Chapter 3. Foreign trade and trade with mainland Russia: An intermediate position
3.5 A high degree of trade openness as a consequence of trade intermediation
An analysis of Kaliningrad’s trade flows with mainland Russia and the region’s foreign trade leads to the following conclusions:
• Trade with Russia plays a significant role in the trade balance of the Kaliningrad oblast, making up more than 40% of overall trade flows (Table 3.8).
• Russia is a major supplier of fuels and petrochemical production as well as raw materials in other sectors. Equally, it is a major market for Kaliningrad’s import-substitution industries: assembly lines for consumer electronics, automobiles, food processing and furniture. That lets us confirm that the oblast is the more developed trade partner in its trade with mainland Russia in terms of buying fuels and raw materials, and selling processed goods (Samson 2000a; Samson, Lamande & Vinokurov, 2004).
• Yet, the growth of trade has originated primarily from the existence of the SEZ and the development of import-substitution industries aimed at the Russian market.
• Trade inflows and outflows have grown rapidly since 1998. The largest increase is registered in imports and outflows to mainland Russia (Table 3.9). While imports sharply exceed inflows, outflows exceed ‘real’ SEZ exports by six times (although they were on a comparably low level after the 1998 crisis).
• Although politically it may be justified to characterise Kaliningrad in the context of a
‘double periphery’, it may not be justified to talk about the oblast as peripheral in trade terms, taking into consideration its high degree of trade openness to both the EU and mainland Russia.
Table 3.8 Kaliningrad oblast total trade flows, 1999–2004 (in $ mn)
World – Kaliningrad Russia – Kaliningrad Year
X M X M
1998 297.5 1,130.1 – –
1999 281.7 800.1 – –
2000 430.7 807.3 432.2*(424.9 SEZ) 468.9a)
2001 403.1 1,010.5 618.9 (SEZ) –
2002 408.5 1,578.5 758.9 (SEZ) –
2003 555.4 2,138.1 1,117.8(SEZ) 800 b)
2004 1,089.4 3,006.8 1,802.0(SEZ) –
2005 1,710.6 3,973.8 2,369.9 (SEZ) –
a) Author’s calculations for the 2000 data for trade with mainland Russia (Vinokurov, 2002b)
b) Estimation by Gareev, Zhdanov & Fedorov (2005).
Source: NWCO (2001–06);
Table 3.9 Trade flows as a percentage share of GRP (in %, GRP = 100%)
1997 1998 1999 2000 2001 2002 2003 2004 Foreign trade
Foreign trade turnover
118 171 177 154 140 152 158
Total exports 24 36 44 52 46 31 33 50
Total imports 92 132 125 94 94 121 126 141
Foreign trade balance
-70 -99 -89 -50 -48 -89 -93 -90 Trade with mainland Russia
Deliveries of goods to Russia under the IM40 SEZ customs procedures*
– – – 49 56 58 66 84
For reference GRP at official exchange rate ($ mn)
1,403 898 655 874 1,100 1,309 1,702 2,137
* The IM40 SEZ certificate refers to goods “considered to be produced in the SEZ”.
Sources: KRCS (2001–05) for GRP calculations; NWCO (2001–05) for trade flows; author’s calculations.
Kaliningrad’s high degree of regional trade openness is connected with the SEZ regime and with the intermediary trade orientation of the regional economy.
New calculations for trade flows with Russia allow us to re-assess Kaliningrad’s trade openness.
Typically, the trade openness indicator is calculated for countries following the formula of
∗2
= + GRP
M TO X
(5) The formula needs to be adapted to the regional context to include trade flows with the rest of
the same country.
∗2 + +
= +
GRP M X M
TOregion X rus rus
(6) where Xrus and Mrus correspond to trade with other regions of the same country, Russia in our
case. The trade openness of the Kaliningrad region amounted to 133.5% in the year 2000 if we take official figures for the GRP (Table 3.10). That means that the total trade flows (with both foreign states and mainland Russia) were more than double (2.67) the GRP. Trade flows with mainland Russia add significantly to regional trade openness, making the oblast the third most open region of the Russian Federation in 2000 (after Ingushetia and Kalmykia, which have obtained their highest degrees of trade openness owing to their functions as tax havens (TACIS, 2002a)).
