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Competitiveness in the Southern Euro Area: France, Greece, Italy, Portugal, and Spain

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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IV. Are the Southern euro area Countries Advancing in the Search for New and Better Products?1

A. Introduction

Globalization is posing major challenges to the southern euro area (SEA-5) countries2—new products of better quality can be an alternative to increase their competitiveness. In this context, the main finding of this chapter is that product quality has not shown a marked improvement over the last decade. This slow progress appears associated with a loss of market share.

The importance of product quality in international trade has been extensively documented in the recent theoretical and empirical literature. As countries become richer, their consumers tend to demand not only more goods but also goods of better quality. Copeland and Kotwal (1996, p. 1,746) emphasize this point, “…it is the quality of a differentiated good that responds to an income change: richer people buy fancier cars rather than more cars.” Hummels and Klenow (1995) find that within product categories, richer countries export higher quantities at modestly higher prices. This, they infer, implies that rich countries sell higher quality products. At the same time, Hallack (2006) finds that rich countries tend to import relatively more from countries that produce higher quality goods. Therefore, improving exports’ quality, which, to some extent, is associated with technology upgrading, is crucial for export competitiveness. In this context, using a sample of 54 countries, covering almost 94 percent of world trade, Fabrizio, Igan, and Mody (2007) show that, controlling for the initial market share and the initial quality, an increase of export quality helps expand market share with, as one can expected, diminishing returns.

In this context, this chapter analyzes the evolution of these countries’ export structure from different angles, focusing particularly on technology and quality upgrading. The export structure is analyzed using six-digit data for export of manufacturing goods from COMTRADE (a description of the data and methodologies is reported in the Appendix), which implies a breakdown of exports into more than 4,000 differentiated product categories on average per country per year. This chapter assesses to what extent SEA-5 countries’ exports have been subject to a shift in composition, quality, and technology intensity during the period 1994–2005, and if there is the scope for further enhancing the relative sophistication of their exports.

The empirical analysis shows that the export structure of the SEA-5 countries changed over the last decade. Greece and Portugal, which had the highest export concentration in a few sectors in mid-1990s, diversified their export substantially between 1994 and 2005, while Italy and France, whose exports were more diversified at the beginning of the period. Spain, which had already diversified its export before 1994, as it joined the European Union, maintained broadly the same level of diversification. In general, countries tended to shift away from textile to chemicals and fabricated metals.

SEA-5 countries also moved up the technology ladder. SEA-5 countries upgraded export technology over the past decade, with the exception of Spain, which presented already a relative high degree of technology content during the second half of the 1990s and broadly maintained the same share of low- medium low-tech exports during 2000–05. Technology upgrading was particularly rapid in Greece and Portugal, the exports of which were mostly of a low-tech content in the mid-1990s. Although technology tends to improve together with quality, this is not always the case. Moreover, when considered together with quality upgrading as possible determinants of competitiveness, the primary factor in gaining market share appears to be quality improvement (Fabrizio, Igan, and Mody, 2007).

But improvements in export quality were limited. SEA-5 countries did not increase their export quality relative to their main competitors, the other European Union (EU-15) countries, over the last decade, although they improved it somewhat relative to the pool of other competitors. Furthermore, quality did not increase for goods with higher potential. Looking to the extent at which new products have affected the overall relative quality of exports, the results suggest that Greece, Portugal, and Spain and, to a lesser degree, Italy shifted to products of higher quality than the goods traditionally exported, while France moved to products of slightly lower quality. At the same time, these countries discontinued products of relatively higher quality, and, comparing the contribution to overall quality of newly exported goods with that of products discontinued during the period under consideration, only for Greece and Portugal does the change in export structure appears to have been favorable during 1994–2005.

The rest of this chapter is organized as follows. Section B studies the evolution of exports by industry. Section C presents the results of the analysis of technology and the quality of exports. Section D concludes.

B. Did the Export Structure of SEA-5 Countries Evolve Over the Last Decade?

Export structure by industry changed during 1994–2005; in particular, in countries with an initial high concentration in a few sectors. Though export structure differs across SEA-5 countries, some similarities in the evolution of this structure can be identified (Figure IV.1). With the exception of France, all countries increased their proportion of exports of chemical and chemical products, which have became an important share of their manufacturing exports. The export share of basic and fabricated metals also increased in Greece, Italy, and Portugal. While exports of food, beverages, and tobacco increased in Portugal, Spain, and Italy, they declined substantially in Greece and France. All SEA-5 countries, but Spain, saw their textile exports dwindle.

