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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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VI. Services Exports in SEA-5: Performance and Restructuring1

A. Introduction

Economic development is accompanied by increased specialization in services at the expense of industrial production. But while services account for over 60 percent of world production, they make up only 20 percent of world trade. International trade in services is limited by the nontradable nature of many services, which require physical interaction between producers and consumers. In addition, liberalization of trade in services has lagged with respect to liberalization of trade in goods. However, new technologies such as the internet facilitate the delivery of services, and increasing trade liberalization has created new opportunities for trade in services. Specialization in trade in services could result in improvements in the terms of trade; services prices typically grow faster than good prices and raises income as productivity in services exceeds productivity in manufacturing.

This section analyzes the pattern of trade in services specialization in the southern euro area five (SEA-5) countries and the performance of the sector during the last decade.2 In particular, it explores whether SEA-5 countries have improved their competitiveness by increasing their specialization in exports of fast growing sectors and markets and high value-added services. The section also analyzes the impact of increased trade in services on terms of trade and discusses the factors that could hamper further growth in exports of services.

The degree of specialization on services exports and the performance of the sector varied across the SEA-5 countries. Traditionally, these countries have been specialized in relatively low-growth and low-productivity sectors, such as tourism, which hampers services export growth. The best performers among the SEA-5, Greece and Spain, relied on a strong growth in the tourism sector and increasing specialization in fast growing and/or high value-added sectors—sea transport in the case of Greece and business services in the case of Spain. However, performance lagged behind that of some other countries in Europe (notably Ireland and some Nordic countries). Services market liberalization and increased research intensity in the services sectors would further increase productivity growth and improve export performance in these sectors.

B. Trade in Services Specialization and Performance in the SEA-5 Countries

The degree of specialization in trade in services and its evolution varies considerably across SEA-5 countries. Compared to the EU-15, Greece is clearly specialized in trade in services, and Italy and France are underspecialized according to a variety of indicators (Figure VI.1). France is the most service-intensive economy, as measured by the share of services value- added in total value-added; however, the low propensity to export services results in services trade underspecialization. In the case of Italy, both the size of the service sector in the economy and the propensity to export services are small compared to EU-15 countries while the opposite applies to Greece. Regarding the evolution in the degree of specialization, it only appears to have increased substantially in the case of Greece. All SEA-5 countries are relatively specialized in travel services (mostly tourism), Greece is specialized in transport services as well, and all countries are underspecialized in “other services,” which includes business and financial services.

Export of Services by Type, 2000-06

Sources: National Central Banks; and Eurostat.

Note: Data for EU 15 and Greece exclude 2006.

Figure VI.1:Specialization in Trade in Services

Sources: Eurostat; National Central Banks; and IMF, WEO.

Increased specialization in trade in services will result in a positive terms of trade shock as service sectors are typically more sheltered from competition due to trade and physical restrictions. Indeed the behavior of export deflators for goods and services in most countries confirm this hypothesis although with some exceptions; notably Italy, where export deflators for goods grew faster than in any of the other non-oil producing economies, as well as Greece and the U.S. in the recent period.

Selected Countries: Average Growth in Exports Deflators(euro terms)
ServicesGoods
1996–20062000–061996–20062000–06
SEA-5
France1%2%0%0%
Greece3%3%3%4%
Italy3%2%5%5%
Portugal3%3%1%1%
Spain3%4%2%2%
Other industrial countries
EU-152%2%1%1%
Finland1%2%-1%0%
Germany0%0%0%0%
Ireland4%4%1%0%
Norway5%6%9%13%
Sweden1%1%0%0%
United Kingdom4%2%1%0%
United States2%-1%2%1%
Source: Eurostat, National Accounts.

Services exports performance, as measured by market shares, varies greatly among the SEA-5 countries. Spain and Greece exploited their catch-up potential and increased their market share in total world imports of services while that of Portugal remained stable. The share of Italy and France declined over time, although other large European countries (U.K. and Germany) maintained or increased their market share. Indeed, growth rates of export services in Italy and France have lagged behind growth rates in most European countries. The strong growth in transport exports in Greece is the main factor behind the increase in market share, while in Spain exports of services other than transport and travel have grown strongly, contributing decisively to bring the Spanish service market share to a similar level to that of France or Italy. Total services export growth rates in Spain and Portugal compare favorably with growth rates in the EU-15 but are below growth rates in Ireland and the Nordics.

