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Former Yugoslav Republic of Macedonia: Selected Issues

Author(s):
International Monetary Fund. European Dept.
Published Date:
September 2015
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Export Competitiveness in FYR Macedonia1

  • Export performance in FYR Macedonia has been strong over the last decade, critically contributing to overall growth. Exports have been re-oriented towards new products with higher technological content, allowing for the build-up of revealed comparative advantages in these products. Our analysis based on Constant Market Share analysis shows that the overall competitiveness gap of FYR Macedonia with respect to other emerging European countries has narrowed.
  • There appears to be significant room for quality improvement, including for the most successful export products. Also, while the contribution of exports to GDP growth has been significant, spillover into the domestic tradable sector from the foreign investment led export sector remains limited so far.
  • Despite a relatively low potential due to the small size of the economy, FYR Macedonia has received significant FDI which has faciliated links with the European supply chains. Financial incentives, competitive wages and improvements in business environment, have successfully attracted FDI and contributed to FYR Macedonia’s export diversification. To further deepen integration with European supply chains and foster backward linkages to the domestic economy, better infrastructure as well as additional reforms to improve skills and operating environment for the domestic private sector is needed.

A. Introduction

1. For a small open economy such as FYR Macedonia, improving export competitiveness is critical to bolster economic growth and reduce unemployment. In the short to medium run, an improved export performance is needed to strengthen the trade balance and reduce the country’s dependence on remittances from migrant workers to raise national income. In the longer run, technological and managerial spillovers typically associated with the establishment of foreign exporting firms can be expected to foster backward linkages to local producers, thus promoting the integration of the domestic tradable goods sector into global supply chains and supporting sustainable growth. For these reasons, attracting foreign direct investment (FDI) and building up export capacities have been the linchpin of the authorities’ economic policy over the last decade.

2. Strong export performance and economic convergence have gone hand in hand in successful emerging European countries. Higher exports and trade openness have been associated with better resource allocation and the development of a resilient tradable goods sectors in the literature (see, e.g., Edwards, 1993), ultimately being conducive to higher standards of living. This positive correlation between exports and real GDP per capita has held up in Central and Eastern European Countries that are members of the European Union—henceforth New Member States (NMS)—over the last decade (Figure 1). While the correlation appears weaker for some Balkan economies, for FYR Macedonia, real GDP growth has been strongly associated with export growth (Figure 1).

Figure 1.FYR Macedonia and Peers: Export and GDP Growth

Sources: IMF, WEO; and IMF staff Calculations.

3. Against this backdrop, this research aims at investigating FYR Macedonia’s export performance relative to other Western Balkan (WB) countries and the NMS. In Section B, we take stock of recent export performances relative to peers, by looking at export diversification, revealed comparative advantages, export product quality, and the contribution of exports to the domestic economy. Section C tries to identify contributing factors to competitiveness while Section D focuses on the contribution of FDI to greater integration into global supply chains. The concluding Section E offers policy advice to enhance the contribution of the domestic export sector to growth.

B. Comparative Evaluation of Export Performance

4. Since the mid-2000s, FYR Macedonia’s overall export performance has been better than those observed in other Balkan countries. Exports of goods and services have represented between 30 and 45 percent of nominal GDP, well above the shares prevailing in peer WB countries (Figure 2). Such levels are broadly in line with those observed in more advanced Central and Eastern European Countries such as the Czech Republic, the Slovak Republic and Hungary in the preceding decade. Despite this higher base, export growth in FYR Macedonia has only fallen slightly short of that in peer WB countries, and has proved resilient to the global financial crisis. The ability of Macedonian exporters to maintain or even increase their positions during times of severe contraction in trade flows has allowed for steady market share gains within the European Union, as well as in the world.

Figure 2.FYR Macedonia and Western Balkans: Export Performance, 2004–2014

Sources: IMF, DOTS; IMF, WEO; and IMF staff calculations.

Western Balkans: Export Contribution to Growth, 2010–2014

(Percent)

Sources: IMF, WEO; and IMF Staff Calculations.

5. Exports have contributed more to GDP growth in FYR Macedonia than in other Balkan countries. While net exports have been a negative contributor to growth, notably due to the high import content of new investments and the importance of low-end assembly production, exports have provided major contributions to real growth, helping to pull the economy out of the short-lived recession experienced in 2012 in the wake of the global financial crisis. Exports stemming from the Technological Industrial Development Zones (TIDZ) have been growing at double digits in the last few years, representing about 40 percent of total exports in 2014.

