Thomas F. Rutherford, University of Colorado at Boulder David Tarr, The World Bank

Improved market access for Improved market access for Russia or own liberalization as Russia or own liberalization as part of WTO accession:part of WTO accession: What will raise Russian income and reduce poverty more?

Thomas F. Rutherford, University of Colorado at BoulderDavid Tarr, The World Bank

Oleksandr Shepotylo, University of MarylandUpdated version available at:

www.worldbank.org/trade/russia-wto

June 6, 2005

The views are those of the authors and do not necessarily reflect those of the World Bank.

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WTO is important to Russia for WTO is important to Russia for two reasons:two reasons:

WTO accessionWTO accession. 2005 as the goal, 2006 as more realistic

The Doha AgendaThe Doha Agenda—world price change implications for Russia.

We compare the impact of these two potential events on Russia.

WTO accessionWTO accession—primarily a set of own commitments—especially in business services

Doha Agenda for RussiaDoha Agenda for Russia—subsidy and tariff reductions in the rest of the world

Comparison devolves to:

Can Russia gain more from trade and subsidy reform in the rest of the world or from its own liberalization?

Small open economy CGE model of Russia Small open economy CGE model of Russia

We depart from the standard CGE model in two ways:1. Foreign direct investment in business services, with Dixit-

Stiglitz endogenous productivity effects from FDI in business services and from trade liberalization in imperfectly competitive goods sectors.

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.

Services Z enter the production function as a CES aggregate of domestic and multinational services

1) Domestic and imported services are CES aggregates of

domestic and multinational firm varieties, respectively.

2)

This is pure firm level product differentiation.

/1)( ZMZDZ x

/1/1

md n

jj

n

ii zmZMzdZD

Dual to the Dixit-Stiglitz quantity aggregates are Cost Functions that reflect the cost of purchasing service varieties at minimum cost:

3) 4) 5)

Thus, costs decline with the number of varieties—the Dixit-Stiglitz love of variety effect.

11

11

1m

n

izm

mmm

ipCM

11

11

1d

n

izd

dmd

ipCD

11 and dm

d

zd

m

zm

npCD

npCM

We assume that multinational service providers Import some specialized inputs—either skilled labor Or technology.

Thus, they use domestic labor less intensively than domestic firms.

Although imported specialized inputs are partial equilibrium substitutes for domestic labor, they may be general equilibrium complements.

2. We build a “real household” model.

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.

Counterfactuals:Counterfactuals:

1. Elements of the WTO accession counterfactual package

– Tariffs reduced by 50% across the board.– Discriminatory tax on multinationals service providers

removed or reduced.– Improved terms of trade due to improved market access of

from 0.5%-1.5% for seven sectors.2. We evaluate the impact of reduction in the barriers

to FDI only. 3. We also evaluate WTO accession with a reduction

in the barriers on FDI by 50% of the cuts in our WTO scenario.

4.4. Global Free TradeGlobal Free Trade (without Russian participation); full removal of tariffs, export subsidies

5. and domestic support.

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.

5. 5. Doha Doha Full removal of export subsidies; modest reductions in tariffs and domestic support.

Results:Results:

1.1. WTO accessionWTO accession– Weighted average gains across households of 7.3% of

consumption with a standard deviation across households of 2.2%. Virtually all households gain.

– Liberalization of barriers against FDI is responsible for about 70% of these gains.

– The poorest decile of the population gains (7.6%) slightly more than the richest (6.8%) since the return on capital rises less in real terms than the wage rate of unskilled labor. See table 7.

– We plot the whole distribution and the poorest and richest deciles of the population in figure 2.

Rutherford, Tarr and Shepotylo have shown that:

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.

2.2. Global free trade Global free trade (elimination of export subsidies and domestic support)

– Gains to Russia overall are 0.2% of consumption with a standard deviation of 0.2% of consumption.

– Gains are evenly distributed across deciles. In figure 3 we plot the distributions of the entire population, the poorest and richest deciles. Despite gains on average, a significant share of the households are estimated to lose.

– Russia is a significant net food importer. Elimination of subsidies to agriculture raises the import bill for food in Russia.

4.4. Doha .Doha . ModestModest 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.

– The small tariff cuts do not provide enough gains to Russia to offset the negative impact of the subsidy reduction.

