Zinnes Eliat, and J. Sachs, 2001, “Benchmarking Competitiveness in transition Economies, Economics of Transitions,” EBRO, Vol. 9(2), pp. 315–53.
Prepared by Patrick Megarbane (MED).
The caveat regarding the use of CPI -based REER in assessing competitiveness is the existence of distortions from price controls and the fact that non-traded goods are included in the CPI basket while intermediate goods are not.
The weights assigned to the Tehran Stock Exchange (TSE) and official exchange rates varied depending on the composition of transactions.
For further indications on the underlying factors affecting the real exchange rate, see Chapter II.
More specifically, the real appreciation amounted to 44 percent between Dec. 1999 and Dec. 2001 when using the TSE rate and to 35 percent when using the weighted average rate (Figure III-l).
Similarly, the relative non-oil terms of trade have remained stable over the last couple of years and thus are unlikely to have caused an appreciation of the equilibrium real exchange rate.
This measure may be the most appropriate as a competitiveness indicator since it proxies production costs when combined with productivity and is an important factor in determining profitability. However, the measure misses some components of actual costs, such as capital and energy. The measurement of productivity, which underlies the ULC-based measure is difficult to assess in practice. As a proxy for productivity growth in manufacturing, we used the growth in the value-added per employee in the industrial sector. Two available series for wages were used: wages in the construction sector and wages in large manufacturing companies.
Competitiveness is determined by structural factors that extend far beyond the level of the real exchange rate. In particular, factors such as good governance, openness, adequate infrastructure, sound financial sector, flexible labor markets, and developed market institutions, in addition to technology, are important determinants of competitiveness (see Zinnes, 2001).