Table 3.10 Trade openness, 2000 and 2003
GRP ($ mn) Total trade ($ mn) TO (%)
2000, current prices 837.6 2,241.7 133.5
2003, current prices 1,702.2 4,611.3 135.5
2000, PPP 6,025.0* 2,241.7 18.6
* The figure for GRP 2000 according to PPP is derived from author’s calculations based on Samson et al. (2002).
Source: Author’s calculations.
By using customs data for outflows to the mainland and the estimation by Gareev, Zhdanov &
Fedorov (2005) for inflows from the mainland, an estimation for the regional trade openness can be produced for 2003. Despite rapid growth and profound changes in trade, the regional trade specialisation apparently remained at the same level, amounting to 135.5%. In other words, total trade flows (both with foreign states and with mainland Russia) exceeded GRP by 2.71 times in 2003.
We cannot measure the degree of trade openness for 2001 onwards, since the data on the inflows from mainland Russian is missing, making the total trade data incomplete. Estimations assume that, despite a sharp increase of GRP measured at the official exchange rate in 2001–04, the degree of trade openness remained at the same level. In international comparisons, Kaliningrad’s trade openness exceeds those of the small open economies of the Baltic such as Estonia (at 93%, Estonia is the most open among the CEECs), Latvia (60.3%) and Lithuania (45%), although the trade openness of the ‘Baltic tigers’ markedly exceeds that of Kaliningrad in PPP terms. It is comparable to that of Hong Kong. In Hong Kong, trade in goods and non-factor services reached 277% of GDP in 2001 (WTO, 2002). The comparison of Hong Kong with Kaliningrad is justified in this case since the WTO’s calculations for the former include trade with mainland China as well as trade with the rest of the world. The comparison is not straightforward, however, because trade in non-factor services is included in Hong Kong’s figure.
64 |
Factors of regional competitiveness
4.1 Introduction
Chapters 2 and 3 described the major shift that Kaliningrad has experienced in its economic orientation towards the tertiary sector. A new and distinctive industrial orientation has emerged based on a role as an intermediary in EU–Russian trade. The intention of this chapter is to quantify the region’s comparative and competitive advantages as well as its production factors and resources. Based on this investigation, we can determine whether the current orientation corresponds with the factors mentioned above. Is there coherence or contradiction? Also, it is important to identify the kinds resources and competitive advantages that are currently built into the region.
In this chapter, both macroeconomic (revealed comparative advantages and intensity of intra-industry trade (IIT)) and microeconomic (factor endowment and factor costs) indicators are elaborated in order to assess the comparative and competitive advantages of the Kaliningrad region. The chapter also looks at the SEZ regime as a defining factor of Kaliningrad’s current competitiveness. Additionally, we consider the quantification of exclave costs and respective issues of cargo and passenger transit as well as border trade.
The first task is to reveal the structure of Kaliningrad’s comparative advantages, for which a measurement of IIT and comparative advantage is undertaken. The second task is to identify the basic factor endowments and their role in regional competitiveness. Furthermore, one key question is to what extent the competitiveness of the region is underpinned by the mere factor endowments. Historically, national (regional) competitiveness has been determined by the availability of raw materials. Yet with scientific and technical progress, the availability of traditional factors has become of limited value.
