Abstract
This paper analyzes a broad range of price and nonprice indicators to assess developments in the international competitiveness of the French economy during the 1980s and early 1990s. The paper provides a brief review of conceptual issues concerning the competitiveness indicators used in this study. Developments in conventional price- and cost-based indicators, both at the aggregate and bilateral levels, are reported. The paper discusses additional price- and quantity-based measures of competitiveness, and also examines the labor market dynamics and economic policy of France.
I. Competitiveness and Trade Performance 1/
This study analyzes a broad range of price and nonprice indicators to assess developments in the international competitiveness of the French economy during the 1980s and early 1990s. Section I provides a brief review of conceptual issues concerning the competitiveness indicators used in this assessment. Developments in conventional price-and cost-based indicators, both at the aggregate and bilateral levels, are reported in Section 2. Section 3 discusses additional price- and quantity-based measures of competitiveness. Section 4 examines aspects of the export performance of the French manufacturing sector in the past 15 years, while Section 5 offers some concluding remarks.
1. Competitiveness indicators: conceptual issues
The indicators of competitiveness examined below are indices of real effective exchange rates based on value added deflators, export unit values, and unit labor costs in the manufacturing sector, and the real exchange rate based on consumer price indices (CPIs). Also considered are internal price competitiveness indicators, import penetration ratios, and relative profitability indices in the manufacturing sector.
As is well known, these indicators provide valuable information on external competitiveness. Each of them, however, suffers also from a number of conceptual and practical limitations. 2/ For instance, indices based on relative export prices have two major limitations: unit values are highly sensitive to changes in the composition of exports, and the pressure of international competition will tend to limit differences in export prices across countries. Thus, this indicator would not reveal whether a squeeze of profits might weaken exports in the future. The real exchange rate index based on value-added deflators for manufacturing provides a relevant indicator of competitiveness if goods are not homogeneous, but movements in the index may also reflect shifts in demand preferences rather than changes in competitiveness. Real exchange rate indicators based on consumer prices can be prepared in a timely fashion because data are often readily available, but they may provide biased signals of international competitiveness because CPIs are heavily weighted with nontradable goods.
The use of indices based on unit labor costs provides useful indications on cost developments, but limitations apply also to this indicator. Available data on unit labor costs in manufacturing encompass only the cost of labor services that are incurred directly in manufacturing, and therefore exclude the cost of other important labor inputs used in producing manufactured goods. These excluded costs may be in the form of labor from the services sector (such as marketing and advertisement services) as well as other indirect labor costs embodied in the intermediate inputs needed for producing manufactures. Thus, for a relative unit labor cost index for manufacturing to be a good indicator of the capacity of the manufacturing sector to compete internationally, the share of direct labor costs in total production costs of manufactured goods must be relatively similar across countries. In addition, relative changes in non-labor costs per unit of output have to be the same as movements in relative unit labor costs. In practice, of course, these conditions are unlikely to hold. Capital intensity differs across countries, and few measures of labor costs allow for such differences.
Profitability-based measures of competitiveness are a valuable analytical tool, but they are also subject to a variety of limitations. In particular, relative profit margins may not provide reliable indicators of developments in rates of return on capital if there are significant differences in technology across countries: profits per unit of output may fall relative to competitors but, if capital used per unit of output falls even more, profits will increase faster than for competitors. A shift to more capital-intensive sectors may tend to push up the value-added deflator beyond any rise in unit labor costs, even though no individual sector has become more profitable. Furthermore, as indicated earlier, labor costs are only one factor affecting total production costs and thus profitability; non-labor costs (such as material input costs) may represent an important component--whose evolution may distort profitability indices. Finally, changes in import penetration ratios may reflect a variety of structural factors (such as changes in the degree of openness of the economy) rather than changes in competitiveness as such.
2. Conventional price- and cost-based indicators
Price- and cost-based indicators for manufacturing and the CPI-based real exchange rate are the most frequently used measures of competitiveness. 1/ This section begins by examining the behavior of aggregate indices, and then turns to an analysis of real exchange rate developments with respect to France’s main trading partners.
a. Aggregate indices
Chart 1 displays the behavior of five measures of price- and cost-based competitiveness indicators. These indicators consist of indices of real effective exchange rates based on value added deflators, export unit values, unit labor costs, and normalized unit labor costs in the manufacturing sector, and the CPI-based real effective exchange rate. In each case foreign prices and costs are calculated on the basis of a weighted basket of 20 industrial countries, which includes France’s main competitors. 1/ (Nominal exchange rate movements are shown in Chart 2, while Chart 3 illustrates developments in CPI inflation in France and its major trading partners).
