In 2003 the EU15 took almost 62% of Latvia’s exports, but in January-October 2006 this share had reduced to less than 44%. Conversely, the economies of Latvia’s two Baltic neighbours, Estonia and Lithuania, have grown rapidly in recent years, and their share in Latvia’s foreign trade has increased accordingly. On the import side, Germany is still the most important country, providing some 15% of Latvia’s imports, especially machinery and cars, which is another way of saying that Latvia is a good German customer.
The IMF economists also say this:
In the aftermath of the Russia crisis, Latvia successfully reoriented the destination of its exports, but failed to transform its product structure. Exports therefore remain concentrated in resource and labor-intensive goods (wood and wood products comprise 30 percent of exports), embodying inputs of low- and medium-skill blue collar workers. Among the EU8, Latvia has—by a wide margin—the largest share of low-tech, labor-intensive exports which compete directly with low-cost countries. In contrast to several other new EU members which are moving up the technology ladder, in recent years Latvia has seen some regression in the skill- and technology content of its exports.
The Dynamics of Product Quality and International Competitiveness
Stefania Fabrizio, Deniz Igan, and Ashoka Mody
IMF WP 07/97
Despite the appreciation of the exchange rate, the eight Central and Eastern European countries (the CEE-8) that entered the European Union in May 2004 have achieved a decade of impressive export growth, expanding significantly their shares of world markets. Does this mean that the real exchange rate is irrelevant? If not, what other factors compensated for the appreciation to explain the apparently strong competitiveness of these economies? And will these favorable factors continue to power export growth? This paper places in international context the achievements of the CEE-8 and helps more broadly to identify the determinants of international competitiveness. Building from data at the six-digit level of disaggregation, it shows that the CEE-8 made an impressive shift in product quality and in the technological intensity of exports, and that these shifts associated with the structural transformation were also associated with increased market share. The analysis strongly suggests that, when trading in international markets, countries benefit from higher product quality. However, while the structural transformation achieved was valuable in raising market shares, the easy gains from this process may be over.
The IMF selected issues had this to say:
Analyzing the product composition of Latvia’s exports can also shed light on the ease with which Latvia can expand its export markets. This is done by examining the quality and technology content of Latvia’s exports, and by analyzing demand growth in the markets in which Latvia competes and the characteristics of its major competitors. 24. To assess the quality and technology content of Latvian exports, we apply three alternative classifications:10 (i) Technology and resource content, whereby exports are divided into (a) low-tech and labor-intensive products, (b) resource-intensive products, and (c) medium- to high-tech products (Appendix II, Figure 1). (ii) Comparative advantage, in which exports are classified into (a) mainstream manufacturing products, (b) labor-intensive products, and (c) capital-intensive and techdriven products (Appendix II, Figure 2). (iii) Skill requirement in which exports are allocated into (a) low-skill products, (b) mediumskill blue-collar products, and (c) medium-skill white-collar and high-skill products (Appendix II, Figure 3).
Data indicate that Latvia’s exports remain concentrated in resource- and labor-intensive goods that are produced with low- and medium-skill blue-collar labor.
Moreover, this structure has changed very little since 2000. In contrast, all other EU8 countries have steadily increased the technology content of their exports, particularly the Czech Republic and Hungary—which have also been the largest recipients of manufacturing FDI. This finding does not bode well for Latvia’s export prospects. This is confirmed by Fabrizio, Igan, and Mody (2006), who find that improved export quality and technology upgrading among the EU8 during 1994-2004 contributed significantly to the increase in their international market shares.
The second approach to analyzing the structure of Latvia’s exports examines the speed of growth of individual export markets and the intensity of price competition that Latvia could face. Figure 11 depicts ten industrial branches that accounted for more than 70 percent of Latvia’s export sales in 2004. The size of each circle represents the branch’s share of Latvian exports. The vertical position of a circle measures the share of emerging market countries in global trade for that industry. A horizontal axis is drawn at 28 percent, which reflects the average presence of emerging markets in world trade. With the exception of pharmaceuticals, all of Latvia’s major export sectors currently face an above-average degree of emerging market competition, with some (e.g., textiles) facing very high levels of competition from low cost countries. The horizontal axis captures the strength of global market growth. Each sector is positioned horizontally according to how rapidly the worldwide market for that industry grew in nominal U.S. dollar terms—relative to the 37 percent increase in world trade—during 2000–04.
This analysis finds that Latvia’s exports are concentrated in industries in which world demand is growing relatively slowly, and where there is a heavy presence of low wage countries. In Figure 11, the most desirable location for an industry is the south-east quadrant, with the least desirable being the north-west quadrant. The intuition of this analysis is that Latvian exporters could do well even if they were losing market share to low-cost producers provided the global market for that product is expanding rapidly. However, only two of Latvia’s major export industries—iron and steel, and pharmaceuticals—are growing rapidly worldwide, and they accounted for just 12½ percent of Latvia’s exports in 2004. Moreover, nearly 30 percent of Latvia’s exports are in goods where competition from emerging markets is above average or intense (clothing and apparel, textiles and fabrics, and electrical equipment).11 Latvia’s largest export category—wood and cork—would not seem to offer significant growth potential since market growth has been marginally below average, while emerging market countries are participating in the sector at close to the average for all industries.
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