World Economic Vulnerability Monitor (WEVUM) Trade shock analysis

Transcription

1 World Economc Vulnerablty Montor (WEVUM) Trade shock analyss Measurng the mpact of the global shocks on trade balances va prce and demand effects Alex Izureta and Rob Vos UN DESA 1. Non-techncal descrpton Trade shocks are defned here as net gans or losses from trade caused by changes n nternatonal prces and n the volume of goods and servces that are traded nternatonally. It relates to shfts n global markets typcally outsde of the nfluence of ndvdual countres. Observed data to measure the mpact of world market shfts on trade balances of ndvdual countres typcally become avalable wth mportant tme lags. Informaton on mportant changes n world market prces for maor commodtes and on trends n the volume of world trade s typcally avalable wth hgher frequency and much shorter tme lags. Polcy makers, especally n developng countres whose economc welfare s heavly dependent on world tradng condtons, wll be nterested n havng more real-tme assessments of trade shocks on ther economy. The methodology proposed n the below attempts to do so, usng aggregate nformaton on global trade and prces and lnks that to the composton of trade of ndvdual countres. Ths way, t s possble to assess the vulnerablty of countres to specfc knds of prce and global demand shocks. Trade shocks are decomposed nto prce and volume effects. The net earnngs from trade equal export revenue mnus mport expendture and changes theren are nfluenced by both prce and volume effects. Consequently, the analyss of trade shocks entals estmaton of four components (plus nteracton terms, whch for sake of smplcty have been omtted n ths non-techncal secton): () the effect of a change n nternatonal prces of exported goods Work carred out wthn the Global Economc Montorng Unt of the Development Polcy and Analyss Dvson of UN-DESA. It has benefted from comments and nputs from Pngfan Hong, Hung-Y L and Ncolas Maystre.

2 () () (v) the effect of a change n the nternatonal prces of mported goods the effect of a change n the volume (quanttes) of exports demanded by the rest of the world the effect of a change n the volume of mports demanded from the rest of the world. The net sum of the frst two components, () and (), wll be called the terms-of-trade shock. For example, f the prces of a country s exports rse and the prces of a country s mports fall, the country would experence an unambguous postve terms-of-trade shock. At the other extreme, f prces of exports fall and prces of mport rse, the country wll experence an unambguously negatve terms-of-trade shock. In other combnatons of prce changes the sgn of the terms-of-trade shock wll depend on the magntude of the changes n world market prces and the relatve mportance of the correspondng products n the trade balance. The other two components () and (v) are not aggregated nto one sngle category as the terms of trade shock mentoned above. Ths s because generally polcy-makers tend to nterpret the changes n export demand from the rest of the world as an exogenous event (a true shock ), whle change n the demand for mports are endogenous to ncomes and behavour of domestc economc agents whch can be drectly nfluenced by government polcy. In ths sense, the change n the demand for exports (component ) s seen as a true external shock and wll be labelled as the demand component of the trade shock, or demand shock for short.. Dsaggregaton and data sources The four components of the trade shocks descrbed above (and nteracton effects explaned n the techncal note below) are estmated for 164 countres of the UN system whch have relable data. The analyss covers all goods traded among these 164 countres (servces are excluded for lack of data) and a reasonable degree of dsaggregaton s used (3 dgts of the standard classfcaton). Thus, there can be found about 50 product categores n the system, of whch about 60 are commodtes and the rest manufactures. For certan aspects of the analyss, these 50 products are further aggregated nto the fve man sectors: agrcultural raw materals, food, energy, mnerals and manufactures. The data avalable s obtaned from the followng sources:

3 UNCTAD and IMF commodty prce statstcs for almost all prmary commodtes. For a few product categores whose prces were not avalable n these datasets, two complementary sources are used: the World Bank Commodty Prce Data ( pnk sheets ) and the U.S. Bureau of Labor Statstcs Import and Export Prce Indeces. Central Plannng Bureau of the Netherlands (CPB) for seres on volume changes per regon, and nternatonal prce ndex for manufacturng products. UN Comtrade values of exports and mports per country and category (50 products) IFS for nomnal GDP (US $), current account balances and consumer prce nflaton. UN/DESA GEMU estmates of real GDP growth and domestc prce nflaton. Among the lsted types of data, nformaton about commodty prces, volume changes per regon, and Comtrade values of exports and mports are mnmally requred to apply the trade shock decomposton methodology. Other data are used for comparsons, valdaton and complementary analyss of correlatons between the trade shocks and other factors. These datasets have four lmtatons. Frst, t should be noted that the use of nternatonal prces s only a rough approxmaton for the specfc prces experenced by each country. Ths could be a serous lmtaton n few cases but overall there are no evdences of sgnfcant mss-matches. Second, the data on volume changes s recorded by regon and aggregated across all categores. Ths s a more serous lmtaton because volume changes are not necessarly the same for all countres n a regon and, moreover, some categores of products lke manufactures change more drastcally than energy or food n the event of global demand shocks. Auxlary estmates have been generated to overcome ths lmtaton, but such solutons are stll to be fully ntegrated nto the system. A thrd problem refers to avalablty of data on prce and volume changes for the current year. The statstcal sets nclude monthly seres wth a lag of about two months. Thus, for the prevous years the full seres of annual data can be generated but for the current year extrapolaton s necessary to obtan the annual fgure. Thus, the current year s always partly hstorc and partly estmated on standard assumptons. The system allows varatons of such assumptons but the default assumpton s to roll over three-month averages that gve a greater weght to the last avalable month. The fourth problem s that there may be gaps n the data seres for mports and exports n the Comtrade database. In the applcaton, these gaps are flled by applyng the same trade shock decomposton 3

