In the past few years Russian economy has undergone a tremendous transformation from the planified to the market economy. This transition was accompanied by a substantional political and social change. It has succeeded in some areas more than in others, for instance Russian institutions have been neglected during this process and had to adapt their Soviet content to the new order. This has been a considerable disadvantage to the competitiveness of Russian business and investment climate. One of the ways Russian authorities are hoping to correct this is by joining World Trade Organisation (WTO) and adopting its current norms and regulations, thus making governmental institutions more transparent and bringing them up to date with the rest of the economy.

The negotiations for Russian accession have been going on for the past 17 years, and now that they are finally reaching a successful conclusion many new articles on the topic are. I have chosen the article by Oxana Babetskaia-Kukharchuk and Mathilde Maurel on Russia’s accession and the potential effects that accession would entail. In particular this paper attempts to investigate the impact of Russian institutions on trade and seeks to predict the potential for trade augmentation between Commonwealth of Independent States (CIS) and EU in authors words: “Our objective in this paper is to estimate the potential benefit from Russia’s participation in the WTO, by computing the impact of institutions on the intensity of bilateral trade flows.”

In order to reach their objective the authors use the gravity framework 2 to foresee the effect of being a member of CIS on bilateral trade levels. They develop the gravity equation by adding several institutional variables, for example the level of protection of the property rights, the share of black economy and the level of corruption in the custom duty, and level’s of tariff and non-tariff barriers to trade. The article justifies its topic with the fact that the main issue for Russian accession to the WTO is the weakness of its institutions, particularly its reluctance to liberate corrupted and subsidised markets such as Agriculture, Services, and Standard and Certification.

Excerpt

Plan.

1. Personal Summary.
a. Introduction
b. Methodology
c. Results

2. Overview of the Existing Literature
a. Other studies on the issue (focus on Rodrik (2000)
b. The multicollinearity issue (focus on Dollar and Kraay (2003))

3. Conclusion: Analysis
a. Critical Analysis of the article
i. Several assumptions are not credible
ii. Omitted factors
iii. Variables definitions
iv. Institutions quality and energy sector correlation argument
v. Petrol sector subsidies issue
vi. WTO
b. Critical Analysis of the field

1. Personal Summary.

a. Introduction

The negotiations for Russian accession have been going on for the past 17 years, and now that they are finally reaching a successful conclusion many new articles on the topic are. I have chosen the article by Oxana Babetskaia-Kukharchuk and Mathilde Maurel on Russia’s accession and the potential effects that accession would entail. In particular this paper attempts to investigate the impact of Russian institutions on trade and seeks to predict the potential for trade augmentation between Commonwealth of Independent States (CIS) and EU in authors words: “ Our objective in this paper is to estimate the potential benefit from Russia ’ s participation in the WTO, by computing the impact of institutions on the intensity of bilateral trade flows. ” ¹

In order to reach their objective the authors use the gravity framework² to foresee the effect of being a member of CIS on bilateral trade levels. They develop the gravity equation by adding several institutional variables, for example the level of protection of the property rights, the share of black economy and the level of corruption in the custom duty, and level’s of tariff and non-tariff barriers to trade. The article justifies its topic with the fact that the main issue for Russian accession to the WTO is the weakness of its institutions, particularly its reluctance to liberate “Do Russian Institutions matter for its levels of trade and the WTO accession?” corrupted and subsidised markets such as Agriculture, Services, and Standard and Certification.

b.Methodology

As previously stated the authors have based their study on the gravity equations. The article points out its originality of their econometric methodology that allowed the “ estimating time-invariant variables coefficients even in the fixed effects framework”, which is intended to make this paper more precise and thus credible.

