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Asia for us or we for Asia?

FEFU expert on global economic partnership with APR countries

On the eve of the Fourth East Economic Forum, EastRussia and the Far Eastern Federal University are opening a series of mini-lectures on the most pressing issues on the agenda of the event. The first lecture is given by Natalia Kuznetsova, Doctor of Economic Sciences, Professor of the World Economy Department, Head of the Laboratory of Economic Studies of World Economic Relations and Processes at the School of Economics and Management of the FEFU, on how cooperation with the nearest neighbor countries of the Far East regions is developing.

Asia for us or we for Asia?

Natalia Kuznetsova

D.E. Professor of the Department of World Economy, Head of the Laboratory of Economic Studies of World Economic Relations and Processes of the School of Economics and Management of the FEFU
We have been hearing for a long time how to declare the entry of the Far East of Russia into the Asia-Pacific region (APR). This determined the interest of the collective of the Laboratory of Economic Studies of World Economic Links and Processes of the School of Economics and Management of the FEFU to the study of the problems of the economic development of the APR. Let's see how things really are, while we rely solely on facts, and they are, as you know, a stubborn thing.

The fact of the first. Most of us, who pronounce this magical abbreviation "ATP", poorly represent which states are at stake. The spread of opinions on the countries in the region is quite large - from 12 to 61. Since there is no unified opinion on the definition of ATR, and there is only a conditional classification of the economies entering into it, we include the country 54 in the concept of ATR.

The fact of the second. Is it legitimate to talk about global economic partnership with the APR countries? Analysis of trade and economic relations between the countries of the region (54) shows that the APR does not exist either as a whole region or as an integral economic complex. It is possible to single out several groups of states that differ markedly in terms of their level of development and therefore compete rather weakly among themselves. 

Cooperation and competition between national economies is rather weak. We believe that modern integration in the APR is not such an established system.

We observe extremely low trade exchange among the APR countries. Differences or similarities in the sectoral structure of GDP do not affect the increase in the volume of mutual trade between partner countries. The empirical analysis of the APR countries confirmed that in this case the formation of trade blocs does not entail an increase in the volume of mutual trade flows. This proves that many trade blocks are a political decision, and not an objective economic process.

The statistics confirms the thesis that the majority of APR countries do not have any commercial significance either for each other or for other sub-regions of the Asia-Pacific region. Countries actively compete in the international market and do not regard each other as strategically important partners. Cooperation in solving problems of peace and security, environmental protection in the region does not necessarily require integration groups, in particular, trade preferences.

The third fact. We analyzed all the commodity markets of the APR countries and their industry specialization. The basis of exports is the products of the fuel and energy complex, and its share in the total export volume is equal to 73%, and in the import share of this product is equal to 2%. The second component in terms of export volume is 9% - these are metals and products from them, the share of imports for this group is 8%. The third place in the ranking of commodity groups that make up the volume of exports is divided into two categories: a group of products of the chemical industry and a group comprising machinery, equipment and vehicles. The share of food products and agricultural raw materials in the export structure is 4%.

The main countries of the Asia-Pacific region with whom Russia's export operations are carried out are Australia, Mongolia, India, Guatemala, Honduras, Indonesia, Canada, China, Colombia, Malaysia, Peru, Taiwan, Republic of Korea, Singapore, Thailand, USA, Philippines, Japan. Import operations take place with Australia, India, Indonesia, Canada, China, Taiwan, the Republic of Korea, USA, Ecuador, Japan.

Obviously, this is a fairly small part of the ATR. This determines the need for a conscious alignment of the strategy of entering the APR, clearly prescribing which countries we see as our effective partners.

The fact is the fourth. Important factors of trade and economic cooperation in the region remain openness of the economy and the importance of foreign trade. The most closed is the Chinese economy, since all international treaties signed by the PRC are directed to its domestic market and the growth of the national economy.
In Russia, the largest export and import quotas are in the Central Federal District: the export quota exceeds 40%, and the import quota is 30%, that is, the export market is quite open, like the import market. It should be noted that open export markets are typical for the Northwestern, Volga and Siberian federal districts. The Far Eastern Federal District (FEFD) is closed in both exports and imports, its export and import quotas are 5,53% and 2,06%, respectively.

The question arises: how close are the economies of Russia and its potential Pacific partners? In the framework of our study, gravity models of exports and imports between the Far Eastern Federal District and the Asia-Pacific countries were built, as well as separately for the major partner countries of the region. As a result of the calculations, six gravitational models were constructed that characterize the dependence of the export and import of the Far Eastern Federal District with the APR countries for each period of the study from 2000 to 2016.

For the Far Eastern Federal District, when importing from the APR countries, it is typical to perform dependencies, which are the basis of the gravitational model. The connection between the volume of Far Eastern imports from the APR countries and the GDP of the partner countries is weakening with time: the value of the coefficients in the dynamics is decreasing.

If we consider the Far Eastern Federal District against the background of other districts, the growth of foreign trade turnover and its absolute value show low results, the volumes of exports and imports relative to other districts are rather low. The share of the foreign trade turnover of the Far Eastern Federal District in Russia's GDP is 2005% in 5, 2010% in 5, 2013% in 6, and 2016% in 6. These values ​​prove that the Far Eastern Federal District is not in the most favorable position in terms of export and import volumes. After 2013, due to the sanctions, the volume of foreign trade decreased significantly.

