Greece and the Revealed Comparative Advantage revisited

For a while now I want to do a post on the Revealed Comparative Advantages of Greece. With all the talk about which sectors have the capacity to propel Greece forward I think this is more topical than ever.

In case you are not familiar with the Revealed Comparative Advantage (RCA) you can read a rather succinct definition of it here.

Of course, like all indicators, RCA does have some flaws. In my humble opinion, one of these is the fact that the OECD calculates it only for merchandise exports, while for a considerable number of countries, their strengths lie in the services sectors. This is becoming increasing true for “developed countries” which have de-industrialised considerably (I think all the talking about the possible re-industrialisation of developed markets due to rising wages in China and other emerging markets is pre-mature for their validity to be judged and maybe a “tiny” bit overblown). Another drawback could be that the universe which is the base that the index is calculated on is OECD countries only. Of course, these are just my personal views and it sure is easier to tap your keyboard and criticize an indicator than it is to devise one from scratch. 

Quite a lot of charts in this post too so I hope that you’ll bear with me...

Enough with the prologue, let’s move on to our beloved Greece. Greece is one of the cases that the above indicator misses out on quite a big part of its potential, since services exports are a bigger chunk of total than they are for the EU.

source: Eurostat

 

source: Eurostat

 

Another shortcoming, applying to Greece particularly (especially at the time the RCA was calculated) is that the Greek economy is the least export oriented among the OECD crowd, hence, a sector that sports a few success stories can be characterized as one that the country possesses a comparative advantage. Well, I’m more skeptical about that. Finally, given how static (if one is charitable enough to characterize it as such and not as declining) the Greek tradable sector was in the 00s, one sector possessing a comparative advantage doesn’t mean that it displays dynamism or that it is booming, it could merely mean that it is declining in a slower pace than others (or that none other has emerged to take its place). I will elaborate on that and try to overcome the “obstacle” that the last point remarks on later in the post.   

source: World Bank, own calculations

The last year that the OECD calculated the RCA for is 2009. Of course it is “a bit” dated but we have to make do with what we have. Here is the chart.

source: OECD

Greece’s comparative advantages lay in Food Products, Beverages & Tobacco, Textiles, Chemicals, Non-Metallic Minerals and Basic Metals. All segments are characterized by low technological content and low added value.

It would be interesting to see where RCA for the Euro Area 12 countries lay. 

source: OECD, own calculations

RCAs for EA 12 countries cover most segments, with the exception of electrical and optical equipment where the clustering of RCAs is rather low. 

The grouping of activities into segments is different from SITC or the other classifications of merchandise exports. 

To get a sense of the value added of each segment in the next chart I’ve plotted the Export Unit Values for each one of them, as far as the Eurozone is concerned. The Export Unit Values are considered a measure of a product’s (perceived) quality. As such they are not a perfect indicator of the product’s value added, since the import content (and some other factors) for each one may vary; nonetheless this is an extremely useful indicator.

source: Euostat, own calculations

As you can see, the RCAs for Greece lay in the segments for which export unit values are the lowest among the ones featured in the chart above.

Back to the opening paragraphs, when recounting the shortcomings of the RCA as an indicator, I said that possessing an RCA does not necessarily mean that the country is actually particularly competent in that niche. To get past that reef, we will use a filter, namely the Export UnitValues. Again this is not in any way a perfect measure for the stated purpose, but which measure is perfect after all..?

The fact that the product classification used in the RCA calculation is different from the SITC means that a few more charts are needed here to take a tour of the product categories that Greece possesses a RCA.

The first segment is Food and Live Animals. Here Greece is ranked mid-table among the EU countries. Note were Italy, Portugal and Spain are ranked, whose climates are similar to ours hence their produce in the said niche could be similar to ours. 

source: Eurostat, own calculations

Next, Beverages and Tobacco.

source: Eurostat, own calculations

Here too, Greece is placed in the middle of the ranking table.

Next chart concerns Chemicals and related products. Greece lies almost at the very end of the table.

source: Eurostat, own calculations

Finally, a chart about Manufactured Goods classified by material (which include, among others, textiles, Basic Metals and Non-metallic Minerals).

Here Greece is ranked even lower, with the export unit values of its produce higher only than those of Latvia’s.

source: Eurostat, own calculations

The charts above portray in a crystal clear way, that the only niche where Greece’s produce is not considered to be of very low quality is Food products, Beverages and Tobacco.

A clarification, since I am sure that some people may take this as an indication that Greek products are actually rather cheap, hence their becoming cheaper is not desired or necessary. Actually, the exact opposite is true; when competing in the lower quality segments, price-competitiveness is the only channel through which you can differentiate your produce. 

Moreover, since according to Eurostat data, in all the sectors mentioned above, personnel costs comprise a non-negligible part of total production value then producers (and as a result workers) in Greece are in a severely handicapped position, with their products classified as low-quality and wages-related costs being double of that of other countries. This is a perfect illustration of what being stuck in a lose-lose situation actually means.

source: AMECO, own calculations

source: Eurostat

This is an monstrously long post, so I hope I didn’t lose you earlier and you got that far. To wrap this up, what the RCA, with the additional filtering of Export Unit Values, tells us is that Greece’s comparative advantages lay in low value-added and low technological content sectors. Out of all these sectors, in my humble opinion, Greece is better positioned to compete in the Food, Beverages & Tobacco segment, where its products are considered to be of higher value and it may not take much to raise value-added even further. The rest of the manufacturing sector currently does and will probably keep finding it hard to compete since, its products are deemed to be of rather low quality, while at the same time, it is very difficult (economically and socially) for Greece to improve its cost-competitiveness against low-cost countries.