REGIONAL COOPERATION AND ECONOMIC INTEGRATION
REGIONAL COOPERATION AND ECONOMIC INTEGRATION
REGIONAL COOPERATION AND ECONOMIC INTEGRATION
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PART II:<br />
VAR and to test if one may reject the restrictions implied by the reduced rank of Π .<br />
136<br />
3.1. The analysis of exports<br />
The econometric analysis of exports is based upon the variables which represent the<br />
basic elements of price and cost competitiveness (Jefferson Institute, 2006). Accordingly,<br />
the neo-classical economic theory special attention pays to the real exchange rate (RER)<br />
and real effective exchange rate (REER) as a measure of price competitiveness (Edwards,<br />
1989 and Lipschitz, 1979). In addition, the appreciation/depreciation of the real exchange<br />
rate of the particular country exhibits loss/gain in the levels of competitiveness (Edwards,<br />
1989). The equilibrium real exchange rate is to be implemented as a reference to determine<br />
the currency misalignment (RER appreciation or depreciation). Principally, there are<br />
few problems related to RER as a measure of competitiveness (Minale, 2002). At first,<br />
measuring the competitiveness as a relative price may certainly narrow the definition of<br />
competitiveness. Moreover, competitiveness of the economy is not to be just a function<br />
of wages and prices (relative to other countries) but it is also greatly influenced by the<br />
non-price factors. Secondly, the intuition behind RER as a measure of competitiveness<br />
is hardly applied to developing countries which have the advanced ones as their trading<br />
partners (Minale 2002). Implicitly, the RER definition is based upon the assumption of the<br />
tradable homogeneity, as well as availability of technology to all the countries without cost.<br />
Productivity measures are also very important to study the export competiveness. However,<br />
competitiveness is not to be determined merely by productivity, but also cost of inputs in<br />
the production. Indeed, a well-known measure of international competitiveness combines<br />
labor cost and productivity into a single measure of labor cost per unit output. Unit labor<br />
cost (ULC) are broadly used for international comparisons of cost competitiveness but also<br />
have been compared in terms of ULC trends or the real effective exchange rate. The meaning<br />
of the ULC concept might be even better understood when expressed in terms of the ratio<br />
of labor compensation per unit of labor (wage or the total labor cost per employed person<br />
or per hour worked) and the productivity of labor (measured as output per employed person<br />
or per hour). The country may therefore improve its competitiveness either by decreasing<br />
its labor cost per person employed or raising the productivity performance. Unit labor<br />
costs are most easily measured and best understood for tradable sectors of the economy<br />
but it is also useful for analysis at the level of the aggregate economy. Noteworthy is here<br />
to mention that a change in unit labor cost in the non-tradable sector also impacts the<br />
tradable sector, in particular when non-tradable products or services are used as an input<br />
by the tradable sector. Moreover, many service industries are becoming more tradable<br />
themselves, which is an indication that the distinction between tradable and non-tradable<br />
sectors of the economy is becoming increasingly anachronistic. An exclusive focus on<br />
unit labor cost in the manufacturing industry may therefore be a too restrictive approach<br />
to study competitiveness (van Ark et al, 2005). Even for tradable, the ULC index may<br />
not to be considered as comprehensive measure of competitiveness for several reasons.<br />
Firstly, ULC measures deal exclusively with the labor cost. Although they account for the<br />
major share of inputs, the cost of capital and intermediate inputs are to be also the crucial<br />
factors for comparisons of cost competitiveness between countries. Secondly, the measure<br />
reveals only the cost competitiveness as some durable consumer and investment goods<br />
competitiveness is also determined by other factors than costs, such as technological and<br />
social capabilities and demand factors. Thus, in the literature of competitiveness attention<br />
is given not only to the factor input, but also the innovation and production capacity<br />
(Porter, 1990, Fagerberg et al, 2005). The importance of export supply function is specially<br />
emphasized in the literature (Stern, Francis and Schumacher, 1976) since most of the