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Competitiveness in the Southern Euro Area

Author(s):
Bogdan Lissovolik, Julio Escolano, Stefania Fabrizio, Werner Schule, Herman Bennett, Stephen Tokarick, Yuan Xiao, Marialuz Moreno Badia, Eva Gutierrez, and Iryna Ivaschenko
Published Date:
April 2008
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I. Competitiveness of the Southern euro area: a Helicopter Tour12

This collection of studies focuses on developments in the external competitiveness of five countries: France, Greece, Italy, Portugal, and Spain (hereafter five southern euro area countries or SEA-5 for short). As members of the EU and euro area, these countries share key institutional arrangements—notably their currency, exchange rate, and trade policy. Also, the challenges posed by globalization have been prominent in the debate among policymakers and observers—partly owing to conspicuous export market share losses, either across the board or in specific areas perceived as important. The studies, however, show that there is much diversity in these countries’ economic trajectories. Indeed, these five economies were chosen, in part, to provide a sufficiently varied sample of experiences, contrasting two G-7 economies with countries where catch-up in the wake of EMU membership has played a crucial role—while maintaining the data volume manageable given the heavy use of disaggregated statistics in some of the studies.

Throughout these studies, we take competitiveness to mean the success of an economy in seizing the opportunities afforded by an increasingly integrated international economic environment to deliver sustained growth in living standards.3 To achieve a given level of living standards, proxied by purchasing power, an economy can either obtain goods and services directly by domestic production or by exchanging part of that production through external transactions. Conceptually, external markets can be seen as an additional “technology” available to an economy, whereby exports (the inputs of that “technology”) are transformed into imports (the outputs) at a rate given by the price of exports relative to imports, i.e., the terms of trade (TOT).4 Thus, from the standpoint of an individual economy, the ongoing expansion in international markets’ span and depth is similar to a shift in the frontier of available productive technologies.5 Also, in practice, the economic processes associated with adopting new technologies and with increasing participation in international markets are essentially the same: redeployment of resources across firms and sectors, restructuring of production and distribution chains, product innovation and quality upgrading, R&D and investment (including FDI), market development, etc. In this light, the ultimate test of competitiveness is productivity corrected for TOT effects6—over the long term, it closely tracks income per capita and other measures of living standards. Specifically, TOT-adjusted total factor productivity (TFP) is particularly pertinent to competitiveness as it epitomizes the efficiency of an economy in obtaining goods and services in a globalized world with its given resources.

The importance of this external sector “technology” relative to overall activity has grown rapidly as external trade increased. Over the 10 years to 2006, the volume of world trade doubled, and its value increased by 120 percent, rising from 22 to 30 percent of world GDP (Figure I.1). Like many other relatively mature economies, the SEA-5 countries have faced a large expansion of external markets (goods and services as well as financial and direct investment flows) that far exceeded the organic growth of their domestic markets—providing both opportunities for faster growth and a spur for economic change. Thus, not surprisingly, SEA-5 openness also increased during that period from 24 to 29 percent of GDP.7

Figure I.1.World Imports of Goods and Services

Source: IMF, WEO.

A. Overall Performance

The success of most SEA-5 countries in taking advantage of the expansion of international economic flows to achieve high growth has been lackluster (Table I.1). Only Greece has experienced robust per capita growth underpinned by commensurable productivity gains.8

Table I.1.Growth Indicators, 1996–2006(Average annual change in percent)
Real GDP

per capita
Real GDP

per capita

adjusted for

terms of trade
Labor

productivity

adjusted for

terms of trade
Total factor

productivity

adjusted for

terms of trade
France1.81.91.30.9
Greece3.63.73.02.2
Italy1.11.00.10.1
Portugal1.41.20.90.0
Spain2.62.80.20.1
euro area1.71.50.60.4
Germany1.31.00.80.7
United Kingdom2.32.62.11.5
United States2.22.21.91.3
Canada2.53.11.91.8
Sources: AMECO; OECD; and IMF staff estimates.
Sources: AMECO; OECD; and IMF staff estimates.

Spain’s significant GDP per capita growth stems mainly from an upward shift in the occupation rate (which must stabilize in the medium term) rather than from productivity growth, which—despite some recent acceleration—remains low.9 Other SEA-5 economies experienced lower real GDP per capita growth, below the U.S., U.K., or Canada, rooted in poor labor productivity and TFP growth.

