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Konstantīns Beņkovskis (Bank of Latvia) Julia Wörz (Österreichische Nationalbank) 27 April 2012
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Evaluation of Non-Price Competitiveness of Exports from the Central, Eastern and South-Eastern Central, Eastern and South-Eastern
European Countries in the EU market
Konstantīns Beņkovskis (Bank of Latvia)Julia Wörz (Österreichische Nationalbank)
27 April 2012
Outline
• Drawbacks of traditional REER indicators
• How to assess non-price competitiveness?o Theoretical framework
o Elasticities of substitutiono Elasticities of substitution
o Dynamics in price and non-price competitiveness in CESEE
o Contribution of non-price factors in some product sectors of Estonia’s exports
• Conclusions
MotivationREER signal losses in price competitiveness – is it the whole story?
Real effective exchange rate (36 partner countries, 1999=100)
190
210CPI based
180
200
220ULC based
Bulgaria
Czech
RepublicEstonia
Latvia
Source: Eurostat3
90
110
130
150
170
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
80
100
120
140
160
180
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Latvia
Lithuania
Hungary
Poland
Romania
Slovenia
Slovakia
MotivationMarkets shares signal improving competitiveness
The share of exports in the World trade (2002=100)
190
210
230
250
Latvia
Lithuania
Estonia
Source: WTO4
90
110
130
150
170
190
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Q1-Q3*
Bulgaria
Czech Republic
Hungary
Poland
Romania
Slovakia
Slovenia
MotivationREER indicators have list of drawbacks
• Bad approximation for export priceso Whole economy, no distinction between domestic and external
markets
o Profit martins are ignored
• Structural issues are not captured:Structural issues are not captured:o Differences in export structure are not taken into account
o Need to analyse competitiveness at disaggregated level
• Focusing on price competitivenesso Some measures are adjusted for quality (e.g. CPI-based)
o However, many other important factors left aside (e.g. taste, image of brands)
o Need to consider non-price competitiveness issues
Goal of the projectPrice and non-price competitiveness of CESEE countries
• Evaluate the price and non-price competitiveness of CESEE countries– Latvia, Estonia, Lithuania, Poland, Czech Republic,
Hungary, Slovakia, Slovenia, Romania, Bulgaria
• Due to data constraints we are limiting our analysis to the exports to the EUo Still analysing the most part of CESEE exports
Short literature reviewSeveral papers dealing with quality and variety issues
• Feenstra, R.C.(1994) “New Product Varieties and the Measurement of International Prices”, American Economic Review, 84(1), pp.157-177.
• Hummels, D. and Klenow, P.J. (2005) “The Variety and Quality of Nation’s Exports”, American Economic Review, 95(3), pp.704-723.
• Broda, C. and Weinstein, D.E. (2006) “Globalization and the Gains from Variety”, Quarterly Journal of Economics, 121(2), pp.541-585.from Variety”, Quarterly Journal of Economics, 121(2), pp.541-585.
• Benkovskis, K. and Rimgailaite, R. (2011) “The Quality and Variety of Exports from the New EU Member States”, Economics of Transition, 19(4), 2011, 723-747.
• Benkovskis, K. and Wörz, J. (2011) “How Does Quality Impact on Import Prices?”, OeNB Working Papers, 175/2011.
• Benkovskis, K. and Wörz, J. (2012) “Evaluation of Non-Price Competitiveness of Exports from Central, Eastern and South-Eastern European Countries at the EU market”, Bank of Latvia WorkingPapers, 1/2012.
How to evaluate non-price competitiveness?
