Can deep free trade and association modernise the economies of the Eastern Partnership countries?

1. Can deep free trade and association modernise the economies of the Eastern Partnership countries? Alan Mayhew SIDA Brussels April 2010 Prof. Alan Mayhew JMWEN and University of Sussex

2. ASSOCIATION AND MODERNISATION A. Why DCFTA and not FTA B. What are the key economic problems faced by the EaP countries C. How will association/DCFTA help D. What could be considered a good Association agreement by the countries concerned Alan Mayhew SIDA Brussels April 2010

3. A. WHY DCFTA NOT FTA • Tariff cutting as a stimulus to international trade and economic growth is reaching its limits as tariffs move toward zero on many products • Freeing trade is therefore less important than systemic changes for countries transitioning to the market economy • Systemic transition is always more difficult to undertake domestically without external pressure Alan Mayhew SIDA Brussels April 2010

4. A. WHAT IS MODERNISATION • Modern economies are generally characterised by high levels of competition, low levels of state aid and an entrepreneurial culture supporting innovation and new business • Insider economies generally have lower levels of competition, unpredictable state aid, high levels of bureaucracy and high levels of corruption • Modernised economies generally produce high levels of welfare for citizens Alan Mayhew SIDA Brussels April 2010

5. A. THE ACQUIS COMMUNAUTAIRE IS A LIMITED MODERNISING AGENDA • The acquis covers the essential elements of a modern economic constitution and is based on a set of values now anchored in the Lisbon Treaty • The DCFTA is based on the economic and ‘Ordnungspolitische’ elements of the acquis • But the acquis does not deal in detail with macroeconomic policy, the labour market and other key areas which are the domain of national policies Alan Mayhew SIDA Brussels April 2010

6. A. EU ECONOMIC AND TRADE POLICY FOR RELATIONS WITH OTHER EUROPEAN COUNTRIES • Since the ‘ Global Europe: competing in the world’ Commission communication of 2006, Multi-lateral first (WTO) but bilateral or regional FTAs emphasising market opening and regulatory alignment • ENP moved trade negotiations in the direction of spreading the economic acquis to third countries and introduced DCFTA to all neighbouring countries • EaP opened the way for Association Agreements with all EaP countries Alan Mayhew SIDA Brussels April 2010

7. B. WHAT ARE THE KEY PROBLEMS FACING THE COUNTRIES OF EASTERN EUROPE? • It is difficult to generalise as the size, history, geography and economy of the countries are very different • Degree of openness varies considerably as does the trade integration with the EU and the structure of production • Ownership of the economy is very different as is the business environment Alan Mayhew SIDA Brussels April 2010

8. Alan Mayhew SIDA Brussels April 2010

9. Alan Mayhew SIDA Brussels April 2010

10. Alan Mayhew SIDA Brussels April 2010

11. B TRANSITION INDICATORS • EBRD TIs tell us something about the progress in each country in modernising the economy • Ukraine, Georgia, and Moldova all show weaknesses in governance and enterprise restructuring, competition policy and financial regulation • In WB ‘doing business 2010’: Ukr 142nd, Moldova 94th and Georgia 11th out of 183 • Many of these problems are dealt with in DCFTAs Alan Mayhew SIDA Brussels April 2010

12. Alan Mayhew SIDA Brussels April 2010

13. B. COMPETITION POLICY, STATE AID, PUBLIC PROCUREMENT • These areas remain key problems in the modernisation of these economies • The insider economy, where business and government work hand-in-hand, lives on restricting competition, non-transparent state aid and corrupt public procurement • Existing businesses prevent the entry into the market of new businesses • History of the public procurement act in Ukraine or the power of the oligarchs is a clear example of the insider economy Alan Mayhew SIDA Brussels April 2010

14. B. LACK OF INVESTMENT IN TECHNOLOGICAL ADVANCE • Investment is not necessary if there is no competition and markets are protected • Businesses not open to competition invest less in technological development and research: e.g poor technological state of Ukrainian steel industry • Poor quality of output leads to a loss of access into more dynamic markets • Leads to a low productivity/low-wage economy Alan Mayhew SIDA Brussels April 2010

15. B. TRANSPARENCY AND MANAGEMENT SKILLS • A lack of transparency in business dealings is a frequent problem as the ownership of companies may be unclear: e.g. Rosukrenergo • Companies sometimes don’t even do annual reports with balance sheets e.g. Naftogaz • This often disguises relatively poor management skills which reduce productivity and living standards Alan Mayhew SIDA Brussels April 2010