The analysis of the foreign trade turnover of the constituent entities of the Russian Federation showed that the Central Federal District occupies the largest share of exports and imports within the analyzed period from 2000 to 2016. In total, the share of this region in terms of exports is 48,1%, and the share of imports is 60%. The share of the Far Eastern Federal District is only 5% of the total amount of foreign trade turnover of all constituent entities of the Russian Federation at the end of 2016, which suggests that the federal district is weakly involved in foreign trade.

The fifth fact. The analysis of the balance of the economies made it possible to reveal that the economy of the Russian Federation is relatively balanced. However, in terms of investment attractiveness, Russia is in a crisis zone. In this regard, it is necessary to increase the rating of investment attractiveness, resource base, innovative activity. But the fact that the production potential of Russia is in a crisis zone deserves special attention. The situation is similar in the areas of financial, demographic and labor resources. This, of course, reduces Russia's chances of an effective mutually beneficial partnership.

The fact of the sixth. We have compiled and analyzed input-output balances for 24 APR countries (the most active potential partners). Based on these, we calculated the Business Activity Multiplier (MBA). The general upward trend in the business activity multiplier by 2000 was observed in the United States, Australia and Mexico. Since 2004, downturns have been seen in Russia, China, India, the United States, the Republic of Korea, Japan, Mexico and Taiwan. 

The decline in the production performance of the economy was observed in the Republic of Korea (MBA decreased by 14,80%), China (-14,49%), Taiwan (-9,83%), Russia (-5,70%) and Japan (-3,01, 2,97%). Analysis of the data showed that in Russia, over the period under review, the business activity multiplier decreased by 23,11%. This is mainly due to a decrease in the value of trade balance multipliers by 6,58% and economic efficiency of costs by 27,55%. In turn, the favorable trend of an increase in the value of the demand multiplier for goods and services by XNUMX% was insufficient to demonstrate a positive increase in the country's business activity.

Based on the calculated indicators of the efficiency of the use of own and attracted foreign resources in the countries of the Asia-Pacific region, according to the data of interbranch balances, as well as the assessment of MBA countries, the demand and supply for the respective economic activities were determined. Assessing the position of Russia in terms of its integration integration into the industrial markets of the APR countries, it should be noted that the country's presence in the region is based exclusively on its raw materials in the form of oil and gas and forest resources, as well as minerals.

In aggregate, the data presented indicate that Russia needs to change the strategic goals of economic development.

The fact is the seventh. Nobody pays attention to the Economic Complexity Index (ECI). It not only carries information about the productive structure of countries, but also determines future growth. Product space is a technological feature of products, not countries, that is, there is one product space in which countries develop. The economic complexity index reflects how complex the aggregate of a country's products is. The more complex the economy, the richer the country. Specialization in simple technologies does not allow achieving sustainable high levels of well-being. The only exceptions are oil-producing countries during the period of high oil prices. In other countries, the economy does not have this level of complexity. Innovation and R&D are underdeveloped or have little impact on most industries. Such countries may rely on just one or two major products that provide the bulk of their national income.

In other words, if a country produces only a few products, the complexity factor of such an economy is low. On the other hand, if a country produces many different goods, but all of them are simple, and they can be replicated elsewhere, the complexity of the economy is also not high enough.
Extractive industries are limited in terms of life expectancy depending on the reserves inside the country, and countries can not grow steadily, simply extracting more resources indefinitely. Countries do not get rich in a sustainable way due to the production of one commodity in large quantities; they change what they produce, moving to activities that are new and more productive. The process of diversification leads to an increase in complexity over time. Countries need to gradually build the capacity and know-how to move into an ever-expanding set of new and more complex products. The complexity and uniqueness of the products that society makes are indicative of the amount of knowledge and skills that they have accumulated.

In the first place in ECI is Japan - 2,26, for Russia ECI = 0,235 (low complexity index). But depressing level of export complexity of the economies of the Russian regions, reflecting the proximity of the export basket to the technological part of the world export space, as well as the potential of complicating their export baskets, that is, the ability to approach the technological central part of space and produce more complex goods.

The most technologically advanced region is the Moscow region, with an index of economic complexity equal to 1,36. Particular concern in this context is the state of the economy of the Far East - the lowest indicators. From the perspective of the complexity of the economy, the least developed subject of Russia is the Primorsky Territory (ECI = -0,326). A similar situation develops in the Khabarovsk Territory. At the same time, both of these subjects are perceived by the potential, readiness, and development level among the subjects of the Far Eastern Federal District to be safe.

Thus, it takes a lot of work to diversify the existing products, which will lead to an increase in complexity, increasing the capacity to expand a set of new and more complex products, accumulating the knowledge and abilities produced. It is important for the DFO to realize the need to diversify the existing export basket. We draw attention to the fact that the issue is not the investment of investments in innovations in the export basket. For the DFO, the most rational approach is that it should focus on the existing structure of the export of the economy. This approach, in particular, allows explaining why investments in lagging economies may not lead to higher growth rates: too ambitious goals of economic development may dictate the wrong choice of directions for diversification.

The fact of the eighth. It is very important to realize that in modern conditions it will not be possible to repeat the "Japanese miracle". We are entering the era of the formation of "closed clubs" of the leading countries, trade wars, economic sanctions, which limit the opportunities for catching-up development, by copying innovations and stepping over the stages of technological systems. 

To date, the greatest, clearly manifested threat is the creation of closed clubs of individual countries. The results of the multiparameter classification of 189 countries around the world in terms of innovative development show that the states represented are divided into five clusters and within each group the leading countries that form the "core" of the cluster are identified. The peculiarity of this threat lies in the fact that the transition from one technological order to the other, Japan, Korea, and China, was carried out through borrowing. Now, it will be harder for Russia to make the necessary borrowings for development.
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