Exporting is not just a matter of cutting costs

  • 24/12/2018
  • 1 min reading time

As it is well known, the relationship between a country’s production costs and export success is not clear-cut since there are two offsetting factors at play (see here for a good reference). On the one hand, globalisation and the intensification in competition suggests that exports should become more sensitive to costs, enabling the enterprises and countries that manage to export more cheaply to acquire a larger market share. On the other hand, product competition is increasingly focused around quality, variety, sophistication and technological/innovative content. From that perspective, price or cost competitiveness does not necessarily yield better results for exporters.

Having analysed data broken down by product category for the eurozone top six exporters, in a recent paper we show that a decrease in production costs is not the only factor relevant to stimulating exports. In particular, our findings suggest that cost competitiveness (measured using unit labour costs or ULCs) alone does not explain export success (measured as a given country’s share of world OECD exports). This idea is consistent with the first paper mentioned above as well as with a more recent study that focuses on quantifying the importance of price adjustments in explaining the trend in Spanish exports. In this study the authors find that the elasticity of Spanish exports to foreign demand is higher than their price elasticity.

All this suggests that there are other factors beyond cutting costs -such as the firm’s innovation activity, R&D intensity, or its ability to identify and satisfy foreign demand- which may also be significant to driving growth in manufacturing exports. From that standpoint, the argument can be made that it is important to move beyond the internal devaluation practices adopted to tackle the crisis towards new measures aimed at recapitalising the economy (be it Catalan, Spanish or EU) in all its facets including physical capital, technological capital and, above all, human capital.

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