BRIEF

Trade Competitiveness

April 21, 2014

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World Bank Group Experts Help Countries Compete in Global Markets
  • An environment that fosters private-sector growth is vital to firms’ ability to compete on international markets
  • Competitiveness is central to job-creation and, ultimately, to the World Bank’s goals of eliminating poverty and increasing shared prosperity
  • The World Bank Group has developed a range of tools for policy-makers to better understand and exploit a wide range of factors that impact competitiveness, including countries' export composition, export sophistication level, and export diversification

In recent years, support of trade growth has moved beyond trade policy to embrace a wider set of 'behind the border' issues, focused on establishing an environment conducive to the emergence of firms that are competitive in both export and domestic markets. Competitiveness is central to stimulating private sector growth and job-creation. This, in turn, is vital to the World Bank Group’s twin goals of eliminating poverty and increasing the incomes of the poorest 40 percent in countries around the world. Better integration in global flows of trade and investment helps firms to be competitive and, in turn, generate higher incomes through better-paid jobs.

Trade competitiveness is no longer about viewing exports and export performance in isolation. Increasingly, it is the result of strong interdependencies between imports and exports, as well as international flows of capital, investment, and know-how. In addition, modern, competitive services are vital as intermediate inputs to a high-performing private sector. Indeed, the interactions between all of these factors determine firm productivity. Through trade and foreign investment, developing countries can benefit from a range of ideas that come from abroad: intellectual property, trademarks, managerial and business practices, marketing expertise, and organizational models. The flows of goods, services, people, ideas, and capital are now interdependent and should be assessed jointly.

Finally, a phenomenon important to developing countries is the emergence and endurance of global value chain (GVC) production. The flow of know-how from developed to developing countries often takes place in the context of vertical trade and production chains that cross many borders from raw material to finished product. Taking advantage of that structure is a key determinant of industrial development in the 21st century. Developing countries can now industrialize by joining GVCs instead of building their own value chain from scratch, as Japan and the Republic of Korea had to do in the 20th century.

In this context, World Bank Group experts provide research, analytical work and other country-specific assistance to country officials trying to address barriers to firm productivity and to private industry’s competitiveness in the international marketplace. Understanding how trade flows work and how they contribute to countries’ industrialization through GVCs is a fundamental precondition to ensure that the countries deliver pro-development outcomes. World Bank Group experts help developing countries’ policymakers and private sector leaders better understand and take advantage of this dynamic.

For example, the World Bank Group can help countries perform analysis of the determinants of their competitiveness in the international markets (i.e. trade competitiveness). Professional technical assistance can identify drivers of growth and the relative importance of different factors of production, including technology, access to foreign vs domestic assets, etc. The World Bank’s trade experts can perform firm-level analyses of trade and trade determinants, which look at trade and productivity jointly. These techniques have proven important to better understanding productivity and export performance.

The World Bank’s technical assistance also can include concrete proposals for embedding national GVC policies into broader portfolios of policies aimed at upgrading skills, physical and regulatory infrastructure, and enhancing social cohesion. It also helps countries better understand whether entry into GVCs furthers development goals, such as enhancing job prospects for workers at home.

Tools for analysis

The World Bank Group has developed a range of diagnostic toolkits, indicators and analytical products that help countries understanding their position and competencies in national and global markets. This approach connects trade outcomes, potentials and diagnostics to deliver country-specific policy advice. It draws on the latest research and techniques, and increasingly relies on firm-level data of imports, exports, productivity, balance sheet and census characteristics as well as cross-country indicators to benchmark country performance.

