Here is a paper by Crespo Rodiguez, Gabriel Perez-Quiros and Ruben Seguera Cayuela that talks about the challenges faced in coming up with an indicator for competitiveness in international trade:
Whenever I have studied international trade, relative prices has been taken as the best indicator for competitiveness. The argument is simple - if you can produce goods at a cheaper price (after accounting for exchange rates) than your competitors, then you are more competitive in the international market.
However, the authors take a European focus, and challenge such simplistic arguments on two fronts:
- real exchange rate explains well below 10% of the variance in exports
- the 'Spanish Paradox', where Spain has lost a lesser share of its exports than would be indicated by the relative price indicators
In Table 1, the authors show that in most cases, over 80% of the variance of exports is explained by a country's world trade volume. As of now, this argument seems a bit circular to me. The correlation between variance of exports and world trade volume is obvious.
The paper then explores the well-documented 'Spanish Paradox', under which Spain has out-performed its relative-price performance. If one was to construct a regression line between the decrease in relative price competitiveness (on the horizontal axis), and decrease in export share (on the vertical axis), then Spain would lie to the right of this line, implying that its export share has decreased less than what its relative price would suggest (Netherlands would be the only other major European country to be on the right; Greece would be on the line and all other countries to the left).
The authors then attempt to explain the Spanish Paradox. Table 2 shows that larger companies (ones with >249 employees) participate more in trade in Spain as compared to Germany or other large European countries. It is also these firms that have experienced the best Unit Labour Costs (ULCs) over the past few years.
The authors divide the change in ULC into three components - constant shares (assuming constant share of the different industry sizes), reallocation (considering the change in distribution) and an interaction term. One can then observe that while Spain has experienced a significant decline in ULC, then reallocation component is much smaller than other nations. What this means is that Spain could have benefited more from declining ULC if resources were allowed to move freely to those industries that had low ULC.
The Spanish Paradox is thus settled - loss of competitiveness (as reflected by ULC) was lowest among the largest firms, with the greatest presence in international trade. Competitiveness could have been boosted by initiating reforms to allow better allocation of resources.
The paper then explores the well-documented 'Spanish Paradox', under which Spain has out-performed its relative-price performance. If one was to construct a regression line between the decrease in relative price competitiveness (on the horizontal axis), and decrease in export share (on the vertical axis), then Spain would lie to the right of this line, implying that its export share has decreased less than what its relative price would suggest (Netherlands would be the only other major European country to be on the right; Greece would be on the line and all other countries to the left).
The authors then attempt to explain the Spanish Paradox. Table 2 shows that larger companies (ones with >249 employees) participate more in trade in Spain as compared to Germany or other large European countries. It is also these firms that have experienced the best Unit Labour Costs (ULCs) over the past few years.
The authors divide the change in ULC into three components - constant shares (assuming constant share of the different industry sizes), reallocation (considering the change in distribution) and an interaction term. One can then observe that while Spain has experienced a significant decline in ULC, then reallocation component is much smaller than other nations. What this means is that Spain could have benefited more from declining ULC if resources were allowed to move freely to those industries that had low ULC.
The Spanish Paradox is thus settled - loss of competitiveness (as reflected by ULC) was lowest among the largest firms, with the greatest presence in international trade. Competitiveness could have been boosted by initiating reforms to allow better allocation of resources.
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