European Integration of Ukraine Is the Main Task

European Integration of Ukraine is the main task, which unites government and opposition In connection with the new political season, which began not only in the Ukrainian Parliament, but also in the European Parliament, delegation of MPs of Ukraine from the Party of Regions arrived on an official visit to Strasbourg.Delegation members are Chairman of the Party of Regions parliamentary faction Olexander Yefremov, Deputy Chairman of the Party of Regions for International Affairs Leonid Kozhara, First Deputy Chairman of the Verkhovna Rada Committee on Freedom of Speech and Information Olena Bondarenko, member of the Verkhovna Rada Committee on Finance, Banking, Tax and Customs Policy Vitaliy Kaliuzhny.Today, September 13, in the European Parliament took place a public meeting on â€Å"The Future of EU-Ukraine Relations and Ukraine’s Internal Political Situation†, where the Chairman of the Party of Regions parliamentary faction Olexander Yefremov informed about the current situation in Ukraine. Particular attention Olexander Yefremov paid to reforms, which are being carried out by authorities. â€Å"Over the past year and a half great changes took place in Ukraine. Unfortunately, in Europe, few people know what is actually happening in the country.The country's leaders held a number of reforms – this is pension and judicial reforms, adoption of anti-corruption legislation and the new Tax Code,† the politician said. â€Å"Now we are preparing such global documents as a bill on the land market, new Criminal Procedure, Housing and Communal and Labour Codes. In Ukraine these laws have a long history, they are not modernized. And, unfortunately, over the 20 years of existence of Ukraine as an independent state, no one worked on them. It is our task.Therefore we have a lot of work to do. And as you can see, we are working very hard,† said Olexander Yefremov. MEPs stressed the importance of the visit of Ukrainian parliamentarians becaus e now it is a key moment in relations between the EU and Ukraine, and Europe needs first-hand information. Olexander Yefremov reminded that in 2009 Party of Regions started with very bad starting positions. â€Å"When we conducted an audit of the national economy, it was found that in 2009 we began with minus 15% of GDP.It was a disastrous number. And we had to find quickly the tools for economic growth, to overcome the economic crisis. However, our operational work and the actions that we undertook, gave a good positive result. 2011 we are to finish with 5% increase of our economy,† he stressed. Representatives of the European Parliament agreed to this. They noted how significantly increased the intensity of work of Ukrainian Parliament and adopted documents. According to Olexander Yefremov, today the government command faces many challenges.And one of the most important is the European integration of the country. â€Å"And at the moment it is one of the uniting issues for opposition and authorities. There is no dissent and no opponents here. Everyone understands that we need to work on this common goal,† said Olexander Yefremov. Answering the question, what Ukraine will choose: Deep and Comprehensive Free Trade Area with Europe or the Customs Union, Olexander Yefremov said that our first priority is the EU, but at the same time we want to maintain good relations with Russia, if that's possible from its side. In turn, we declare that we want to be a part of civilized Europe,† said the politician. The head of the Party of Regions parliamentary faction got stronger conviction that there is practically no opponent of integration between Ukraine and EU, everybody is trying to help, to give an advice; no one wants to see Ukraine worse or poorer, or further from the EU; everybody is trying to support it. MEPs, in turn, said that Europe would like to see Ukraine developing further and happy people living in Ukraine.The MPs acknowledged that Europ e knows very little about what is actually happening inside the country. In addition, Olexander Yefremov said that judging by the questions he was asked about Tymoshenko case, there is a significant lack of information about the topic. That is, people know about it, but nobody goes into details, and, as a rule, the very essence is hidden in details. He reminded the gist of the charges against ex-Prime Minister of Ukraine. â€Å"In January 2009 Tymoshenko was in talks with Russia on gas supplies.Under the Law â€Å"On International Treaties of Ukraine† the authority to negotiate and to sign international treaties is granted by the Cabinet of Ministers of Ukraine as a collective body. The Prime Minister can not alone authorize someone to negotiate on behalf of the Government. When negotiations with Russia began, most of the ministers at the Cabinet of Ministers session refused to support Tymoshenko's personal position, as evidenced by minutes of meeting. Despite of this, she p rovided the Ukrainian negotiators a document entitled Directives of the Cabinet of Ministers of Ukraine†, which contained the signature of Tymoshenko and official government seal. Thus, the ex-Prime Minister is charged with single-handed decision and document forgery,† said Olexander Yefremov. In addition, the MP informed about extremely unfavorable conditions for Ukraine, which are in the contract. This, above all, is the highest price, unreasonable amount of compulsory gas purchase (Ukraine consumes 40 billion cubic meters and must buy 52 billion cubic meters), and extremely inadequate penalties.If the country does not buy stated in the contract amount of gas, then there is the penalty 150% in summer, and in winter – 300%. â€Å"If such a contract was signed in the business between the two businessmen, one of them would be admitted to be crazy, that is absolutely inadequate and disadvantageous