There exists a vast body of literature on the measurement of comparative advantages and international specialisation. Given that the Lloyd-Grubel index of IIT and the Lafay index of international specialisation are specifically calculated here, Balassa (1965), Lafay (1979), Lafay
& Herzog (1989) and OECD (2002) are particularly important. There is also a body of literature on the measurement of Russia’s and Kaliningrad’s indices of international specialisation, notably Ahrend (2004) and OECD (2004) for Russia among the latest publications as well as Samson (2000a and 2000b) and TACIS (2002a) for Kaliningrad. As regards the factor endowment and factor costs, this presentation of labour productivity issues in Kaliningrad is largely based on the work done by the Kaliningrad Regional Development Agency (RDA) and the project “Support for the Regional Development of Kaliningrad, Russia”
(EUROPEAID/114287/C/SV/RU). The results were summarised in the 5th Economic Bulletin published by the EU–Russia Cooperation Programme (2004d). In addition, the collective work by the Institute for Economy in Transition attempted to analyse the regional competitive advantage citing labour costs, energy tariffs and the relative weight of students among the population as important factors (IET, 2002). TACIS (2002b) experts devoted serious attention to the problem of investment attractiveness from the viewpoint of the factors of regional competitiveness. The central methodology applied below is that of the French economists Colletis & Pecqueur (1994), who elaborated an analytical framework based on the typology of regional competitive factors in terms of generic and specific resources and assets. Pecqueur’s framework was applied to the Kaliningrad case by Samson (2000a and 2000b). The high road of economic transition is seen as moving from specialisation based on generic resources to one that is based on specific assets.
Measurement of the revealed comparative advantage (RCA) is a classic method for the analysis of international specialisation. A variety of indices exists. The task of assessing the comparative advantage and the economic orientation of the Kaliningrad region is complicated by the fact that it is not a country but a part of a country. It is necessary to select and adjust the index methodologies that would allow us to measure the situation in a region in view of the scope of available data. We use two indices to assess the comparative international specialisation and IIT. They are partially modified to adapt them to the measurement of the comparative advantage and international economic orientation of a region and not a country. We start by calculating the Lafay indicator for assessing trade specialisation based on the methodology by Lafay (particularly Lafay & Herzog, 1989). Then, we calculate a Lloyd-Grubel index for measuring IIT in the interpretation employed by OECD (2002).
4.2 Measurement of comparative advantages, international specialisation and intra-industry trade
Lafay index of international comparative advantage
The measurement of the international specialisation of a country is based on different indicators and ratios, each possessing its own strengths and weaknesses. The measurement of the international specialisation of a region is further complicated by its inclusion in the national economics. One should also account for the multitude of economic dimensions of a country or a region. When the ratio relies solely on trade flows, it can be biased since an increase of inter-branch flows will reduce the values of the ratio without meaning a drop in competitiveness. The following procedure was designed to account for these problems. The methodology is adopted from the work of Lafay, most notably Lafay & Herzog (1989, pp. 390-92). This methodology used was initially applied to Kaliningrad in Samson et al. (1998) and TACIS (2002a) on a lower level of aggregation (mostly the two-digit tariff nomenclature (TN VED) code). It is applied on a higher level of aggregation (10 sectors) and then this measurement is introduced to the complete regional trade for 2000, i.e. including trade with mainland Russia.
We use the following symbols:
T – foreign trade turnover (X+M) GRP – gross regional product X – export of goods and services M – import of goods and services
Xi – export of i-type of goods and services Mi – import of i-type of goods and services
To account for the bias of ratios based on external trade flows, the methodology provides for the correction of the external balance of a product by the size of the GRP – thus deriving a relative balance:
yi=1000*(Xi-Mi)/GRP (7)
The yi is comparable in time and space, allowing us to describe, in a specific manner, year on year, the relative dimension of trade in a certain product or sector.
One should also eliminate the impact of external macroeconomic factors that could imbalance the foreign trade. A balanced trade situation (gi) is taken as a reference. Foreign trade is used as a weighting base:
gi=(Xi+Mi)/X+M (8)
A neutral position (zi) of the product in the external balance is thus
zi=gi*yi (9)
The RCA therefore measures the weighted contribution of each product to the external balance of payments. The values are either positive or negative. But this ratio does not suffice for measuring the adaptation of the industry to the demand in manufactured goods. Since Kaliningrad possesses several different natural resources, this ratio is biased by the existence of oil resources, which reduce the need for foreign trade surpluses in manufactured goods.
