UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

Transcription

1 working paper 23/2009 Indusrial Developmen and he Dynamics of Inernaional Specializaion Paerns UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

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3 RESEARCH AND STATISTICS BRANCH WORKING PAPER 23/2009 Indusrial Developmen and he Dynamics of Inernaional Specializaion Paerns Olga Memedovic Research and Saisics Branch Programme Coordinaion and Field Operaions Division UNIDO Lelio Iapadre Associae Professor of Inernaional Economics Universiy of L Aquila Johns Hopkins Universiy SAIS Bologna Cener UNU Insiue for Comparaive Regional Inegraion Sudies UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION Vienna, 2010

4 Acknowledgemens This working paper was prepared by Olga Memedovic, UNIDO saff member, for he UNIDO Research Projec: Srucural Changes in World Economy. The main conribuors are Olga Memedovic, UNIDO saff member and Lelio Iapadre, Professor of Inernaional Economics, Universiy of L'Aquila, Johns Hopkins Universiy SAIS Bologna Cenre, and UNU Insiue for Comparaive Regional Inegraion Sudies. Research assisance was provided by Andreas Alfons, Michele Bernini, Sefan Eichwalder and Maeo Puzolu. Iguaraya Saavedra provided adminisraive suppor. The designaions employed, descripions and classificaions of counries, and he presenaion of he maerial in his repor do no imply he expression of any opinion whasoever on he par of he Secrearia of he Unied Naions Indusrial Developmen Organizaion (UNIDO) concerning he legal saus of any counry, erriory, ciy or area or of is auhoriies, or concerning he delimiaion of is froniers or boundaries, or is economic sysem or degree of developmen. The views expressed in his paper do no necessarily reflec he views of he Secrearia of he UNIDO. The responsibiliy for opinions expressed ress solely wih he auhors, and publicaion does no consiue an endorsemen by UNIDO. Alhough grea care has been aken o mainain he accuracy of informaion herein, neiher UNIDO nor is member Saes assume any responsibiliy for consequences which may arise from he use of he maerial. Terms such as developed, indusrialized and developing are inended for saisical convenience and do no necessarily express a judgmen. Any indicaion of, or reference o, a counry, insiuion or oher legal eniy does no consiue an endorsemen. Informaion conained herein may be freely quoed or reprined bu acknowledgemen is requesed. This repor has been produced wihou formal Unied Naions ediing. This documen reflecs work in progress. Is disribuion is limied for he purposes of eliciing commens and reviews only.

5 Conens Lis of figures...iv Lis of ables...iv Absrac...v 1. Inroducion The naure of consan-marke-shares analysis Specificaion problems A new specificaion of CMS analysis Consan-marke-shares analysis of expor performances: Dynamic efficiency and polarisaion of expor specialisaion paerns Summary and conclusions...45 References...48 Annex...50 iii

6 Lis of figures Figure 1 World merchandise expors by echnology level...25 Figure 2 World merchandise expors by indusry...27 Figure 3 World merchandise expors by desinaion region...29 Figure 4 China: CMS analysis of expor performance...31 Figure 5 Germany: CMS analysis of expor performance...32 Figure 6 Unied Saes: CMS analysis of expor performance...33 Figure 7 Japan: CMS analysis of expor performance...34 Figure 8 France: CMS analysis of expor performance...35 Figure 9 Ialy: CMS analysis of expor performance...35 Figure 10 Unied Kingdom: CMS analysis of expor performance...36 Figure 11 Republic of Korea: CMS analysis of expor performance...36 Figure 12 Russian Federaion: CMS analysis of expor performance...37 Figure 13 Kingdom of Saudi Arabia: CMS analysis of expor performance...38 Figure 14 India: CMS analysis of expor performance...38 Figure 15 Brazil: CMS analysis of expor performance...39 Figure 16 Poland: CMS analysis of expor performance...40 Figure 17 Souh Africa: CMS analysis of expor performance...41 Figure 18 Relaive polarisaions of expor specialisaion paerns...44 Lis of ables Table 1 Consan-Marke-Shares Analysis of World Merchandise Expors...23 Table 2 Deerminans of he commodiy-srucure effec, iv

7 Absrac In his paper we invesigae he complex relaionship beween indusrial developmen and economic srucure, by focusing on one of is rade implicaions, he effec of inernaional specialisaion paerns on expor performances of counries. Consan-Marke-Share (CMS) analysis is applied o disenangle he effec of counries specialisaion srucure from compeiiveness facors. This work conribues o he mehodological debae on CMS puing forward a new specificaion of he disaggregaion formula by which counries share of world expors is explained as he resul of seven differen effecs. This new specificaion is applied o he sudy of world merchandise expors beween 1995 and 2007 for 208 counries in BACI daabase. Resuls are here presened for a sample of 37 counries seleced among he main exporers in all regions. Our analysis proves ha besides macroeconomic facors, specialisaion paerns in he inernaional disribuion of economic aciviies are fundamenal o explain relaive rade performances and heir evoluion over ime. v

