Selected Issues

Abstract

Selected Issues

The Competetive Landscape for El Salvador’s Exports1

We analyze the exports of El Salvador with a focus on the degree of competition it faces in its major export products from the major competitors. Using a value and a count based index of competition, we characterize the intensity of competition with respect to major competitors, across major export products, and over time. While competition with the traditional large exporters – U.S., Germany, and Japan – has declined, competition with China has increased rapidly. Textile exports not only face stiff competition from some of the big players like China, India and Bangladesh, but also from emerging smaller Asian countries like Vietnam and Cambodia. To catalyze export growth El Salvador needs to undertake important structural reforms aimed at creating an entrepreneur enabling environment, with the twin objectives of increasing competitiveness of exporting firms and diversifying the export base.

A. Overview

1. El Salvador’s exports have been stagnant over the last few years. El Salvador’s exports are sizeable relative to GDP though not the highest when compared to other countries in the region. A worrying sign is that the exports have been stagnating. Unlike other countries of the region El Salvador has not seen growth in its exports over the last few years (since 2011).2 Looking at El Salvador’s share in world exports over the longer run, we find that its share has been roughly constant over the last 15 years, whereas Dominican Republic and Costa Rica have seen rapid increase in their shares after 2010.

uA03fig01

Total Exports to GDP

(Average 2012–16, percent)

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig02

Exports Growth

(Average 2012–16, percent)

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

uA03fig03

World Export Market Share, Good and Services

(Percent)

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: UN Comtrade and author’s calculations.

2. El Salvador’s merchandise exports are highly concentrated geographically and to a lesser extent across products. Geographically, El Salvador’s merchandise exports are highly concentrated. In 2016, 48 percent of El Salvador merchandise exports went to the U.S. and 39 percent went to Central America. Concentration of exports across products is also high, with textiles accounting for about 46 percent of merchandise exports in 2015.3

B. Index of Competition

3. Focusing on merchandise exports we analyze the degree of competition faced by El Salvador from its major competitors across its dominant export products by constructing the value and the count based index of competition proposed by Mattoo, Mishra and Subramanian (2016).4 For the main competitors and the dominant products, we also analyze the variation in competition indices across destination markets and over time.

4. The value-based index (VBI) of competition captures the competition faced by El Salvador for a certain product in a destination country, where exposure to competition is captured by the dominance of a competing country in that product’s market in the destination country. More formally, the competition faced by El Salvador (SLV) with respect to a competitor, c, in an importing country, j, for product, g, can be measured as:

IgSLV,j=Σg=1G(VgSLV,jVgSLV,j)Sgc,j,

where g is a HS-4 digit product, g’ is a HS-6 digit product and G is the total number of HS-4 digit products.5 The first term (in parenthesis) on the right-hand side captures the relative importance of g’ in the exports of El Salvador. This is measured as the value of HS-6 digit product g’ exported by El Salvador to importing country, j, divided by the value of the corresponding HS-4 digit product g exported by El Salvador to importing country, j. The second term, Sgc,j captures the relative importance of a particular competitor, c, as a source of imports of HS-6 digit product, g’, in importing country j. It is measured as the value of HS-6 digit product, g’, exported by the competitor to importing country, j, divided by the total imports of HS-6 digit product, g’, by importing country, j. The product of the first and the second term obtained at the HS-6 level is then aggregated to obtain the VBI at the level of HS-4-digit product, g, and a competitor, c.

5. While the VBI captures the intensive margin of competition since it is conditioned on a competitor exporting the products exported by El Salvador, a count based index of competition (CBI) captures the extensive margin of competition – numbers of products exported by a competitor that are also exported by El Salvador. The CBI is given by

IgSLVj,c=NgSLVj,cNgSLVj.

It measures the number of HS-6 digit products, within a HS-4 digit product code g, that are exported by El Salvador and also by competitor c to destination i as a proportion of the total number of HS-6 digit products, within the same HS-4 digit product code g, exported by El Salvador to destination i.

C. Data

6. To construct the VBI and CBI, we use the bilateral merchandise trade data at HS-6-digit level of product disaggregation from the BACI World Trade Database, provided by CEPII.6 The original data behind BACI are the UN COMTRADE data. We restrict ourselves to the period from 2000 to 2014.