Aggregate competitiveness indicators point to substantial export market share losses in some SEA-5 countries (France, Italy, and Portugal) compared to peer economies. In contrast, Greece and, to a lesser extent, Spain performed relatively well (Tables I.2 and I.3). Over the past 10–15 years, the entry of new global markets participants resulted in a substantial reduction in the export market shares of advanced economies, notably in the markets for goods (Table I.4).10 Thus, during 1996–2006, the OECD’s export share in goods and services world trade declined by about 11 percent (13 percent in goods and 1 percent in services)—the euro area experienced similar market share losses. In this context, France and Italy had lower exportgrowth and sustained substantially larger market share losses, in both goods and services, than the OECD or euro area. More detailed analysis in subsequent chapters indicates that these share losses were fairly generalized across manufacturing branches, tourism, and travel, and in the case of France, also business services. Portugal sustained significant losses in manufactures (notably textiles and apparel) only partly mitigated by gains in services. In contrast, Spain was less specialized in the highly contested sectors of textiles, clothes, and apparel, and sustained relatively lower losses in manufactures (which were concentrated in the key car sector) while substantially increasing its share in services. During the 1990s, Greece drastically shifted its export structure away from textile and clothing sectors, in which it sustained significant share losses, and towards transport and tourism—resulting in a remarkable 68 percent market share increase in services. Later, during the recent global economic upswing after 2001, Greece was able to increase its market share of both goods and services (Table I.3).11

Table I.2.Selected Competitiveness-Related Indicators, 1996–2006
World export market share 1/Export growth 2/Terms of trade
G & SGoodsServicesG & SGoodsServices(G & S) 3/
France-25.0-23.3-30.55.15.53.51.8
Greece3.4-36.068.08.53.713.03.8
Italy-26.4-25.0-31.14.95.33.4-3.0
Portugal-14.3-21.613.16.55.88.7-5.1
Spain-0.4-6.017.58.17.79.14.5
OECD-11.1-13.4-0.86.96.87.2-1.7
Industrial economies-13.8-16.8-0.66.66.47.3-2.6
euro area-10.7-12.8-1.27.06.97.2-3.0
Germany-1.4-2.72.88.08.17.6-6.2
United Kingdom-11.9-22.925.16.85.69.87.9
United States-22.7-25.3-13.05.45.35.8-1.1
Canada-10.5-12.6-0.17.06.97.313.6
Japan-28.7-31.3-14.64.64.45.6-17.0
World imports8.28.47.3
Sources: IMF, WEO; OECD; and AMECO.

Change in percent of initial value. Nominal exports as percent of world imports.

Annual percentage change of nominal value in U.S. dollars.

Exports’ deflator relative to that of imports. Change in percent of initial value.

Sources: IMF, WEO; OECD; and AMECO.

Change in percent of initial value. Nominal exports as percent of world imports.

Annual percentage change of nominal value in U.S. dollars.

Exports’ deflator relative to that of imports. Change in percent of initial value.

Table I.3.Selected Competitiveness-Releted Indicators: The Last Global Economic Upswing(2001–06)
World Export market share 1/Export growth 2/Terms of trade
G & SGoodsServicesG & SGoodsServices(G & S) 3/
France-15.4-14.8-17.09.910.57.52.0
Greece-1.71.64.113.214.412.54.1
Italy-9.5-11.91.511.311.212.02.5
Portugal-4.2-7.79.112.612.213.6-3.2
Spain-1.5-4.69.813.213.013.74.2
OECD-7.7-9.50.211.811.811.70.0
Industrial economies-8.6-10.70.511.511.511.7-0.9
euro area-3.5-5.24.312.812.812.5-0.7
Germany5.73.913.314.914.914.4-1.3
United Kingdom-8.5-14.29.511.610.613.73.3
United States-23.9-26.2-14.77.57.38.1-4.6
Canada-21.4-23.4-11.88.28.18.914.7
Japan-13.4-16.85.110.39.912.7-8.8
World imports13.614.111.6
Sources: IMF, WEO; OECD; and AMECO.

Change in percent of initial value. Nominal exports as percent of world imports.

Annual percentage change of nominal value in U.S. dollars.