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9 1. Inroducion In he las few decades, a group of imporan emerging counries have been able o achieve a considerable acceleraion in economic growh, reducing heir gap wih developed counries. However, he majoriy of developing counries sill remain rapped a low income levels. Differen growh raes can easily be linked o differences in labour produciviy and produciviy gains a a counry level migh be associaed wih higher labour efficiency in he same secor and wih migraion of labour from low o high produciviy secors. The connecion beween labour produciviy and srucural change has been he subjec of many heoreical and empirical sudies. The srucuralis approach o economic developmen claims ha high raes of growh can be susained only by redisribuing producive resources oward he mos dynamic secors of he economy (Ocampo, 2005). More precisely, he kind of srucural change which is required o susain growh is characerised by wo main feaures: 1) a shif oward high-produciviy secors, which ofen implies he abiliy o arac indusries locaed in more developed economies; 2) he creaion of new iner-secoral linkages, leading o a more inensely inegraed producion srucure. Economic sysems meeing hese wo crieria of dynamic efficiency end o succeed in narrowing he produciviy gap beween radiional and innovaive secors and o reach macroeconomic equilibrium. Fas-growing counries show similar paerns of srucural change, which can be seen as boh a condiion and an oucome of heir economic developmen. The oupu share of agriculure has been falling consisenly, o he advanage of indusry and services. This correlaion is less clearcu in counries characerised by more moderae growh raes (Rada and Taylor, 2006). The Keynesian approach inroduces he role of demand as anoher imporan deerminan of economic developmen. The ineracion beween produciviy growh and effecive demand deermines he growh rae of he economy and he level of employmen. However, any exogenous increase in labour produciviy can have negaive effecs on employmen, if i is no mached by an adequae increase in effecive demand. In fac, as explained by he Fabrican s law (Oulon and O Mahony, 1994), even in presence of a posiive correlaion beween oal oupu and labour produciviy, oupu growh can be less han proporional o he increase in labour produciviy, leading o a lower demand for labour. For example, his migh occur in developing counries if real exchange rae appreciaion, due o capial accoun liberalisaion, induces a fall in he labour demand of he radable secor (Vos, 2005). 1

10 Recognising he role of demand does no exclude he role of supply-side facors in deermining produciviy and growh regimes. On he conrary, demand and supply should be considered simulaneously. Cimoli and Correa (2005) consider boh aspecs and argue ha raising impor propensiy due o rade liberalisaion, in presence of produciviy gaps, can generae low-growh raps. In his conex, expor expansion may fail o induce an adequae rae of economic growh, and persising produciviy gap can be relaed o he difficuly of spreading innovaions from expor enclaves o he radiional secor. Srucural change in he inernaional specialisaion paern is hen called for o break he rap, ease he diffusion of knowledge across he economy and weaken he exernal consrain o growh. The analysis of counries rade performance is ofen conduced in macroeconomic erms. From an accouning perspecive, he curren accoun balance is equivalen o he difference beween saving and invesmen (or beween income and consumpion). Is behaviour may hus be undersood as he oucome of facors deermining he real wealh accumulaion in he economy. Even when he analysis is concenraed on foreign rade flows, he dynamics of expor and impor volumes is ofen explained by he behaviour of oher aggregae variables, such as real exchange raes and foreign or domesic income. In many cases, however, models considering only macroeconomic fundamenals are inadequae o explain rade performances. These models overlook imporan, bu difficul o quanify, underlying facors of inernaional rade performance, such as produc qualiy, shifs in consumer ases, changes in inernaional rade rules and a whole range of oher srucural facors defining foreign rade disribuion by produc or by counry. For insance, assuming he growh of world demand and all oher circumsances being equal, he dynamics of a counry s expors will be influenced by he concordance beween is inernaional specialisaion paern and he changes in he produc composiion of world demand. In oher words, if he world demand favours producs in which he counry enjoys comparaive advanages, he income elasiciy of is expors will be higher. In his case we may speak of macroeconomic or dynamic efficiency of a counry s inernaional specialisaion paern. The influence of hese srucural facors is more relevan han commonly undersood and may someimes override he effec of aggregae variables, such as price compeiiveness. Differences in foreign rade srucures beween counries are herefore imporan deerminan of heir 2

11 differen growh raes: counries specialisaion paerns affec he income elasiciy of expors and impors and so he inensiy of he exernal consrain o growh. 1 This paper conribues o he sudy of he complex relaionship beween indusrial developmen and economic srucure by focusing on he effecs of inernaional specialisaion paerns on expor performance and he exernal consrain o growh. If expor performance is an imporan deerminan of an economy s aggregae demand level in he shor run and is producive capaciy growh in he long-run, hen we have o analyse he main facors affecing expor performance. We disinguish wo ses of facors: compeiiveness facors such as relaive prices, exchange raes, qualiy and marke power, which deermine he relaive growh of expors by markes and producs, and srucural facors such as he ineracion beween naional specialisaion paerns and changes in he composiion of world demand by produc and counry. In order o measure he relaive conribuion of hese facors, we inroduce a new formulaion of he consan-marke-shares (CMS) analysis. The res of he paper is organized as follows. Secion 2 discusses he significance of CMS analysis for inerpreive purposes. Secion 3 addresses he main problems arising from is applicaion. Secion 4, presens a new specificaion of he decomposiion formula, combining radiional and more recen versions of his echnique. Secion 5 applies he oulined mehodology o 37 developing and developed counries, including he 30 leading exporers in 2007 and 7 African counries wih he highes expor value in he same year. Secion 6 presens a furher decomposiion analysis, o beer capure he deerminans of he dynamic efficiency of specialisaion paerns (i.e. he ineracion beween he disribuion of comparaive advanages and changes in he produc composiion of world impor demand). Secion 7 concludes by summarising our main mehodological and empirical insighs. 2. The naure of consan-marke-shares analysis A saisical mehod commonly used o evaluae he influence of srucural facors on expor growh and marke share is known as CMS analysis. This decomposiion echnique owes is success o he simpliciy of is applicaion and o is capaciy o emphasise srucural facors ha ofen end be overlooked in he analysis. Bu, he heurisic value of his mehod and he variabiliy of he resuls generaed by is differen specificaions have been ofen quesioned. 1 The link beween he income-elasiciy of rade flows and he growh rae of an open economy was highlighed by Thirlwall (1979) and, wih a differen approach, by Krugman (1989). The hypohesis ha inernaional differences in such elasiciy are essenially aribuable o differences in he srucure of foreign rade was advanced, among ohers, by Goldsein and Khan (1985). 3