France: Real Effective Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, Research Department; IMF, Information Notice System.1/ Against the currencies of 20 industrial countries as described in International Financial Statistics. An increase indicates a real appreciation of the franc.France: Real Effective Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, Research Department; IMF, Information Notice System.1/ Against the currencies of 20 industrial countries as described in International Financial Statistics. An increase indicates a real appreciation of the franc.France: Real Effective Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, Research Department; IMF, Information Notice System.1/ Against the currencies of 20 industrial countries as described in International Financial Statistics. An increase indicates a real appreciation of the franc.
France: Foreign Currency per French Franc 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics.1/ An increase indicates an appreciation of the franc.France: Foreign Currency per French Franc 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics.1/ An increase indicates an appreciation of the franc.France: Foreign Currency per French Franc 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics.1/ An increase indicates an appreciation of the franc.
Consumer Price Inflation, Major Industrial Countries
(four quarter change, in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics.Consumer Price Inflation, Major Industrial Countries
(four quarter change, in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics.Consumer Price Inflation, Major Industrial Countries
(four quarter change, in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics.All indicators show that the period of dollar strength in the early 1980s allowed France to improve significantly its competitiveness. However, between 1985 and 1987, the nominal depreciation of the U.S. dollar and higher wage and price inflation in France than in some of its major industrial partners led to a steady loss in competitiveness, broadly offsetting the earlier improvement.
Between 1987 and early 1989, the combination of a stable exchange rate, and moderate wage settlements and low inflation in France led to significant gains in competitiveness (as measured, in particular, by unit labor costs). These gains were partly reversed in late 1989 and 1990, notably as a result of a nominal appreciation of the franc relative to the U.S. dollar. But competitiveness improved in 1991, as the franc fell vis-à-vis the dollar and the yen.
During 1992, overall competitiveness of the French manufacturing sector deteriorated, as a result of two factors. First, as discussed below, some of France’s trading partners within the European Union either left the ERM and witnessed a large depreciation of their currencies, or devalued after the exchange rate crisis of September 1992. Second, a marked slowdown in productivity growth in France led to a significant increase in unit labor costs in manufacturing relative to major partner countries.
In 1993, competitiveness of the French manufacturing industry improved somewhat as a result of more moderate increases in unit labor costs and domestic prices in France relative to its major partner countries, and the fact that exporters of countries with depreciating currencies (Italy, Spain and United Kingdom) used the exchange rate adjustments to rebuild profit margins. During 1994 the franc appreciated significantly in nominal terms against the dollar, the lira, and the peseta. However, continued low wage and price inflation France kept the real effective appreciation (based on CPIs and normalized unit labor costs) small in 1994. In early 1995 the franc appreciated significantly in nominal terms against the dollar and depreciated against the yen, but these movements were subsequently reversed in the second and third quarters of the year. Favorable price developments have also contributed to maintaining the real effective exchange rate, based on consumer prices, at a broadly unchanged level in the first semester of 1995. Overall, external competitiveness has remained broadly stable since the late 1980s and has slightly improved since the early 1980s.
b. Bilateral indices
Chart 4 shows bilateral real exchange rates between France and its main trading partners. With respect to the United States, no clear trend emerged following the sharp nominal appreciation and loss in competitiveness registered between 1985 and 1987 which offset earlier gains. Competitiveness vis-à-vis the United States has been broadly unchanged in the past ten years. Movements in competitiveness indicators relative to the Japanese yen (which closely mimic movements in the bilateral nominal exchange rate) suggest that competitiveness of the French manufacturing sector improved in a more or less sustained manner since the early 1980s until 1988. It deteriorated in 1989 because of the weakening of the yen, but improved sharply in the early 1990s, as the yen resumed its strong rise. In all, the French franc depreciated by 30-50 percent in real terms vis-à-vis the yen since 1980.
