ECONOMIC ANNALS, Volume LVIII, No. 196 / January – March 2013 UDC: 3.33 ISSN: 0013-3264

DOI:10.2298/EKA1396007P

Viera Pavličková*

THE COMPETITIVENESS OF SLOVAK FOREIGN TRADE IN THE EUROPEAN MARKET

ABSTRACT: The paper deals with the with prices. Labour- and capital-intensive competitiveness of the Slovak Republic in commodities, along with the automotive its ability to succeed in foreign markets. It industry, dominate Slovak foreign trade. provides a complex view of Slovak foreign Technology- and R&D-driven goods have a trade within the European Union using a comparative disadvantage as a consequence sectoral classification of products. Several of several factors, such as lack of innovation appropriate methods (Constant Market and creativity in the business sphere. A Share Analysis, Revealed Comparative shift towards export of more sophisticated Advantage, Michaely Index, and unit products would be beneficial in supporting export and import values) are applied to long-term sustainable development; quantify the competitiveness of Slovak however, no significant change in Slovak foreign trade and to identify the level and commodity structure has occurred over the trend of its specialisation. The analysis uses past years. the data provided by the Eurostat Comext database for the period 1999-2011. KEY WORDS: competitiveness, Constant The results confirmed Slovakia as a former Market Share Analysis, Revealed transition country to be a fast developing Comparative Advantage, Michaely Index, open economy. Its production is competitive REVELAST Method in the European market, although mainly

JEL CLASSIFICATION: F14

* Department of Banking and Investment, Faculty of Economics, Technical University of Košice, Slovakia, E-mail: [email protected]

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1. INTRODUCTION

The discussion of international trade performance is relevant for small open economies, as any change in imports or exports may influence the economic growth and per capita income of the country. The issue is also current in the context of the on-going economic crisis, which is significantly hindering international trade.

In this paper we focus on the competitiveness of Slovak international trade. In this context competitiveness is understood as the ability of a country to sell in foreign markets. This approach is advocated by the OECD (1992, str. 237), Rose (1997) and Ganesh-Kumar, Sen and Vaidya (2003).

The Slovak Republic is a small open economy in which foreign trade plays a key role. Both exports and imports recorded significant growth immediately after the split from the Czech Republic in 1993 (see Table 1).

Table 1. Year-on-year changes in export and import growth 1994-1999 1994 1995 1996 1997 1998 1999 Exports (Change in %) 28 19 6.1 19.7 15.7 9.9 Imports (Change in %) 9.5 23.1 30.7 15.1 16.1 0.9 Source: SO SR

Slovak international business relations have been influenced by the transformation process since 1989. Within its first decade as a market economy Slovakia faced two main challenges in its foreign trade: a trade balance deficit and an unsuitable foreign trade structure. The former was connected to imbalances between domestic demand and domestic supply. The latter was owing to a strong focus on insufficiently qualitatively competitive export products, which was closely connected to the not fully restructured business sphere after the transition. Technological backwardness was associated with the significant need for import of raw materials, thus conserving the commodity structure. Moreover, no central foreign trade strategy was put in place. State guarantees, despite their volumes (14% of GDP in 1999, Marcinčin, Beblavý, 2000), did not improve export performance.

In the commodity structure of foreign trade up until 1999, labour- and capital- intensive products had the highest export share (50% of exports, 27% of imports, SO SR, 2012). Slovakia achieved a comparative advantage in traditional branches

8 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET such as iron and steel - represented by a long-term producer and one of the most significant exporters, Eastern Slovak Iron Works; in machinery; in paper and related products; in clothes; and in chemical products. The automotive industry, already with a strong foundation and representing a modern sector with higher added value, reported the sharpest increase of all industrial branches. Thus most exports were only price-competitive, reacted negatively to the appreciation of the Slovak koruna after 1995, and significantly contributed to the above-mentioned trade deficit. Long-term consumption and investment products were almost exclusively imported.

In the geographical structure of Slovakia’s foreign trade there was a tendency to shift from the former Comecon markets to modern Western Europe. Germany slowly became the decisive Slovak business partner, overtaking the Czech Republic, which, however, also remained a significant target market.

A government policy aimed at improving the country’s foreign trade performance served mainly as short-term import hindrance (import deposits, legislation on protection against dumping, certification requirements on imported goods, etc.). Any export-enhancing tools were ineffective. Thus, after the first decade of a market economy, improving Slovak export performance remained a key issue of Slovakia’s further economic development.

This paper focuses on the second and the beginning of the third decade after the transition, the period 1999-2011, when several significant changes took place in the economic and political development of the Slovak Republic.

The first half of the analysed period is characterised by various reforms. In 1999 the restructuralisation of the banking sector and privatisation of Slovak banks began. Within the next four years this lead to the creation of a stable and transparent banking system. A tax reform in 2004-2006 supported the development of the business sphere and significantly attracted foreign investors. Furthermore, from 2004 a pension system reform was implemented in order to contribute to a sound economic environment. All these changes of the transition country contributed to the successful entrance of the Slovak Republic into the European Union on May 1st 2004.

The period of Slovak EU membership showed massive economic growth (up to 10.5% of real GDP growth in 2007 and 5.8% in 2008) until the beginning of the world economic and financial crisis (year 2009 recorded a real GDP growth rate of -4.9%, Eurostat (2012)). An important milestone for Slovakia was the adoption

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of the Euro on January 1st 2009, which certainly reduced the foreign exchange risk in Slovak foreign trade in the European market.

The purpose of this paper is to investigate the competitiveness of Slovak foreign trade in the EU27 market in the period 1999-2011. The European Union constitutes a significant target market for Slovak foreign trade, as more than 80% of total Slovak exports and over 70% of total Slovak imports were realised in the EU27 market in years 1999-2011. The paper uses a complex range of methods to evaluate and quantify different aspects of the foreign trade, which has not often been used to such an extent in the existing literature.

The structure of the paper is as follows: after the introduction the second chapter presents the existing literature on this issue. The third section describes the methodology and the fourth summarizes the data. Chapter 5 presents the results in logical order. Firstly, we consider whether Slovak foreign trade was competitive in 1999-2011. Secondly, we find concrete commodities which were competitive in the EU27 market by identifying the level of foreign trade specialisation, expressed in terms of revealed comparative advantage. Thirdly, the type of competitiveness of the commodities is identified. Finally we analyse the development of trade specialisation in time with respect to its ability to compete in the European market, and hence we assess the ability of foreign trade to adjust to the needs and changes of the economic environment. The sixth section of the article summarizes the findings.

2. LITERATURE REVIEW

There have been several studies devoted to the competitiveness of foreign trade. Authors focus either on one particular country and its foreign relations, or discuss the situation of a certain union of countries with respect to its environment or the situation within it.

Owing to the purpose of this paper, we summarise existing literature that analyses Slovakia or a group of countries of which Slovakia is a member. The following table (Table 2) presents studies, utilised methods, and results of research concerning the Slovak Republic, Central and Eastern Europe, and the European Union and euro area.