6. Reflecting developments in the TIDZ, FYR Macedonia has recently built up revealed comparative advantage (RCA) in new products. Overall, the country’s main comparative advantages remain in the production of intermediate and consumer goods (Figure 3). More recently, RCA has diversified away from traditional product lines to more capital intensive goods. While remaining highly competitive in the production of textiles, beverages, tobacco, and food products, the country managed to dramatically push its advantage in chemical products.

Figure 3.FYR Macedonia: Revealed Comparative Advantages, 2005–2013

Sources: World Bank WITS; and IMF staff calculations.

7. However, the diversification trend is less pronounced when compared to others in the region. An analysis of export diversification by products and partners during the 2000s reveals the following.

  • The overall level of export product diversification (which is demonstrated by the ‘intensive margin’ in the concentration indicator in Figure 4)2 has remained below that of other WB countries and the NMS until 2010—notwithstanding some improvement since 2008, which reflect progress regarding insertion into European supply chains.
  • The overall level of export partner diversification seems to have remained stable during 2000–2010 and may have even decreased in recent years in the context of a gradual replacement of neighboring countries by a limited subset of ‘core’ euro area economies as the main trade partners The degree of diversification by partners has been lower than in the NMS and slightly higher than the WB peers (Figure 4).

Figure 4.FYR Macedonia and Peers: Export Diversification by Products and Partners, 2000–2010

Source: IMF staff calculations.

Note: West Balkans: Albania; Bosnia and Herzegovina; Croatia; FYR Macedonia and Serbia. New Member States: Bulgaria; Czech Re public; Estonia; Hungary; Latvia; Lithuania; Poland; Slovak Republic; and Slovenia.

8. There appears to be significant room for improvement in the overall quality of Macedonian export products. Despite successful integration into European supply chains and the build-up of new RCAs, the overall improvement of export quality has been less pronounced during 2000–2010 than, and remains below the average levels observed in, the NMS as well as WBs.3 While the gap between the quality provided by Macedonian exports and that demanded by importing destinations have narrowed over time, it remains significant (Figure 5). Notwithstanding the caveats attached to the construction of quality indicators, which rely on adjusted unit values to—very imperfectly—proxy the ‘intrinsic’ characteristics of exported products, these trends highlight room for improvement. At a disaggregated level, room for quality upgrade appears warranted even for the most successful export products, such as automobile components. When assessed against all other countries using percentile rankings, the quality of exports in the manufacturing and chemical sectors turns out to be just average—a situation which may be ascribed to the very elevated quality standards required for specialized industrial products (such as wiring or electronic circuits) to be exported to the EU, and to the downstream nature of production performed by FYR Macedonia (Figure 5).

Figure 5.FYR Macedonia and Peers: Export Quality and Room for Improvement

Source: IMF staff calculations.

Note: West Balkans: Albania; Bosnia and Herzegovina; Croatia and FYR Macedonia. New Member States: Bulgaria; Czech Republic; Estonia; Hungary; Latvia; Lithuania; Poland; Slovak Republic; and Slovenia.

9. Overall, FYR Macedonia’s competitiveness gap with respect to other emerging European economies is strongly narrowing. A Constant Market Share Analysis (CMSA) for FYR Macedonia helps analyze whether the country’s exports growth has been due to gains in competitiveness, or driven by higher world demand, or demand from particular export markets or for particular commodities (see the Appendix for a description of the methodology). The CMSA can be used to compare FYR Macedonia’s export growth with that of a comparator group (in this case, other emerging European economies) and sort out how much of the export growth difference is due to ‘intrinsic’ competitiveness rather than the composition of exports and markets. We thus assess FYR Macedonia’s export performance during 2000–07 and 2008–14 based on a product disaggregation at the SITC 1-digit level, with export market disaggregation into three broad groups: the EU-28, Emerging Europe outside those in the EU, and the rest of the world.