7. To identify the set of important competitors for El Salvador, we first identified products, at the HS-4 digit level, whose share in El Salvador’s total exports in 2014 was greater than 1 percent.7 This yielded 22 products, which together accounted for more than 60 percent of El Salvador exports.8 Then for each product, a set of competing exporters was determined. An exporting country was classified as a competitor for El Salvador if its share in world exports of a given product was greater than 1 percent and it was among the top fifteen exporters of that product. This yielded many advanced economies (AEs) such the U.S., Germany and Japan, and also some large developing economies like China and India. An additional criterion to be classified as a competitor was if the country’s share of world exports of that product was between 0.4 percent to 1 percent, and it was an emerging market (EM) or a low-income developing country (LIDC), for example Brazil, Guatemala. This is done to proxy for quality. Given that we cannot measure quality of products, the level of development (income) of a competitor can be a proxy for the quality of its product for each HS6 product line. It is reasonable to expect that El Salvador’s product quality is closer to that of EMs/LIDCs than to that of AMs. In other words, given the same VBI across two different competitors for a certain product, it is more likely that El Salvador faces more competition from the country with the lower level of development. Lastly, other countries in Central America that did not meet these two criteria were also included. In all, 46 competitors were identified.9

D. Analysis

Main Competitors

8. While China is top competitor of El Salvador among the emerging economies and low-income countries (EM/LIDCs), the United States (US) takes the top spot among the advanced economies (AEs). To compute the VBI at the level of a competitor we pool the data for all years and then for each competitor, we average the VBI across all products and destinations markets. This yields an estimate of average VBI for El Salvador with respect to each competitor over the entire sample period. The same procedure is followed for the CBI. The competitors are divided into AEs and EMs/LIDCs. For value-based competition, among the AEs U.S. is by far the most dominant competitor, followed by Germany, Italy and Japan. Among the EMs/LIDCs China comes in with the highest VBI followed by Mexico, Guatemala, Brazil and Costa Rica. The picture remains quite stable for the AEs when we look at the count-based index, with Japan dropping considerably as a competitor compared to its VBI ranking. A similar drop is observed for Guatemala among the EM/LIDCs group. Furthermore, among the EM/LIDCs, Thailand, Indonesia, Poland and Hungary are tougher competitors based on count compared to value. CAPDR members are tougher competitors based on value compared to count. This is suggestive of greater specialization among countries within the CAPDR region.10

9. The set of top competitors of El Salvador in its two main destination markets – U.S. and CAPDR – is influenced by free trade agreements. In the U.S., from the AEs Canada is the top competitor based on count as well as value. In the EM/LIDC group Mexico and India eclipse China as the big competitors in terms of count, even though China continues to be the top competitor in terms of value. Guatemala, on the other hand, drop significantly as a competitor in the U.S. compared to its global ranking. Compared to the U.S., in the CAPDR region as a destination, the CAPDR countries tend to be much tougher competitors. Also, among the AE competitors in the CAPDR region, the distribution of VBI is more skewed compared to that in world market, with the U.S.’s dominance in CAPDR being significantly larger.

Figure 1.
Figure 1.

El Salvador: Top Competitors

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Figure 2.
Figure 2.

El Salvador: Top Competitors in the U.S.

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Figure 3.
Figure 3.

El Salvador: Top Competitors in CAPDR

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.

10. Over time the competition from advanced economies has declined, but that from EM/LIDCs has increased, both from larger economies line China and smaller economies like Vietnam and Cambodia. How has the degree of competition faced by El Salvador with respect to its major competitors changed over time? To answer this, we plot, over time, the two indices of El Salvador with respect to each of its top competitors after averaging across products and importers for each year. Due to space constraints, and for ease of viewing, we only show the evolution over time for the top 10 competitors for AEs and EM/LIDCs separately. For the AEs count based competition remained stable but value based competition declined, driven largely by the decline in VBI for U.S., Canada and Japan. Among the EM/LIDCs, competition from China increased, especially in terms of value (more than two-fold increase). For the U.S. and the CAPDR markets, the trend for AEs remain like those observed for the world. Among the EM/LIDCs, competition from China increased considerably in both markets, largely due to the increase in VBI (two-fold increase in the U.S. and more than three-fold increase in CAPDR) and to some extent due to the increase in CBI in CAPDR. In the U.S., Vietnam is fast becoming an important competitor by rapidly increasing the number of product lines overlapping with El Salvador. However, in the CAPDR market its VBI declined. In CAPDR, El Salvador has also seen an increase in competition from Mexico (due to VBI), India and Guatemala (due to CBI), but a decrease in competition from Costa Rica (due to VBI) and Sri Lanka (due to both, VBI and CBI).

