SIEI Calculations Integration of Markets

Integration of markets

Labour migration

Electric power Trade integration

Education Agriculture Figure 3.2.

Market integration indicators

3.2. SIEI Calculations Integration of Markets

The evaluation of markets in the SIEI is based on scrutiny of the cross-border flows of production factors. This method appears to be the optimal one, in view of the insufficiencies of the available time-series data (which makes it impossible to apply econometric methods) and the lack of comparable data on prices in post-Soviet countries. The SIEI uses two groups of indices: (1) evaluation of “general market integration” (i.e. covering all sectors) and (2) evaluation of the integration of specific markets. The first group of indices characterises the overall level of regional cooperation achieved by particular countries or regions, whilst the second group refers to critical areas of cooperation which are capable of becoming the “areas of actual solidarity” described above.

The choice of functional areas was determined by the importance attached to particular areas of cooperation and the availability of data. In this report we provide an evaluation of three sectors:

electric power, agriculture and education. It is no doubt that these three sectors are of paramount importance to the sustainable development and economic security of the respective countries, and cross-border cooperation in these sectors is essential. Electric power and agriculture provide a basis for modernisation, and education is directly responsible for building the economies’

potential for innovation. In addition, cooperation in education, which is understood as levels of student exchange between countries, indirectly characterises the potential for social integration (Kegley and Howell, 197) – notably, long-term social integration, as student exchange consists of young people.

There are fewer questions around the evaluation of “general market integration”. In the SIEI, we calculate the indicators of two types of cross-border cooperation: international trade and labour migration. Logically, we should have considered one more critical area of cooperation – capital flows and mutual investment. Unfortunately, due to the scarcity of data, we cannot

Indicator Country pair Country-to-region Region A. General market integration

Mutual trade

(Country’s share in the total foreign trade turnover of the country pair + country’s share in the total GDP of the country pair) *100 / 2

(Country’s share in trade with the region in the total foreign trade turnover of the country + country’s share in trade with the re-gion in the country’s GDP)

*100 / 2

(Share of the countries’

mutual trade in their total foreign trade turnover + share of the countries’

mutual trade in the region’s total GDP) *100 / 2

Migration

Share of labour migrants from each country of the pair working in the other country in the total popula-tion of the country pair

Share of labour migrants from the country working in the region in the total population of the country

Share of labour migrants from all countries of region working in other countries of the region in the total population of the region B. Functional cooperation in key markets

Electric power

Volume of trade in electric power between the coun-tries of the pair (kWt.h) / their total GDP

Volume of trade in electric power between the coun-try and the region (kWt.h) / the country’s GDP

Volume of trade in electric power between the coun-tries of the region (kWt.h) / the region’s GDP

Agriculture

Volume of trade in cereals between the countries of the pair (tonnes) / their total GDP

Volume of trade in cereals between the country and the region (tonnes) / the country’s GDP

Volume of trade in cereals between the countries of the region (tonnes) / the region’s GDP

Education

Number of students from each country of the pair studying in the other coun-try / total population of the country pair

Number of students from the country studying in the region / population of the country

Number of students from all countries of the region studying in other the countries of the region /

Note: all figures are provided in Annex 2. The trade integration index is divided by 100 in order to make the presentation of data more convenient, and to ensure compatibility with the standard “share in foreign trade” indices which are expressed in percent.

calculate these indicators for the entire region, at least not at present. This issue is discussed in more detail in Annex 3, in which we provide recommendations on how to fill this gap in future. The procedure for calculating the indicators of market integration is summarised in Table 3.1.

As can be seen, practically all SIEI indicators are calculated by a standard formula: an integration index is a fraction in which the numerator is the volume of cross-border flow of production factors with the studied group (country pair, a country and region, or all countries of a region), and the denominator is a normalising value which allows the volume of cross-border flow to be

The method of calculating the mutual trade index is different. First, the numerator in this case is foreign trade turnover, which comprises export and import. A standard problem encountered when calculating this index is a discrepancy in recording the same flows in export and import statistics, which can occur due to technical reasons (e.g., export and import are accounted for using different prices) or misrepresentation. Therefore, we calculate the numerator as follows:

• country pairs: where a pair comprises country A and country B, the numerator is the sum of export from A to B, import from A to B, export from B to A, and import from B to A;

• country-to-region: the numerator comprises import from the country to the region, export from the country to the region, import from the region to the country, and export from the region to the country;

• region: the numerator is the sum of values calculated for all pairs of countries in the region.