– Impacts are evenly distributed across deciles.– We also simulate Doha with no export subsidy reduction

and no domestic subsidy reduction. In that case, we estimate Russia will gain 0.2% of consumption. This shows again that subsidy reduction hurts Russia.

Conclusions:Conclusions: 1.1. Own liberalization is most important Own liberalization is most important (especially

services for Russia)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:

– Doha;Doha;– Global free tradeGlobal free trade– WTO accessionWTO accession

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.

2.2. A model with FDI liberalization in services with A model with FDI liberalization in services with endogenous productivity effects is crucial to even endogenous productivity effects is crucial to even assess the sign of the gains to the Russian poor assess the sign of the gains to the Russian poor from WTO accession.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.

3.3. Transition costs must be considered by policy-Transition costs must be considered by policy-makers, although they are outside of this model. makers, although they are outside of this model.

(results are percentage change from initial equilibrium)

WTO Accession WTO Reform of FDI with partial Doha 1 a/ Doha 2 b/

accession barriers only reform of FDI No change in Full removal No change in Some reductionbarriers domestic of domestic domestic in domestic

support support support support(1) (2) (3) (4) (5) (6) (7)

Aggregate welfare

Welfare (EV as % of consumption) 7.3 5.3 4.1 0.2 0.0 -0.3 -0.2

(2.2) c/ (1.5) (1.3) (0.2) (0.2) (0.2) (0.2)

Welfare (EV as % of GDP) 3.4 2.4 1.9 0.1 0.0 -0.1 -0.1

Government budget

Tariff revenue (% of GDP) 0.9 1.4 0.8 1.4 1.3 1.3 1.3

Tariff revenue (% change) -33.2 10.9 -35.2 5.1 3.4 3.3 3.5

Aggregate trade

Real exchange rate (% change) 2.6 1.1 1.8 -0.1 -0.5 -0.3 -0.4

Aggregate exports (% change) 14.4 3.7 11.9 0.2 -0.1 -0.5 -0.3

Returns to mobile factors

Unskilled Labor (% change) 3.7 2.9 1.7 0.1 0.1 0.0 0.0

Skilled Labor (% change) 5.3 2.8 3.2 0.0 -0.1 -0.2 -0.2

Capital (% change) 1.8 1.4 2.2 0.0 -0.2 -0.3 -0.3

Percent of Factors that must adjust

Unskilled labor 1.2 0.4 1.3 0.2 0.4 0.3 0.3

Skilled labor 1.4 0.7 1.00.1 0.3 0.2 0.2

Capital 0.5 0.1 0.4 0.2 0.4 0.3 0.3 Source: Authors' estimates

a/ Doha 1 assumes modest tariff reductions, without participation by Russia.b/ Doha 2 assumes more substantial tariff cuts, without participation by Russia.c/ Numbers in parentheses are the standard deviations.

Table 5: Impact of Russian WTO Accession and the Doha Agenda on Economy-Wide Variables in Russia

Full Removal of Export SubsidiesGlobal Free Trade

Mean S.D.d/ Mean S.D. Mean S.D. Mean S.D. Mean S.D. Mean S.D.Decile 1 (0-10%) Rural 7.0 (4.0) 5.3 (3.0) 0.2 (0.3) 0.1 (0.3) -0.2 (0.2) -0.1 (0.2)

Urban 8.3 (2.0) 5.8 (1.3) 0.1 (0.2) -0.1 (0.3) -0.3 (0.2) -0.2 (0.2)

Combined 7.6 (3.4) 5.5 (2.4) 0.2 (0.2) 0.0 (0.3) -0.2 (0.2) -0.2 (0.2)

Decile 2 (11-20%) Rural 6.7 (2.2) 5.1 (1.6) 0.2 (0.2) 0.1 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 8.2 (1.7) 5.6 (1.1) 0.1 (0.2) -0.1 (0.2) -0.3 (0.2) -0.2 (0.2)

Combined 7.6 (2.0) 5.4 (1.3) 0.1 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 3 (21-30%) Rural 6.6 (2.4) 5.0 (1.6) 0.2 (0.2) 0.1 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 8.3 (1.8) 5.6 (1.1) 0.1 (0.2) -0.1 (0.2) -0.3 (0.2) -0.3 (0.2)