Figure IV.1.Has the Structure of Exports of Manufacturing Products Changed? Share of Nominal Exports of Manufacturing Products by Industry, 1994–2005

A- food, beverage; and tobacco; B - textiles and textile products; C - leather and leather products; D - wood and wood products; E - paper and paper products; G - chemicals and chemical products; H - rubber and plastic products; I - other and plastic mineral products; J - basic metals and fabricated metal products; K - machinery and equipment nor elsewhere classified; L - electrical and optical equipment; M - transport equipment; N - not elesewhere classified.

Sources: COMTRADE; and IMF staff calculations.

The change in export structure translated in a higher diversification of exports for some countries. Greece and Portugal (Table IV.1), which had the highest concentration in a few sectors in the mid-1990s (namely, textile in both countries and food and beverages in Greece) diversified substantially their export, as measured by the Herfindahl index.3 Spain also had a high concentration of exports in a few sectors in the mid-1990s, with transport equipment and food and beverages representing more than 40 percent of manufacturing exports, but its export structure did not diversify much over the last decade. France and Italy, which presented the lowest concentration in the mid-1990s, maintained, or slightly reduced, export diversification, following the evolution of export of group of the EU-15 countries.

Table IV.1.Diversification of Exports of Manufacturing Products, 1994–2005

(Herfindahl index) 1/

199419951996199719981999200020012002200320042005
France0.140.130.140.140.140.150.140.150.150.150.150.16
Italy0.110.110.110.110.110.110.110.110.110.110.110.12
Greece0.240.220.200.190.190.180.160.160.160.160.160.15
Portugal0.160.140.140.130.130.130.110.120.110.110.100.11
Spain0.160.160.160.160.160.160.150.150.150.150.150.16
EU-150.120.120.120.120.120.130.130.130.130.130.140.14
Sources: COMTRADE; and IMF staff calculations.

C. Have the Product Quality and the Technological Intensity of Exports Increased?

While the pace and timing of the shift once again varied across countries, technology changes also occurred. All SEA-5 countries, but Spain, experienced a shift from low-tech to higher-tech exports (Figure IV.2). Technology upgrading was impressive in Greece and Portugal, which presented a high concentration of low-tech export in the mid-1990s, 50 percent and 41 percent, respectively. The share of high-tech products increased, although at different pace, in all countries, while the direction of change in medium low- and medium high-tech export varied across countries.

Figure IV.2.To What Extent SEA-5 Countries Have Experienced Technology Upgrading? Shares of Nominal Exports of Manufacturing Products by Technology Intensity, 1994–2005

High technology—aerospace, computers, office machinery, electronics-communications, and pharmaceuticals.

Medium-high technology—scientific instruments, motor vehicles, electrical machinery, chemicals, other transport equipment, nonelectrical machinery.

Medium-low technology—rubber and plastic products, shipduilding, other manufacturing, nonferrous metals, nonmetallic minaral products, fabricated metal products, and ferrous metals.

Low technology—paper printing, textile and clothing, food, beverages, and tabacco, wood and furniture.

Sources: COMTRADE; and IMF staff calculations.

Turning to export quality, the unit value of a country’s exports relative to the unit value of competitors’ exports is used to measure quality. The unit value of each product that a specific country exports is calculated by dividing the export value by the quantity. Then, the competitors’ unit value for the same basket of goods is calculated. The country’s unit value for each product in the basket is then divided by the competitors’ unit value for the corresponding product. Finally, the product unit value ratios are aggregated into a single unit value ratio (UVR), using the weights of each product in the overall exports of the country. The reported UVR takes the logarithm of this ratio. The basic idea of this measure is that consumers will be willing to pay more for the same product if they perceive it to be of better quality. Although the UVR is extensively used in the literature as a proxy of product quality on the premise that a higher price reflects higher quality, caution must be applied in interpreting results, as concerns remain that the UVR can pick up other influences, in particular if monopolies exist and competition does not arbitrate away differences in quality-adjusted prices.4

Market Shares of World Import of Manufacturing Products in Nominal Terms, 1994-2005

(Index, 1994=100; right scale= China; left scale=other countries)

Sources: COMTRADE; and IMF staff calculations.