• We have trade data on a very disaggregated level:o prices (unit values, euro/kg)
o volumes (kg)
• Why shouldn’t we combine both sources instead of • Why shouldn’t we combine both sources instead of focusing just on one?o If real market share improves when relative export price is
increasing, it gives us some clue about non-price factors
• Consistent theoretical framework needed
Theoretical frameworkConsumer’s utility function
• First-level CES utility function (imports and domestic good)
• Second-level CES utility function (different imported goods)
1;111
>
+=
−−−
κκκ
κκ
κκ
ttt MDU
• Second-level CES utility function (different imported goods)
• Third-level CES utility function (different varieties of a good)
1;111
>
=
−
∈
−
∑ g
Cc
gctgctgt
g
g
g
g
g mdM σσ
σ
σ
σ
σ
1;11
>
=
−
∈
−
∑ γγγ
γγ
Gg
gtt MMelasticity of substitution
between products
elasticity of substitution
between varieties
quality or taste parameter
set of goods
set of countries
Theoretical frameworkMinimum unit-cost function
• After solving the utility maximization problem
o minimum unit-cost depend on price, quality or taste
gg
Cc
gctgctgt pdσσφ−
∈
−
= ∑
1
1
1
o minimum unit-cost depend on price, quality or taste parameter and set of partner countries (variety)
• The exact import price index for good g is defined as:
1−
=gt
gt
gPφ
φ
Theoretical frameworkRelative price on a single market
• Our goal, however, is to evaluate quality-adjusted relative export price indexo We can interpret xgct as country’s c exports of a product g
o We propose to define changes of relative export price as follows
( )( ) 1
where• φgt
k – minimum unit-cost of good g in case it is exported only by country k
• φgt-k – minimum unit-cost of good g in case it is exported by all
countries except k
( )( )k
gt
k
gt
gktgktgktgkt
k
gt
k
gt
k
gt
k
gt
gkt
gddppRXP −
−−
−−−
−−
−
− ==1
1
1
11
1
1
φφφφ
φφ σ
Theoretical frameworkChange of a relative price on a single market
• Relative price of a good g imported from country k relative to other origins:
∏∏−
−
−
−
∈
−
−
−−
−−
−
∈ −
−
=
kg
g
kgct
g
kg
kgct
Cc
w
gkt
gct
gct
gkt
k
gt
k
gt
Cc
w
gkt
gct
gct
gkt
gctd
d
d
d
p
p
p
pRXP
σσ
λ
λ 1
1
11
1
11
1
whereo Cg
-k – set of countries exporting to a particular market in both periods, excluding country k
o w-kgct – Sato-Vartia weights of exporters, excluding county k
o
gg
∑
∑
−
−
∈
∈− =
kgt
kg
Cc
gctgct
Cc
gctgct
k
gtxp
xp
λ∑
∑
−−
−
∈−−
∈−−
−− =
kgt
kg
Cc
gctgct
Cc
gctgct
k
gtxp
xp
1
11
11
1λ
Theoretical frameworkChange of a relative price in a single market
• Relative price of a good g imported from country k relative to other origins:
∏∏−
−
−
−
∈
−
−
−−
−−
−
∈ −
−
=
kg
g
kgct
g
kg
kgct
Cc
w
gkt
gct
gct
gkt
k
gt
k
gt
Cc
w
gkt
gct
gct
gkt
gctd
d
d
d
p
p
p
pRXP
σσ
λ
λ 1
1
11
1
11
1
1. Traditional relative price index – increase denotes worsening price competitiveness
2. Adjustment for changes in monopoly power of exporters. If set of partner countries is increasing, relative price index increase as well
3. Adjustment for changes in quality or taste. Rise in relative quality or taste decrease relative price index and improve competitiveness
1 2 3
Theoretical frameworkHow to estimate quality/taste parameter?
• After solving utility maximization problem:
+
=
gctgctgct
x
x
p
p
d
dln
1lnln
1
σσ benchmark country
relative prices (UVX) relative quantities (kg)
• Relative quality or taste depends on relative prices and relative volumes of sales
• It also depends on elasticity of substitutiono relative quantities are not important for perfect competition
gktggktgktg xpd σσ benchmark country
Theoretical frameworkAggregated relative export price
• Relative price indices on a particular market (RXP(i)gkt) should now be aggregated by products (g) and by export markets (i)
• Weights from exporter side should be used
( )∏∏= WigtiRXPRXP
whereo RXPkt – aggregated relative export price index
o Wigt is weight of a product g exported to country i in total exports to country k
( )∏∏∈ ∈
=Ii Gg
W
gktktigtiRXPRXP
Estimation of elasticitiesSystem of demand and supply equations
• We need to estimate elasticities of substitution
• Elasticity of substitution between varieties estimated from the systemo Relative demand equation:
( ) ps lnln ∆∆
o Relative supply equation:
• Absence of exogenous variables to identify the system and estimate elasticities
( ) gctgctgct
gkt
gct
g
gkt
gctd
p
p
s
sln;
ln
ln1
ln
ln∆=+
∆
∆−−=
∆
∆εεσ
gct
gkt
gct
g
g
gkt
gct
s
s
p
pδ
ω
ω+
∆
∆
+=
∆
∆
ln
ln
1ln
ln
• In order to take advantage of the independence of an
, these two equations are multiplied together to obtain (Leamer’s, 1981, approach):
gctε
gctδ
gctgctgctgctu
spsp+
∆
∆
+
∆
=
∆ lnlnlnln
22
θθ
Estimation of elasticitiesTransformation of the system
• Relative price x market shares are correlated with error term, estimates will be biased