  • During 2000–07, FYR Macedonia’s exports underperformed relative to the comparator group as shown by a market growth effect higher than 100 percent: if the country were to keep its relative market share constant (i.e., grown by the average rate experienced by the comparator group), exports should have been higher by 91 percent. The underperformance was driven by lower demand commodity composition, and a large competitiveness gap.
  • In the more recent 2008–14 period, FYR Macedonia’s exports marginally over performed those of comparator countries as shown by the market growth effect being lower than 100 percent. A positive commodity composition effect and a positive market distribution effect (though smaller than in the previous period) slightly outweighed the narrowing, but still negative, competitiveness effect.
  • Overall, export performance improved dramatically since 2007 relative to the comparator group, driven by faster demand commodity composition and a much lower competitiveness gap which nonetheless remains sizeable and calls for further enhancement of export quality and efficiency.
Constant Market Share Analysis of FYR Macedonia’s Export Growth(Percent)
2000–20072008–2014
Market Growth Effect19199
Commodity Composition Effect-2614
Market Distribution Effect11572
Competitiveness Effect-180-84
Source: World Integrated Trade Solution (WITS) Database; and IMF staff calculations.
Source: World Integrated Trade Solution (WITS) Database; and IMF staff calculations.

C. The Role of Domestic Policies for Export Success

10. FDI picked up in FYR Macedonia since the mid-2000s. FDI inflows were negligible until 1998 and increased moderately until the global crisis, along with the privatization of SOEs and the acquisition of large domestic companies by foreign investors. The largest acquisition was that of the national telecom operator by Magyar Telekom (Deutsche Telekom group) in 2001. The majority of FDI inflows, however, took place in the tradable sector, which turned out to be a supporting factor for the country’s exports. Against the background of the EU accession objective, FYR Macedonia has engaged in major policy moves since the mid-2000s to improve its business environment and provide incentives to attract FDI in tradable sectors as a major component of the country’s export strategy.

Figure 6.FYR Macedonia and Western Balkans: FDI Inflows and Composition of Stock

Sources: NBRM; UNCTAD, World Investment Report 2014; and IMF staff calculations.

11. A favorable tax policy has been a critical pillar of the country’s pro-FDI strategy. FYR Macedonia offers an attractive tax environment to investors: this includes a flat 10 percent tax on personal income and profits. Over the past few years, the implementation of these measures, combined with a relatively low revenue efficiency by regional standards, has contributed to a continuous decline in government-revenues-to- GDP ratio, in contrast to experience in other European emerging economies (text chart).

FYR Macedonia and Peer Countries: General Government Revenue

(Percent of GDP)

Sources: IMF World Economic Outlook; and IMF staff calculations.

12. Against the backdrop of a low potential, FYR Macedonia has fared reasonably well in attracting FDI compared with regional peers. At around 50 percent of GDP, the stock of inward FDI is above that of Albania and Bosnia, but below that of Serbia. Most FDI inflows in recent years have been greenfield and concentrated in the export-oriented manufacturing sector (as opposed to the financial and transport sectors as was the case in the early 2000s). FYR Macedonia’s comparative performance must be assessed against its relatively low FDI potential. The UNCTAD’s Inward FDI Potential Index captures four key economic determinants of the attractiveness of an economy for foreign direct investors (UNCTAD, WIR 2012). FYR Macedonia ranks as one of the lowest in the region in terms of potential mostly due to lack of natural resources market attractiveness due to its small size. While economic policies can do little to expand the size of the market and the country’s natural resource endowment, they can focus on enhancing manufacturing skills and FDI-enabling infrastructure (transport and energy). The authorities’ policies in recent years aimed at catching up in those areas.

FYR Macedonia and Peers: FDI stock per capita, 2011

(Thousands of US dollars)

Source: IMF, IIP Database.

Country rankings by Inward FDI Potential Index, 2011
Market

attractiveness
Labour cost

and skills
InfrastructureNatural

resources
Overall rank
POL1532262018
CZE6126303835
ROM6734473239
HUN6835504343
BGR9136404649
SVK5344626152
HRV103..239263
SRB102..516864
LTU3368577165
EST2986639775
LVA55737710080
SVN97852110281
BiH135..939193
ALB133..96114123
MKD1148784130130
Source: UNCTAD, World Investment Report 2012.
Source: UNCTAD, World Investment Report 2012.

13. Recent FDI have rebalanced towards industrial sectors. Since 2009, a gradual shift from services to industrial products has been observed. With respect to industry, investments have gradually branched out of traditional sectors such as food and metal processing into technology-intensive industries, in particular automotive components for which major global players have become FYR Macedonia’s main exporters. The structural shift in greenfield FDI reflects low labor costs, various incentives mentioned earlier, and improved business environment but also the opportunities offered by the geographical proximity to assembly plants in Central and Western Europe and Turkey, and the duty-free access to the European market. Other sectors attracting FDI include construction materials, residential construction, glass (e.g., for the packaging of agricultural products and wine), and food processing.