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Table 2. Empirical studies on competitiveness Region Author Indicators Conclusions Over the period 1985-2001, the euro area´s export market share declined from 26% to 23%, two thirds of which CSMA (Constant was caused by a structural effect and ECB (2005) Market Share one third by a competitiveness effect. Analysis) The structural effect was mainly influenced by a market effect (an increase in demand for the country´s exports in destination markets). Both new and cohesion countries of the EU have a comparative advantage RCA (Revealed in trade in middle- and low-quality Comparative products. In high-quality products the Advantage), Trade Borbély (2006) rest of the countries dominate. Coverage Index, Technology, R&D, foreign direct Grubel-Lloyd investment, and relative labour Index, EUV productivity have significant influence on the RCA. EU, euro areaEU, Deutsche Trade balance is negatively influenced Trade balance, Bundesbank by price indicators and volume of export volume (2007) private sector loans. The increase of the euro area´s export share from 1997 to 2007 rose, which was due to a market effect. A competitiveness effect was rather negative, while product effect (increase Banco de CSMA in demand for country´s exported Espaňa (2010) products) and mixed-structure effect were marginal. Out of the analysed countries, Slovakia improved its competitiveness position in the international markets the most.

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The RCA is positively influenced by Hoekman a RCA, export outward processing trade and imports Djankov (1997) volume in intermediate consumption. Central Europe´s export market share increased in the period 1992-1997 from Simonis (2000) CMSA 1.2% to 1.5%. This was mainly due to a positive competitiveness effect. CEE countries have a comparative advantage in labour-intensive RCA, export Kovačič (2008) production and disadvantage in volume Central and Eastern Europe marketing- and technology-driven industries. CEFTA countries have a comparative Outrata (2000, Grubel-Lloyd advantage in products of lower added 2004) Index, EUV value. RC (Revealed Vokorokosová, Slovakia is competitive in the Competitive Čarnický production of relatively higher capital, Advantage), RCA, (2003) material, and labour intensity. Michaely Index Intra-industry trade has been Vokorokosová Grubel-Lloyd increasing in Slovakia, mainly in the (2004) Index sectors of chemicals and industrial machinery. export volume, The most significant foreign trade trade balance, Hronský (2007) partners of Slovakia are the Czech export share in Republic, Germany, and Russia. the world market Bobáková, RCA, Michaely Price and cost competitiveness prevails

Slovak republic Hečková (2007) Index in the Slovak Republic. Turkish exports to Slovakia are Aysan, positively influenced by their value Hacihasanoglu export volume from the previous period and labour (2007) productivity, and negatively affected by capacity utilization. Exports are positively influenced by a De Broeck export share in growth of related industry branches (2010) the world market and negatively by labour costs. Hečková, Connected to the study of Bobáková, RCA, Michaely Chapčáková Hečková (2007). It confirms previous Index (2011) findings. Source: Author

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From the existing studies before 2008 it is possible to conclude that Slovakia evolved similarly to other Central European countries. The country´s foreign trade is price- and cost-competitive also in the 2000s. It possesses a comparative advantage, mainly in labour- and capital-intensive products with lower added value.

We base our analysis on these studies and combine several methods to gain a complex and more detailed picture of the current state of Slovak foreign trade from the point of view of its competitiveness and specialisation, considering its development from a macro perspective.

3. METHODOLOGY

In order to analyse the competitiveness of Slovak foreign trade we have applied a selection of the aforementioned methods.

First of all, Constant Market Share Analysis (CMSA) is used to identify and quantify competitiveness from the export data. This method breaks down a country´s export performance (market share growth) into a pure competitiveness effect and a structural effect. We have used an equation in the following form: (ECB, 2005)

*  *   *  g − g = ∑∑()θ ij − θ ij g ij  + ∑∑θ ij ()g ij − g ij  (1)  ij   ij 

Competitiveness Structural e ect e ect g (g*) represents the percentage change in Slovak (EU27) exports in period t, gij

(g*ij) stands for the percentage change in Slovak (EU27) exports of product i to * destination market j in period t, and θij (θ ij) is the share of product i to market j in total Slovak (EU27) exports in period t-1.

The first term on the right side of the equation reflects changes in price and non- price competitiveness. Hence, we speak about gains or losses which may occur if export geographical or sectoral structure remains unchanged. The latter term describes the impact of specialisation in particular export target markets or industries on the development of market shares while competitiveness remains

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unchanged. The structural effect involves product effect, market effect, and a residual term: mixed structure effect. (See Equation 2)

 *  ∑∑θ ij ()g ij − g ij  =  ij   θ * θ *  ()θ − θ * g * + ()θ − θ * g * + ()θ − θ * − ()θ − θ * ij − ()θ − θ * ij g * (2) ∑ i i i ∑ j j j ∑∑ ij ij i i θ * j j θ * ij i j ij i j 

Product Market Mixed structure e ect e ect e ect

The product (market) effect shows the gain in shares connected to export of products (export to markets) where the demand has been more dynamic. Thus product effect is influenced by the product composition of the country´s exports and the market effect is affected by a country´s geographical export composition. Mixed-structure effect captures the interaction between the two above-mentioned and not perfectly distinguishable effects.1

To determine the character of the competitiveness of foreign trade branches, the Revealed Elasticity Approach (REVELAST) (WIFO, 2002) has been used. The method uses the values of the export and import volumes, in units of money and export and import unit values. The latter are calculated as follows:

X M EUV = pj ,.IUV = pj (3) X kg M kg

EUV and IUV stand for export unit values and import unit values, respectively.

They are derived as a ratio of export (import) volume in money units X( pj, Mpj)

and export (import) volume in weight units (Xkg, Mkg).

As a result of the WIFO methodology, industry sectors are allocated into four market segments (See Table 3):

1 In a traditional form of the CSMA (Richardson, 1971) no mixed-structural effect is calculated. It is included either in a product or in a market effect influencing the results. In order to avoid the problem of ambiguity of results, we have calculated the mixed-structure term explicitly.

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Table 3. REVELAST Method In these sectors the country competes successfully in quality. Successful X >M It is a country´s target segment. Segment 1 quality pj pj EUV > IUV The trade of products in this competition segment leads to a positive trade balance. Products in this segment have Deficit of X < M lost the ability to compete in the Segment 2 pj pj competitiveness EUV > IUV market with competitive prices, resulting in a trade deficit. These industrial branches Successful price X > M compete successfully with Segment 3 pj pj competition EUV < IUV prices and cause a positive trade balance. The products are not competitive even with lower prices in comparison with the Structural X < M Segment 4 pj pj competition. Structural changes problems EUV < IUV (in production, innovation, etc.) are necessary. This segment leads to a trade deficit. Source: WIFO (2002)

The level and the development of Slovak foreign trade specialisation have been analysed using the Michaely Index and the RCA.

The Michaely Index (Michaely, 1962) expresses the difference between the share of a country in world exports and its share in world imports. It has the following form:

X M MI = ij − ij , (4) ∑ X ij ∑ M ij i i where Xij (Mij) stands for the volume of the country´s exports (imports) within a particular industry and ( ) represents the same variable for the whole world. Positive values (0,1) signify specialisation of the country in that particular

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sector, as it exports more than imports. Negative values (–1,0) can be interpreted analogically.