• However, we can obtain consistent estimates by exploiting the panel nature of the data
gct
gkt
gct
gkt
gct
gkt
gct
gkt
gctu
spsp+
∆
∆
+
∆
=
∆ lnlnlnln
21 θθ
( )( );111 −+=
gg
g
σω
ωθ
( )( )( );11
212 −+
−−=
gg
gg
σω
σωθ gctgctgctu δε=
• Broda and Weinstein (2006) argue that one needs to define a set of moment conditions for each good g by using the independence of unobserved demand and supply disturbances for each country over time:
Estimation of elasticitiesGMM estimates
( ) ( )( ) cuEG ∀== 0ββ
• For each good g the following GMM estimator is obtained
o solved as constrained minimization problem. B is a set of economically feasible values of β (σg>1, ωg≥0)
( ) ( )( ) cuEG ggcttg ∀== 0ββ
( )ggg ωσβ ,=
( ) ( )gg
Bg WGG βββ
β
**minargˆ ′=∈
Estimation of elasticitiesResults for big EU countries
800
1000
1200Germany
France
UK
Medianelasticity
Median mark-up
Germany 6.19 19.3%
France 5.39 22.8%
Distribution of elasticities of
substitution
0
200
400
600
800
1.0
-1.
2
1.8
-2.
2
3.3
-4.
1
6.0
-7.
4
11.0
-13
.5
20.1
-24
.5
36.6
-44
.7
66.7
-81
.5
121.
5 -
148.
4
221.
4 -
270.
4
403.
4 -
492.
7
735.
1 -
897.
8
UK
Italy
France 5.39 22.8%
Italy 5.76 21.0%
UK 4.91 25.6%
… … …
Database and coverageEurostat Comext data
• Eurostat Comexto Import data for all 27 EU countries
o 8-digit CN classification level
• approx. 10 000 products
o 1999 to 2010, annual datao 1999 to 2010, annual data
o 50 main partner countries
• All EU countries, US, Japan, China, India, Brazil, Canada, Russia etc.
• Therefore, we are assessing competitiveness of CESEE countries on EU marketo Still analysing the most part of CESEE exports
Relative export price indicesBaltic countries and Bulgaria
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Estonia
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Latvia
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Conventional Adjusted by non-price factors
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Bulgaria
Conventional Adjusted by non-price factors
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Lithuania
Conventional Adjusted by non-price factors
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Conventional Adjusted by non-price factors
Relative export price indicesVyshegrad group countries
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Poland
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Czech Republic
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Conventional Adjusted by non-price factors
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Hungary
Conventional Adjusted by non-price factors
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Slovakia
Conventional Adjusted by non-price factors
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Conventional Adjusted by non-price factors
Relative export price indicesRomania and Slovenia
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Slovenia
708090
100110120130140
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Romania
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Conventional Adjusted by non-price factors
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Conventional Adjusted by non-price factors
Relative quality/taste of Estonia’s exportsBy main export sectors
Cumulated contribution of relative quality to export competitiveness (1999=100)
220
260
300
340
160
180
200
220
24
20
60
100
140
180
60
80
100
120
140
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Machinery and mechanical appliances Wood and wood products
Base metals and articles thereof Prepared foodstuffs
Chemical products Mineral products (RHS)
Relative quality/taste of Estonia’s exportsBy main export markets
Cumulated contribution of relative quality to export competitiveness (1999=100)
400
500
600
190
220
250
25
0
100
200
300
70
100
130
160
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Finland Sweden Latvia
Lithuania Denmark Germany (RHS)
ConclusionsQuality/taste of CESEE exports is increasing
• The traditional competitiveness measures based on unit values show that CESEE export prices increased faster than export prices of competitorso Is it creating a problem for export competitiveness?
• Our analysis indicates that it was driven by faster increase in quality/taste of CESEE exportso In fact, aggregate competitiveness (including price and
non-price factors) of CESEE even improved
Further plansNeeds for improvement in methodology, other database
• No effect on relative price index from changes in set of export products/marketso Gains from diversification?
o Theoretical framework should be more developed for supply sidesupply side
• separate taste from quality?
• Due to data constraint we analyse only competitiveness on the EU marketo Competitiveness on the World market
o UN Comtrade database
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