Belgium: Selected Issues
Author: International Monetary Fund
Publication Date:
04 Apr 2011
eISBN:
9781455233083
Language:
English
Keywords:
ISCR; CR; Belgium; debt ratio; export; bank; export growth; Belgiotal Belgian export; export recipient; Belgium's export; growth of Belgium export; Export performance; Real effective exchange rates; Imports; Labor costs; Belgium's recovery
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Belgium’s impressive past fiscal consolidation is an example for other countries that need to bring down their public debt and also provides insights on how best to address its own current fiscal challenges. Belgium has a unique history of a long and successful large fiscal consolidation. Belgium lived through various episodes of fiscal adjustment and each one of these contains important lessons for future consolidation. After Belgium’s public debt-to-GDP reached a peak of about 135 percent in 1993, it was steadily reduced to about 84 percent by 2007.

Abstract

Belgium’s impressive past fiscal consolidation is an example for other countries that need to bring down their public debt and also provides insights on how best to address its own current fiscal challenges. Belgium has a unique history of a long and successful large fiscal consolidation. Belgium lived through various episodes of fiscal adjustment and each one of these contains important lessons for future consolidation. After Belgium’s public debt-to-GDP reached a peak of about 135 percent in 1993, it was steadily reduced to about 84 percent by 2007.

IV. Belgium’s Export Performance: How Did it Play out During the Recession and Recovery?1

This note reviews recent developments in Belgium’s external competitiveness and discusses the evolution of its export performance, including after the 2008 financial crisis. The note finds that Belgium has been losing export market shares since the 1990s; in particular, Belgium has been outperformed by Germany and the Netherlands. The evolution of Belgium’s exports during the crisis and recovery has largely reflected demand factors of its trading partners. Over the longer run, price factors have played a bigger role in its loss of competitiveness.

A. Introduction

1. Belgium’s exports, like those of many other European countries, are on a long-term declining trend and more recently, they tumbled after the 2008 financial crisis. of the financial crisis, Belgiotal Belgian exports lost over one third of its value in 2009:Q1 relative to the peak levels in 2008 before strongly rebounding subsequently. At the same time, over a longer horizon—as indicated in many previous studies such as Dresse (2009), Kegels (2009), and Biatour and Kegels (2010)—Belgium is losing competitiveness and export market share.

2. This note examines Belgium’s long-term export performance and discusses the short-term evolution of Belgium’s export performance during the financial crisis and the subsequent recovery. It has two parts. In the first part, the note compares the country’s competitiveness with its European peers as well as emerging and developing economies over a longer time horizon. In the second part, the note focuses on the short term by econometrically assessing the contributions of the traditional determinants of trade to the short-term evolution of exports in the aftermath of the financial crisis.

3. The rest of the note proceeds as follows: Section B presents some stylized facts in relation to Belgium’s recent export performance; Section C examines changes in Belgium’s export market share, aiming to shed light on developments in Belgium’s competitiveness against the backdrop of the crisis and recovery; Section D quantifies the dynamic contributions of foreign demand and price competitiveness to exports using an error-correction model; finally, Section E concludes with some policy implications.

B. Stylized Facts

4. After peaking in the second quarter of 2008, Belgian exports sharply declined following the financial crisis and then gradually recovered after bottoming out in 2009:Q1. From the peak to the trough, Belgian exports lost over one third of its value in US dollar terms, with the decline in exports to euro Area and non-euro area roughly of equal magnitude (Figure 1). The decline in volume, however, is much less pronounced, partly reflecting the impact of euro-dollar exchange rate movements on export valuation as the depreciation of the Euro in the aftermath of the crisis exacerbated the decline in export values. Despite the strong recovery, exports are still below the pre-crisis peak level.

Figure 1.
Figure 1.

Belgium: Export Value (in USD) and Volume

(2006:Q1=100)

Citation: IMF Staff Country Reports 2011, 082; 10.5089/9781455233083.002.A004

Sources: WEO; IMF Staff Calculations.

5. The impact of exports on GDP growth in Belgium has been more significant than in many other European economies (Table 1). This partly reflects Belgium’s higher degree of trade openness. In fact, the contribution of exports to GDP growth has been relatively large, averaging to around 3½ percent per annum during 2000–07, higher than that in Germany and the euro area average, albeit smaller than that in the Netherlands. Consequently, the impact of the drop in international trade associated with the financial crisis took a higher toll on the overall economy compared to its European peers, with the impact culminating to above 10 percent of GDP during the worst time of the crisis. Conversely, the subsequent normalization of world trade also played a relatively larger role in Belgium’s recovery.