The RCA (Revealed Comparative Advantage) is expressed as the ratio of the share of domestic exports in total exports of the industry to the share of exports of the country in total world exports. The original formula of the RCA suggested by Balassa (1965) has the following form:

X ij

∑ X ij RCA = i , (5) ∑ X ij j

∑∑X ij ji

where Xij denotes the volume of exports of a country i in an industry j. The RCA can gain values from the interval (0,∞) and those higher than one express the comparative advantage of the country. Relative to the situation in the whole world market, the export share of the country is larger.

It is necessary to note that in our analysis we have used the EU-27 market instead of the world market. Thus the focus is on the position of the Slovak Republic under European conditions.

Moreover, we have widened the analysis by observing the development of trade specialisation over time, using an econometric model proposed by Dalum, Laursen and Villumsen (1998). The model works with the revealed comparative advantage, but in its symmetric form (Laursen, Dreier, 1997):

RCA −1 RSCA = . (6) RCA +1

Revealed Symmetric Comparative Advantage (RSCA) can obtain values from the interval (–1,1) which make the variable symmetric and suitable for its use in econometric models. Positive values are connected to a comparative advantage, negative values to a comparative disadvantage.

The form of the above-mentioned econometric model is as follows:

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t2 t1 RSCAij = α i + β i RSCAij + ε ij. (7)

The model considers the values of the RSCA of a country i and an industry j in two periods – t1 and t2. αi is the intercept, βi represents a regression coefficient expressing the relationship between the RSCAs of the two periods, and εij stands for the error term.

The RSCA of the initial period has been tested against the RSCA of the final period, while β represents the stability of the country´s foreign trade specialisation. In cases where β is close to 1, the degree of turbulence in a trade specialisation pattern is very low. If β exceeds 1, we speak about the β-specialisation, denoting increase of specialisation in sectors in which the country was specialised and decrease of specialisation in sectors where the country recorded comparative disadvantage in the period t1. For β∈(0,1) there is a decrease of specialisation in previously specialised sectors, and vice versa considering non-specialised industries. This situation is termed β-despecialisation. Negative β means a reversed order of sectors according to the level of specialisation.

In order to solve the econometric model we have applied the Ordinary Least Square method which has been submitted to tests of linear model assumptions.

4. DATA

We have used the export and import data from the Comext Database (2012) which provides extensive data on international trade. The analysed branches have been classified by the SITC (Standard International Trade Classification, Rev. 4) two-digit classification (See Appendix 1). Furthermore, to make the analysis more transparent and comprehensible, the divisions within the SITC have been allocated into one of the taxonomic groups according to factor inputs (See Table 4):

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Table 4. Taxonomic groups2 Taxonomic group 2-digit SITC classification Mainstream manufacturing 58, 62, 66, 71, 72, 73, 74, 75, 76, 78, 79 Labour-intensive industry 21, 24, 61, 63, 65, 77, 81, 82, 84 23, 25, 26, 28, 32, 33, 34, 51, 52, 56, 57, 64, 67, 68, Capital-intensive industry 69, 96, 97 00, 01, 02, 03, 04, 05, 06, 07, 08, 09, 11, 12, 22, 29, Marketing-driven industry 42, 43, 55, 83, 85, 89 Technology-driven industry 27, 53, 54, 59, 87, 88 Source: Peneder (1999)

To gain the first broad picture, the following graph (Figure 1) presents the development of Slovak exports and imports in the EU27 area during the period 1999-2011.

Figure 1. Export and import year-to-year growth in %

Source: Author´s calculations based on Comext Database

2 SITC divisions 35, 41, 91, 93, 96, 97, and 99 were excluded from the Market Segmentation Method because of unavailability of data on exports and imports in weight units. SITC divisions 00, 02, 35, 41, 91, 93, and 95 were excluded from the Constant Market Share Analysis because of unavailability of data for all EU27 countries. However, in both cases values involved in the analyses include more than 97% of the total exports and imports of the Slovak Republic in the EU27 area.

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There was a growth in foreign trade during the whole period, continuing the development before 1999. The only exception was the year 2009, marked by the economic crisis arriving in Europe, as the core of Slovak exports involves cyclically sensitive commodities. However, the values arrived at positive numbers very quickly due to the improvement of Slovak export partners’ economic conditions and certain short-term export stimuli of the Slovak government. The absolute value of exports increased from 8 billion EUR in 1999 to 48 billion EUR in 2011, and imports rose over the analysed period from 7.9 billion EUR to 40 billion EUR. Positive foreign trade development also improved the trade balance of the country. It went from -1502 Mio. EUR in 1999 to 946.1 Mio. EUR in 2009 and remained stable until 2011.

If we look at the commodity decomposition of Slovak intra-EU27 exports and imports in Figure 2 and Figure 3, we can see a similar development of mainstream manufacturing and total export and import development.

Figure 2. Export year-on-year growth in % respecting taxonomic groups

Source: Author´s calculations based on Comext Database

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Figure 3. Import year-on-year growth in % respecting taxonomic groups

Source: Author´s calculations based on Comext Database

An increase of both exports and imports in all industry branches is clearly visible. The most significant positive development was recorded in mainstream manufacturing, including rubber (62) and plastics manufacturing (58), telecommunications (76), industrial machinery (74), and road vehicles (78). The volume of exports (imports) increased from 3.2 (3) billion EUR in 1999 to 22.8 (15) billion EUR in 2011. This was followed by capital-intensive industries, such as textile fibres (26), gas (34), iron and steel (67), and paper manufacturing (64), and then labour-intensive industries (electrical machinery (77), skin (21) and leather (61) production and wood (63) and furniture (82) manufacturing). Marketing- driven and mainly technology-driven sectors were left behind, although they increased slightly. The following section presents the results of the conducted analysis.

5. RESULTS

The following section presents the results of the above-mentioned methods applied in order to examine the competitiveness of Slovak foreign trade. The methods enable us to identify and quantify competitiveness as well as to determine its character and trend.

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5.1. Competitiveness of Slovak exports Constant Market Share Analysis has been applied to identify the competitiveness element of Slovak export performance, and it has showed interesting results (See Table 5). A positive total effect indicates that Slovakia has had a 11% per annum higher export growth in comparison to the EU27 area, on average. The most significant differences were in years 2003 and 2007 (21% per annum of difference)3. The results are in line with the economic openness of Slovakia, emphasising the key role of foreign trade. The development of the total effect was mainly influenced by a positive competitiveness effect in each of the analysed years. A structural effect influenced the Slovak export market share to a lower positive extent; in 2002 and 2009 it was even negative. The structural effect was kept in positive values mainly by the market effect.

