Competitiveness of New Europe: Papers from the Second Lancut Economic Forum [1 ed.] 041545462X

Citation preview

Competitiveness of New Europe

New Europe is a rhetorical term used by some analysts to describe European post-communist transition success stories. The term implies their recent return to European, or more precisely, Western civilization, but suggests – given their (forced) communist detour – that there is no single Pan-European identity in the EU. The lamentable experience of Soviet-type economics makes them, e.g., more willing to accept free market solutions than is the case in Old Europe. This book examines the nations that make up the so-called New Europe (those that joined the European Union in 2004) to look at the economic competitiveness in comparison with each other and the rest of Europe. The editor – a leading scholar on transition economics – draws together contributions from a wide range of contributors to look at this important issue. These essays stress the interaction between successful transition measures creating an encouraging, more transparent, liberal (i.e. free market) environment on the one hand and the inflow of foreign investors encouraged by that environment on the other. This book is useful reading to scholars with an interest in transition studies and international economics as well as economists and policy-makers engaged with trade and investment. Jan Winiecki is Professor and Chair of International Economics and European Studies at the University of Information Technology and Management, Rzeszow, and Tischner School of European Studies, Cracow, Poland.

Routledge Studies in the European Economy

1 Growth and Crisis in the Spanish Economy, 1940–1993 Sima Lieberman 2 Work and Employment in Europe A new convergence? Edited by Peter Cressey and Bryn Jones 3 Trans-European Telecommunication Networks The challenges for industrial policy Colin Turner 4 European Union – European Industrial Relations? Global challenges, national developments and transnational dynamics Edited by Wolfgang E. Lecher and Hans-Wolfgang Platzer 5 Governance, Industry and Labour Markets in Britain and France The modernizing state in the mid-twentieth century Edited by Noel Whiteside and Robert Salais 6 Labour Market Efficiency in the European Union Employment protection and fixed-term contracts Klaus Schömann, Ralf Rogowski and Thomas Kruppe 7 The Enlargement of the European Union Issues and strategies Edited by Victoria Curzon-Price, Alice Landau and Richard Whitman

8 European Trade Unions Change and Response Edited by Mike Rigby, Roger Smith and Teresa Lawlor 9 Fiscal Federalism in the European Union Edited by Amedeo Fossati and Giorgio Panella 10 European Telecommunications Liberalisation Edited by Kjell A. Eliassen and Marit Sjøvaag 11 Integration and Transition in Europe The economic geography of interaction Edited by George Petrakos, Gunther Maier and Grzegorz Gorzelak 12 SMEs and European Integration Internationalisation strategies Birgit Hegge 13 Fiscal Federalism and European Economic Integration Edited by Mark Baimbridge and Philip Whyman 14 Financial Markets in Central and Eastern Europe Stability and efficiency Edited by Morten Balling, Frank Lierman and Andy Mullineux 15 Russian Path Dependence Stefan Hedlund

16 The Impact of European Integration on Regional Structural Change and Cohesion Edited by Christiane Krieger-Boden, Edgar Morgenroth and George Petrakos 17 Macroeconomic Policy in the European Monetary Union From the old to the new stability and growth pact Edited by Francesco Farina and Roberto Tamborini

18 Economic Policy Proposals for Germany and Europe Edited by Ronald Schettkat and Jochem Langkau 19 Competitiveness of New Europe Papers from the second Lancut Economic Forum Edited by Jan Winiecki

Competitiveness of New Europe Papers from the second Lancut Economic Forum Edited by Jan Winiecki

First published 2009 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2008. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2009 selection and editorial matter, Jan Winiecki; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A Catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Lancut Economic Forum (2nd : 2006 : Poland) Competitiveness of new Europe : papers from the second Lancut Economic Forum / edited by Jan Winiecki. p. cm. — (Routledge studies in the European economy ; 19) Includes bibliographical references and index. 1. Former communist countries—Economic policy—Congresses. 2. Former communist countries—Commerce—Congresses. 3. Europe, Eastern—Economic policy—1989—Congresses. 4. Europe, Eastern—Commerce—Congresses. I. Winiecki, Jan. II. Title. HC244.L3185 2008 338.947—dc22 2008006824 ISBN 0-203-89252-6Master

e-book ISBN

ISBN 10: 0-415-45462-X (hbk) ISBN 13: 978-0-415-45462-9 (hbk)

Contents

List of contributors

ix

Introduction

1

JAN WINIECKI

1

Overview of export performance of ‘New Europe’

15

MATIJA ROJEC AND MAJA FERJANCˇICˇ

2

Changes in export patterns of the Czech Republic, Hungary and Poland

52

ANNA WZIATEK-KUBIAK

3

How to attract FDI and maximize its benefits

74

BEATA S. JAVORCIK AND BARTLOMIEJ KAMINSKI

4

Multinational corporations and export competitiveness of ‘New Europe’

97

BARTLOMIEJ KAMINSKI AND BEATA S. JAVORCIK

5

A new international division of labor in Europe

122

DALIA MARIN

6

From crisis to crisis?

137

JUDIT HAMAR

7

How much do trade and FDI theories help in analyzing competitiveness-related issues?

157

LASZLO CSABA

8

How much are studies of competitiveness worth?

174

WOJCIECH BIENKOWSKI

Index

189

Contributors

Wojciech Bienkowski, PhD, Professor, Warsaw School of Commerce (SGH), Warsaw, Poland Laszlo Csaba, PhD, Professor, Central European University (CEU), Budapest, Hungary, and Chair, Committee on Economics, Hungarian Academy of Sciences Maja Ferjancˇicˇ, Researcher, Institute of Macroeconomic Analysis, Lubljana, Slovenia Judit Hamar, PhD, Research Economist, Kopint-Datorg Institute, Budapest, Hungary Beata S. Javorcik, PhD, Senior Economist, Development Economics Research Group, World Bank, Washington DC Bartlomiej Kaminski, PhD, Professor, Government and Politics Dept., Maryland University, College Park, MD, USA, and consultant, World Bank, Washington, DC Dalia Marin, PhD, Professor, Economics Department, Munich University, Munich, Germany Matija Rojec, PhD, Professor, Faculty of Social Sciences, University of Lubljana, Lubljana, Slovenia Jan Winiecki, PhD, LLD, Professor, University of Information Technology and Management, Rzeszow, and economic adviser, WestLB Bank Polska, SA, Warsaw, Poland Anna Wziatek-Kubiak, PhD, Senior Researcher, Institute of Economics, Polish Academy of Sciences, Warsaw, and Professor, Lazarski School of Commerce and Law, Warsaw, Poland

Introduction Jan Winiecki

The competitive strength of countries successfully accomplishing post-communist transition has been one of the major surprises of the process in question. After all weaknesses and inefficiencies of the communist political-economic system have been most strongly visible precisely in communist countries’ external economic relations. And especially in their relations with the West. From Franklyn Holzman (1974, 1979) to the present writer (Winiecki, 1985, 1987, 1988) system-specific distortions, making export improvements difficult (if not impossible), have been pointed out many times by a range of specialists in comparative economics and Soviet studies. These countries found it extremely difficult to expand exports other than those of commodities (raw materials, fuels and agricultural products). A shift in the product structure of exports toward the increasing share of manufactures – and particularly more sophisticated manufactures – was not only very slow, but also marked by long periods of reversals. Worse still, especially in industries with greater capital and human capital intensity, communist countries were obtaining lower and lower relative prices vis-à-vis their competitors. To give an example, measured by unit values (that is kilogram prices), they used to obtain in 1965 in engineering industry about 50 per cent of unit values obtained by other exporters to the European Union. Twenty years later, in 1985, they obtained barely 25 per cent! It meant that to even maintain the export value in real terms, let alone increase it, they had to export more and more. The process in question continued throughout the whole period of communist rule (see, e.g. Goldmann and Kouba, 1969, and Winiecki, 1988, 1990). And yet, in spite of the foregoing, we have been observing for many years now an increasing international competitiveness of the eight countries from the postcommunist part of Europe, which joined the European Union in 2004 (Bulgaria and Romania are a different story!). As stressed in the first chapter by Matija Rojec and Maja Ferjancic, a ‘remarkable upgrading of export performance of the “New Europe” countries has been one of the most outstanding features of transition and EU integration ...’. By ‘New Europe’ authors understand the eight countries referred to in this book. Unsurprisingly, such a marked change has been worthy of an academic inquiry and international debate, which in this case took place in a beautiful palace

2

Jan Winiecki

in Southeastern Poland within the framework of Lancut Economic Forum on ‘New Europe’. This book is a follow-up of the Lancut conference; to be more precise, the Second Lancut Economic Forum in 2006. The conference has to a large extent been devoted to exploring the flow of goods and production factors (primarily capital), as well as their theoretical and policy-dependent underpinnings. The red thread seen throughout the successive chapters, consisting of adapted papers from the conference, has been changing institutions and their importance for the successes in increasing competitiveness. The book consists of eight chapters, concentrating on four areas of importance for the theme of the conference: ● ● ●

●

foreign trade performance and its components; the role of foreign direct investment in the performance; a look on ‘New Europe’ (and the region as a whole) from the vantage point of global relocations of production; and theoretical issues concerning competitiveness.

Two chapters are devoted to each theme. Chapters 1 and 2 concentrate on underpinnings of foreign trade successes. The eight ‘New Europe’ countries (NE-8 for short) increased their exports in the 1990–2004 period almost sevenfold (precisely by 665 per cent). This exceeded three times export the increases of the EU (220 per cent) in the same period and 2.5 times the increase in world exports. Their share in world exports increased accordingly (from 1.11 per cent in 1990 to 2.81 per cent). Now, with respect to sources, or underpinnings, of such outstanding performance Rojec and Ferjancic offer us a two-pronged approach. On the one hand they look at traditional trade models such as gravity model, shift-share analysis and other calculations (such as those of competitiveness). These and some other calculations signal us that a large part of success comes from the gradually improving access to EU markets. But they stress also the growth in supply capacity of NE-8. The picture in the latter respect seems muddled, however, by the misunderstanding about data. Decline in supply capacity noted in empirical studies, quoted in the Rojec and Ferjancic chapter, comes largely from the inability to differentiate between ‘tradeables’ and ‘saleables’; the supply of tradeables did shrink sharply in early transition, but the supply of saleables did not. For most of the export supply capacity under communism was on paper only because the low quality and technological obsolescence made a large part of tradeables unsaleable on competitive world markets. More meaningful, therefore, seem to be the results of shift-share analysis, which suggest that as much as 66.1 per cent of export increase was due to NE-8 countries being able to increase their exports of certain categories of goods to certain markets more than their competitors. Regardless of the ongoing debate what competitiveness is about, it is legitimate to say that in terms of exports NE-8 were on average more competitive than others. A large part of that stemmed from improved export supply capacity.

Introduction 3 Another important approach to determinants of performance is more qualitative in nature and refers to the post-communist transition. Rojec and Ferjancic note a series of studies, which altogether point to an unsurprising, but extremely important conclusion that speed and scope of transition have been more important than other variables in explaining inter-country differences in export performance between countries (in the context of Lancut Forum: between NE-8 and other countries in transition). In other words, institutions mattered. Although much different in methodology, their results are, in this writer’s opinion, quite compatible with the results obtained from empirical applications of traditional trade models. After all, such an important role of the improved EU market access (which took place in stages between 1990 and 2004) is a logical consequence of progress by the NU-8 countries in post-communist transition, that is shifting to a normal capitalist market economy. Without the institutional change in question export performance simply would have stopped at some point – as it did with respect to other countries of the post-communist Europe. Chapter 2, by Anna Wziatek-Kubiak on export patterns of the three largest countries of NE-8 (Czech Republic, Hungary and Poland – CHP for short), adds a lot of detailed explanations, enriching an overall assessment of performance, as well as adding some nuances, e.g. those concerning timing. What this author would like to stress first is Wziatek-Kubiak’s empirical results, concerning relative unit export value (kilogram price) changes in CHP exports, since her results show such a stark contrast with the communist past. As signaled briefly earlier in this introduction relative unit values of communist countries’ exports have been decreasing almost all the time over the 45 years of communist domination in East-Central Europe. Although the Wziatek-Kubiak chapter covers only the 1996–2003 period, the picture is the reverse of what we noted in communist times, namely a near-continuous increase in kilogram prices. And, while maintaining the time perspective and economic systems’ comparative perspective, this author notes after the authoress of the paper that Hungary (rather than most highly developed Czech Republic) records the highest kilogram prices. The explanation why this is the case would require separate analysis, but it is worth reminding that Hungary had the highest unit export values also in communist times and – quite probably – in pre-communist times as well (though there are no studies with respect to the earlier period). Such an exceedingly good performance might have had, in the opinion of this author, yet another – little noted – cause. All New Europe countries are in effect middle-developed economies, a state which is largely neglected in trade theory deliberations; the trade theory, as well as theory of economic development, know only developed and developing (meaning underdeveloped) economies. It can be seen in the Heckscher-Ohlin factor proportions theory, where there are capital abundant (meaning rich) and labor abundant (meaning poor) countries. But middle-developed New Europe countries are just in the middle between the two. And it is their advantage for they are still competitive in more sophisticated labor-intensive product groups, while at the same time they are already competitive in less sophisticated capital-intensive products. Using examples, as in Figure 1, they

4

Jan Winiecki Labor-intensive products

I A (furniture)

III

B (cars) II Capital-intensive products

Figure 1 How middle-developed countries (transformation curve III) fit into the H-O explanations of international trade specialization along factor abundance lines.

are already competitive in exporting cars, but still competitive in exporting furniture. The range of export product groups in middle-developed economies is quite large. Another empirical discovery in the Wziatek-Kubiak chapter has been a telling difference between Hungary and the other two countries with respect to timing of export acceleration. Whereas in Hungary the acceleration occurred in the 1996–2000 period, Czech Republic and Poland recorded similar acceleration only after 1999. Clearly, the foregoing empirical observation should be linked to the different timing of the foreign direct investment (FDI) inflow to the countries in question. Hungary, the early leader in transition, experienced the largest inflow of FDI in early to mid-1990s, while the Czech Republic and Poland attracted multinationals (MNEs) and their investments mostly in the second half of the 1990s. As the maturation of new divisions or subsidiaries may last four to five years, effects of their coming of age as exporters and/or suppliers to the host country markets become mostly visible with a similar lag. It is due to the lag in question that the latter countries accelerated their MNE-driven exports a few years after Hungary. The linkage between MNEs’ foreign investment and export performance is also a convenient passage from the first theme and the first two chapters to the second theme and the next two chapters. That is to chapters on the role of multinationals, this time written jointly by a World Bank pair: Beata S. Javorcik and Bartlomiej Kaminski. The first chapter deals with more general issues, concentrating on how to attract foreign direct investment (FDI for short) and maximize its benefits.

Introduction 5 The authors dwell on the issue of potential benefits of technology transfer. It does not come as a surprise since – as numbers tell us – 700 MNEs accounted for 46 per cent of world R&D spending. Some large multinationals, such as Pfizer, Daimler-Chrysler and Siemens, spend twice as much annually on research and development as EU-8 countries taken together! Although R&D is concentrated in the home countries of multinationals, an increasing part of research is being conducted abroad. For example, in Hungary 62.5 per cent of business R&D is undertaken by foreign affiliates of multinational firms. Benefits, as stressed strongly by the authors, come not only from technological upgrading. In what this author regards as the most important part of the chapter Javorcik and Kaminski point to the variety of benefits resulting from FDI. After the takeover by MNE, FDI received significant increases of the total factor productivity; after two years it may increase from 14 per cent in the case of a takeover in a developed country to 35 per cent in the case of an underdeveloped one. Affiliates tend to become more integrated into the global economy by exporting a larger share of their output and sourcing larger share of their inputs from abroad than comparable local firms. Javorcik and Kaminski inquire also into the indirect effects of FDI (known as spillovers). They quote various studies yielding conflicting results as far as the impact of entry of an MNE has on the entered industry (horizontal spillovers) and explain why this is the case: demonstration effects are uniformly positive while competition effects are not. In the shorter run increased competition leads to losses of market shares of less efficient firms and rise rather than decline in unit costs in local firms losing the competition. In the longer run, however, worst performers exit and the average productivity of remaining firms, enhanced also by demonstration effects, increases. But an important contribution of the chapter is its stress on indirect effects on supplying industries. Cases from EU-8 (Lithuania, Hungary) support the positive effects of such vertical spillovers. Benefits are drawn in various ways. The most traditional are, of course, high quality requirements of multinational firms, which generate greater upgrading efforts on the part of actual and potential suppliers. In certain cases (more frequent in some countries than in other) multinationals extend assistance to their local suppliers; in a study on the Czech Republic such assistance was extended to about 20 per cent of suppliers. Indirect effects on supplying industries are the greater, the larger is the share of locally sourced inputs. In the quoted Czech case (Javorcik and Spatareanu, 2005) the average Czech affiliate of a multinational firm has sourcing relationship with 10 Czech firms. Altogether 48.3 per cent of inputs is purchased from Czech firms (and another 12.6 per cent from affiliates of other multinationals in that country). The present writer posits that the share of locally sourced inputs is dependent on the proximity of a given country to the standard capitalist market economy (measured by the progress in transition) as well as by the level of economic development (measured by GNP pc). The Czech Republic is near or at the top in both respects. By contrast, in the case of transition laggards, indirect effects of FDI are expected to be markedly weaker at the aggregate level.