D. Spillovers into Domestic Economy

14. Spillovers of the FDI-led export sectors to the domestic economy have been limited so far. Anecdotal evidence suggests that the development of backward linkages between big foreign investors and potential domestic suppliers has been limited, largely owing to the inability of local producers to meet the technical and safety requirements needed to export towards the EU. Rather, small and medium-sized domestic firms of the sector mainly produce for exports to neighboring countries, with limited opportunities to integrate with the European supply chains. Overall, despite the build-up of significant export capacities, the domestic tradable sector remains insufficiently developed.

15. There are specific factors that impede the establishment of backward linkages with the domestic private sector. Generally, the prevalence of informality in the economy and the impediments to access finance are major constraints faced by private sector firms for doing business, by regional comparison (see also World Bank, 2013b). Domestic firms also face credit and liquidity constraints due to high collateral requirements, delays in collecting payments (on average requiring four months to collect claims), and weak private sector balance sheets. Private sector debt, fueled by both credit growth and external borrowing, has risen fast since mid-2000s. A cross-country analysis of private sector debt shows that FYR Macedonia’s private sector debt is high when compared to its fundamentals, such as interest costs and growth potential.4

FYR Macedonia and Peers: Top 5 Business Environment Constraints

(Percent of firms)

Sources: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank; and IMF staff calculations.

Notes: NMS-10: Bulgaria; Czech Republic; Estonia; Hungary; Latvia; Lithuania; Poland; Romania; Slovak Republic; and Slovenia. Western Balkan: Albania; Bosnia and Herzegovina; Croatia; Kosovo; FYR Macedonia; Montenegro; and Serbia.

16. Examples of successful integration of domestic firms into the global supply chain suggest the need for skilled labor and availability of production network. Central Eastern European countries have a qualified workforce and a long-standing tradition of machinery and transport equipment manufacturing. In these countries, the need for steel and metal products generated by car assembly plants was provided by domestic firms creating backward linkages with the economy. The industry also fostered forward linkages with the car services sector such as car repair services, fuel stations, car wash facilities, further contributing to employment growth. Furthermore, car production has favored the relocation of R&D centers from Western to Central Europe. Assembly plants have clustered in specific areas (such as West Slovakia, Eastern and Central Czech Republic, Southern Poland and Northern Hungary) connected by a network of road and railway infrastructures.

17. Limited spillovers into domestic economy in FYR Macedonia are partly due to constraints posed by shortages of skilled labor. Despite a record of macroeconomic stability and an improving business environment, FYR Macedonia continues to experience an unemployment rate of nearly 28 percent, along with skills shortages across sectors. Improvements have been noticeable over the last few years, especially with regard to better learning outcomes at the primary level and the effect of compulsory enrollment in secondary education. However, automotive firms, for example, continue to have difficulty filling not only management and technical positions, but also lower-skill positions. The export-oriented apparel industry generally attributes its shortage of skilled labor force to obsolete curricula at FYR Macedonian universities.

18. In the longer run, the innovative capacity of FYR Macedonian domestic firms needs to be strengthened. Human and financial resources are insufficiently geared towards R&D and innovation, owing to the country’s specialization in low- and medium-tech industries (World Bank, 2013a). Although R&D expenditure is almost exclusively funded by the government, public R&D expenditures in the country accounted for only 0.22 percent of GDP in 2012. Government-sponsored R&D facilities rarely invest in applied research and lack the mechanisms to transfer knowledge and technologies to the private sector. Brain drain, particularly in technical and engineering occupations, remains a major concern for the private sector and the scientific community.

E. Policy Lessons and Recommendations

19. FYR Macedonia’s strategic policy choices have borne fruit but not without costs. Tax breaks and other incentives have attracted FDI, mostly in the tradable sector, leading to the re-orientation of exports towards technology-intensive products, hence allowing for significant market share gains and a strong contribution of exports to growth. This has also generated employment. While an overall cost-benefit assessment remains to be done, this low tax environment has contributed to a decline in revenues as a share of GDP and rising public sector indebtedness.