Table 5. CMSA of Slovak exports Year 2000-2005 2006-2011 2000-2011 Total effect 0.11 0.10 0.11 Competitiveness effect 0.09 0.08 0.09 Structural effect 0.02 0.02 0.02 Product effect 0.00 -0.00 -0.00 Market effect 0.02 0.02 0.02 Mixed-structure effect -0.00 -0.00 -0.00 Source: Author´s calculations based on Comext Database

If we look at the following graph (Figure 4), the common development of the total effect and the competitiveness effect is clearly visible.

3 For the results of the CMSA in each separate year of the period 1999-2011 see Appendix 2.

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Figure 4. Total effect

Source: Author´s calculations based on Comext Database

The significant competitiveness effect is the result of the country’s long journey. The industrial inheritance of the Slovak Republic after its split from the Czech Republic involved mainly heavy engineering and armament manufactures, which lost their target markets (mainly former Comecon countries) after the Velvet Revolution. Necessary reforms had to take place, which turned Slovakia into a modern open European economy. The competitiveness of Slovak exports peaked twice in the analysed period, in 2003 and 2007. By contrast, its lowest point was recorded in 2010. In the same year the structural effect overcame the competitiveness effect and stayed above its values in 2011 as well. The reasons for this development will be discussed in the following subsections.

5.1.1 Competitiveness effect A closer look at the competitiveness effect (see Figure 5) and its breakdown into several taxonomic groups indicates the significant role of mainstream manufacturing in competition in the European market.

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Figure 5. Product decomposition of the competitiveness effect

Source: Author´s calculations based on Comext Database

The whole competitiveness effect almost copied the development of mainstream product exports within the analysed period. A sharp increase of the effect in years 2003 and 2007 was also due to the influence of mainstream manufacturing, the share of which in total Slovak exports was significantly higher than its share in EU27 exports. More precisely the development was mainly due to the export of road vehicles (78), which has played a key role in Slovak foreign trade since the early 1990s, and of telecommunication apparatus (76). Until 2003 the competitive export of road vehicles increased due to the success of Volkswagen Slovakia. In 2004 and 2005 the decrease in Slovak exports’ competitiveness effect was strongly influenced by changes in Volkswagen’s operational programme which decreased road vehicle production. In 2007 automotive production increased once more, mainly due to newcomers PSA Peugeot Citroën and Kia Motors, who made Slovakia first in the world in the production of road vehicles per capita (105.7 vehicles per 1000 inhabitants, SARIO, 2007).

Until 2003, and then slightly in 2007, labour-intensive industry had a similar influence and increased the competitiveness effect. The export of electrical machinery and, until 2003, of furniture, was the key element in this development. However, later its positive impact decreased, and it turned into a negative influence in 2010. A certain positive influence was also due to capital-intensive products, mainly in 2000 and 2004. Other than the export of petroleum and related products and iron and steel, which both have a long tradition in Slovak industry (the former represented by Slovnaft Plc and the latter by U.S. Steel, formerly Eastern Slovak

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Iron Works - both top Slovak exporters), the export of paper and paper products should also be mentioned. Within the EU Slovakia is considered to be relatively rich in the wooden and cork inputs of the associated production. Several paper producers, either with domestic ownership or supported by foreign investors, have operated in the Slovak market since its establishment. Technology-driven and marketing-driven industries contributed to the competitiveness of Slovak exports to a markedly small extent.

With respect to the product decomposition of the competitiveness effect, no significant changes are visible in Slovak foreign trade in comparison to the previous decade. The production of already competitive mainstream goods, especially road vehicles, increased, and technology- and marketing-driven commodities remained insignificant. Thus the emphasis was still on the less qualitatively competitive exports.

Considering the decomposition of the competitiveness effect according to target markets (Figure 6), Slovakia gained significant shares in Germany (mainly until 2003) and France (mainly in the period 2005-2009 after the entrance of PSA Peugeot-Citroën to the Slovak market), the development of which was strongly connected to the competitiveness of the Slovak automotive industry. Another important target market was the Czech Republic (which reached positive values in 2004) with iron and steel, petroleum products, and electric and telecommunications apparatus. Exports of the same commodities to Poland and Austria were also competitive during almost the whole period, but to a lesser extent. It is also necessary to mention a strong positive influence of exports to the United Kingdom (road vehicles and electrical machinery) and Italy (road vehicles and industrial machinery), which was present over the whole analysed period, but mainly in 2006 and 2007.

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Figure 6. Market decomposition of the competitiveness effect

Source: Author´s calculations based on Comext Database

The results show the orientation of Slovak international business to be shifting from the former Comecon countries inherited from the previous regime to the Western European countries, while retaining close relations with the V4 countries.

5.1.2. Structural effect A positive structural effect indicates the success of a country´s exports in dynamically rising markets or in commodities for which there is a strong demand. The structural effect in Slovakia (See Figure 7) was positively influenced mainly by the market effect. The structural effect and both its elements reached bottom in 2009.

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Figure 7. Structural effect

Source: Author´s calculations based on Comext Database

5.1.3. Market effect The market effect significantly explains the development of the structural effect.

Figure 8. Market effect

Source: Author´s calculations based on Comext Database

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Looking at Figure 8, the market effect supports the idea of aiming Slovak exports at the Czech, Polish, Hungarian, German, Austrian, and French markets. After the establishment of separate Slovak and Czech Republics, the Czech Republic was the key destination market of Slovak exporters (in 1993 42% of Slovak exports ended up in the Czech market, Marcinčin and Beblavý, 2000). Later on, with changes in the Slovak production structure and an endeavour to move Slovak exports from the Comecon markets to more developed ones, the spectrum of target Slovak production markets widened. Slovakia exported especially the above-mentioned products, such as road vehicles, petroleum products, iron and steel and electrical machinery.

The only exception was 2009, when the focus turned to other EU27 countries because of the sharp fall in road vehicle exports to common target markets due to poor economic conditions.

During the whole analysed period a negative impact on the market effect was mainly caused by exports to the United Kingdom and France, on which, however, Slovak exports do not focus.

5.1.4. Product effect The product effect (see Figure 9) was positive except for years 2001-2003 and 2008-2009. This was mainly due to marketing- and technology-driven industries. Their negative growth rates, relative to EU27 trade growth, were not outweighed by commodities dominant in Slovak exports. This indicates a delay in the development of Slovak exports, which does not focus on more sophisticated products with high added value based on technology and innovation, although the European demand for such products has increased.

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Figure 9. Product effect

Source: Author´s calculations based on Comext Database

The loss of the export share of products in 2009 was caused by the reduction in automotive production and exports because of the economic crisis, despite the high demand dynamics within these commodities.

Moreover, the graph reveals a strong positive influence of capital-intensive industries, mainly petroleum products and iron and steel, until 2007. The main Slovak petroleum producer, Slovnaft Plc., restructured its production processes and started to offer products with higher added value in 2000. The company has more than 100 years of successful existence. In iron and steel exports U.S. Steel is the main company in Slovakia, and started its business in the country in 2000 by modernising production processes and becoming the most significant job provider in Eastern Slovakia. The company is continuing the 50year history of the iron and steel industry in Slovakia.

