Recent Trade Policies and An Approach to Further Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

This paper reviews the extent to which the Fund’s trade policy advice to the Baltic countries, Russia and other countries of the Former Soviet Union has been implemented. It broadly traces the evolution of trade policies, emphasizing the period from mid-1993 through end-1995, attempting to identify some of the factors affecting uneven progress in trade reform. Based on insights from the public choice literature on endogenous policy theory, the paper makes recommendations for refining Fund advice with a view to facilitating future progress on the trade-policy front.

Abstract

This paper reviews the extent to which the Fund’s trade policy advice to the Baltic countries, Russia and other countries of the Former Soviet Union has been implemented. It broadly traces the evolution of trade policies, emphasizing the period from mid-1993 through end-1995, attempting to identify some of the factors affecting uneven progress in trade reform. Based on insights from the public choice literature on endogenous policy theory, the paper makes recommendations for refining Fund advice with a view to facilitating future progress on the trade-policy front.

I. Introduction

With the dissolution of the U.S.S.R in late 1991, the Baltic countries, Russia and the other countries of the Former Soviet Union (FSU) 2/ were confronted with the challenge and opportunity of designing, as part of the transformation process, a trade policy regime de novo-albeit, inevitably influenced by the inherited political and institutional setting. In the early 1990s, the Fund, in close cooperation with the World Bank, advocated an approach that emphasized the need to move quickly to adopt a system of market-determined prices, decentralize and liberalize trading rights, achieve full current account convertibility, eliminate import subsidies, quantitative export and import restrictions (QRs), and export taxes, adopt a low uniform import tariff, and substitute domestic taxes for trade taxes over the medium term as the uniform tariff was reduced. 3/ The response has varied, from some who moved quickly to adopt a highly liberal trading system, to others where reform has been hesitant and uneven.

This paper reviews the extent to which the Fund’s trade policy advice has been implemented. It broadly traces the evolution of trade measures, emphasizing the period from the middle of 1993 through the end of 1995, attempting to identify some of the factors affecting uneven progress in trade reform. By identifying policy-related conditions, both macroeconomic and structural, under which trade liberalization becomes politically feasible, it may be possible to assist countries in achieving a better record on the trade-policy front. The paper examines how Fund advice might be refined in order to achieve this. Although the paper does not uncover direct and compelling evidence of causation—the proverbial smoking gun—that definitively explains why some countries have been able to undertake extensive reforms while others have not, indirect evidence combined with existing theoretical work on endogenous policy theory points to a number of likely factors.

Section II outlines the Fund’s approach to trade reform in the FSU and reviews recent trade policy developments. Section III discusses possible factors influencing policy decisions on trade reform. Based on insights from the public choice literature on endogenous policy theory, elements of a refined approach to further trade reform are set out in Section IV. Section V summarizes and concludes.

II. The Fund’s Trade Policy Advice and its Implementation

1. The Fund’s approach to trade reform in the FSU

The demise of the centralized Soviet system appeared to offer countries of the FSU a chance to re-invent their economic policies. Given that the countries in the FSU had accepted the principle of a rapid, fundamental economic transformation, it was considered feasible to adopt a highly liberal trade regime from the outset, before protectionist lobbies became entrenched. While there were clearly other entrenched interests who stood to lose from liberalization, such groups were already under vigorous challenge as evidenced by the comprehensive restructuring that was underway, and thus appeared weakened and vulnerable. As a result, the distinguishing feature of the Fund’s approach to trade reform in the FSU was to encourage these countries to move directly to an efficient, simple, transparent, and tariff-based trading system. 4/

Specific elements of trade policy advice provided by the Fund, and a summary of FSU trade regimes at the end of 1995, appear in Table 1. The essential components of Fund recommendations in the FSU can be broken down into five main elements. The first priority was to eliminate state trading (including centralized imports) and state orders, along with the corresponding system of export QRs. This was viewed as crucial to setting the foundation for a market-oriented trade regime. Second, it was essential that the dismantling of the state order system not be replaced by quantitative restrictions (QRs) on imports, including import licensing restrictions (except those warranted under GATT—now WTO—rules, principally for health and security reasons). Third, export quantitative restrictions would initially be replaced by export taxes so that world price signals could begin to affect resource allocation. Fourth, in tandem with the liberalization of domestic prices, all export taxes would be eliminated as soon as possible. Fifth, a simple, relatively open, and transparent tariff-based import regime would be adopted; a low, uniform tariff of not more than 10 percent to 15 percent was recommended, with a medium-term, pre-announced objective of an even lower (single digit) rate. 5/

Table 1.