contract for the country,† said Olexander Yefremov. EU Integra tion and Trade: a Look from the Outside of the EU Eastern Border. Oleksandr Shepotylo*, Kyiv School of Economics and Kyiv Economics InstituteAugust, 2009 Abstract: This paper develops a methodology for trade policy analysis of costs and benefits of alternative regional integration scenarios, based on the disaggregated gravity equation, and applies it to calculate the impact of the EU enlargement on integration strategies of non-member countries. In particular, the paper measures the impact of the 2004 EU enlargement from the standpoint of Ukraine – a country that has been left on the sideline.This angle allows estimating the costs of non-integration that occurred due to trade and investment diversion, and forgone opportunity to carry our structural changes in the Ukrainian economy. According to the results, EU accession would dramatically change the composition of Ukrainan exports by almost doubling exports of manufactured goods by 2007. The costs of non-integration accumulat e towards the end of the investigated period. Projecting the results into the future clearly indicates that the benefits of EU accession for Ukraine would have been unambiguously positive.By showing that costs of non integration are high, the results shed some light on the debates over the benefits of EU integration for the newly accepted states. They also give guidance on the potential export gains from signing a deep FTA between EU and Ukraine which is currently negotiated by policymakers. JEL categories: C33, F12, F17 Keywords: gravity model, EU enlargement, Ukraine, CIS, heterogeneous firms, trade policy Introduction The studies of European Union (EU) enlargement mostly focus on the impact of the enlargement on the current and new EU members (e. . Bussiere et al. 2008, Nilsson, 2000, Baldwin, 1995 and 1997, Gros and Gonciarz 1996). This paper looks at the impact of EU enlargement from a different angle and estimates the costs of non-integration into EU. It develops a methodology for evaluating alternative regional integration scenarios. Comparing costs and benefits of different integration scenarios, a policymaker decides on the best integration strategy for a county. When an additional country joins a regional trade bloc, it imposes additional costs on outsiders due to trade and investment diversion.The costs of non-integration are growing when more countries join the bloc, which triggers a new wave of enlargement, a so-called domino effect introduced by Baldwin (1993). For example, the enlargement of the European Economic Community (EEC) – a process that started in 1960s – induced integration of the members of the European Free Trade Agreement (EFTA) into the EEC: â€Å"The 1960s saw rapid discriminatory liberalisation with the EEC and EFTA. This had a dramatic effect on trade patterns. The EEC’s share of trade with itself rose from 30 to 50 per cent.The share of EEC imports from other European nations stagnated or fell. This discri mination meant lost profit opportunities for exporters in both groups, but since the EEC market was more than twice the size of EFTA’s market (and growing faster), the EEC club was far more attractive to exporting firms. This generated new political economy forces within the EFTA nations – forces that pushed for EEC membership. † (Baldwin, 2008) Currently, a similar process involving the EU and Commonwealth of Independent States (CIS) trading blocs is evolving.The differences in size and level of development between EU and CIS blocs imply that the EU bloc is more attractive and the opportunity costs of not-integrating into the EU are higher. Recently, EU has expanded by 12 new members, mostly by countries that for a long time had been important trading partners of CIS countries. At the same time, Georgia left the CIS in August, 2009, while Ukraine and Central Asia countries significantly reduced their involvement into the CIS programs.These developments indirectl y indicate that the EU accession strategy looks as an increasingly attractive policy for the CIS countries. However, the literature says little on how the different integration scenarios can be compared. What are the costs for the CIS countries of not integrating into EU? Do the costs of non-integration exceed the benefits of staying in the CIS? Empirically, this question has not been studied and the primary goal of this paper is to evaluate the ex post costs of non-integration. To answer these questions, the paper focuses on Ukraine.De facto, Ukraine is a member of the CIS. However, Ukraine participates in the CIS programs very selectively and the Ukrainian parliament never ratified the CIS Charter. Moreover, after 2004, Ukraine explicitly declared the EU accession as its strategic goal. Ukraine is an eligible candidate for enlargement based on the geographical criteria. It is an important EU trading partner that moves towards EU both politically and economically. In February, 2008 , the Ukraine has started a round of FTA negotiations with EU which is the next step towards the EU integration.The launch of negotiations followed the finalization of Ukraine’s WTO accession process on February, 5 2008 , which was a prerequisite for FTA talks. Therefore, the advantage of looking at Ukraine while comparing costs and benefits of a deeper EU integration vs. deeper CIS integration is as follows. First, it is not a purely theoretical exercise but a question of practical importance. Did Ukraine make a right choice when declaring the EU integration as the policy priority? Second, the answer to this question gives guidance for policymakers of the EU and Ukraine for the decision on the future of the EU enlargement process.How Ukrainian exports would look like if the country joined EU in 2004? To answer these questions, this paper develops a