995 agreement – but not of the Dushanbe agreement 2007 • WTO member since 1998 • April 2010: Bakiyev steps down • Atambaev wins election on promise of close ties with Russia • Kyrgyzstan joins in 2015 Effect of Customs Union on Kyrgyzstan • Re-import business and textile industry historically benefitted from low tariff regime • Kyrgyzstan expected to be a net-loser from joining customs union • But Kyrgyzstan also suffers negative external effects from core customs union • Main industries equally hit by exclusion from integrating market How to Explain Sequencing in Eurasian Customs Union • So by joining Kyrgyzstan loses compared to status quo ante • But once core customs union has formed joining is the least bad option • So is the strategic sequencing model the best explanation of what happened with Kyrgyzstan’s entry? A Historical Precedent: The Zollverein • The German Customs Union (Zollverein) was founded in 1833 between independent German states • Development that started at Prussia’s initiative in 1816 • And finally resulted in German nationhood www.geraldpech.net 7 The Zollverein: Hesse-Cassel • In 1828, Hesse-Darmstadt joined Zollverein • Negative externalities on Hesse-Cassel – through higher border-tariffs of neighbouring Darmstadt – resulting in civil unrest – and fear of further loss of transit traffic • Recalcitrant duke resigned in 1831, successor signed ratification documents The Zollverein www.geraldpech.net 9 www.geraldpech.net 10 An Aside: Why Was Prussia Interested in Integration? • Prussia did not benefit that much from trading with the smaller states • But it a gained better bargaining position when negotiating over trade with big players such as England and France www.geraldpech.net 11 What is missing from the story • As Alimbekov/Madumarov/Pech (2015) show, the AAH story either needs – myopic accession candidates – an exogenous constraint on bargaining institutions which the agenda setter can choose from – bargaining frictions: it takes time to bargain • Kyrgyzstan’s WTO membership makes negotiations more complicated • Problems in negotiating with Bakiyev gvt’ – better modelled as “political uncertainty?” Richer Explanations Some more facts • Kyrgyzstan receives Russian infrastructure support … some more facts • New border facilities at Kazakh-Kyrgyz border – Making core customs union more credible and costly? • Russia promises Kyrgyzstan help in securing its outer border – suggests that desire to “incentivize” Kyrgyzstan to invest into border controls could have played a role An Imperfect Commitment Model of Accession • Assume accession is irreversible • and accession candidate cannot credibly promise to implement policies which are necessary to make union successful • Like investing in border security • Sequencing solves the incentive problem: Make accession conditional on investment Supporting Materials www.geraldpech.net 17 Winners and Losers • Economic welfare of a country is sum of – Consumer surplus – Tariff revenue – Profits of home producers – We assume that foreign firms have market power! • As a proxy for impact of CU we use – change in current account balance – change consumer surplus of non numeraire good • Political benefits and costs! www.geraldpech.net 18 Eurasian Customs Union • 1995: First agreement signed between Belarus, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. – Uzbekistan not interested at the moment – Tajikistan only has land border with Kyrgyzstan • 2007: Dushanbe agreement on customs union signed between BY, KZ and RU • 2010: Official launch of CU with external tariff at (high) Russian rates – for some goods July 2010, for others July 2011 www.geraldpech.net 19 Tariff Protection Kazakhstan simple average 2009 6.78% weighted average 2009 5.52% Belarus 8.00% 2.3% Russia 8.09% 5.9% EU 10.6% 7.37% from: Jandasov/Sabyrova 2009 www.geraldpech.net 20 Standard and non standard channels Source: Vashakmadze, E., Kaminski, B., Mironova, Y., (2011). www.geraldpech.net 21 Standard and non standard channels www.geraldpech.net 22 EXPit 0 1CU s 2,..,6 sCDi 7CU Ii • • where is the average value of the export index for country i in the pre- and the post customs union period (t=1,2), CU is a dummy variable for customs union which takes the value 1 for the subsample starting in 2010, CDi is the country fixed effect and Ii is a dummy which is 1 if the country is a latecomer in the customs union (i.e. Tajikistan (TAD), Kyrgyzstan (KY) or Armenia(ARM)) and 0 if the country as of now is not expected to join the customs union (i.e. Ukraine, Azerbaijan, Moldova). Dependent Variable: EXPit Method: Least Squares Date: 05/03/15 Time: 17:39 Sample: 1 12 Included observations: 12 EXPit =b0+ b1*CU+ b2*TAD+ b3*KY+ b4*ARM+ b5*MOL+ b6*AZ + b7*(KY+TAD+ARM)*CU b0 b1 b2 b3 b4 b5 b6 b7 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient Std. Error t-Statistic Prob. 238.1018 289.1980 -166.0115 0.672807 49.87698 -179.2669 383.8645 -235.6465 96.99498 96.99498 137.1716 137.1716 137.1716 118.7941 118.7941 137.1716 2.454785 2.981577 -1.210246 0.004905 0.363610 -1.509056 3.231343 -1.717896 0.0701 0.0407 0.2928 0.9963 0.7346 0.2058 0.0319 0.1609 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat 338.6452 255.7868 12.62738 12.95065 12.50770 2.690579 0.921567 0.784308 118.7941 56448.15 -67.76429 6.714100 0.042389