Is
the customs union a success?
In 2010, Kazakhstan
formed a trade union with Russia
and Belarus
to spur regional trade. The three
countries would lower their trade barriers to one another (barriers to other
countries were another matter) and thus begin to integrate their
economies. Or…did they?
Here’s a simple-minded answer. If the three economies are merging, at least
with respect to traded goods, then the international price differentials for
those goods should dwindle. Eventually,
the prices of two identical goods – say, a tomato in Russia
and one in Kazakhstan,
both from the same farm – should differ only by the costs of transporting the
exported fruit and of arranging the sale.
If the price differential exceeds these costs, then an entrepreneur can
profit by purchasing tomatoes at the cheaper Site A and selling them at the
more expensive Site B. Supply will
decrease at A, raising its price, and increase at B, lowering its price. The price differential (the B price minus the
A price) will diminish until it just covers the transport and transaction
costs.
For example, suppose that a tomato in Kazakhstan costs five tenge to grow and one
tenge to ship to Russia. If the two economies are integrated, then the
tomato should sell for the equivalent of six tenge in Russia and for five in Kazakhstan. If the Russian price is seven tenge, then the
prospect of a tenge of profit will induce exports to Russia until that price falls to
six. But if the two economies are still separate,
then the price differential may persist, since a trade entrepreneur cannot
easily attempt arbitrage.
Pricing
puffs
Do such price differentials actually
exist? To answer this question, consider
the cigarette. It may be ideal for trade
(more so than cement, anyway) since its value well exceeds its transport cost. Some brands may carry a higher price than
others, because smokers think them better.
But the cost of transporting a cigarette by a given distance is pretty
uniform across all brands. If the Russian
and Kazakhstani economies are integrating, then the price differential for a
cigarette of a given brand in the two countries should be about the same for
all brands. If the differential is six
tenge for a Winston, then it should also be about six for a Parliament.
A few weeks ago, the Kazakhstani business
weekly Kursiv’ published cigarette
prices for eight brands in Russia,
Kazakhstan and Kyrgyzstan. For the first two countries, the price
differential for a pack varied sharply over the brands, from 69 tenge for the
brand LD West to 146 tenge for Parliament.
Relative to the average price differential, a measure of the dispersion in
the price gap – the standard deviation – was 27%.
Curiously, the price differential for Kazakhstan and Kyrgyzstan was not as large – just from 48 tenge (for Parliament) to 86
(Marlboro). Relative to the average
price differential, the standard deviation was only 18%.
As I said, this approach is simple-minded. We can’t draw hard-and-fast conclusions about the
customs union from a sample of prices of only eight cigarette brands at a
particular time. But the data do raise a
larger question: What has
the union accomplished, aside from tightening Russia’s
grip on Kazakhstan’s
economy? --Leon Taylor, tayloralmaty@gmail.com
Moreover,
Russian and Kazakhstani cigarette prices are diverging. On average across brands, a one-percent
increase in the price of a Russian pack relates to a rise of just over one-half of
one percent in the price of a Kazakhstani pack (controlling for the prices in Kyrgyzstan).
Since the Russian price is already higher than our price, the gap
between the two may well widen when they rise in response to a hefty cigarette tax
that Russia
plans for the next few years. The two
national markets may not merge; they may drift apart. But the data are too scanty to permit us to be sure of this.
References
Murtazyn, Azat. Dim s ‘dordoya’. Kursiv’. August 29, 2013. Page 2.