Exports’ deflator relative to that of imports. Change in percent of initial value.

Sources: IMF, WEO; OECD; and AMECO.

Change in percent of initial value. Nominal exports as percent of world imports.

Annual percentage change of nominal value in U.S. dollars.

Exports’ deflator relative to that of imports. Change in percent of initial value.

Table I.4.Change in Export Market Shares (Goods), 1996–2006(Percent of initial 1996 share, shares in current prices)
Imports
WorldIndustrial-

country
EU-country
France-23.5-23.2-21.2
Greece-15.3-14.9-23.2
Italy-23.0-20.7-21.1
Portugal-20.8-24.3-20.5
Spain-5.2-4.3-1.7
Industrial countries-18.6-10.8-14.4
Belgium/Luxembourg0.99.79.4
Germany-3.71.7-3.2
Netherlands6.813.112.6
United Kingdom-29.7-26.4-24.2
United States-33.9-35.2-34.2
Canada-18.9-23.0-12.7
Japan-32.4-42.1-38.8
Asia excluding Japan31.633.624.7
Source: IMF, Direction of Trade Statistics.Note: Differences in methodology and compilation systems result in discrepancies with national accounts-based data shown in other tables, e.g., Tables I.2 and I.3.
Source: IMF, Direction of Trade Statistics.Note: Differences in methodology and compilation systems result in discrepancies with national accounts-based data shown in other tables, e.g., Tables I.2 and I.3.

B. Exports of Goods

Goods export share losses appear associated with less SEA-5’s flexibility relative to peers in the face of changing global trade patterns. With the exception of France, SEA-5 countries started off with an adverse manufacturing export specialization—subsequent performance in the different dimensions (sectoral, geographical, technological), analyzed in the accompanying studies, varies across countries. But overall, SEA-5 economies have been slower than relevant comparator groups (e.g., EU, OECD, or key trade partners) in redirecting activity and exports to fast-growing markets.12 Specifically, the export shares of France, Italy, and Portugal declined particularly in some of their largest and world’s fastest-growing export sectors, in contrast to Germany or Spain (Figure I.2). Regarding the geography of export markets, Spain, Portugal and France have been slower than the EU or OECD in redirecting their exports towards emerging Asia and eastern Europe. Overall, SEA-5 countries have a lower geographical diversification than Germany or the world average—particularly Portugal and Spain, whose exports remain concentrated in the EU-12. Other aspects, such as offshoring and inward FDI, which evidence suggests tend to support competitiveness, also lagged in the SEA-5.

Figure I.2.Manufacturing Exports in SEA-5 and Germany: 1995–2005 1/

(Size of bubbles proportional to share in total goods exports of each country, largest 15 SITC-3 sectors for each country)

Source: UN Comtrade database; and Chapter II by Lissovolik.

1/ Excluding food and chemicals.

SEA-5 countries faced high competition pressure in their goods export markets, which has generally increased—although often it increased less than for peer economies. Disaggregated product-level data13 show that exporters from SEA-5 countries operate in markets with more intense competition levels (measured by the reciprocal of the degree of concentration) than the world average or Germany—particularly Portugal, Greece, and Italy, partly reflecting the weight of textile, apparel, leather, and related exports. Moreover, the effective14 level of competition faced by SEA-5 exporters, except Greece, has risen during 1995–2005. This trend was shared by peer economies (Germany, U.K.) and by the world average. However, the increase in the level of competition faced by Spain and Portugal (and for Italy in the first half of the period) has been less pronounced than for the world average, Germany, or the U.K. Greece even reduced the overall level of competition it faced, partly owing to growing presence in southeast Europe markets. The increase in competition has been mainly driven by nonmanufacturing and low-tech manufacturing goods, while higher technology exports tended to palliate the increase in overall competition faced.

