Objectives and Hypotheses

EU Eastern Neighbourhood: Economic Potential and Future Development [ENEPO]

The main objective of this project is to examine the potential of the European Neighbourhood Policy1 to upgrade the relations between the enlarged EU and the new independent states (NIS) of the former USSR2 in the spheres of trade, investment, labour movement, technical cooperation, and to speed up economic and governance reforms in NIS, with special attention given to mutual interdependence between these cooperation areas.

The 2004 EU Enlargement moved the EU external borders to the East and Southeast, changing radically the EU's geopolitical and economic perception of the NIS and their potential importance as economic and political partners (particularly for the EU new member states).

Concentration of research efforts on the economic aspects of the eastern neighborhood is justified by the importance of further economic and governance reforms, trade and investment openness and free movement of people for bringing CIS countries closer to Europe and enabling them to commence a fast modernization process.

In the trade, investment and labour migration areas, major research efforts have been concentrated so far on the economic integration of Central and Eastern Europe (including the Baltic countries) with the EU, leaving EU cooperation with NIS outside of the main stream of analysis3. Moreover, with EU eastern enlargement just completed, the geographical coverage of the potential research agenda has changed radically - instead of analyzing the EU-15, the entire EU-25(27) should be analyzed as the economic partner of the CIS states4.

In the governance sphere, a large body of research work focuses on the post-communist transition of individual NIS and the CIS region as a whole, as well as cross-country and cross-regional comparative analyzes. However few studies have attempted to analyze the role of the European integration process as the potentially most powerful factor determining success or failure in building a market economy and democratic society in the post-communist world. The same applies to the adoption of European economic, legal and political institutions by the NIS, their appropriateness to the development needs of the less-developed NIS and their potential to speed the transition and modernization process.

We intend to achieve the following specific objectives during the implementation of the project:

Objective 1: Analysis of the development gap between the CIS and EU countries

The first objective of ENEPO is to identify and analyse various aspects of the development gap in terms of income per capita, various infrastructure, human development, demographic and social indicators, poverty and inequality (including its gender dimension), cross-country and intra-country regional differentiation. We will also identify the main development challenges facing the CIS countries in the forthcoming decade(s) and, in this context, their chances to diminish the existing gap. This objective will be achieved in WP1 and WP2.

Objective 2: Analysis of trade flows and implications of free movement of goods and services between CIS countries and the EU

The increasing importance of the exchange of goods between the CIS and the EU and their contribution to economic growth draws us to analyze the volume and structure of CIS-EU trade flows in relation to their potential level as determined by factors such as economic development and geographical proximity. A separate workpackage will be devoted to the analysis of trade and cooperation in the energy sphere. A further step will involve the analysis and simulation of the economic implications of WTO accession of all (or most) CIS countries for CIS-EU trade, as well as various variants of future free trade agreements between the EU and CIS countries. These objectives will be met in WPs 3-5.

Objective 3: Analysis of the sources of and obstacles to capital inflows to CIS countries

This direction of research will involve an analysis of the volumes and structures of the capital flows of CIS countries (with special emphasis given to FDI), identification of the main factors determining the flow of capital and discussion of the remaining impediments to investment inflow. The analysis will conclude with proposals for actions which could allow CIS countries to follow the Central European/ Baltic/ Balkan experience in attracting FDI and portfolio investment. Meeting this objective is the main task of WP6.

Objective 4: Exploration of the actual and potential role of labour migration and its consequences for CIS and EU countries

Labour migration is regarded as one of the most sensitive issues in the cooperation between CIS countries and the EU. Thus, the next objective of ENEPO is to analyze the actual and potential future role of labour migration and its economic and social consequences (costs and benefits) both for destination and origin countries. This research will be amended by a legal and political science analysis of the cooperation in the area of justice, security and freedom (visa regimes, border controls, illegal migration, refugees and asylum, cooperation of security and justice agencies). This objective will be addressed by WPs 7-9.