12 Tyszynski (1951) was he firs o apply CMS analysis o he sudy of expors. Oher mos influenial sudies based on his approach are Leamer and Sern (1970), Richardson (1971), Magee (1975), Fagerberg and Sollie (1987). Milana (1988) work placed he mehodological debae on CMS analysis in he framework of he economic heory of index numbers. This work resuled in a new specificaion of he formula ha was furher perfeced in Guerrieri and Milana (1990). Despie persising scepicism abou is heurisic value, CMS analysis is sill widely used in academic research as well as in policy-oriened work. 2 CMS analysis allows measuring he relaive conribuion of compeiiveness and srucural facors o expor performances. In pracice, his involves breaking down he variaions of a counry s oal expors or aggregae marke share over ime. The analysis sars wih an accouning ideniy o which a decomposiion formula is applied. For his reason, i has ofen been emphasised ha CMS analysis should no be employed for forecasing purposes, bu insead for he ex-pos accouning measuremen of each facor s conribuion o he behaviour of an aggregae variable (see Milana, 1988, pp ) 3. Given he accouning naure of he decomposiion, i would be wrong o ascribe CMS analysis wih an inerpreive capabiliy similar o ha of an economeric model. Noneheless, is resuls are a useful ool o orien furher research on he behaviour of specific variables. Each erm generaed by he decomposiion formula has an economic meaning, which can be relaed o a se of explanaory facors. For insance, he compeiiveness effec, obained by decomposing expor growh, represens an ex-pos measuremen of he impac exered by he enire se of compeiiveness facors on aggregae expor performance, afer conrolling for composiion effecs. The compeiiveness effec, herefore, should be preferred o he aggregae expor marke share as he dependen variable in any economeric exercise aimed a assessing he role of real exchange raes and oher compeiiveness facors. CMS analysis may be likened o oher saisical mehods used for breaking down he changes of an economic aggregae value variable ino price and quaniy indexes. As we will see laer, par of he problems encounered in is specificaion can be seen as a sympom of an indexnumber problem 4. 2 An example is given by he able eniled Expor performance for oal goods and services, which appears in each issue of he OECD Economic Oulook and is based on a very simple varian of CMS analysis. This saisical echnique has been used also in economic hisory (see, e.g. Irwin, 1995). 3 A new specificaion of CMS analysis, based on an economeric esimae of is elemens, has recenly been used by Chepea, Gaulier and Zignago (2005). 4 See Richardson (1971), p. 234 and Milana (1988). 4

13 More generally, CMS analysis may also be conceived as a special case of a decomposiion mehod ha is useful o analyse he saisical link beween he behaviour of an aggregae eniy and of is single pars, whenever he aggregae variable can be represened as a weighed average of is pars Specificaion problems 3.1 Inroducion Despie he concepual simpliciy of CMS analysis, is formulaion has given rise o several varieies based on he differen specificaions of he base accouning ideniy and o he diverse soluions adoped for he underlying index-number problem. Much of he debae on CMS analysis focused on he problems posed by his variey of specificaions. However, as Magee poins ou, if we can dispose of he mehodological problems, consan-marke-shares analysis sill sands or falls on wheher, as an ideniy, i yields a useful organisaion of he daa. If his ideniy, like he GNP ideniy, conains behavioural pars ha can be explained by oher independen variables, and if his process gives expanded insigh ino he behaviour of inernaional rade flows, hen more research is warraned, on mehod and applicaion." (1975, p. 222). The following secions review he main mehodological problems posed by CMS analysis and he various specificaions proposed o solve such problems. Firs, we explore wo issues concerning he base accouning ideniy: he choice of he decomposiion objec and he number of disaggregaion crieria. We also analyse he sensiiviy of he resuls o he order of decomposiion by produc and by marke). Second, we review he alernaives available for he decomposiion formula of he base ideniy, saring from he choice of he weighing mehod, which remains he mos debaed issue in CMS analysis and may be regarded as an aspec of he more general index-number problem." We also discuss he dependence of decomposiion resuls on he ime-pah of he elemenary daa, an issue raised by Milana (1988). 3.2 The Choice of he Base Accouning Ideniy The saring poin of CMS analysis is an accouning ideniy, relaing an aggregae variable, expors or marke shares, o is disaggregaed componens a produc and/or desinaion marke level. A decomposiion formula is hen applied o his ideniy, so ha changes of he aggregae variable over ime are expressed as he sum of wo or more erms, represening changes in is 5 Acually, he CMS mehod can be seen as an applicaion o inernaional rade daa of a echnique, called shif-and-share analysis, widely used in regional economics and pioneered by Creamer (1943). Useful surveys of his field of research have been provided by Holden, Nairn and Swales (1989) and Loveridge and Seling (1998). An ineresing applicaion of he shif-and-share mehod o inernaional rade daa a sub-naional level can be found in Coughlin and Pollard (2001). 5

14 underlying facors. The specificaion problems of his decomposiion formula are discussed laer in his paper (in Secion 3.3). This secion addresses he base accouning ideniy and is divided ino wo sub-secions. The firs sub-secion looks a he variable o be decomposed, which appears on he lef-hand side of he ideniy. The second sub-secion deals wih he various disaggregaion crieria, used in he righ-hand side of he ideniy The Decomposiion Objec The selecion of aggregae variable appearing on he lef-hand side of he base accouning ideniy depends on he research aims and affecs he choice of he decomposiion formula. The mos common opions adoped in CMS-based sudies are discussed below, as follows: a) The Choice of he Trade Variable As menioned in Secion 2, he CMS mehod is used o analyze he relaive conribuion of compeiiveness and srucural facors o a counry s rade performance. Expor growh rae has been ofen used o represen such performance. Bu o ge a more proper evaluaion of a counry s posiion in inernaional rade, is impors should also be aken ino consideraion. This would require consrucing decomposiion formulas similar o CMS analysis for he normalised rade balance or for he expor-impor raio. The key issue is hen: how o express he rade flows? In he lieraure, in some cases, rade performance is simply measured as he absolue or relaive change in a counry s expors, wihou reference o any comparison erm. In oher cases, rade performance is explicily measured as he change in a counry s marke share, defined as he raio beween is expors and he expors of a reference area such as he world or a group of compeiors 6. Equivalenly, rade performance can be measured as he difference beween he growh rae of a counry s expors and ha of he reference area 7. 6 The choice of he daa on which he formula is applied, raises an addiional problem. A counry s expors oward he res of he world may also be viewed as impors of he world from his same counry and correspondingly, he marke share may be calculaed eiher as he raio beween a counry s expors and hose of he world, or as he raio beween he world s impors from ha counry and oal world impors. If one acually had daa for he whole marix of world rade, his choice would be of marginal imporance, since any divergence in he resuls could only be due o saisical discrepancies, for example he difference beween F.O.B and C.I.F daa. The issue becomes more relevan, when daa referring o a more resriced se of counries (for example indusrial counries) are available. In hese cases, using expor daa allows o regard he enire world as a marke, bu forces o exclude from he se of compeiors, hose counries for which expor daa is no available (for example developing counries). On he oher hand, if impor daa is used, he analysis mus be narrowed o a smaller marke (indusrial counries), bu all compeiors may be considered. The choice will hus be based on daa availabiliy and on he research arge. 7 See, for example, European Cenral Bank (2005). 6