The product effect does not indicate significant shifts in Slovak foreign trade, either generally with comparison to the decade before 1999, or in particular with respect to commodities structured towards higher technological products and innovation.

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5.2. Level and development of Slovak foreign trade specialisation After establishing that Slovak exports are, in general, competitive in the EU27 market, we move on to an extended analysis conducted using the RCA and the Michaely Index, in order to see which commodities have a comparative advantage and which do not.

Firstly, we provide the results of the RCA index for the years 1999-2011 (see Figure 10).

Figure 10. Revealed Comparative Advantage in the Slovak Republic in the period 1999-2011

Source: Author´s calculations based on Comext Database

Looking at figure 10, we can conclude that:

• Slovakia has recorded a comparative advantage in mainstream manufacturing, labour-intensive industry, and capital-intensive industry. The results correspond with the CMSA analysis. Moreover, they also indicate a continuation in trade trends from before 1999. • Similarly, the marketing-driven and technology-driven sectors have maintained a comparative disadvantage.

29 Economic Annals, Volume LVIII, No. 196 / January – March 2013

• Unlike labour-intensive and capital-intensive industries losing their comparative advantages over time, Slovakia has been becoming increasingly specialised in mainstream manufacturing. The RCA value has reached 1.5 in the past three years. • Marketing- and technology-driven industries have recorded a slight increase; however it is still well below 0.

To gain a more complex picture of the situation, a Michaely Index has been calculated that also considers import data (see Figure 11).

Figure 11. Michaely Index of the Slovak Republic for the period 1999-2011

Source: Author´s calculations based on Comext Database

Several conclusions may be drawn:

• To some extent the evaluation of the Michaely Index is similar to the values of the RCA. • The most significant increase has occurred in mainstream manufacturing, which has been positive since 2005. This fact is also supported by the RCA, which implies Slovak specialisation in these industry sectors. The volume of production satisfies both domestic and to a great extent foreign demand. Negative values before 2005 may be explained by the relatively higher exports

30 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET

to countries outside the EU. The situation after EU membership in 2004 has changed in favour of intra-EU exports. • A slight decrease of the Michaely Index (similarly to the RCA values) has occurred in labour-intensive industries. Although according to the RCA the country still has a comparative advantage in these products, this specialisation is not transformed into a positive Michaely Index. • Capital-intensive industry production has recorded a significant fall in the Michaely Index throughout the period, which corresponds to the development of the RCA. The current value of the Index at around 0 implies production that covers domestic demand. The relative values of exports and imports are almost the same. • Since 1999 more marketing-driven and technology-driven products have been imported than exported. The RCA showed no specialisation of Slovak foreign trade in this product area.

The following table (Table 6) provides more detailed results, enabling a better view of the competitiveness of particular commodities in the foreign markets. To see the development over time we have decided to observe the values in 1999, 2005, and 2011.

31 Economic Annals, Volume LVIII, No. 196 / January – March 2013 1 3 3 4 3 3 1 3 3 1 3 4 4 4 3 4 3 1 3 3 2 2 2 4 4 3 4 1 4 4 4 4 1 4 4 3 3 3 2011 1 3 1 2 3 1 1 3 3 3 3 4 4 4 3 4 1 4 1 3 2 2 4 4 4 1 4 2 2 4 4 3 3 3 4 3 1 3 2005 1 3 1 4 3 1 3 3 4 3 3 3 2 4 3 4 3 2 3 3 2 4 4 4 2 3 4 4 2 4 2 3 3 4 4 3 1 3 Segments (WIFO) Segments 1999 2011 1.114 1.119 1.910 1.018 0.176 1.752 0.474 1.491 0.105 0.418 1.051 0.164 1.652 1.212 1.983 0.703 0.739 0.251 1.079 0.779 0.927 1.882 0.706 4.678 0.922 1.202 1.288 0.487 0.597 0.894 0.863 0.645 0.560 1.139 0.648 2.360 1.475 0.948 2005 RCA 1.155 1.019 1.510 0.741 1.031 1.158 2.316 1.376 0.519 1.675 0.125 0.768 2.510 2.156 1.322 0.633 1.023 1.496 0.853 1.267 1.654 2.681 1.607 3.269 0.356 0.692 1.084 0.636 0.997 1.240 0.499 0.250 0.480 0.443 0.884 1.223 1.088 1.424 1999 1.185 1.417 0.178 0.183 1.136 1.491 0.417 0.765 1.527 0.767 0.691 1.601 0.291 1.073 1.734 1.027 0.675 0.738 1.093 0.786 1.277 1.948 2.471 1.077 1.263 0.626 1.409 3.667 1.506 1.248 2.295 1.044 0.899 0.088 2.867 1.512 0.971 1.360 2011 0.016 0.033 0.001 0.001 0.029 0.003 0.003 0.003 0.002 0.080 0.005 0.009 0.006 0.000 0.000 0.098 0.007 -0.014 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.023 -0.003 -0.003 -0.005 -0.002 -0.007 -0.007 -0.009 -0.006 -0.006 -0.004 -0.004 -0.015 2005 0.014 0.010 0.015 0.027 0.038 0.001 0.025 0.003 0.003 0.005 0.008 0.008 0.004 0.044 0.004 0.004 0.000 0.000 0.013 0.062 0.024 -0.011 -0.014 -0.016 -0.018 -0.013 -0.012 -0.001 -0.003 -0.003 -0.002 -0.002 -0.002 -0.002 -0.002 -0.007 -0.002 -0.006 Michaely Index 1999 0.013 0.019 0.012 0.051 0.033 0.001 0.041 0.058 0.002 0.002 0.009 0.008 0.006 0.004 0.006 0.004 0.000 0.026 0.088 -0.014 -0.018 -0.019 -0.012 -0.033 -0.001 -0.001 -0.001 -0.024 -0.003 -0.003 -0.007 -0.002 -0.005 -0.002 -0.005 -0.002 -0.006 -0.001 0.14 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.03 0.02 0.05 0.02 0.07 0.05 0.02 0.02 0.02 0.05 0.02 0.02 0.02 0.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.15 0.37 0.25 2011 0.14 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.03 0.03 0.03 0.05 0.02 0.02 0.02 0.02 0.05 0.02 0.02 0.09 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.18 0.00 0.37 0.22 2005 0.14 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.03 0.03 0.02 0.05 0.02 0.02 0.02 0.07 0.02 0.08 0.04 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.19 0.38 0.20 1999 Share in total imports 0.17 0.15 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.02 0.07 0.02 0.02 0.02 0.02 0.05 0.02 0.04 0.06 0.14 0.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.47 0.25 2011 0.17 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.05 0.02 0.02 0.02 0.09 0.08 0.06 0.04 0.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.19 0.40 0.28 2005 0.01 0.01 0.01 0.01 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.02 0.02 0.05 0.07 0.02 0.02 0.02 0.02 0.08 0.06 0.04 0.04 0.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.21 0.29 0.38 1999 Share in total exports Slovak Republic foreign trade data from SITC classification

