Transcript Comments on “Income and Price Elasticities of Croatian Trade

Comments on
“Income and Price Elasticities of
Croatian Trade - A Panel Data
Approach”
Bobić Vida
by Saša Žiković
Motivation
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Croatia’s current account deficit is for the most part a
consequence of a large deficit in merchandise trade.
The goal of the paper was to determine the most
important factors which affect movements in Croatian
merchandise trade.
Stable elasticity coefficients can be of great use in 1)
gauging the impact of changes in the economy as well
as of fiscal and monetary policy measures on the trade
balance and 2) macroeconomic forecasting.
Analyse the influence of kuna/euro exchange rate on
trade and competitiveness of Croatian goods.
Data
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Period: 2000-2007 annual data
Variables:
Sectoral imports and exports according to the National
Classification of Economic Activities (NCEA) – 30 sectors
Income (world total real GDP, Croatian real GDP)
Prices (unit value indices calculated from disaggregated
data on euro values and quantities)
Nominal kuna/euro exchange rate
FDI (stock or flow?)
Croatian import tariffs
Model: dynamic panel data method – estimation via GMM
Findings
Export function:
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Import function:
Import tariffs expected sign but negligible effect
For Croatian exports, competitiveness works through prices,
not quality of goods.
Exchange rate does not have a strong role in determining
export flows, while it contributes to import growth.
Use of currency depreciation as an export promotion tool is
not validated.
Good points of the paper
 First, the paper asks a very interesting and relevant
research question, which is of great importance for the
Croatian policy makers.
 Second, this paper is among a few papers that
empirically deals with trade mechanics in Croatia.
 The finding from this paper (if accepted as valid) raise
important economic and political questions in Croatia
(other transitional countries?).
 The author shows good understanding of issues involved
in trade modelling
 Overall, this is a well-written, interesting paper with a
potential to be a publishable piece of work.
Comments and questions
This is a solid econometric exercise but...
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 The purpose of the paper has very little ambition (income and
price elasticities) or is it to ambitious (HRK/€)?
 What does this paper bring new to the literature about
transitional economies?
 Who will be interested in this paper?
 What are the policy implications?
 What should be done on fiscal and monetary front?
 There is no explanation of Croatian economical and trade
specifics. An investigation of these would substantially increase
the quality of the paper!
 Taking account of regional elements and previous knowledge of
product and trade among ex YU and ex communists countries is
necessary.
 What happened in 2003-2004 (reversal of trend)?
 Page 3 – What is the reason of Croatia’s low competitiveness and
pronounced imbalance in international trade?
Comments and questions
Although the author is aware of Croatian specifics the paper
still uses the most standard setup, why? (potential to be the
first and original)!
 For some strong presumptions there is little backing in the
literature
 Better literature overview – what are the findings of the
papers that are mentioned in the overview (some of them
are contradicting the findings in this paper)
 Wide range of elasticity coefficient 0.17-5.3 why are they not
presented?
 Are the coefficients stable? Robustness check?
➨ Given the nonstationarity of variables, cointegration analysis
seems an appropriate technique for uncovering the existence
of a long-run relationship involving the export price,
domestic cost, and the exchange rate!
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Comments and questions
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What about regional prices (a lot of empirical proofs about
competition among transitional countries (TC) for the
placement of goods in developed countries - see Faini,
Clavijo, Senhadji-Semlali (1992) )
As a result of these factors, exchange rate policies lose much
of their effectiveness, demand from developed countries is
again a major determinant of TC export performance.
Devaluation is an effective tool in this respect when used by
one TC, if employed by a group the effects are wiped out!
Devaluation though may still be an effective tool to promote
efficient import substitution, bring a more efficient allocation
of resources and by avoiding unrealistic appreciation, deter
capital flights from the onset.
Importance of regional effects!
Comments and questions
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The paper should take into account that placing Croatian
goods on foreign markets were caused mainly by (1) a
breakdown of the ex YU and communist markets, which
had absorbed the bulk of Croatian exports prior to 1991;
(2) the still low competitiveness of Croatian production;
(3) changing ownership relations in firms and unfinished
company restructuring (4) war
Are there any structural breaks in the data?
What structural equations are used in the paper?
The imperfect substitutes model (Goldstein, Moris, Khan
1985)? OR some extension?
Other models: Greenhalgh, Taylor and Wilson (1994),
Blake and Pain (1994), Pain and Wakelin (1997),
Greenaway, Souza and Wakelin (2002), Algieri (2004)...?