15 These varians are subsanially equivalen because heir ulimae goal is o compare a counry s rade performance wih ha of he reference area. Bu if specificaions based on expor changes are chosen, hen he decomposiion formula will be slighly more complex, as anoher erm appears, besides hose measuring compeiiveness and composiion effecs, which measures he effecs of world demand growh. b) Daa a Curren or Consan Prices A widely discussed issue is he choice beween variables in curren or consan prices 8. This is an imporan issue because daa in consan prices would be necessary when he ask is o assess he effec of price compeiiveness on expor volumes, bu are ofen unavailable or no reliable a he disaggregaed level. If compeiiveness is undersood in a wider sense o include no only prices bu also he whole range of oher underlying facors, such as qualiy, image and organisaion of sales, hen he daa in curren prices can be favoured as hey allow measuring hese facors overall effecs on expor values. For example, he aggregae marke share in value erms can improve when higher price compeiiveness of naional producs simulaes a rise in expor volumes and when he qualiaive characerisics of naional producs allow selling hem a higher prices or enering more lucraive segmens of he foreign markeplace Disaggregaion Crieria Besides he choice of he decomposiion objec, he second imporan aspec for he definiion of he base accouning ideniy is he number of disaggregaion crieria. Toal expors (he aggregae marke share) may be reaed as he sum (weighed average) of expor flows of is componens (of he componens marke shares) classified according o one or more crieria: by produc, by desinaion counry, by firm size, by producion region, and so on. The earlies sudies based on CMS analysis used a sole disaggregaion crierion (by produc), bu successive formulaions ook boh producs and desinaion markes ino accoun. For simpliciy s sake, we sar by using a single disaggregaion crierion, applied o an exporing counry s aggregae share in a desinaion marke s impors, which can be expressed as 9 : S k k m M k k [1] in which: 8 See, for example, Richardson (1971) pp Throughou his secion superscrip denoes ime. 7

16 S : he exporing counry s aggregae marke share a ime ; m : desinaion marke impors from he exporing counry in he k kh produc (k = 1... p); M k : desinaion marke impors from he world in he kh produc. The following base accouning ideniy expresses he aggregae marke share as he weighed arihmeic mean of he elemenary shares recorded for each produc: S [2] in which: sk w k world. k sk wk mk M k M k k M : he exporing counry s share in he desinaion marke s impors by k h produc; : weigh of he k h produc over he desinaion marke s oal impors from he k If, on he oher hand, here are wo classificaion crieria, for insance by produc and imporing counry, as may happen when he desinaion marke is a geographic area or he world, he aggregae share of an exporing counry in he desinaion marke impors may be expressed as: S i j mij i j M ij [3] in which: m : impors of he ij jh counry (j = 1 m) from he exporing counry in he i h produc (i = 1 n); M : impors of he ij jh counry from he world in he i h produc. From definiion [ 3 ] five alernaive specificaions of he base accouning ideniy can be derived as follows: S S S i j sij wij i j sij g p ij i. i j sij g p. j ij [4] [5] [6] 8

17 S S i j sij g p. j i. d ij i 1 j sij g p ij ij d ij [7] [8] in which: sij produc; wij mij M ij : he exporing counry s share of he j h counry s impors from he world in he i h M ij i j M ij : weigh of he j h counry s impors from he world in he i h produc over he desinaion marke s oal impors from he world; g ij M ij j M : weigh of he j h counry s impors over he desinaion marke s impors ij from he world in he i h produc; g. j im ij i j M impors from he world; p ij p i. M ij im ij ij : weigh of he j h counry s impors over he desinaion marke s oal : weigh of he i h produc over he j h counry s oal impors from he world; world; d ij j M ij i j M M ( im ij)( j M ij) ij : weigh of he i h produc over he desinaion marke oal impors from he M w ij i j ij ij p g i.. j : Srucural diversificaion index (SDI): raio beween he weigh of he j h counry (of he i h produc) over he desinaion markes impors in he i h produc (over he j h counry s oal impors) and he weigh of ha counry (of ha produc) over he desinaion marke s oal impors from he world. 9

18 Ideniy [4] is subsanially equivalen o [2]: he wo vecors of elemenary marke shares and weighs conain a number of elemens (m x n) equalling he cells of a double-enry able in which he rows refer o he producs and he columns o he imporing counries. Bu in [4] i is no possible o disinguish he commodiy from he geographic disaggregaion crierion, because each weigh is he raio beween he value of impors of each cell and he oal value of he desinaion marke s impors from he world. Such cells will henceforh be designaed as segmens of he imporing marke being considered. Ideniies [5] and [6] have mos ofen been used (explicily or implicily) as base ideniies in CMS analysis. In [5] he daa on he desinaion marke s impors are firs disaggregaed according o produc ype and hen, for each one of hese, by imporing counry, while in [6] he opposie occurs. This is eviden because ideniy [5] can also be expressed as follows: S isi. pi. [9] in which: s i. jm jm ij ij j s ij g ij [10] he exporing counry s share of he desinaion marke s impors from he world in he i h produc; and similarly ideniy [ 6 ] may be wrien as follows: S j s. j g. j [11] in which: s. j im ij i M ij [12] isij pij he exporing counry s share of he j h counry s oal impors from he world. In pracice, ideniy [5] is aained by consrucing wo ideniies similar o [2] a differen disaggregaion levels: firs, he aggregae marke share is expressed as he weighed average of marke shares by produc (ideniy [9]) and second, each of hese is reaed as he weighed average of he elemenary marke shares by each produc in each imporing counry (ideniy [10]). A similar saemen is also valid for ideniy [6]. 10