The first part of this paper is dedicated to the illustration of the connection between Russian institutions and Russia’s level of integration in the world market. Secondly they develop the interdependence of Russian institutions and the accession to the WTO. The authors present two existing theories on how institutions affect trade via openness and effective strategies. In spite of lack of empirical studies in this topic, the paper points out that: dumping measures, export subsidies and abuse of environmental and safety regulations are the main obstacle for Russian accession. However, it is very important to notice that Russia is in a very particular position: it is a developing nation but with many similarities to several European countries. For instance it indirectly subsides the energy sector to maintain low prices that are actually seen as arrears that delay the transition to the market economy. Russian argument is that this should be seen as their comparative advantage just like cheap labour in Asia for example. Overall Russian economy is very much dependant on the energy sector and Russia’s competitiveness is still very low. The issue of the negative correlation between the energy intensity and the quality of institutions was brought to light. (Figure 1) Authors claim that the improvement in the market institutions would entail trade increase, foreign direct investment and a better business climate. In short: “ Joining the WTO is therefore likely to have an impact on trade intensity through the decline of protectionist policies but also through cutting-off the subsidies, which take the form of low energy prices and arrears, and more generally through favouring the emergence of the institutions characterising a market oriented economy. ” ³

Figure 1: Correlation between the energy intensity and the quality of institutions.

Abbildung in dieser Leseprobe nicht enthalten ⁴

The second part of the study was left for the demonstration of the specification of their gravity equation, that was developed with the institutional variables. The gravity model of trade in international economics demonstrates the bilateral trade flows using the economic sizes of (for instance GDP) and distance between two regions. The basic theoretical model for trade between two countries (i and j) takes the form of:

Where F is the trade flow, M is the economic mass of each country, D is the distance and G is a constant. As this is the simplest form of the equation, naturally more variables can be added. Authors decide not to use qualitative variables due to the danger of them being biased since there is no possibility to take into account the non-observable variables. The panel structure of the data-set, proposed in this paper, has excluded all the possible bias from the omitted variables. The variables are mainly aimed at protectionism deterioration, and economic freedom that should encourage trade.

Here we accept two basic equations with and without GDP per capita variable, whether it is perceived as a “economic distance” or as a “development influence” factor, it does not correspond to the reality and thus by eliminating the population variable, authors hope to create a more suitable model. It is also crucial to separate the impact of institutions on trade from the impact of economic development on trade as they are very much correlated. Both equations are from the Anderson and Van Wincoop (2003) gravity model. The first one illustrates trade by the product of partners GDP⁵, and by several transaction costs. Transaction costs include: transportation costs, exchange rate volatility and institution variables, which trough their ineffectiveness generate extra costs. The second model is developed with GDP per capita variable. Figure 2 demonstrated the specification of the gravity equation used in this paper:

Figure 2: Specification of the gravity model by Babetskaia-Kukharchuk and Maurel (2004)

Abbildung in dieser Leseprobe nicht enthalten⁶

Where LnTradeij⁷ is the bilateral trade, explained by all the variables in this equation, measured in thousands of dollars as a natural logarithm of exports value from country “I” to country “j”. LnGDPij⁸ are the logs of the real GDP in PPP, which acts as a measure of the market size of each economy. VOL⁹ refers to the bilateral rate volatility (via standard deviation of the ratio of the monthly exchange rate over its yearly average). LnDISTij¹⁰ is the log of the distance between two capitals to reflect the transportation costs. INSTij¹¹ refers to the quality of institutions relying on several proxies such as: the rule of law, the degree of contract enforcement, trade policy, property rights, corruption and others. At the end of the equation there is a bloc dummy in order to compensate for the bloc trade bias.

c. Conclusions

The sample of 14 countries and over the period of time from 1994 to 2001 resulted in a large number of observations, 13712, which allows us to expect a sufficient level of accuracy in these conclusions. In order to resolve the problem of simultaneously of the effects between trade and the quality of the institutions authors use the method recommended by Hausman and Taylor (1981) which consists of deteriorating all time-invariant variables on time-variant exogenous variables, thus taking into account the fixed effects and still keeping the time-invariant variables.

As we can see from the results the market size elasticity is very high, 0.92. (Figure 3) The volatility coefficient changes a lot, but has a negative sign as predicted. On the other hand, the distance coefficient is very stable. The dummy coefficient shows that the blocs are not trade-diverting as we expected except CIS the levels are rather adequate. CIS trade level with the European Union is very low at only 18% (36%). However the trade exchange with the Central and East European Countries, (CEEC) are very high, a Soviet Union traditional trade destruction effect¹² .

Abbildung in dieser Leseprobe nicht enthalten ¹³

Figure 2: Gravity equation estimates without population.