methodology that allows predicting trade patterns of Ukrainian exports in such a hypothetical situation. The offered method assu mes that the main differences between being an EU member and being a typical CIS country stem from the changes in behavioral relationships of the parameters of the gravity equation rather than from the changes in factors that represent the gravity forces per se (see Egger, Pfaffermayr, and Schmidt 2006).By setting its regulatory framework in line with the EU standards, signing a deep FTA with EU, and, in the long run, achieving its final goal of becoming a full-fledged EU member, the Ukraine would gradually evolve from being a part of the CIS trading bloc with its distinct reliance on export of raw materials towards being a part of the EU trading block with a high degree of intra-industry trade in processed goods. Therefore, its trade patterns would become more in line with the trade patterns of the Eastern European countries.The behavioral changes would come from better access to the EU market, changes in the institutional environment, deep reforms of the regulatory framework, and standardization of export and import regulations. To capture the behavioral changes, the gravity model is estimated for two samples: one sample includes sixteen Eastern European countries – twelve EU member countries that recently joined EU (EU12) and four countries that are not member of the EU but are considered as candidates for enlargement in the future (EUC4) ; the other sample includes nine CIS countries .In addition to evaluating the behavioral change, the novelty of the paper lies in applying an estimation of the disaggregated gravity equation using the two stage procedure developed by Helpman, Melitz, and Rubinstein (2008) (henceforth HMR). The method explicitly deals with a substantial number of zero trade flows, and unobserved firm-level heterogeneity.Unlike the HMR method, we exploit both cross-sectional and time dimensions to remove the pair-specific fixed effects that can bias the cross-sectional results and estimate the impact of the EU accession on bilateral t rade flows by the Hausman-Taylor method (Hausman and Taylor, 1981) treating the EU accession as an endogenous decision that correlates with variable and fixed costs of trade. The model demonstrates substantial costs of not integrating into EU.If the Ukraine had became an EU member in 2004, it would have benefited from an increase in export volumes, redirection of trade from CIS trading partners towards the EU trading partners, and restructuring of exports from industrial products with low value added, primarily exports of raw materials, towards exports of manufactured products with high value added and exports of agriculture and food .The benefits would have come not from the EU accession per se but from the gradual process of reforms, economic restructuring, and behavioral changes in the bilateral trade relationships with its trading partners. The initial losses from breaking the trade relationships with other CIS countries would be more than compensated later along the development path. The structure of the paper is as follows. Section 2 compares existing trade patterns of the Eastern European countries with trade patterns of the CIS countries.Section 3 briefly discusses the methodological issues, presents a theoretical model and develops the estimation procedure. Section 4 discusses data. Section 5 presents estimation results for aggregated trade data and discusses advantages of the Hausman-Taylor method. It also presents estimated gains in disaggregated exports from the EU-Ukraine trade integration for two counterfactual experiments. Finally, Section 6 concludes. Trade patterns of EU and CIS countries: first glance at the data The theory of regionalism and preferential trade agreements (i. . Baldwin, 1993; Baldwin et al. 2006) stresses that costs of non-integration into a regional trade bloc increase with the size of the bloc which, in turn, induces more countries to join the bloc due to a so-called â€Å"domino effect†: by lowering trade barriers a nd improving market access, a discriminatory liberalization of trade within a trading bloc gives an edge to the companies located within the bloc over the outsiders and create additional incentives for multinational companies (MNC) to move their activities inside the bloc.This creates an additional pressure for inclusion on outside countries. Hence, once started, the process of regionalization captures ever-growing number of countries. The story of the latest EU enlargement illustrates this point. The Council of Mutual Economic Assistance (CMEA) that, by 1989, included fifteen Soviet republics, six Eastern European countries – Bulgaria, Czechoslovakia, East Germany, Hungary, Romania, Poland –, and three other countries – Cuba, Mongolia, and Vietnam generated a substantial intra-bloc trade due to a high degree of economic and political integration The economic cooperation with the rest of the world was limited at best and in some instances prohibited. Since the b eginning of transition, Eastern European countries and Baltic States have rapidly moved away from the Moscow-centered economic gravity towards the Brussels-centered one. As was correctly predicted by some scholars (i. e. Wang and Winters, 1991 Hamilton and Winters, 1992, and Baldwin, 1994), this led to the reorientation of their trade flows away from the CMEA countries towards the EU members.By 1995, Eastern European trade flows did not differ considerably from that of similar Western European countries and mostly exhausted the westward expansion of exports at the intensive margins of trade (Gros and Gonciarz (1996). This view is supported by a more recent World Bank (2005) report which shows that currently most of the EU12 countries trade above their potential or ‘normal’ level.