19 This remark shows ha ideniies [5] and [6] are characerised by an inernal asymmery in he degree of daa disaggregaion by produc and by counry. This affecs he decomposiion formulas giving rise o one of he mos discussed mehodological problems of CMS analysis, namely he variabiliy of resuls wih respec o he decomposiion order. To solve his problem, Guerrieri and Milana (1990) proposed accouning ideniies [7] and [8], 10 wih he produc weighs defined a he same disaggregaion degree as he geographic ones, as follows: In [7], boh are calculaed a he margins of he double-enry able of he desinaion marke s impors; he desinaion marke s impors disribuion by produc is deermined independen of ha by imporing counry 11. In [8], all he weighs are calculaed inside he double-enry able, which generaes as many produc disribuions as here are imporing counries and as many geographical disribuions as producs. Sill, hese formulaion do no make resuls independen of disaggregaion order, as claimed by Guerrieri and Milana (1990, p. 332). They simply presen his problem in a differen shape. The resuls change wih he choice beween marginal (ideniy [7]) or inernal (ideniy [8]) weighs in he double-enry able. Beween [7] and [8], here is essenially he same relaion as beween ideniies [5] and [6] in he radiional formulaions 12. In any case, he symmery in geographic and produc disaggregaion levels characerizing ideniies [7] and [8], makes hem preferable o he radiional ones. Bu such resul can only be reached by inroducing in he formulas anoher elemen, he marix of srucural diversificaion indexes (SDIs). These indexes show o wha degree he produc disribuion of a desinaion marke s impors is differeniaed across imporing counries, or o wha degree is disribuion by imporing counry varies by producs. Thus, he SDIs reveal he degree of reciprocal dependence beween he srucure of he marke by imporing counry and ha by produc, and show if he impors of he desinaion marke are uniformly disribued among he various segmens, or are insead concenraed in some segmens. In he exreme case of all SDIs being equal o one, he commodiy (or he geographic) disribuion of impors would be equal for all counries (and for all producs). Thus here is a 10 An English version of his proposal can be found in Milana (2004). 11 A similar approach has been followed in European Cenral Bank (2005). 12 A differen soluion for his problem has been adoped by Chepea, Gaulier and Zignago (2005), who derive he CMS effecs from an economeric exercise, making he decomposiion order no relevan for he resuls. 11

20 precise relaion beween hese indexes and Pearson s quadraic average coningency coefficien (f), calculaed on he double-enry able showing he desinaion marke impors disribuion by produc and by imporing counry, as follows: ( ) 2 f = 1 ij d ij w ij [13] From his expression, we can see ha if all he diversificaion indexes were equal o one, here would be no saisical connecion beween he wo disaggregaion crieria (by produc and by imporing counry), while as inerdependence beween he wo disribuions grows, hese indexes depar from one. 3.3 The Choice of he Decomposiion Formula Besides he specificaion of he base accouning ideniy, oher issues affecing he CMS decomposiion formula have been explored in he lieraure. The mos imporan one sems from he shif from a coninuous o a discree ime formulaion, and lies in he choice of he weighing sysem o be used in he decomposiion (i.e. he index-number problem of CMS analysis, as discussed in Richardson, 1971 and Milana, 1988). The nex sub-secion surveys he various alernaives proposed for weighing he decomposiion formula. Sub-secion discusses he relaed problem of he dependence of decomposiion resuls on he ime-pah of he elemenary daa The Weighing Mehod and he Index-Number Problem in CMS Analysis Referring o he base ideniy [2], he coninuous-ime decomposiion of is variaions can be expressed as follows: d S d s d k wk = k k k k d d w + d s [14] where, he aggregae marke share rae of change over ime is he sum of wo erms: he weighed average of disaggregaed marke shares changes and he effecs of changes in he srucure of desinaion marke s impors. The firs erm is defined as he compeiiveness effec (CE). Given he demand srucure, one can hold ha changes in disaggregaed marke shares mirror ex-pos he effecs of changes in relaive prices and oher facors of compeiiveness. The second erm is called he srucure effec (SE). I represens he variaion ha he aggregae marke share would in any case have because of he effec of changes in he srucure of he desinaion marke s impors, even if he elemenary marke shares did no change (consanmarke-shares). I mirrors he conformiy of a counry s specialisaion paern o changes in he srucure of demand. 12