6

Jan Winiecki

Another interesting inquiry made by the authors concerns effects of FDI inflows into service industries (banks, telecommunications, etc.) upon the performance of manufacturing firms. Improvements introduced due to FDI in services reduce the vulnerability of MNEs, with their international networks of cooperating affiliates, to vagaries of low-quality service links, upsetting the delivery schedules in the intra-firm, but international supply chains. Chapter 4, by Kaminski and Javorcik, is more oriented toward export competitiveness-related effects of linkages with large multinational firms; it also presents more empirical evidence on EU-8 countries and draws relevant conclusions therefrom. To begin with, the authors stress the paramount importance of the interrelationship of the success in systemic change, or post-communist transition, and the participation in what they call a pan-European market in industrial goods. Participation of post-communist countries in the latter has enhanced the attractiveness of the region for multinationals, for it created the prospect of duty-free access to EU-25 markets, as well as those of some other European economies – a highly attractive proposition for MNE networks interacting across boundaries of many countries. However, for prospects to become a reality, post-communist economies should successfully accomplish the shift to an open capitalist market economy. A decade earlier (see Kaminski et al., 1996) Kaminski had already underlined that the successful export performance is strongly correlated with the progress in transition to the market. Here, Kaminski and Javorcik go much further. They systematize certain characteristics of linkages between domestic firms and multinationals, outline a sequence of change in the product structure of exports, link the foregoing with the presence (or absence) of MNEs – and, then, explain successes and failures to improve foreign trade performance. Kaminski and Javorcik distinguish between two types of organizational/legal arrangements: buyer-driven value chains and producer-driven value chains. The former are managed by large, often multinational, retailers and the latter by manufacturing MNEs. Each arrangement displays different relationship between demanders and suppliers. The difference extends also to the ownership issue, for retailers rarely – and if so to a small extent – take over their suppliers, while manufacturers generally prefer wholly owned affiliates and establish jointventures (JVs for short) as a minimum. The difference in question has important consequences. Authors of the chapter explain the consequences – and link them to progress in transition – by taking two countries as contrasting examples. Thus, Hungary is an example of successful transition and, consequently, successful structural change in exports. Successful, that is, continuously upgrading the product structure. The authors explain how distorted product structure inherited from communist times has been changing during the transition period. Thus, in terms of factor intensity of Westbound exports, natural resourcesintensive products (46 per cent of exports in 1989) shrunk by almost half already by 1995, in the first five years of transition. They were at first substituted by unskilled labor-intensive products, typical for buyer-driven arrangements in light industry: textiles, clothing, footwear and at a somewhat higher level of

Introduction 7 sophistication also furniture. In Hungary these were increasing their share until 1993. They were, however, gradually overtaken by capital-intensive and – more slowly – by human capital (skilled labor)-intensive products. Already in 1997 the latter two groups of higher value-adding products more than doubled their initial 1989 share to 66.3 per cent. Bulgaria started in a similar manner. Until 1993, unskilled labor-based products were the driving force of Westbound exports, but their share in these exports began to decline afterward. It was the consequence of the departure from a successful transition path, taken at that time by a number of countries, including Bulgaria, and the return to various interventionist measures (as well as a freeze on privatization). The results were heavily negative not only in terms of retrogression of the export structure. Such retrogression was an outcome of a number of adverse domestic economic trends. A recovery of communist-built natural resources and capital-intensive industries, supported by subsidies, turned out to be unsustainable. With the limitation of subsidies came severe weakening of their performance and, consequently, the second recession (two years of negative GDP growth). The return to the basic transition program in 1997 brought about again a positive change. Economic growth returned, exports of unskilled labor-intensive products accelerated and began again to increase its share in aggregate exports (to over 40 per cent in 2001). However, in contrast with Hungary, there has been no further structural change, that is no increase in the share of capital-intensive and skilled labor-intensive products; that share amounted to about 30 per cent of the aggregate exports in both 1989 and 2003. Kaminski and Javorcik explain the sharp difference between the two countries by the presence or absence of high-quality multinationals. Whereas in Bulgaria littleknown firms, registered in low-tax havens, tried to exploit the rent-seeking opportunities created by state interventions, well-known MNEs established their affiliates in Hungary. With its record of institutional instability, Bulgaria has been less attractive for MNEs, especially as the resumed reforms did not go much further than the first-stage reforms accomplished by others in the first few years of transition. In Hungary the ‘package’ offered by multinationals allowed their affiliates to reach the desired quantity and quality levels relatively quickly and were integrated into these firms’ global networks. A continuous increase in the share of more value-adding products of capital-intensive and skilled labor-intensive nature has primarily been the consequence of the presence of MNEs; for MNEs not only increased their shares in aggregate exports, but increased their shares even more in exports of high-technology products (see the already quoted Rojec and Ferjancic’s Chapter 1 in this collection). The role of multinationals may be presented in terms of a modification of the traditional capital absorbtion model. Borrowed capital may bring positive effects – a net increase in value added – only when there are complementary production factors available in the borrowing country. Where they are not available (or available in smaller quantities than necessary) borrowed capital may bring about a net decrease. Figure 2 shows the impact of a set of production factors coming to a host country in

8

Jan Winiecki

a ‘package’ (rather than capital coming alone as in typical borrowing). An upwardly pointing arrow signals that the ‘package’, by bringing factors other than capital as well, increases the probability of success by shifting upward the marginal value product of capital curve there. Like Wziatek-Kubiak in another already quoted chapter, Kaminski and Javorcik point out that other successful transition countries began their shift in the product structure of exports with a few years, lag vis-à-vis Hungary because the massive inflow of FDI also began there with a lag. Everywhere in the successful transition countries producer-driven arrangements were largely the initiative of multinationals, primarily in the capital- and skill-intensive product groups (primarily automotive products and, somewhat later, information technology products). They generated two-way flows of parts and components among affiliates located in different countries of the world.

Figure 2 The role of MNE’s ‘package’ brought into a host country. An arrow pushing the MVP curve upward (from MVP1 or MVP2 position to MVP3) shows how MNEs improve the probability of success of their foreign direct investment due to the ‘package’ nature of such investment. Interest rate (IR) and return on capital

Domestic IR

Marginal value product of capital

World IR MVP2

MVP3

MVP1

Quantity of capital Domestic Borrowed capital capital

Notes: MVP1 – No value is added by borrowing capital, when there are no production factors complementary to capital. MVP2 – Little value is added (less than the cost of borrowed capital), when there are insufficient complementary production factors. MVP3 – By adding complementary factors along with capital (in a ‘package’), MNEs allow to use capital efficiently.

Introduction 9 Chapters 5 and 6 also link very well with the preceding considerations. The third theme of the conference was devoted to the place of New Europe countries in the global relocations of production in the contemporary world economy, for production activities not only shift to countries under consideration, but also further East (and South). The production also begins to move in these directions from the EU-8 group of countries. Chapter 5, by Dalia Marin, picks up the theme, where the chapters from the preceding session left, with respect to explanations of foreign trade and investment performance of EU-8 or a larger group of post-communist transition countries. At least two important issues are worth signaling in this introduction. The first is a differentiation of competitiveness of the post-communist countries (the authoress divides the region into three-country groups: EU-8, Southern Europe (EU candidates and other Balkan countries) and CIS countries (Russia and other post-Soviet states, except the Baltics). Marin looks at the competitiveness of what she calls outsourcing, that is, establishing supply links with local firms, and offshoring, that is, foreign direct investment in these countries (her differentiation between outsourcing and offshoring is a similar concept to that of the earlier quoted buyer-driven and producer-driven value chains). Although she deals with only two EU countries, Germany and Austria, her chapter is of special value because her empirical investigation applies not to samples, but to whole populations of firms trading with and investing in the postcommunist part of Europe (80 per cent of German firms and full 100 per cent of Austrian firms). Also, these two countries are in the lead in terms of shares in trade and investment among both large and small old EU countries. Marin calculates that outsourcing does not at present allow for significant amount of cost saving because after allowing for differences not only in wages, but also in productivity the unit labor costs do not differ much. Only in CIS countries, with their dramatically low wages, low productivity does not obliterate all the cost advantage and the unit labor costs tend to be lower by about 30 per cent. There is a world of difference between outsourcing and offshoring, however. FDI works well to upgrade the productivity and other performance characteristics. The outcome is that investments in New Europe countries result in unit labor costs amounting to 27.6 per cent of those in Germany and 48.7 per cent of those in Austria. Investments in both Southern Europe and CIS countries yield also significantly lower unit labor costs. Thus, what Dalia Marin proves in her study is an empirical support of the special contribution of the MNE-delivered ‘package’ of production factors accompanying FDI in contrast with ‘stand-alone’ capital transfer. Even more fascinating, however, is another empirical inquiry based on the same survey of German and Austrian firms, made by the same author (see Marin, 2004). It looks into the impact of relocation upon the production factors in home countries, especially on skilled workers. She established that human capitalintensive production is relocated to EU-8 not only because of lower labor costs of skilled workers, but also because of their greater availability there. It has rarely been noted (but see Javorcik and Kaminski in this collection) that the ratio of

10

Jan Winiecki

high-skilled (tertiary education) to total employees does not differ much between old and new Europe and the ratio of those with at least secondary education to total employees is even higher in New Europe. Given the foregoing, it is not surprising that the employment of high-skilled employees in affiliates of German firms is two to three times higher in relative terms than in the plants of the same firms in Germany and Austria. There are twofold consequences stressed by Marin in this respect. The first is that job losses among skilled workers have been rather small because of the relative shortage of skilled workers in the home countries. What has been relocated were more often than not activities that would not find enough available skills in these countries. The relocation of skilled labor (human capital)-intensive activities to New Europe, as well as to some other countries, is called by Dalia Marin – tongue in cheek – the ‘reverse maquiladora’. A case study of relocation pressures on the Hungarian textile and clothing industry by Judit Hamar in chapter 6 addresses a more standard economic development issue. It deals with the decline of unskilled labor-intensive industries, namely textile and clothing (TC industries for short), in the Hungarian economy in the midst of structural change. The pattern shown by Hamar supports earlier observations in Kaminski and Javorcik’s Chapter 4, that is, an early increase in the share of TC industries in both output and exports. However, over time rapid structural change in favor of capital-intensive and skilled labor-intensive industries, as well as growth of wages in TC industries, undermined the cost competitiveness of the latter industries, while capital, domestic and foreign, found attractive opportunities elsewhere, in more value-adding industries. Although the woes of Hungarian TC industries have been painted in the chapter by Hamar as a drama, they were for researchers of structural change in the process of economic development somewhat inevitable. At the middle to high level of development these industries at first begin to lose their relative position (their shares in aggregate manufacturing output and employment decline) and later, with markedly changed labor/capital and unskilled/skilled labor ratios, they begin to decline even in absolute terms. This is precisely what has happened in Hungary in recent years. What might have dramatized an ordinary case of structural change has probably been the ‘entry of a dragon’, that is, a rapid increase in the shares of China and India in the TC industries’ exports to the world market. The speed of change left less time for adjustment to the inevitable. What, however, the present writer found surprising, is the fact that the accelerated relocation of productive activities (largely to Asia) did not generate a wave of studies either by academics or by business associations of affected industries. And yet from the circumstantial evidence, collected by this author in numerous conversations with business managers and owners of firms, the phenomenon of relocation of some activities – along the lines of the fragmentation of production processes – has undoubtedly been taking place in the Visegrad countries (Poland, Hungary, Slovakia and the Czech Republic). The relocation from these countries is undoubtedly Eastward-directed – from Ukraine to China.

Introduction 11 No matter how we define competitiveness, the case of the Hungarian textile and clothing industries has been undoubtedly one of declining competitiveness in the process of upgrading the manufacturing production structure in the process of economic development. But how do we define and, consequently, also measure competitiveness? The theme had also been debated at the 2006 Lancut Forum on Competitiveness of New Europe and finds its reflection in the last two chapters presented in this collection. A reader may draw a conclusion from the careful reading of Laszlo Csaba’s Chapter 7 and Wojciech Bienkowski’s Chapter 8 that we are light years away from an acceptable definition of competitiveness. None of the authors offered us his own definition, regardless of their more or less positive attitude to competitiveness as a (vaguely) defined study area. The same applies to measurement. Bienkowski, a strong believer in the tractability of the study area in question and in the usefulness of studying competitiveness at the national level, quotes Cohen and Zysman (1987) who disarmingly admit that ‘competitiveness is a recognition of a broad set of indicators, none of which tells the whole story, but that together provide a highly legitimate focus’. Thus, studying competitiveness may be defined as a plethora of data in search of theory. In fact, Csaba concludes that ‘the concept of competitiveness remains without a firm anchoring in any established school of economic theory, be it macro or micro’. Maybe we observe yet another study area facing the problem of the inability to formulate a concise, widely acceptable definition, such as, economics of development. In the past it had an enormous problem in defining what constitutes a developing country. Some practitioners were saying, however, that if one points at a given country it is not that difficult to classify it as a developing (that is underdeveloped) or developed country. And the study of economic development has continued to evolve for decades. Clearly, even without an acceptable definition in sight, national competitiveness’ studies and debates may flourish as well. The Second Lancut Forum is a good piece of evidence in this respect. Are there points in common in Bienkowski and Csaba’s chapters? The points of agreement are probably less numerous than those of disagreement, but the present writer sees two such closely intertwined points. The first concerns the sound macroeconomic foundations stressed by both authors. Csaba observes that competitiveness theories converge with broader macroeconomic theories (including the insights from development studies and economic policy-making). At the same time, the so-called magic quadrangle in Bienkowski is a set of macroeconomic indicators, whose observance is expected to enhance macroeconomic performance in the longer run. The comparison of both papers is made difficult by different methodologies applied to institutions. Where Csaba sees, first, institutions and, second, policies implemented within the framework of these institutions (rules of the game), Bienkowski puts policies ahead in the sequence. It is policies – in his methodology – that are all-inclusive, and encompass the change in institutions. The second agreement is on micromanagement, or specific policies aimed at one or another aspect of competitiveness. Csaba warns expressis verbis against

12

Jan Winiecki

policies involving targeted subsidies and other similar redistributive intrusions, which may crowd out basic functions of creating stable macroeconomic environment, provision of quality education and R & D, etc. Bienkowski, in turn, stresses the measures improving the quality and stability of institutions and implicitly rather than explicitly shuns micromanaging measures (although his comments about Japanese policies may be seen as suggesting otherwise). While both stress the fundamentals, Csaba is more skeptical about the ability of governmental policies to influence potential for economic growth in the long run. Also, the skepticism is seen in Csaba’s evaluation of the impact of globalization, which Bienkowski sees as the main driving force generating policy interest in enhancing competitiveness. The present writer sees so much divergence that even the whole conference devoted to the nature of competitiveness would not resolve the contentious issues of theory, methodology and data. But still it is possible to end this introduction on a positive note. No matter how we would define competitiveness, the countries under study have been doing well, improving their international position with respect to foreign trade, foreign investment and structural change. In this last respect they have been fulfilling one of the criteria of enhanced competitiveness in the long run, that is the criterion of ability to adapt to the evolving world economy. At the end, acknowledgements are in order. Thus, the conference participants and the editor of this volume are grateful to the Polish Society of Economists (TEP) for turning into a reality an idea of the regular international meeting of analysts concerned with the post-transition performance of former post-communist transition leaders in the changing international setting. Also, they are grateful to the Rzeszow University of Information Technology and Management for its generous financial and organizational contribution to creating the Lancut Economic Forum on ‘New Europe’ and locating the debates in the beautiful setting of the Lancut palace.

