Exports are the main driver of economic growth in CSE

In the past 25 years, exports played an almost dominant role in the economic growth of the Central and Southeast Europe (CSE). In this period Poland strengthened its role as an exporter of intermediate goods.

The process of globalization, which greatly accelerated in the 1990s, has significantly changed the division of labor and the structure of world trade. The processes of production have undergone fragmentation, that is, division into stages scattered throughout the world. At the same time, we have observed so-called vertical specialization in international trade, which means that individual countries have started to specialize in the specific stages of manufacturing, instead of the production of specific goods and services as has been the case before. This process was also associated with the increased inflow of FDI to the developing countries. The objective of these investments was, among other things, to increase the efficiency of production of goods and services and to enable integration with the global value chains (GVC).

CSE countries, which have been undergoing the process of transition from a centrally planned economy since 1989, and which have also been in the process of integration with the European Union since the mid-1990s, naturally became not only a participant but also a beneficiary of these processes. These economies benefited from the relocation of some of the global production processes, which increased the manufacturing capacity of the CSE countries and accelerated the accumulation of capital.

As a result of vertical specialization in trade, the economies of the countries participating in the GVC significantly increased the value of their exports. However, this value grows not only due to the ongoing growth in the domestic production of goods and services, but also because this production is increasingly import-intensive: semi-finished products, parts and materials, that is, intermediate goods from previous stages of production, flow into a given the country to be subjected to further processing. They are then exported in the form of finished goods, but also in the form of intermediate goods, which will undergo further processing elsewhere in the production chain. What is important here is the fact that the significant value of the exports only partially increases the domestic value added and, consequently, the domestic GDP. In particular, the increase in the value of exports may, in extreme cases, did not lead to an increase in GDP at all, if the increase only results from an increase in the value of the accompanying imports. Therefore, it is becoming increasingly difficult to assess the importance of exports, as well as the process of globalization, for economic growth.

The standard formula illustrating the process of GDP utilization (from the demand side) takes into account the value of net exports, which means that the GDP is equal to the sum of total private consumption, public consumption, investment and the difference between exports and imports. That is true, but it should be noted that while the first three components of demand indicate the consumption of finished goods and services, the net exports concern total exports and imports (and therefore also include intermediate goods). Thus, if the import intensity of individual components of the GDP is different, the measure of the net exports includes not only the contribution of net exports to the GDP, but also an adjustment for the import intensity of other GDP components. In the CSE countries, the process of accumulation of capital in the transition period was associated with investments. They were implemented, in particular, with the use of high-technology equipment or advanced machinery and devices, a significant part of which were imported. As a result, the investments were very import-intensive, and consequently the net exports and their contribution to the GDP have been negative for a significant part of the period since 1989 until now. Does this mean, therefore, that exports have had a negative contribution to GDP growth?

In order to assess the real contribution of exports to GDP growth in the years 1995-2014, the authors of this article have employed modern methods from the literature concerning the global value chains, which has been developing rapidly since the late 1990s, but which is derived from the methods developed in mid-20th century by Wassily Leontief. The authors used so-called international tables of inter-sectoral flows (international input-output tables), that is, detailed information on the structure of the production processes in the most important countries of the world and the flows of intermediate goods between the individual production sectors. These datasets made it possible to determine what part of the added value created in each country (that is, approximately, the GDP) goes to the domestic market and what part is exported.

These measures show the true contribution of exports to GDP and presented over time (following appropriate adjustments for price changes) they enable us to assess the real contribution of exports to economic growth. Such a decomposition also allows us to take into account the exports of value added from sectors that are not exporting directly. For example, the business services sector creates services provided to the exporting sectors in manufacturing. As a result, the value added created in services is indirectly exported by the exporters from the manufacturing sector. The relationship between the GDP calculated from the supply side of value added and the GDP calculated in a traditional way is shown in the figure.

The results presented in the paper entitled “Unraveling the economic performance of the CEEC countries. The role of exports and global value chains” indicate that the role of exports and vertical specialization was very important in the economic growth of Poland. The average contribution of exports to GDP growth in Poland amounted to approximately 1.8 percentage points in the years 1995-2014. Considering that the average annual rate of GDP growth in this period amounted to approximately 3.7 per cent, this means that exports were responsible for about 47 per cent of the economic growth. Interestingly enough, the importance of exports has increased over time. In the years 1995-2003, that is, at the beginning of the process of Polish enterprises’ economic integration with the global economy, the share of exports in GDP growth amounted, on average, to 31 per cent. Meanwhile, after 2008 the relative contribution of exports to economic growth already amounted to about 66 per cent.

The role of exports in economic growth varied considerably between the individual economies of the European Union. On the one hand, exports played a predominant role in the economies of CSE, which were in the process of economic convergence and catching up with the EU15 countries. In the years 1995-2014, the average share of exports in the growth of value added in Slovakia, Hungary and the Czech Republic amounted to 87 per cent, 78 per cent, and 70 per cent, respectively. At the same time, in the economies of Western Europe, international trade contributed to economic growth to a lesser extent. The average share of exports in the economic growth of France, the United Kingdom and Spain in this period amounted to 34 per cent, 26 per cent, and 32 per cent, respectively. One exception in this group is Germany, whose increased production capacities were the result of that economy’s export expansion.

The important role of international integration within global supply chains is confirmed by the results of decomposition that enable us to take into account the impact of changes in the structure of the linkages between the sectors. In Poland, as in the other economies of CSE, the effect of changes in the structure of the linkages between the individual industries accounted, on average, for 20 per cent of the GDP growth in the years 2003-2014. The situation was completely different in the economies of Western Europe, where the changes in the network of linkages between the sectors reduced the long-term rate of economic growth. This process was associated, among other things, with the relocation of some production processes from the EU-15 to the CSE countries.

The results of more detailed decomposition of the changes in the exported value-added help us better understand the phenomenon of the large role of value added exports. Firstly, almost 60 per cent of the increase in exported value added can be attributed to intermediate goods. Therefore, it is not the export of finished goods that proved crucial for economic growth. Secondly, the value added exported from Poland was used primarily to produce finished goods in markets located in close geographic proximity. Just as in the traditional statistics, the economy of the European Union plays a dominant role here. Thirdly, the increase in Polish exports of value added were mostly driven by consumer goods (about 60 per cent) and investment goods (30 per cent). The above characteristics prove that over the last two decades Poland’s role as an exporter of intermediate goods, and therefore a supplier in the local network of linkages between the sectors, has strengthened.

Jan Hagemejer and Jakub Mućk are the experts of the Economic Analyses Department at Poland’s central bank, NBP.

The views expressed in this article are the private views of the authors and are not an expression of the official position of the NBP.

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