Synopsis of the Trade Regimes of FSU Countries at end-1995

Armenia

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Azerbaijan
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Belarus
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Estonia
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Georgia
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Kazakstan
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Kyrgyz Republic
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Latvia
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Lithuania
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Moldova
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Russia
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Tajikistan
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Turkmenistan
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Ukraine
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Uzbekistan
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2. Trade policy developments

From 1993 to the end of 1995, countries of the FSU continued to reform their trade regime, with varying success in conforming to the above-mentioned approach. Broadly, three groups can be identified: (i) those making significant progress on all trade-reform fronts (notably Estonia and the Kyrgyz Republic); (ii) those where progress was mixed—in these cases implementation was almost always good in the high-priority areas of Fund advice on trade reform (viz., elimination of price controls and the phasing out of the system of export quantitative restrictions, state trading, and state orders), but there were serious delays and setbacks in other areas, mostly in eliminating export taxes and reducing the level and dispersion of tariffs (Armenia, Azerbaijan, Belarus, Georgia, Kazakstan, Latvia, Lithuania, Moldova, Russia, and Ukraine); and (iii) those where trade reform was uniformly slow, leaving the trade regime in need of comprehensive reform (e.g., Tajikistan, Turkmenistan, and to a lesser extent Uzbekistan) (see Table 1).

a. Major progress

By the end of 1995, Estonia and the Kyrgyz Republic were unambiguously the most liberal traders of the FSU countries. 6/ Estonia’s state order system had been eliminated entirely by the middle of 1992. In early 1992, Estonia began liberalizing export quotas, and export controls had been eliminated on most goods by the middle of 1992. 7/ By January 1993, the list of exports requiring a license had been reduced to three, and these licensing restrictions were finally dropped in October 1994. Estonia’s import regime had essentially abolished import quantitative restrictions and non-automatic licensing requirements by early-1992. 8/ By the end of 1992, import tariffs on alcohol and tobacco products were replaced by excise taxes, 9/ leaving import duties only on automobiles (10 percent) and furs and fur products (16 percent). 10/ In April 1995, the import duty on automobiles was replaced by a motor vehicle excise tax.

The state order system in the Kyrgyz Republic was replaced by a more liberal state purchase system in April 1992, under which a sizeable portion of trade, nevertheless, continued to be conducted by state agencies. State orders were reintroduced for certain products by the end of 1993. After a slow start and some setbacks, the Kyrgyz Republic took bold steps in 1994 and 1995 to liberalize its trade regime by abolishing the system of state orders and purchases, lifting all import and export licensing requirements, consolidating an import tariff structure ranging from zero to 50 percent into a uniform 10 percent import duty—applied only to goods from non-CIS countries—, and eliminating export taxes on all but one product. 11/ Moreover, with the planned implementation of a value-added tax (VAT)—originally scheduled for January 1996 but postponed to July 1996—the Kyrgyz Republic expressed its intention to eliminate the 10 percent customs duty entirely, subjecting imports, as domestic goods, only to the VAT. While the Kyrgyz Republic’s trade regime was highly liberal and poised on virtual free trade at the end of 1995, this is jeopardized by its decision to join—at the end of March 1996—the customs union of Russia, Kazakstan, and Belarus. 12/

b. Mixed progress

Despite the inability of many countries of the FSU to adopt highly liberal trade regimes, there were positive developments during 1993-95, particularly in implementing the high-priority elements of Fund trade policy advice. A number of countries further reduced the state’s direct involvement in foreign trade by abolishing the monopoly rights of state trading organizations (e.g., Armenia, Kazakstan 13/), eliminating centralized trading schemes and the rights of so-called strategic exporters (Russia), and phasing out the state order systems (Azerbaijan, Georgia). Substantial progress was also made in eliminating many of the remaining export QRs. For example, export quotas were phased out during the course of 1995 in Azerbaijan, Kazakstan, Moldova, Russia, 14/ and Ukraine. In addition, as prices were liberalized, export taxes were substantially reduced (e.g., Latvia) or gradually eliminated in many countries (e.g., Georgia, Lithuania, Moldova, Ukraine). With the elimination of all QRs on imports in Russia by the middle of 1993 and the abolition of non-automatic licensing in Moldova by the end of 1993, few formal import QRs (other than those applied for health and security reasons), were in place at the end of 1995 in FSU countries. Exceptions included import QRs applied to certain agricultural products (Latvia), energy products and cotton (Azerbaijan), non-automatic licensing restrictions on certain industrial equipment (Georgia), and tariff-rate quotas 15/ on certain agricultural products (Lithuania).

Notwithstanding these positive developments, trade liberalization since 1993 has been slow in certain areas and significant barriers to trade remain among the FSU countries making mixed progress. Georgia maintains export bans and licensing for about 30 products; 16/ Lithuania maintains a ban on the export of 5 products, and licensing requirements for export of non-ferrous metals, alloys, and their scrap and waste; export licensing applies to 3 product groups in Armenia. Progress has been slow in reforming the system of export taxes in Russia: although the number of commodity groups subject to export taxes had been reduced from 53 to 29 by September 1994, the 24 liberalized commodity groups were not very significant as they represented only about 10 percent of exports of subsidized commodities. Further progress was, however, made in December 1995 when export duties were eliminated on timber and certain petroleum products in Russia. 17/