France: Bilateral Real Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics; IMF, Reseach Department.1/ An increase indicates a real appreciation of the franc.France: Bilateral Real Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics; IMF, Reseach Department.1/ An increase indicates a real appreciation of the franc.France: Bilateral Real Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics; IMF, Reseach Department.1/ An increase indicates a real appreciation of the franc.France: Bilateral Real Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics; IMF, Reseach Department.1/ An increase indicates a real appreciation of the franc.France: Bilateral Real Exchange Rates 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, International Financial Statistics; IMF, Reseach Department.1/ An increase indicates a real appreciation of the franc.Competitiveness relative to Germany remained unchanged between 1982 and 1986, but improved continuously thereafter. This improvement reflected mainly lower wage and price inflation in France. Based on relative consumer prices, the total gain in competitiveness since 1986 was about 10 percent, while a larger improvement (of the order of 20 percent) is indicated by movements in unit labor costs.
Relative to the United Kingdom, competitiveness deteriorated sharply in 1985-86 but improved equally markedly in 1987-88. Both episodes reflected mainly changes in the nominal exchange rate. There was a modest improvement in competitiveness vis-à-vis the United Kingdom in 1990-91--when sterling was part of the ERM--as inflation in France continued to be lower. The 20 percent appreciation of the franc against pound sterling since 1992, has led to a deterioration in competitiveness of about 10 percent.
Sizable gains in competitiveness were registered vis-à-vis Italy and Spain in the late 1980s and early 1990s due to more favorable price and cost developments in France. Between 1987 and 1991, unit labor costs in France grew only by 1.5 percent, whereas in Spain, for instance, they rose by 22 percent. Following a period of intense pressure in exchange markets, Italy left the ERM and floated the lira on September 17, 1992, whereas Spain devalued the peseta in September 1992 and again in November 1992. As a result, the franc appreciated sharply in real terms against the Italian lira and the Spanish peseta. The turmoil in currency markets in mid-1993 and early 1995 and the associated weakening of the lira and devaluation of the peseta led to further losses in competitiveness with respect to Italy and Spain. In all, the real appreciation of the franc in 1993-95 with respect to the Spanish peseta and the Italian lira broadly offset the large gains in competitiveness during the second half of the 1980s.
3. Other indicators
Three additional indicators of competitiveness of the French economy are discussed in this section: measures of internal price competitiveness, import penetration ratios, and relative profitability indices.
a. Internal price competitiveness
Internal price competitiveness can be measured by the ratio of import prices over prices of domestic production. Chart 5 shows three aggregate indices of this type for the manufacturing sector as a whole, whereas Chart 6 displays the evolution of internal price competitiveness for different categories of manufactured goods. The first observation is that all indices appear to be significantly less variable over time than the conventional price- and cost-based indicators of competitiveness discussed earlier. This pattern may reflect a “pricing to market” strategy by foreign suppliers (as discussed below in Section 4), which would tend to dampen the response of France’s import prices--or foreign competitors’ export prices, measured in domestic currency--to changes in competitiveness.
France: Internal Price Competiveness in Manufacturing 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE, Direction de la Prévision, and O.E.C.D.1/ Internal competitiveness is measured by the ratio of import prices over domestic prices in manufacturing. A decrease indicates a loss in competitiveness.2/ Adjusted for the price of raw materials.3/ Index of import unit values over domestic demand deflator for manufacturing (see Durand et al., 1992).France: Internal Price Competiveness in Manufacturing 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE, Direction de la Prévision, and O.E.C.D.1/ Internal competitiveness is measured by the ratio of import prices over domestic prices in manufacturing. A decrease indicates a loss in competitiveness.2/ Adjusted for the price of raw materials.3/ Index of import unit values over domestic demand deflator for manufacturing (see Durand et al., 1992).France: Internal Price Competiveness in Manufacturing 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE, Direction de la Prévision, and O.E.C.D.1/ Internal competitiveness is measured by the ratio of import prices over domestic prices in manufacturing. A decrease indicates a loss in competitiveness.2/ Adjusted for the price of raw materials.3/ Index of import unit values over domestic demand deflator for manufacturing (see Durand et al., 1992).