According to the final formula, the ratio Fi characterises the influence of the given (i-type) product on the comparative advantage of a region (relative balance yi minus neutral position zi).
Coefficient Fi=yi-zi, or Fi=yi-gi*yi, or GRP The greatest problem in measuring the comparative advantage of a region consists of the typical
insufficiency of data on trade with other regions of the same country. That is why the calculations of the Lafay indicator in Samson (1998) and TACIS (2002b) are based on foreign trade alone, i.e. they represent an incomplete measure of comparative advantage in foreign trade. The coefficient shows the contribution of each good (or industry) to foreign trade. Thus, the coefficient measures foreign trade specialisation and not regional specialisation overall. The problem is objective since, while we possess the outflow data (the Customs Office data for outflows to mainland Russia under the IM40OEZ certificate), the data on inflows from the Russian regions to Kaliningrad is lacking. A special methodology is provided in Vinokurov (2002b and 2004d), which, although not without deficiencies, allows us to arrive at a decent estimation of trade with mainland Russia for 2000 on the level of TN VED two-digit estimations (eight sectors in total). Unfortunately, we possess only sectoral data at a high level of aggregation and not for individual goods or sub-industries. It was impossible to apply this methodology to estimate trade in the years following 2000. We proceed by calculating the RCA for a number of years following 2000. These calculations, combined with those already performed by other authors, provide a dynamic assessment of the regional foreign-trade specialisation from 1996 to 2004. In addition, the ‘full regional RCA’ is calculated for 2000 based on the data for both foreign and interregional trade. Thus, the full regional RCA represents a measure similar to what we would have done for a country.
We calculate the Lafay index for international comparative advantage on a high level of aggregation for 1999–2003 based on available and reliable customs data (Table 4.1). The second column for 2000 is the ‘complete RCA’ including the totality of Kaliningrad’s trade.
Table 4.1 Revealed comparative advantage of the Kaliningrad region*
TN VED code Sector 1999 2000 2000 complete
44,47, 48 Timber and products, pulp and paper
42 62 42 52 51 5
50-67 Clothing and footwear 33 13 – 14 13 -3 72-81 Ferrous and non-ferrous
metals and products
51 21 -11 2 5 3
84-90 Machine-building -179 -86 – -103 -119 -149
Other goods -66 -41 – -39 -36 -27
* The formulas with corresponding values are
1999: (1082.6*(Xi-Mi)-(Xi+Mi)*(-518.9))/(1082.6*655) 2000: (1238.1*(Xi-Mi)-(Xi+Mi)*(-376.6))/(1238.1*874)
2000 complete: (2139.2*(Xi-Mi)-(Xi+Mi)*(-376.6))/(2139.2*874) 2001: (1413.6*(Xi-Mi)-(Xi+Mi)*(-607.5))/(1413.6*1100) 2002: (1987*(Xi-Mi)-(Xi+Mi)*(-1170))/(1987*1309) 2003: (2693.5*(Xi-Mi)-(Xi+Mi)*(-1582.7))/(2693.5*1702) Source: Author’s calculations.
One should admit right away that the value of RCA calculations is limited for several reasons.
The main reason, basing the measurement on foreign trade alone, has already been noted. Also, bearing in mind the dominant position of crude oil in exports, the ratio is biased, since oil exports reduce the need for foreign trade surpluses in manufactured goods. Moreover, a greater proportion of the oil is in fact nothing more than a transit flow of oil extracted on the mainland and registered as Kaliningrad oil. The same is valid for exports of fertilisers. In addition, the comparative advantage in shipbuilding in the 1990s did not result from a healthy shipbuilding industry but rather the sale of the Soviet ‘heritage’. In fact, even the sales were largely fictional, as the vessels were moved to offshore sites. Furthermore, ferrous and non-ferrous metals, also important in the 1990s, were exported as scrap.