Ʃ Ʃ Ʃ 74 81 51 76 61 21 52 33 78 75 71 57 32 79 62 69 73 67 82 65 63 72 23 58 68 56 25 77 24 28 26 34 84 66 64

mainstream manufacturing mainstream labour intensive labour SITC intensive capital division Table 6. Table

32 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET 4 2 2 3 4 1 3 4 4 2 3 4 4 3 4 3 4 4 4 4 4 3 3 4 4 2 4 4 4 4 2 4 4 1 1 2 4 2 1 4 4 3 2 3 2 4 2 2 3 3 3 2 2 2 4 4 3 4 2 3 4 1 1 4 4 4 1 4 4 4 4 3 2 4 4 2 4 4 3 4 2 2 2 4 0.174 0.110 0.918 0.175 0.179 1.091 0.476 1.339 0.491 0.744 0.955 0.291 0.053 0.353 0.053 0.271 0.578 0.361 0.379 0.930 0.073 3.227 2.496 0.246 0.504 0.225 0.648 2.315634 0.119 1.149 1.931 0.152 0.814 0.316 0.511 0.108 0.251 0.927 1.099 0.241 0.598 0.483 0.030 1.243 0.377 0.294 0.285 0.856 0.303 0.066 0.242 2.454 0.242 0.581 0.222 1.913856 0.110 1.167 0.153 0.919 0.195 1.475 0.742 0.691 0.473 0.798 0.055 0.030 0.492 0.277 0.326 0.050 0.303 0.223 3.509 0.480 0.366 0.343 0.640 0.300 0.300 0.317 0.509 2.210166 0.002 0.002 0.004 0.000 0.000 0.000 0.000 -0.010 -0.001 -0.028 -0.003 -0.003 -0.002 -0.002 -0.002 -0.005 -0.002 -0.002 -0.002 -0.008 -0.008 -0.009 -0.009 -0.006 -0.004 -0.037 -0.051 0.008331 0.001 0.001 0.002 0.002 0.002 0.000 0.000 0.000 -0.015 -0.001 -0.001 -0.025 -0.022 -0.003 -0.007 -0.005 -0.002 -0.002 -0.002 -0.007 -0.009 -0.008 -0.006 -0.004 -0.004 -0.039 -0.067 0.008722 0.001 0.001 0.001 0.002 0.000 0.000 -0.011 -0.011 -0.015 -0.021 -0.001 -0.001 -0.001 -0.026 -0.003 -0.003 -0.003 -0.003 -0.005 -0.002 -0.009 -0.008 -0.006 -0.004 -0.004 -0.053 -0.066 0.012924 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.04 0.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.07 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.03 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.12 0.09 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.02 0.02 0.04 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.13 0.09 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02 0.09 0.01 0.01 0.01 0.01 0.01 0.01 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02 0.08 0.01 0.01 0.02 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02 0.06

Ʃ Ʃ Author´s calculationsAuthor´s based Comext on Database 11 01 53 55 59 12 27 03 87 85 83 29 89 22 02 05 07 88 43 54 09 08 42 06 04 00

driven

marketing driven marketing technology technology Source:

33 Economic Annals, Volume LVIII, No. 196 / January – March 2013

If we look closer at the data, Slovakia achieves a comparative advantage (grey colour) mainly in the first three taxonomic classes, as stated above. Therefore the situation remains the same as before 1999.

Firstly, even in the second post-transition decade, mainstream manufacturing and labour- and capital-intensive industries still have the highest export share in total Slovak exports. Exports of mainstream manufacturing and capital- intensive industries represent approximately 47% and 25%, respectively, of total Slovak exports. The share of the labour-intensive commodities is 14%.

Within mainstream manufacturing the country is, according to the RCA results, significantly specialised long-term in rubber (62), road vehicle manufacturing (78) and telecommunication apparatus (76) (in years 2005 and 2011) with values markedly above 1. As stated several times above, the automotive industry is traditional and dates back in Czechoslovak history to the Skoda company. Moreover, one of the first foreign investors in Slovakia was Volkswagen, who nowadays, together with Kia Motors Slovakia and PSA Peugeot Citroën Slovakia, is among the country´s top exporters. Nor is rubber manufacturing new in Slovakia, represented by Matador, a.s. The sector of telecommunications equipment has reported the most significant change within the analysed period. First of all, its share in the country´s total exports has risen by 13 percentage points. This was caused by the establishment of many small companies mainly exporting to the Czech Republic, but primarily by the two dominant companies, TESLA, a.s. and Samsung Electronics. TESLA, which has existed for over 50 years in the Slovak market, restructured and modernised its production in 2000 and 2001 by investing in new technologies and innovation. Samsung entered the Slovak market in 2002 and since then has become the biggest Samsung subsidiary in Europe and number one in production of LCD and LED monitors in the Slovak Republic.

A comparative advantage has also been recorded in the traditional sectors of non-metallic mineral manufactures (66), metalworking machinery (73), and general industrial machinery and equipment (74). Almost all of these results are confirmed by the Michaely Index. The most visible difference occurs in the case of metalworking machinery, which is slightly negative in the Michaely Index, while in the RCA it is still above 1, despite a slight decrease. Although the country specialises in these products in comparison to world exports, it also imports a comparable value.

34 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET

Since its establishment Slovakia has excelled in labour-intensive production due to its cheap labour. Over the analysed period the country unsurprisingly has a comparative advantage in all of the products except for raw hides and skins (21), which decreased significantly in the two latter years of the analysis. In the case of textile yarn, fabrics, and related products (65) and articles of apparel and clothing accessories (84), the values have oscillated around 1, signifying neither apparent comparative advantage nor disadvantage, recording a decline since 1999 for the latter of the above-mentioned sectors. The Michaely Index again corresponds with the RCA results. The most significant difference appears in the case of leather manufacture (61), with a slightly negative Michaely Index, which again shows a larger relative volume of imports than exports, despite the country´s specialisation.

Within the capital-intensive sectors, a significant comparative advantage has been recorded in fertilizers (56) and iron and steel production (67). This is also supported by the positive values of the Michaely index. Iron and steel production has had a long tradition in Eastern Slovakia where the Eastern Slovak Iron Works operated till 2002 before its ownership transferred to U.S. Steel and it became one of the top Slovak exporters. Similar values may also be assigned to paper and related articles (64). The most significant exporters are SCP Paper in Ružomberok, Smurfit Kappa in Štúrovo, and the SHP Group, all supported by foreign investors.

According to the RCA a slight specialisation is also observable in petroleum products (33) (Slovnaft Plc, one of the top three refineries in Europe, is a significant exporter) and metal manufacturing (69); while in the latter case the Michaely Index is negative. Again, this implies higher import values despite the country’s specialisation in its production in comparison to other countries’ exports. The RCA analysis shows an increase in Slovak specialisation in gas manufacturing (34) to values above 1. These results correspond to the situation before 1999, preserving traditional sectors.

However, the comparative advantage in the sectors of pulp and waste paper (25), paper articles (64), textile fibres (26), metal scrap (28), non-ferrous metals (68), and plastics in primary forms (57) has changed to a disadvantage. The Michaely Index reflects this development.