References Cohen S.S. and J. Zysman (1987) Manufacturing Matters: The Myth of the Postindustrial Economy, New York: Basic Books, Inc. Goldmann, Josef and Karel Kouba (1969) Economic Growth in Czechoslovakia, Prague: Academia. Holzman, Franklyn D. (1974) Foreign Trade under Central Planning, Cambridge, MA: Harvard University Press. Holzman, Franklyn D. (1979) Some systemic factors contributing to the convertible currency shortages of centrally planned economies, American Economic Review, 69(2). Javorcik, Beata S. and Mariana Spatareanu (2005) Disentangling FDI spillover effects: What do firm perceptions tell us?, in T. Moran, E. Graham and M. Blomstrom (eds), Does Foreign Direct Investment Promote Development?, Washington, DC: Institute for International Economics, pp. 45–72. Kaminski, Bartlomiej, Zhen-Kun Wang and L. Alan Winters (1996) Export performance in transition economies, Economic Policy, October, 23: 421.

Introduction 13 Marin, Dalia (2004) A Nation of Poets and Thinkers – Less so with Eastern Enlargement?, Austria and Germany, CEPR Discussion Paper No. 3526, London: Centre for Economic Policy Research. Winiecki, Jan (1985) Central planning and export orientation in manufactures. Theoretical considerations on the impact of system-specific features on specialization, Economic Notes (Siena), 14(2). Winiecki, Jan (1987) Soviet-type economies’ strategy for catching-up through technology import – An anatomy of failure, Technovation, 6. Winiecki, Jan (1988) The Distorted World of Soviet-type Economies, London: Routledge. Winiecki, Jan (1990) East European economies: Forced adjustment forever?, Banca Nazionale del Lavoro Quarterly Review, 173: 237–263.

1

Overview of export performance of ‘New Europe’ Theoretical underpinnings and empirical evidence Matija Rojec* and Maja Ferjancˇicˇ

Introduction A remarkable improvement in export performance of the ‘New Europe’ has been one of the most outstanding features of the transition and EU integration processes of the former socialist countries of Central and Eastern Europe (CEEC). Since the beginning of the 1990s, these countries recorded extremely high growth of exports, in absolute as well as in relative terms, which have been accompanied by increasing market shares abroad, by a domination of EU-15 as the main market, and by considerable changes in the commodity structure of exports in favor of goods with higher value added. In the following analysis we confine ourselves to the most developed CEEC and distinguish between the new members states of the EU (NMS-8: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) and the three candidates for EU membership (CC-3: Bulgaria, Croatia and Romania). In the period 1990–2004, exports of NMS-8 increased almost seven times, i.e. by 667 per cent, as compared to 220 per cent for EU-15 (in 1991–2004) and 263 per cent for world total. Absolute increase of exports has been accompanied by no less impressive increase in export intensity; exports to GDP ratio in NMS-8 increased on average from 29.3 per cent in 1995 to 46.0 per cent in 2004, compared to increase from 20.5 per cent to 26.6 per cent in the case of EU-15 (in 1991–2004) and from 16.1 per cent to 22.0 per cent in the case of world total. The foregoing has been accompanied by their growing competitiveness, reflected in higher market shares abroad, especially in the EU-15. The share of NMS-8 exports in total world imports increased from 1.11 per cent in 1990 to as much as 2.81 per cent in 2004. The corresponding shares in total EU-15 imports increased from 2.62 per cent to 8.16 per cent (in the 1991–2004 period). The result has been an ever growing importance of EU-15 for NMS-8 exports. EU-15 is now by far the dominant foreign market of NMS-8, which in 2004 absorbed 65.9 per cent of NMS-8 exports, as compared to 46.0 per cent in 1990. Yet another feature of NMS-8 export expansion has been a major structural shift in favor of medium and high skill/technology intensity products in these countries’ exports. In the 10 years period of 1995–2004 the share of these products in NMS-10 exports increased from 36.0 per cent to 56.1 per cent. The magnitude of the above increases and structural changes varies across individual countries, but the direction is the same in all of them. In spite of the fact

16

Matija Rojec and Maja Ferjancˇicˇ

that CC-3 also improved their export performance considerably since 1990 and that they experienced similar structural changes in exports, the scale of both the improvements and structural changes has been much more modest than in NMS-81 (see Table 1.1 and Table A1.1 in the Appendix for details). Overall, the picture depicted by the above data clearly shows an impressive positive change in export performance of ‘New Europe’ since the beginning of transition. The question is what are the determinants of such achievements of NMS-8 and CC-3 exports performance. The objective of the paper is to overview the existing literature on export performance of CEEC and to analyze theoretical underpinnings and empirical evidence of the phenomenon. In analyzing the determinants of export performance, it seems convenient to distinguish between factors determining market access and factors determining supply capacity of exporting countries (on this point, see, for instance, Redding and Venables, 2003, 2004; Fugazza, 2004). As far as market access is concerned, the gravity theory presents the most powerful explanatory tool. In gravity models, trade between two countries is positively related to both countries’ economic size and development level and negatively to the distance between them, with the latter determining transport costs (Rivera-Baits and Olive, 2003: 99–102). Size determines the supply conditions in the source country and the demand conditions in the host country. Other factors, which influence the magnitude of bilateral trade, like common language, two countries being a part of the same territory, common border, free trade arrangement, are also commonly included in the model (Busier et al. 2005: 14–15). The opening up of CEEC economies seems to be the most important factor of their improved export importance, simply because it enabled the gravity forces – proximity of and integration into the large and high purchasing power EU market – to influence the patterns and make EU-15 the main market of CEEC. The supply capacity factors of export performance can be explained by comparative advantages arising from different factor intensities/endowments and/or by economies of scale in (horizontal) intra-industry trade characterized by similarities in technology and quality standards. The recognition that the main part of international trade is the intra-industry trade among developed countries has led to the emergence of two strands in international trade theory. One strand tackles the problem by upgrading the traditional comparative advantages and factor abundance approach of Heckscher-Ohlin-Vanek (HOV) through important modifications in the model. Thus, they relax the assumption that all countries have the same technologies and allow for international productivity differences, introducing a demand function that permits home biases in consumption, incorporating trade costs and distance, and introducing intermediate inputs and distinguishing between tradable and non-tradable goods. The other strand is the ‘new trade theory’. This is in fact a theory of (horizontal) intra-industry trade, i.e. a theory of trade in differentiated products produced under increasing returns to scale and imperfect competition and is not based on comparative advantages and factor abundances. In new trade theory models, products are manufactured with the same technologies and factor intensities.2

Overview of export performance of ‘New Europe’

17

Both theoretical approaches are relevant for the explanation of CEEC’s export performance because, as documented by the data, the main part of CEEC’s trade is still inter-industry trade and vertical intra-industry trade. However, the share of horizontal intra-industry trade is slowly increasing. More horizontal intra-industry trade will only gradually outweigh trade based on comparative advantages. The chapter is structured as follows. Section 2 analyzes the literature, which tackles CEEC’s improving export performance by a complex, in some cases model approach (gravity models, shift-share analysis, export competitiveness’ analysis). Further sections analyze particular factors of CEEC’s improved export performance, as put forward by the literature, i.e. Section 3 deals with improved access of CEEC to EU markets, Section 4 with structural changes in CEEC’s exports, Section 5 with increased levels of productivity in CEEC, Section 6 with the role of foreign direct investment (FDI) in growing export performance, and Section 7 with the role of the institutional changes, i.e. with the complete change of institutional setting in CEEC. Section 8 contains conclusions.

Complex approach to analyzing CEEC’s export performance: gravity models, shift-share analysis, export competitiveness’ analysis In this section we analyze the literature, which tackles CEEC’s improving export performance by a complex, in some cases model approach. This ranges from gravity models, upgraded gravity models, distinguishing between market access and supply capacity factors, shift-share analysis, analysis of (export) competitiveness and more or less comprehensive descriptive analysis of factors behind growing export performance. Main findings of this literature are the following: ●

●

●

●

●

●

Transition from centrally planned to market economies has led to increased and geographical restructuring of foreign trade along the lines of the gravity theory, i.e. foreign trade intensity of CEEC increased to a major extent and EU-15, as large, near and highly developed market, assumed the role of the dominant trading partner. Gravity models show that CEEC gradually approach the ‘normal’ level of their trade with developed countries, especially the EU, but there are considerable differences across individual countries. Market access has been more important than supply capacity for improving export performance of CEEC. Shift-share analysis shows that CEEC considerably improved their competitive position in EU-15 compared to non-EU competitors, due to preferential trade arrangements but also due to improved supply capacity. Speed and scope of transition reforms prove to be more important than initial conditions and market access in explaining inter-country differences in export performance. (Export) competitiveness analysis of CEEC suggests positive contribution of supply capacity factors to CEEC’s export performance.

18

Matija Rojec and Maja Ferjancˇicˇ

Table 1.1 Main export-related indicators of NMS-8, CC-3, EU-15 and world exports in 1990–2004 (in mill. euro at current prices and in %) 1990

1991

2744,364 2836,352 100 16.1

2825,290 2922,542 103 15.4

2899,256 2980,536 106 15.5

3220,729 3275,259 117 15.3

3627,651 3676,185 132 16.2

3951,773 3995,077 144 17.6

n.a. n.a. n.a. n.a. n.a.

1201,850 1232,648 100 20.5 41.1

1224,991 1235,180 102 20.0 41.1

1247,462 1183,345 104 20.3 38.1

1396,704 1319,305 116 21.7 38.0

1572,823 1476,558 131 23.4 39.4

NMS-8 Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports

31,357.9 28,150.7 100.0 n.a. 1.11 n.a. 46.0

32,296.8 33,433.8 103.0 n.a. 1.11 2.62 58.9

34,753.6 38,384.9 110.8 n.a. 1.17 2.81 62.2

44,575.1 53,203.6 142.1 n.a. 1.36 3.77 56.8

52,126.4 61,423.5 166.2 n.a. 1.42 3.95 59.2

61,702.7 74,031.2 196.8 29.3 1.54 4.18 60.6

CC-3 Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports

17,887 20,990 100 n.a. 0.63 n.a. 21.7

8766 9793 49 n.a. 0.30 0.71 38.9

9771 11,649 55 n.a. 0.33 0.79 40.5

10,588 13,267 59 n.a. 0.32 0.89 42.9

12,117 13,891 68 n.a. 0.33 0.92 48.6

13,854 18,134 77 n.a. 0.35 0.94 50.1

WORLD Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP EU-15 Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1991=100) Exports as % of GDP Exports as % of World imports

1992

1993

1994

1995

Sources: UNCTAD, World Bank and WIIW (The Vienna Institute for International Economic Studies) databases. Note: Data for NMS-10.

By far the most popular approach to the analysis of CEEC’s export performance is the one inspired by the gravity theory, saying that trade between two countries is positively related to both countries’ economic size and development level and negatively to the distance between them. The gravity models explain whether trade of a particular country with an individual country is above or below a ‘normal’, benchmark level of trade predicted by the model. Collins and Rodrik (1991) were the first to assess how the opening up and transformation of former socialist economies would affect their future trade patterns. They predicted considerably increased trade levels in the future and a considerable concentration of their trade on EU. Havrylyshyn and Pritchett (1991), Rosati (1992), Hamilton and Winters (1992), and Baldwin (1994) all

Overview of export performance of ‘New Europe’

1996

1997

1998

1999

4256,672 4322,374 155 18.0

4918,471 4996,528 179 18.7

4905,154 5012,916 179 18.5

5347,581 5473,587 195 18.6

1665,205 1547,433 139 23.6 38.5

1856,468 1720,310 154 25.0 37.2

1944,269 1835,065 162 25.1 38.8

66,691.1 89,023.1 212.7 27.9 1.54 4.31 58.8

81,695.5 94,109.4 108,973.8 122,628.0 260.5 300.1 30.3 32.4 1.64 1.88 4.75 5.13 60.4 65.1

13,955 19,393 78 n.a. 0.32 0.90 50.2

15,503 22,414 87 n.a. 0.31 0.90 51.1

15,264 22,471 85 22.8 0.30 0.83 56.2

2000

19

2001

2002

2003

2004

6965,078 7178,605 254 20.4

6894,386 7121,075 251 19.7

6848,770 7009,480 250 19.9

6622,691 6794,693 241 20.5

7220,908 7437,393 263 22.0

2033,628 1969,006 169 24.9 37.2

2411,635 2394,873 201 27.7 33.6

2473,163 2398,083 206 27.4 34.7

2481,826 2358,467 207 26.5 35.4

2453,286 2351,142 204 25.8 36.1

2639,310 2564,615 220 26.6 35.5

98,758.6 127,080.8 314.9 32.5 1.80 5.02 69.1

129,082.4 162,833.3 411.6 36.7 1.80 5.39 68.4

148,052.8 179,233.4 472.1 37.4 2.08 6.17 67.8

159,724.4 173,113.3 209,204.6 189,009.4 200,259.2 235,200.5 509.4 552.1 667.2 37.8 41.5 46.0 2.28 2.55 2.81 6.77 7.36 8.16 67.5 67.1 65.9

15,747 22,397 88 23.8 0.29 0.80 57.9

21,344 29,909 119 21.3 0.30 0.89 58.4

23,647 35,744 132 25.9 0.33 0.99 61.5

25,925 38,617 145 26.4 0.37 1.10 61.5

27,750 43,358 155 26.9 0.41 1.18 62.3

33,372 51,242 187 25.7 0.45 0.00 60.0

came to basically the same conclusion, i.e. that pre-transition trade of CEEC with developed Western and in particular EU countries was much smaller than potential trade level predicted by the gravity model. Kaminski et al. (1996a) and Jakab et al. (2001) predicted especially fast catching-up with the potential trade levels for CEEC having free trade arrangements with the EU. This prediction was confirmed by Havrylyshyn and Al-Atrash (1998), Egger (2003), and Fidrmuc and Fidrmuc (2003) who claim that by the end of the 1990s most CEEC have achieved trade openness ratio similar or at least approaching that of market economies of comparable size and level of development, and that trade between the EU-15 and CEEC was already close to the potential level predicted by the model. The last in the long line of gravity models on transition countries’ trade

20

Matija Rojec and Maja Ferjancˇicˇ

is the one of Busier et al. (2005). They use a much longer period of time (1980–2003), with more than half of the period being already in the transition era, and find that trade integration between the more developed transition countries and Euro area is already relatively well advanced, while some Baltic and South Eastern European countries still have significant scope for trade integration. The gravity models, thus, suggest that, at the beginning of transition, CEEC’s foreign trade with developed market economies was much below the ‘normal’ level, but it converged to more ‘normal’ levels over time. There still remains some space for converging, for some countries more than for others. In fact, central planning, trade restrictions and preferential trade arrangements under the CMEA prevented normal trade relations and functioning of gravity fundamentals. As put by Havrylyshyn and Al-Atrash (1998), independence and transition process has resulted in increased foreign trade intensity and in more normal geographical distribution of trade as the central planning restrictions on foreign trade were lifted. Or, in the words of Busier et al. (2005), due to their geographical proximity with the Euro area and their GDP levels, it is natural for CEEC to have a significant share of their trade with the Euro area. Havrylyshyn and Al-Atrash (1998) and Busier et al. (2005) specifically point to the importance of the speed and scope of transition reforms for the pace of individual countries’ converging to the ‘normal’ level and geographical structure of trade as predicted by gravity models. Redding and Venables (2003, 2004), and on their basis Fugazza (2004) developed a theoretical framework-model of trade which uses gravity techniques in a way to estimate separately the contribution of demand conditions in the host country and of supply conditions in the source country. This is essentially a standard new trade theory model based on product differentiation derived from a constant elasticity of substitution demand structure (Fugazza 2004: 7). They attempt to explain to what extent export growth of a country is due to changed access to foreign markets and to what extent due to changes in internal supply capacity of the exporting country. Market access segment, i.e. access to foreign markets, is then disaggregated across particular regional groupings. Countries at the center of (or at least near to) a fast growing region experience favorable foreign market access (Fugazza, 2004). Particularly positive for foreign market access may be regional economic integration (Redding and Venables, 2003). Favorable geographic position (proximity of EU-15) and EU integration processes seem to be obvious positive factors in the upgrading of NMS-8 and CC-3 export performance. The internal supply capacity is regressed to variables such as GDP, population, internal transport costs and one or two institutional variables (real exchange rate fluctuations, risk of expropriation, labor market characteristics). The institutional variable may be of particular importance in the case of NMS-8 and CC-3, which have gone through an overwhelming transformation process from socialist to a market economy, and may still have some implementation gap as far as institutional framework is concerned. In addition to the institutional variable, Fugazza (2004) introduces technological environment as another variable affecting export sector competitiveness. He measures it by the level of FDI penetration.

