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Improved market access for Russia or own liberalization as part of WTO accession: What will raise Russian income and reduce poverty more? . Thomas F. Rutherford, University of Colorado at Boulder David Tarr, The World Bank Oleksandr Shepotylo, University of Maryland
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Thomas F. Rutherford, University of Colorado at Boulder
David Tarr, The World Bank
Oleksandr Shepotylo, University of Maryland
Updated version available at:
June 6, 2005
The views are those of the authors and
do not necessarily reflect those of the World Bank.
We compare the impact of these two potential events on Russia.
Comparison devolves to:
Can Russia gain more from trade and subsidy reform in the rest of the world or from its own liberalization?
We depart from the standard CGE model in two ways:
We build first on Jensen, Rutherford and Tarr (2004)
Two previous efforts to include endogenous productivity effects and FDI
Brown and Stern (2001) — but results depend on capital outflow or inflow — e.g., Japan loses because it invests abroad.
Productivity effects not mentioned in the results.
Dee et al.(2003) — Question of quota rents —countries that remove barriers gain due to capture of quota rents. Productivity effects not significant in the results.
However, in our model, endogenous productivity effects from FDI liberalization in services are fundamental to the results.
This is pure firm level product differentiation.
Thus, costs decline with the number of varieties—the Dixit-Stiglitz love of variety effect.
All the 55,000 households of the Russian Household Budget Survey are agents in our general equilibrium model.
We build on Rutherford, Tarr and Shepotylo (2004).
A new algorithm was developed for models with a very large number of agents.
Both the GAMS code and a graphical
interpretation of the algorithm are available.
Russia’s commitments will be dependent on its WTO accession agreement rather than Doha commitments of WTO incumbents. We assume Russia does not participate in these cuts.
New price vectors of weighted average export and import prices facing Russia from the GTAP model are the shocks to our small open economy model.
Full removal of export subsidies; modest reductions in tariffs and domestic support.
A constant returns to scale model without liberalization of barriers against FDI in services and endogenous productivity effects (inappropriate for Russian WTO accession) would produce much smaller average welfare gains (about 1.2 percent) and the wrong sign for the about seven percent of the Russian population.
Global free trade (elimination of export subsidies and domestic support)
Doha .Modest tariff cuts; export subsidy elimination and modest reduction in domestic support
Gains to Russia overall are -0.3% of consumption with a standard deviation of 0.2% of consumption.
Russia has by far the most to gain from its own liberalization, especially in business services, rather than from improvements in market access as a result in reforms in tariffs or subsidies in the rest of the world.
Figure 5 shows the histogram of estimated welfare results for three scenarios:
The distributions of welfare impacts of Doha and global free trade are very close and overlap considerably. Global free trade is slightly more beneficial. But the distribution of gains from WTO accession shows dramatically larger gains.
A model with FDI liberalization in services with endogenous productivity effects is crucial to even assess the sign of the gains to the Russian poor from WTO accession.
If a constant returns to scale model were employed, without liberalization of barriers against FDI in business services, the gains from Russian WTO accession would be only about 1.2 percent of consumption with about 7 percent of households expected to lose, i.e., for these seven percent of the households, the estimated sign of the effects would likely be wrong.
a/ Global free trade assumes full removal of export subsidies, no change in domestic support, and full removal of tariffs outside of Russia.
a/ Doha 2 assumes full removal of export subsidies, some reduction in domestic support, and significant tariff cuts outside of Russia.