16. B.CORRUPTION • The insider economy spawns corruption: this causes major costs to the economy, reduces growth and welfare • In Transparency International CPI, Ukraine is 146th, Moldova 89th and Georgia 66th (Greece 71st) • Economic transparency and modern company law, competition and open public procurement are one contributor to the anticorruption policy (Independent and efficient judiciary and anticorruption laws are others) Alan Mayhew SIDA Brussels April 2010

17. B. EFFICIENCY OF THE PUBLIC ADMINISTRATION • Frequently the public administration is highly bureaucratic, inefficient and sometimes corrupt (also applies to some countries inside the EU!!) • This reduces the propensity to invest, create new enterprises and to innovate • Also works against modernising policy agreed by government but not implemented by the bureaucracy. • Affects the capacity to negotiate with the EU and other third countries Alan Mayhew SIDA Brussels April 2010

18. C. HOW DOES DCFTA AND ASSOCIATION HELP TO SOLVE THESE PROBLEMS? • Trade liberalisation • Introducing EU competition policy, control of state aids, public procurement and company law • Improving the business environment, thus stimulating investment • Introducing transparency, improving customs procedures and thus cutting corruption • Helping to increase foreign direct investment in the economies • Reducing the cost of borrowing if association agreement seems to be implemented • And therefore raising the standard of living of the population • And Association is usually accompanied by some financial contribution by the EU to the implementation of the agreement Alan Mayhew SIDA Brussels April 2010

19. C. FDI AND MODERNISATION • FDI increases the capital stock of these countries • The capital stock is usually of a more recent technology e.g. Kryvorizhstal steel complex • foreign plant usually leads to an increase in the quality of local production by suppliers • Often introduces new management techniques which raise productivity • Opens new markets abroad Alan Mayhew SIDA Brussels April 2010

20. Alan Mayhew SIDA Brussels April 2010

21. POLAND Alan Mayhew SIDA Brussels April 2010 UKRAINE

22. C. RAISING INSTITUTIONAL EFFICIENCY • The Association Agreement will have its own institutions: Council, Committee, Parliamentary Committee and various working groups: these will bring politicians, civil servants and others into contact with their homologues in the EU • International contacts of this kind promote increasing efficiency in domestic institutions • These contacts proved very productive in raising standards in institutions in the new member states immediately after 1989. • Serious implementation of the Association Agreement also requires strong coordination in government which should be very positive Alan Mayhew SIDA Brussels April 2010

23. D. WHAT SORT OF DCFTA/ ASSOCIATION AGREEMENT IS GOOD FOR YOU? • Association agreements were crucial in both the reform of the economy in the new member states and in the integration with the European Union. • However these countries had a guarantee of full accession to the EU: could argue that higher costs today were worth paying for accession in the longer term • The Eastern Partnership countries do not have this guarantee and this changes the way they look at an Association Agreement Alan Mayhew SIDA Brussels April 2010

24. D. AMBITIOUS OR REALISTIC • The Association Agreement proposed by the EU to Ukraine is very ambitious (strangely the AA and the DCFTA are negotiated separately) • Ukraine invited to introduce EU environmental legislation, transport acquis, health and safety at work etc. Costs would be very high and implementation very difficult • Choice between an agreement which can be realistically implemented and a long-term ambitious agenda which may lead to disappointment Alan Mayhew SIDA Brussels April 2010

25. D. REGULATORY IMPACT ASSESSMENT (RIA) • RIA necessary on key parts of the acquis to reveal the impact on the third country’s economy: without RIA negotiators don’t understand the implications of the negotiation • RIA undertaken by many of the new member states with help from the World Bank: this material can be used as a rough guide to EaP countries • Should involve wide discussions with business and other interests Alan Mayhew SIDA Brussels April 2010

26. D. DCFTA /ASSOCIATION AS EXTERNAL ANCHOR FOR REFORM • If Association Agreements taken seriously by the political class, can support them in economic reform measures: external anchor • Without accession perspective, external anchor is much weaker • Risk that the Association Agreements negotiated by good civil servants, but not owned either by politicians or by business interests • If Association Agreements are not implemented, highly damaging for relations with the EU. Alan Mayhew SIDA Brussels April 2010