Figure 4.
Figure 4.

El Salvador: Competition Over Time

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Figure 5.
Figure 5.

El Salvador: Competition Over Time in the U.S.

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Figure 6.
Figure 6.

El Salvador: Competition Over Time in CAPDR

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.

Competition in the Product Space

11. Among the main export products, garments tend to have higher CBI than VBI, signaling that even though these product lines are highly contested varieties exported by El Salvador may be a of higher quality. To arrive at a product level VBI and CBI for El Salvador we pool the data over all years and then average across all importers and competitors for each HS4 product line. We restrict the analysis to the major export products of El Salvador, which, as explained earlier, are picked based on their export shares. Given that these products are the major exports of El Salvador, these are likely to be the products in which El Salvador has comparative advantage (or has had comparative advantage).11 The graph below shows the VBI and CBI for the top 10 products (by export share), in a decreasing order of export share as we go from left to right. Together these products account for 45 percent of merchandise exports in 2014. Cane/beet sugar, and Electrical capacitors, face the highest levels of value based competition, followed by Underpants of men’s/boys, and Coffee. Out of the four product lines, Cane/beet sugar and Coffee also exhibit high level of count based competition. T-shirts and vests, and Jerseys and pullovers (combined share in exports value is around 20 percent) are the other product lines that exhibit high CBI. However, their VBI is among the lowest. Medicaments exhibits a pattern similar to that observed for Electrical capacitors.

12. The set of top products exported by El Salvador is different across its two-main destination market —U.S. and CAPDR —, with the U.S. market dominated by textile exports. In the U.S. the composition of top products is heavily skewed towards apparel, but different from that in the world market, and relative to the world market the competition is higher in terms of count. On the other hand, the world market sees higher levels of VBI competition than in the U.S. for top products that overlap. In the CAPDR market, the composition of top products does not have much apparel, and in comparable products competition is lower for both count and value compared to the world market. Based on the top products, there is a greater level of diversification observed in the export basket of El Salvador to CAPDR compared to its export basket to the US, but the level of competition is much higher in the US especially, based on count.

Figure 7.
Figure 7.

El Salvador: Competition in Main Product Lines

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Figure 8.
Figure 8.

El Salvador: Competition in Main Product Lines in the U.S. and CAPDR

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Figure 9.
Figure 9.

El Salvador: Competition in Main Product Lines Over Time

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Figure 10.
Figure 10.

El Salvador: Competition in Main Product Lines Over Time in the U.S. and CAPDR

Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A003

Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.

13. Lastly, we analyze evolution of the two indices of competition for the top products over time. For the world, for CBI, we observe a decline for Electrical capacitors and an increase for Toilet paper, tissues and napkins, Tights, socks and other hosiery, and Underpants of men’s/boys, knitted or crocheted. VBI remained mostly stable, except for a significant increase for Underpants of men’s/boys, knitted/crocheted in 2005 followed by a comparable decline by 2010, and a large increase for Toilet paper, tissues and napkins and Cane/beet sugar. In the U.S. market, Underpants of men’s/boys and suits, and Ensembles of women/girls experienced a substantial increase in count based competition, while Cane/beet sugar saw a big drop. In terms of value, most products saw in increase in competition, with Tights, socks and hosiery leading the pack, but Electrical capacitors saw sharp reduction. In the CAPDR region, there has been a noticeable increase in count based competition for Water, and Medicaments, but a decline in Bread, cakes, biscuits, and Fabrics knitted/crocheted. For value based competition, we observe a decline in for most products, with the sharpest decline for Jerseys, pullovers, cardigans.