France: Internal Price Competitiveness in Manufacturing, By Category of Goods 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE.1/ Internal competitiveness is measured by the ratio of import prices over domestic prices, for each category of goods. A decrease indicates a loss in competitiveness.2/ Include food, beverages and tobacco; textiles, apparel and leather products.France: Internal Price Competitiveness in Manufacturing, By Category of Goods 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE.1/ Internal competitiveness is measured by the ratio of import prices over domestic prices, for each category of goods. A decrease indicates a loss in competitiveness.2/ Include food, beverages and tobacco; textiles, apparel and leather products.France: Internal Price Competitiveness in Manufacturing, By Category of Goods 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE.1/ Internal competitiveness is measured by the ratio of import prices over domestic prices, for each category of goods. A decrease indicates a loss in competitiveness.2/ Include food, beverages and tobacco; textiles, apparel and leather products.The second observation is that for manufacturing as a whole, and for all categories of manufactured goods except transport equipment, internal price competitiveness appears to have deteriorated almost continuously since 1984-85--in part reflecting pricing decisions of foreign producers. Since early 1993, however, losses in competitiveness appear to have either stabilized or begun to be reversed--as for instance for household equipment goods and current consumption goods. 1/
b. Import penetration ratios
A quantity-based indicator of internal competitiveness is given by the import penetration ratio in the manufacturing sector, which is equal to the share (at constant prices) of imports over domestic demand of manufactured goods--the latter calculated as the sum of domestic production and imports minus exports. Chart 7 shows the evolution of import penetration ratios in manufacturing, for the sector as a whole and for various groups of products. The data suggest a gradual and continuous increase in the share of imports in total domestic demand. This upward trend appears to reflect mainly the opening of the French economy to foreign trade during the 1980s, rather than declining competitiveness. Here again, however, the import share shows a tendency to stabilize for some categories of goods (such as household equipment goods and current consumption goods) since the early 1990s. In part, this outcome may be related to the 1992-93 recession and a proportionally higher reduction in demand for imported goods.
France: Penetration Ratios in Manufacturing, by Categories of Goods 1/
(in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE.1/ The penetration ratio is equal to the share of imports to domestic demand, both measured in volumes.2/ Include food, beverages and tobacco; textiles, apparel and leather products.France: Penetration Ratios in Manufacturing, by Categories of Goods 1/
(in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE.1/ The penetration ratio is equal to the share of imports to domestic demand, both measured in volumes.2/ Include food, beverages and tobacco; textiles, apparel and leather products.France: Penetration Ratios in Manufacturing, by Categories of Goods 1/
(in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: INSEE.1/ The penetration ratio is equal to the share of imports to domestic demand, both measured in volumes.2/ Include food, beverages and tobacco; textiles, apparel and leather products.c. Relative profitability in manufacturing
Several alternative measures of relative profit margins in manufacturing are shown in Chart 8. Measures based on both relative value added deflators and export unit values suggest that profit margins improved between 1987 and early 1992 in tradable goods industries. These movements are broadly consistent with developments in wage and price inflation during that period and the stability of the franc with respect to the currencies of France’s major trade partners. By contrast, since 1992 we observe either a reduction or stability in profit margins. This pattern appears to reflect more intense competition from European partner countries, following the nominal exchange rate adjustments that took place during 1992-1993.
France: Relative Profit Margin in Manufacturing 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, Research Department.1/ An increase indicates an improvement in profitability.2/ Defined as the ratio of real effective exchange rates based, respectively, on implicit value-added deflators over unit labor costs.3/ Defined as the ratio of real effective exchange rates based, respectively, on implicit value-added deflators over normalized unit labor costs.4/ Defined as the ratio of real effective exchange rates based, respectively, on export unit values over unit labor costs.5/ Defined as the ratio of real effective exchange rates based, respectively, on export unit values over normalized unit labor costs.France: Relative Profit Margin in Manufacturing 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, Research Department.1/ An increase indicates an improvement in profitability.2/ Defined as the ratio of real effective exchange rates based, respectively, on implicit value-added deflators over unit labor costs.3/ Defined as the ratio of real effective exchange rates based, respectively, on implicit value-added deflators over normalized unit labor costs.4/ Defined as the ratio of real effective exchange rates based, respectively, on export unit values over unit labor costs.5/ Defined as the ratio of real effective exchange rates based, respectively, on export unit values over normalized unit labor costs.France: Relative Profit Margin in Manufacturing 1/
(1980 = 100)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: IMF, Research Department.1/ An increase indicates an improvement in profitability.2/ Defined as the ratio of real effective exchange rates based, respectively, on implicit value-added deflators over unit labor costs.3/ Defined as the ratio of real effective exchange rates based, respectively, on implicit value-added deflators over normalized unit labor costs.4/ Defined as the ratio of real effective exchange rates based, respectively, on export unit values over unit labor costs.5/ Defined as the ratio of real effective exchange rates based, respectively, on export unit values over normalized unit labor costs.4. Export performance
Changes in competitiveness must eventually lead to changes in export performance and export market shares. Chart 9 shows the behavior of the OECD’s measure of France’s export market performance in manufacturing, which is defined as an index of export volumes divided by an index of export markets. The latter (whose rate of change is also represented in Chart 9) is calculated on the basis of import volumes of all countries to which France exports and represents a measure of France’s potential for export growth. The data suggest that after having maintained export market shares in the early 1980s, France suffered a sudden and substantial loss in the mid-1980s--in line with a deteriorating export market potential. Since the late 1980s, export market shares have once again stabilized.
