Tuesday, 17 July 2012

Export market shares momentum and its connection with internal devaluation success

Anyone that has taken a even furtive glance at the titles of my posts must have noticed that the catalysts behind export growth particularly interest me. This is particularly interesting for the countries undertaking internal devaluation since exports are in most cases the major driver behind GDP growth.

Eurostat publishes stats for export market shares. What’s more it publishes the 5-year rolling growth rate of export market shares. I think that this data-point is of particular significance since it captures the trend in each country’s competitiveness.

I wanted to run a regression between the 5-year rolling growth rates in export shares  and the average growth rate of real exports for years 2010-2011 (after the 2009 great trade collapse). Here’s the scatter plot.

source: Eurostat, own calculations

As the scatter plot makes rather obvious the 2009, 5-year growth rate of export shares can produce a quite good forecast of the next 2 years average growth rate of real exports. Of course, this is a rather facile and over-simplifying claim and what’s more this is an ex-post claim when everything tends to appear to be clearer.

Nonetheless, this is a point that no-one has actually brought-up in the current debate regarding export-led growth. Namely, a country with declining competitiveness, that is losing export market share fast will find it harder to turn the tables than a country which is gaining market share.

Furthermore, a rather worrying fact is that all western European countries are witnessing their export market shares decline fast. Even, the, admittedly, more dynamic (but not without their own sets of problems and not decoupled from their western neighbours) Central Eastern European (CEE) countries, are witnessing their export market shares rise at a declining pace.

Since it would take many pages to post the charts about all European countries, here are the charts about those that are (or were) in the midst of internal devaluation processes.

source: Eurostat

source: Eurostat

A quite important indicator of whether internal devaluation will be successful or not, is the size of a country’s external sector, along with its dependence on domestic demand. But this is not enough. Ireland, is a perfect example to back the above claim. Its external sector and small dependence on domestic demand, made internal devaluation less painful, always compared with other countries (for example my native Greece). Nonetheless, the growth of real exports was lackluster. Maybe the country’s declining market share can be blamed.

To wrap this up, the above puts to show how much a multi-factorial affair the success of internal devaluation is. And the overall momentum of a country’s external sector as well as of the whole of its economy seems to be rather crucial…

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