Quality improvements in SEA-5 countries’ exports have been limited, and market shares have declined. Findings suggest that SEA-5 countries did not increase their export quality relative to their main competitors, the other EU-15 countries, between 1994 and 2005 (Figure IV.3), although they moved a little bit ahead of the pool of other competitors in the world on the quality ladder (Figure IV.4).

Figure IV.3.Are SEA-5 Countries Upgrading the Quality of Their Exports? Unit Value Ratios (in logarithms) Relative to EU-15 Competitors 1/

Sources: COMTRADE; and IMF staff calculations.

1/ The unit value (UV) of each product that a specific country exports is calculated by dividing the trade value by the quantity. Then, the competitors’ UV are calculated for the same basket of goods. The country’s UV for each product in the basket is then divided by the competitors’ unit value for the corresponding product. Finally, these product UVRs are aggregated into a single UVR, using the w eights of each product in the overall exports of the country. The reported UVRs are the logarithm of this ratio. Hence, a negative UVR corresponds to a quality low er than comparators’ standards.

2/ Bulgaria, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Romenia, Slovak Republic, and Slovenia.

Figure IV.4.Are SEA-5 Countries Upgrading the Quality of Their Exports? Unit Value Ratios (in logarithms) Relative to The World Competitors 1/2/

Sources: COMTRADE; and IMF staff calculations.

1/ UVRs are calculated as indicated in footnote 1 of Figure IV.3.

2/ U.S. is excluded from the pool of world competitors, because the UVR appears to be affected by the exchange rate, in particular, during the period 2000–04.

The limited upgrading in quality would partly explain the loss of market shares experienced by these countries since the mid-1990s. In this regard, a panel data analysis performed for the SEA-5 countries suggests that recent broad findings in the empirical literature apply also to these countries.5 Specifically, countries benefit from higher product quality when trading in international markets (Hallak, 2006; Dulleck and others, 2005; Fabrizio, Igan, and Mody, 2007). The results are reported in Table IV.2. Controlling for the initial market share, both higher6 starting product quality and quality upgrading have been important determinants of market share changes for SEA-5 countries over the last decade.

Table IV.2.SEA-5 Countries: Does Quality Help Increase Competitiveness?
Ratio of end-of-period market share to

beginning-of-period share
(1)(2)(3)
Initial share-0.15

(0.34)
-0.42

(0.24)
-0.49

(0.25)*
Initial UVR0.92

(0.94)
3.31

(0.92)***
3.29

(0.85)***
UVR change2.66

(0.56)***
2.58

(0.53)***
REER change-0.14

(0.26)
Observations151515
Number of countries555
R -squared0.110.590.61
Notes: Standard errors in brackets: * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. All variables are in logarithms

Furthermore, quality did not increase for goods with higher potential. As presumably quality matters more for some products than for others, it is relevant to analyze whether SEA-5 countries have improved quality for goods for which there is more scope to increase quality. Following Rauch (1999), who identifies the degree to which product varieties are differentiated within a product group, we classified goods into three categories, reflecting the differences in their price-setting mechanisms. Differentiated products, which do not have well-defined product standards and are not traded on specialized exchanges, and carry the largest potential for quality variation (e.g., soya sauce). Reference-priced products, which have referable standards with reference prices available in specialized publications, allow for quality variation but less so than for differentiated goods (e.g., soya bean flour). Homogenous products, which have clearly defined standards and/or are internationally traded on organized exchanges, have smallest potential variation in quality, e.g., soya beans, (see the Appendix for details). The results suggest that, compared to the other EU-15 countries, SEA-5 countries slightly deteriorated the quality of differentiated products between 1994 and 2005, the goods with higher potential, while they somewhat improved it for homogeneous products, for which there is a more limited scope for price differentials (Figure IV.5). New products helped maintain higher overall quality of exports in four countries out of five. The export structure of SEA-5 countries changed over the last decade, which could imply that either the export of some products increased/decreased or that these countries have started to export new products/discontinued the exports of other products (or both). Hence, the question is, To what extent did the change in export structure help increase the overall relative quality of exports of the SEA-5 countries? Comparing the quality of “traditional” products (goods exported since the beginning of the period) with that of the new goods, Greece, Portugal, Italy, and Spain shifted to products of higher quality than the goods traditionally exported, while France moved to products of slightly lower quality (Figure IV.6). At the same time, all countries, but France, discontinued the export of products that also had better quality than the traditional goods.