Comments and questions
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Traditional imperfect substitutes model: domestic cost and foreign
prices are treated as exogenous to exchange rate changes.
Such an assumption may be justified for some group of products
and possibly in the short run.
This seems inappropriate given the pervasive effects of exchange
rates on production costs through imported inputs and indirect
cost competition in the world market.
For instance, the prices of commodities are usually denominated
and invoiced in dollars. Thus, a depreciation of the currency vis-avis the dollar will increase the non-US dollar prices of
commodities, which in turn will raise production costs and export
prices.
In traditional trade models, a currency depreciation deteriorates
the terms of trade, which tends to increase the trade balance and
aggregate demand. Unless the returns to scale are constant, unit
costs are likely to vary with changes in aggregate demand.
Comments and questions
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FDI variable:
The paper uses the logic behind the use of FDI as a proxy
for competitiveness and productivity (taken from Czech
Rep.) – not appropriate since in CZE it went into
manufacturing industry in CRO mostly service sector without
export potential!
Prices variable:
“...relatively more expensive imports which will work to
lower imported quantities” not so straightforward, what
about product like (cars, phones, computers, building
machinery...)?
Bias in obtained results due to both homogenous and
differentiated goods within sectors – solution: use indexes of
product differentiation - see Chiarlone (2000)
Focus on main trading partners not the whole world
Comments and questions
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Income variable:
World total GDP – main trading partners GDP?
Tariffs variable:
Tariffs in foreign markets, EU quotas, non tariff
impediments to exports from Croatia – significant but
not taken into account
By concentrating on main trading partners import tariffs
could be accounted for (not an easy but a extremely
important task!)
What about the other side of the coin – subsidies,
completely unchecked (why?)
See the current cheese crisis imported from EU!
Comments and questions
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Exchange rate variable:
Check the real effective exchange rate index based on the CPI
and related to the currencies of the given trade partners
During the investigated period kuna is appreciating against the
euro, there is no strong depreciation so how can any conclusion
be drawn about the effects of kuna depreciation?
Exchange rate also works through price variable, how can the
paper say that exchange rate depreciation is unimportant in
exports?
Wansing Hung et al. (1993) found feedback into the exchange
rate from the other variables is present in most countries. The
feedback tends to make the exchange rate innovations decay
rapidly.
In estimation, a simultaneous equations approach seems
necessary to properly estimate pass-through processes since
exogeneity assumptions are clearly violated in most countries.
Be careful this is a overly simplifed analysis to conclude anything
about exchange rate mechanics!
Comments and questions
Some of the variables that are omitted but should be checked:
 monetary policy interest rate
 economies of scale
 supply-side based factor shaping the intensity of exports and imports is
economies of scale – see Krugman and Obstfeld (2003) - approximated
by material inputs.
 change in productivity
 Capital (at constant prices) per unit of labour - reallocation of
production to industries that use higher capital per labour leads to an
increase in exports!
 Tariff rates levied abroad on Croatian exports
 Monetary policy (stock of real M2)
 Material input values adjusted for price changes
 Croatian price changes in industries - measuring the intensity of
nominal convergence
 indexes of quality and supply reliability - Greenhalgh, Taylor and Wilson
(1994)
 Availability of output as a determinant of exports (Algieri, 2004)
Comments and questions
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A lot of studies emphasize the importance of market
structure - the market share, market concentration,
substitutability between domestic and foreign variants of
a product, high sunk cost of production, the level of
trade barriers, etc.
See Dornbusch (1987), Baldwin (1988), Dixit (1989),
Froot and Klemperer (1989), and Feenstra (1989).
These effects are expected to be more important in less
than perfectly competitive market (exporter follows the
competitors’ price) such as Croatia.
Where is out-of-the-sample forecasting to validate the
findings?
Comments and questions
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What is the export content of imports?
Is there any correlation between exports and imports
within the same sectors (intra-industry trade)?
As the negative sign of import prices reveals, the import
penetration strategies of exporters are based on
competition in product price not quality – this is strange
(opposite is found for other transitional economies) –
what is the meaning of this?
How does Croatian production compete with imports?
Test this by testing Croatian price changes in industries
in the import equation. If it has a positive coefficient it
means that a domestic price increase supports imports
Conclusion
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Foundations have been laid but a lot of work
and sleepless nights still ahead!
Congratulation to the author on having the
courage to chose a very demanding but
important field of research for any country in the
world.
 If the author wishes to pursue this field of
research I wish her the best of luck!