Market Share in World Imports of Services

Source: IMF, WEO.

Selected Countries: Average Growth in Services Exports(euro terms)
1996–20062000–06
ServicesTransportTravelOtherServicesTransportTravelOther
SEA-5
France4%3%5%4%3%2%4%4%
Greece15%76%15%-2%11%22%5%2%
Italy6%2%5%11%5%6%2%9%
Portugal8%10%6%11%7%13%4%9%
Spain10%11%7%15%8%10%5%14%
Other industrial countries
EU-158%6%6%11%7%4%4%10%
Finland9%4%4%16%14%4%4%25%
Germany8%6%6%8%8%7%7%8%
Ireland30%9%9%49%22%8%8%26%
Norway9%5%5%20%8%4%4%18%
Sweden12%10%10%15%11%10%10%13%
United Kingdom11%6%6%15%8%4%4%9%
United States7%4%4%6%3%1%1%4%
Sources: National Central Banks; and Eurostat.

C. Dynamic Sectors and Markets Services Exports

SEA-5 countries have not increased specialization in dynamic sectors. Increased specialization in sectors and markets with strong growth opportunities results in improved export performance for a given level of price competitiveness. Figure VI.2 reveals that the most dynamic services sectors (as measured per the increase in the share of world exports of services) include computer services, royalties, insurance and financial services, and sea transport. On the other hand, the less dynamic sectors include air and other transport, construction, and travel. SEA-5 countries tend to be specialized in the less dynamic sectors (sectors in the bottom quadrants in Figure VI.2), therefore curtailing their export growth potential. The only exception is Greece, which is specialized in sea transport. In general, SEA-5 countries have lost market share in high-growth services sectors, with exceptions (Greece increased its market share on exports of sea transport services and Spain on exports of financial sector services). Despite unfavorable specialization patterns, Spain and Portugal have improved their performance in most low-growth sectors (measured by the increase in the market share), while France has lost market share in those same sectors. Poor performance of Italian travel exports is the main factor behind the decline in the Italian market share in world imports of services.

Figure VI.2.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; and Eurostat.

* Data for Greece for 1996–2004.

Exports to dynamic markets such as India, China, and Russia do not appear to have grown significantly. Exports to OECD countries account for the bulk of services exports in all European countries, and the share has been stable. The only exception is France, where it declined by 6 percentage points from 2000–04. However, the share of exports to the most dynamic markets only increased by 1 percent during the period.

Share of French Services Exports to Fast Growing Countries

(Percent of total exports)

Sources: OECD; and Trade in Services by Partner.

Selected Countries: Services Exports to OECD(Share of total services exports)
20002001200220032004
SEA-5
France84%81%80%78%78%
Greece84%83%85%85%83%
Italy83%84%84%85%84%
Portugal91%90%90%91%90%
Spain93%93%92%93%93%
Other industrial countries
Germany87%86%87%86%85%
Irelandn.an.a79%83%81%
Finland72%73%71%74%72%
Sweden87%87%87%86%87%
United Kingdom79%78%79%78%77%
Sources: OECD; and Trade in Services by Partner Country.

D. Exports of Travel Services

As all SEA-5 countries are specialized in tourism, strong overall performance of services exports requires strong growth in travel services exports. Figure VI.2 shows that Greece and Spain increased their market share in world imports of travel services, France and Portugal maintained it, while it declined in Italy. Spain increased its share in the number of visitors while the average traveler expenditure increased considerably in Greece. Both the market share of visitors and the average expenditure declined in Italy.

Share on Internation Vistitiors

(Percent of total international visitors to the world)

Source: World Travel and Tourism Council.

Average Traveler Expenditure

(Percent of world average)

Source: World Travel and Tourism Council.

Poor tourism export performance in Italy can be explained by structural factors. The travel and tourism competitiveness index published by the World Economic Forum, highly correlated both with the number of visitors and the average expenditure for visitor, found that Italy ranked lowest among the Mediterranean EU countries. Restrictions to foreign ownership and participation on the sector, poor railroad and port infrastructure, low level of professional qualification among sector employees, and lack of government policies prioritizing the sector are the main factors driving down Italy’s rank.