Liberalization and consolidation of the tariff system is another area where progress has been slow and occasionally reversed. Tariffs remain relatively high and dispersed with peaks of up to 100 percent in Lithuania and Ukraine, for example. In December 1994, Georgia raised its average tariff from about 2 percent to a relatively uniform 12 percent, mainly for fiscal reasons. In Armenia, a relatively low and uniform tariff of 10 percent was replaced in January 1995 by a more dispersed structure with 5 rates ranging from zero to 50 percent. 18/ In 1994, Moldova increased import duties on various alcoholic beverages with the maximum tariff rate raised from 70 percent to 300 percent, before being reduced to 30 percent in April 1995. The Moldovan authorities reduced the number of tariff rates from 7 to 5, and the standard maximum rate from 30 percent to 20 percent in November 1995. However, the 1996 budget increased the number of “exceptional” items with rates above 20 percent. Russia raised its weighted average tariff from 8 percent to 12 percent in July 1994, and to 13 percent in July 1995, apparently in response to pressures from defense industries, agriculture, textiles and auto manufacturers. 19/

Implications of an FSU Customs Union

The customs union (CU) formed in 1995 between Belarus, Kazakstan, and Russia raises at least two pertinent questions: (i) How might the existence of the union alter the trajectory of trade liberalization for member countries, other things equal? (ii) Does the formation of this customs union undermine any of the general or specific recommendations presented in Section IV?

Understanding the decisions of a customs union, unlike a free-trade area, generally would require not only a model of preference formation at the country level, but also a model of the negotiations process that ultimately produces the common external trade policies of the CU. This suggests that the decision process of a CU generally would be more complex than in the case of countries acting autonomously. In the special case of the Russia-Belarus-Kazakstan customs union, however, the decisions of the union on external trade policies may simply correspond to the decisions of the dominant member. Because of Russia’s relative economic size, and the earlier relationship between Moscow and the newly independent states, it seems likely that Russian trade-policy preferences will be decisive in determining the development of the union’s future external trade policies. Indeed, this so far has been the case. The willingness of the smaller partners to follow Russia’s lead appears to have occurred when Belarus and Kazakstan agreed to adopt Russia’s external trade taxes, rather than negotiating a new structure for the union. If this kind of dominance can be expected to hold in the future, the evolution of trade policy within the union can be largely understood by looking exclusively at the political economy of trade policy developments in Russia.

Whether this is cause for optimism or concern depends on whether these countries would be expected to move more swiftly or more slowly in partnership with Russia than independently. Looking at the initial move to the customs union, it is not clear whether Belarus adopted, on balance, a more or less restrictive import regime. In the area of exports, Belarus reversed its December 1994 abolition of export taxes in order to conform with Russia’s less open system. Still, Russia intends to abolish many of its export taxes in early 1996, with exceptions for crude oil, gas, and certain industrial products. Kazakstan, however, appears to have adopted a somewhat less dispersed import tax system, with most items now falling in the 5-30 percent range compared to 5-50 percent before the union. Because the trade regimes of Russia, Belarus and Kazakstan were not markedly different at the outset of the customs union agreement, there is no reason to believe a priori that the evolution of trade liberalization under the customs union will be either faster or slower than the paths Belarus and Kazakstan might have followed independently.

The entry of the Kyrgyz Republic into the customs union is another matter. The Kyrgyz Republic had already moved significantly further toward open trade than the other members, and announced in 1995 its intention to eliminate import duties altogether by early 1996. Entry into the customs union, thus represents a significant retreat from liberal trade in the Kyrgyz Republic.

The set of measures set out in section IV to help facilitate sustainable trade liberalization continue to apply regardless of whether a customs union is in place. Indeed, if Russia does act as a leader in the formation of future trade policies for the union, it becomes all the more important that Russia adopt such measures in order to facilitate trade liberalization within the union. All of the complementary measures remain within the province of individual CU members. Of the trade-related measures, only tariff policies require some degree of coordinated action from the CU members; transparency and public information, and safeguards policy both remain within the province of individual members.

Sustained trade liberalization in agriculture has also been difficult. Import duties on agricultural products in Latvia, for example, averaged 53 percent at the end of 1995. In July 1994, Lithuania increased tariffs on 50 agricultural goods from an average of 20 percent to 40 percent, then reduced the average for agriculture to 35 percent in October 1994, and to 27.5 percent by September 1995; in Russia, import tariffs on a number of food products were raised from zero and 5 percent to 15 percent and 25 percent on July 1, 1995.

c. Slow progress

In Tajikistan, Turkmenistan, and to some extent Uzbekistan, state involvement in trade, mainly exports, 20/ remains substantial, as indicated by a pervasive system of quotas and licensing requirements, and an array of export taxes. In Tajikistan, for example, 54 items representing more than 70 percent of exports were subject to quotas until early 1995, when the number was reduced to 6, and there are many export taxes ranging from 0.2 percent to 500 percent. 21/ Uzbekistan 22/ introduced export bans on 13 product groups on July 25, 1995 and maintained export quotas on 11 products through September 1995—at which time export quotas were reduced to 4 products. The state order system in Uzbekistan applies to about half of cotton and grain production at prices well below those in world markets. 23/ Also, reflecting shortages of foreign exchange, stemming in part from direct restrictions on exports and surrender requirements at overvalued exchange rates, barter and clearing arrangements continue to play a major role in these countries’ trade with most other FSU countries.