Descriptions of some of the data tools and customized assistance available for trade competitiveness analysis are below:

  • The Trade Outcomes Indicators is a data module that allows for review of four dimensions of country-level trade performance: (i) the composition, orientation, and growth of exports and imports; (ii) the degree of export diversification across products and markets; (iii) the level of sophistication of a country’s main exports; and (iv) the survival rate of its export relationships. This framework allows the analyst to evaluate the dynamics of the country’s exports along different margins of trade and to benchmark specific countries’ position with respect to their peers. The toolkit can be used to assess the competitiveness of a country’s overall basket of products as well as specific traded sectors. It facilitates the identification of the primary constraints to improved trade competitiveness and the policy responses to overcome these constraints.  
  • Trade Competitiveness Diagnostic Toolkit (TCD). The TCD is a simple guide that facilitates a systematic assessment of a country's position, performance, and capabilities in export markets. The TCD combines quantitative analysis – including comparison of the country against global averages, regional and income-level peers – with an emphasis on in-depth, qualitative analysis, focusing on in-country interviews with key stakeholders across trade value chains. The TCD includes two components:
    • Trade Outcomes Analysis: a quantitative and qualitative analysis of historical trade organized around four components: 1.) the intensive margin, with a focus on the level and growth of exports as well as market share performance; 2.) the extensive margin, including diversification of both products and markets; 3.) the quality margin, focusing on the quality or sophistication of exports; and 4.) the sustainability margin, including the participation and survival of firms in export markets.
    • Competitiveness Diagnostics: cover a broad set of factors that impact trade performance, organized around three themes: 1.) The incentive framework for trade, including an analysis of trade and investment policy, and the business regulatory environment; 2.) Factor inputs, productivity, and trade costs, including issues of labor, technical efficiency, access to inputs and backbone services, and trade and logistics; and 3.) Proactive policies to support trade, including standards, export promotion, and spatial industrial policies like clusters and economic zones.
  • Firm-level analysis of trade and determinants. These are customized to countries and carried out by an expert team of trade economists.
  • Analysis of the incentive framework to export. This is a customized analysis that links trade outcomes, potentials and diagnostics. It includes desk-based quantitative and econometric analysis and field-based qualitative survey and direct engagement with the public and private sector stakeholders in the country to take stock of relevant trade and industrial outcomes. This guides systematic generation of hypotheses about a country’s performance, its determinants and potential.  We then connect challenges to proximate causes typically clustered around the (i) incentive framework, (ii) factor and transaction costs, (iii) pro-active trade and industrial policy. The use of firm-level data and the possibility to connect production data to employment data at the firm level allows discussing not only growth, but also shared prosperity issues. 

Recent projects

Analytical work often extends from the identification of the biggest challenges in trade performance through quantitative and qualitative stocktaking. Such examples of specific analytical issues include: augmenting quality of exports and moving up the value chain in Turkey and Croatia; exploring options for diversification in Kazakhstan; sustaining durable export relationships in Macedonia and Kazakhstan; increasing the size of the export sector in Ethiopia; creating export opportunities by linking services to manufacturing in Nepal; and overcoming dual economy characteristics and extending benefits of export participation from original enclave of select exporters to the country in Nicaragua.    

The World Bank Group’s experts in trade competitiveness support a mix of i) policy reforms, ii) capacity building of institutions, and iii) horizontal or sector-based support to industry. Policy reforms in the area of trade and competitiveness are often addressed through Development Policy Loans and Development Policy Credits that address policy incentives that are misaligned with the goal of improving competitiveness. This generally involves trade policy reform, including streamlining of tariffs and non-tariff measures inhibiting both imports and exports, rationalization of taxes, enforcement of competition laws, and guidance on the type of “light-handed” industrial policy initiatives that can help foster both participation in GVCs and linkages between GVCs and the domestic economy by overcoming market failures or capturing coordination externalities.     

Projects aimed at building capacity of institutions range, for instance, from improving the analytical competencies of staff and inter-governmental coordination to physical investments in the upgrading of export quality and standards and creation of new institutions like a skills development center. Finally, sector-based lending can support the creation of industrial zones, as in Ethiopia, or promote exports through matching grants, as was done in Cambodia. In certain cases, the World Bank Group works with governments to target specific industries for improvements in competitiveness, as seen in the garment industry in Lao PDR.




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