EXPORT DIVERSIFICATION IN UKRAINE. INTENSIVE AND EXTENSIVE MARGINS

EXPORT DIVERSIFICATION IN UKRAINE INTENSIVE AND EXTENSIVE MARGINS by Mykhailo Syrotenko A thesis submitted in partial fulfillment of the requirements for the degree of MA in Economics Kyiv School of Economics 2009 Approved by _ KSE Program Director _ _ _ Date _ Kyiv School of Economics Abstract EXPORT DIVERSIFICATION IN UKRAINE INTENSIVE AND EXTENSIVE MARGINS by Mykhailo Syrotenko KSE Program Director: Tom Coupé Export diversification is very essential for transition countries External economy of Ukraine is an issue of high interest of economists because Ukraine takes one of the first places in the world regarding the rate of ration of foreign-trade to GNP The reasons for diversification of Ukrainian trade are quite clear Ukraine will be less sensitive to the shocks on the world markets of products in case of more diversified trade So export diversification decreases the risks from the unstable demand of the trade partners This paper uses the recent developments in the international trade theory that considers the fact that some firms export, some not to investigate the pattern of export diversification Using a gravity model the highly disaggregated trade data in the period from 2001 to 2007 was analyzed It was found that intensive margin is the most important share of the trade growth As for extensive margin we can conclude that geographical extensive margin is more important than product extensive for the growth of export Signing free trade agreement increases the probability to diversify TABLE OF CONTENTS INTRODUCTION .1 LITERATURE REVIEW .6 METHODOLOGY 13 DATA DISCRIPTION 20 ESTIMATION RESULTS 23 BIBLIOGRAPHY 36 APPENDIX 38 LIST OF FIGURES Number Page Table 4.1 Descriptive statistic of the variables……………………………….16 Table 5.1 The quantity of zero-export from Ukraine to the 20 lаrgest import partners…………………………………………………………………… 20 Table 5.2 Overall growth of export, extensive vs intensive margins ……… 21 Table 5.3 Tobit estimation Marginal Effect on intensive margin, by industry …………………………………………………………………… 22 Table 5.4 Tobit estimation n Marginal Effect on extensive margin, by exporter …………………………………………………………………….23 Table A1: Total level export in Ukraine vs export of metal in Ukraine …… 30 Table A2: Variables, definitions, and sources………………………………….33 Table A3: List of importers of Ukrainian export………………………………34 Table A4 Correlation matrix………………………………………………… 35 Table A5: Classification of products to industries…………………………… 36 Table A6: Probit model……………………………………………………….38 ii Table A7 : Tobit model Marginal Effects: Latent Variable………………… 39 Figure 3.1 Margins, Amurgo-Pacheco (2007) ………………………………10 Figure 3.2 The trade pattern, Baldwin, Richard (2005b) …………………….12 Figure 5.1 The evolution of the total level of Ukrainian export………………18 Figure 5.2 Counties distribution of the level of aggregated import from Ukraine (2001-2007) ………………………………………………………………….18 Figure 5.3 The Evolution of the quantities of zeros in trading matrix (2001-2007) ……………………………………………………………………….21 Figure A1: The distribution of Ukrainian exports among industries………….31 Figure A2: Intensive margins………………………………… 32 iii vs Extensive ACKNOWLEDGMENTS The author wishes to express thankfulness to his advisor Larysa Krasnikova for her great support and invaluable comments Special words of thanks are devoted to Oleksandr Shepotylo for providing the dataset for research and help with a topic selection The author would like to thank Tom Coupe for his advices and useful suggestions during the whole academic year iv GLOSSARY Intensive margin means that increase of trade export happens due to increase the quantity of exported goods that have been exported before Extensive margin means that increase of trade export is due to the growth in new class of goods v Chapter INTRODUCTION Export diversification is very essential for developing countries If a country concentrates its trading efforts on some certain products and (or) on the trade with some group of countries, as a result such a country can have a very unstable income from trade Russia has been a major buyer of Ukrainian