III. Possible Factors Affecting Trade Reform

The foregoing discussion suggests that Fund advice on trade reform has met with relative success in the priority areas of eliminating or reducing state orders, state trading monopolies, and associated export QRs. It has met with less success in liberalizing import regimes once export barriers were reduced. Overall, most countries of the FSU are now experiencing the same kinds of obstacles to trade liberalization that have beset non-FSU countries. This section explores why some countries may have fared better than others in liberalizing their trade regimes, so that measures might be identified to facilitate sustainable trade liberalization throughout the FSU.

1. Extensive liberalization

As mentioned in the previous section, Estonia and the Kyrgyz Republic have so far carried out the most comprehensive trade reform. However, the timing and the conditions leading to reform were somewhat different. Estonia had set the stage for moving rapidly to establish a very liberal trade regime as early as 1992, by building upon economic reforms—including price, tax, trade and wage reforms—undertaken well before the breakdown of the former Soviet Union. In the Kyrgyz Republic, the trade regime remained largely unaltered until early 1994, at which time trade reform was substantially accelerated.

In the case of Estonia, early and decisive steps toward market oriented reforms, firm macroeconomic policies, accelerated structural reforms beginning in 1993, a highly skilled and mobile labor force, generous access to European markets, and the financial discipline imposed by a currency board all helped ease the path to trade liberalization and thus underpinned the success of trade reforms (Hansen and Sorsa, 1994).

It also appears that trade reform in Estonia—as in the Kyrgyz Republic—was facilitated by the relatively small share of heavy industries, which are both difficult to restructure and often represent powerful constituencies for the status quo. Estonia was able to realign production even further toward light industries, in which it appears to have a comparative advantage, and to reorient a major share of trade rather quickly toward non-FSU markets. 24/

Firm pursuit of macroeconomic stabilization creates a propitious environment for trade reform. 25/ The need to prevent inflationary deficit financing, for example, led to early price liberalization and the enactment of strong domestic tax measures in Estonia which, in turn, paved the way for the elimination of QRs on exports and a reduced reliance on trade taxes. The stringent rules of the Estonian currency board scheme, 26/ which is precluded from lending to the Government and to commercial banks, 27/ imposed hard budget constraints throughout the economy. This helped to strengthen the credibility of reform, thereby speeding up the adjustment process including trade reform. Trade reform may also have been aided by the initial undervaluation of the Estonian kroon that provided across-the-board protection from foreign competition, thereby reducing incentives for specific industries to lobby for protection, while enhancing the competitiveness of the export sector.

In Estonia, the commitment of the political leadership to comprehensive economic reform had widespread political support from the outset. Support for trade liberalization, in particular, was illustrated by the promptness with which the Estonian parliament acted to adopt a number of laws that paved the way for trade liberalization.

In the Kyrgyz Republic, progress in the reform process owed much to the leadership of the President who was confronted with a parliament hostile to market-oriented reforms. Parliamentary opposition appears to have stemmed largely from the threat posed by such reforms to the privileged position of enterprise managers and local officials, who comprised the majority of the parliamentarians at that time. In early 1994, when the reform process was deadlocked, the President called for a national referendum that modified the constitution and restored his ability to act more decisively as the chief executive.

The Central Bank appears also to have played an important role in moving the reform process forward in the Kyrgyz Republic. It did this by supporting the introduction of a national currency and ensuring its external convertibility and relative stability. Moreover, the urgent need to attract foreign assistance and investment following the drying up of large budgetary transfers from the rest of the Soviet Union may also have ultimately persuaded the Kyrgyz authorities’s to pursue an open-economy policy. 28/ As previously noted, in 1996 the Kyrgyz Republic joined the Belarus-Kazakstan-Russia customs union, which implies a significant retreat from its stance of a liberal trade regime on an most-favored nation (MFN) basis.

2. Setbacks and delayed trade liberalization

Factors contributing to setbacks and delays in trade reform in many countries of the FSU include: (i) a persistent decline in aggregate economic activity and high levels of unemployment; (ii) inappropriate macroeconomic policies that distort price signals and slow structural reorientation; (iii) powerful sector-specific interest groups with well entrenched connections to government; (iv) insufficient complementary structural reform (privatization, price liberalization, labor market and financial system reforms); and (v) domestic or regional armed conflicts. These explanatory factors are discussed below with reference to countries exhibiting mixed progress and those where overall progress has been slow.

The persistent decline in output and associated high levels of unemployment—even long after the collapse of the FSU—appears to have been a major impediment to decisive liberalization of trade in many FSU countries. 29/ Those governments that opted for a gradual approach to trade liberalization, maintaining a substantial portion of their state order system and retaining a web of bilateral barter and clearing arrangements (Tajikistan, Turkmenistan, and Uzbekistan), appear to have intended these ongoing restrictions to help cushion the drop in output, sometimes also by providing enterprises with subsidized energy and other raw materials.

