LITHUANIAN EXPORTS: ARE SERVICES AND MODERN SERVICES DIFFERENT?

Mariarosaria Comunale

Principal EconomistApplied Macroeconomic Research DivisionEconomics Department

Bank of Lithuania – 2015.03.20 –

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Motivation

Services� Fastest growth rates in international trade in the recent years (avg 10%

annual growth rate since the 90s)� Shifting towards more modern/high-skill intensive services � modern services

are becoming crucial� Important initiative by the EU Commission “Smart specialization” � promotion

of high-value added activities including modern services and high-tech goods

We analyze in this paper the Lithuanian exports, focusing on thedifference between goods, total services and modern services.

• Stylized facts : percentage growth in exports; main partners; identification ofsurges in exports, technology weighted index of revealed comparativeadvantage (specialization).

• Econometric estimation of exports determinants : price competitiveness and the trade-weighted measures of foreign demand � short- and long-run.

Types of services

• Traditional services: transport services (64% of total exports in services), travel services and insurance and financial services.

• Modern services: Telecommunications, Computer, and Information services (TCI), R&D, consulting and technology/trade-related services and recreational services.

• Other services: government services, construction, maintenance and repair services not included elsewhere.

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Exports as % GDP

4

16%

12,3%

Growth rates in exports

5

-30

-20

-10

0

10

20

30

40

2005 2006 2007 2008 2009 2010 2011 2012 2013

% growth in exports of total services vs. goods

TOTAL SERVICES TOTAL GOODS

-25

-20

-15

-10

-5

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013

% growth in exports of modern vs. traditional services

MODERN SERVICES TRADITIONAL SERVICES

Growth rates in exports

6

-40

-30

-20

-10

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010 2011 2012 2013

% growth in traditional services by category

Transport Travel Insurance and financial services

-20

-15

-10

-5

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010 2011 2012 2013

% growth in modern services by category

TCI Other business services Recreational services

Main trade partners for services

• Exports of total services 2004 vs. 2014

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other countries

13%

other EU16%

Germany13%

Denmark6%

Estonia3%

Finland2%

GB4%

Latvia6%

The Netherlands

3%

Poland4%

Russia26%

Sweden3% US

1%

exports in total services 2014q2

Main trade partners for services

• Exports of modern services 2004 vs. 2014

8

other countries

5%

other EU11%

Germany16%

Denmark5%Estonia

3%Finland6%

GB5%

Latvia12%

The Netherlands

4%

Poland4%

Russia10%

Sweden7%

US12%

exports of modern services 2004q1other

countries17%

other EU13%

Germany13%

Denmark5%

Estonia6%

Finland3%

GB5%

Latvia11%

The Netherlands

6%

Poland7%

Russia5%

Sweden6%

US3%

exports of modern services 2014q2

Surges in exports

� To have a surge = exports growth rate of 2% or more for 3 consecutive years

• Traditional service surges: 2010-2013• Modern services surges: in the TCI sector in 2007-2010 and fo r recreational

services in 2008-2011.� The surge in services should be preceded by an increase in FDIs � in the case of surge

in modern services exports it is true for both total FDIs and FDIs to services; similar pathfor traditional services as well.

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Modern services Traditional services

Technology RCA index

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• When the country is specialized in an industry, i.e. when RCA>1, the RCA index has been multiplied by the technology level of that industry (OECD).

����,�� =%�� ����������������������������� ��

%�� ��������������������������������

• Lithuania = technology RCA index for manufacturing is 1.4, which is the highest among the Baltic States (Estonia 0.3 and Latvia 0.4), but far from Hungary, Slovenia and Slovakia;

• Lithuania = technology RCA index for services less than 1 and the value of the index is decreasing;= specialized in high-tech goods not in modern serv ices yet

Econometric analysis

• We study the determinants of different categories of real exports:

1. Real Effective Exchange Rate (deflated by CPI; GDP or exports prices in goods and services: XP)

2. The trade-weighted foreign demand based on real GDP or Gross Value Added (GVA)

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Long-run Short-run

Data description

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i = partner country (I = latest partner country, here 37 countries); w = trade weights (% total trade LT vs. partner i w.r.t. total trade LT vs. rest of the world);CPI= consumer prices index; e=nominal exchange rate partner i vs Lithuania (to have foreign prices in Lithuanian currency)

• Our dataset cover a period from 2004Q1 to 2014Q2 , with quarterly frequency;• The data for exports in services are from the Statistics Department of the Bank of

Lithuania, as for total exports;• The exports are in real terms, in constant euros;

DETERMINANTS OF EXPORTS:• REERs as a measure of price competitiveness = an increase in REER means a

decrease in competitiveness• REER is deflated by CPI (or GDP or exports prices):

������, =�!"��,

∑ $%,��, (�%,��, �!"%, '%() )

Data description (cont.)

���� Foreign demand (FD): 2 different measures1. As real GDP of each trading partner weighted by the percentage of the trade Lithuania vis-à-vis each partner;2. As Gross Value Added (GVA) in the goods sectors (industry) or services of each partner weighted by the percentage of the trade Lithuania vis-à-vis each partner;• The weights (w) are calculated from the bilateral trade in total exports in

services or goods exports.

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GVA goods sector

GVA services sector

goods services

goods services

Results

Types of foreign demand GDP GVA GDP GVA

Short-run Long-run

Total services CPI-REER -2.725 -6.100*** 0.512 -0.498

(2.006) (2.024) (0.322) (0.558)

Foreign demand 1.260*** 1.049 0.170 1.390***

(0.345) (0.882) (0.476) (0.573)

Modern services CPI-REER -2.040 -2.541 0.975** 0.633

(2.290) (3.421) (0.409) (0.943)

Foreign demand 1.420*** 0.256 0.688 0.373

(0.430) (1.288) (0.601) (0.862)

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Results (cont.)

For exports in total services=

� +1% in CPI-REER (decreasing in competitiveness)- 6% in exports of total services in the short-run (~ within 1-2 years)� +1% in (GVA) foreign demand +1,4% in exports of total services in the long-run ( ~ 8-10 years)

For exports in modern services=

� +1% in CPI-REER (decreasing in competitiveness)� +1% in (GVA) foreign demand � NO effects of these determinants on exports in mode rn services� Other variables may matter � supply factors

� +1% foreign demand (GDP) � +1,4% exports in modern services in the short-run (REER wrong sign in the long-run)

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Conclusions

• Exports in total services only 12,3% GDP in 2004 � 16% GDP in 2013

• Exports in total services growth: 10% in 2013 (16% in 2012);

• Exports in modern services growth: 5% in 2013 (20% in 2012!);

• The modern services experienced a positive growth rate in 20 09 (TCI andrecreational services contribute for the sign);

• Looking at the foreign demand for services, especially for modern services, thischanged a lot in the last decade � Non-EU countries are becoming veryimportant, decreasing role of Russia and US for modern servi ces exports;

• Role for FDIs � supply factors• Tech RCA index still lower than 1 for services, very high instead for goods

(specialization in high-tech goods);

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Conclusions (cont.)

• Results for the determinants:

� For exports in total services: REER still plays a role only in the short-runand the foreign demand is a key factor (especially in the long-run);

� For modern services : the foreign demand matters in the short-run onlyif foreign demand is calculated from real GDP values otherwise NO rolefor REER or foreign demand� supply side factors seem to matter more than demand factors (FDIs& investments in R&D)

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Ačiū už dėmes įThank you for your attention

E-mailto: mcomunale@lb.ltmariarosaria.comunale@gmail.com