Marko Nokkala

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A turnaround in the European peripheralty?

Paper prepared for Nectar Conference, Espoo May 17, 2001

Marko Nokkala

VTT Building and Transport

P.O.Box 1901

FIN-02044 VTT

Abstract. This paper examines the trade and transportation systems between Finland and Russia. This paper defines, using economic criteria based on the investment theory, the possible future developments of the cross-border trade between the two countries. From the Finnish point of view, the improvement of trade and transportation between Finland and Russia may well be a solution to better integrate to core European markets through transit transportation. Apart from this development, the cross-border trade is influenced currently by economic and technical standards and bureaucracy. Both are causing delays in transportation, and creating discontinuation in the marginal costs. This is unfortunate, since there are alternative transportation routes that will become more attractive unless these obstacles are solved. Also, major investments on both sides of the border may be required to promote the positive development of trade.
Using scenarios, the strategic importance of investments in road transport is assessed. Experiences from Greece show that major investments in infrastructure can turn a European periphery into an integral part of core-European transportation network. Using the available data, it will be analysed whether such investments are likely to take place in Finland and what are their economic impacts. Following scenarios were produced: baseline scenario and two different growth scenarios. The baseline scenario illustrated the effects of current policies on the Finnish regions. The modest growth scenario assumed an annual improvement rate of 50 per cent in the transport facilities and policies, whereas the high growth scenario was based on a major increase in the investment level. The meaning of these impacts as a factor in regional development turned out to be insignificant. However, from the strategic trade policy point of view, these investments can create considerable economic impacts, both at the regional and the national level.

Contents Page

1. Introduction 4

1.1 Background on the research 4

1.2 Structure of the paper 5

2. Finland-Russia trade: trends and possibilities 5

2.1 Trade patterns 5

2.2 Legislative framework 6

2.3. Transit-trade: opportunities or threats? 7

3. Forecasting the impacts of road investments 7

3.1 Methodology and data 7

3.2 Investment theory in investment decision making 8

3.3 Scenario technique 9

4. Scenarios 10

4.1 Trend scenario 10

4.2 Modest investment scenario 11

4.3 Large investment scenario 12

5. Conclusions 13


Appendix 1- Input-output table for growth region (Region 1) 17

Appendix 2- Input-output table for stabile development region (Region 2) 19

Appendix 3- Input-output multipliers for Finnish growth and stabile development regions 21

1. Introduction

1.1 Background on the research

This paper looks at the impacts of trade between Finland and Russia on the regions benefiting from road infrastructure investments. The approach is to see, how the major road investments to provide access to Russian markets through Finland would affect Finnish regions. Finland, in the European Union context, could be classified as a periphery. The motivation for this study stems from the fact that recent developments in Greece have turned a European periphery into central European region. As recently as in 1998 a European Union FAIR programme financed STREFF project (Structural Policy Effects in Remote Rural Areas Lagging behind in Development) defined regions in Finland, Greece and Scotland remote and rural based on a number of criteria. Remote, peripheral areas are often characterised by low population density and high dependence on agriculture. Rural areas closer to centres have usually higher population density, lower dependence of farming, a more developed and diversified economic base, and, following from their location, a better access to main markets.

This concept of traditional European periphery is changing dramatically. Especially in Greece, it has been already argued that there is a shift from rural periphery towards a central European positioning. This opportunity has been opened by the introduction of major European infrastructure investment, which has boosted regional economic activity and growth in the regions, positively affected by the investments. These changes require changes not only in the physical infrastructure, but also in the mental framework. People in the rural areas need to be prepared to accept the changes taking place as a consequence of the shift from periphery to centre, not necessarily always positive. Increased traffic can lead to pollution, more waste and environmental problems. On the positive side, the increased economic activity can reduce unemployment rates, promote small-scale business and create new markets for local producers.
It can be immediately argued that such development is not likely to take place in rural areas of Scotland, since the developments in Greece are based on a new and improved trade facility between the European Union and its eastern accession countries. However, it remains a subject to investigation, whether such developments could take place in Finland. First of all, Russia and other former CIS countries possess a significant market area next to Finland, an area which is likely to expand in purchasing parity and customer variety over the next years. Second, the traditional links between Finland and Russia already exist. The barter trade that took place until the collapse of Soviet Union left trade relationship on a weak base, but the fact remains that despite permit and clearing problems trade has continued. Third, Finland has advantage in providing rail services to and from Russia. The rail width in Finland is same as in Russia, since the network was built when Finland was a Soviet autonomy. Services to change European trains to fit Soviet system are offered and competition from Baltic countries is reducing prices as well.
This paper briefly addresses the current situation, and, based upon this assessment, analyses the possible future developments in cross-border trade between Finland and Russia, based on the investment decisions in the infrastructure in the regions most likely to benefit from the trade opportunities.

1.2 Structure of the paper

Where does Finland-Russia trade currently stand? Historically, there has been a strong linkage between the countries, which at the moment is more or less fading in importance. Finland’s main exports (electronics, cellular phones) are consumed in western markets, dominated by high technology standards, until yet not reached in Russia. Another, more prominent future for the trade is that of increasing the volume of transit-trade. This means that the importance of networks would increase in transport systems would be stressed more than already is being done. In chapter 2, the trends in trade are discussed in order to show how the trade has evolved over the decades.

The methodology and approach of this paper is described in chapter three. Basically, the approach is to utilise regional input-output data to illustrate the direct impacts of road investments on the regional economies, influenced by these investments.
In chapter 4, the future development paths are sketched using available data to provide forecasts of trade flows. These estimates should be treated with the notion that the situation can change quite dramatically, depending on which measures are taken by the authorities in each country. Even if heavy investments should take place in Finland, they may not be accompanied with similar developments on the other side of the border. Thus, identifying the possible bottlenecks is important, as this will determine the likelihood of success for growth scenarios.
Finally, chapter 5 presents a synthesis of the possibilities created by major investments in road transport, based on the presentation in chapter 2 and scenarios created in chapter 4.

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