Inadequate macroeconomic discipline, by generating high inflation, excessive exchange rate volatility, often deep fiscal imbalances, and unemployment also helped to create a political-economic environment that was hostile to trade liberalization. By allowing fiscal imbalances to reach near crisis levels, trade taxes—particularly import taxes—were sometimes viewed as the least unattractive tax policy response, especially where traditional revenue sources were declining. Armenia, Georgia, Tajikistan, and Russia, for example, all adopted trade taxes to help reduce large fiscal imbalances. A number of studies have found evidence that exchange rate volatility tends to stimulate protectionist pressures. 30/ In a number of countries of the FSU, pressures for protection during periods of real effective exchange rate (REER) appreciation appear to have contributed, at least temporarily, to a racheting-up effect for protection, whereby trade restrictions introduced during periods of unusual currency strength were not eliminated following a REER depreciation. This seems to have occurred, for example, in the Baltics in late 1992. 31/

Highly concentrated industrial structures (e.g., the oil sector in Azerbaijan; cars and textiles in Russia; aluminum in Tajikistan; natural gas in Turkmenistan) may also have contributed to protectionist pressures and the maintenance of some trade barriers. It is well-known that highly concentrated industries, including those that are geographically concentrated (Pincus, 1975), are more likely to solve the coordination problem 32/ and thus to pursue collectively rational rent-seeking behavior. 33/ These pressures have been accommodated through various subsidies, the maintenance of government monopolies, and an array of import and export restrictions. In most cases, highly concentrated industrial structures were a remnant of the integrated Soviet system. Some of the countries that inherited the most concentrated industrial structures from the former Soviet system (e.g., Uzbekistan, Tajikistan and Turkmenistan) have indeed moved quite slowly in liberalizing trade.

Trade liberalization has also been retarded by a failure to achieve a critical mass of reform in complementary areas such as price liberalization, labor market and financial system reforms, and privatization. In Tajikistan and Uzbekistan (until the middle of 1995), for example, the retention of price controls necessitated the maintenance of export controls, which, by reducing the availability of foreign exchange, acted as an indirect tax on imports. 34/ It is likely that protectionist forces have been less vocal and direct import barriers low in those FSU countries where significant export barriers remain; this is because of the indirect protection afforded by export restrictions. Until recently, for example, Uzbekistan maintained extensive export restrictions with relatively unrestricted imports. Following some relaxation of goods subject to export quotas in late 1994 and again in July 1995, Uzbekistan reintroduced an array of import duties ranging from 5 percent to 100 percent in October 1995. The case of Lithuania also suggests that liberalization of exports may be accompanied by new trade barriers toward imports. In the middle of 1993, Lithuania eliminated most export QRs, which coincided with an appreciation of the real effective exchange rate and the adoption of new import tariffs and some non-tariff barriers (Sorsa, 1994, p.163). Since then, more than a dozen changes in the import tariff structure have occurred in Lithuania, which on balance have produced both higher average tariffs and greater rate dispersion (Čičinskas, et al., 1995, p. 8).

A failure to mitigate labor market rigidities may also have contributed to hesitant trade reforms. In Lithuania, for example, major restrictions on labor mobility, direct and indirect, remained in place at least through early 1993, including steep severance pay requirements for state and private employers, requiring official permission to move to certain cities, and the existence of a critical housing shortage. 35/ Efforts to eliminate labor market rigidities imply easier transitions for labor under trade reform and, other things equal, less resistance to open trade. Moreover, if factor market rigidities are extensive, the objectives of trade liberalization—viz, improved resource allocation—would, in any case, be thwarted. Correcting factor market rigidities can thus affect not only the political feasibility of trade liberalization, but also its social value.

For some states of the FSU, regional or domestic armed conflicts have inhibited structural reforms in general, and trade liberalization in particular (e.g., Armenia, Tajikistan, and Azerbaijan). Indeed, in an attempt to improve domestic supply, particularly of energy, fertilizer and other critical inputs, the authorities generally tightened restrictions and state controls over foreign trade, and extended the coverage of bilateral clearing or barter arrangements. For example, between January and April 1994, Tajikistan issued new regulations which further centralized export controls by increasing the number of product groups subject to Government monopoly from 37 to 50, mandated that export of cotton and aluminum (which accounted for about 75 percent of Tajikistan’s exports) would be handled exclusively by the state, and that these products would be traded only for imports of energy products and grain.

3. Market access in industrial countries

Trade policy decisions at home can also be influenced by the treatment a country’s exports receive abroad. A summary of the conditions of market access available to the economies of the FSU appears in Table 2. It is clear that virtually all of these countries are granted most-favored nation (MFN) treatment in the major OECD markets. In some cases, these countries also benefit from preferential market access under the generalized system of preferences (GSP). Thus it might appear that market access abroad has not been a notable problem. However, despite MFN or GSP treatment, antidumping/countervailing actions and the threat of these, particularly from the European Union and the United States, has presented an important obstacle to market access for some FSU exporters (Table 3). Antidumping actions could be particularly pernicious to these fledgling market economies because such actions penalize them for incipient export success at a time of difficult macroeconomic and structural adjustment. Moreover, as these transition economies make further progress in liberalizing export controls, the prospect of antidumping actions may increase. 36/ Their capacity to adopt a liberal trading system could be undermined by “contingent protection” abroad, as the latter may strengthen the hand of domestic protectionists.

Table 2:

Market Access to Selected OECD Countries

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Source: Organization for Economic Co-operation and Development, Trade Directorate.
Table 3.

Antidumping Actions by the European Union and United States Against the Baltic Countries, Russia and the Other Countries of the Former Soviet Union

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Source: Author’s compilation from Semi-Annual Reports to the GATT Committee on Anti-Dumping Practices, European Reports (various issues) and the International Trade Reporter (various issues).

