Greater Eurasia

Providing public goods at the supranational level: deliberations from the European economic debate for the EAEU

October 4, 2020
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_ Yuri Kofner, junior economist, MIWI – Institute for Market Integration and Economic Policy. Munich, 4 October 2020.

The EAEU should offer public goods

The Eurasian Economic Union (EAEU) is primarily a customs union and a common market for the free movement of goods, services, capital, and labor. The main task of the EAEU is the so-called “negative integration”, i.e. completing the construction of the common market by gradually eliminating interstate trade barriers.While virtually all member states benefit from the single economic space, which adds 1.1 to almost 12 percent to their national income [1], the economic benefits of the EAEU are not obvious to many.This may be, since eliminating trade barriers is a complex and slow process. Ever new and not-yet-removed market barriers are more visible to the media, entrepreneurs, and citizens than the quiet successes of the Eurasian Economic Commission (EEC) in removing them.In this regard, for the benefits of Eurasian integration to become more visible, the EAEU should add “positive integration” to its agenda, i.e. offering supranational public goods.

Providing public goods at the supranational level: the European debate

In economics, a public good refers to a commodity or service that is made available to all members of society. Typically, these services are administered by national governments and paid for collectively through taxation. Public goods are the opposite of private goods, which are inherently scarce and are paid for separately by individuals. The two main criteria that distinguish a public good are that it must be non-rivalrous and non-excludable. Non-rivalrous means that the goods do not dwindle in supply as more people consume them; non-excludability means that the good is available to all citizens. In some cases, however, public goods are not fully non-rivalrous and non-excludable. These goods are referred to as “club goods”.Examples of public goods include traffic lights, national defense, and the rule of law. Public goods also refer to more basic goods, such as access to clean air and drinking water.The supply of public goods is a key task for nation-states. However, subject to the principle of subsidiarity, the costs of providing a public good at a higher supranational level may be lower and the welfare effects higher. This is due to economies of scale and the very nature of public goods as being non-exclusive and non-rivalry. The same is also true for “club goods”, though non-rivalry in consumption may not be perfect due to congestion effects and for which exclusion is possible, but where the joint provision is still more efficient.[2]Debates on this topic have recently intensified in Europe, and leading economists such as Gabriel Felmbermayr, president, IfW Kiel,[3] Clemens Fuest, president, ifo Institute,[4] and Mario Holzner, executive director, wiiw,[5] advocate that the EU should purposefully offer more public or club goods. Examples of such goods already offered by Brussels, are the euro, the Schengen area, the farmer subsidy program (CAP), the structural cohesion funds, and the science grant program “Horizon 2020”.Among the new public or club goods that, according to the aforementioned economists, the European Union should offer at the supranational level, the most prominent are: military procurement and defense; migration policy and redistribution of migrants; climate change mitigation; cybersecurity and setting standards for the global digital economy; pan-European infrastructure projects in transportation, electricity transfer and communications; research and development in large and risky projects.Applying the economic subsidiarity principle based on the Tiebout model of economic federalism, as well as on the Oates effect, as a benchmark for defining European core competencies, Jürgen Stehn, economist of the IfW Kiel was able to define eight core competencies, which would be provided more efficiently at the supranational EU level, rather than at the national level: free goods and services trade, the free movement of capital and enterprise, merger and state aid supervision, as well as asylum, security and environmental policy. According to Stehn, the common monetary policy is a special case, arguing, that the monetary union could be effective, provided the optimal currency area criteria would be met. [6]Researchers of the ZEW, applying a unified quantified approach with counterfactuals, concluded that a re-allocation of national competences to the EU level would be desirable in five out of the eight policies, namely: asylum and refugee policy, defense policy, corporate taxation, development aid, unemployment insurance. At the same time, the findings were ambiguous for railway freight transport policy and indicated better potentials for education and agriculture policy with national responsibility. The study employed a weighted scoring method with the following criteria: free-riding problem, economies of scale, preference heterogeneity of voters, the merits of intra-jurisdictional competition, and the interplay of competence allocation with the functioning of the European internal market. [7]