Textiles

14. Given the large share of textiles in the exports of El Salvador (about 46 percent), we take a closer look at the textile industry, and find that while China is the top competitor smaller countries like Vietnam and Cambodia are the new emerging competitors.12 We observe a regional concentration in competition in the textile industry, with Asian countries emerging as the top competitors. This dominance has increased over time as El Salvador’s VBIs with respect China, Bangladesh, Vietnam and Cambodia have increased substantially. China’s VBI doubled over the 14-year period, that of Vietnam tripled, and that of Cambodia increased by almost a factor 4. The U.S. on the other hand has seen its VBI halve over the sample period, but it is still the most dominant competitor after China. South Korea has seen an even bigger decline – its VBI in 2014 was about one-third of the 2000 level. Changes in CBI show much less heterogeneity. Almost all top competitors exhibit an increase in CBI, with the most notable increase for Cambodia (by a factor of 3), followed by China and Vietnam. In terms of the level of competition China and U.S. remain the top competitors, with both countries competing with El Salvador in more than 96 percent of El Salvador’s export products within the textile industry.

Electrical Capacitors

15. In 2014, Electrical Capacitors accounted for about 5 percent of total merchandise exports. Analysis of the VBI of the competitors reveals that while Japan and U.S. used to be the top competitors in 2000, China and Germany have taken their positions in 2014. Again, China has increased the level of competition very sharply compared to other major competitors. Besides China, Czech Republic, South Korea and Malaysia have also seen a big increase in their VBIs. Shifting the focus towards CBI, during the period 2000–2014, U.S. and Japan have seen a modest decline in their CBIs. But, other developed countries like France, UK, South Korea and Germany experienced much bigger drops in their CBIs. On the other hand, China and Mexico have seen a significant rise in their CBIs, while CBI for Malaysia remained steady. Based on CBI, U.S., China, Japan, Mexico and Czech Republic were the most dominant competitors in 2014.

uA03fig05
Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Cane/Beet Sugar

16. Though sugar has much lower value added and technological sophistication compared to textiles and electric capacitors, it accounts for 3.3 percent of total exports. Among the dominant players in the export market for sugar, Brazil has seen the largest decline in its VBI, followed by the U.S. All other major competitors have experienced an increase in their VBIs, with Colombia and France leading the pack, followed by U.K. and Germany. From the central American region, El Salvador has seen an increase in degree of competition from Guatemala. Based on the VBI, between 2000 and 2014 Brazil was replaced by Colombia as the most dominant competitor. Count based competition levels are high for most top competitors, with the U.S. and Brazil being the top competitors. Between 2000 and 2014 most top competitors exhibit a decline in count based competition, except Italy.

uA03fig06
Sources: HS-6 level data from BACI World Trade Database, authors’ calculations.
Policy Priorities

17. The analysis shows that competition from large exporters of 2000s – U.S, Germany and Japan – has gone down, and by 2014 the place of these dominant exporters was largely taken by China. In textiles, the largest export industry, El Salvador now faces stiff competition from even smaller Asian economies like Vietnam and Cambodia. The table below shows that China, which has the largest market share, saw its share in peak in 2010 and since then it has seen a small decline. This may, in part, be due to an increase in cost of labor in China. During the period 2000–10 China’s share increased most rapidly, and many top competitors saw their market shares decline. Between 2010 and 2014, the shares of most developed economies declined but those of the developing economies increased, but El Salvador was not one of them. El Salvador has seen its market share decline between 2000 and 2010, and remain stagnant between 2010 and 2014. The space created by a decline in China’s share has been filled by countries like Vietnam and Cambodia. Interestingly, competition from Vietnam increased in the U.S. market, while that from Cambodia increased in the CAPDR market (mostly due to increase in CBI).13

Table 1.

Share in World Exports of Textiles

(In percent)

article image
Sources: BACI World Trade Database and authors’ calculations.

18. From the point of view of export growth, two issues need to be addressed: (a) improving competitiveness of exporting firms, and (b) diversifying the export base.14 Besides entrepreneurial ability, firms, in order to be competitive and to become successful exporters must (i) have access to a well-trained workforce (exports tend to be of higher quality); (ii) have access to finance (exporting involves high fixed/sunk costs); (iii) be able to invest in research, technology, and innovation (to improve competitiveness and product quality over time); and (iv) have access to strong infrastructure and an entrepreneur enabling regulatory environment.