The Travel and Tourism Competitiveness Index, 2007
Overall indexRegulatory

framework
Bussines

environment and

infrastructure
Human cultural

and natural

resources
SEA-5
France1213528
Greece24203215
Italy33423032
Spain1525719
Portugal22112230
Other countries
Croatia38584011
Cyprus2029233
Czech Republic35403722
Malta26233121
Turkey52536348
Source: World Economic Forum.

E. Exports of High Value-Added Services

SEA-5 countries are not specialized in high-value added sectors, with the exception of Greece. Restructuring production towards high productivity sectors raises the competitiveness of the economy, which in the long run is associated with productivity. Data from Klems database indicates that high productivity services, measured by nominal value-added per worker, include insurance and financial sector activities; computer and communication services; business services such as leasing, legal technical, and advertising; and water and air transport. By and large, these sectors are also the most dynamic, discussed in the previous section, except for communication and business services. Overall, only Greece is specialized in high value-added sectors, thanks to the importance of sea transport. All SEA-5 countries increased their market share in communications, and only France and Greece lost market share in other business services (Figure VI.2).

High Value-Added Exports as Share of GDP, 2005

Sources: Eurostat; and National Central Banks.

In the last decade, SEA-5 countries (with the exception of Greece) have restructured their exports towards these high valued-added services at a lower pace than the EU-15, as indicated by the increase in the share of exports of high value-added services on GDP. However, Greece specialized in high value-added transport services at the expense of reducing its specialization in financial and other business services. Among the rest of the SEA-5 countries, Spain and Portugal increase their specialization on high value-added services by more than France mostly due to their better performance in other business services, which include marketing, legal, and advertising activities. While the performance of Italy in this sector was comparable to that of Portugal and Spain, the decline in services of sea transport exports explains the overall worse performance.

Evolution of Specialization in High Value-Added Sectors(Increase in services exports in percentage points of GDP, 1996–2005)
TotalFinancial

services
InsuranceCommuni

cations
Computer servicesOther

business
Air

transport
Water

transport
SEA-5
Greece3.4-0.70.10.1-0.2-1.70.15.6
Spain1.10.1-0.10.00.10.80.2-0.1
France0.2-0.10.00.10.0-0.10.00.2
Italy0.5-0.10.00.10.00.80.2-0.4
Portugal1.1-0.10.00.10.00.80.20.0
Other countries
EU-152.00.40.00.10.40.80.10.3
Germany1.50.10.00.00.20.70.10.4
Ireland22.32.74.20.19.25.9-0.40.7
Finland5.00.30.10.30.73.40.00.1
Sweden1.90.9-0.20.10.30.7-0.20.2
United Kingdom0.30.1-0.20.00.20.9-0.1-0.6
Sources: National Central Banks; and Eurostat.

Structural reforms are needed to boost productivity and enhance export performance in high-value added sectors. Higher productivity growth rates are associated with higher export growth rates in high value-added services for the countries in our sample. Thus, restructuring towards these sectors will require faster productivity growth in the SEA-5 countries vis-à-vis other European countries. Structural reforms to liberalize these sectors would help boost productivity.3 While the investment rate in these sectors in the SEA-5 countries compares favorably with that of countries with better export performance, lower R&D intensity could also help explain the lower productivity.

Productivity and Export Growth Rates in High-Value Added Sectors in European Countries*

(Average growth rate, 1996-2005)

Source: Klems

*Greece, Spain, France, Italy, Portugal, Germany, Ireland, Sweeden, and the U.K.

Selected Countries: Total Investment and R&D Expenditures(Average, 1991–2003)
Gross fixed

capital
R&D Intensity (Ratio of R&D expenditures to

production, percent) 1/
Total

business

services 2/
Transport

and

storage
Post and

comuni

cations
Financial

interme

diation
Other

business

activities
(Percent of GDP)
France10.20.01.6n.a0.2
Italy8.10.00.10.10.1
Spain10.30.00.70.00.3
Finland9.40.12.7n.a0.3
Norway7.70.01.00.40.9
Sweeden7.30.01.60.70.1
Source: OECD, Stan database.
References

Prepared by Eva Gutiérrez.

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

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