Chapter 4. Factors of regional competitiveness
4.8 Conclusions
Our first task in this chapter has involved revealing the structure of Kaliningrad’s comparative advantages. To achieve this goal, a measurement of IIT and comparative advantage has been undertaken. The second task has been to identify Kaliningrad’s basic factor endowments and their role in regional specialisation and competitiveness.
The calculations of the Lafay indicator of revealed comparative advantage show the following dynamic trends:
• a strong and sustainable comparative advantage in the sectors of oil and timber (including timber, pulp, paper and plywood);
• a gradual decline from positive to neutral positions or even negative values in the clothing and footwear sectors; and
• a worsened comparative disadvantage in the food products and machine-building sectors (in foreign trade).
The limits of the indicator when used solely for foreign trade can be clearly seen. Two broad sectors with the greatest comparative disadvantage, food products and machine-building, correspond exactly to the two fields of Kaliningrad’s specialisation. Accounting for interregional trade flows with mainland Russia brings about profound changes in the Lafay indicator:
• The indicator for food products changes from strongly negative to positive.
• The indicator for oil and oil products changes from strongly positive to positive.
• The indicator for petrochemical products changes from neutral to negative.
• The indicator for the wood-working sector declines although remains positive; the same is true for leather and furs.
• The indicator for metals changes from positive to slightly negative.
The substantive factor explaining the high IIT values in Kaliningrad’s total trade is the intermediary role of Kaliningrad’s economy in Russian–European trade and the proliferation of low value-added, low-degree transformation processes. Kaliningrad–Russian trade should show a higher IIT level than foreign trade, but it should not be as high as the value for total trade.
Furthermore, the IIT analysis reveals the extent to which comparative advantages explain Kaliningrad’s economic orientation. Total trade reveals high IIT values. Although comparative advantages based on basic factor endowments may still be relevant to explain Kaliningrad’s orientation, their explanatory power is limited. We need to move away from basic factors to consider other factors, resources and assets, notably including the legal framework. At the same time, foreign trade includes the majority of sectors with low IIT values. Here, the explanatory
power of comparative advantage is rather strong and still highly relevant for Kaliningrad’s specialisation.
The contrast of all-Russia comparative advantages with those of Kaliningrad leads to the following observation. Kaliningrad’s comparative advantages coincide with all-Russia ones as regards exports (oil, timber, metals and metal-working and pulp). Yet the region also possesses comparative advantages in consumer electronics and food products, which are sectors with a markedly strong disadvantage in Russia. The correspondence is clear: Kaliningrad’s comparative advantages are developing in those fields of import substitution in which the conditions are best for a partial compensation of the Russian disadvantage.
The wages/labour productivity ratio in the Kaliningrad region, Russia as a whole and Lithuania (except for mechanical engineering) is approximately the same. Meanwhile, the relation between labour costs and productivity in the region’s industry is 2-2.5 times less than in ‘old’
EU member states. This feature determines the current orientation of Kaliningrad’s industry and, under certain conditions, can be one of the factors underpinning the competitiveness of Kaliningrad products exported to foreign markets. Kaliningrad holds comparative advantages in labour-intensive products compared with the old EU member states and, to a much lesser degree, the CEECs. But there is no comparative advantage based on the labour costs/labour efficiency ratio in relation to Lithuania or to mainland Russia.
Despite certain advantages over foreign companies in terms of the labour costs involved (reflected in the ULC indicator), Kaliningrad firms yield considerably to their overseas counterparts in technological advances (reflected in the capital/labour ratio). This circumstance amounts to a serious disadvantage in capital-intensive goods.
Finally, as regards energy and fuel costs as an important production factor in a number of industries, Kaliningrad holds a strong advantage compared with the EU, including the new member states. That being stated, the spread in energy prices is gradually diminishing. Also, Kaliningrad finds itself slightly at a disadvantage regarding energy tariffs in relation to mainland Russia.
Conclusions about the problems in terms of the labour-, capital- and energy-intensive nature of firms in Kaliningrad can be summed-up in the following points. Kaliningrad is markedly weak in capital-intensive industries. Its weakness in energy-intensive industries in comparison with mainland Russia, combined with its remoteness from principal raw materials, conditions its comparative disadvantage in energy-intensive manufacturing. A regional comparative advantage is only present in labour-intensive sectors.
The analysis of the cost structure allows the identification of several general factors influencing Kaliningrad companies’ competitiveness with regard to costs. Companies receiving raw materials from Russia have to bear a higher level of costs for components, significantly exceeding the average indices across the country. At the same time, the share of material costs in the structure of aggregate production costs in companies oriented to foreign markets (meat-processing and mechanical engineering) is comparable to indices typical for foreign companies.
This result can be explained by the distance of Kaliningrad companies from Russian raw material sources, which leads to an increase in the costs of delivery of the components, spare parts and materials to the Kaliningrad region.
Does the current economic orientation correspond to Kaliningrad’s factor endowments? Is there a coherence or contradiction between them? Kaliningrad’s economic orientation and the major shift that has occurred in one and a half decades of transition have been described in chapters 2 and 3. In the present chapter, we have determined that the use of advantages in labour costs and efficiency, along with external factors, has played an important role in shaping of the direction taken by the regional economy. Today’s economic orientation cannot be successfully explained
by labour costs alone, however. It must be viewed in combination with other factors, particularly the SEZ regime. Within the typology of regional competitiveness factors (Colletis
& Pecqueur, 1994) and the three development paths elaborated in Samson (2000b), the situation in the region is dominated by import substitution and by a shift from generic resources to generic assets, i.e. along a low development path. There are two supplementary trends: first, export promotion along the low development path (the rise of oil exports due to the exploration of the sea shelf, which is unsustainable in the long run since the resources are limited); and second, modest elements of import substitution along the high development path (e.g. the creation of territoriality in the furniture industry). The SEZ regime plays a major role in valorising the advantage in labour costs, partially to the detriment of more promising resources.
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