Final antidumping measures in force on December 31, 1993.

Action against the USSR and remains in place.

Antidumping petitions and preliminary actions 1992-1994.

Final antidumping measures in force on June 30, 1994.

Suspension agreement or price undertaking.

Price undertaking reported U.S. Semi-Annual Report, April 22 1993.

IV. Refining the Approach to Trade Reform

In reviewing the actions of FSU countries against the trade-policy advice of the Fund and the Bank it is clear that in the high-priority areas—elimination of price controls and the phasing out of the system of export QRs, state trading, and state orders—with a few notable exceptions, expectations have largely been met. Clearly the dismantling of these remnants of the former Soviet system cannot be explained by the absence of vested interests. Why then has progress on these fronts been relatively successful? The reason would seem to be that these reforms are not merely trade reforms, but are central to the transformation process itself. Price controls, state orders, state trading, and associated export QRs are all inimical to a market-based economy. This linkage ensured that the political economy of liberalization on these fronts was determined by that of liberalization more generally.

Maintaining or adopting a liberalized import regime, on the other hand, is not tied symbiotically to the transformation process. Thus, in retrospect, it is not surprising that the ambitious goal of moving directly to a simple, relatively open, and transparent tariff-based import regime has been more difficult to achieve. Where export restrictions have been relaxed and import pressures subsequently strengthened, governments, in most cases, have demonstrated sensitivity to protectionist pressures, and, as a result, tariff structures have become increasingly dispersed. 37/ 38/

A government’s ability to follow Fund trade policy advice may require that the advice include measures to help secure a political consensus for continued trade liberalization over the longer term. 39/ In the language of endogenous policy theory, there may be a need to identify measures that will help to shift the “political equilibrium” in favor of more open trade. 40/ The intent is not to modify the ultimate goal (viz., achieving highly liberal and transparent trade regimes throughout the FSU), but to ask how policy advice might be refined to help sow the seeds of sustainable trade liberalization over the longer term.

What stands out is the apparent inability of most FSU countries to contain pressures for protection once export restrictions have been eliminated, as reflected in the dispersion, levels, and instability of tariff structures. If officials have been prevented by “political realities” from immediately adopting a low uniform tariff, indirect measures can be identified that may help to improve the political-economic environment for achieving sustainable trade liberalization. This is done by changing the expected distributional consequences of trade liberalization, and by enhancing transparency so that the sectoral and economy-wide costs of protectionism become readily perceived. In this respect, the Baltic countries, Russia and the other countries of the FSU are similar to industrial and developing market economies, all of whom need to cope with protectionist pressures. However, because transition economies remain in the early stages of building new economic, social, and political institutions, it may be particularly crucial for them to adopt measures that help to dissipate the influence of protectionists. A menu of general measures to help facilitate gradual movement toward a highly liberal trade regime appears in Table 4 and these are discussed below. The following discussion is, in many instances, also applicable to market economies.

Table 4.

Summary of General Policy Measures to Facilitate Trade Reform

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As suggested by the discussion in Section III, a country’s capacity to enact trade reform may depend on a large number of factors, including some which might at first appear unconnected to protectionism. Such factors might include the degree of industry concentration, domestic barriers to entry and exit, the development of factor markets, macroeconomic conditions, institutional arrangements that affect transparency and influence the responsiveness of governments to protectionist pressures, and international commitments. The following sections suggest a specific package of policy measures that, when treated as a whole, may help facilitate an improved response in the area of import liberalization. The recommendations below are divided into trade-related and complementary reforms.

1. Trade-related recommendations

a. Tariffs and taxes

Import tariff regimes in the FSU could benefit from the experience in a wide range of developing countries, which suggests that achieving a consolidated tariff structure (perhaps three-four tariff bands ranging from 0-30 percent depending on the initial condition) is often feasible even when the initial regime is highly diffuse. 41/ Such consolidation acknowledges the need for some accommodation of protectionist pressures, but also facilitates movement toward a low uniform tariff 42/ by enhancing transparency and by creating a focal point for future liberalization; namely, the focus is on collapsing the top rate onto the next lowest rate in just two or three successive pre-announced stages.

Only those countries with highly dispersed tariff structures should be advised to adopt the extreme case of four bands and a maximum rate of 30 percent. 43/ At the same time, a specific timetable for achieving a low uniform tariff over a period of from 3 to 5 years should be announced. The announcement should include a corresponding timetable for implementing alternative domestic tax or spending measures in order to prevent revenue loss from upending the planned tariff reform. This will also serve to signal commitment and thereby enhance the credibility of the tariff reform from the outset.

b. Transparency and public information

Without a high degree of transparency, insiders tend to dominate the politics of policy formation. If an industry can proceed with a bid for protection without the full knowledge of user industries, final consumers, or foreign exporters, other things equal, the likelihood of provoking an antiprotectionist response is reduced. A high degree of transparency, on the other hand, helps to shift the political equilibrium in favor of liberal trade. 44/

A relatively modest step toward facilitating transparency would be to introduce legislation requiring specific procedures for early and frequent press releases that trace all salient developments in the consideration and adoption of new trade measures. If existing trade legislation grants discretionary authority to administrative agencies handling trade—such as non-automatic import and export licensing, the granting of duty waivers and exemptions, trader registration requirements, etc.—the specifics of all such decisions should be made available for public scrutiny on a timely basis.