A comparative advantage in the marketing-driven industries is rarer. The most significant is oil-seeds and oleaginous fruits (22), of which the values in the analysed period exceed 2 and 3, respectively. In this case the Michaely Index is also positive, although very close to 0. This subsector of Slovak agriculture has

35 Economic Annals, Volume LVIII, No. 196 / January – March 2013

always predominated. The export of Swedish turnips, sunflowers, and sunflower oil remains important. The main importers are Poland, Italy, and Germany.

The RCA, supported by the Michaely Index, also records a specialisation in footwear (85), with RCA significantly above 1. The main exporters are Rieker s.r.o in Komárno, exporting approximately 80% of total production, Rialto, s.r.o, and Gabor, s.r.o, following the tradition of clothing and footwear production in Slovakia.

Similar results were also achieved in the export of live animals (00) and sugar and honey manufacturing (06). A deterioration in the country´s specialisation is observable in travel goods (83), the RCAs of which were higher than 1 in 2005 and 1999.

As far as technology-driven industry is concerned, the only sector of specialisation is the production of crude fertilizers and minerals (27), although the values have declined over time to very close to 1, signifying neither specialisation nor non-specialisation. The Michaely Index also reached 0. The relevant minerals are magnesite and common salt, which are dominant among Slovak mineral resources.

The RCA and the Michaely Index confirm little change has been made in Slovak foreign trade. The traditional sectors still have a comparative advantage while the more sophisticated sectors do not. The most dynamic development has been the export of road vehicles and telecommunication equipment: both increased their importance to become the most significant exporting sectors.

5.3. Character of competitiveness After identifying whether the Slovak foreign trade is competitive in the EU27 market, and after a more precise investigation of commodities that have a comparative advantage, we now move on to identify the type of competitiveness the commodities achieved in the period 1999-2011.

Bearing in mind the significant price competitiveness of Slovak exports before 1999, we have used the REVELAST method (see Table 6, last column). To a large extent the analysis has confirmed the previous pattern.

Mainstream manufacturing and labour-intensive industry have been price- competitive throughout the whole analysed period; the capital-intensive sector

36 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET appeared in the quality competition segment, although in 2011 it was already in the price competition segment. Marketing- and technology-driven industries have recorded structural problems. A look at individual taxonomic divisions will provide a more complex view.

Road vehicles (78) and other transport equipment (79) compete in quality in the mainstream manufacturing segments, while the former became price competitive in the last analysed year. In the case of road vehicles the country specialises in their production (RCA > 1), which is also supported by the market share of this sector (17% of export volume in 2011) and relatively more exports than imports (Michaely Index > 0). Despite the quality competition the automotive industry in Slovakia mainly focuses on assembling components where the value added is rather low. By contrast, despite the success in quality competition, there is a significant comparative disadvantage in other transport equipment and the values of the Michaely Index are very close to 0. Their share in total exports is 2%.

Moreover, the country has achieved quality competitiveness in the last analysed year in rubber manufacturing (62), general industrial machinery and equipment (74), and office machines (75). The country specialises in the production of the former two, with export shares of 3% and 5% respectively. The country is not considered to specialise in office machines, despite their quality and previous price competitiveness. Slovakia competes successfully price-wise in telecommunications equipment (76), which has recorded the most significant positive change over the analysed period. In other branches of mainstream manufacturing (plastics in non-primary form (58), non-metallic mineral manufacture (66), power-generating machinery (71), metalworking machinery (73), and machinery specialised for particular industries (72)) Slovakia has some structural problems. Despite this negative situation the country specialises in the production of non-metallic manufactures and metalworking machinery.

The only industrial branch of all the labour-intensive industries in the quality competition segment in which the country is specialised according to both the RCA and the Michaely Index is prefabricated buildings, sanitary, plumbing, heating, and lighting fixtures (81). However its share of total exports is only 1%. Moving from quality competitiveness to price competitiveness is typical for crude cork and wood (24) and its manufactures (63), and articles of apparel (84). These products also maintain their position in Slovak industry and foreign trade. Among the EU countries Slovakia is considered as having a rich supply of wood, which provided an even higher volume of wood after the disastrous storm in the Tatra mountains in 2004. In all three cases specialisation has deteriorated,

37 Economic Annals, Volume LVIII, No. 196 / January – March 2013

although in the case of cork and wood it is still significantly above 1. All other labour-intensive branches show a lack of competitiveness.

Although the capital-intensive sector in general records successful quality and price competitiveness, its decomposition is much more complex. The only qualitatively competitive industry branch in 2011 was metalliferous ores and metal scrap (28), processed mainly by U.S. Steel. Furthermore, Slovakia is price competitive in petroleum and petroleum products (33), gas manufacturing (34), fertilizers (56), paper and articles of paper (64), iron and steel production (67), and non-ferrous metals (68). Of these paper and non-ferrous metals are not on the list of variables with comparative advantage. Again, these are products which were already price competitive in the 1990s and continued their success in foreign markets. Other articles of this taxonomic class record either a deficit of competitiveness or structural problems.

Travel goods (83) and live animals (00) were marketing-driven articles in the first segment of quality competition, although the latter recorded price competitiveness in year 2011. Despite this success the country is not specialised in the production of travel goods: its RCA values are significantly under 1. Cereal manufacturing (04), sugar production (06), the oil seed sector (22), and fat and oil manufacturing (42) are price competitive. However, only the production of sugars and oil seeds has a significant comparative advantage. All others products in this taxonomic class lack competitiveness or face structural problems. This also corresponds to the results of the RCA and the Michaely Index, which outline no specialisation in the mentioned sectors.

In the last taxonomic class, the technology-driven industries, Slovakia does not compete in quality with any product in the European market. The only positive result is the price competitiveness of crude fertilizers and minerals (27), in which the country specialises, also according to the RCA values. However, the export share of this sector is very low. All other branches show comparative disadvantage and a deficit of competitiveness or structural problems. This is also consistent with the results of a decade ago.

5.4. Development of trade specialisation The last part of the analysis is devoted to the development of trade specialisation. We have showed which commodities are competitive and which have a comparative advantage and found that the results are very similar to the situation in the 1990s. To prove it statistically we have applied the model proposed by Laursen for the

38 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET whole analysed period (1999-2011) and then decomposed it into two models (1999-2005 and 2005-2011). This simple model maps the changes in the adjusted RSA values and thus provides clear information on the time evolution of foreign trade specialisation.

First, to get a broad review of the data, see the descriptive statistics (Table 7).

Table 7. Descriptive statistics RSCA (year 1999) RSCA (year 2005) RSCA (year 2011) Number of observations 62 62 62 Mean -0.1624287 -0.1646247 -0.1920131 Standard deviation 0.3952115 0.3915213 0.3901853 Variance 0.1561921 0.1532890 0.1522446 Median -0.1323250 -0.0910100 -0.1614450 Minimum -0.9408100 -0.9410800 -0.8994600 Maximum 0.5715000 0.5314700 0.6477300 Source: Author´s calculations

All models have been submitted to tests of linear regression assumptions and present results that confirm the regression coefficient to be unbiased at a significance level of 5% (the only exclusion is the assumption of normality of residuals in the second model for the period 2005-2011, which is fulfilled on a slightly lower level of significance - 3%). For the figures, see Table 8.

