Competitiveness ESTP Course - MIP Luxembourg 1-3 December 2015 Justyna Gniadzik, MIP TF

MIP Competitiveness indicators 3 headline indicators REER ULC EMS + auxiliary indicators GFCF, Net Trade Balance of energy products, REER – EA, EMS vs. advanced economies, Terms of trade, EMS in volume, Labour productivity, Nominal ULC, ULC performance vs. EA

MIP Competitiveness measures The conventional view of competitiveness is mostly restricted to prices and costs You are competitive if you can keep wage cost low Following very closely REER/HICP Monitoring aggregate developments Monitoring gross trade flows

MIP Competitiveness measures Price competitiveness and export market shares (Average annual percentage changes, pre-crisis Q3)

MIP Competitiveness measures Cost competitiveness MIP indicators: REER, ULC Labour, energy, intermediate services costs Terms of trade, REER vs. EA,… Non-cost competitiveness MIP indicators GERD, Labour productivity, … Other official statistics Rankings - WB doing business Research – TFP Developments in trade EMS Net Trade Balance of energy products Breakdowns by products, markets; different frequencies Global value chains + data sources

Real Effective Exchange Rate

Effective Exchange Rate Bilateral exchange rates do not move together, so we need some method to summarise the overall strength or weakness of a country’s currency The nominal effective exchange rate (NEER) is defined as the exchange rate of the domestic currency vis-à-vis other currencies weighted by their share in world trade Which currencies? What weights? Significance of the base year

Real Effective Exchange Rate Real effective exchange rate (REER) also takes account of price level changes between countries adjusts the NEER by the ratio of foreign to domestic inflation assess change in competitive position of a country relative to its competitors Example suppose currency of country A has depreciated over one year by 10% against currency of country B suppose inflation rate in A is 7% and in B is 2% then real depreciation (change in REER) is 10% - (7% - 2%) = 5% improvement in competitive position is 5%, not the 10% suggested by the NEER

REER definition How to compute REER? where, N stands for number of the competitor countries in the reference group w i is the overall trade weight assigned to the currency i D i and D j are the deflators for partner country i and country j e i,j is the nominal exchange rate of country i in terms of currency of country j

REER - rationale "REER often been found to be a statistically significant predictor of the incidence of economic crisis" Balassa-Samuelson effect Price and cost competitiveness Thresholds +/-5% for EA, +/-11% non EA

REER for MIP REER computed by EC – DG ECFIN: Real – deflated by HICP, ULC, GDP deflator, export prices, producer prices Effective – based on bilateral trade (42, 37, EU, EA) ER – X rates vs. USD Headline indicator 3y % change in REER vs. 42IC; HICP/CPI p.m. y-o-y Auxiliary indicators 3y % change in REER vs. EA; HICP/CPI 10y % change in ULC performance vs. EA based on REER's double export weights

REER - Data sources REERs – DG ECFIN; Price and Cost Competitiveness database Components: HICP/CPI Eurostat International Financial Statistics (IMF IFS); OECD Exchange Rates IMF IFS; ECB; ECFIN (before 1999) Unit Labor Cost indexes Eurostat Bilateral Trade IMF - Data on Trade (IMF DoT) GDP; export prices Eurostat

REER – statistical issues Bilateral exchange rates Trade basis Trade weights Choice of deflators Coverage of trading partners

REER – statistical issues and actions Total trade - Current source - IMF; and Eurostat data? community vs. national approach (quasi transit) …and why not trade in manufacturing? …or trade in services? - Domestic supply (GDP, GVA…) - Frequency of weights updates - Chain linking method

REER – statistical issues and actions Coverage of trading partners ECFIN: EA18; EU28; IC37; IC42; BIS: broad index – 61; ECB: EER-39 Exchange rates Averages of daily data; USD vs. EUR Deflators Price/cost competitiveness HICP/CPI, GDP deflators, Export prices, ULCT ULCM? PPI?

REER – economic interpretation

BE case – cost competitiveness

REER – conclusion There is no single “all purpose” REER – Difficult trade-offs such as fit vs. quality – Awareness of statistical engine is crucial

Unit Labour Cost

ULC - rationale monitors developments in cost competitiveness across EU MSs measures the average cost of labour per unit of output rise in an economy’s NULC corresponds to a rise in labour costs that exceeds the increase in labour productivity

ULC – definition (1) compensation of empl/no. of employees real GDP per person employed based on Eurostat data from National Accounts MIP indicator - percentage change over 3 years Thresholds: +9% for euro-area +12% non-euro-area ULC =

ULC – definition (2) 3 auxiliary ULC indicators:  Labour productivity – yoy % change  NULC – 10 years % change -Both based on Eurostat National Accounts  ULC based on REER for EA -Source: DG ECFIN

ULC – economic interpretation

BE case – cost competitiveness

ULC - actions Quality Adjusted Labour Index Total hours worked as input measure for analysing labour productivity changes over time is not adequate = assumes each hour worked has the same quality Combining social surveys with NA data

Export Market Shares

EMS – rationale Three competitiveness indicator: REER CPI deflated – price competitiveness Nominal ULC – cost competitiveness Export Market Shares – broader view on competitiveness; export performance that cannot be explained by price developments geographical specialisation (trade openness) sectoral specialisation product quality and composition

EMS - rationale EMS is driven by: numerator effect denominator effect +83% in multilateral trade liberalisation unilateral trade liberalisation of some emerging countries (e.g. China, India and Brazil) increased trade in services due to development of ICT

EMS – definition (1) Headline indicator 5y % change in share of total world exports p.m. y-o-y BoP data from Eurostat and IMF Threshold: -6% Auxiliary indicators 5y % change in share of Advanced Economies exports Eurostat and OECD data 1y % change in EMS in volume IMF data

EMS – economic interpretation

High tech exports

BE - Trade balance by broad category (BEC classification)

BE - Sectoral EMS; goods

EMS – statistical issues

EMS in volume – statistical issues Change of the source: IMF WEO ->Eurostat NA Improved harmonization among MSs and with other MIP indicators (EMS headline indicator; terms of trade) BE, BG, DK, NL, PT, SE: the whole series differ for 7 other countries only 1 or 2 values differ Main causes of discrepancies: Source of primary data Methodology for deriving volumes Exports of goods only Length of time series (actual data)

EMS – actions BPM6 – EMS limited coverage Global Value Chains – mapping international trade Input-output tables and gross trade Tradables / non-tradables

BE case other aspects

BE case – cost competitiveness

BE case – non-cost competitiveness

BE case – deindustrialization

Doing business

Global value chains

Breakdown of gross manufactured exports by value added (% of total, 2009) Source: OECD; TiVA

BE – competitiveness assessment MIP category 2 Imbalances, which require monitoring and policy action CSR for Restore competitiveness by ensuring, in consultation with the social partners and in accordance with national practices, that wages evolve in line with productivity

Concluding remarks Importance of assessing a broad set of factors when analysing a country’s competitiveness; For policy design - analysis has shown how crucial it is to implement structural reforms to boost competitiveness; For statistics - further enhancement of the analytical capabilities by providing an appropriate toolbox, including a broader set of indicators; How can we improve the current set-up?