Combined 7.7 (2.1) 5.4 (1.3) 0.1 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 4 (31-40%) Rural 6.6 (2.1) 5.0 (1.6) 0.2 (0.1) 0.1 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 8.2 (1.6) 5.6 (1.1) 0.1 (0.1) -0.1 (0.2) -0.3 (0.2) -0.3 (0.2)

Combined 7.7 (1.9) 5.4 (1.3) 0.1 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 5 (41-50%) Rural 6.4 (2.0) 4.8 (1.4) 0.2 (0.1) 0.1 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 8.1 (1.7) 5.6 (1.2) 0.1 (0.2) -0.1 (0.2) -0.3 (0.2) -0.2 (0.2)

Combined 7.7 (2.0) 5.4 (1.3) 0.1 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 6 (51-60%) Rural 6.2 (1.9) 4.7 (1.3) 0.2 (0.1) 0.0 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 8.0 (1.6) 5.5 (1.1) 0.1 (0.2) -0.1 (0.2) -0.3 (0.2) -0.3 (0.2)

Combined 7.5 (1.9) 5.3 (1.2) 0.1 (0.2) -0.1 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 7 (61-70%) Rural 6.2 (2.2) 4.8 (1.6) 0.2 (0.1) 0.1 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 7.8 (1.7) 5.5 (1.3) 0.2 (0.2) -0.1 (0.2) -0.3 (0.2) -0.2 (0.2)

Combined 7.5 (2.0) 5.3 (1.4) 0.2 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 8 (71-80%) Rural 6.0 (1.9) 4.6 (1.3) 0.2 (0.1) 0.1 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 7.8 (1.7) 5.4 (1.2) 0.2 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.1)

Combined 7.5 (1.9) 5.3 (1.2) 0.2 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 9 (81-90%) Rural 6.1 (2.4) 4.8 (2.1) 0.2 (0.1) 0.1 (0.2) -0.2 (0.2) -0.1 (0.2)

Urban 7.3 (1.6) 5.3 (1.3) 0.2 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Combined 7.2 (1.8) 5.2 (1.5) 0.2 (0.2) 0.0 (0.2) -0.3 (0.2) -0.2 (0.2)

Decile 10 (91-100%) Rural 5.6 (2.3) 4.4 (2.0) 0.3 (0.2) 0.1 (0.2) -0.1 (0.2) -0.1 (0.2)

Urban 6.8 (1.9) 5.2 (1.6) 0.3 (0.2) 0.1 (0.2) -0.2 (0.2) -0.2 (0.2)

Combined 6.8 (2.0) 5.1 (1.7) 0.3 (0.2) 0.1 (0.2) -0.2 (0.2) -0.2 (0.2)

(2) (6)(5)

Full removal ofdomestic support

Table 7. The Mean and Standard Deviation of the Welfare Impacts of WTO Accession on Russian Households, from Poorest to Richest (welfare change as a percent of consumption)

a/ The model is executed with 55 thousand households. Decile 1 is the poorest ten percent of all households on a per capita consumption basis. Results for decile 1 (combined, rural and urban) are a weighted average of the equivalent variation as a percentage of consumption of the households (combined, rural and urban) in the decile. Other deciles are calculated analogously.

(1) (3) (4)domestic support

Some reduction indomestic support

Reform ofFDI barriers

only

WTO

b/Doha 1 assumes modest tariff reductions, without participation by Russia.

Household types a/

Full Removal of Export SubsidiesGlobal Free Trade Doha 1 b/ Doha 2 c/

No change indomestic support

No change inaccession

Figure 1: Production and Allocation of Output

Gross Output

Sector Specific

Resources

Skilled Labor

DomesticIntermediate

ImportedIntermediate



CES

CompositeIntermediateIRTS goods

CES

CompositeIntermediateCRTS goods

Value-addedBusiness Services

CES

…. = 1

= 1.25

Value-added and Business Services

Leontief

Intermediate Goods

= 0

Leontief = 0

CET

Domestic Supply

Export Supply

= 5

Business Service 11

CES

Business Service 1

CES

Domestic Presence Services

Cross Border Services

Cobb-Douglas

= 1.5 = 1.5

= 1

=3 =3

Other Services 11

Other Services 1

Leontief = 0

Other Services

CES

Domestic Services

=3

Multinational Services

Russian Services

Capital Unskilled Labor

Cross Border

Services

CES =3

Domestic Services

Cross Border

Services

=3



=3


Russian Services

….