21 The index-number problem of CMS analysis refers o he variey of possible soluions in adaping ideniy [ 14 ], which is formulaed for coninuous ime, o he discree-ime daa available for empirical analysis. The suggesed alernaives, differing by he weighing mehod chosen, are he following: ( ) ( ) S S 0 = k s k s 0 k w 0 + k k w k w 0 k sk ( ) ( ) S S 0 = k s k s 0 k w + k k w k w 0 k s 0 k ( )[ ( 1 ) ] ( )[( ) k k k k 1 k k k k k] S S 0 = k s s 0 w + w 0 + w w 0 s + s 0 [15] [16] α α α α [17] ( ) ( ) ( )( ) S 0 S = k s 0 0 k sk w + k k w 0 0 k wk s + k k w 0 k wk s 0 k sk ( ) ( ) ( )( ) S 0 S = k s 0 k sk w + k k w 0 k wk s k k w 0 k wk s 0 k sk [18] [19] The mos widely used formulas in CMS analysis have been based on ideniies [15] or [16], because of heir simpliciy; or on ideniy [18], because i offers he advanage of a coheren weighing mehod, so ha all weighs refer o he iniial period. However, ideniy [18] requires inroducing an addiional decomposiion erm, based on he ineracion beween changes of disaggregaed marke shares and variaions of demand srucure. The economic meaning of his erm has long been debaed. Richardson (1971) considered his as a second measure of compeiiveness", because i shows how much a counry succeeds in concenraing posiive rade performances (he rise in is marke shares) in he mos dynamic segmens of he desinaion marke s impors. Fagerberg and Sollie (1987) defined he ineracion erm as a measure of he expor specialisaion paern s flexibiliy in response o changes in he srucure of demand and called i he adapaion effec (AE). They also showed ha such a erm could be decomposed in hree elemens according o he following formula: AE ( 0 0 k k s s) ( 0 k k) 2 2 r s s w w A k k = µ + µ [20] In which: r : Linear correlaion coefficien beween changes of disaggregaed marke shares and A changes of marke segmen weighs; µ : Unweighed arihmeic mean of disaggregaed marke shares. s 13

22 In his formula, he correlaion coefficien r esablishes he sign of he ineracion erm, while A is value depends on wo measures: a measure of dispersion of disaggregaed share changes around heir average and a measure of variaion in he srucure of marke demand. Milana (1988) depared from all he radiional formulaions of CMS analysis and criicised he use of he ineracion erm, conending ha he only specificaion coheren wih index-number heory is [17], wih α = 0.5. This is equivalen o using he averages beween he saring and he final period as weighs, similarly o he price index formula devised by Törnqvis (1936). Milana claimed ha his formulaion is o be preferred o all he ohers, as i allows for a beer discree-ime approximaion of he coninuous-ime decomposiion formula. On he conrary, he ineracion erm appearing in equaions [18] and [19] is produced by he inabiliy of he linear approximaing formula o compleely disenangle he componen effecs by racing a non-linear funcion (Milana 1988, p. 467). 13 This argumen is based on he economic approach o index-number heory ha splis up a value variable ino is price and quaniy componens, assuming an aggregaion funcion of such componens founded on he microeconomic heory of consumer behaviour. In CMS analysis, insead, i appears impossible o posulae a precise and heoreically founded funcional relaionship beween he wo elemenary componens of he accouning ideniy (marke shares and weighs), and so we lack he coninuous-ime aggregaion funcion, based on which we could selec he bes discree-ime approximaion. Besides his heoreical problem, formula [17] appears inferior o formula [18] in erms of descripive power. Indeed, using he averages beween he saring and final periods as weighs does no allow us o nealy disenangle he compeiiveness from he srucure effec 14. For insance, he srucure effec no longer represens he aggregae marke share change beween period 0 and period, had he elemenary marke shares remained equal o hose a he saring period, as in formula [18], bu is compued as if such shares had remained consan a an inermediae level beween he saring and he final one. By doing his, however, he srucure effec ends up by capuring a par of he changes of he elemenary marke shares ha should insead be capured by he compeiiveness effec, and vice versa. 13 Milana s approach has been followed, among he ohers, by Simonis (2000). 14 Similar argumens, in a differen conex, may be found in a conribuion by Menzler-Hokkanen and Langhammer (1994, pp ) on he bilaeral index number echnique for he measuremen of he qualiy of impors and he subsiuion among rading parners. 14

23 I is rue ha equaion [17] splis he enire change of he aggregae marke share ino only wo componens, wihou any residual, bu by doing so i muddles heir economic meaning. On he conrary, equaion [18] does no produce an exac bipariion, bu allows he srucure effec o be clearly disinguished from he compeiiveness effec. Moreover is residual ineracion erm may have an ineresing economic inerpreaion, concerning he flexibiliy of expor specialisaion paerns. In equaion [17] he srucure effec is saic: i measures he influence of a counry s inernaional specialisaion paern, defined in a cerain period (halfway beween 0 and ), on changes in is aggregae marke share, bu ignores he effecs of muaions in he specialisaion paern iself. In [18], on he oher hand, he saic srucure effec is coupled wih a dynamic adapaion effec, which measures he effec of changes in a counry s specialisaion paern on is global expor performance The Dependence of Decomposiion Resuls on he Time Pah of he Elemenary Daa Anoher problem linked o he choice of he weighing mehod for he decomposiion formula is ha of he dependence of is resuls on he ime-pah of he elemenary daa. Milana (1988) raised his issue in his reformulaion of CMS analysis, ying i o he approximaion error ha appears when expressing a coninuous aggregaion funcion wih an index number consruced in discree ime. To avoid his approximaion error, Milana referred again o he index-number heory, which suggess building indexes for a cerain ime span, subdividing i ino he shores possible inervals and chaining ogeher he indexes calculaed a hose inervals. Similarly in CMS analysis, by using he chain mehod, we may consider he whole pah followed by he daa from he saring o he final period. Hence, he size and he sign of he effecs become sricly dependen on such a pah, in ha for any given levels of marke shares and weighs in he saring and final period, heir inermediae levels deermine he values of he erms generaed by he decomposiion. In his sense, he pah-dependency problem is no solved, as claimed by Guerrieri and Milana (1990, pp ), bu is creaed by he chain mehod. In conras, in radiional formulaions, he decomposiion is performed by direcly comparing final and saring period daa, hus losing he opporuniy o benefi from all he informaion conveyed by he inermediae daa. Bu, i is precisely because of his simplificaion ha decomposiion resuls are independen of he pah followed by he elemenary daa in he inermediae periods, whaever formula used. 15