This approach enables us to make full use of all available data, but creates the problem of “double calculations”. As “double calculations” are involved in all the indices without exception and our task is to study their dynamics in space and time, in principle this problem could be ignored. It can also be mitigated to some extent by applying the following method.

As can be seen from the above table, each index of trade integration is an arithmetic mean of two values which have the same numerator but different denominators. The first index is calculated the same way as all the others, where the basis for calculation is absolute GDP. However, the trade indices are special in that it is possible to use an alternative basis for comparison which, as we have mentioned above, is a standard element of indices used in literature – that is, the total turnover of trade with all the world’s countries. Therefore, we calculate the second index, in which the basis for comparison is⁸:

• country pair: the aggregate foreign trade turnover of both countries;

• country-to-region: doubled foreign trade turnover of the country;

• region: the aggregate foreign trade turnover of all countries of the region.

In the case of the first and third indices, the “double count” problem is present in both the numerator and the denominator and therefore no correction is necessary. In order to correct this problem in the second index, the denominator is multiplied by two. Again, as far as comparative analysis is concerned, this is not a critical issue.

In this group of indices, higher values correspond to higher levels of integration; and flows of commodities and production factors in the context of the studied country pairs or regions are significant in relation to the aggregate size of this territory’s economy.

Economic convergence

The convergence of post-Soviet economies is evaluated in four areas: macroeconomics, monetary policy, financial policy, and fiscal policy. Each of these indices comprises several characteristics. The objective of the exercise is to generalise this data and determine the degree of convergence of the region’s economies from the perspective of particular characteristics. For the purposes of the above four indices, the following characteristics are considered:

8 We decided to omit the “trade intensity” indicators, because our system consisting of three types of indicators (country, country-to-region and country-to-region) copes with the problem of inadequate representation of large countries quite efficiently.

Convergence of economic systems

Macroeconomics

Fiscal policy Financial policy

Monetary and credit policy

Figure 3.3.

Indicators of convergence of economic systems

• macroeconomics: per capita GDP, annual GDP growth (thus, we take into account both of the aspects of “growth convergence” that are discussed above);

• financial policy: average deposit rate, average lending rate;

• fiscal policy: the share of consolidated budget expenditure in GDP, the share of foreign debt in GDP, the share of consolidated budget balance in GDP, and the Frank index⁹.

• monetary policy: annual rate of growth of national currency against the US dollar and average annual inflation rate.

In this case we use an approach which on the whole corresponds to the concept of σ-convergence.

Each country is considered a point in multi-dimensional space, and each dimension corresponds to a characteristic. Each index included in the analysis is interpreted as a coordinate of that point (i.e. a country) in the space of integration characteristics. The closer two points come, the higher their convergence level is. The distance is a simple Euclidian distance. Characteristics that are of a different nature are made comparable by standardising: from each index, its average value for all countries is deducted, and the result is divided by standard deviation. Therefore, the absolute size of the characteristics does not affect the resulting index.

To evaluate the integration of country pairs, the distance between the respective points (i.e.

countries) is calculated. To evaluate the integration of a country and a region, a new point (“region”) in space is created, whose coordinates correspond to an average value of respective coordinates of all existing points (countries of the region). Next, the distance between that point (country) and the region is measured. Finally, to evaluate the integration within a region, we use an average module of the coefficient of variation (standard deviation divided by an average value) for all the characteristics considered for the purposes of this index. The use of the coefficient of variation is warranted by a sustained trend observed in data series (e.g., sustained economic growth was observed in the post-Soviet countries throughout the studied period) which may distort the final results. The absolute value of the coefficient is used because, whilst some characteristics are by definition higher than zero, others (e.g. budget balance) may be negative; accordingly, the use of the initial value (without a module) would have led to a situation in which, given a negative average value, an increase in standard deviation of budget balance leads to a decrease in the resulting index. Thus (in contrast to calculation of market integration indices), higher indices correspond to greater distances between countries and regions and, accordingly, lower levels of integration.