Competitiveness

ESTP Course - MIPLuxembourg 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

Price competitiveness and export market shares(Average annual percentage changes, pre-crisis 1999-2008Q3)

MIP Competitiveness measures• Cost competitiveness

MIP indicators: REER, ULC Labour, energy, intermediate services costs

Terms of trade, REER vs. EA,…

• Non-cost competitivenessMIP indicators

GERD, Labour productivity, …Other official statistics Rankings - WB doing businessResearch – TFP

Developments in trade •EMS

Net Trade Balance of energy productsBreakdowns by products, markets; different frequencies

•Global value chains+ data sources

Real Effective Exchange Rate

Effective Exchange RateBilateral 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

REER definitionHow to compute REER?

where, N stands for number of the competitor countries in the reference groupwi is the overall trade weight assigned to the currency iDi and Dj are the deflators for partner country i and country jei,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 MIPREER computed by EC – DG ECFIN:Real – deflated by HICP, ULC, GDP deflator, export prices, producer pricesEffective – 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-yAuxiliary 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 sourcesREERs – DG ECFIN; Price and Cost Competitiveness database

Components:• HICP/CPIEurostatInternational Financial Statistics (IMF IFS); OECD• Exchange RatesIMF IFS; ECB; ECFIN (before 1999)• Unit Labor Cost indexes Eurostat• Bilateral TradeIMF - Data on Trade (IMF DoT)• GDP; export pricesEurostat

REER – statistical issues

Bilateralexchangerates

Trade basis

Trade weights

Choice of deflators

Coverage of trading partners

REER – economic interpretationREER vs 42IC; HICP deflated (2000=100)

70

80

90

100

110

120

130

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BE DE

EL ES

FR IT

HU NL

PL PT

UK

Comp. loss

Comp. gain

BE case – cost competitivenessREER for Belgium vs. EA (2005=100)

95

97

99

101

103

105

107

109

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

HICP deflatorNominal ULC, total economyPrice deflator GDP, market pricesPrice deflator, exports of goods and services

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 % changeNULC – 10 years % change-Both based on Eurostat National Accounts

ULC based on REER for EA-Source: DG ECFIN

ULC – economic interpretationNULC (2000=100)

95

100

105

110

115

120

125

130

135

140

145

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EU EA BE DE EL ES FR IT CY PT

Hourly labour cost levels in business economy (2014, EUR)

0

5

10

15

20

25

30

35

40

45

DK BE SE LU FR NL FI DE AT EA IE IT EU UK ES CY SI PT MT EE SK CZ HR PL HU LV LT RO BG

wage non-wage

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 1994-2007• 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 IMFThreshold: -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 interpretationExport Market Shares in 2014 (5 years % change)

LTLV

ROET

BGPL

SKMT

LUESIE

PTCZ

DENLFR

UKSI

ATSEDKIT

HUCYELHR

FI

BE

-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30

of world total

of advanced economies

EMS – economic interpretationShare of exports going to EA

30

35

40

45

50

55

60

65

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BE DE IE FR IT NL PT

EMS – economic interpretationEMS goods and services in 2014 (5 years % change)

LVLT

ROBG

ETSK

PLCY

ESPT

CZMT

NL

ELUK

SIIT

DK

ATIE

HUSE

HRLU

FI

BE

DE

FR

-40 -30 -20 -10 0 10 20 30

Goods

Services

Goods ServicesGoods and

Services

BE 1,8 2,4 1,9DE 8,4 6,6 8,0ES 1,7 3,2 2,0FR 3,1 5,2 3,5IT 2,8 2,4 2,7NL 3,0 2,5 2,9PL 1,1 0,9 1,1UK 2,6 6,5 3,3EU28 31,2 43,6 33,7

EMS – statistical issuesExport Market Shares (y-o-y % change)

-10

-5

0

5

10

15

20

CY FI UK CZ MT SE IT IE AT NL DK DE FR EL LV SI EE HR BE SK HU ES BG PL PT LT LU RO

in volume

in current prices

Source: Eurostat; IMF

%

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 caseother aspects

BE case – cost competitiveness

BE case – non-cost competitivenessGERD (% of GDP)

1,5

2,0

2,5

3,0

3,5

4,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EU BE DE FR NL FI

0,74

0,38

0,46

Doing business

Economy

Ease of Doing

Business Rank

Starting a Business

Dealing with Construction

Permits

Getting Electricity

Registering Property

Getting Credit

Paying Taxes

Denmark 3 29 5 12 9 28 12United Kingdom 6 17 23 15 45 19 15Sweden 8 16 19 7 11 70 37Finland 10 33 27 16 20 42 17Germany 15 107 13 3 62 28 72Estonia 16 15 16 34 4 28 30Ireland 17 25 43 30 39 28 6Lithuania 20 8 18 54 2 28 49Austria 21 106 47 17 26 59 74Latvia 22 27 30 65 23 19 27Portugal 23 13 36 25 27 97 65Poland 25 85 52 49 41 19 58France 27 32 40 20 85 79 87Netherlands 28 28 85 43 30 79 26Slovak Republic 29 68 84 48 5 42 73Slovenia 29 18 71 35 36 126 35Spain 33 82 101 74 49 59 60Czech Republic 36 93 127 42 37 28 122Romania 37 45 105 133 64 7 55Bulgaria 38 52 51 100 63 28 88Croatia 40 83 129 66 60 70 38Hungary 42 55 88 117 29 19 95Belgium 43 20 54 53 132 97 90Italy 45 50 86 59 24 97 137Cyprus 47 64 145 67 92 42 44Greece 60 54 60 47 144 79 66

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 2015-2016• 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?