Overview of export performance of ‘New Europe’

21

Results of Redding and Venables (2003) and Fugazza (2004) confirm the predicted direction of influence of foreign market access and individual factors of supply capacity on exports performance, and of considerable variation of individual factors’ impact on different countries’ exports performance. Coverage of CEEC in both papers (see notes to Table 1.2) is such that it does not allow specific conclusions for NMS-8 and CC-3. It does, however, provide some relevant insights. Results of Redding and Venables (2003) are rather straightforward. In both periods they analyzed, foreign market access growth was a much more important source of export growth than supply capacity growth. In both periods, the main component of foreign market access growth was Western Europe. Results of Fugazza are more ambiguous. In the first phase of transition (1988–95), foreign market access was much more important for export growth than supply capacity growth, while the situation in 1992–99 is quite the opposite. It is more or less obvious that beginning of transition was characterized by the opening of the markets in EU and elsewhere, while defensive enterprise restructuring (elimination of non-viable companies and products) reduced the supply capacity. Really surprising is negative contribution of foreign market access growth outside the region in 1992–99. One would expect that EU integration process, which has been going on in that period, would bring quite the opposite results. Analyzing the factors of supply capacity growth in Eastern Europe, Redding and Venables (2003: 18–19) show that actual level of trade is lower than one would expect with regard to good market access and better than average internal

Table 1.2 Components of export growth in CEEC presented in Fugazza (2004) and Redding and Venables (2003) Period

Exports growth

Foreign market access (FMA) growth

Supply capacity growth

Fugazza: Eastern Europe and Central Asia2 1980–87 9 –2 7 1984–91 23 31 34 1988–95 4 80 –90 1992–99 66 –9 48 Redding and Venables: Eastern Europe3 1970/73– 187 95 40 1994/97 1970/73– 44 34 11 1982/85 1982/85– 100 45 26 1994/97

FMA growth FMA growth within the outside the region/ region Western Europe1 –17 30 117 5

–1 31 79 –9

3

61

0

18

3

32

Notes: 1 ‘Outside the region’ in the case of Fugazza and ‘Western Europe’ in the case of Redding and Venables. 2 Hungary, Poland, Romania, Bulgaria and Turkey. 3 Albania, Bulgaria, Czechoslovakia, Hungary, Poland, Romania.

22

Matija Rojec and Maja Ferjancˇicˇ

geography and institutions. Supply capacity constraints seem to be the main problem of export performance of CEEC. Results of Fugazza (2004) are similar; supply capacity does not appear to have been a limiting factor of export performance, nor a driving force behind the export performance of the analyzed CEEC. All in all, if foreign market access of CEEC has been constantly improving since the beginning of transition, there is more to be done as far as supply capacity is concerned. Obviously transition and real convergence is a long-lasting process. Havlik et al. (2001) analyze export growth by the so-called shift-share analysis method, which decomposes the overall increase in exports into general demand component, structural effect component and competitive effect component. The general demand component indicates how a given country’s exports would evolve if growing at the same rate as total imports of export markets; structural effect component shows to what extent a given country’s exports grow because they are centered on goods that are in above-average import demand in the export markets; competitive effect component shows whether a country increased exports of certain goods to export markets more than its competitors. The competitiveness effect component is the main indicator of trends in competitiveness. Havlik et al. (2001: 20–24) apply the shift-share analysis on the manufacturing exports of 10 CEEC (Bulgaria, Czech Republic, Slovakia, Hungary, Poland, Romania, Slovenia, Estonia, Latvia and Lithuania) to EU-15 in 1995–1999. The figures indicate that the contribution of the general demand component accounted for 42.1 per cent of export increase, the contribution of structural effect component was negative, i.e. –8.1 per cent, while as much as 66.1 per cent was accounted for by competitive effect component. This means that the analyzed transition countries increased their market shares in the EU largely by raising their competitiveness against the other non-member states exporters to the EU-15.3 To analyze and compare CEEC’s progress in foreign trade in 1985–1994, Kaminski et al. (1996b) create a synthetic index of export performance4 and classify countries into top, satisfactory and poor performers, based on the synthetic index value. Top performers are the Visegrad countries and Estonia, satisfactory performers are Bulgaria, Lithuania, Latvia and Romania, while all the others, i.e. the former Soviet republics, are poor performers. In searching for the reasons of countries’ variation in the development of export performance, Kaminski et al (1996b) consider three broad sets of determinants, i.e. initial, pre-transition conditions, changes in access to Western markets and policy stances as reflected in the reform process. They claim that initial conditions and changes in market access do influence trade performance, but do not seem to distinguish strong from weak export performers. Policy, on the other hand, appears to offer almost perfect discriminating instruments, showing the difference between classes of export performance, with sound stabilization and thorough-going domestic price liberalization characterizing almost exactly the same set of transitional countries as strong export performers (Kaminski et al., 1996b: vii–viii). The authors in question, thus, consider the speed and scope of the reform process as being the main determinant of transition countries’ export performance.5 Another stream of literature of relevance for the analysis of CEEC’s export performance is the one on (export) competitiveness. This literature actually

Overview of export performance of ‘New Europe’

23

concentrates on the supply capacity segment of export performance and analyses export competitiveness at the national, industry or firm level.6 At the national level, the most commonly used indicator is the real exchange rate developments. Other authors propose also foreign market shares, export unit values in manufacturing, unit labor costs in manufacturing, etc. (see Halpern 2002).7 A rather common approach of assessing competitiveness at the national level is the so-called benchmarking, the most commonly known being that of IMD (2004) and WEF (2004). These publications use a rather complex system of competitiveness indicators, which at the end are usually summed up into several and/or one synthetic indicator. Transition countries as a rule show gradual but constant improvement of their ranks in IMD and WEF rankings. A benchmark model specifically developed for transition countries is the one of Zinnes et al. (2001). Their synthetic indicator of competitiveness is composed of seven sub-indicators, the most important from the point of view of export performance being the one on openness. According to Zinnes et al. (2001: 325), the indicator of openness seeks to capture the ease with which economic activity can take advantage of the foreign sector for markets, know-how, competition, financing, investment, sources of inputs and other components linking its markets and firms to the global economy. As expected, as far as the synthetic indicator of competitiveness, as well as the openness sub-indicator, is concerned, the NMS-8 ranked one to eight among analyzed 25 CEEC and CC-3 countries. Unfortunately, Zinnes et al. (2001) just provide the results for 1998 and not for a longer period of time, which would help to follow developments in openness and competitiveness in general. Havlik (2000) attempted to evaluate various aspects of international competitiveness of the four more developed CEEC (Czech Republic, Hungary, Poland and Slovenia), both at the macroeconomic and industrial branch levels. He focused on the evolution of labor costs and trade competitiveness, as well as on the role of exchange rate policies and FDI in the process of catching-up and integration with the EU. Havlik’s main conclusions are the following: (a) all four countries are competitive due to their low labor costs; (b) in the 1990s, wage competitiveness in Hungary and Slovenia improved, but not so in Poland and Czech Republic; (c) productivity and quality gaps of the analyzed countries partly eliminated their cost advantages arising from the low wages. The analysis of unit labor costs developments at the macro level shows that the labor cost competitiveness has deteriorated since the early 1990s in the Czech Republic, Poland and Slovenia, while it has markedly improved in Hungary. According to Havlik (2000), this can be partly attributed to much higher foreign investment penetration in that country. In particular, a more intensive involvement of foreign investors in the Hungarian manufacturing industry has brought about large efficiency gains. Apart from foreign trade fundamentals of the gravity theory, the existing literature puts forward five factors which deserve special attention in analyzing CEEC’s export performance: ● ●

improved access to the EU market; changes in export structure;

24 ● ● ●

Matija Rojec and Maja Ferjancˇicˇ increased levels of productivity; the role of FDI and institutional changes.

Improved access of CEEC to EU markets One of the most outstanding features of CEEC’s export performance since the beginning of transition is the increasing importance of EU-15 as the main market of their exports (see Table 1.1 and Table A1.1 in the Appendix). Most of this development is explained by gravity theory, i.e. by the fact that pre-transition trade with CMEA countries was much above the ‘normal’ level and with EU-15 much below the ‘normal’ level. Size, proximity and development level of EU-15 is an extremely strong gravity force for CEEC’s exports. Additionally, EU integration process has provided these countries with a preferential access to EU-15 markets. How important has been this institutional factor? The fact that NMS-8 and CC-3 considerably increased their market shares in the EU-15 suggests that preferential access to EU-15 markets has produced the anticipated effects. Unfortunately, to our knowledge, no econometric estimation of the subject has been done so far.8 The literature suggests that preferential market access, especially the Europe Agreements, has clearly been important for increasing the volume of CEEC’s trade, but has not been directly responsible for much of the growth of their exports (Kaminski et al., 1996b: 34). The scope of preferential treatment has been limited by a number of constraining factors (antidumping procedures, tight rules of origin, delays in liberalizing imports of sensitive products) and even more so because other basic factors of export performance have been more important for export expansion. That is why transition countries with basically the same scope of preferential access to EU-15 perform differently as far as their exports to EU-15 are concerned. The access of transition countries to OECD markets has evolved in three stages. The first stage was the removal of discriminatory measures (non-tariff barriers) aimed specifically against state trading economies, in fact the granting of the MFN status. EU was the first to do that. The second stage was granting of preferential market access under the General System of Preferences (GSP), which put transition economies on a par with developing countries, with quota-limited free access for most products. Again EU was the first to do that. The third stage was the conclusion of Europe Agreements between EU-15 and most of the NMS-8 and CC-3 by mid-1990s, and their anticipated accession to the EU after the Copenhagen EU summit (Kaminski et al., 1996b). According to Kaminski et al. (1996b: 33), GSP represented a big step in tariff liberalization,9 but there is little evidence that, ‘with its limitations and exclusions (quantity limits, special treatment of sensitive products, uncertainty of access), it alone can explain changes in transition economies shares in OECD imports’. Clearly, Europe Agreements have been more important than GSP. Kaminski (1994) analyzed the effects of Europe Agreements with Czechoslovakia, Hungary, Poland, Romania and Bulgaria signed in 1991 and 1992. Kaminski claims that

Overview of export performance of ‘New Europe’ 25 provisions on trade in industrial products, which affected about 80 per cent of exports of five countries to the EU, significantly improved their access to EU markets. In 1992, the first year they were in force in Hungary, Poland and former Czechoslovakia, the Agreements freed slightly less than 50 per cent of total exports to the EU from import duties and non-tariff barriers. According to the Agreements, these shares were to increase over five years to about 80 per cent for the former Czechoslovakia, 60 per cent for Hungary and 70 per cent for Poland. Apart from that, tariffs were reduced for a number of other products, and Copenhagen summit further cut the time to reach the top of the EU preferential trade pyramid, at that time occupied by EFTA countries. These reductions translated into a competitive edge over suppliers from other countries. Still, the Europe Agreements retained a number of restrictions characteristic for GSP (delays in liberalizing imports of sensitive products, tight rules of origin, continuing threats of antidumping and the virtual exclusion of agriculture), which were removed only gradually in the process of EU integration.

Structural changes in CEEC’s exports Since the beginning of transition, export commodity structure of NMS-8 and CC-3 has undergone significant structural changes in terms of an increasing share of medium and high skill/technology intensive manufactures and corresponding decrease of the share of primary commodities, labor intensive and resource-based manufactures and of low skill/technology intensive manufactures (see Table 1.3). Structural upgrading, originating from the transition-related restructuring of the manufacturing sector, has been much more intensive than in the case of EU-15, indicating that CEEC have been gradually closing down the structural gap in exports. The question here is, to what extent has the structural upgrading of exports contributed to the growing export performance of CEEC. The answer could not be a straightforward one, as there is no such thing as optimal economic structure. A higher share of medium and high skill/technology intensity products in exports is not per se a guarantee of a better export performance or competitiveness. Still, extensive literature on structural changes in CEEC’s exports tends to claim that structural upgrading positively contributed to export performance. Firstly, as claimed by Hoekman and Djankov (1996), export growth of CEEC has been based on products that were not exported in the pre-transition era and on ‘traditional’ export items that have been substantially upgraded or differentiated. Secondly, (export) restructuring has been characterized by positive specialization patterns between and within industries, and accompanied by quality upgrading as indicated by increased value added per employee, increased unit values and more engagement in medium and high quality segments of manufacturing industries. Thirdly, the share of horizontal intra-industry trade with the EU also seems to increase, albeit slowly. There are, however, differences among countries. In the words of Dulleck et al. (2004), there is little evidence of CEEC falling into a ‘low-quality trap’, except for low quality segments’ specialization of Romania, Bulgaria and the Baltics in the high technology industries.

26

Matija Rojec and Maja Ferjancˇicˇ

Table 1.3 Structure of merchandise exports of NMS-10 and EU-15 according to UNCTAD classification1, in 1995–2004, in % 1995

2000

2001

2002

2003

2004

19.8 28.2

18.1 19.6

17.8 19.0

17.9 18.3

18.3 17.9

19.2 17.4

Labor-intensive and resource-based manufactures EU-15 11.8 10.2 10.3 EU-10 19.7 16.7 16.6

10.2 16.0

10.2 14.6

10.1 13.6

Low skill and technology-intensive manufactures EU-15 7.9 6.7 6.8 EU-10 14.1 10.4 10.9

6.8 10.3

8.0 10.6

9.2 10.9

Medium skill and technology-intensive manufactures EU-15 30.1 30.0 30.8 EU-10 21.4 32.6 32.8

30.9 33.9

31.7 34.9

32.8 35.9

High skill and technology-intensive manufactures EU-15 24.5 29.6 29.9 EU-10 14.6 18.9 18.2

29.9 19.7

27.9 20.0

23.5 20.2

Primary commodities EU-15 EU-10

Source: UNCTAD (2003), own calculations. Notes: 1 See UNCTAD (2002, Classification of world merchandise exports, Annex 1 to chapter III). The classification does not classify all commodities, therefore, the sum of the shares of five commodity groups does not add to 100 per cent.

The issue of changing export structure is probably the most extensively analyzed export-related issue of CEEC. Here, it is important to note that structural change in itself does not necessarily lead to increase of competitiveness. An increased share of high-technology products in exports is not per se an indicator of higher export competitiveness. As put by Szalavetz (2005), in some developed and catching-up countries, the relation between upgrading economic structure and competitiveness looks strong, but there are also countries featuring strong competitiveness despite an outdated, traditional structure. What matters is the quality of properties of economic activity. Thus, what does the existing literature say about the quality of structural changes in transition countries’ exports? Two streams of studies have been tackling this issue. The first concentrates on the extent and characteristics of intraindustry trade, and the second on structural changes between and within the industries and on the related quality upgrading processes. The level of intra-industry trade is one of frequently used quality indicators of foreign trade. The intra-industry trade, driven by product differentiation and economies of scale, represents a lion’s share of trade among developed countries. Relatively high level of industrialization, significant stock of human capital, geographic proximity and significantly lower real wages provide significant

Overview of export performance of ‘New Europe’

27

scope for rapid growth of intra-industry trade between CEEC and the EU-15 (Aturupane et al., 1997). The data in Table 1.4 show a mixed picture in this regard. Czech Republic, Slovenia and Hungary have the highest level of intraindustry trade, followed by Slovakia, Poland and Estonia. Intra-industry trade has risen rapidly in Czech Republic and Poland, and it has stagnated at a relatively high level in Hungary, Slovenia and Slovakia (Havlik et al., 2001: 9). Analysis of intra-industry trade further distinguishes between vertical and horizontal intra-industry trade. The latter (implying an approximate level-of-development equality of the trading partners) is a trade in which the difference between unit values of similar imported and exported products is low, whereas in the former (implying inequality of the trading partners), this difference is bigger. Thus, horizontal intraindustry trade comprises the exchange of similar goods that are differentiated by attributes rather than quality, while vertical intra-industry trade consists of exchange of similar goods of different quality. The level and growth of horizontal intra-industry trade is a good indicator of the extent to which the trading economies are similar to each other. A normal expectation is that in intra-industry trade between CEEC and EU the vertical one prevails. Indeed, Aturupane et al. (1997) claim that, in the 1990–1995 period, 80 per cent to 90 per cent of intra-industry trade between the transition economies and the EU was vertical and there was no trend of increasing the share of horizontal intra-industry trade. This is less than half of the level of horizontal intraindustry trade of Austria, Spain or Switzerland with the EU in the same period. Figures quoted by Soos (2002) go in the same direction, but with a positive trend of increasing the share of non-inferior intra-industry trade. Intra-industry trade is inferior when a country sells cheaper products than it buys within the same industries. Non-inferior intra-industry trade is a sum of horizontal intra-industry trade and the part of vertical intra-industry trade, in which a given country is in a superior position, i.e. it sells more expensive products than it buys. In 1993 and 2000, the estimated Table 1.4 Indicators of intra-industry trade of Central and Eastern European transition countries with the EU in 1995 and 1999 (Grubel-Lloyd indices)

Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia

1995

1999

Index 99/95

0.401 0.645 0.440 0.578 0.290 0.273 0.455 0.327 0.534 0.651

0.401 0.729 0.475 0.606 0.271 0.347 0.508 0.371 0.553 0.674

100 113 108 105 93 127 112 113 104 104

Source: Havlik et al. 2001: Table 6, p. 9. Notes: GL = 1 – ∑ ABS (xij−mij) / ∑ (xij+mij); where xij and mij are country i’s exports and imports of 3-digit Standard Classification of Activities sector j.