Institutions also play an important role. While this paper has focused on the effect of the quality of institutions on the levels of trade, it also investigates the effect of the WTO accession on the quality of these same institutions. One would argue that by entering the WTO and accepting European norms and regulations the country’s

Figure 3:Gravity equation estimates without population BabetskaiaKukharchuk and Maurel

Abbildung in dieser Leseprobe nicht enthalten

domestic institutions would improve. The authors demonstrate that the differences of the institutional scores between CIS and EU are much larger than between CEEC and EU, and this allows us to claim there lies a potential for trade increase. Assuming a hypothesis of EU quality institutions score with other CIS date generates a result of the 89% increase in trade, much of which is due to the decrease of the Black Market. (Figure 4) For Russia in particularly the increase is 66.2% due to the fact that its institutions are slightly better than those of their neighbours. If these estimations are accepted and conclusive the whole WTO accession process would be undermined as it is marginalising the poorest countries from a possible method of improving their institutions quality and creating an adequate business climate.

Figure 4: Impact of institutional improvement on trade by CIS country, in %

Abbildung in dieser Leseprobe nicht enthalten¹⁴

2. Overview of the Existing Literature

a. Other studies on the issue (focus on Rodrik (2000)

While it is generally agreed that good institutions create a favourable environment for growth and investment by guarantying property rights and minimising transaction costs, there is still a lack of empirical studies evaluating the effect of institutions directly on trade. For instance Rodrik (2000) has pointed out that the level of trade depends on the institution quality to make a country more attractive for trading partners. In his paper he focuses on “which institutions matter and how does one acquire them?”, he discusses institutions that favour the market development and claims that there is not one possibility of the institutional setup but rather a pool of options. For him such institutions have to be based on the “rule of law” and categorised in the following manner: property rights; regulatory institutions; institutions for macroeconomic stabilization; institutions for social insurance; and institutions of conflict management. Furthermore, he demonstrates a positive correlation between growth and a democratic regime. For Rodirik (2000) there are two methods to obtain such market-supporting institutions: the “blueprint”, which entails copying these institutions from a more developed economy with already established institutional order, or the “local knowledge” perspective of developing your own “know how” that corresponds to the local mentality, culture and tradition. From this point on Rodrick advocates a convergent scenario of complementing the two approaches that he exemplifies with Chinese economy. On a more quantative level, James E. Anderson and Leslie Young (2000) estimate the effect of the quality of the institutions on trade. They use a model of trade under two different regimes: “rule of law” and anarchy, from which they conclude that while the former one encourages trade the latter on does the contrary. In their study James E. Anderson and Leslie Young (2002) they establish a non-linear empirical dependence between the level of contract enforcement and trade. Another significant contribution by Broadman and Renati (2001) is an inverse causality between the two: the economic development together with democratization and trade openness explains the increase in corruption. Corruption is seen as an undermining factor for reforms, while good institutions are presumed to achieve the opposite all the while reducing corruption itself.

There are several studies that focus specifically on the causality of institutions to trade intensity, for example Hare (2002) estimates the WTO accession would promote reforms and help further liberalisation of the market. Similar results are reached by the White Book (2002) where the author suggest that European Union can provide expertise for Russia to develop its institutions and claims that throughout this process Russian-EU relations have a potential for improvement. Finally according to Piazolo (2002) WTO accession would trigger trade integration through the decline of protectionism. This rise in the trade intensity can be only beneficial, as the “sensitive” sectors such as agriculture and textile are not especially regulated at the world level. Overall we can note that most of the studies support the article hypothesis and agree that better quality institutions tend to promote trade.

b. The multicollinearity issue (focus on Dollar and Kraay (2003))

The previous article has attempted to examine the role of the quality of institutions on trade, and the role of the WTO accession on the quality of the institutions. Both are very complex as the causality runs in several directions. For instance, better quality of institutions would surely simplify and thus encourage trade, however, the higher the levels of trade the better the institutions become at facilitating it! A similar reasoning can be done, and was the conclusion of the previous article, for the WTO accession and the quality of the institutions. To be approved for the WTO membership Russia needs to improve its institutions, however once it is a member the institutions will improve automatically by the means of adjusting to the European standards.