Figure IV.5.Have SEA-5 Countries Increased the Quality of Their Export in Sectors with High Potential? UVRs According to Potential Quality Differentiation, 1994–2005 1/

Sources: COMTRADE; and IMF staff calculations.

1/ UVRs relative to EU-15 competitors and calculated as indicated in footnote 1 of Figure IV.3.

Figure IV.6.Have Exports Shifted to Higher Quality Products? Quality (UVRs) by Products 1/2/

Sources: COMTRADE; and IMF staff calculations.

1/ UVRs are calculated as indicated in footnote 1 of Figure IV.3. In the comparison, it is important to consider that the overall quality of exports depends on the quality of the products as well as on their weight in the export basket. As such, not only quality but also quantity matters of the single product to determine the overall quality of exports.

2/ Unit value ratios relative to EU-15 competitors.

But the shift in export structure from goods, discontinued during 1995–2005, to new products was not always favorable. Comparing the contribution to overall quality in 1994 (at the beginning of the sample period) of products the export of which was discontinued during 1995–2005 with the contribution to overall quality of new products by the end of the sample, only for Greece and, to a lesser extent, Portugal does the switch in export appear to have been favorable (Figure IV.7).7 Regarding France, the fact that the country discontinued products of lower quality than that of new goods, but both kinds of products had lower quality than the traditional goods, would suggest that the overall quality of its export could have been even worse if the country had maintained the structure of export as in 1994.

Figure IV.7.Quality of Discontinued Products Vis-a-Vis Quality of New Products, 1994 and 2005

Sources: COMTRADE; and IMF staff calculations.

D. Conclusions

Are the SEA-5 countries advancing in exporting higher value products? The evidence is mixed. SEA-5 countries are making progress. The export structure has changed, and the countries with higher concentration in a few sectors, are diversifying their exports, although the switch in production has not been always favorable in terms of adding to overall quality. SEA-5 countries, at different pace, have also moved up to the technology ladder. However, not much progress was made in upgrading quality of exports, in particular vis-à-vis their main competitors, the other EU-15 countries. Furthermore, quality has increased more for goods with a limited scope for price differentials than for goods with higher potential.

Looking ahead, the task is clear but challenging. An alternative way to remain competitive is to produce new products of better quality, and the empirical evidence suggests that SEA-5 countries have room for upgrading their products. However, as technology and quality competition becomes stronger, the task will become harder. Therefore, continued policy efforts to raise productivity will also be needed.

Appendix IV.A

The Appendix reports on the data sources, industry taxonomies, construction of the UVR, and selected products under the Rauch classification of goods.

Data sources

The trade data are from the UN Comtrade database and consist the trade values and quantities of export flows. The export data are at the six-digit product level, according to the Harmonized System (HS) classification. For each product, an observation consists of the country of origin, time, trade value in dollars, quantity, and units in which the quantity is expressed.

Construction of variables

We construct measures of technology and quality change at the country level using the detailed trade data at the product level. As in similar studies, the sample of products is limited to those of the manufacturing sectors. We use the Classification of Economic Activities in the European Community (NACE). Manufactures of coke products, refined petroleum products, and nuclear fuel are excluded from the analysis.

The technology content of products is based on the taxonomy provided by Hatzichronoglou (1997). Products are classified into four groups: high technology, medium-high technology, medium-low technology, and low technology. This classification is based on a cutoff procedure using R&D intensities in select OECD economies in two-digit International Standard Industrial Classification (ISIC) product categories.

The measure of product quality is the relative unit value of a country’s exports with respect to the unit value of competitors’ exports to a given market. Referred to as the “unit value ratio (UVR)” and commonly used in the trade literature, this concept of measuring quality by relative unit value has its basis in the idea that consumers would be willing to pay more for the same product if they perceive it to be of better quality.

We first calculate the unit value of each product that a specific country exports by dividing the trade value by the quantity. Then, we calculate the competitors’ unit value for the same basket of goods. We then divide the country’s unit value for each product in the basket by the competitors’ unit value for the corresponding products. Finally, we aggregate these product unit value ratios into a single unit value ratio, using the weights of each product in the overall exports of the country. The reported UVR takes the logarithm of this ratio. Hence, a negative UVR corresponds to a quality lower than world standard.