28

Matija Rojec and Maja Ferjancˇicˇ

shares of non-inferior intra-industry trade in total trade with EU were respectively: for Slovenia 12.5 per cent and 16 per cent, Hungary 12.5 per cent and 18 per cent, Czech Republic 7 per cent and 17 per cent, Ireland 20 per cent and 20 per cent and Portugal 16.5 per cent and 26 per cent respectively. High and increasing level of vertical intra-industry trade among the transition economies and EU is due to the increasing integration of the former into production and marketing networks of EU companies. Aturupane et al. (1997), Hoekman and Djankov (1996) and Kaminski and Ng (2001) all find a strong relationship between export performance of CEEC and growth in vertical intra-industry trade with the EU, that is getting inputs from EU suppliers that are then used in the production of goods exported to the EU. According to Kaminski and Ng (2001), CEEC – and especially the most developed among them – are increasingly integrated into the globalization of production processes, in global production fragmentation and trade arising thereof, into EU networks of production and marketing. Dulleck et al. (2004) tackles the issue of export specialization and quality upgrading in three groups of CEEC: five Central European countries (Czech Republic, Hungary, Poland, Slovakia, Slovenia), the Baltics, and Bulgaria and Romania, and consider three dimensions of quality upgrading. The first dimension refers to shifts in export structure from low to high technology industries. The second dimension identifies shifts inside industries from low to high quality segments. In the third dimension, they look at quality improvements inside quality segments within industries. The countries find themselves in a ‘low-quality trap’ if they specialize in low technology industries, or in low-quality segments within industries, or if they experience negative trends in unit values or unit value ratios. The results are presented in Table 1.5. The general picture arising from Table 1.5 is that CEEC are successfully upgrading the quality of their products with respect to industry specialization patterns, specialization patterns within industries and quality upgrading within segments. The composition of their exports has moved toward high-technology industries and the unit values of exports have increased in nearly all industries and quality segments.10 Furthermore, their unit value ratios compared to the EU also increased in most quality segments. However, an important distinction between five Central European countries and five other countries can be observed. While five Central European countries appeared to be successful in substantial quality upgrading of their export structure according to all three dimensions, some evidence of a ‘low-quality trap’ can be found for the Baltics and Bulgaria and Romania in the second dimension, i.e. low end specialization within industries. Bulgaria and Romania, and Baltic countries show the tendency of increasing specialization in low-quality segments of high-tech industries. These developments were confirmed by the regression analysis in Dulleck et al. (2004: 23–24).

Increased levels of productivity in CEEC Productivity growth has been another (potential) source of growing export performance of CEEC. Productivity growth of CEEC has been remarkable since the beginning of transition. Unfortunately, there is no econometric analysis available, which would assess the impact of productivity growth on CEEC’s export performance.

+2.8 +2.0 +3.3 +1.6 +2.2

Quality upgrading within quality segments of industries – unit values2 (current weights) Low-technology 19.4 18.1 −1.3 15.5 18.3 Low-quality segment 8.3 7.4 −0.9 6.3 8.3 Medium-quality segment 15.1 17.2 +2.1 12.2 15.5 High-quality segment 29.1 27.8 −1.3 20.2 21.8 High-quality segment 49.2 75.9 +26.7 46.1 48.3

−3.7 −1.4 +5.1

+4.7 +2.4

+4.9 −2.4 −2.5

100.0 15.3 31.3 53.4 100.0 62.4 26.3 11.3

Specialization pattern within industries (export structure in %) Low-technology 100.0 100.0 Low-quality segment 28.6 33.3 +4.7 Medium-quality segment 26.9 27.4 +0.5 High-quality segment 44.5 39.3 −5.2 High-technology 100.0 100.0 Low-quality segment 70.5 67.6 −2.9 Medium-quality segment 19.0 20.7 +1.7 High-quality segment 10.5 11.8 +1.3

47.8 10.6

Difference

100.0 11.6 29.9 58.5 100.0 67.3 23.9 8.8

43.1 8.2

−8.6 10.2

Industry specialization pattern (export structure in %) Low-technology 24.6 16.0 High-technology 27.1 37.3

2000

1995

Difference

1995

2000

Bulgaria & Romania

Central European countries1

Table 1.5 Export specialization patterns and quality upgrading in 10 CEEC

13.6 5.6 12.7 19.2 11.9

100.0 26.8 29.5 43.6 100.0 71.2 20.4 8.4

43.5 4.9

1995

17.3 7.7 18.6 21.9 49.3

100.0 25.4 30.1 44.6 100.0 75.1 16.9 8.0

37.8 10.1

2000

Baltic countries

Continued

+3.7 +2.1 +5.9 +2.7 +37.4

+3.9 −3.5 −0.4

−1.4 +0.6 +1.0

−5.7 +5.2

Difference

11.5 6.2 9.3

+6.7 +2.8 +5.0

18.8 8.4 20.6

12.1 5.6 15.6

12.0 5.7 16.4 +0.14 +0.16 +0.20 +0.13 +0.38 +0.33 +0.15 −0.12

+0.5 −0.5 +7.1

Difference

−0.23 −0.21 −0.14 −0.30 −0.38 −0.58 −0.73 −0.86

10.8 3.6 35.7

1995

−0.02 0.06 0.13 −0.16 −0.19 −0.07 −0.53 −0.44

16.5 11.1 24.9

2000

Baltic countries

−0.21 −0.27 +0.28 +0.14 +0.18 +0.51 +0.20 +0.41

+5.7 +7.5 −10.8

Difference

Notes: 1 Czech Republic, Hungary, Poland, Slovakia, Slovenia; 2 Unit value is the ratio between value and quantity of exports (For methodology see Dulleck et al. 2004: 8–9); 3 Unit value ratio is a unit value for a particular country in a particular quality segment compared to the unit value of total EU-15 imports in the same quality segment. The logs of the unit value ratios are presented. In logs, the ratio is greater (smaller) than zero if the export unit value of particular country group is greater (smaller) than the unit value of total EU-15 imports (For methodology see Dulleck et al. 2004: 8–9).

Source: Dulleck et al. (2004: Tables 1, 2, 3a, pp. 11, 12, 14).

Quality upgrading within quality segments of industries – unit value ratios3 (current weights) Low-technology −0.03 0.05 +0.08 −0.29 −0.15 Low-quality segment −0.06 −0.04 +0.02 −0.27 −0.11 Medium-quality segment 0.02 0.14 +0.12 −0.20 0.00 High-quality segment −0.03 0.06 +0.09 −0.37 −0.24 High-technology −0.35 −0.17 +0.18 −0.74 −0.35 Low-quality segment −0.36 −0.21 +0.15 −0.62 −0.29 Medium-quality segment −0.48 −0.33 +0.15 −0.94 −0.79 High-quality segment −0.55 −0.32 +0.23 −0.81 −0.94

High-technology Low-quality segment Medium-quality segment

1995

Difference

2000

1995

2000

Bulgaria & Romania

Central European countries1

Table 1.5 Export specialization patterns and quality upgrading in 10 CEEC—cont’d

Overview of export performance of ‘New Europe’

31

Bernard and Jensen (1998), who analyzed the US export boom in 1987–1994, claim that aggregate productivity gains from 1987–1992 accounted for under 10 per cent of overall export growth; the dominant sources of the export boom were foreign income growth and exchange rate changes. This speaks in favor of a relatively small role played by productivity increases in export growth. Table 1.6 points to a very high productivity growth in NMS-8, especially since 1995. Altogether since 1990, NMS-8 increased their macro-productivity by 52.8 per cent (3.3 per cent on average annually), as compared to only 18.9 per cent increase in EU-15. The increase of NMS-8 productivity and the differential against EU-15 is even much higher if one looks only at the manufacturing sector; 79.1 per cent (8.7 per cent on average annually) for NMS-8 against 16.4 per cent for EU-15 in 1995–2002. In NMS-8, productivity growth in NMS-8 really took-off only after 1995. Before that, the productivity growth in NMS-8 was actually slower than in EU-15. Obviously, the transition process on the ground needed quite some time to take roots. The result of the above trends is a strong productivity catching-up process of NMS-8. In 1995–2004, the unweighted average of labor productivity of NMS-8 relative to EU-25 increased from 44.2 per cent to 59.1 per cent, while the unweighted average for EU-15 nearly stagnated, i.e. increased from 107.0 per cent to only 109.3 per cent. The increase for CC-3 is much less impressive. The highest increase, by 20.0 percentage points, was achieved by Estonia, followed by Lithuania (19.5), Poland (19.0), Slovenia (15.0), etc. In 2004, the highest productivity level in terms of EU-25 benchmark was exhibited by Slovenia (75.3 per cent), followed by Hungary (68.2 per cent), Czech Republic (64.4 per cent), Poland (62.2 per cent), Slovakia (59.1 per cent) and the Baltic countries (see Figure 1.1). Still, the productivity levels of NMS-8 remain much under that of EU-15 and there is a lot of scope for further productivity catching-up of the NMS-8. In terms of export performance, two additional productivity growth-related issues are worth mentioning. The first relates to wage competitiveness and the second to the impact of structural changes on the productivity growth. As far as wage competitiveness is concerned, Table 1.7 shows that with the exception of Czech Republic, Hungary and Poland, wage competitiveness of CEEC improved in the 1995–2004 period. Among NMS-8, growth of wage competitiveness has been the most remarkable in Baltic countries. To assess the impact of structural changes on productivity growth of NMS-8, Havlik (2005) applies the shift-share analysis. The shift-share analysis allows distinguishing between labor productivity growth due to shifts of labor from less to more productive sectors and due to differential growth of labor productivity within sectors. More than 80 per cent of aggregate productivity growth in NMS-8 during 1995–2002 can be attributed to the productivity growth within individual economic sectors. Aggregate productivity growth in NMS-8 has, thus, ‘mostly resulted from productivity improvements within individual sectors and their across the board productivity catching up’ (Havlik, 2005: 12).

The role of FDI in growing export performance of CEEC The importance of FDI for NMS-8 exports is very high and on the increase. At the end of 2001, foreign subsidiaries were responsible for 87.9 per cent of manufacturing

32

Matija Rojec and Maja Ferjancˇicˇ

Table 1.6 Productivity1 growth rates in NMS-8 and EU-15 in 1990–2003 1990–1995

1995–2003

1990–2003

Cumulated

Annual average

Cumulated

Annual average

Cumulated

Annual average

9.6 n.a.

1.9 n.a.

39.5 79.1

4.3 8.7

52.8 n.a.

3.3 n.a.

10.1

1.9

7.5 16.4

0.9 2.2

18.9

1.3

Growth Differential Between NMS-8 and EU-15, in percentage points Total economy −0.5 −0.1 32.0 3.4 52.8 Manufacturing n.a. n.a. 62.7 6.5 n.a.

3.3 n.a.

NMS-8 Total economy Manufacturing2 EU-15 Total economy Manufacturing2

Source: Havlik 2005: 3, 21. Notes: 1 For total economy in terms of GDP per person employed, and for the manufacturing in terms of gross value added in constant prices per employee; 2 For manufacturing 1995–2002.

Figure 1.1 Labor productivity per person employed and GDP in purchasing power standards (PPS) per person employed relative to EU-25 (EU-25 = 100).

Source: Key Indicators on EU Policy – Economy and Finance – National Accounts (Eurostat), http://epp.eurostat.cec.eu.int/portal/ Note: Bulgaria and Croatia for 1996–2004, and for Romania for 2000–2004.

Overview of export performance of ‘New Europe’

33

exports in Hungary, for 69.3 per cent in the Czech Republic, 66.2 per cent in Poland, 48.5 per cent in Estonia and 36.8 per cent in Slovenia. Foreign subsidiaries are especially important for exports in high and medium-high tech industries; they dominate high and medium-high tech exports of Hungary, Poland and Estonia (see Table 1.8). Foreign subsidiaries also show much faster restructuring toward high and mediumhigh tech exports and much higher export propensity than domestic enterprises. Figure 1.2 exhibits quite intensive and positive structural changes of the manufacturing exports in the case of foreign subsidiaries, but only slow structural changes in the case of domestic enterprises in Hungary, Poland, Estonia and Slovenia. In 1993–2001, the share of low technology industries in manufacturing exports of foreign subsidiaries decreased from 30.8 per cent to only 13.2 per cent, while that of high technology industries increased from only 5.6 per cent to 26.8 per cent. Comparable figures for domestic enterprises are increase of low technology industries from 27.8 per cent to 29.4 per cent and increase of high technology industries from 2.8 per cent to 5.1 per cent. Altogether in 2001, high and medium-high technology industries accounted for 75.8 per cent of foreign subsidiary exports and only 41.5 per cent of domestic enterprise exports. Positive structural trends have been accompanied by similar trends in export propensity of foreign subsidiaries. In 1993–2001, in Estonia, Hungary, Poland and Slovenia, exports to sales ratio of foreign subsidiaries in high technology industries on average increased from 31.5 per cent to as much as 89.2 per cent, and in medium-high technology industries from 44.4 per cent to 81.0 per cent. Export propensity of low (37.4 per cent in 2001) and medium-low technology industries (36.0 per cent) remained much lower. Except in the medium-low technology industries, export propensity of domestic enterprises has been much lower and also increased less in the analyzed period. Damijan and Rojec (2004) claim that the above pattern of FDI in CEEC’s manufacturing speaks in favor of the so-called ‘flying geese growth model’ (FGM), which says that as the leading country – in our case EU-15 – moves up on the technology ladder, it transfers lower technology level industries via FDI to less developed countries – in our case CEEC. FDI is an important vehicle of manufacturing sector restructuring and productivity growth in CEEC.11 In this context, increased exports, especially in high and medium-high technology industries, has probably been one of the main contributions of FDI to the catching-up process of CEEC. In spite of the remarkable contribution of FDI to the export performance of CEEC, the causal relationship between export propensity and strategic foreign ownership remains ambiguous. The issue whether foreign ownership as such, after normalizing for all other differences between foreign subsidiaries and domestic enterprises, matters as far as export propensity is concerned has long been discussed in the literature. There seems to be an agreement that most of the difference between exports propensity of foreign subsidiaries and domestic enterprises is explained by other factors, including the multinationality (Pfaffermayr and Bellak, 2000). Rojec et al. (2004), in discussing the determinants of export propensity of foreign subsidiaries in the Estonian and Slovenian manufacturing sectors relative to domestic enterprises, claim that differences in export propensity between foreign subsidiaries and domestic enterprises are due to structural differences

34

Matija Rojec and Maja Ferjancˇicˇ

Table 1.7 Trends in wage competitiveness1 in NMS-8 and CC-3 in 1995–2004

Czech Republic Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia Bulgaria Croatia Romania

1995–2000

2000–2004

1995–2004

1.00 0.87 1.01 0.81 0.94 1.19 0.96 0.90 0.91 1.03 0.89

1.02 1.01 1.08 0.98 0.89 0.92 1.01 1.07 0.96 0.91 0.83

1.03 0.88 1.10 0.79 0.84 1.10 0.97 0.96 0.87 0.94 0.74

Source: WIIW database. Note: 1 Calculated as a ratio between growth of average annual gross wages in national currency and the growth of GDP per employed person in national currency. Ratio higher than 1 means that growth of wages per employee lags behind the growth of GDP per employee.