Table 1:

Contributions of Exports to Real GDP Growth

(year-on-year growth, in percent)

article image
Sources: WEO

6. Over a longer time span, the growth of Belgium exports has lagged behind those of the country’s European peers and has been much below those in emerging economies (Figure 2). Between 2000–04 and 2005–09, Belgian exports of goods and services grew by 3.3 percent on an annualized basis, compared with 6.6 percent for Germany and 4.2 percent for the euro area during the same time frame, although the growth rate was higher than those of France and Italy. The lag is even more pronounced when comparing Belgium’s export performance to that of emerging and developing economies, whose growth rate was almost three times that of Belgium.

Figure 2.
Figure 2.

Real Export Growth—Average of 2005–09 to Average 2000–04

Citation: IMF Staff Country Reports 2011, 082; 10.5089/9781455233083.002.A004

Sources: WEO

7. The composition of Belgium’s export destinations has been relatively stable over the past two decades, although there is some sign of a shift towards emerging economies after the crisis. Belgium’s exports have been primarily geared towards advanced economies, which account for over three quarters of the Belgium exports during 2000–09. Among advanced economies, the euro area is Belgium’s principal export destination, with two-thirds of the Belgian exports designated for its euro partners. Exports to emerging and developing economies have gained importance gradually towards the end of the 2000s, although these continue to account for a relatively small share of total Belgian exports.

Table 2.

Belgium’s Main Export Destinations

(In percent of Belgium’s total exports of goods and services)

article image
Source: IMF staff calculations.

C. Is Belgium Losing Competitiveness?

8. Like other advanced economies, Belgian exports have been gradually losing market shares over the past few decades, but the losses have decelerated during 2000s. Compared with the past decade, Belgium has lost around ½ percentage points of its world export market share. But the decline in export market share is not unique to Belgium, and appears to have been a negative shock common to most advanced economies, which has been documented in other studies.2 Nevertheless, the relative extent of Belgium’s loss in market share appears to have been more severe than for its most competitive peers in the euro area—namely Germany and the Netherlands. At the same time, Belgian exporters fared better than those in France and Italy. During the 2000s, the decline in market shares has somewhat decelerated and shares held steady recently.

Table 3.

Belgium’s Export Market Shares

(As a percent of total world imports, in value)

article image
Source: IMF staff estimates.

9. One plausible explanation for the loss of market share could be Belgium’s inability to capture new fast-growing regional markets. To gauge this effect, growth of Belgium’s exports to a region is compared to the growth of the import demand of that market. The analysis suggests that:

  • Between 2000–04 and 2005–09, the regions with fastest growth in import demand (in values) include Africa, Developing Asia, Emerging Europe, and the Middle East, with growth rates of around or over 20 percent (Table 4).

  • However, Belgian exports to these fast-growing emerging economies appear to have lagged behind demand growth, although its exports to non-euro area advanced economies, emerging Europe, and Latin America have grown faster than demand growth, thereby offsetting some of the losses elsewhere.

Table 4.

Export Growth and Import Demand Growth by Regions, 2000–09

(Per annum, in percent)

article image
Source: IMF staff estimates.

Total demand refers to the imports to a region from the entire world, with growth calculated as the annualized growth rate from the average level of 2000–04 to the average level of 2005–09.

Export growth is also calculated as the annualized growth rate from the average export levels of a country to a region during 2000–04 to the average levels during 2005–09.

Difference refers to the difference between export growth and total demand growth (discussed above). For example, French exports to the world grew by around 7.5 percent, while world import demand grew by 12.6 percent, with the difference between the two growth rates being negative 5 percent. This suggests that French exports growth lagged behind total import growth by 5 percent.

10. One aspect of the decline of Belgium’s competitiveness relates to the fast growing unit labor costs relative to its trading partners and sluggish growth in productivity (Figure 3). In terms of the real effective exchange rate—whether based on the CPI or unit labor costs—Belgium has clearly lost competitiveness to its main competitors, namely Germany, France, and the Netherlands, although it fared better than other European peers. More importantly, in terms of the unit labor cost and productivity, Belgium appears to have been the least competitive among its peers, with the exception of Italy and Spain.

Figure 3.
Figure 3.

Begium Price Competitveness, 1999–09

Citation: IMF Staff Country Reports 2011, 082; 10.5089/9781455233083.002.A004

Source: IMF Staff Calculations1/ Based on the manufacturing sector only.

D. Econometric Analysis

11. This section seeks to explain the evolution of Belgian exports after the financial crisis with traditional determinants of trade, namely foreign demand and price competitiveness. Using an error-correction model, reduced-form equations were estimated in two steps: first, a long-run cointegrating relation is estimated with variables in levels (in terms of logarithms). In the second step, short-run elasticities were estimated with variables estimated in first differences along with the error correction term from the cointegrating equation in the first step.

