Export-led growth in Central and Eastern Europe

Jan Hagemejer, Jakub Mućk 29 May 2019

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In Central and Eastern European countries (CEECs), globalisation overlapped with the economic transition and integration with the EU, and the large amount of structural change that occurred at that time. This involved a gradual removal of barriers to trade and international capital flows. 

CEEC economies have become the manufacturing backbone of the European economy, due to their tight integration with regional global value chains (GVCs), a high degree of vertical specialisation in the production of intermediate goods (see, for example, Hummels et al. 2001 for technical introduction and Baldwin 2014 for a historical perspective), and a reliance on intermediate imports and FDI. 

The role of exports

Exports from CEEC economies have more than doubled relative to GDP through the last two decades, but followed by a substantial increase in imports. Net exports have been persistently negative for CEECs. This measure may not provide an accurate assessment of the contribution of exports to growth (Kranendonk and Verbruggen 2008, Cardoso et al. 2013), because it not only controls for the value of imported intermediates in the value of exports, but also takes into account the varying import-intensity of final demand components. 

In particular, in a highly export-oriented developing country with fast export growth, the overall contribution of net exports to growth is likely to be dragged down by the continued investment needs of a growing economy.

We have analysed the growth structure of the economies of CEECs between 1995 and 2014 (Hagemejer and Mućk 2018, forthcoming). We propose a novel approach to growth accounting. Instead of investigating the role of the factors of production (labour and capital) or standard aggregate demand components (e.g. consumption, investment and net exports) we decompose GDP into the value added that is ultimately absorbed at home (the domestic demand contribution to GDP) and the value added that is absorbed abroad (the exports contribution to GDP). 

To do this, we use an assessment of export contribution to GDP growth based on modern measures of value added in trade (Johnson and Noguera 2012). By applying the sectoral value added deflators we are able to convert these measures to annual changes, and decompose the growth of GDP into these two components. 

Exports contribute to GDP

Our results suggest that the role of exports and vertical specialisation was substantial for our period of study between 1995 and 2014. The average annual export contribution to the GDP growth in Poland was 1.8 percentage points (Figure 1). Considering the average annual GDP growth over that period was 3.7%, exports were responsible for around half of GDP growth. 

The role of exports over this period varied across Europe. On one hand, in the CEEC economies that converged over time to the EU15, exports were dominant. The average share of exports in overall economic growth in Slovakia, Hungary, and Czechia were 87%, 78%, and 70%, respectively (Figure 1). 

On the other hand, in the advanced economies of the West the contribution of exports to growth was much lower: 34% in France, 26% in the UK and 32% in Spain. Only in Germany were exports a predominant growth component.

Figure 1 Value added growth and its components for European countries, average between 1995 and 2014 (%)

To evaluate how GVC development has contributed to economic growth in CEECs, we analyse the development of input-output linkages between the analysed countries and their trading partners. In Poland, Slovakia and Czechia, the effects of changes in the intersectoral linkages were responsible for roughly 20% of GDP growth between 2003 and 2014 (Figure 2). 

In contrast, in western Europe, the changes in input-output linkages had a negative effect on economic activity. This process may can be attributed to offshoring of tasks towards CEECs.

Figure 2 Value added growth and its components for European countries between 2003 and 2014, annualized (%) 

More detailed decompositions provide stylised facts:

  • Intermediates are important. At least 60% of the growth of exported value added can be attributed to the exports of intermediates. Therefore, it was not the exports of final goods that was key to economic growth. This highlights the role of vertical specialisation and GVC participation, as the international production process has become more fragmented, and now that firms in CEECs have specialised in these stages of production, located far from final demand. 
  • Goods are sold within EU. The value added exported from CEECs was predominantly used in production of final goods abroad that were mainly sold to other EU member countries. 
  • There are systematic differences in the structure of exported value added among CEECs. For instance, in Poland, the foreign private consumption demand played the largest role in economic growth. In Slovakia, Czechia, and Hungary, the role of foreign investment demand was slightly higher. 

The predominant role of exports and vertical specialisation sheds new light on convergence. We now know that exported value added was the main source of economic convergence among EU countries. Our results suggest that the pace of convergence in exported value added was around four times faster than the value added absorbed in the domestic market.

References

Baldwin, R (2014), "Trade and Industrialization after Globalization’s Second Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters", in R C Feenstra and A M Taylor (eds.), Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century, University of Chicago Press: 165–212.

Bernard, A B and J B Jensen (1999), “Exceptional exporter performance: cause, effect, or both?” Journal of International Economics 47: 1–25.

Cardoso, F, P S Esteves, and A Rua (2013), “The import content of global demand in Portugal”, Banco de Portugal Economic Bulletin.

Hagemejer, J and J Mućk (2018), "Unraveling the economic performance of the CEEC countries. The role of exports and global value chains", NBP working paper 283, Narodowy Bank Polski, Economic Research Department.

Hagemejer, J and J Mućk (2019), "Export-led growth and its determinants. Evidence from Central and Eastern European countries", World Economy.

Hummels, D, J Ishii and Kei-Mu Yi (2001), "The nature and growth of vertical specialization in world trade", Journal of International Economics 54(1): 75-96.

Johnson, R and G Noguera (2012), "Accounting for intermediates: Production sharing and trade in value added", Journal of International Economics 86: 224–236.

Kranendonk, H and J Verbruggen (2008), "Decomposition of GDP Growth in Some European Countries and the United States", De Economist 156: 295-306.

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Topics:  Europe's nations and regions Industrial organisation International trade

Tags:  value added, central Europe, Eastern Europe, growth, growth accounting, transition, exports, global value chain, GVC

Head of Division, Economic Analysis Department, National Bank of Poland

Economic Advisor, National Bank of Poland

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