There is a high and growing concern with the export performance of
European industries due to increasingly fierce global competition. Yet
the statistical basis of the relationship between relative costs and
export market shares is still poorly understood. At a lunchtime
meeting organized by the Centre for Economic Policy Research, Wendy
Carlin and John Van Reenen pose two core questions:
How much do costs matter in explaining export performance in 12 key
industries in the main fourteen OECD countries?
What determines the sensitivity with which exports react to cost
changes?
The answers to these questions have implications for the functioning
of European Monetary Union (EMU) and the design and scope of industrial
policies. Carlin and Van Reenen conclude that the core EMU countries
have less export sensitivity to costs than European non-EMU countries
like the UK and Sweden. This helps provide an economic explanation of
the reluctance of these countries to participate in monetary union where
they can no longer use what for them may be the potent weapon of
exchange rate changes.
There are ‘deep structural’ factors that have enabled countries
to maintain their share of export markets and which are ignored when
attention is focused solely on labour costs. Long-run success in export
performance is dependent on factors such as a country’s education
system and structure of corporate governance, which must be considered
alongside conventional economic variables.
Although the usual focus on macro economic aggregates disguises this
relationship, relative unit labour costs certainly do matter for
exports. Over the longer-run a 10% improvement in costs (whether from
wage restraint, productivity improvement or exchange rate devaluation)
leads to a 2-3% improvement in export market share. Furthermore,
technical progress as embodied in new investment also has an important
role to play.
More surprisingly, even when technology and costs are netted out,
some nations perform surprisingly well. West Germany, for example,
managed to slightly increase market share between 1970-92, despite its
costs rising nearly 1% per year faster than its competitors. Carlin and
Van Reenen suggest that there are three factors that explain the ability
of countries like Germany overcoming rising relative costs: high levels
of schooling, rapid technological progress and strong ownership
concentration.
A more educated work-force appears to enable a faster improvement in
the quality of manufactured products. The export performance of
individual industries appears to be boosted by improvements in
efficiency in the broader business sector.
Finally committed owners would appear to confer an advantage on
exporters – for example, through facilitating long-term relationships
with suppliers.
Turning to the second question, sensitivity of exports to costs
differed in predictable ways across industries. For example, in
high-tech industries the elasticity is much lower. Yet despite the
growth of high- tech industries, costs have become more important
for determining exports over time for most industries. This is likely to
be due to the hotting up of global competition: the industries with the
biggest increases in cost sensitivity are also those which have faced
the stiffest increases in global competition.
Relative costs really do matter. Recent work on economic growth has
emphasised the importance of a range of structural and institutional
factors. Similar forces are operative in determining long-run success in
export performance with the consequence that factors such as the
education system and corporate governance must be considered alongside
conventional economic variables.
These underlying trends in export market shares could be disruptive
inside a monetary union. A member country with poor underlying export
trends would find it necessary to achieve a lower growth rate of unit
labour costs than its neighbours. Although concerns have often been
expressed about the ability of members to keep the growth of their unit
labour costs in line with the inflation rate set by the ECB, the
speakers suggest that the problem is a more serious one.
In conclusion, the authors find that the core EMU countries have less
export sensitivity to costs than European non-EMU countries like the UK
and Sweden. This helps provide an economic explanation of the reluctance
of these countries to participate in monetary union where they can no
longer use what for them may be the potent weapon of exchange rate
changes.
Notes for Editors:
CEPR is a network of over 450 Research Fellows based throughout
Europe, who collaborate through the Centre in research and its
dissemination. CEPR helps its Research Fellows to develop projects,
obtain their funding, administer them and disseminate their results. The
Centre’s research ranges from open economy macroeconomics to trade
policy, from the economic transformation of Central and Eastern Europe
to regionalism in the world economy. The views expressed in the
lunchtime meeting are the speakers’ own. CEPR takes no institutional
policy positions. CEPR is an ESRC Resource Centre. For further
information about CEPR, please contact Rita Gilbert, External Relations
Manager, Tel: 44 20 7878 2917 or email: rgilbert@cepr.org
Wendy Carlin teaches in the Department of Economics at University
College London and is a Research Associate in CEPR’s Economic
Transformation in Eastern Europe programme.
John Van Reenen is at University College London and is a Research
Affiliate in CEPR’s Industrial Organization programme.
‘Quantifying a Dangerous Obsession? Competitiveness
and Export Performance in an OECD Panel of Industries’
Wendy Carlin, Andrew Glyn and John Van Reenen
Discussion
Paper No. 1628
Available for £5/$8/€8
plus a postage and packaging cost of 50p/$1/€1 (UK or Europe) or £1/$2/€2
(Rest of World) from
CEPR, 90-98 Goswell Road, London EC1V 7RR, UK
Tel: (+ 44 20) 7878 2900 Fax: (+44 20) 7878 2999 Email: orders@cepr.org