In order to eliminate this problem of endogeneity several papers have already investigated possible solutions, however not reached any consensus on the issue. For example, Alcálá and Ciccone (2002) researched the impact of GDP per worker on trade as a percentage of GDP and measures of institutional quality. They conclude that trade is an important factor, but the institutional quality is much less significant, by using a linguistic origins instrument for these two dependable. Another paper by Dollar and Kraay (2002) continued in a similar direction, however in contrast with Alcálá and Ciccone, Dollar and Kraay claim that the cross-country variation in the data is not sufficiently conclusive on the contributions of institutions and trade. Lastly, Rodrik, Subramanian and Trebbi (2002) determine several specifications similar to those of Alcálá and Ciccone and Dollar and Kraay trying to distinguish the geographical, institutional, and trade-related factors contributing to development. To the contrary of the other two papers these researches conclude that institutions matter and trade has no actual impact.

Due to this apparent contradiction Dollar and Kraay (2003) continued further investigating this issue. In their (2003) paper they demonstrate the inefficiency of the empirical specifications that isolate the partial effects of institutions and trade. Claiming that they have serious identification problems, David Dollar and Aart Kraay (2002) attempt the use of geographical and historical instruments as they have a good explanatory power for both endogenous variables! They record the identification problem with the use of the partial R-squared diagnostic and the minimum eigenvalue test of the null hypothesis of weak instruments. After finding evidence to their observation they compute confidence intervals for these structural coefficients and use various methods proposed by the existing literature. The results they obtain help them to formalise their claim of the identification problem: “the cross- country variation in trade, institutions, and their historical and geographical determinants is not very informative about their relative importance for growth in the long run.” (Dollar and Kraay (2003) ) The results of this paper demonstrate the general difficulty independent sources of variation in order to determine the separate effects of growth. Dollar and Kraay have made an important contribution by pointing out the importance of a complete variable examination in order to eliminate omitted factors. At last I would like to mention a study by Grogan and Moers that examines the significance of institutions as a factor of growth and foreign direct investment (FDI) in 25 transition countries for 1990-1998. The findings show that state institutions are very important for growth and FDI, they also state that macroeconomic stabilization and liberalization play an important role, however the multicollinearity problems are too extensive to examine its importance towards institutions. The Figure 5 below demonstrates the whole scope of this issue, as you can see the endogenity scores are high for several relevant for us variables.

Abbildung in dieser Leseprobe nicht enthalten ¹⁵

Figure 5: Correlation matrix.

3. Conclusion: Analysis

The critical analysis of the article In my personal opinion the biggest problem of this paper lies in its weak theoretical framework and lack of a clear hypothesis. It seems that while the econometric approach is very advanced the authors haven’t clearly understood the theoretical economic framework that they would like to consider. From there on their problems begin: the assumptions are not credible, several crucial variables are omitted, many of the variables that are present are not correctly defined and calculated, numerous problems such as: multi-collinearity, auto-collinearity and endogenity arise. All these imprecisions lead to the final results being uncertain, in my opinion over-estimated.

a. Several assumptions are not credible

According to the gravity theory when using the a) parameter GDP/capita in order to determine economic distance: the smaller it is, the less should be the export of this country to those with high GDP/capita; b) similarly the higher is the distance between the countries, the lower is the trade between them; and c) if the countries are not in the same economic zone (ex: EU, CIS) the trade should be lower then if the partners share the same economic zone. In reality these assumption are often contested:

- China with a relatively low GDP/capita has very significant export volumes to USA and Europe (countries with the highest GDP/capita), furthermore this trade involves enormous distances;

- Qatar, a country with one of the highest levels of GDP/capita, exports certain gas products to far away countries with low GDP/capita in Latin America. There are many of such examples from real life that contradict these assumptions accepted in the gravity theory. The trade in such countries occurs according to the basic comparative advantage theory (of course taking into account the logistics for transportation). Another important point that undermines these assumptions is the trade of the service sector: consulting, banking, insurances, IT services and so on, where the distance has no impact.

b. Omitted factors play a role.

There are other important factors that are neglected by the gravity model. For instance:

1. Availability of innovative knowledge and technology.

2. Geographical situation, access to roads, the level of the infrastructure development (ports, airports, train stations)

3. Local Income Tax System of each country has a direct effect on levels of trade, just like any other economic activity.

a. Variables definitions.

i. Trade

Trade measure doesn’t reflect the real volumes for the following reasons:

- With a high level of corruption the goods are brought through customs with low prices (under the special low tariff exception categories) but sold on the market with real prices.