Nevertheless, the measurement of the comparative advantage according to the chosen methodology has some strong points. One has to remember that the ratio Fi characterises the influence of the given (i-type) product on the comparative advantage of a region (relative balance yi minus neutral position zi). Therefore, the final coefficient may be positive while the trade balance is negative. The index is useful for assessing the dynamics of the influence of a given sector or product on the comparative advantage of a region. Inclusion of gross regional product as a variable serves this purpose in particular.
The calculations show the following dynamic trends:
• a strong and sustainable comparative advantage in the sectors of oil and timber (timber, pulp, paper, plywood, etc.);
• a gradual slip from positive to neutral positions or even negative values in clothing and footwear; and
• the calculations magnify the comparative disadvantage in food products and machine-building (in foreign trade).
The limits of the indicator, when used only for foreign trade, can be clearly seen. Two broad sectors with the greatest comparative disadvantage, the food products and machine-building sectors, correspond exactly with the two main areas 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 sectors decreases, although remains positive; the same is true for leather and furs.
• The indicator for metals changes from positive to slightly negative.
These findings on regional comparative advantages illustrate Kaliningrad’s advantages in a number of goods through its share in Russian national production. The region’s share in a few consumer electronics specialties (such as TV sets and vacuum cleaners) is growing phenomenally. More important from the point of view of sheer volume is the growth in the production of canned fish and meat. Additionally, Kaliningrad holds significant shares of the Russian national production of furniture (5.7%), cellulose (5.1%), paper (1.7%) and alcoholic beverages (2.7).
Yet Kaliningrad’s very high shares in consumer electronics and food processing correspond with highly negative values of the Fi indicator for the international comparative advantage in the respective sectors (which is -102 for foodstuffs and -143 for machine-building). This is attributable to the fact that these two leading sectors rely heavily on imports for supplies of raw materials and components (Table 4.2).
Table 4.2 Share of the Kaliningrad region in Russia’s national production, 2002–04
Commodity Russian
Sources: KRCS (2004) and NWCO (2005).
Grubel-Lloyd index of IIT
Intra-industry trade has risen significantly in the last decades (OECD, 2002). Indeed, a large extent of trade among developed countries is realised as IIT. The theory of comparative advantage is not easily applied to IIT, since the latter often flourishes between countries with similar basic factor endowments. Thus, measuring the scope of IIT will help us to answer the following question: To what extent are comparative advantages still relevant for Kaliningrad?
The applied index of IIT was proposed by Grubel & Lloyd (1975). The methodology that was further elaborated by the OECD (2002, pp. 159-71) is applied. IIT flows are conventionally defined as a two-way exchange of goods within standard industrial classifications. The extent of IIT is commonly measured by Grubel–Lloyd indices based on commodity group transactions.
Thus, for any particular product class i, an index of the extent of IIT in the product class i between countries A and B is given by the following ratio:
) 100
where Xistands for export of i good or sector, Mi is import of i good or sector, and the vertical bars in the numerator denote absolute value. This index takes the minimum value of zero when there are no products in the same class that are both imported and exported, and the maximum value of 100 (in this case Xi is equal to Mi).
It is also possible to calculate bilateral indices of IIT between country A and country B for total manufacturing. These are defined as the weighted average of the IIT indices for all product classes i, with weights given by the share of total trade of i over total manufacturing trade.
Nevertheless, the analysis below is limited to IIT for 10 sectors.
We proceed in two steps. Again, this procedure is related to the issue of the data availability. As Kaliningrad is a region and not a country, the data on trade flows with mainland Russia are not readily available. In fact, we possess reliable data for outflows based on the goods that were shipped to mainland Russia with the SEZ certificate of origin. On the other hand, for the
We proceed in two steps. Again, this procedure is related to the issue of the data availability. As Kaliningrad is a region and not a country, the data on trade flows with mainland Russia are not readily available. In fact, we possess reliable data for outflows based on the goods that were shipped to mainland Russia with the SEZ certificate of origin. On the other hand, for the