goods It imports about 22 percent of the total Ukrainian exports Countries that have contiguity frequently sign free trade agreements The advantages of such agreements are liquidation of customs barriers; raise in the level of trade between countries; reduction in price of imported products; efficient usage of the resources Ukrainian authorities have signed the free trade agreement with Russian Federation in 1993 According to the existing agreement the countries can exclude products from free trade But for this purpose country-partner has to show a well-grounded reason for this action The quantity of such exclusions has increased significantly of late Russian authorities try to influence on domestic policy in Ukraine There are a lot of reasons for these actions There are a lot of unsolved problems, e.g.: future location and withdrawal of the Black Sea Fleet, common border, particularly in Sea of Azov Russian authorities don’t wish to solve these problems and hold them as a way of pressure on Ukraine in future In addition, Russian authorities are waiting for possible political conjuncture in Ukraine to solve all problems in own interests The problems of gas supply and “trade war” become a continuation of political opposition between Ukraine and Russian Federation So, Russian authorities use these questions to destabilize the political situation in Ukraine Russia had imposed special duty on Ukrainian caramel in November of 2005, quotas on glow lamp and forbidden to import all animal products in January of 2006 These restrictions had negatively influence on Ukrainian exports The official explanation for all these restrictions was that Ukrainian products did not meet the veterinary and sanitary standards of Russian Federation But Ukrainian veterinaries, Customs Service and producers of the products deny claim A couple of examples: 10 months ago Russia stopped buying the milk solids and cheese from Ukraine As a result Ukraine lost the benefits that had before from this trade The level of trade export of Ukraine decreased in August, 2008 by 895 million of dollars in comparison with July, about 700 million of dollars due to decreasing in export of metal A similar problem Ukraine has with the chemical industry, there is a significant decrease in the level of exports for chemical products that was produced The trade exports of Ukraine have decreased even more during last three months of 2008 As a result Ukraine can have negative balance of foreign trade and the devaluation pressure on national currency (foreign currency from export comes each month less and less) The question is: whether it is possible to decrease the negative consequences of unstable demand from trade UNIAN—Ukrainian information agency probability to have more diversified level of export Free trade agreement has the most significant effect among other observed factors on diversification level Signing the free trade agreement with the partner increases the probability to export new goods As for policy recommendation it can be mentioned that stimulation of product innovation may not be the best way of diversification taking into account that geographical diversification is more important In addition policy authorities should work on liberalization of trade Distance and free trade agreement have positive influence on intensive margin and extensive margin as well Thus Policy authorities have to sign free trade agreements to improve export diversification and to promote the growth in intensive margin Empirical estimation presented in this paper is only the first step in analyzing the diversification of Ukrainian export At this stage it was shown that Ukrainian external economy is quite weak in the context of export diversification and very sensitive to possible shocks in world market of goods The stability of external sector is not only achieved by liberalization of international trade and currency market but mainly due to implementing complex internal economic policy that will stimulate the honest competition , stimulating the conditions of introducing of new production of small and middle enterprises and other actions The policy that