20. The climb ahead would be more challenging. Two issues signal the need for structural reforms going forward. First, the room for fiscal incentives appears largely exhausted in light of low revenue levels, including when compared with other emerging European countries which also provide fiscal incentives to foreign investors. Hence, attracting additional FDI in the tradable sector would require improvements in fundamentals such as labor skills and infrastructure. Second, further reforms are needed to ease the operating environment for domestic private firms so as to strengthen backward and forward linkages with foreign firms.

  • Easing access of the domestic corporate sector to formal finance remains critical. High collateral requirement by banks is a problem for business development. Banks tend to not lend on the basis of business models and cash flow projections, but rather based on physical assets that can be pledged. Uneasy access to finance compounds the financial situation of the private sector. Policy priorities to help alleviate this problem include addressing crisis legacies of bad debts, and shortenings payment delays in the economy so as to ease domestic firms’ liquidity constraints.
  • Boosting higher education and skills would help lift a major constraint. The significant emigration of highly educated citizens holds back output potential. Replenishing the pool of lost skills by ensuring attendance at, and high standards of, local schools and universities would be critical. Technical and managerial skills such as business planning are key factors of a country’s integration into global supply chains. A more systematic negotiation of knowledge exchange and learning programs with incoming foreign investors would also help.
  • Improving infrastructure is needed to improve connectivity with trading partners. The scaling-up of public infrastructure, notably in the transport sector, is a welcome development—provided it is assessed in a cost-benefit investment framework and remains consistent with sustainable levels of public debt (see the next chapter: “FYR Macedonia: Fiscal Rules To Ensure Sustainability”).

Box 1.Indicators of Export Performance—Some Definitions

Export diversification by product or by partner is measured by the Theil index. The Theil index is a statistics commonly used to measure inequality, which computes the ‘distance’ between some parameter values and an ‘ideal’ egalitarian state where they would be the same for each member of a given population—akin to alternative measures such as the Gini coefficient. Its formula is given by:

Where x is the parameter of interest (in this paper, the value of export lines or the relative importance of export partners) and N is the total number of population members. A further decomposition of the index allows to distinguish an intensive margin that reflects the degree of inequality prevailing between the shares of existing parameter values (in our case, the value of active export lines or the importance of active trade partners), and an extensive margin that reflects the increase in the number of parameter values (in our case, a rising number of active export lines or of trading partners). In all cases, the higher the index, the more concentrated the distribution of the parameter across the population, so that declining trends are indicative of greater diversification. Thus, an increased dispersion in the value of already exported good categories would be reflected in a decline in the intensive margin, while the addition of new categories to the exported production would be indicated by a decline in the extensive margin; both developments would result in a decrease of the overall index, pointing to increased diversification.

Export quality indexes are calculated as unit values adjusted for differences in production costs and for the selection bias stemming from relative distance. Relying on an enriched version of the COMTRADE database over the period 1962–2010, country-specific quality indexes are computed in three steps by Henn, Papageorgiou and Spatafora (2013). First, unit values, i.e., the average trade prices for each product category taken as a proxy for export quality, are regressed on some measure of unobservable quality, exporter income per capita taken as a proxy for production costs, and distance between importers and exporters. Second, an augmented gravity equation is estimated for each product line, where the exporter-specific quality parameter estimated above interacted with the importer’s income per capita enters as an explanatory factor of import quality, further to distance, and importer and exporter fixed effects. Third, the regression results are used to calculate quality estimates for each product line. The indicator is available at different product classification levels, with higher values indicating higher quality levels. The indicator of room for quality improvement can subsequently be computed by reference to the average quality absorbed by a country’s importers. It is important to note that the methodology improves on, but still relies on, unit values as an—imperfect—proxy for export quality, thus reflecting the price valuation of goods on export markets rather than their ‘intrinsic’ characteristics.

Revealed comparative advantages measure the relative comparative advantages of countries for various export lines as evidenced by trade flows. The index is constructed as the proportion of an export product line in a country’s total exports to a specific destination country (in this paper, the EU) relative to the average share of the same product line in the total exports to this destination country. A comparative advantage is revealed ex post by trade flows if the index is above unity.