24 However, he pracice of subdividing he ime span ino shor inervals can be useful o beer undersand he dynamics of he underlying variables, and o generae ime series of he decomposiion effecs ha can be inegraed in economeric models A new specificaion of CMS analysis In his secion, we presen a new decomposiion formula for CMS analysis, addressing he problems discussed in secion 3. This formula may be used for analyzing daa on impor marke shares, classified by imporing counry and by produc. The base accouning ideniy is given by equaion [ 3 ] as specified in [ 7 ], where symbols assume he same meaning as already showed in Secion S i j sij g p. j i. d ij Changes of [ 7 ] over ime are decomposed wih a formula similar o [ 18 ]. Bu since in [ 7 ] each addend is he produc of four facors, he number of erms generaed by he decomposiion is no hree, as in [ 18 ], bu fifeen. No all hese erms can easily be given an economic inerpreaion. So i is more convenien o group some of hem ogeher and use a decomposiion formula exracing seven effecs: 15 Recen applicaions of he shif-and-share analysis make wide use of his pracice, advocaed by Barff and Knigh (1988). For an ineresing example of how shif-and-share analysis can be inegraed ino economeric models, see Banasick and Hanham (2006). 16

25 ( ij ij) S S i j s s wij = + [CE] ( p i ) i i p s i. [CSE] j g g s j. j. j [GSE] i j ( d ij d ij) sij p g + i.. j 0 0 ( p p i i ) g 0 0 g j j sij d ij ( p p i i )( d.. ij d ij) s g + ij. j g g ( d d ) s p. j. j + ij ij ij i. ( ) ( ) i. i.. j. j ij ij [SIE] p p g g d d s ij [ 21 ] i i j ( ij ij)( ) i i s s p p g d [CAE] + ( ij ij) [GAE] j j s s g g p. j. j i. d ij ( s ij sij)( d ij d ij) p g + i.. j ( s ij sij)( p p ) g 0 g i i j j d ij ( s ij sij) ( p p )( ) i. d d g + i ij ij j 0 0 ( s s ) g 0 0 ij g ij ( d d ) p j j +.. ij ij i ( s ij sij)( p p ) g 0 g ( d ij d ij) i j.. [RAE] i. i.. j. j ij The firs erm is called he compeiiveness effec (CE), as i is he weighed average of he changes of an exporing counry s marke shares in all he produc/counry segmens ino which he impor marke is subdivided. The underlying idea is ha such changes display he effecs of variaions in relaive prices and in he oher compeiiveness facors such as qualiy, image, disribuion nework, and so on, ha make one counry s producs preferred o hose of compeiors. Essenially, his effec is no ex-ane measure of he compeiive srengh of a 17

26 counry s producs, bu a synheic ex-pos indicaor of heir compeiive performance in he desinaion marke. The subsequen hree erms, aken as a whole, are equivalen o he second erm of [18], which is he srucure effec (SE). They show how a counry s aggregae marke share would have changed because of he effec of changes in he srucure of impor demand, given he saring level of is disaggregaed marke shares. The commodiy srucure effec (CSE) measures how changes in he produc composiion of he desinaion marke impor demand affec an exporing counry s aggregae marke share. Is sign depends on he correlaion beween changes in he relaive imporance of each produc in oal impors of he desinaion marke, and he marke shares held by he exporing counry in each produc in he saring period. In oher words, he more he counry s expor specialisaion paern (defined by he vecor of is produc shares in he saring period) is oriened oward he producs wih fas growing foreign demand, he more he CSE becomes favourable. Similarly, he geographic srucure effec (GSE) shows o wha degree he behaviour of a counry s aggregae marke share is influenced by changes in he disribuion of he desinaion marke demand by imporing counry. The beer he geographic orienaion of a counry s expors corresponds o hese changes, he higher is GSE. In oher words, counries whose expor marke shares are relaively larger in he mos dynamic imporing counries will reach a posiive and high GSE. The srucural ineracion effec (SIE) depends on how changes in he geographic and commodiy srucure of desinaion marke impors are relaed o each oher. I is posiive if such changes end o raise he relaive incidence of he marke segmens in which a counry is specialised. As we can see from he formula, he SIE is made of five erms generaed by he decomposiion. The firs of hese, named he srucural diversificaion effec (SDE), depends on how he SDIs of he desinaion marke impor demand change over ime. The sign of his effec is deermined by he ineracion beween SDI changes and he iniial levels of disaggregaed marke shares and of he oal counry and produc weighs. The greaer he demand for impors concenraes in he segmens in which an exporing counry is specialised (he more hese segmens raise heir specific weigh in oal desinaion marke impors), he more he SDE becomes favourable for ha counry. The SDE is subsanially equivalen o he specific marke-produc effec inroduced for he firs ime in CMS analysis by Guerrieri and Milana (1990). Is usefulness derives from he fac ha including SDIs ino he decomposiion formula allows using homogeneous weighs (a a similar degree of disaggregaion) in he calculaion of he oher srucure effecs (CSE and GSE), as discussed in Secion