Analyses of SEA-5’s nonprice competitiveness dynamics—such as gaining “niche” markets and enhancing product quality—indicate some success (particularly in the case of Italy) and highlight the importance of flexible redirection of resources within and across exports. The analysis of export unit values by product relative to other world market participants indicates that most SEA-5 countries have been able to moderately increase the quality of their exports but not relative to the EU-15. The maintained hypothesis here is that a sustained increase in relative export unit values15 reflects upward shifts along a product’s quality ladder, specialization, technological intensity, or other gains in market power.16 A detailed market breakdown by product and country of destination—thus more specifically identifying actual direct competitors—points to a correlation between increased competition and declines in export unit values relative to competitors (Figure I.3). Thus, Greece experienced both a decline in competition and an increase in relative export unit values and, at the opposite extreme, the converse is true for France and Germany. As it can be expected, increased competition tended to drive down prices. However, Italy substantially increased export unit values despite an equally substantial increase in the level of competition it faced; and to a lesser extent, the same applies to Portugal, pointing to successful nonprice competitive strategies. Generally among SEA-5 countries, the larger contribution to increased competition was the evolution in their traditional export markets. Entry and exit, and export reallocation across markets mitigated this effect in some cases. Regarding quality upgrading, the contribution of entry and exit was positive in all countries except Italy, indicating net entry in markets where exporters could charge a higher price than incumbent competitors. Greece, Portugal, and particularly Italy increased also the quality of exports to their traditional markets.

Figure I.3.Market Concentration and Relative Unit Values, 1995 and 2004

(Changes, in percent)

Sources: UN, COMTRADE; IMF staff calculations; and Chapter V by Moreno-Badia.

During 19942005, SEA-5 countries (except Spain) upgraded the technology composition of their exports and overall output. The technology content and diversification of exports (and overall manufacturing output) in Greece and Portugal increased rapidly. This was related to the catch-up process following EU and subsequently EMU memberships. The technology and diversification indices for Spain, however, did not materially change, which appears linked to weak investment in manufacturing for most of the period. Changes in France and Italy paralleled the evolution of the EU-12.

C. Exports of Services

Services exports strongly enhanced the competitiveness of Greece, Spain, and Portugal with substantial gains in export revenue, market share, and TOT—in contrast to Italy and France, which performed poorly in this area. Sustained TOT gains (Table I.2) were often made possible by the idiosyncratic features of services markets. First, demand for travel and tourism (key for SEA-5 countries), and other services exhibits high income elasticity as reflected in the services’ increasing share of spending in OECD countries (the main destination of SEA-5 services exports). And second, on the supply side, productivity growth was lower in services than in manufacturing and competition from low-cost competitors more limited. Greece, in addition, expanded its exports of maritime and other transport services by an impressive 76 percent in a market boosted by booming world trade.

Some high-growth, high value-added services exports have expanded rapidly in Greece, Italy, Portugal, and Spain—pointing to prospective productivity gains (Figure I.4). Service sectors with the highest growth and productivity include transport, insurance and financial activities, computer and communication services, and other business services. Increasing output and exports of many of these services would support productivity growth directly—as they typically have high productivity levels—and indirectly, as their output, particularly ICT and business services, increases efficiency in the production of other goods and services (including through outsourcing and offshoring). From the standpoint of export levels, SEA-5 countries are relatively underspecialized (except Greece) in the export of these high value-added services. This category of services exports, however, is showing strong dynamism in most SEA-5 countries, with the exception of France. The export growth of Greece in this area has been limited mainly to transport while in the case of Spain, it shows recently a broader base and rapid market share gains. Italy has gained share in other business services and communications. Performance in this group of high value-added services exports has been poor in France (except in communications).

Figure I.4.Services Exports in SEA-5 and Germany, 1996–2005

(Size of bubbles proportional to share it total services exports of each country)

Sources: IMF, BOP statistics; Eurostat; and Chapter VI by Gutierrez.

* Data for Greece for 1996–2004.

D. Other Aspects of Competitiveness

Price competitiveness appears to play a minor role (at least in the short term) on imports. Analyses of competitiveness typically assign a secondary role to imports; they are seen as determined mainly by the evolution of domestic demand. The statistical evidence for SEA-5 countries supports this view with a role for price competitiveness (as measured by real effective exchange rate) significantly lower than for domestic demand.