Box 2.FDI Incentives

The establishment of Technological Industrial Development Zones (TIDZs) has supported the FDI policy. TIDZs aim at attracting higher technology companies and are regulated by a specific legislation. A Directorate for Technological Industrial Development Zones has been established in 2000 and is operational since January 2002 so as to develop and supervise the zones. The first company to be operational in one of them was Johnson Controls (automotive components, USA) at the end of 2007. Since then, major German, American, British, and, more recently, Belgian firms have started outsourcing the production of components for the automobile industry in FYR Macedonia’s TIDZs. Those have replaced traditional trade partners—Kosovo, Bulgaria, and Serbia—as the main export destination. This move has reflected a marked shift in the production of tradable goods, which now predominantly consists of manufacturing goods. There are currently four operational zones (Skopje 1, Skopje 2, Stip, and Kicevo) while ten others are at various stages of development.

Incentives were put in place to encourage the establishment of firms in TIDZs. The measures offered by the Macedonian authorities match the characterization of FDI incentives proposed by UNCTAD (1994) as they are “designed to influence the size, location or industry of a FDI investment project by affecting its relative cost or by altering the risks attached to it through inducements that are not available to comparable domestic investors”.

Incentives cover a broad range of benefits. FYR Macedonia’s free economic zones provide a 10-year corporate tax holiday, and a broad range of additional incentives, including:

  • no customs duties and VAT on imported raw materials, equipment & construction materials;
  • 0% personal income tax for 10 years;
  • 0% property tax;
  • 0% excise taxes;
  • free connection to utilities;
  • up to EUR 500,000 subsidies for construction costs;
  • ‘green’ customs channel at the border for expeditious export to EU countries;
  • long-term land lease for a period of up to 99 years;
  • grants for training and job creation.

Such incentives are widely used across the region. Those adopted by FYR Macedonia come on top of a highly competitive wage environment and a stable currency exchange rate.

FDI Incentives
BiHBGRHRVCZEESTHUNLVALTUSVNPOLSRBSVKROUMKD
Cash grants/incentivesxxxxxxxxxxxxx
Tax exemptionsxxxxxxxxxxxxxx
Property assistance/other fiscalxxxxxxxxxxn.a.x
Training/labor marketxxxxxxxxxxxx
Guarantees/cheap financexn.a.xxxxxxxx
Target sectorsxxn.a.xxxxxxxxxxx
Sources: FDI Intelligence; FDI Atlas.com; national authorities.
Sources: FDI Intelligence; FDI Atlas.com; national authorities.

Box 3.Fostering Backward/Forward Linkages: Successes and Pitfalls

Slovak Republic

The integration of Slovakia into the global supply chains (GSCs) has been exemplary.1 The degree of openness of the economy, as measured by the sum of exports and imports of goods as a percent of GDP, has grown steadily from around 100 percent at the end of the 1990s to more than 170 percent in 2014. This expansion was supported by significant inflows of FDI and went hand in hand with a growing participation of the Slovak economy in GSCs. The share of foreign inputs and domestically-produced inputs used in other countries’ exports, which is a measure of a country’s participation in GSCs, increased from 50 percent in 1995 to 63 percent before the large trade collapse of 2008. Slovakia ranks second among OECD economies in terms of being integrated into GSCs. The country’s participation in GSCs significantly changed the structure of its exports, which shifted toward more knowledge-intensive sectors. For example, in the early 1990s, Slovakia showed no revealed comparative advantage (RCA) in the transportation and electronic sectors, which only started to emerge in 2007. Slovakia’s business cycle (exports and GDP) has become increasingly synchronized with Germany’s: foreign value added from Germany in Slovakia’s exports has increased from 5 percent in 1995 to 9 percent in 2008. Moreover, about one-fourth of Slovakia’s exports to Germany are re-exported to third countries.

Strong productivity growth and wage moderation played a critical role in Slovakia’s success. Triggered by FDI, productivity growth has been generated by the migration of the workforce from agriculture to high-growth manufacturing and services. Simultaneously, wages remained relatively lower than in other UE countries, even when adjusted for differences in productivity. This advantage was combined with the proximity of export markets, a favorable tax and business environment, and a qualified workforce having expertise in the automobile industry.

The Dominican Republic

The Dominican Republic (DR) successfully established special economic zones (SEZs), but generated weak backward linkages. With a program ongoing for more than 40 years, the country hosts world-class special economic zones and industrial parks that attract investment in manufacturing or outsource business-processing services. DR’s SEZ’s initially mostly established in the textile sector fuelled economic growth during the 1990s. They were hit by the expiration of trade preferences in textiles in the 2000s, and somewhat diversified. Based on WB-IFC Enterprise Surveys, Sanchez-Martin et al. (2015) find that foreign-owned firms have traditionally developed few backward linkages with the rest of the economy.