4 methodology as dscussed above. For example, f a partcular country msses a data pont for the value of exports of a certan product n a certan year, an estmate s generated by takng the prevous year s value of exports and add the proected change n the exports of that product based on changes n global demand and the world market prce for the product n the mssng year. There are several ways to check the relablty of ths method to estmate the magntude of trade shocks at country level. Frst, t should be recalled that changes n the trade balance result necessarly from the addton of the four components referred above, () to (v), plus nteracton terms. Thus, for the hstorc perod where observed country-level trade data are avalable t s possble to compare changes n trade balance as derved drectly from the Comtrade statstcs, and the changes n trade balance that can be calculated by the net addtons of the components calculated by the system. These two seres should track closely each other and results show that ths s generally the case. A second way to corroborate ths analyss s by comparng the obtaned results wth reports of a smlar knd that could be n some countres publshed sporadcally or wth research papers. So far no contradcton has been found wth any such studes. Another test s to aggregate the sum of all trade shocks on exports and mports for the world as a whole, whch should n prncple dentcal to zero. Also n ths case, the results show a close match for each and every year. 3. Techncal descrpton of the accountng relatons and decomposton analyss The mpact of the fnancal crss, and more generally global shocks, on the economc performance of a partcular country can be traced n frst nstance by a statc decomposton of the current account. 1 The standard defnton of the current account s well-known: [1] CA P X P M + NFI + NTI + OT x m where CA stands for the current account surplus measured n US dollars, P x and P m stand, respectvely, for dollar prces of exports and mports; X s the volume of exports, M s the volume of mports, NFI s net factor ncome, NTI s net transfer ncome excludng offcal transfers, OT, whch 1 By statc decomposton t s mpled that feedbacks between prces and quanttes of exports and mports, as well as feedbacks through the domestc economy, are assumed away and the analyss s lmted to observed ex-post data. 4

5 wll be consdered separately. Sums are defned over the entre set of exports () and mports () of good and servces. The prces should be those applcable for each country and commodty, but n ths case the nternatonal prces are used. Changes n the external balance nduced by trade shocks, on the statc assumptons mentoned above, are as follows: ( x ) ( ) x x m m m [] ΔCA Δ P X + P Δ X +ΔP ΔX Δ P M + P Δ M +ΔP Δ M +Δ NFI +Δ NTI +ΔOT (nteracton effects, lke ΔP. Δ X wll not be dscarded a pror but may n some cases be too small). x For sake of smplcty, perod suffces are omtted. Deltas refer to the perod t (t-1) and varables alone lke P, X, M, etc are those of perod (t-1). In a frst exercse, the sources of shocks to be consdered are changes n nternatonal prces and changes n volume of goods only 3. Thus, the basc relaton to estmate wll be changes n the trade balance of goods (ΔTBg): ( x ) ( ) x x m m m [3] ΔTBg Δ P X + P Δ X +ΔP ΔX Δ P M + P Δ M +ΔP ΔM The terms due to prce changes (ΔP.X or ΔP.M) wll be usually referred as (export or mport) prce component, those due to volume changes (P. ΔX or P. ΔM) wll be referred as (export or mport) volume component and the rest are nteracton components. The terms-of-trade shock and the demand shock mentoned n the prevous secton wll be: x m [4] totshk ΔP X ΔP M demshk P X x Δ [5] Fnally, the term shock wll refer to the sum of terms-of-trade and the demand shock: shk totshk + demshk [6] Offcal transfers (OT) s the component of total (net) ad flows (grants) that s recorded n the current account. 3 Forthcomng analyses wll expand to consder changes n nternatonal servce markets, n factor payments (of whch remttances and nterest payments on debt may be crtcal ones for some countres) and n offcal transfers. 5

6 The approxmaton used for the estmaton of prce components wll be: Xˆ ΔPxt. X t ΔPx. 1 t Px Mˆ ΔPmt. M t ΔPm. 1 t Pm [7] where the hats on X and M denote values reported by Comtrade and when non-avalable such values wll be calculated teratvely as: Xˆ Xˆ +ΔXˆ Xˆ +Δ P X + P Δ X +ΔP ΔX t t t t x t x t x t 1 1 t 1 t Mˆ Mˆ +ΔMˆ Mˆ +Δ P M + P Δ M +ΔP ΔM t t t t m t m t m t 1 1 t 1 t [8] Prce changes per category of commodty n the hstorc perod are known. Prce changes n the current year wll be estmated on bass of smple assumptons to extrapolate avalable monthly fgures towards the end of the year. These assumptons wll work for all commodtes and wll be programmed as parametrc swtches that allow the researcher to choose what s more approprate. Some of these assumptons could be: Prce of last month s preserved towards the end of the year Movng averages (say, 3-months) are scrolled over towards the end of the year, wth more weght beng gven to last observed prce The pattern of prce rses over the known months of the year wth respect to the same perod the year earler s mposed on the remanng months over the same perod last year. The approxmaton used for the estmaton of the volume components wll be: Px. ΔX Px. ΔX reg Pm. ΔM Pm. ΔM reg [9] where the suffx reg denotes that the regonal volume changes for the country are used, and for all commodty categores alke. Ths assumpton, whch s unavodable because of lack of data for 6

7 on volume changes for each country and commodty, may ntroduce sgnfcant errors n some cases and therefore an auxlary programme s used to take country and commodty patterns nto account. Fnally, lke wth prce changes, the fgures for changes n volume are also monthly, thus provdng full coverage for the prevous years whle for the current year smlar extrapolatons as those of prce changes (see above) are used. 7