Table 1.8 Share of foreign subsidiaries1 in total manufacturing exports in selected NMS in 1993–2001 (in %)

1993 1994 1995 1996 1997 1998 1999 2000 2001 Memorandum item: High technology industries Medium-high technology industries Medium-low technology industries Low technology industries

Czech Republic

Estonia

Hungary

Poland

Slovenia

14.9 15.9 n.a. n.a. 41.9 47.5 60.5 62.5 69.3

n.a. n.a. 25.4 32.5 32.1 35.2 43.3 44.9 48.5

52.2 65.5 68.3 73.9 83.0 85.9 88.8 84.7 87.9

34.6 25.3 32.6 39.5 44.9 52.3 59.8 63.8 66.2

n.a. 21.1 23.2 25.8 28.0 32.9 30.3 34.2 36.8

n.a. n.a.

76.0 58.1

97.6 92.0

89.9 69.1

47.0 43.5

n.a.

39.4

72.3

49.7

23.1

n.a.

43.7

69.3

68.5

35.7

Source: WIIW database. Note: 1 Enterprises with 10 per cent or higher foreign equity share.

Overview of export performance of ‘New Europe’

35

Figure 1.2 Distribution of manufacturing exports of foreign subsidiaries1 and domestic enterprises by technology-defined groups of industries2 in Estonia, Hungary, Poland and Slovenia in 1993–20013 (In %)

Source: WIIW database. Notes: 1 Enterprises with 10 per cent or higher foreign equity share; 2 H = High technology, MH = Medium-high technology, ML = Medium-low technology, L = Low technology industries. They sum up to 100 per cent; 3 Hungary and Poland for 1993–2001, Estonia for 1995–2001 and Slovenia for 1994–2001.

between them, which are reflected in different efficiency of factors utilization and productivity levels, and in differences in other operational characteristics determining productivity and export propensity. The superior export propensity of foreign subsidiaries is, thus, partly due to the factor of foreign ownership itself, which also embraces the effect of multinationality.

36

Matija Rojec and Maja Ferjancˇicˇ

Transition from socialist to market economies: complete change of institutional setting How important are institutions for export performance? To answer this question, one can apply either a more broad or more ‘technical’ approach. A more broad approach would say that a whole strand of thought in economic science stands for institutions being the most important.12 Rodrik et al. (2002) find that institutional quality has a positive and significant effect on (trade) integration. Integration also has a (positive) impact on institutional quality but it is the quality of institutions which is the most important. On the other side of the coin we have a more technical approach usually used in gravity models. These models recognize that business environment is an important determinant of a country’s export performance, particularly with respect to costs of exporting, and then use some measure of institutional quality, such as the protection of property rights or risk of expropriation (Redding and Venables, 2003; Fugazza, 2004), labor market institutions, real exchange rate as a measure of macroeconomic environment (Fugazza, 2004), fraction of population speaking English (Rodrik et al., 2002), etc. In the case of the ‘New Europe’, we have to do with countries, which have gone through an overwhelming change of the entire socio-economic system and building of institutions, which normally takes decades to become really operational. This speaks in favor of the broadest possible concept of institutional quality when analyzing its influence on export performance. Simply taking, for instance, a risk of expropriation as a proxy for institutional quality would be too narrow in the case of ‘New Europe’. What we need for CEEC is a complex measure of the reform process. Assuming that the extent to which transition reforms have been accomplished in any given country can be objectively measured, one can look at the most commonly used indicator of reform progress, namely, the transition index of the European Bank for Reconstruction and Development (EBRD). Table 1.9 provides trends in two indices and for two groups of countries for 1990–2005 period. The first is the index of foreign exchange and trade liberalization and the second is the overall transition index, calculated as the average of individual country scores in nine key areas of transition reforms (see note to Figure 1.3). Index ranges from 1 to 4+, with

Table 1.9 Exports to sales ratio of foreign subsidiaries in the manufacturing sector of Estonia, Hungary, Poland and Slovenia in 2001 by technology-defined groups of industries (in %)

High-technology industries Medium-high technology Medium-low technology Low-technology industries

Estonia

Hungary

Poland

Slovenia

72.7 78.1 53.6 62.0

90.1 81.6 32.5 33.8

50.6 50.9 19.1 23.9

76.2 80.7 74.5 55.7

Source: WIIW database. Note: 1 Enterprises with 10 per cent or higher foreign equity share.

Overview of export performance of ‘New Europe’

37

Figure 1.3 Exports to sales ratio of foreign subsidiaries1 and domestic enterprises by technology-defined groups of industries2 in Estonia, Hungary, Poland and Slovenia in 1993–20013 (In %)

Source: WIIW database. Notes: 1 Enterprises with 10 per cent or higher foreign equity share; 2 H = High-technology, MH = Medium-high technology, ML = Medium-low technology, L = Low-technology industries. They sum up to 100 per cent; 3 Hungary and Poland for 1993–2001, Estonia for 1995–2001 and Slovenia for 1994–2001.

1 meaning only the initiation of transition reforms and 4+ meaning more or less the situation in advanced industrial economies. Thus, once a country approaches level 4, its institutional setting is near to that in advanced industrial countries. The higher the index the more favorable the comparative costs of exporting for a country. Figure 1.4 shows the long way that NMS-8 and CC-3 have made since the beginning of the 1990s. As far as foreign trade (and foreign exchange) liberalization is concerned, all of them achieved very high level (index value of 4 or higher) already

38

Matija Rojec and Maja Ferjancˇicˇ

Figure 1.4 Overall and foreign exchange and trade liberalization EBRD transition indices for NMS-8 and CC-3 in 1991–2005

Source: EBRD 2000, 2002, 2003, 2004 and 2005. Notes: Overall index for 1993–2004 is calculated as simple average of the following 9 indices: index of price liberalization, index of foreign exchange and trade liberalization, index of small scale privatization, index of large-scale privatization, index of enterprise reform, index of competition policy, index of infrastructure reform, index of banking sector reform and index of reform of non-banking financial instututions. For 1990–1992 index of infrastructure reform is not available. EBRD does not include an overall indicator in its table of sub-indicators, it does, however, carry out analyses in its reports, using such an aggregate (EBRD 1999, charts 2.1–2.4; see Zinnes et al. 2001: 335).

in 1994–95, while at the end of the analyzed period they have all achieved the maximum possible level of foreign exchange and trade liberalization index (4.3). Trade liberalization was one of the first transition reform measures. As far as overall transition index is concerned, the progress has been much more gradual but constant, and there were no changes for the worse. In 1991 the value of overall index was only 1.79, but by 2005 it increased to 3.68, i.e. close to the level of an ‘ideal type’ advanced market economy. How important has been the major institutional transformation of CEEC for their export performance? In the most basic sense, the transformation from a

Overview of export performance of ‘New Europe’

39

centrally planned to a market economy has been the only really sine qua non requirement of improving export performance. Without transformation, the fundamentals of the gravity theory would not be allowed to work at all, there would continue to exist man-made (i.e. policy) barriers to normal foreign trade flows and there would be no real expansion of trade with the EU and beyond. Havrylyshyn and Al-Atrash (1998) say that political independence and removal of central planning restrictions increased foreign trade intensity and led to a geographical reorientation of trade. But once we go beyond the establishment of the basic institutional setting, once we open up the economies and allow gravity theory fundamentals to work, how important have been further institutional developments of the ‘New Europe’? The existing literature on the subject is pretty straightforward. For Havrylyshyn and Al-Atrash (1998), as well as Kaminski (1993) and Kaminski et al. (1996b), the speed and scope of transition reforms have been crucial for improving export performance. Havrylyshyn and Al-Atrash (1998), by using a variant of the gravity model, find that geographic diversification of CEEC’s exports to the EU is the greater, the closer is geographic proximity and the more progress a given country makes in its structural reforms. Kaminski (1993) finds a close link between export performance and the decision to move quickly to a market-based economy. He illustrates this by a big difference between the export performance of the fastest reforming transition countries (Czechoslovakia, Hungary, Poland) and that of the Balkan countries. Countries which liberalized their trade regimes, devalued currencies, introduced unified exchange rates and removed administrative controls over prices succeeded in rapidly increasing exports to OECD. Interestingly, he claims that developments in export performance, following the implementation of comprehensive transformation programs, were little influenced by previous export performance under central planning and earlier tinkering with trade and other systemic reforms. Kaminski et al. (1996b) provide probably the most comprehensive analysis of the impact of the transition reform process on export performance. They analyze data on a number of aspects of economic reform (price liberalization, stabilization policy, exchange rate regime, trade regime, state monopoly of foreign trade, export and import controls) in transition economies and find strong empirical evidence of the link between radical domestic reforms, which bring about macroeconomic stability, competitive markets and liberal foreign trade regimes and successful foreign trade reorientation. Reforms in one area reinforce reforms in other areas. The attempts of ‘hardening’ enterprises’ budget constraint, liberalizing foreign trade and making domestic currency convertible, etc. – all play a vital role in supporting export reorientation. Countries that scored the highest in terms of trade reorientation also recorded the greatest progress in overall transition. Thus, ‘the common denominator among the top export performers is price decontrol combined with strong and credible government commitment to macroeconomic stabilization and broadly conceived liberalization. While resource endowments, past patterns of production and the pace of adjustment in different

40

Matija Rojec and Maja Ferjancˇicˇ

industries determine the trade patterns of a country, progress in macroeconomic stabilization and in establishing market-supporting institutions was perhaps the single most important factor determining foreign trade performance over the transitional period (Kaminski et al., 1996b: 46).

Conclusions A remarkable improvement in export performance of the ‘New Europe’ countries has been one of the most outstanding features of both the transition and EU integration processes of CEEC. Since the beginning of the 1990s, CEEC recorded extremely high growth of exports in absolute and relative terms, that has been accompanied by increasing market shares abroad, by a domination of EU-15 as the main market and by considerable changes in the commodity structure of exports in favor of goods with higher value added. Our objective has been to overview existing theoretical and empirical literature on export performance of CEEC and to analyze its determinants. The existing literature tends to distinguish between factors determining market access and factors determining supply capacity of exporting countries. As far as market access is concerned, the gravity theory presents the most powerful explanatory tool. The supply capacity factors of export performance can be explained by comparative advantages arising from different factor intensities/endowments and/or by economies of scale in (horizontal) intra-industry trade characterized by similarities in technology and quality standards. Both theoretical approaches are relevant for the explanation of CEEC’s export performance because the main part of CEEC’s trade is still inter-industry trade and vertical intra-industry trade. However, the share of horizontal intra-industry trade is slowly increasing. Opening up of CEEC economies has been the sine qua non requirement for their improved export importance, simply because it enabled gravity forces – proximity of and integration into the large and high purchasing power EU markets – to act and to make EU-15 the main market of CEEC. Without the opening up and system transformation, the fundamentals of the gravity theory would not be allowed to work, there would be artificial barriers to normal foreign trade flows and there would be no real expansion of trade with EU and broader. Main findings of the literature based on gravity models, shift-share analysis, analysis of (export) competitiveness and more or less comprehensive descriptive analysis of factors behind growing export performance are the following: ●

●

Transition from centrally planned to market economies has led to increase and geographical restructuring of foreign trade along the lines of the gravity theory, i.e. foreign trade intensity of CEEC increased to a major extent and EU-15, as large, near and highly developed market, assumed the role of the dominant trading partner. Gravity models show that CEEC gradually approach the ‘normal’ level of their trade with developed countries, especially the EU, but there are considerable differences among individual countries.

Overview of export performance of ‘New Europe’ ●

●

●

●

41

Market access has been more important than supply capacity for growing export performance of CEEC. Shift-share analysis shows that CEEC considerably improved their competitive position in EU-15 compared to non-EU competitors, due to preferential trade arrangements but also due to improved supply capacity. Speed and scope of transition reforms prove to be more important than initial conditions and market access in explaining inter-country differences in export performance. (Export) competitiveness analysis of CEEC suggests positive contribution of supply capacity factors for CEEC’s export performance.

Apart from foreign trade fundamentals of the gravity theory, the existing literature puts forward five factors which deserve special attention in analyzing CEEC’s export performance: (1) improved access to EU market, (2) changes in export commodity structure, (3) increased levels of productivity, (4) the role of FDI and (5) institutional changes. Improved access to EU market Most of the export reorientation of NMS-8 and CC-3 exports to the EU-15 is explained by gravity theory, i.e. by the fact that size, proximity and development level of EU-15 is an extremely strong gravity force for CEEC’s exports. However, since the beginning of transition we have also witnessed an EU integration process, which has provided CEEC with a preferential access to EU-15 markets. Preferential market access, especially the Europe Agreements, has clearly been important for increasing the volume of trade of CEEC, but the scope of preferential treatment has been limited by a number of inherent limitations and even more so because other basic factors of export performance have been more important for export expansion. Changes in export structure Since the beginning of transition, export structure of NMS-8 and CC-3 has undergone significant structural changes. Structural upgrading positively contributed to their export performance. Export restructuring was characterized by positive specialization patterns between and within industries, and accompanied by quality upgrading as indicated by increased value added per employee, increased unit values and more engagement in medium and high quality segments of industries. The share of horizontal intra-industry trade with the EU also seems to increase, albeit slowly. There are, however, differences across CEEC in these respects. Increased levels of productivity Productivity growth has been another source of growing export performance of CEEC. Productivity growth of CEEC has been remarkable since the beginning of transition. Unfortunately, there is no econometric analysis available which would assess the exact impact of productivity growth on export performance of CEEC.

42

Matija Rojec and Maja Ferjancˇicˇ

Econometric analysis done for some other countries speaks in favor of positive but relatively small impact of productivity increase on export growth. The role of FDI The importance of FDI for NMS-8 exports is very high and increases. Foreign subsidiaries also show much faster restructuring toward high and medium-high technology exports and much higher export propensity than domestic enterprises. Differences in export propensity between foreign subsidiaries and domestic enterprises are due to structural differences between them, which are reflected in different efficiency of factors’ utilization and productivity levels, and in differences in other operational characteristics determining productivity and export propensity. Institutional changes The existing literature on the importance of institutional reforms for the growing export performance of the ‘New Europe’ countries is pretty straightforward: the speed and scope of transition reforms have been crucial for the growth of export performance. There is strong empirical evidence of the link between radical domestic reforms, which bring about macroeconomic stability, competitive markets and liberal foreign trade regimes and successful foreign trade reorientation. Countries that scored the highest in terms of trade reorientation also recorded the greatest progress in overall transition.

Notes * Faculty of Social Sciences, University of Ljubljana and Institute of Macro-Economic Analysis and Development; e-mail: [email protected]. 1 One of the reasons is also that the initial year of our analysis is 1990. Namely, CC-3 experienced a sharp decline of exports from 1990 to 1991, which has since then been followed by a constant increase. If one would take 1991 as the base year, the indicators of export performance improvement of CC-3 would be much higher. 2 For a comprehensive overview of developments in international trade theory see RiveraBaits and Olive 2003: 1–123. 3 Estonia increased its market share on account of increased competitiveness (‘competitive gains’) by 79.8 per cent, Hungary by 78.6 per cent, Slovakia by 74.6 per cent, Lithuania by 72.6 per cent, Czech Republic by 72.3 per cent, etc. The improved competitive effect component may be a result of improved market access of the analyzed countries, due to preferential trade arrangements in the framework of EU integration process and/or of their improved supply capacity. Differences in competitive effect component among the analyzed transition countries, which were subject to similar preferential trade arrangements with EU, suggest difference among countries in the growth of their supply capacity. 4 The index is composed of four criteria: (i) the change in the dollar value of total exports, (ii) the change in the share of CMEA countries’ trade in total exports, (iii) the percentage increase in manufactured exports to OECD and (iv) the ratio of OECD-oriented manufactured exports to GDP. 5 Apart from that, Kaminski (1993) claims that differences among Czechoslovakia, Hungary and Poland in 1990–92 export growth to the OECD were positively correlated with the size of the contraction in GDP, i.e. the domestic demand slump associated with the transformation was a very important determinant of export performance in the initial period.