Note: First, to calculate the UVR, we considered quantities expressed in the same units across the sample of countries. Second, the weights used in aggregating the country’s product unit values change as the export composition changes. Hence, the aggregated unit value reflects not only the quality but also the composition of exports. Third, the UVRs are calculated considering three groups of products. Products that appear consistently in a country’s export basket (products that the country has been exporting on a continuous basis, “traditional” exports). Products that appear at the beginning of the period and present at least two consecutive observations afterward (products the export of which has discontinued). And products that appear at the end of the period and for which there are at least two consecutive observations prior 2005 (new products that the country has started to export during the sample period). Finally, market shares are calculated using the whole basket of goods.

Following Rauch (1999), we classify goods into three categories, reflecting the differences in their price-setting mechanisms: 1) differentiated products do not have well-defined product standards and are not traded on specialized exchanges. They carry the largest potential for quality variation; 2) reference-priced products are goods that have referable standards with reference prices that are available in specialized publications; however, they are not traded on organized exchanges. Quality variation is possible but less so than for differentiated goods; and 3) homogenous products are goods that have clearly defined standards and/or are internationally traded on organized exchanges. Hence, they have well-defined prices and the smallest potential variation in quality.

Partial List of Products in Rauch Classification
DifferentiatedReference PeriodHomogenous
Soya sauceSoya bean flour and mealCoffee, not roasted nor decaffeinated
Vitamins and their derivativesTar distilled from coal or ligniteBarley
Beauty, make-up, skincarePropane, liquefiedRice in the husk (paddy or rough)
Artificial waxesMercurySoya beans
Chemical preparations for photographySulphates of copperCrude soya-bean oil
Activated carbonMethanol (methyl alcohol)Raw cane sugar, in solid form
Prepared rubber acceleratorsIonones and methyliononesRaw beet sugar, in solid form
Articles of apparel and clothing accessoriesVaccines for human medicineCocoa beans, whole or broken, raw
Vulcanized rubber thread and cordPlates of polymers of ethyleneTobacco, not stemmed/stripped
Hygienic or pharmaceutical articlesCellulose and its chemical derivativesOres and concentrates
Articles of apparel of leatherMedicaments of alkaloids or derivativesLignite, not agglomerated
Wooden frames for painting and photographsGummed or adhesive paperPetroleum oils and oils
Textile wall coveringsWoven fabrics of cottonCarbon
Articles of gold or silversmithWoven fabrics of synthetic fibersAluminum oxide, other than artificial
Flanges, stainless steelAsphalt or similar material articleNatural rubber latex, in primary form
Chain, roller, iron or steelFerro-alloysLatex of synthetic rubber
Table knives having fixed bladesFlat-rolled products of stainless steelCotton, not carded or combed
Carbon or graphite electrodesRails, iron or steelWood in rough form
Electrical insulatorsPipes and tubes, copper-zinc baseDiamonds unsorted whether worked or not
Rail locomotivesChain and parts thereof of copperSilver in unwrought forms
AutomobilesPlates, sheet, strip and foil, nickelGold in unwrought forms, nonmonetary
Aircraft undercarriages and partsFoil, aluminumPlatinum, in unwrought or in powder forms
Optical devices, appliances, and instrumentsTin bars, rods, profiles and wireIron, unrefined
Clocks and watchesMolybdenum and articles thereofCopper-zinc base alloys, unwrought
Ballpoint pensMagnesium and articles thereofNickel, unwrought, not alloyed
Playing cardsNickel-iron electric accumulatorsPowders, molybdenum
Magnesium
1/ See Rauch (1999).
References

Prepared by Stefania Fabrizio.

SEA-5 countries comprise France, Greece, Italy, Portugal, and Spain.

The Herfindhal index is calculated as the sum of the squares of the shares of exports of each industry. The index ranges in value from 0 (in the case of very diversified exports) to 1 (if the exports are concentrated in only one sector).

See Fabrizio, Igan, and Mody (2007) for a more detailed discussion about the limitations of using UVR as proxy for product quality.

The results should be considered with caution, given the limited number of observations available.

Findings for 2005 should be interpreted with caution, as COMTRADE data for that year are still very preliminary.

In the comparison, it is important to consider that the overall quality of exports depends on the quality of the products as well as on their weight in the export basket. As such, not only quality but also quantity matters of the single product to determine the overall quality of exports.

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