stimulates investors also improves the diversification of Ukrainian export, because foreign investors give not only new technologies and production power to the country, but also 34 “now-how” such as new methods of management, the standards of quality that is very important for transition economy But there is a positive tendency as well Today despite a lot of problems that Ukraine has, the external sector becomes more oriented to European countries Ukrainian export to European countries increases not only by size but there was an increase in the quantity of varieties Ukraine still has a chance to join to of European production integration, if its economic policy will be oriented on realization of relative advantages of the country in metal- and labor-consuming manufacture As a result European countries will have a possibility transfer a part of its production to Ukraine, forming vertical industrial relations with Ukrainian producers And it will have strong positive effect on overall stability of the economy 35 BIBLIOGRAPHY Amiti, M and C Freund 2007 An Anatomy of China’s Export Growth World Bank Policy Research Working Paper No 4628 Fund Staff Papers 16(3): 159-176 Baldwin, R 2005 Heterogeneous Firms and: Testable and Untestable Properties of the Melitz model., National Bureau of Economic Research working paper 11471 Amurgo-Pacheco, A 2006 Preferential Trade Liberalization and the Range of Exported Products: The Case of Euro-Mediterranean FTA Ph.D Dissertation, Graduate Institute of International Studies Baldwin, R and V Di Nino 2006 Euros and zeros: The common currency effect on trade in new goods Centre for Economic Policy Research, Discussion Paper No 5973 Bernard, A and B Jensen 1999 Exceptional Exporter Performance: Cause, Effect, or Both?” Journal of International Economics, Vol 47, pp 125 Amurgo-Pacheco, A and D Piérola 2007 Patterns of export diversification in developed countries: intensive and extensive margins World Bank Policy Research Working Paper No 4473 Anderson, J and V Wincoop 2003 Gravity with Gravitas: A Solution to the Border Puzzle American Economic Review, 93(1), pp 17092 Bernard, A., B Jensen and P Schott 2004 Forecasting the Timing of Market Entry by Low-Wage Countries Tuck School of Business Working Paper Armington, P 1969 A Theory of Demand for Products Distinguished by Place of Production International Monetary Dixit, A and J Stiglitz 1997 Monopolistic Competition and Optimal Product Diversity 36 American Economic Review, 67(3), pp 297308 Volumes Harvard University, mimeo Hummels, D and P Klenow 2005 The Variety and Quality of a Nation's Exports American Economic Review, American Economic Association, vol 95(3), pages 704-723 Evenett, S and A Venables 2002 Export Growth in Developing Countries: Market Entry and Bilateral Trade Flows University of Bern working paper, mimeo Felbermayr, G and W Kohler 2006 Exploring the Intensive and Extensive Margins of World Trade A joint initiative of LudwigMaximilians-Universitaet and the Institute for Economic Research, Working Paper Series No 1276 Krugman, P 1980 Scale Economies, Product Differentiation, and the Pattern of Trade American Economic Review, 70(5): 950–59 Melitz, M 2003 The impact of trade in intra-industry reallocations and aggregate industry productivity Econometrica 71(6), 1695-1725 Feenstra, R 1994 New Product Varieties and the Measurement of International Prices American Economic Review, 84(1):157—177 Tinbergen, J 1962 Shaping the World Economy: Suggestions for an International Economic Policy New York: The Twentieth Century Fund Funke M and Ruhwedel R 2003 Export variety and economic growth in East European transition economies BOFIT Discussion Paper, 2003 Helpman, E., M Melitz, and Y Rubinstein 2006 Trading Partners and Trading Wang, K and A Winters 1992 The Trading Potential of Eastern Europe Journal of Economic Integration, Vol 7, pp 113-136 37 APPENDIX Table A1: Total level export in Ukraine vs export of metal in Ukraine Year Export of metal, Growth of export of Total level billion metal to the of export, USD previous year, % billion USD 2001 6,72 103,9 19,8 2002 7,12 106,0 22,0 2003 8,50 119,3 27,3 2004 