Overview of export performance of ‘New Europe’

43

6 For a short inventory of the approaches to measuring (export) competitiveness at different levels, see Halpern (2002: 59–62). 7 Most of these indicators of competitiveness, plus a number of others, like structural changes and FDI penetration, are analyzed in various parts of this chapter. 8 Recent analysis of Mongelli et al. (2005) in a part deals with this issue, although not directly related to the EU accession process. They investigate the link between economic integration and the overall institutional process of regional integration in Europe. The evidence suggests that the interaction between regional institutional and trade integration matters. Such interaction runs in both directions, although the link from institutional to trade integration dominates. 9 At the time of its introduction for CEEC, MFN tariffs on industrial products in the EU averaged around 6 per cent, whereas average GSP tariffs were around 2 per cent and most of GSP items (94 per cent) were subject to zero rates; 74 per cent of tariff lines of industrial products had zero rates (Kaminski et al., 1996b: 34). 10 Landesmann and Stehrer (2002) report similar findings for the 1995–99 period. In general, unit values of 10 transition countries (NMS-8, Bulgaria and Romania) exports to EU are much below average unit values of total EU imports but, in 1995–99, they managed to considerably reduce this gap. The gap was eliminated in technology-driven industries, and considerably reduced in high skill industries and medium skill/blue collar industries. However, it is particularly in the latter two industries that the lag behind the average import prices in the EU remains by far the largest, in particular in high skill industries. 11 However, the catching up via FDI has been going on mostly in industries at the lower end of the technological intensity spectrum and less so when it comes to industries at the upper end of the technological intensity spectrum (Damijan and Rojec, 2004). 12 According to Rodrik et al. (2002), three strands of thought stand out in explaining the differences in development levels of countries. The first is centered on geography, the second on (trade) integration and the third on institutions. They estimate the respective contribution of institutions, geography and trade integration to economic development, and claim that quality of institutions is the most important.

References Aturupane, C., S. Djankov and B. Hoekman (1997) Determinants of Intra-Industry Trade between East and West Europe, Policy Research Working Paper 1850 (November), Washington, DC: World Bank. Baldwin, R.E. (1994) Towards an Integrated Europe, London: CEPR. Bernard, A.B. and J.B Jensen (1998) Understanding the US Export Boom, NBER Working Paper Series, Working Paper No. 6438, Cambridge, MA: National Bureau of Economic Research. Busier, M., J. Fidrmuc and B. Schantz (2005) Trade Integration of Central and Eastern European Countries: Lessons from a Gravity Model, Working Paper Series No. 545 (November), Frankfurt: European Central Bank. Collins, S. and D. Rodrik (1991) Eastern Europe and the Soviet Union in the World Economy, Washington, DC: Institute for International Economics. Damijan, J.P. and M. Rojec (2004) Foreign Direct Investment and the Catching-up Process in New EU Member States, WIIW Research Reports No. 310, Vienna: The Vienna Institute for International Economic Studies. Dulleck, U., N. Foster, R. Stehrer and J. Woerz (2004) Dimensions of Quality Upgrading in CEECs, WIIW Working Papers No. 29, Vienna: The Vienna Institute for International Economic Studies.

44

Matija Rojec and Maja Ferjancˇicˇ

EBRD (1999) Transition Report 1999, London: EBRD. EBRD (2000) Transition Report 2000, London: EBRD. EBRD (2002) Transition Report 2002, London: EBRD. EBRD (2003) Transition Report 2003, London: EBRD. EBRD (2004) Transition Report 2004, London: EBRD. EBRD (2005) Transition Report 2005, London: EBRD. Egger, P. (2003) An econometric view on the estimation of gravity models and the calculation of trade potentials, The World Economy, 25(2): 297–312. Fidrmuc, J. and J. Fidrmuc (2003) Disintegration and trade, Review of International Economics, 11(5): 811–829. Fugazza, M. (2004) Export Performance and Its Determinants: Supply and Demand Constraints, Policy Issues in International Trade and Commodities Study Series No. 26, New York and Geneva: United Nations Conference on Trade and Development (UNCTAD). Halpern, L. (2002) International trade, competitiveness and catching up in transition countries – Some recent developments and policies for improvement, in V. Benacˇek and J. Gacs (eds), Catching Up and EU Accession – Conditions for Fast Real Convergence in the Candidate Countries, Interim Report IR-02-068/October, Laxenburg: IIASA, pp. 59–63. Hamilton, C.B. and A.L. Winters (1992) Opening up international trade for Eastern Europe, Economic Policy, April: 78–115. Havlik, P. (2000) Trade and Cost Competitiveness in the Czech Republic, Hungary, Poland and Slovenia, World Bank Technical Paper No. 482 (November), Washington, DC: World Bank. Havlik, P. (2005) Structural Change, Productivity and Employment in the New EU Member States, WIIW Research Reports, No. 313 (January), Vienna: The Vienna Institute for International Economic Studies. Havlik, P., M. Landesmann and R. Stehrer (2001) Competitiveness of CEE Industries: Evidence from Foreign Trade Specialization and Quality Indicators, WIIW Research Reports, No. 278 (July), Vienna: The Vienna Institute for International Economic Studies. Havrylyshyn and Al-Atrash (1998) Opening Up and Geographic Diversification of Trade in Transition Economies, IMF Working Paper, WP/98/22, Washington, DC: International Monetary Fund, European II and Policy Development and Review Departments. Havrylyshyn, O. and Pritchett (1991) European Trade Patterns after the Transition, Policy, Research and External Affairs, Working Papers, Trade Policy, WPS 748, Washington, DC: World Bank. Hoekman, B. and S. Djankov (1996) Intra-Industry Trade, Foreign Direct Investment, and the Reorientation of Eastern European Exports, Policy Research Working Paper 1652 (September), Washington, DC: World Bank. IMD (2004) IMD World Competitiveness Yearbook 2004, Lausanne: Institute for Management Development. Jakab, Z., M.A. Kovacs and A. Oszlay (2001) How far has trade integration advanced? An analysis of the actual and potential trade of three Central and Eastern European countries, Journal of Comparative Economics, 29(2): 276–292. Kaminski, B. (1993) How the Market Transition Affected Export Performance in the Central European Economies, Policy Research Working Papers, International Trade, WPS 1179 (September), Washington, DC: World Bank, International Economics Department.

Overview of export performance of ‘New Europe’

45

Kaminski, B. (1994) The Significance of the Europe Agreements for Central European Industrial Exports, Policy Research Working Paper 1314, Washington, DC: World Bank, International Economics Department, International Trade Division. Kaminski, B. and F. Ng (2001) Trade and Production Fragmentation: Central European Economies in European Union Networks of Production and Marketing, Policy Research Working Paper 2611 (June), Washington, DC: World Bank. Kaminski, B., Z.K. Wang and L.A. Winters (1996a) Trade performance, export reorientation in the transition, Economic Policy, October: 421–442. Kaminski, B., Z.K. Wang and L.A. Winters (1996b) Foreign Trade in the Transition: The International Environment and Domestic Policy, Studies of Economies in Transformation, No. 20, Washington, DC: World Bank. Landesmann, M. and R. Stehrer (2002) The CEECs in the Enlarged Europe: Convergence Patterns, Specialization and Labor Market Implication, WIIW Research Reports, No. 286 (July), Vienna: The Vienna Institute for International Economic Studies. Mongelli, F.P., E. Dorrucci and I. Agur (2005) What Does European Institutional Integration Tell Us about Trade Integration?, Occasional Paper Series, No. 40 (December), Frankfurt: European Central Bank. Pfaffermayr, M. and C. Bellak (2000) Why Foreign-Owned Firms Are Different: A Conceptual Framework and Empirical Evidence for Austria. HWWA Discussion Paper No. 115, Hamburg: Hamburg Institute of International Economics. Redding, Stephen and Anthony J. Venables (2003) Geography and Export Performance: External Market Access and Internal Supply Capacity, NBER Working Paper Series, Working Paper 9637, Cambridge, MA: National Bureau of Economic Research (NBER). Redding, Stephen and Anthony J. Venables (2004) Economic geography and international inequality, Journal of International Economics, 62(1): 53–82. Rivera-Baits, Luis A. and Maria-Angels Olive (2003) International Trade: Theory, Strategies and Evidence, New York: Oxford University Press. Rodrik, D., A. Subramanian and F. Trebbi (2002) Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development, NBER Working Paper Series, Working Paper No. 9305, Cambridge, MA: National Bureau of Economic Research. Rojec, M., J.P. Damijan and B. Majcen (2004) Export propensity of Estonian and Slovenian manufacturing firms, Eastern European Economics, 42(4): 33–54. Rosati, D. (1992) Problems of Post-CMEA Trade and Payments, Discussion Paper 650, London: Center for Economic Policy Research. Soos, K. A. (2002) Upgrading on the periphery: Accession countries’ exports to the EU in international comparison, 1993–2000, Revue Elargissement: Special Specializations Trends, 22 (May). Szalavetz, A. (2005) Structural Change – Structural Competitiveness, Working Papers No. 155 (April), Budapest: Institute for World Economics, Hungarian Academy of Sciences. UNCTAD (2002) Trade and Development Report 2002, New York and Geneva: United Nations Conference on Trade and Development. UNCTAD (2003) Handbook of Statistics 2003, Trade structure by product and country group, New York and Geneva: United Nations Conference on Trade and Development. WEF (World Economic Forum) (2004) The Global Competitiveness Report 2004–2005, New York and Oxford: Oxford University Press. Zinnes, C., Y. Eilat and J. Sachs (2001) Benchmarking competitiveness in transition economies, Economics of Transition, 9(2): 315–353.

46

Matija Rojec and Maja Ferjancˇicˇ

Appendix Table A1 Main export-related indicators of NMS-8 and CC-3 in 1990–2004 (in mill. EUR at current prices and in %)

Czech Republic Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Estonia Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1993=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Hungary Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Latvia Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1993=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Lithuania Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1993=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports

1990

1991

1992

1993

1994

1995

7099 7698 100 n.a. 0.3 n.a. 35.4

6382 5704 90 n.a. 0.2 0.52 56.8

6774 8011 95 n.a. 0.2 0.55 61.6

12,362 12,493 174 n.a. 0.4 1.04 52.7

13,471 14,632 190 n.a. 0.4 1.02 58.7

16,504 19,406 232 31.9 0.4 1.12 60.5

n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a.

273 412 100 n.a. 0.01 n.a. 42.9

687 764 251 18.6 0.02 0.08 51.6

1104 1400 404 33.7 0.03 0.11 45.9

1407 1946 515 38.4 0.04 0.13 44.2

7500 6771 100 n.a. 0.26 n.a. 42.11

8245 9230 110 42.7 0.28 0.67 58.64

8262 8604 110 48.4 0.28 0.67 62.33

7627 10,814 102 25.1 0.23 0.64 58.13

9045 12,318 121 21.8 0.25 0.69 63.68

9972 11,905 133 26.5 0.25 0.68 62.66

n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a.

734 700 100 n.a. 0.02 0.06 45.7

887 901 121 35.8 0.03 0.07 32.1

833 1149 114 26.1 0.02 0.06 39.3

981 1384 134 22.3 0.02 0.07 44.2

n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a.

531 470 100 n.a. 0.02 0.04 88.5

988 1183 186 23.3 0.03 0.08 66.9

1707 1980 321 27.7 0.05 0.13 30.1

2068 2789 389 34.9 0.05 0.14 36.4

Overview of export performance of ‘New Europe’

47

1996

1997

1998

1999

2000

2001

2002

2003

2004

17,694 22,193 249 34.2 0.4 1.14 58.6

19,811 24,014 279 35.6 0.4 1.15 59.8

23,068 25,287 325 36.4 0.5 1.26 64.0

24,640 26,386 347 41.7 0.5 1.25 69.2

31,483 34,876 443 40.8 0.4 1.31 68.6

37,251 40,675 525 46.3 0.5 1.55 68.9

40,726 43,025 574 47.5 0.6 1.73 68.4

43,051 45,243 606 50.7 0.6 1.83 69.8

53,995 54,824 761 49.6 0.7 2.41 68.3

1638 2531 599 38.4 0.04 0.15 44.4

2585 3912 945 37.5 0.05 0.19 47.0

2896 4274 1059 52.2 0.06 0.20 45.5

2829 3853 1035 55.4 0.05 0.19 47.1

4146 5772 1516 47.6 0.06 0.22 50.0

4486 5840 1641 62.1 0.06 0.23 46.6

4595 6207 1681 60.0 0.07 0.24 50.2

4972 7044 1819 56.5 0.07 0.26 48.5

4750 6726 1737 55.0 0.06 0.28 n.a.

10,472 12,912 140 28.0 0.24 0.68 62.68

16,910 18,780 225 26.0 0.34 0.98 71.18

20,477 22,871 273 40.3 0.41 1.12 72.96

23,491 26,288 313 45.4 0.43 1.19 76.22

30,545 34,856 407 46.0 0.43 1.28 75.10

34,082 37,654 454 52.3 0.48 1.42 74.28

36,523 39,939 487 49.0 0.52 1.55 75.14

38,041 42,189 507 49.7 0.56 1.62 73.63

44,630 48,550 595 46.9 0.60 0.99 70.80

1123 1823 153 22.3 0.03 0.07 44.1

1473 2399 201 20.8 0.03 0.09 48.8

1617 2849 220 24.9 0.03 0.09 56.6

1615 2762 220 24.0 0.03 0.08 62.6

2019 3446 275 19.0 0.03 0.08 64.6

2277 3915 310 21.7 0.03 0.09 60.1

2448 4276 334 23.0 0.03 0.10 59.5

2558 4637 349 24.5 0.04 0.11 61.8

3200 5662 436 23.0 0.04 5.20 52.6

2588 3474 487 32.5 0.06 0.17 33.4

3406 4976 641 29.8 0.07 0.20 32.5

3313 5173 623 34.4 0.07 0.18 38.0

2816 4532 530 32.6 0.05 0.14 50.1

4123 5905 776 22.7 0.06 0.17 47.9

5118 7093 963 30.4 0.07 0.21 47.8

5796 8159 1091 34.1 0.08 0.25 48.3

6333 8669 1192 35.3 0.09 0.27 42.1

7477 9956 1407 35.0 0.10 0.00 45.5

Continued

48

Matija Rojec and Maja Ferjancˇicˇ

Table A1 Main exports-related indicators of NMS-8 and CC-3 in 1990–2004 (in mill. EUR at current prices and in %)—cont’d

Poland Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Slovakia Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Slovenia Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Bulgaria Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports Croatia Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports

1990

1991

1992

1993

1994

1995

11,250 7484 100 n.a. 0.40 n.a. 49.9

12,014 12,512 107 n.a. 0.41 0.97 64.2

10,165 12,443 90 n.a. 0.34 0.82 65.7

12,154 16,052 108 n.a. 0.37 1.03 69.2

14,559 18,205 129 n.a. 0.40 1.10 69.2

17,710 22,491 157 13.7 0.44 1.20 70.0

2264 2513 100 n.a. 0.08 n.a. 36.9

2654 2915 117 n.a. 0.09 n.a. 41.3

2864 2960 126 n.a. 0.10 n.a. 50.7

4662 5421 206 25.1 0.14 0.55 29.7

5652 5585 250 35.9 0.15 0.59 35.0

6634 6783 293 38.1 0.17 0.59 37.2

3244 3684 100 n.a. 0.11 n.a. 64.7

3003 3072 93 34.3 0.10 0.24 71.2

5150 4784 159 31.0 0.17 0.42 60.9

5207 5575 161 47.5 0.16 0.44 63.2

5755 6156 177 42.9 0.16 0.44 65.6

6426 7327 198 37.1 0.16 0.44 67.0

10,560 10,315 100 n.a. 0.37 n.a. 5.6

2773 2181 26 263.4 0.09 0.22 17.4

3024 3445 29 70.5 0.10 0.24 31.5

3174 4058 30 32.7 0.10 0.27 30.0

3347 3515 32 38.9 0.09 0.25 37.6

4142 4377 39 33.4 0.10 0.28 37.7

3162 4038 100 n.a. 0.11 n.a. 59.8

2554 2941 81 78.9 0.09 0.21 64.8

3382 3377 107 64.9 0.11 0.27 53.9

3210 3606 102 36.6 0.10 0.27 57.9

3595 4397 114 39.3 0.10 0.27 59.5

3595 5810 114 35.9 0.09 0.24 57.6

Overview of export performance of ‘New Europe’