19. El Salvador ranks poorly relative to other countries in Central and Latin America in starting a business, dealing with construction permits, access to electricity, and protection of investors (World Bank Doing Business). The Global Competitiveness rankings show that El Salvador lags in almost every dimension compared to CAPDR and LA-5, and for institutions, human capital, innovation and labor market efficiency this gap is the widest. Though El Salvador’s ranking jumped 22 notches in the 2018 Doing Business Index produced by the World Bank, from 95 to 73, there is still substantial room for further work in reducing the difficulties in starting a business and getting construction permits. El Salvador ranks 140 in terms of regulations on starting a business. It has a very low new business entry density compared to the LA-5 and other CAPDR economies.

uA03fig07
Sources: ECLAC; and World Bank, World Development Indicators, Doing Business Indicators, and Global Competitiveness Indicators.

20. Both, competitiveness and diversification will be positively affected by policies targeting – improving access to education and training to upgrade skills and to keep up with technological change; improving infrastructure and the institutional environment to support private investment and reduce internal trade costs; (iii) improving financial inclusion, and greater gender equality to support greater entrepreneurial activity and activity in more sectors; and (v) investment in research, technology, and innovation to improve product quality.15

21. An issue that comes up often in the context of diversification is the use of industrial policy. The conventional view on this is that the use of industrial policy should be avoided because of high informational demand, poor implementation, and potential capture due to rent-seeking. However, more recently there has been a push for use of such policies under certain conditions.16 Such conditions include, policies steering clear of picking winners; instead, they should be implemented at the level of sectors, and should support sectors that have large positive spillovers only insofar as these are competitive, with the support being spread across many firms and not being detrimental to entry of new firms.

Annex I. Products and Competitor Countries Included in Analysis

Table AI.1.

Top Exports of El Salvador

(To determine competitors)

article image
Sources: BACI World Trade Database and authors’ calculations
Table AI.2.

Competitors for El Salvador Exports

article image
Sources: BACI World Trade Database and authors’ calculations
1

Prepared by Nitya Aasaavari and Rahul Giri.

2

2017 has seen a resurgence in exports.

3

On the import side, U.S. accounts for 37 percent of all merchandise imports of El Salvador, whereas Central American countries account for 21 percent.

4

Matto Aditya, Prachi Mishra and Arvind Subramanian, 2016, “Beggar-thy-Neighbor Effects of Exchange Rates? A Study of the Renminbi,” American Economic Journal: Economic Policy, forthcoming.

5

HS is the harmonized system of product classification used in trade data. Each HS-6-digit product can be mapped to its parent HS-4-digit product.

6

The data used to construct the index of competition is available at: http://www.cepii.fr/CEPII/en/bdd_modele/bdd_modele.asp

7

The data used to identify competitors is available at: http://atlas.media.mit.edu/en/profile/country/slv/

8

Please see Table A1 for a list of the 22 products.

9

Please see Table A2 for a list of the 46 competitors

10

CAPDR refers to Central America, Panama and Dominican Republic.

11

We also looked at products with the highest degree of competition, but these are likely to be products in which El Salvador does not have comparative advantage. Quite of a few of the products are resource based such as metals and primary agricultural products. Our methodology may also miss products in which El Salvador has latent comparative advantage.

12

Textiles is defined as HS2 chapters from 50 to 63.

13

Between 2003 and 2016, the correlation between export growth and nominal and real effective exchange rate changes is very small, suggesting that the more recent slowdown in exports is not due to an appreciation of the dollar. But, this issue needs to be investigated more.

14

For El Salvador, the high level of informality makes the task of improving competitiveness and diversification more challenging.

15

On diversification see IMF 2014, “Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries—The Role of Structural Transformation and Diversification.”

16

See Aghion, P. et al, 2015, “Industrial Policy and Competition,” American Economic Journal: Macroeconomics, 7(4):1–32; and Stiglitz, J. E. et al., 2014, Creating a Learning Society: A New Approach to Growth, Development, and Social Progress, Columbia University Press.

El Salvador: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.