27 The oher erms ha make up he SIE arise from he ineracion among he various kinds of weighs used in he formula (produc weighs, geographic weighs and srucural diversificaion indexes). The economic imporance of hese erms is no inuiive. Loosely speaking, hey end o have a posiive sign for hose counries wih specialisaion in hose marke segmens wih rising imporance. The las hree erms of formula [21], aken as a whole, represen he adapaion effec (AE) and are exacly equal o he corresponding erm of equaion [18]. The commodiy adapaion effec (CAE) shows he ineracion beween he compeiiveness effecs recorded by a counry in each produc 16 and he changes in he produc srucure of desinaion marke demand for impors. The CAE can be inerpreed boh as a second compeiiveness measure, if a counry succeeds in gaining marke shares in he mos dynamic producs, and as an indicaor of flexibiliy of he counry s inernaional specialisaion paern, if such a paern changes in ways conforming o he endencies of marke demand. This ambivalence occurs because changes of marke shares over ime can be read boh as an effec of compeiiveness facors (as in he CE), and as an oucome of changes in he specialisaion paern, which is defined by he marke share disribuion around heir average (as in he SE). Similarly, he geographic adapaion effec (GAE) shows o wha degree an exporing counry s marke share gains end o be concenraed in he mos dynamic counries in erms of impor demand. Is sign depends on he correlaion beween changes in he srucure of desinaion marke demand for impors by imporing counry and he compeiiveness effecs recorded by he exporing counry in each imporing counry. 17 Finally he residual adapaion effec (RAE) encompasses five ineracion erms, whose dimensions are normally small. They capure he correlaion among he changes of disaggregaed marke shares, srucural diversificaion indexes and a combinaion of geographic and produc weighs. Even he RAE, if posiive, shows ha a counry s bes rade performances end o be concenraed in he mos dynamic segmens of he marke. The main value of CMS analysis lies in is abiliy o gauge he role played by composiion 16 For each exporing counry i is possible o calculae a se of produc compeiiveness effecs. Each one of hose effecs is equal o he weighed average of he marke share changes recorded for ha produc in he various imporing counries. Acually, hese produc compeiiveness effecs, similarly o he global one (CE), indicae how he produc marke shares of he exporing counry would have changed, had he geographic srucure (by imporing counry) of desinaion marke impors in individual producs remained unchanged. 17 Each one of hese counry compeiiveness effecs is equal o he weighed average of marke share changes recorded by he exporing counry for he various producs. In oher words, hey indicae how he marke shares of he exporing counry in each imporing counry would have changed, had he produc srucure of he imporing counry s demand remained unchanged. 19

28 facors in deermining expor performance. This role may be beer undersood by furher decomposing he srucure effecs measured by he CMS formula, using an approach similar o ha proposed by Fagerberg and Sollie (1987) for he adapaion effec. 18 For insance, we may express he commodiy srucure effec (CSE) as follows: 0 0 ( i s) ( 0. i. i. ) 2 2 r SC i s p p i CSE = µ [22] in which: r SC 0 s i. = linear correlaion coefficien beween an exporing counry s iniial expor marke shares in each produc and he changes of produc weighs in desinaion marke impors; = an exporing counry s iniial expor marke share in produc i; 0 µ s = unweighed arihmeic mean of an exporing counry s p i. iniial produc marke shares; = produc i's weigh on desinaion marke oal impors. Equaion [22] shows he commodiy srucure effec as he produc of hree facors: a) The degree of correlaion beween he produc srucure of an exporing counry s marke shares, which defines is specialisaion paern, and he changes in he produc srucure of desinaion marke impor demand. b) An indicaor of he variabiliy of produc marke shares around heir mean or, in oher erms, of he degree of polarisaion of he specialisaion paern. c) An indicaor of change in he srucure of demand, as measured by he variaion of he produc weighs in desinaion marke impors. Since he hird facor is common o all exporing counries, i is he firs wo ha are decisive for differeniaing each counry s CSE. More precisely, he sign of he CSE is esablished by he coefficien of correlaion, while is size relaive o oher counries, depends on he inensiy of he correlaion and on he coefficien of comparaive advanage polarisaion. In oher words, a equal correlaion degree beween he exporing counries specialisaion paerns and he changes in he srucure of impor demand, he highes posiive (or negaive) CSEs are recorded by hose counries whose specialisaion paerns are more differeniaed beween srong and weak poins: he polarisaion degree of he specialisaion paern amplifies he magniude of he srucure effecs. 18 See secion

29 5. Consan-marke-shares analysis of expor performances: In his secion we presen he resuls obained from applying he CMS analysis described in Secion 4 o he sudy of world merchandise expors in he period The analysis was based on he BACI daabase, developed by he Cenre d' Éudes Prospecives e d'informaions Inernaionales (CEPII) using he UN COMTRADE daa. 19 We considered 208 exporing counries in he daabase, bu here we presen resuls only for he firs 30 exporers in 2007, and for he 7 larges African exporers (Souh Africa, Nigeria, Algeria, Angola, Egyp, Morocco and Tunisia), which are included for a more comprehensive represenaion of world expors (our sample of 37 counries ogeher makes up for around 87 percen of oal world expors on average over he period). The world marke was disaggregaed ino he 208 desinaion counries and ino 4,968 producs a he HS 6-digi classificaion, which muliplied among hem resuled in 1,033,344 elemenary marke segmens. The analysis was performed for each year of he period 1995 o 2007, as suggesed in sub-secion 3.3.2, and hen he resuls were aggregaed over ime. Table 1 shows hese resuls for he enire period The mos sriking resul is he remarkable expansion of Chinese expors. China ranked firs in he world ranking of exporers already in 2006, wih a marke share of 10 percenage poins of world expors, moving from he sevenh place in Chinese expors grew consanly, and faser han compeiors, a an annual rae of 17.4 per cen (in curren US dollars) or double han ha for he world average. This rise has come a he expense of all major developed counries. The greaes absolue marke share losses were recorded by he Unied Saes of America, from 12.3 o 8.4 per cen of world expors, and Japan from 9.1 o 5.3, followed by all he larges member counries of he EU-15, and Canada, Malaysia, Singapore and Swizerland wih sizable losses. More sriking is ha no oher emerging economy has reached comparable resuls in absolue erms, alhough oher counries of he BRICS grouping (including Brazil, Russian Federaion, India, China and Souh Africa) have also increased heir expor marke shares. The second larges rise in absolue erms was recorded by he Russian Federaion (from 1.1 o 2.5), followed by oil exporing counries such as Kingdom of Saudi Arabia and he Unied Arab 19 BACI (Base pour l'analyse du Commerce Inernaional) is he world rade daabase developed by CEPII a he HS 6-digi produc disaggregaion. BACI is developed using an original procedure ha reconciles he declaraions of he exporer and he imporer. Original daa are from he Unied Naions Saisical Division (COMTRADE daabase). The harmonisaion procedure enables o exend considerably he number of counries for which rade daa are available, as compared o he original daase. BACI provides bilaeral values and quaniies of expors a he HS 6-digi produc disaggregaion, for more han 200 counries over he period For furher informaion, see Gaulier and Zignago (2009). 21