49

1996

1997

1998

1999

2000

2001

2002

2003

2004

19,488 29,677 173 14.3 0.45 1.26 66.2

22,798 37,484 203 14.1 0.46 1.33 64.0

25,145 41,539 224 14.9 0.50 1.37 68.3

25,729 43,151 229 16.0 0.47 1.31 70.5

34,383 53,122 306 13.8 0.48 1.44 69.9

40,375 56,223 359 16.2 0.57 1.68 69.2

43,400 58,307 386 19.3 0.62 1.84 68.7

47,511 60,288 422 22.7 0.70 2.02 68.8

60,014 71,812 533 23.3 0.81 0.00 67.4

7048 8878 311 40.4 0.16 0.57 41.3

7299 9119 322 37.7 0.15 0.62 41.7

9541 11,635 421 36.9 0.19 0.64 55.7

9602 10,628 424 49.9 0.18 0.60 59.4

12,880 13,860 569 43.8 0.18 0.65 59.0

14,115 16,488 623 55.2 0.20 0.71 59.9

15,270 17,517 674 54.9 0.22 0.78 60.6

19,359 19,947 855 52.7 0.28 0.96 60.6

22,352 23,525 987 58.5 0.30 0.99 59.7

6641 7536 205 39.8 0.15 0.43 64.5

7413 8290 229 38.2 0.15 0.43 63.5

8052 8999 248 39.4 0.16 0.44 65.5

8037 9482 248 40.0 0.15 0.41 66.0

9505 10,996 293 38.6 0.13 0.40 63.7

10,349 11,345 319 43.2 0.15 0.43 62.1

10,966 11,578 338 43.7 0.16 0.46 59.4

11,288 12,242 348 44.1 0.17 0.48 58.4

12,786 14,146 394 43.2 0.17 0.00 58.2

3901 4048 37 53.0 0.09 0.25 39.1

4368 4361 41 42.6 0.09 0.25 43.2

3841 4476 36 38.4 0.08 0.21 49.6

3734 5140 35 31.6 0.07 0.19 52.0

5253 7085 50 27.2 0.07 0.22 51.1

5714 8128 54 34.4 0.08 0.24 54.8

6063 8411 57 34.4 0.09 0.26 55.7

6668 9611 63 34.2 0.10 0.28 56.5

7985 11620 76 34.3 0.11 0.00 54.2

3602 6220 114 46.0 0.08 0.23 51.0

3666 8060 116 39.3 0.07 0.21 49.7

4046 7477 128 32.2 0.08 0.22 47.6

4027 7324 127 33.3 0.07 0.20 48.7

4818 8588 152 29.4 0.07 0.20 54.3

5210 10,232 165 31.6 0.07 0.22 54.1

5187 11,325 164 31.4 0.07 0.22 52.9

5468 12,546 173 29.3 0.08 0.23 54.7

6452 13,342 204 28.1 0.09 130.21 51.6

Continued

50

Matija Rojec and Maja Ferjancˇicˇ

Table A1 Main exports related indicators of NMS-8 and CC-3 in 1990–2004 (in mill. EUR at current prices and in %)—cont’d

Romania Exports of goods (in EUR) Imports of goods (in EUR) Exports index (1990=100) Exports as % of GDP Exports as % of World imports Exports as % of EU-15 imports Exports to EU-15 as % of total exports

1990

1991

1992

4166 6637 100 n.a. 0.15 n.a. 33.9

3439 4670 83 n.a. 0.12 0.28 36.9

3365 4827 81 n.a. 0.11 0.27 35.1

1993

4203 5604 101 n.a. 0.13 0.36 41.3

1994

5174 5980 124 n.a. 0.14 0.39 48.2

1995

6116 7947 147 n.a. 0.15 0.41 54.0

Sources: UNCTAD, World Bank and WIIW (The Vienna Institute for International Economic Studies) databases. Note: Data for NMS-10.

Overview of export performance of ‘New Europe’

1996

6451 9125 155 n.a. 0.15 0.42 56.4

1997

7469 9993 179 n.a. 0.15 0.43 56.4

1998

7376 10,518 177 20.0 0.15 0.40 64.3

1999

7986 9933 192 22.1 0.15 0.41 65.3

51

2000

2001

2002

2003

2004

11,273 14,235 271 19.8 0.16 0.47 63.6

12,722 17,383 305 25.1 0.18 0.53 67.6

14,675 18,881 352 26.3 0.21 0.62 67.0

15,614 21,201 375 27.9 0.23 0.66 67.5

18,935 26,281 455 25.7 0.25 28.60 65.3

2

Changes in export patterns of the Czech Republic, Hungary and Poland Anna Wziatek-Kubiak

Introduction Given the growing intensity of economic interactions throughout the world economy, business people, labor leaders and policy makers have become more concerned with the competitiveness of their countries’ exports. The international trade literature concerning our region presents a wide range of the characteristics of export patterns of the new EU member states, especially the Czech Republic, Hungary and Poland. These patterns are also compared to those of the four cohesion countries (Greece, Ireland, Portugal, Spain). The literature concentrates on determinants of trade patterns, such as the factor content of trade flows and the quality of the manufacturing sector, in which industries operate (see Landesmann (2002); Havlik (2000); and Borbély (2004, 2005)). In this chapter the export performance and export patterns of the three accession countries (AC-3) – the Czech Republic, Hungary and Poland – are analyzed from a number of perspectives. Looking at AC-3 exports to the EU-15 from the perspective of the EU market (and referring to the title of the conference), we concentrate on the determinants and effects of change in export competitiveness of the AC-3 countries in comparison with EU competitors, its differentiation across industries and the results in the form of export patterns of the AC-3. As an effect of AC-3 export expansion, the process of ‘pushing out’ the competing EU-15 industries that took place in the pre-accession period and determinants of this process will be shown. Focusing also on those AC-3 industries that increased competitive pressure on the EU market the most, we present some features of AC-3 export patterns and their effects for potential AC-3 growth. The chapter consists of four sections. The opening section presents the analytical framework used. The second section shows the exports performance and export patterns of the Czech Republic, Hungary and Poland since the mid-1990s, when the European Agreement came into force and the most intensified liberalization of trade relations took place. Changes in the export pressures of the three new member states on the EU market are also included. The third section, then, turns to the fundamental factors responsible for differentiation of this pressure across industries and countries. Based on statistical analysis, Section 4 focuses on two types of ‘gainers’, which increased EU-25 market shares the most. Conclusions follow.

Changes in export patterns of the Czech Republic, Hungary and Poland

53

Export competitiveness and its measurement Although export competitiveness (competitive advantage) is a word often used in the literature, it is seldom to be found in economic textbooks, which prefer the term comparative advantage. However, competitive advantages and comparative advantage do not overlap. Competitiveness is a category used more in business and management than in economics. The former, if seen as the ability to win competition at the microeconomic (i.e. enterprise) level, has become synonymous with competitive advantage, as opposed to country level comparative advantage. In economics, competitiveness is an ambiguous notion and is understood in various ways. It suggests linkages to economic growth, foreign trade performance and efficiency. There are at least three major areas of and approaches to competitiveness: macro, micro and international trade. Definitions of competitiveness as ‘the ability of an economy to provide its population with high and rising standards of living and high rates of employment on a sustainable basis’ (the European Commission, 2000–2004) or ‘the ability of a nation’s economy to make rapid and sustained gains in living standard’ (The Global Competitiveness …, 1996: 8), exemplify the macroeconomic approach, that is the competitiveness of a country’s entire economy. Based on indicators commonly used in the evaluation of economic development, the foregoing approach makes competitiveness synonymous with the level and factors of development. The trade approach to competitiveness is based on the classical theories of international trade – the comparative advantage theory and the factor proportions theory. The subject of research is foreign trade performance, especially the commodity structure of exports, or specialization pattern of a given country. The concept of ‘revealed comparative advantage’ (RCA), elaborated by Balassa to measure specialization, is used here. However, according to Balassa, ‘competitiveness means the ability to sell, to compete on the market. But since international trade is determined by relative rather than absolute advantages, this concept does not fit well into classical comparative-cost theory’ (Balassa, 1963: 29). Balassa, similarly to Porter, rejects the validity of using the theory of international trade to assess competitiveness. Porter introduces the notion of competitive advantage, which is principally different from the notion of comparative advantage (1986: 15, 17–18). The latter is derived from the theory of international trade, which, according to Gomory and Baumol (2000: 4), does not consider the competition processes, and should therefore be modified. Gomory and Baumol stress that ‘there are in fact inherent conflicts in international trade (…). An improvement in the productive capacity of a trading partner that allows it to compete effectively with a home country industry, instead of benefiting the public as a whole, may come at the expense of the home country overall’ (p. 4). They are the first to introduce processes of competition into foreign trade models and thus to modify the classical theory of trade. In the micro approach to competitiveness, the framework of microeconomic and competition theory is applied. In this approach the subject of analysis is the tradeable sector and its parts (industries and companies). Competitiveness reflects

54

Anna Wziatek-Kubiak

the companies’ ability to compete; that is to retain and strengthen their market position. Because, on the one hand, the effect of competition among players is the ‘seizure of subject’s market by other subjects’ (Reynauld and Vidal, 1998: 59), then the result of competition is the change of competitive position on the market (Frischtak, 1999: 86). On the other hand, a company is competitive if it is willing to accept the returns available from selling its product at the prevailing market price. Uncompetitive companies make inadequate returns and are therefore forced to withdraw from the market. As competitiveness is the other side of competition (Glikman and Lipowski, 2005), forms and factors of competitiveness are defined by forms and factors of competition. This includes rivalry in prices, in improved production techniques and for productive resources. As prices are affected by costs and the productivity of factors of production, these factors are also analyzed. In our analysis of export competitiveness of the AC-3 against the EU-15, the Schumpeterian approach is used. In a Schumpeterian world, the concept of competition is grounded in cost and quality advantage, which Schumpeter felt to be much more important than price competition. The former produce an internal efficiency, one of the foundations of the ‘creative destruction’ of the capitalist economic process. On the one hand, competition is a source of internal efficiency within a firm and plays a crucial role in its economic expansion. On the other, the issue of quality, incorporated into economic theory, has become an economic variable at least as important as price, along with product differentiation (Abbott, 1955: 108). To select a range of competition, markets are divided into segments. The demand for each segment is determined. Both intra- and inter-segment competition exist within a market consisting of multiple segments. Competitors compete within segments by offering products with similar functional characteristics in an attempt to better attract the buyer within each segment. However, firms challenge not only those consumers already present in their products’ market, but also others (as well as their disposable incomes). Firms want consumers to buy their products instead of goods from other segments, i.e. from outside a given branch of manufacturing. Therefore, competition takes place not only within single branches but also between them. This stems from the continuously increasing product differentiation and the fight for consumers’ disposable income. Intra-segment competition is the most common form of competition between products that are positioned in the same segment. The products within the segment are broadly similar to each other and compete for the same customers. For example, high-income consumers tend to buy high-quality variants of a product and the number of variants produced within vertical product differentiation depends on the income spread. Inter-segment competition involves highly differentiated products, positioned in different segments that are competing for different customers. The differences in consumers’ disposable incomes and changes in spending patterns take place have an impact on the range of competition between producers. Selection of markets into quality segments enables a determination of the range of competition.

Changes in export patterns of the Czech Republic, Hungary and Poland

55

In this chapter we assume that competitiveness derives from competition and thus directly reflects the competitive struggle. The competitive struggle, in turn, includes the process of pushing some firms (and therefore goods produced by them) out of the market. In other words the process of market selection takes place. It results in changes in the international specialization of the market agents. Change in export competitiveness results in change in export patterns, although both notions differ considerably. Since competitiveness reflects the ability to compete and competition is a selection process then, first, changes in export competitiveness are reflected in changes in export market shares. Second, this also implies that export competitiveness is a relative term. The assessment of competitiveness of an export product through, for example, its productivity, should be related to the productivity of its rivals on the market, where the competition takes place. Third, the forms and methods of competition (price and non-price) are reflected in the forms and methods of changes in competitiveness. In a Schumpeterian world, great importance is attached to both improving relative cost and the quality of products. However, we should keep in mind that higher quality enables higher price without losing market share (premium pricing). Consequently, in the framework of monopolistic competition, by increasing the quality of goods produced, a country can at the same time shift its import demand curve inward and its export demand curve outward. It follows from the foregoing that an increase in market share may reflect not only an improvement in the relative productivity of the substitute but also an upward shift on the quality ladder. The foregoing makes possible an entry into a more dynamic part of the market, stimulated by an increase in the disposable income of consumers. However, we should keep in mind that changes in export market shares as a measure of changes in export competitiveness are affected also by other changes: those in market orientation (domestic or foreign) of production, export and import dynamics as compared to production dynamics, differences in demand dynamics between domestic and foreign markets and shifts in quality of products. Deriving competitiveness from the concept of rivalry, and thus treating it as a relative category, implies the need to introduce relative (AC-3 as compared to EU-15) measures of competitiveness. Depending on the availability of data (third digit level of NACE Rev. 1.1 classification), the focus is on three factors analyzed in a relative manner, i.e. relative to rivals. The average EU-15 value of all the analyzed indicators will be considered as a point of reference.1 The following indicators have been chosen: relative unit labor costs (RULC), relative unit export value (RUEV), and investment rate (IR), i.e. investment related to turnover. Unit Labor Costs (ULC) is calculated as the labor compensation (wages and salaries plus social contributions) of a particular industry (at a threedigit level, NACE classification) related to its total sales. Relative ULC (RULC)2 is derived by dividing ULC in the AC-3 by ULC in the EU-15 for each of the industries. Whenever RULC is above one (ULC in AC higher than in the EU), the efficiency of the use of labor in the AC-3 is lower than in the EU. RUI is the relationship between the AC-3 and the EU-15 investment rate (share of investment in sales).

56

Anna Wziatek-Kubiak

The competition approach to competitiveness discourages us from using value added per employee as a measure of labor productivity since firms do not compete via value added but by reducing their costs and/or improving the efficiency of production. Such steps allow lower prices (price competition), expansion and the accumulation of resources to finance quality enhancements, necessary to win the competition via horizontal and vertical differentiation. The foregoing also contributes to faster production growth. A comparison of unit labor costs across countries tells a different story than a comparison of productivity growth. The former is a more comprehensive indicator of export competitiveness than the latter, as it shows whether changes in productivity are higher than increases in wages and salaries, for the relatively high productivity growth may be accompanied by even higher wage increase. In such a situation, despite productivity growth, the RULC would have worsened. Similarly, an increase in productivity may be accompanied by a decrease in unit labor costs because wages did not rise. Rather, the compensation of another input, such as capital, may increase. This would amount to a redistribution of income among the factors of production. For example, an increase in the compensation of labor relative to capital may induce a company to make labor-saving investments. This would raise labor productivity and moderate the change in unit labor costs. In general, changes in labor cost and labor productivity do not have a simple, direct effect on unit labor costs. A change in unit labor costs can always be traced, in an accounting sense, to a change in productivity or labor costs, but this linkage may or may not reveal the underlying causal influences. In our analysis we consider factors influencing changes in productivity and quality such as changes in investment rate, employment and production dynamics. Unit values of exports reflect the valuation of goods by consumers and, therefore, are directly linked to the potential for quality competition and vertical differentiation. As a proxy for product quality we use unit export value (UEV). Their calculation is based upon the ratio of nominal values to physical volumes. Its measurement is centered on products and reveals information about vertical differentiation and product quality, irrespective of labor productivity (OECD Proceedings, 1998: 94). In the literature (Aiginger, 1997) it is suggested that the unit export value is, for many countries, a good ‘overall’ quality indicator, as it comprises many different aspects of product quality. Although it reflects changes in quality and other value-enhancing features (service component, design and advertising) it is not free from some deficiencies.3 We use here the relative unit export value (RUEV) as the measure of the quality position of AC-3 exports to the EU-15 as compared to EU-15 intra-grouping exports for each of the manufacturing industries. The increase in RUEV is a sign of an improvement in the quality of products or a widening of the range of exported commodities within the more differentiated industries. Based on RUEV, the AC-3 manufacturing industries were divided into three quality segments. The first covers industries in which UEV was similar to the EU average

Changes in export patterns of the Czech Republic, Hungary and Poland

57

(RUEV > 0.85). The second segment covers industries in which RUEV was between 0.45 and 0.85 (middle quality), while the third segment comprises the lowest quality products (RUEV 30 per cent; Outsourcing when ownership share