Financing public (club) goods at the supranational level

To offer public or club goods at the union level, it is necessary to finance them, which implies a certain supranational budget and supranational powers of fiscal policy. However, the budget competencies are different for the EU and the EAEU.The European Union has its own and a rather large budget, which averaged USD 173.4 billion annually in 2015-2018, or about 1 percent of the EU’s gross domestic product. The European budget has three main sources of income: the member states’ share contributions based on their gross national income (about two-thirds), import duties and sugar levies (ca. 15 percent), as well as deductions from national VAT (ca. 11 percent). The EU budget is mainly spent on structural cohesion programs to support economic convergence between the member states and their regions, state aid to European agriculture and fishing, environmental protection, but also on foreign aid, combating terrorism, organized crime, and illegal immigration, as well as on administrative expenses.[8]Unlike the European Union, the Eurasian Economic Union has only one expenditure side, one revenue side, and only two redistributive spheres. The only expenses of the EAEU budget are the administrative expenses of the Eurasian Economic Commission and the EAEU Court. On average annually for the period 2015-2020, they amounted to USD 110.5 mln (USD 105.5 mln for the EEC and USD 5 mln for the Court). They are financed on the revenue side of the EAEU budget through shared contributions by the EAEU member states in the following ratio:
  • Armenia – 1.220 percent;
  • Belarus – 4.560 percent;
  • Kazakhstan – 7.055 percent;
  • Kyrgyzstan – 1.900 percent;
  • Russia – 85.265 percent.[9]
In addition to the revenue side of the Eurasian budget, where the Russian Federation bills the largest share, the only other area where the EAEU has the legal power to redistribute financial resources between its member states is the redistribution of aggregate revenues from import customs duties of the union. In the latest edition, this distribution quota was as follows:
  • Armenia – 1.220 percent;
  • Belarus – 4.860 percent;
  • Kazakhstan – 6.955 percent;
  • Kyrgyzstan – 1.900 percent;
  • Russia – 85.065 percent.[10]
In this regard, any public good to be provided at the supranational level by the EAEU could theoretically be financed either directly through further contributions by the EAEU member states, or as a deduction from the total amount of import customs duties collected by the EAEU.On average, the EAEU collected a total of USD 12.4 bln per annum in total import customs duties between 2015 and 2019. [11] Potentially deducting only 1 percent of this sum, the EAEU could potentially allocate USD 123.7 million on average annually for the provision of supranational public goods. Since this 1 percent would be deducted before the redistribution of aggregate customs revenues to the member states, each of them would bear the cost of maintaining the fund equally in the form of deducting only 1 percent from the amount of the customs revenues it receives.Using data from the EEC Department of Macroeconomic Policy and the EEC Department of Finances, the author, using an econometric regression, estimated that the gross customs revenue of the EAEU in 2020, 2021, and 2022 may amount to USD 6.8 bln, USD 16.6 bln and USD 16.9 bln, respectively (Multiple R = 0,8; R2 = 0,6).[12] Consequently, the annual deduction for the provision of public goods at the union level could be USD 68.4 mln. USD 166.1 mln and USD 168.8 mln, respectively.

Which public goods could and should the EAEU offer?

At the beginning of the article, the author proposed that it would be advisable and timely for the EAEU to offer certain public (club) goods at the supranational level. But what public or club goods would and should the Eurasian Economic Union offer?This question ought to be answered based as much as possible on a scientific approach and employing the following empirical criteria:
  • Is the principle of economic subsidiarity observed?
  • Are there economies of scale and how significant are they?
  • What are the potential budgetary constraints?
  • Can member states free ride on public goods provided mainly by other member states?
  • How strong is the preference heterogeneity between shareholders, i.e. member states, business circles, voters, etc.?
  • What are the merits of intra-jurisdictional competition?
  • What is the interplay of competence allocation with the functioning of the single Eurasian market?
At this point, the author would like to leave it to the readers to decide what public goods the EAEU could and should offer to its citizens. It would be advisable that leading economic research institutes would analyze the ideal competence allocation of different policies based on the above criteria and examples from the above-mentioned European debate.In the author’s personal opinion, primarily due to limited financial resources, the EAEU could (and should) afford to offer a public good in one or two policy fields: either financing innovation (R&D and venture startups) and/or financing infrastructure transport connectivity. The Eurasian Development Bank (EDB) could act as an operator in both policy fields on behalf of the Eurasian Economic Union.Notes:[1] Kofner Y. (2020). Who wins and who loses from the Eurasian Economic Union? MIWI Institute. URL: https://miwi-institut.de/archives/534 style="text-align:justify;display:block;">[2] EEAG Report on the European Economy (2018). All Together Now: The European Union and the Country Clubs. CESifo Group. URL: https://www.cesifo.org/DocDL/EEAG-2018.pdf style="text-align:justify;display:block;">[3] Felbermayr G. (2020). What the EU should do for its citizens. URL: https://miwi-institut.de/archives/124 style="text-align:justify;display:block;">[4] Fuest C., Pisani-Ferry J. (2019). A Primer on Developing European Public Good. EconPol. URL: https://www.econpol.eu/publications/policy_report_16[5] Creel J., Holzner M., et al. (2020). How to Spend it: A Proposal for a European Covid-19 Recovery Programme. wiiw. URL: https://wiiw.ac.at/how-to-spend-it-a-proposal-for-a-european-covid-19-recovery-programme-dlp-5352.pdf style="text-align:justify;display:block;">[6] Stehn J. (2017). The core problem of the EU. IfW Kiel. URL: https://miwi-institut.de/archives/369 style="text-align:justify;display:block;">[7] Heinemann F. et al. (2017). How Europe can deliver. Optimizing the division of competences among the EU and its member states. ZEW, Bertelsmann Stiftung. URL: https://miwi-institut.de/archives/652 style="text-align:justify;display:block;">[8] EU expenditure and revenue 2014-2020. European Commission. URL: https://ec.europa.eu/budget/graphs/revenue_expediture.html style="text-align:justify;display:block;">[9] Ministry of Finance of the Republic of Belarus. URL: http://www.minfin.gov.by/upload/ministerstvo/cooperation/eaes.pdf style="text-align:justify;display:block;">[10] Protocol of 1 October 2019 amending the Treaty on the Eurasian Economic Union of 29 May 2014, as well as amending and terminating certain international treaties. Eurasian Economic Commission. URL: https://docs.eaeunion.org/docs/ru-ru/01423866/itia_15112019 style="text-align:justify;display:block;">[11] See note 1.[12] EEC Statistics Department. Eurasian Economic Commission. URL: http://www.eurasiancommission.org/ru/act/integr_i_makroec/dep_stat/union_stat/Pages/default.aspx
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