13,05 150,0 38,0 2005 14,04 107,6 40,4 2006 16,42 117,2 45,9 2007 20,78 126,5 58.3 The data is taken form Ukrstat database http://www.ukrstat.gov.ua/ 38 Figure A1: The distribution of Ukrainian exports among industries in 20078 41.65% 8.267% 8.705% 10.33% 10.35% Metal 42% Chemical 10% Mineral products 8% Food 4% Textile 3% This graph was built using COMTRADE dataset 39 Equipment 10% Agriculture 9% Vehicles 7% Wood 3% Others 3% Figure A2: Intensive vs Extensive margins9 This graph was built using COMTRADE dataset 40 Table A2: Variables, definitions, and sources Variable Defination Source Tijt The total value of United Nations export for product i Commodity from Ukraine Trade to Statistics Database GDP_forj country j at time t http://comtrade.un.org/ Gross domestic International Monetary t product of the foreign Fund country GDPt at time t http://www.imf.org nominated in USD Gross domestic International Monetary product of Ukraine at Fund time t nominated in http://www.imf.org Distj USD Distance between Centre Ukraine and country j d`Etudes Prospectives et d’Informations Internationales Agreem http://www.cepii.fr Dummy that equals to World Trade Organization entj if has some free http://www.wto.org/ trade agreement with Trade_d ev foreign county Dummy that equals to Trade Statistics for if Ukraine export to International Business developed country Development http://www.trademap.org 41 Afghanistan African Customs Union Albania Algeria Angola Antigua and Barbuda Argentina Armenia Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bolivia Bosnia Botswana Brazil Brunei Darussalam Bulgaria Burkina Faso Burundi C?te d'Ivoire Cambodia Cameroon Canada Cape Verde Central African Rep Chad Chile China China Colombia Comoros Congo Congo Costa Rica Croatia Cyprus Rwanda Czech Rep Denmark Djibouti Dominica Kyrgyzstan Lao People's Dem Latvia Lebanon Liberia Dominican Ecuador Egypt El Salvador Eq.Guinea Eritrea Estonia Ethiopia Finland Vietnam France Gabon Gambia Georgia Germany Ghana Greece Grenadines Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary Iceland India Indonesia Iran Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kuwait Libya Lithuania Luxembourg Macedonia Madagascar Malawi Malaysia Maldives Mali Malta Mauritania Mauritius Mexico Mongolia Morocco Mozambique Myanmar Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman Pakistan Panama Paraguay Peru Philippines Poland Portugal Qatar Rep of Korea Rep of Moldova Romania Rus.Federation Saudi Arabia Senegal Serbia and Montenegro Seychelles Sierra Leone Singapore Slovakia Slovenia Spain Sri Lanka Sudan Suriname Swaziland Sweden Switzerland Syria Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Uganda United Arab Emirates United Kingdom Uruguay USA Uzbekistan Vanuatu Venezuela Yemen Zambia Zimbabwe S.K and Nevis Saint Lucia Samoa Sao Tome and Principe Table A3: List of importers of Ukrainian export 42 Table A4 Correlation matrix l_trade l_gdp l_dist fta dev l_trade 1.0000 0.1193 -0.2203 0.1941 0.0450 l_gdp l_dist fta dev 1.0000 -0.2767 -0.0330 0.5442 1.0000 -0.3003 -0.2417 1.0000 -0.1176 1.0000 Code Industry/ HS 1996 Sections Agriculture I Live animals; animal products II Vegetable products III Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Food IV Prepared foodstuffs; beverages, spirits and vinegar; tobacco and manufactured tobacco substitutes Mineral products V Mineral products Chemical VI Products of the chemical or allied industries VII Plastics and articles thereof; rubber and articles thereof Wood VIII Wood and articles of wood; wood charcoal; cork and articles of cork; manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork 43 IX Pulp of wood or of other fibrous cellulosic material; recovered (waste and scrap) paper or paperboard; paper and paperboard and articles thereof Textile X Textiles and textile articles Metal XI Base metals and articles of base metal Table A5: Classification of products to industries Code Industry/ HS 1996 Sections Equipment XII Machinery and mechanical appliances; electrical equipment; parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such XIII articles Vehicles Vehicles, aircraft, vessels