France: Export Market Growth and Relative Export Performance in Manufacturing
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: O.E.C.D.1/ Semester over semester, annualized. A country’s export market growth is equal to the rate of change of its export market, which is defined as a weighted average of all imports (in volume terms) of all countries to which the country under consideration exports. See Durand et al. (1992). A positive number indicates an improvement in France’s potential for export growth.2/ Relative export performance is measured as the ratio of export volumes to the export market. An increase indicates that the country’s exports rise faster than its market, and is thus registering a gain in market shares. See Durand et al. (1992).France: Export Market Growth and Relative Export Performance in Manufacturing
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: O.E.C.D.1/ Semester over semester, annualized. A country’s export market growth is equal to the rate of change of its export market, which is defined as a weighted average of all imports (in volume terms) of all countries to which the country under consideration exports. See Durand et al. (1992). A positive number indicates an improvement in France’s potential for export growth.2/ Relative export performance is measured as the ratio of export volumes to the export market. An increase indicates that the country’s exports rise faster than its market, and is thus registering a gain in market shares. See Durand et al. (1992).France: Export Market Growth and Relative Export Performance in Manufacturing
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: O.E.C.D.1/ Semester over semester, annualized. A country’s export market growth is equal to the rate of change of its export market, which is defined as a weighted average of all imports (in volume terms) of all countries to which the country under consideration exports. See Durand et al. (1992). A positive number indicates an improvement in France’s potential for export growth.2/ Relative export performance is measured as the ratio of export volumes to the export market. An increase indicates that the country’s exports rise faster than its market, and is thus registering a gain in market shares. See Durand et al. (1992).Another quantity-based indicator of external trade performance is the trade ratio, that is, the ratio of exports over imports. Chart 10 shows the behavior of the trade ratio in manufacturing goods since the early 1980s, at both constant and current prices. The data suggest that relative export performance deteriorated significantly between 1985 and 1988 (consistent with the indicator shown in Chart 9), a phenomenon which appears to reflect the (lagged) effects of the sharp appreciation of the franc between 1985 and 1987. Following a period of relative stability between 1989 and 1991, the performance of the manufacturing sector has improved almost continuously.
France: Manufacturing Trade Ratio 1/
(in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: Direction de la Prévision, Ministère de I’Economie.1/ The trade ratio is defined as the ratio of exports over imports.France: Manufacturing Trade Ratio 1/
(in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: Direction de la Prévision, Ministère de I’Economie.1/ The trade ratio is defined as the ratio of exports over imports.France: Manufacturing Trade Ratio 1/
(in percent)
Citation: IMF Staff Country Reports 1995, 141; 10.5089/9781451813470.002.A001
Source: Direction de la Prévision, Ministère de I’Economie.1/ The trade ratio is defined as the ratio of exports over imports.In interpreting the above results, it is important to keep in mind that there are several difficulties involved in assessing trade performance and the effect of cost- and price-based indicators of competitiveness on trade flows. The first is that aggregate results for the manufacturing sector must be interpreted with care. Various studies based on more disaggregated data suggest that France has a low share of exports in sectors with strong external demand, in comparison with Germany, Japan, and the United States. 1/ These sectors include chemicals, pharmaceuticals, office and data-processing products, precision and optical instruments, and electrical goods where international demand grows faster than general economic activity. Market shares have also been lost in the areas of automobiles and textiles. The second is the existence of significant delays between changes in competitiveness indicators and changes in trade flows. Year-to-year movements are also affected by differences in relative cyclical positions. To account for lagged effects and isolate the impact of competitiveness indicators on trade flows requires a regression approach. 2/
The third difficulty results from the fact that price setting behavior of domestic producers on foreign markets involves a trade-off between profitability and competitiveness. On the one hand, prices must be maintained sufficiently above costs to ensure profitability of exports, and therefore some long-term relation between prices and costs must be maintained. On the other hand, if export prices are pushed too high, producers will lose market shares on foreign markets, and therefore in the long-term there must be some relation between export prices and the prices of foreign competitors denominated in the same currency.