- The black market exports exist for drugs, arms, caviar and so on. These exports are enormous and for some countries determine the overall economic condition of the whole economy. Therefore such countries either need to be eliminated from this calculation or accounted for by a separate examination. This allows us to see that depending on the country and the structure of the demand the statistics can be seriously underestimated, especially in cases of countries with low institutional quality which helps to hide the real trade levels.

ii. “Dist” definition

A more suitable way is to measure the proportion of the expenditures on logistics in export instead of physical distance or the actual expenditure. This way the accent falls on the effectiveness of logistic infrastructure and its impact on the foreign trade. The more developed infrastructure is, the more effective it is, the cheaper the transportation becomes. The method used in the paper is unsuitable, as it would hold under the following argument. The higher the added value the more expensive means of transport can be used, as mentioned above, Qatar has long-distance transportation of gas to Latin America and remains competitive against for example Russia (Gasprom) that transfers gas via underground pipes to Europe. Russia in its turn is not able (due to its lack of infrastructure) to export its gas to Japan or China despite the territorial proximity.

Even more surprising is the usage of the distance between capitals! A more reasonable approach is to use the distance between the main logistic hubs or ports, for instance in Holland, Rotterdam rather than Amsterdam, in Russia, Vladivostok and Novorossiysk.

A possible solution could be to use a proxy of the proportion of the logistics expenditure on the trade operations and the physical distance between logistic hubs (very important for all large countries: USA, Canada, Brazil but also for Europe where deliveries often pass through the ports of other countries: Rotterdam, Marseille, etc.) Surely this would entail a large scope of work but it would also assure us in the certainty of the results.

iii. Property rights

“Property rights” variable has a perfect correlation and is accounted for by the GDP. Also we should take into consideration that this variable plays a critical role for the long term investments, however for trade exchanges all risks are covered by the insurance, therefore included in the logistics cost already, which means that this factor is covered by at least three variables: GDP, GDP/capita and DIST; and thus the result will not correspond to the real impact of this factor on trade.

iv. Corruption

First of all the effect of corruption is already covered by the GDP and GDP/capita variables. Secondly, the relationship between trade and corruption is unclear, often corruption can encourage trade, for instance in poorer countries such as Colombia. The higher the corruption, the easier it is to bypass tariffs, the cheaper it is to trade, the higher the trade levels are.

v. Black market

This variable in endogenous with Trade, as the larger the black market is the lesser the volumes of the official statistics of trade volumes, and therefore the results of this calculation are biased.

b. Energy consumption and the institutional quality correlation argument

There are two possible explanations for the correlation between the quality of institutions and the usage of energy:

1. Energy sector is usually highly monopolised (state ownership, of large natural monopolies)- which means market doesn’t demand transparent institutions in this sector.

2. Bad institutions lead to low competiveness that means no incentive to optimise and innovate in order to lower the production costs.

c. Petrol Sector Dispute

For the moment Russian companies are indirectly subsidised through low energy pricing. While it is clear that Russian government and its state company Gazprom can allow itself to continue doing so due to the volumes of natural resources in order to support Russian domestic business, it is also true that it has a negative effect of reducing the incentive to become more competitive on an international level.

WTO requires Russia to stop these subsidies in order to encourage innovation and competiveness. However, doing so would endanger a large proportion of Russian companies that would not be able to pay the same prices for energy usage as European companies.

Russian argument is that in this lies their comparative advantage, like cheap labour for China, and if it were to follow WTO recommendations the impact would be so strong that most companies would cease to exists rather than become more productive.

Further calculations should be done to evaluate analytically the costs of the low pricing subsidy today (the difference between the Russian and European countries) and the losses that might occur if that was to change (economic and social costs of all those firms that would have to reallocate).

d. WTO & conclusions.

