Q-Tool Extension: Competitiveness

1. Agenda

2. Definitions and Indicators

3. CGE Implementation

4. Conclusions

1. Agenda

Agenda

Specification of Competitiveness

Firm level (cost structure, innovation potential, ...) Sectoral level (market shares, mark-ups, ...) Country level (terms-of-trade,...)

Review of existing indicator systems

Input/output-based indicators Data availability

Compatibility with quantitative modeling framework

Implementation of indicators in CGE core-model Illustrative policy application (here: EU leadership in climate policy)

2. Definitions and Indicators

Selected Definitions

Firm level: A firm is competitive if it can produce products [...] of superior quality or lower costs than its domestic and international competitors. (US-President`s Commission on Industrial Competitiveness 1985, S. 6) Sectoral level: ... Position of a sector in relation to other sectors or to the same sector in other countries in terms of market share and productivity. National level: Competitiveness [...] is understood to mean a sustained rise in the standards of living of a nation and as low a level of involuntary unemployment possible. (European Competitiveness Report 2004)

Indicators (1)
ex-post Based on: Output / Performance Market share Profitability Productivity (Relative) market shares RMS Revealed Comparative Advantage - RCA Productivity / Profitability Real Exchange Rate Terms of Trade Constant Market Shares (CMS) Productivity Per Capita Income Balance of Current Account ex-ante Input / Policy R&D Expenditures Stock of Human Capital Cost Structure Innovation Potential R&D expenditures Investment flows (FDI) Innovation Potential (Patents)

Firm level:

Sectoral level:

National level:

Labour unit costs R&D expenditures Investment Flows (FDI) Innovation Potential

Indicators (2): Country Level

Indicators: RCA
Revealed Comparative Advantage RCA (Balassa 1965)

3. CGE Implementation

Application: EU Leadership in Climate Policy

Issue:
Unilateral EU carbon emission constraints (e.g. EU-ETS)

Impacts on international competitiveness

Global environmental effectiveness (carbon leakage)

Policy implementation:
Alternative emission reduction targets: - 5,10,15, 20, 25, 30% cutback of CO2 emissions compared to BaU Endogenous tax differentiation: - Tax rates discriminated in favour of carbon-intensive industries - Tax ratios between other sectors and carbon-intensive industries: 1 (uniform), 2, 5, 10, 20, inf (exemptions)

Parameterization of Static PACE Version

Data base of global economy: GTAP V6
Base year: 2001 Coverage: 87 regions, 57 sectors, 5 factors

Aggregation:

Stylized Model Structure

Results (1): Welfare

Welfare change (in % HEV from BaU) 0 -0.5 -1 -1.5 -2 20 -2.5 0 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target inf

Results (2): Differentiated Carbon Values

Carbon tax (in USD per ton of carbon) 300 250 200 150 100 50 0 0 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target inf 20

Results (3): Terms-of-Trade

Terms of trade change (in %) 0 -0.2 -0.4 -0.6 -0.8 -1 -1.2 0 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target inf 20

Results (4): Output of Carbon-intensive Industries (EIS)

Output change for EIS (in % from BaU) 0 -1 -2 -3 -4 -5 -6 -7 -8 0 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target 20 inf

Results (5): Output of Other Industries (OTH)

Output change for other industries (in % from BaU) 0 -0.2 -0.4 -0.6 -0.8 -1 -1.2 0 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target inf 20

Results (6): RCA Change for Carbon-intensive Industries (EIS)

Change in competitiveness for EIS (in % RCA) 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10 0

inf 20 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target

Results (7): RCA Change for Carbon-intensive Industries (EIS)

Change in competitiveness for other industries (in % RCA) 4 3.5 3 2.5 2 1.5 1 0.5 0 -0.5 0 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target 20 inf

Results (8): Excess Cost of Tax Differentiation

Cost implications of tax differentiation (in %) 20 15 10 5 0 -5 -10 0 15 5 10 10 5 25 2 30 1 Tax ratio 15 20 Emission reduction target inf 20

Conclusions
CGE Implementation of selected competitiveness indicators:
At national level: (Per-capita) income, Terms of Trade, etc. At sectoral level: RCA, RWA, etc.

Cautious Use of Competitiveness Indicators:

Trade-off between indicator at the same level (e.g. sectors) Trade-off between indicators at different levels (e.g. sector / nation) Competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous. (P. Krugman (1994), Foreign Affairs, 1-17)