While not a sustainable strategy in the long run, exporters may try in the short run to defend their market share by “pricing to market” and squeezing profits. Recent evidence suggests that export prices denominated in French francs are relatively sensitive to exchange rate changes, and that adjustment in these prices tend to stabilize the local currency prices in the destination market. 3/ For instance, an appreciation of the domestic currency will lead to a squeeze on profit margins, rather than an increase in export prices and a deterioration in trade performance. The same mechanism is also relevant in interpreting the behavior of import penetration ratios, as discussed in Section 3.
5. Summary and conclusions
This study has provided an assessment of competitiveness and trade performance of the French economy during the 1980s and early 1990s. After a brief review of the pros and cons of the indicators used here, developments in price- and cost-based indicators of competitiveness were examined. Additional indicators (measures of internal price competitiveness, import penetration ratios, and profitability indices) were then evaluated. The last part of the paper examined France’s relative export performance.
The various measures of external price competitiveness used in this study suggest that overall the French economy appears to have maintained its competitiveness in recent years. However, some components of the manufacturing sector may have lost some of their competitive advantage, as suggested by measures based on internal price competitiveness and trade penetration ratios. As emphasized by many commentators in France and elsewhere, a key element in the strategy aimed at improving the external economic performance of the French manufacturing sector is the need to foster a sectoral reallocation of investment towards strong-demand sectors, in order to increase productive capacities and meet the growth in internal and external demand.
Prepared by Pierre-Richard Agénor.
See L. Lipschitz and D. McDonald, “Real Exchange Rates and Competitiveness: A Clarification of Concepts, and Some Measurements for Europe,” Empirica, Vol. 19 (March 1992), pp. 37-69; I. Marsh, and S. Tokarick, “Competitiveness Indicators: A Theoretical and Empirical Assessment,” Working Paper No 94/29, International Monetary Fund (March 1994); and P. Turner and J. Van’t dack, “Measuring International Price and Cost Competitiveness,” Bank for International Settlements, Economic Paper No. 39 (November 1993).
Manufacturing is a key tradable sector in France (as in most industrial countries) and plays an essential role in external trade performance. In 1993, for instance, manufactured products (in volume terms) amounted to 71 percent of total imports of goods and 76 percent of exports. In part, the focus on manufacturing also results from data deficiencies that prevent extending the analysis to other tradables. In particular, although many services are traded, statistics on service prices are not very reliable.
France mostly trades with European Union (EU) countries. In 1993, trade with these countries represented about 60 percent of total exports and imports. Germany is the largest partner, and accounted for about 17 percent of exports and imports in 1993.
Staff estimates indicate that a similar pattern in internal price competitiveness (a marked deterioration during the 1980s, and relative stability since the early 1990s) has been observed in several other EU countries, including Germany, Italy, the United Kingdom, and Spain.
See, in particular, H. Bonnaz and O. Paquier, “Les Echanges Extérieurs de la France depuis 1980,” Economie et Prevision, No 107 (January 1993), pp. 105-17. It is worth noting that analyses along these lines have been at the forefront of the debate on competitiveness in France since at least the early 1970s. See, most notably, G. Lafay, “Compétitivité, Spécialisation et Demande Mondiale,” Economie et Statistique, No 80 (Juillet 1976), pp. 25-36.
See P. R. Agénor, “Competitiveness and External Trade Performance of the French Manufacturing Industry,” Forthcoming IMF Working Paper.
C. Bismut (“Macroeconomic Assessment of French Competitiveness,” unpublished, International Monetary Fund, December 1994) has found that the weight attached to competitors’ prices in export markets is twice as large as the weight attached to domestic labor costs in the determination of French export prices.