Objective 5: Identification of the governance gap between the actual CIS institutions and acquis as well as the potential role of the EU and ENP in closing this gap

The free access to the EU Internal Market and more advanced forms of economic integration of CIS countries with the EU will require a far going approximation of their legal, regulatory and institutional solutions to those determined by the acquis. Thus, this project proposal includes identification of an 'institutional (governance) gap' between the actual institutional settings in NIS and those required from the European integration perspective. We will focus on the priority areas of institutional harmonization, and their potential costs and benefits for CIS countries (including the extent to which the acquis in individual spheres corresponds to the development needs and challenges of low or lower-to-middle income countries). We will also discuss the potential role which can be played by the EU and its technical assistance in speeding up institutional harmonization and cushioning its economic and social costs. This involves a political economy analysis of the neighbourhood policy and its ultimate goals: what is the diversification of interests on both EU and 'neighbour' side, how strong are the incentives provided by the ENP, etc. These objectives will be achieved in WPs 10-13.

Objective 6 Policy recommendations and implications

The final objective of ENEPO is to contribute to a rethinking of the economic policies and reform strategies in the countries of the former Soviet Union to make them more effective in achieving development goals. Policy recommendations should also help in further developing the ENP, its concrete agenda and its instruments. They may also contribute to the debate on the future external frontiers of the EU, further EU enlargement projects and the model of partner relations with neighbouring countries choosing to remain outside the EU. The above will be achieved by giving focused recommendations for each thematic area investigated and, where applicable, for specific countries.

As mentioned above, the innovative approach will consist of deeper investigation of the interrelations between the above mentioned cooperation and policy reform areas. We believe in the existence of far-going interrelations between progress achieved within each area of integration. In particular, we are going to test the following working hypotheses:

H1. Trade expansion between the EU and its Eastern neighbours depends not only on trade liberalization per se (NIS membership in WTO, free trade agreements between EU and NIS) but also on investment climate in CIS, speed of institutional harmonization and, to some extent, on liberalization of movement of people (important for cross-border and "suitcase" trade, and trade in services).

H2. Intensification of foreign investment inflow to NIS depends not only on significant improvement of their domestic investment climate (determined, in turn, by a speed of institutional harmonization) but also on trade liberalization offering potential investors in NIS economies easy access to European markets.

H3. Intensification of trade and FDI and the resulting diminishing of the income gap can weaken the income motive of labour migration from several CIS countries and make freer movement of people less politically and socially controversial in the EU countries. To some extent, free movement of goods and capital may serve as a substitute to the free movement of labour.

H4. Free movement of people is important not only for balancing national labour markets (both in 'origin' and 'destination' countries) and current account (in "origin' countries). It is also significant for the development of the domestic SME sector in 'origin' countries and learning experience of more mature market economies and democratic societies, therefore strengthening domestic constituencies in favour of democratic and market reforms (in 'origin' countries').

H5. Institutional harmonization very often involves substantial social, political and (sometimes) economic costs. Without strong incentives these costs may be considered too high by societies and politicians in neighbouring countries. The traditional pay-off offered by the EU side to the CIS countries (very gradual improvement of their trade regime with the EU and technical assistance) seem to be insufficient. A stronger set of incentives should probably include at least a faster pace of trade liberalization and liberalization of movement of people. In the case of countries which are explicitly interested in EU membership, such a perspective should not be ruled out a priori, as it is potentially an important and powerful incentive.

1Formally speaking, Russia does not participate in the ENP program but it signed a series of bilateral declarations on the Common European Economic Space between the EU and Russia, starting from 2001. The last declaration concerning road maps on four common spaces (common economic space, common space on freedom, security and justice, common space on external security, common space on research, education and culture) was signed on May 10, 2005. In terms of substance, the CEES concept does not differ significantly from the ENP. Thus, for purpose of this particular project we will treat the CEES as the equivalent and part of the ENP concept and Russia as one of the addresses of the ENP.

2Further in this document we will use alternatively NIS and CIS countries.

3Aslund and Warner (2003) paper is one of the few attempts to analyze CIS economic relations with the EU-15 in a complex way. Some other works, including those authored by the team members of this project proposal (see Mogilevskii, 2004; Vihnas de Souza, 2004) concentrate on a single country or a sub-group countries and need in a follow-up research effort.

4Looking ahead, it makes perfect sense to include Turkey, which is an important trade partner of several NIS and popular tourist destination for their citizens, see Dervis et al., 2004.