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STU 04-04 : Special Topic - Geographic market specialisation and export performance [Short Term Update 04-04]

The latest update of the FPB’s medium-term outlook for Belgium shows average GDP growth reaching 2.3% during the 2004-2009 period. This development can be largely accounted for by domestic demand, whereas the role of (net) exports is expected to be more limited. As in 2003, private consumption should evolve in quite a dynamic way during the projection period (1.9% on average), mainly as a result of an expansion of households’ disposable income. At the same time, gross fixed capital formation (and particularly business investment) should recover, with annual growth reaching 3%. The structural loss of export market share should be confirmed with exports increasing by 5.3% a year on average, compared with growth of 6.3% of our potential export markets.

Inflation should remain slightly below 2% in the medium term, mainly thanks to limited wage increases and moderate rises in imported costs. Employment is expected to increase by about 32,000 jobs a year during the 2005-2009 period. This performance can be explained by several factors: a relatively favourable macroeconomic context, limited wage increases, a reduction in working time and various measures taken to promote employment. At the same time, the working population should rise considerably. As a consequence, despite the creation of many jobs, the fall in the unemployment rate should be very limited.

The FPB’s October update of the medium term outlook for Belgium does not yet take into account the measures decided within the framework of the 2005 budget.

It is well known that a country’s trade pattern as regards destination markets has an impact on its trade performance as measured by its export market share. Shifts in the market distribution of world imports may indeed cause a rise or fall in a country’s export market share depending on the geographical market specialisation of its exports. It must therefore be asked which are the destination markets that have increased their share in world imports over the decade from 1991 to 2001 and whether the Belgium-Luxembourg Economic Union (BLEU) and its main trading partners (Germany, France, the Netherlands and the United Kingdom) benefited from these shifts?

The method of analysis

A country's world export market share measures how much of the relevant import demand is covered by the country's exports and is therefore an indicator of the export performance of this country. This share may be analysed through Constant Market Shares Analysis (CMSA). This is an ex-post accounting method used to analyse the change in this share, which makes it possible, among other things, to determine how much of the rise or fall in the country's world export market share is due to the geographical specialisation of its exports, referred to as the 'market composition effect'.

In the present context, the aim is to show how a country’s world export market share would have developed over a particular period if the country had maintained its export market share in every destination market. It is therefore necessary to calculate the impact of the change in a destination market's share in world imports on the country’s world export market share. The underlying idea can be illustrated by an example: the BLEU will only benefit from the increase in the imports of the destination market China if a sufficient share of its exports goes to that market. The sum of these impact values, which are also called contributions of the destination markets, corresponds to the ‘market share effect’.

Using data for commodity trade, this method has been used to calculate the contributions of the destination markets as well as the overall 'market composition effect' for the BLEU and its four main trading partners, i.e. France, Germany, the Netherlands and the UK, which are also among its main export competitors. The contributions have been aggregated into 9 destination areas. The calculations were carried out for two periods: 1991-1997 and 1997-2001. Table 1 reports the results.

The results

To interpret the results reported in Table 1, it is important to keep in mind that these countries have very different weights in world trade. The last line therefore indicates the percentage gain or loss in the world export market share due to the ‘market composition effect’. During the period 1991-1997, the market specialisation of the BLEU's exports had a very negative impact on its export performance. Indeed, the world export market share of the BLEU fell by almost half a percentage point (or 12.4% of the 1991 world export market share) due to the 'market composition effect'. Roughly 75% of the BLEU's exports go to the internal market of the European Union (EU15) and the share of this destination area in world imports declined markedly between 1991 and 1997. The impact of the EU15 is therefore very negative and it accounts for most of the negative overall 'market composition effect'. The same reasoning holds for the BLEU's main trading partners, which all suffer from their specialisation in exports to the internal market of the EU15.

The negative impact of the EU15 is to some extent compensated by positive contributions from the destination areas South East Asia and Eastern Europe. The shares of these areas in world imports did indeed increase substantially during the period 1991-1997. The BLEU has not, however, drawn a great benefit from the emergence of those areas as they account for only a very limited share of its exports (5% for South East Asia and 3% for Eastern Europe). The same is true for the Netherlands. By contrast, Germany has gained a lot from the growth of imports by Eastern Europe. Moreover, the gains from the emergence of South East Asia as an export destination were proportionally greater for France, Germany and the United Kingdom than for the BLEU and the Netherlands. [More in the publication ...]

STU 4-04 was finalised on December 6th 2004

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