A more ambitious approach to improving the flow of information and to helping balance the public debate on trade reform would be to establish a relatively small administrative entity charged with assessing the costs and benefits (including the distribution of these across sectors) of existing and prospective trade measures or legislation. The unit should be granted autonomous status in law with a mandate to review proposed trade legislation and to release its findings on a timely basis to the public. Such a commission would facilitate greater transparency in trade policy decisions and could help to mobilize antiprotectionist interests, thereby preventing import-competing groups from dominating the public debate. There is a risk, of course, that just as regulatory agencies can be “captured” by the industries they regulate, such a commission might be captured by protectionists. Nevertheless, the Australian experience suggests that such a commission can play a highly constructive role in the liberalization process. 45/

c. Safeguards policy

Safeguards policies broadly defined 46/ comprise the rules governing emergency protection for goods under GATT Article XIX, 47/ Articles XII and XVIII:B, 48/ antidumping, and countervailing duty policies. These measures call for a temporary and limited reintroduction of protective trade barriers in the event that, inter alia, injury occurs as a result of imports. 49/ The principal economic rationale for the adoption of safeguards, narrowly defined as emergency protection under GATT Article XIX, is that the impetus toward trade liberalization may be bolstered by providing a safety valve to vent and thereby manage protectionist pressures. Introducing a formal system of safeguards may help to appease protectionists by offering a kind of security blanket, while also ensuring that should protection be reintroduced it will be limited in both level and duration.

Along with other first steps toward liberalization, therefore, adoption of a formalized system of safeguards, along the lines of GATT Article XIX, 50/ might be introduced into the trade-policy legislation of FSU countries. Once the legislation is implemented, appeals for protection initially directed to legislators could be referred to the administrative agency empowered to implement the safeguard law, thereby helping to deflect such appeals from the political track to a rules-based administrative track. It is essential that the safeguards provisions take care to minimize opportunities for abuse by, for example, establishing a strict sunset clause 51/, specific degressivity requirements, 52/ and a stringent injury requirement—at minimum satisfying the rules established under the Uruguay Round agreement, 53/ so that import-competing firms will be induced to use the breathing space either to become efficient or to exit the industry.

There are risks in advocating the adoption of safeguards legislation. A safeguard system that indefinitely impedes economically desirable resource reallocation or that signals an excessively accommodating stance toward assistance to domestic industries is clearly not a system that would facilitate liberal trade over time. It is thus critical that if a safeguards instrument is to be used, it should be formulated with a view to maintaining forward momentum in the liberalization process. The Russian Federation’s foreign trade law of October 1995 (Federal Law no. 157-03), for example, falls short of this recommendation. The law outlines a safeguard provision of the GATT Article XIX type, but it does not specify explicit rules on duration and degressivity. Rather it asserts that such matters will determined by the Government “with due regard to the international obligations of the Russian Federation” (Article 18).

The Fund’s trade policy advice has recognized the potentially constructive role for safeguards as a facilitator of trade liberalization. 54/ While it would not be necessary for the Fund to become involved in advising on specific design issues regarding safeguards (the WTO and World Bank have greater expertise in this area), the Fund could consistently highlight the constructive role a well-designed safeguards system (of the GATT Article XIX-type) can play in advancing liberal trade.

2. Complementary measures

a. Macroeconomic stabilization

Empirical work on market economies suggests that resistance to trade liberalization may be eased if the macroeconomic environment is improved. 55/ Moreover, failing to attend to fiscal problems—including by paving the way for a reduction in reliance on trade taxes as a source of revenue—may also directly complicate trade reforms, as happened, for example, in Armenia, Russia, and Tajikistan. Macroeconomic stabilization can be expected to facilitate efforts to liberalize trade because, more generally, it improves the atmosphere for structural policy changes by, inter alia, keeping inflation low, and thus minimizing distortions in relative price signals, reducing real exchange-rate volatility, and maintaining high levels of employment. Fund-supported adjustment programs typically incorporate macroeconomic measures to promote external viability and internal price stability. 56/

b. Market structure and privatization

Because highly concentrated industries are more likely to solve the coordination problem, and thus to internalize industry-wide incentives to lobby for protection, measures to control industry concentration can help indirectly to facilitate liberalization. Industrial policies that discourage a high degree of market concentration—particularly when it is unrelated to economies of scale—enhance competition while also imposing higher coordination costs on these industries. Higher coordination costs—and so greater difficulty in organizing unified lobbying efforts to petition for the protection—imply lower aggregate lobbying expenditures. An alternative way of expressing this point is that because protection is a public good for the import-competing industry, the free-rider problem ensures that an industry which cannot coordinate its rent-seeking efforts will fall short of its optimal level of lobbying. In this same vein, measures that facilitate entry also reduce the expected payoff to protection, thereby diminishing incentives for seeking protection. Ideally, a competition policy authority should be established and government-imposed barriers to entry should be minimized; these measures would directly improve market efficiency, while also helping to mitigate opposition to liberal trade over time.