Imports, however, are relevant to an economy’s competitiveness since they can reduce costs and increase production efficiency. They allow firms to focus on segments of the production chain for which they have a comparative advantage, while offshoring other segments or purchasing inputs in international markets. There may also be technology and know-how spillovers. Indeed, there is evidence of a positive correlation between sectoral import penetration and productivity growth in each of the SEA-5 countries. These effects are likely to be strongest for intra-industry trade, which accounts for about 50 to 80 percent of all manufacturing imports in SEA-5 countries (except in Greece where it is below 30 percent). Intra-industry imports have increased significantly (as a percent of goods imports) in Spain where they have reached levels similar to those of Germany. In contrast, French intra-industry imports fell sharply after peaking at the end of the 1990s. Imports have also become more technology intensive across SEA-5 countries. Regarding specifically offshoring activity, the evidence points to a positive relationship with productivity and more depreciated real exchange rates, although sometimes with weak statistical significance. This activity, however, remains low in SEA-5 countries.

Inflows of FDI appear to have played only a minor role in fostering SEA-5 countries’ competitiveness. FDI inflows to Greece and Italy were among the lowest in the OECD, while those to France, Portugal, and Spain were only about the OECD average. Moreover, FDI to Portugal and Spain was inversely correlated with the increase in world demand for those sectors. A large share of FDI targeted services sectors, where its distribution was largely uncorrelated with sectoral productivity. Only in the case of France, FDI into services was increasingly directed toward high productivity sectors.

References

Prepared by Julio Escolano.

While responsibility for errors remains with the author, this introduction summarizes some of the findings in the following accompanying studies: “International Competitiveness: Looking at Direct Competitors” (H. Bennett and Z. Zarnic); “Are the SEA-5 Countries Advancing in the Search for New and Better Products?” (S. Fabrizio); “Services Exports in SEA-5: Performance and Restructuring” (E. Gutierrez); “SEA-5: Trends in Value-Added” (I. Ivaschenko); “SEA-5 Exports: Wind in the Sails from Global Growth?” (B. Lissovolik); “Are The SEA-5’s Exports Moving to Markets with Less Competition?” (M. Moreno-Badia); “The Role of Imports—Structural Shifts and Economic Benefits” (W. Schule); “Outsourcing and Competitiveness in Southern Europe” (S. Tokarick); and “Role of FDI in Boosting Productivity and Exports in SEA-5 Economies” (Y. Xiao).

This is similar to the approach taken by the EC’s Competitiveness Report (see European Commission (2007a and 2007b)).

Likewise, the expansion of FDI and international financial markets relaxes constraints on asset allocation and on the intertemporal reallocation of income and expenditure.

Real GDP, corrected for terms-of-trade effects, is computed by deflating exports with the import deflator rather than by their own deflator. Thus, TOT-adjusted GDP indicates the volume of goods and services that can be commanded by the goods and services produced by an economy (also called “command-basis GDP”)—a concept arguably more relevant to the measurement of living standards in open economies than conventional GDP.

Simple cross-country average of half the sum of exports plus imports in percent of GDP.

The national accounts statistics referring to Greece in this and accompanying papers are based on data available before the revisions announced by the National Statistical Service of Greece on October 2007.

Export growth and export market shares are widely used, including here, as a measure of success in external markets (ECB, 2005). These indicators, however, have limitations in the presence of regional trade expansion and changing trade patterns (see Bennett, 2008).

During this later period, however, Greece experienced a small loss of share in the combined goods and services export market. This apparently paradoxical result is due to the high weight of Greece’s exports of services relative to goods—while the latter make up most of world exports and were the fastest growing sector.

Rae and Sollie (2007) reach similar conclusions using a different methodology than the one employed in Chapter II by Lissovolik. Based on an analysis of revealed comparative advantage, it also documents the increased competition from emerging economies faced by southern European countries, particularly by Italy, Greece, and Portugal; and the weak (sometimes negative) correlation between SEA-5 exports and high-growth markets.

Goods, by product and destination country based on six-digit COMTRADE export data.

Weighted by the value of exports to each market.

Measured in each market as the export unit value relative to competitors, and aggregated according to the value of exports to that market.

Alternatively, an increase in relative unit values could also reflect losses in competitiveness and indicate that the country is in the process of being priced out of the market. Which hypothesis obtains is ultimately a factual matter. The interpretation of relative export unit values as indicating product quality is supported by the finding that higher export relative unit values are associated with market share gains (see Chapter IV by Fabrizio)—with this quality effect being even more significant than price competitiveness measured by the real effective exchange rate. The association between unit values and quality is also a common premise of recent trade literature (see Hallak and Schott, 2005).

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