Surely the main logic and benefit of WTO membership is the unification of regulation and norms with all the players on the world markets and thus the access to them. It is important to appreciate the lag time for the adoption of this “new order”, and understand that in the short-term it might have a negative impact on trade volumes. Partly the developed countries use WTO as a mean of denying access to the developing countries and thus allowing them to remain the monopoly of the majority value added industries. The argument made in the paper pointing out that the poorest countries who are unable access WTO, as they are unable to satisfy its membership criterias, could actually satisfy them much quicker if they were allowed to enter WTO in the first place. Generally the results of the paper seem to be inline with the overall opinion of the literature in this field, however due to numerous identification and correlation problems the actual numbers are uncertain.

4. The critical analysis of the field.

The gravity model is accepted and used by most of the researches in this field however it seems to be to simplistic to be able to interpret complex the economic interactions and dependences, as this theory is too controversial and negligent of several crucial factors that determine trade mentioned above.

It is very important to distinguish between long-term and short-term effects of institutions on trade! When reforms take place and the quality of the institutions increases initially the trade will slow down, however in the long term there will be a rise. Therefore it would make sense to include the time factor into our econometric model, which would also allow us to estimate the average time necessary for the market to adapt to the reforms.

The main problem of this subject is that the institutional factors are very highly correlated with other variables. As pointed out in the part on the critical analysis of the (Babetskaia-Kukharchuk and Maurel, 2004) several variables suffer from endogenity, auto-collinearity, and multi-collinearity problems which all add to the lack of precision of these studies.

The importance of some omitted variables cannot be emphasised enough. For instance we can mention the “linguistic zone” variable used in the (Alcala and Ciccone, 2002) study, however ignored in other papers despite the fact that Portugal has stable trade and investment flows with Brazil and Angola, that are rather far in the physical sense but have maintained economic relationships from their colonial past. Similarly a very important omitted factor is the tax system of a country in question, naturally if the income taxes are very high trade as any other economic activity will be discourages and thus its volumes will be affected. Also no mention of the macro-economic variables, most studies fail to take into account economic cycles, recessions and booms.

4. Bibliography

Anderson, James, « Trade Costs », 2003, Boston College, University of Virginia

Babetskaia-Kukharchuk and Maurel, « Russia’s Accession to the WTO: what potential for trade increase? », University of Paris, France,

Dollar, David and Kraay, Aart, « Institutions, Trade, and Growth: Revisiting the Evidence », 2003, World Bank Policy

Gorban, M., S. Guriev, and K. Yudaeva, (2001) “Russia in the WTO: Myths and Reality,” Center for Economic and Financial Research (CEFIR), Moscow, July. www.cefir.ru

Hare, Paul G. « RUSSIA AND THE WORLD TRADE ORGANIZATION», 2002 Russian-European Centre for Economic Policy

Jeffrey and Romer « Does Trade Cause Growth? », 1999, The American Economic Review American Economic Association

Jensen and Rutherford and Tarr, « The Impact of Liberalizing Barriers to Foreign Direct Investment in Services: The Case of Russian Accession to the World Trade Organization » The World Bank

Grogan, Louise and Moers, Luc « Growth empirics with institutional measures for transition countries » 2001

Koukhartchouk and Maurel, « Accession to the WTO and EU enlargement: what potential for trade increase? » 2003

Prikhodko, S., and A. Pakhomov, (2001) “Problems and Prospects of Russia’s Accession to WTO,” Russian-European Centre for Economic Policy (RECEP), Policy Paper Series, Moscow, September.

Rodrik, Dani, « INSTITUTIONS FOR HIGH-QUALITY GROWTH: WHAT THEY ARE AND HOW TO ACQUIRE THEM », 2000, NATIONAL BUREAU OF ECONOMIC RESEARCH, Cambridge

Rodrik and Subramanian and Trebbi « INSTITUTIONS RULE: THE PRIMACY OF INSTITUTIONS OVER GEOGRAPHY AND INTEGRATION IN ECONOMIC DEVELOPMENT », 2002, NATIONAL BUREAU OF ECONOMIC RESEARCH

Rutherford and Tarr and Shepotylo, « Poverty Effects of Russia’s WTO Accession: modeling “real” households and endogenous productivity effects »

Simola, Heli « Russia getting closer to WTO membership - what are the practical implications? »2007

Stern, R., (2002) “An Economic Perspective on Russia’s Accession to the WTO,” William Davidson Institute Working Paper N. 472, University of Michigan, Ann Arbor, June.