….Cobb-Douglas….

CES

Multinational Service

Providers

Russian Firms

=3

Foreign -based Firms

=3


Gross Output

Sector Specific

Resources

Skilled Labor





CES


CES



CES

…. = 1

= 1.25


Leontief

Intermediate Goods

= 0

Leontief = 0

CET

Domestic Supply

Export Supply

= 5

Business Service 11

CES

Business Service 1

CES



Cobb-Douglas

= 1.5

= 1

= =3

Other Services 11

Other Services 1

Leontief = 0

Other Services

CES

Domestic Services

=


Russian Services


Cross Border

Services

CES =3

Domestic Services

Cross Border

Services

=3



=


Russian Services

….


CES

ServiceProviders

Russian Firms

=


=

Multinational

CES CES

ServiceProviders

Russian Service

Providers

=3=3 =3CES =3

Russian Service

Providers


Gross Output

Sector Specific

Resources

Skilled Labor





CES


CES



CES

…. = 1

= 1.25


Leontief

Intermediate Goods

= 0

Leontief = 0

CET

Domestic Supply

Export Supply

= 5

Business Service 11

CES

Business Service 1

CES



Cobb-Douglas

= 1.5 = 1.5

= 1

=3 =3

Other Services 11

Other Services 1

Leontief = 0

Other Services

CES

Domestic Services

=3


Russian Services


Cross Border

Services

CES =3

Domestic Services

Cross Border

Services

=3



=3


Russian Services

….


CES

Multinational Service

Providers

Russian Firms

=3


=3


Gross Output

Sector Specific

Resources

Skilled Labor





CES


CES



CES

…. = 1

= 1.25


Leontief

Intermediate Goods

= 0

Leontief = 0

CET

Domestic Supply

Export Supply

= 5

Business Service 11

CES

Business Service 1

CES



Cobb-Douglas

= 1.5

= 1

= =3

Other Services 11

Other Services 1

Leontief = 0

Other Services

CES

Domestic Services

=


Russian Services


Cross Border

Services

CES =3

Domestic Services

Cross Border

Services

=3



=


Russian Services

….


CES

ServiceProviders

Russian Firms

=


=


=

Multinational

CES CES

ServiceProviders

Russian Service

Providers

=3=3 =3CES =3

Russian Service

Providers

0.0

5.1

.15

.2.2

5D

istri

butio

n of

wel

fare

gai

ns

-1 2 5 8 11 14

Welfare gains as a percent of consumption from WTO accession

all households the poorest decile

the richest decile

Observations in a range from 0 % to 15 % are shown.Deciles are constructed to be representative of ten percent of Russian population based on the weights of the Household Budget Survey

for the entire sample, the poorest decile, and the richest decile.Figure 3. Distributions of estimated welfare gains from Russian WTO accessionFigure 2:

0.5

11.

52

2.5

Dis

tribu

tion

of w

elfa

re g

ains

-1.6 -1.4 -1.2 -1 -.8 -.6 -.4 -.2 0 .2 .4 .6 .8 1

Welfare gains as a percent of consumption

all households the poorest decilethe richest decile

Graph is truncated in a range from - 1.6 to 1

for the entire sample, the poorest decile, and the richest decile.Figure 3. Distributions of estimated welfare gains for Russian households from global free trade

a/

a/ Global free trade assumes full removal of export subsidies, no change in domestic support, and full removal of tariffs outside of Russia.

0.5

11.

52

Dis

tribu

tion

of w

elfa

re g

ains

-1.6 -1.4 -1.2 -1 -.8 -.6 -.4 -.2 0 .2 .4 .6 .8 1


all households the poorest decilethe richest decile

Graph is truncated in a range from - 1.6 to 1

for the entire sample, the poorest decile, and the richest decile.Figure 4. Distributions of estimated welfare gains for Russian households from Doha 2 a/

a/ Doha 2 assumes full removal of export subsidies, some reduction in domestic support, and significant tariff cuts outside of Russia.

020

4060

80D

istri

butio

n of

wel

fare

gai

ns

-2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16


Global free trade Doha 2

WTO accession

and global free trade model results compared. 55098 households sampled.Figure 5. Distributions of the estimated welfare gains: WTO accession, Doha 2,

Documents

Thomas F. Rutherford, University of Colorado at Boulder David Tarr, The World Bank