Lessons to better integrate FDI and domestic firms. The authors suggest that the enabling environment that has helped develop successful SEZs should also be implemented outside the zones. They recommend to ease the business climate and to improve connectivity with the zones, including through the removal of hurdles to trade with firms established in the zones. The study also highlights the risk of a migration of domestic firms into SEZs, which entails potential high fiscal costs. It finally underlines the value of investing in human resources so as to match the needs of foreign companies, especially those that produce increasingly complex manufacturing processes beyond assembling activities. Absent such policies, domestic exporters are likely to be confined to selling low value-added traditional products, while the more sophisticated transformation processes take place in the special zones, thus reinforcing a dual economy with limited positive externalities to domestic companies.

1 This country case is analyzed in Slovak Republic, IMF Country Report No. 13/262, Box 2. See also IMF Country Report No. 13/263 “The German-Central European Supply Chain—Cluster Report”.

Appendix I. Constant Market Share Analysis

According to the Constant Market Share Analysis (CMSA) approach, the market growth effect shows the increase in a country’s exports assuming its exports were to grow by the same rate as a comparator group, in percent of its actual export increase. If this is below 100 percent, the country is overperforming relative to comparators. If this is higher than 100 percent, the country is underperforming. The over or underperformance can then be decomposed into three components:

(i) a commodity composition effect: exports are concentrated in faster growing products;

(ii) a market distribution effect: exports are concentrated in faster growing markets; and

(iii) a competitiveness effect: exports growth is due to other factors (differentials in prices, taxation, productivity growth, quality, efficiency, …).

The actual increase in Macedonian exports between 2000 and 2014 (Δx) can be decomposed into:

Δx= Σ r x imarket growth effect
+ Σ r i x i - Σ r x icommodity composition effect
+ ΣΣ r i j x i j - Σ r i x imarket distribution effect
+ Δx - ΣΣ r i j x i jcompetitiveness effect

Where,

r = percent change in the overall exports of competitor countries5,

r i = percent change in competitors’ exports of SITC product i6,

r ij = percent change in competitors’ exports of SITC product i to market j,

x i = FYR Macedonia’s exports of product i at the beginning of the period

x ij = FYR Macedonia’s exports of product i to market j at the beginning of the period

J 1-3 = EU-28, Emerging and Developing Europe, World.

FYR Macedonia: Constant Market Share Analysis with Respect to EM Europe(Millions of US dollars)
2000–20142000–20072008–2014
Σ r xiΣ ri xiΣΣ rij xijΔxΣ r xiΣ ri xiΣΣ rij xijΔxΣ r xiΣ ri xiΣΣ rij xijΔx
[1][2][3][4][1][2][3][4][1][2][3][4]
SITC 0313416690322193176320182115246382140
SITC 1616852140394379282487789628851616
SITC 22332184352181441172581207910219398
SITC 330037238624185231239102777985-78
SITC 4113240107912015710
SITC 52813825459771731802656758107163911
SITC 62344206334124741443140024521045716538858-571
SITC 739644281495924430557967705384892
SITC 817811086175053310976101037375349362616158
SITC 9223971-1133843-31042
Total629759039545361038773349569120331562178029081577
(Percent)
Market Growth Effect=[1]/[4]17419199
Commodity Composition Effect=([2]-[1])/4-11-2614
Market Distribution Effect=([3]-[2])/[4]10111572
Competitiveness Effect=([4]-[3])/[4]-164-180-84
Source: WITS Database; and IMF staff calculations.
Source: WITS Database; and IMF staff calculations.
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1Prepared by Shan Chen, Marc Gerard and Patrick Gitton.
2See the box on export performance indicators for a description of the measurement metrics used in this section. A higher value of the index indicates higher concentration of products/partners (hence less diversification). The data are available only until 2010.
3Data for export quality are not available beyond 2010.
4See Central, Eastern and Southeastern Europe, IMF Spring 2015 Regional Economic Issues.
5Emerging Europe: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Kosovo, Lithuania, Montenegro, Poland, Romania, Serbia, and Turkey.
6Product disaggregation at STIC 1-digit level (9 categories).

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