Yudaeva, Ksenia « Russia’s WTO accession: current state of negotiations, and forecasts of the effects »

[...]

¹ “Russia's accession to the WTO: the potential for trade increase.” Journal of Comparative Economics, Volume 32, Issue 4, December 2004, Pages 680-699 Oxana Babetskaia-Kukharchuk and Mathilde Maurel

² The gravity equation of trade in international economics forecasts bilateral trade exchanges. It is usually based on the economic sizes and distance between two particular units. The model was first used by Tinbergen in 1952.

³ From “Russia's accession to the WTO: the potential for trade increase.” Journal of Comparative Economics, Volume 32, Issue 4, December 2004, Pages 680-699 Oxana Babetskaia-Kukharchuk and Mathilde Maurel

⁴ From “Russia's accession to the WTO: the potential for trade increase.” Journal of Comparative Economics, Volume 32, Issue 4, December 2004, Pages 680-699 Oxana Babetskaia-Kukharchuk and Mathilde Maurel [see larger version of the figure at the end of the paper]

⁵ For example: (GDPusa * GDPchf)

⁶ From “Russia's accession to the WTO: the potential for trade increase.” Journal of Comparative Economics, Volume 32, Issue 4, December 2004, Pages 680-699 Oxana Babetskaia-Kukharchuk and Mathilde Maurel

⁷ The data comes from the Chelem-CEP2 dataset, IMF-DOTS, and Goskomstat Rossijskoj Federatzii.

⁸ The data comes from the Chelem—CEP2 and the IFM World Economic Outlook.

⁹ The data comes from the Pacific Exchange Rate Service from the Central Bank of Russia and Kazahstan and IMF.

¹⁰ The data comes from the CEP2

¹¹ The data comes from the Index of Economic Freedom.

¹² Effect according to which the trade with the neighbour countries is higher but only at the expense of a High tariff barriers against the non CEEC countries.

¹³ From “Russia's accession to the WTO: the potential for trade increase.” Journal of Comparative Economics, Volume 32, Issue 4, December 2004, Pages 680-699 Oxana Babetskaia-Kukharchuk and Mathilde Maurel

¹⁴ From “Russia's accession to the WTO: the potential for trade increase.” Journal of Comparative Economics, Volume 32, Issue 4, December 2004, Pages 680-699 Oxana Babetskaia-Kukharchuk and Mathilde MaurelFrom “Russia's accession to the WTO: the potential for trade increase.” Journal of Comparative Economics, Volume 32, Issue 4, December 2004, Pages 680-699 Oxana BabetskaiaKukharchuk and Mathilde Maurel

Frequently asked questions

What is the main topic of this academic text?

This text analyzes Russia's potential accession to the World Trade Organization (WTO) and the impact of Russian institutions on trade, particularly with Commonwealth of Independent States (CIS) and EU countries.

What methodology did the authors (Oxana Babetskaia-Kukharchuk and Mathilde Maurel) use?

The authors used a gravity framework to estimate the effect of CIS membership on bilateral trade. They incorporated institutional variables like property rights protection, the black economy share, corruption in customs, and tariff and non-tariff barriers into their gravity equation.

What were the key findings related to institutions and trade?

The study found that the quality of institutions significantly affects trade levels. Improvements in institutions, such as reducing corruption and protecting property rights, are expected to increase trade, attract foreign direct investment, and improve the business climate.

What is the problem of multicollinearity when looking at institutions and trade?

Multicollinearity arises because institutions, trade, and economic development are often highly correlated. It's difficult to isolate the individual impact of each factor on growth and development due to these interdependencies. It's a difficult to measure whether the improvement of Institutions leads to an increase in trade, or whether an increase in trade will make the instutions improve.

What is the critique of the methodology in the paper?

The critique focuses on the weakness of the theoretical framework, the credibility of assumptions, omitted variables, variable definitions, and issues such as multicollinearity, auto-collinearity, and endogeneity. These concerns suggest the final results might be uncertain or over-estimated.

What are some of the omitted factors that are not considered?

Some important factors neglected in the gravity model used by the authors are: availability of innovative knowledge and technology, geographical situation and the level of infrastructure development and the local income tax system.

What is the energy consumption and the institutional quality correlation argument?