Towards a Pan-European Economic Space Ivan Samson1

The lessons of research on the Common European Economic Space

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The lessons of research on the Common European Economic Space
The RECEP White Book shows that the CEES can be an important lever of sustainable growth for Russia, and that it represents something much more sophisticated than a traditional free-trade area, a customs union or recognition of the EU ‘acquis communautaire’. The CEES is both a final aim and an economic mechanism. The final aims of this space are: to implement the four fundamental freedoms for goods, services, capital and persons; to achieve an intensive exchange of know-how and capital through FDI; and to support strong modernisation policies. The importance and the specificity of Russia make any reference to past experiences inadequate and successful creation of the CEES could contribute to the economic and social development of all Europeans.
Achievement of this long-term objective requires implementation of the CEES as an economic mechanism for changing the path of growth and the path of reforms in Russia. The Common European Economic Space (CEES) between Russia and the European Union has first to be considered as a co-development path that will define, step by step, its actual content. As a co-development path the CEES offers a way for Russia to find a virtuous growth cycle that could become sustainable. It is dependent on adequate positive interactions between development of trade liberalisation (the small scale of the Russian domestic market makes the EU market vital for modernisation of the Russian economy), investment and know-how flows, and institutional adjustments. Lack of parallelism between these three essential pillars would induce inefficient reorganisation and could even generate tensions. The economic mechanism of the CEES could organise the whole opening process of the Russian economy, starting with WTO accession. In its movement towards WTO accession, Russia has made the important choice of "large openness" as opposed to "small openness". The nature of Russia’s negotiations on bound tariff rates, which will be progressively reduced, suggests that Russia will benefit from a 6-8 year "window" in order to implement needed adjustments. This is not a long time. EU support is essential for Russian accession to the WTO, and active partnership within the CEES for modernisation of Russia’s production is a condition for making this accession a success.
This co-development path is of mutual interest because creating a Common European Economic Space is a win-win project for the two main forces on the European continent: the Russian Federation and the European Union. For Russia it offers a way to diversify an economic system based mainly on the exploitation of natural resources and permanently exposed to Dutch disease, and to organise a diversified competitive economy based on relevant investments. For the Economic Union, Russia is a major foreign trade partner in absolute terms and presents opportunities for capitalisation of EU strengths through increased complementarities. The chief aim could be best defined as sustainable growth for all the inhabitants of Europe. Russia and the EU may have very different levels of development but, between them, they also have all the ingredients of success at a time when globalisation and knowledge are the main levers of development. Both parties will gain increased prosperity, stability and security from creation of the CEES.
The challenge of the CEES goes beyond creation of a free-trade area and focuses on transformation of the development model of the Russian economy. Despite good performance by the Russian economy after 1998 rouble devaluation and the rise of world energy prices, Russia faces difficulties in transforming its economic surplus into a basis for sustainable development.
Russia’s macroeconomic health since 1999 is reliant on exports: the increase in the trade surplus since 1998 has been 2-2.5 times greater than increase in GDP, which has grown by over 20% in the last three years. The trade surplus exceeds $60 bn, and the net balance is $40 bn. Thanks to this situation, the budget surplus is close to 5% of GDP and debt has been reduced by $2.7 bn. However, since two thirds of Russian exports are primary goods, Russia’s growth is dependent on evolution of world market prices. Lack of significant increase in imports of machinery and equipment also gives cause for concern. The overall investment rate relative to GDP remains low, at around 15-16% over the last five years, which is far below the rates that are needed for economic take-off in emerging economies (between 25% and 35% in a medium-term perspective), and is even below investment rates in developed EU countries. The hypothesis of export-led growth is not convincing, and there is nothing to indicate that such growth, which has benefited from the devaluation of 1998, is sustainable. This is also indicated by the balance of public finances, which remains highly volatile. We are still far from a Russian economic boom based on multi-sectoral productivity increases and strong investment activity. It is thus fair to say that Russia remains mainly a rent economy and a victim of Dutch disease.
The situation is thus more fragile than superficial reading of the macroeconomic indicators may suggest, and two issues have to be considered in order to clarify the challenges for the Russian economy. First, can Russia rely only on primary goods or should it look harder at the new situation created by the knowledge economy and flexible specialisation in industry? And second, can foreign direct investment (FDI) help to bring sustainable growth by boosting current low investment rates? It seems that both the EU and Russia would benefit from integrating within a new type of economic space where a productive partnership could mobilise their respective resources for their common interest. The challenge here is not only trade but also capital and know-how flows. Moreover, dynamic strategies underlying implementation of the CEES must consider new features of the world economic environment. Growth relies on new productive paradigms, such as the knowledge economy and environmental values. Orientation towards the knowledge economy is very consistent with Russia’s human capital endowment. This means that themes such as intellectual property rights, environment-friendly production or SME development have to be at the top of the agenda.

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