and associated transport XIV equipment Others Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; clocks and watches; musical XV XVI XVII XVIII instruments; parts and accessories thereof Arms and ammunition; parts and accessories thereof Miscellaneous manufactured articles Works of art, collectors' pieces and antiques Raw hides and skins, leather, furskins and articles thereof; saddlery and harness; travel goods, handbags and similar containers; articles of animal XIX gut (other than silk-worm gut) Footwear, headgear, umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and 44 parts thereof; prepared feathers and articles made XX therewith; artificial flowers; articles of human hair Articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products; glass and XXI glassware Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal and articles thereof; imitation jewellery; coin Table A6: Probit model Probit extimation l_dist fta* l_gdp 0,125** Agriculture N obs 598808 Food N obs 215016 * N obs 1136348 Wood N obs 264724 Textile N obs 950232 * ** 0,052 (-54,01) (33,2) (-1,16) (0,64) *** 0,421 (-35,18) 1,098** 0,245* * -0,133 (41,52) (8,54) (-1,15) 0,590*** 0,548** 0,339* 0,974* * ** ** (-38,49) (16,8) (-9,26) (6,78) 0,430*** 0,861** 0,120* 0,028* * ** * (37,85) (-74,16) (69,11) (-8,12) (0,49) 0,160 0,584*** 0,702 * -0,006 ** (29,44) (-54,87) (29,99) (-0,26) (9,38) 0,177 0,511*** 0,543 0,162 0,347* * ** ** (-71,77) (35,04) (10,97) (-5,41) 0,436*** 0,628** 0,278* 0,492* * ** ** (17,65) (8,3) 0,365* 0,224* * (20,43) * (20,15) * ** * ** * (49,92) 0,123** Metal 0,616** (28,96) 0,111** Chemical _cons 0,023* 0,123** 0,158** Mineral products N obs 193052 0,464*** dev* * ** (41,81) (-72,3) (42,95) Equipment 0,186** 0,444*** 0,919** 45 * 0,936* ** N obs 660076 * ** * N obs 929424 ** ** (82,62) (29,51) (-4,86) 0,406*** 0,867 0,347* 0,344* * ** ** (27,53) (-33,05) (30,24) (10,79) (-2,89) 0,158** 0,436*** 0,799** 0,054* 0,375* * ** ** (51,64) (-73,61) (59,92) (-3,8) (-6,6) 0,147** 0,449*** 0,770** 0,135* 0,392* * ** ** (-196,73) (148,98) (23,84) (-16,97) (74,96) 0,174 Vehicles N obs 152592 Others N obs 832320 Overall N obs 5932592 ** * * * (126,99) (-92,89) 46 ** Table A7 : Tobit model Marginal Effects: Latent Variable Agriculture N obs 598808 Food N obs 215016 Marginal Effects: Latent Variable _con l_gdp l_dist fta* dev* s 12,42** * 2,77*** -9,93*** 0,72*** 0,56 21,46 (45,75) (-72,06) (53,25) (-2,68) (0,51) 2,07*** -7,17*** 17,21** 3,66*** -0,03 (37,16) (-60,48) (83,2) (14,62) (-0,03) 12,25** 12,17** * * 6,88*** 20,1 7*** (-55,88) (31,16) (-16) (11,83) 14,36** 2,71*** 1,04** 17,45 (-18,35) (-1,87) Mineral products N obs 193052 3,39 Chemical 2,14 N obs 1136348 (71,76) *** (35,25) *** -7,53 * *** * (-115,9) (127,44) 11,14 Wood N obs 264724 σ 2,72*** -9,73*** * -0,13 15,4 4*** (48,4) (-77,91) (54,26) (-0,56) (15,77) ** 16,38 21,17 16,74 7,62** Textile N obs 950232 Metal N obs 660076 3,44*** -9,66*** (69,62) (-88,67) 9,67*** 3,29*** (46,44) (17,34) (-9,23) 10,25** 5,55*** 6,21** (-35,99) (11,39) 2,32*** -7,46*** * (81,91) (-122,13) (85,7) 13,17 ** 5,54*** Equipment 2,78*** -6,47*** * N obs 929424 (122,85) (-143,74) (161,69) (-48,69) 14,45** 5,65*** Vehicles N obs 152592 2,92*** -7,00*** * (43,66) (-52,31) (58,43) (-16,66) 12,59** 1,03*** Others 2,65*** N obs 832320 (81,75) -7,07*** (-105,86) 47 * (88,25) (-7,31) * * 19,08 17,66 3,94** * 14,86 (-9,92) 5,18** * 17,52 (-4,35) 6,69** * (11,83) 16,25 12,59 Overall N obs 5932592 2,61*** (215,28) -7,63*** (-298,39) 48 ** * (231,27) 2,50*** (-45,01) 7,12** * (31,05) 17,19 ... the fixed export cost, stimulating these firms to begin exporting So it will lead to change in extensive and intensive margins of the total trade level In this respect Anderson and van Wincoop (2003)... explain intensive margin and extensive as well and the influence of different factors on both margins According to this model fixed and variable costs have negative effect on extensive margin but... determined the extensive margin played a larger share in the growth of world trade between 1950 and 1970 and again in the mid 1990s, while the intensive margin was more essential in the intervening