12. The findings are consistent with economic intuition and the coefficients for foreign demand and the real effective exchange rate are of the right sign. Using quarterly data during 1990–09, results of the estimation are presented in Table 5. Specifically, the results suggest:

  • A 1 percent increase in Belgium’s foreign demand—calculated as trade-weighted import demand of Belgium’s main export recipients—is associated with an increase in exports of around 0.8–1.0 percent in both the short and the long run;

  • A 1 percent increase (appreciation) in Belgium’s real effective exchange rate (REER) is associated with a decrease in Belgian exports of around 0.2 percent in the long run. The short-run impact of REER on exports is insignificant.3

Table 5.

Determinants of Real Exports in Belgium

article image
Source. IMF Staff estimatesSample period=1991-2009** denotes that a variable is significant at 1 percent significance level while * denotes that a variable is significant at 5 percent significance level.

13. Using the estimated coefficients, one can decompose the evolution of exports into effects due to demand, price, and other factors by rewriting the error-correction model (Figure 4). The result suggests that in the aftermath of the financial crisis, Belgium…s sharp decline in exports was primarily due to a plunge in import demand from its trading partners. Conversely, during 2009:Q3–2010:Q3, Belgium’s recovery of exports has largely reflected the recovery of the global economy and therefore import demand of Belgium’s trading partners.4

Figure 4.
Figure 4.

Contributions to Export Growth During Recession and Recovery

Citation: IMF Staff Country Reports 2011, 082; 10.5089/9781455233083.002.A004

Sources: WEO; IMF Staff Calculations.

14. Over a longer time horizon, there is evidence that Belgium’s losses in competitiveness appear to have been due to its high unit labor costs. Using granular industry-level data on the Belgian share in value-added in Europe and sector-specific labor costs, Kegels (2009) found that over 1970–05 relative prices movements were a significant determinant of the Belgian share of European value added for manufacturing and market services.

E. Concluding Remarks and Implications

15. Belgium has been losing export market shares over the past decade, which points to a need for corrective policy measures to boost its competitiveness. Further efforts are needed to strengthen the productivity of the Belgian economy by boosting innovation, investing in human capital, and containing costs. Labor costs need to be kept in line with those in trade partners in the context of the euro zone monetary union. Given Belgium’s high labor costs, there is little room for wage increases. In order to increase the flexibility in wage negotiations to take account of varying circumstances in different sectors and avoid second-round effects of energy price volatility, the automatic wage indexation mechanism should be reconsidered, including in the public sector.

References

  • Bayoumi, Tamim, Richard Harmsen, and Jarkko Turunsn, “Euro Area Export Performance and Competitiveness,” IMF Staff Position Note, December 2010.

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    • Export Citation

  • Biatour, Bernadette and Chantal Kegels, 2010, « L’évolution des coûts unitaires du travail en Belgique de 1996 à 2008 », Federal Planning Bureau Working Paper 14-10.

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    • Export Citation

  • Biatour, Bernadette and Chantal Kegels, 2010, « Comparaison des composantes de la croissance de la productié: Belgique, Allemagne, France et Pays-Bas 1996-2007 », Federal Planning Bureau Working Paper 18–10.

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    • Export Citation

  • Cheng, Kevin C., 2010, “Developments in France’s External Competitiveness—an Update,” Selected Issues Paper for France’s 2010 Article IV Consultation.

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    • Export Citation

  • Dresse, Luc, 2009, “Economic Outlook for Belgium 2009-2010” Presentation to the 2009 IMF Article IV Mission

  • European Commission, 2010, “The Impact of the Global Crisis on Competitiveness and Current Account Divergences in the Euro Area,” Quarterly Report on the Euro Area Volume 9, No.1 (2010).

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    • Export Citation

  • Kegels, Chantal, 2009 “Alternative assessment of Belgian competitiveness,” Federal Planning Bureau Working Paper 9-09.

1

Prepared by Kevin C. Cheng.

2

For example, see Cheng (2010).

3

As discussed below, such small price elasticity might be due to “averaging.” Indeed, using more granular industry data, one can obtain a larger effect as done in Kegels (2009).

4

Unlike results for other countries, the contributions to exports by unexplained factors (as captured by the residuals) did not have a definite pattern over time.

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Cover IMF Staff Country Reports
Belgium: Selected Issues Paper
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 082
Publisher:
International Monetary Fund
ISBN:
9781455233083
ISSN:
1934-7685
Pages:
41
DOI:
https://doi.org/10.5089/9781455233083.002

Belgium: Export Value (in USD) and Volume

(2006:Q1=100)

Real Export Growth—Average of 2005–09 to Average 2000–04

Begium Price Competitveness, 1999–09

Contributions to Export Growth During Recession and Recovery