Competitiveness

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

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

3. MIP Competitiveness measures Price competitiveness and export market shares (Average annual percentage changes, pre-crisis 1999-2008Q3)

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

5. Real Effective Exchange Rate

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

7. REER definition How to compute REER? where, N stands for number of the competitor countries in the reference group wiis the overall trade weight assigned to the currency i Diand Djare the deflators for partner country i and country j ei,jis the nominal exchange rate of country i in terms of currency of country j

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

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

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

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

12. REER – economic interpretation

13. BE case – cost competitiveness

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

15. Unit Labour Cost

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

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

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

19. ULC – economic interpretation

20. BE case – cost competitiveness

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

22. Export Market Shares

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

24. EMS - rationale EMS is driven by: numerator effect denominator effect +83%in 1994-2007 multilateral trade liberalisation unilateral trade liberalisation of some emerging countries (e.g. China, India and Brazil) increased trade in services due to development of ICT

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

26. EMS – economic interpretation

27. EMS – economic interpretation

28. EMS – economic interpretation

29. EMS – statistical issues

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

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

32. BE case other aspects

33. BE case – cost competitiveness

34. BE case – non-cost competitiveness

35. Doing business

36. Global value chains

37. Breakdown of grossmanufactured exports by value added • (% of total, 2009) • Source: OECD; TiVA

38. BE – competitiveness assessment • MIP category 2 • Imbalances, which require monitoring and policy action • CSR for 2015-2016 • Restore competitiveness by ensuring, • in consultation with the social partners • and inaccordance with national practices, • that wages evolve in line with productivity

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