c. Factor market rigidities

Structural adjustment is impeded by factor market rigidities, including the prevalence of sector-specific factors of production, which may be particularly pronounced in transition economies. Any measure that stands ex ante to ease the movement of labor (for example, from import-competing sectors to export-oriented sectors) can help to limit labor-based opposition to trade liberalization. Trade adjustment assistance programs and retraining programs are examples of measures intended to ease the transition to freer trade. There are both equity and efficiency reasons, however, for hesitating to recommend such measures. Instead, to the extent that specific obstacles to labor market adjustment can be identified and mitigated in individual countries—including, for example, underdeveloped transportation infrastructure, social support programs provided by enterprises rather than by government, housing shortages, and severance pay regulations—correcting these should be pursued as part of an integrated approach to trade liberalization.

Another issue linked to factor specificity and trade liberalization involves the approach to privatization in transition economies. Attitudes toward trade liberalization will depend, in general, on an economic agent’s stake in liberalization, which in turn depends on the extent to which their total assets are diversified across sectors (Hillman and Feeney, 1995). An agent that has all of his capital tied up in an import-competing sector will typically resist trade liberalization. However, an agent that may, for example, have human capital tied up in an import-competing sector but also has financial capital whose performance depends on economy-wide developments—including export performance—will tend to be ambivalent about trade liberalization. As pointed out by Hillman and Feeney (1995), a direct implication of this is that voucher-based privatizations, by helping to spread the stake of individuals across a wide variety of sectors, may also help to lessen resistance to trade liberalization. Conversely, direct transfers of ownership to workers with restricted transfer rights, acts to concentrate sector-specific capital and could thus stiffen resistance to trade liberalization. 57/

V. Conclusions

This paper has reviewed implementation of the Fund’s trade policy advice during 1993-95 in the Baltic countries, Russia and the other countries of the Former Soviet Union with a view to understanding how that advice might be refined in order to produce a more favorable record of trade liberalization in the years to come. Three groups were identified: (i) those making significant progress on all trade-reform fronts (notably Estonia and the Kyrgyz Republic); (ii) those where progress was mixed (Armenia, Azerbaijan, Belarus, Georgia, Kazakstan, Latvia, Lithuania, Moldova, Russia, and Ukraine); and (iii) those where trade reform was uniformly slow (e.g., Tajikistan, Turkmenistan, and to a lesser extent Uzbekistan). Trade measures closely tied to the fundamental reforms of the transition,—viz., price liberalization and elimination of the state order system, state trading, and export QRs,—have proceeded reasonably well in most cases. As such, in those instances where these reforms remain incomplete, they should remain a priority in Fund policy advice. What has been less successful is achieving and maintaining a relatively liberal tariff-based import regime once export barriers have been removed.

Broadly, countries that were able to proceed with extensive liberalization had relatively flexible factor markets, a relatively small share of heavy industries, and demonstrated a strong commitment to market-oriented reforms. Countries that experienced setbacks and delays frequently had inadequate macroeconomic policies, concentrated industrial structures, extensive labor market rigidities, and/or experienced regional or domestic armed conflict. However, none of these factors individually appeared to be decisive in determining the course of trade reform in the FSU.

By drawing on the fragmentary evidence from country experiences and utilizing public-choice principals, a set of policy recommendations was identified that, if implemented, should improve the trajectory of trade reform over the medium term. Trade reform would be facilitated by measures that reduce the freedom of policymakers to grant protection, defuse protectionist pressures by venting such pressures in a rules-based way, stabilize the macroeconomy, diversify the stake of economic agents across sectors, diminish labor market rigidities, resist market concentration, and that help to mobilize antiprotectionist forces.

Specific trade measures include adopting a tariff regime of 3-4 tariff bands in the range of zero to 30 percent, and a moderate average, which acknowledges the political difficulties facing policymakers, while also setting the stage for progressive steps toward a low uniform tariff over the longer term. Measures to further transparency and provide public information on trade policy should be pursued, with specific legislation detailing requirements for the release of information to the public during consideration of all new trade measures or legislation. The establishment of a small administrative entity charged with assessing the costs and benefits of existing and prospective trade legislation might also further the goal of transparency and help to mobilize antiprotectionist interests. Adoption of a well-designed safeguards mechanism, along the lines of GATT Article XIX, may help to defuse protectionist opposition to broad-based liberalization efforts.

A number of complementary policies were also identified which, beyond their direct value as sensible economic measures, would help improve the political environment for trade liberalization. Macroeconomic stabilization will facilitate efforts to liberalize trade by keeping inflation low and thus minimizing distortions in relative prices, reducing real exchange rate volatility, and maintaining high levels of employment. Competition policies that minimize government-imposed barriers to entry, and counter anticompetitive market concentration, apart from directly improving market efficiency, will also help to reduce the expected value of protectionist policies and inhibit industry efforts to coordinate protection seeking. Measures to reduce factor market rigidities, apart from the direct efficiency benefits, will also improve the political atmosphere for sustainable trade liberalization. In this regard, voucher-based privatizations, because these help to spread the assets of individuals across a variety of sectors, may help to break the uniformity of interests that frequently underpins vigorous resistance to liberalization.