Table 8. Testing of linear model assumptions Model 1 Model 2 Test 1999=˃2011 1999=>2005 2005=>2011 Normality of Anderson- p value 0.1186 0.3548 0.03181 residuals4 Darling Test Heteroscedasticity Breusch- p value 0.2432 0.4282 0.9563 of residuals Pagan Test 1.742 Autocorrelation of Durbin- DW 1.9065 (p-value = 1.9464 residuals Watson test statistics 0.147) Ramsey Good specification p value 0.3478 0.4005 0.7445 Reset test Source: Author´s calculations

4 For the graphical analysis, see the Appendix 3.

39 Economic Annals, Volume LVIII, No. 196 / January – March 2013

Considering the regression coefficients, using the Laursen model we have gained the following results (see Table 9, Figure 12):

Table 9. Results of the trade specialisation model Model β Std. Error t value p value Model 1 1999 => 2011 0.64016 0.09703 6.597 1.21e-08 *** 1999 => 2005 0.75275 0.08314 9.054 8.02e-13 *** Model 2 2005 => 2011 0.90962 0.05256 17.305 <2e-16 *** Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 Source: Author´s calculations

Figure 12. Graphical analysis of trend of trade specialisation 0 0 0 1. 1. 1. .5 .5 .5 00 00 00 0. 0. 0. 2011 2005 2011 -1.0 -0.5 0.00.5 1.0 -1.0 -0.5 0.00.5 1.0 -1.0 -0.5 0.00.5 1.0 .5 .5 .5 -0 -0 -0 .0 .0 .0 -1 -1 -1 1999 1999 2005 Source: Author´s calculations

If we look at the analysed period 1999-2011, the value of β (positive, but lower than 1) implies a slight decrease in specialisation in specialised sectors and an increase in specialisation in non-specialised sectors. The decomposition of model 1 into two periods (model 2) has showed that the changes in specialisation mainly occurred in the first analysed period 1999-2005.

As mentioned earlier, a positive change was recorded in the product group of live animals (00) which is quality-competitive, and in sugars (06), animal and vegetable fats and oils (43), and telecommunications (76), which are price competitive. This positive change remained in all mentioned products except for group 43, which return to values of non-specialisation by 2011. A decrease in specialisation occurred in several groups (21, 25, 28, 57, 68, 83), even in quality- competitive products such as metalliferous ores (28) and travel goods (83).

The period 2005-2011 has been almost stable (β = 0.90962), implying an almost unchanged pattern despite the necessity of certain adjustments to improve the situation. According to the market segmentation method, non-metallic

40 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET production records structural problems. However the RCA identifies the country’s specialisation in their production. On the other hand the export share in total Slovak exports of prefabricated buildings, sanitary, plumbing, heating and lighting fixtures, and travel goods and live animals is low, in spite of their quality competitiveness in foreign markets.

Although Slovakia improves in production and export of road vehicles and telecommunication equipment, these are mainly products dependent on an economic cycle and compete to a large extent by price. The country lacks improvement in more sophisticated commodities with higher added value based on technology and innovation, although the demand for these items is rising dynamically.

Slovak foreign trade is thus subject to a certain level of rigidity, which was also typical for the commodity structure before 19995.

Several aspects may be the cause of such a development. The labour force is not flexible and does not adjust sufficiently to changing conditions and requirements. Moreover, a lack of business thinking and creativity, left over from the previous political system, leads to insufficient business and innovation activities. The situation is worsened by the outflow of highly specialised labour that lacks possibilities for work in Slovakia. The general underdevelopment of sophisticated production may also be explained by the low quality of the educational system and lack of quality control. Corruption, clientelism, and relativisation of moral values hinder Slovak production from becoming quality competitive.

6. CONCLUSION

Slovakia is a small open transition economy, the development and growth of which is significantly dependant on the growing volume of its foreign trade.

The first decade of the transition of Slovakia after the velvet revolution, however, left the country with a significant foreign trade deficit and an inappropriate foreign trade structure focused mainly on low quality commodities.

5 For more information on Slovak foreign trade in the period 1990-1999 see Marcinčin and Beblavý (2000).

41 Economic Annals, Volume LVIII, No. 196 / January – March 2013

Our analysis has shown the results of the development of competitiveness of Slovak foreign trade in the period 1999-2011. We investigated if any changes contributed to the improvement of Slovak export performance.

The results show that Slovak foreign trade in the European market over the analysed period has been significantly competitive. Slovakia has a large export market share relative to the whole European Union, mainly in exports of mainstream manufacturing and labour-intensive and capital-intensive products.

A closer look at the whole issue identifies more detailed features of Slovak competitiveness in the European market. The competitiveness of the three above- mentioned product sectors was confirmed by the RCA and the Michaely Index. However, most of these products are price-competitive, as their added value is low. They are mainly labour- and capital-demanding, not technologically demanding. Road and transport vehicles are a positive exception in quality competitiveness; they increased their export market share and maintained their decisive position in Slovak foreign trade, which is well known for its automotive industry. Another significant improvement occurred in the export of telecommunication equipment: beside enhancing its market share it gained a comparative advantage and ended in second place in competitiveness of exported commodities.

The marketing- and technology-driven segments mainly recorded structural problems or a competitiveness deficit. They are complex and demanding in terms of a high degree of finalization, research and development, and a high level of qualification. These segments can contribute to and support the long-term sustainable development of an economy and its international trade. However, except for sugars and oleaginous fruits competing in price and footwear having a long tradition in Slovakia, they do not seem to be successful in the Slovak target export markets.

The last part of our analysis was a quantification of changes within trade specialisation. The results of the Laursen model imply no significant changes over the past six years, despite the necessity of adjusting the Slovak foreign trade structure to demand and new economic trends. The most significant change was the above-mentioned telecommunication equipment strongly contributing to an increase in the price competitiveness of Slovak exports.

As Slovakia is an open economy it is inevitable that attention should be paid to the development of its international trade. Certain structural changes, leading to an increase in the importance of marketing- and technology-driven products within

42 COMPETITIVENESS OF SLOVAKIA IN THE EUROPEAN MARKET

Slovak exports, are necessary in order to improve the position of the country in the European market. This may subsequently mean the improvement of the long- term sustainable economic development of the country.

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Appendix 1

SITC Classification (Rev. 4) – Classes and Divisions (Unstats)

0 - Food and live animals 00 - Live animals other than animals of division 03 01 - Meat and meat preparations 02 - Dairy products and birds’ eggs 03 - Fish (not marine mammals), crustaceans, molluscs and aquatic invertebrates, and preparations thereof 04 - Cereals and cereal preparations 05 - Vegetables and fruit 06 - Sugars, sugar preparations and honey 07 - Coffee, tea, cocoa, spices, and manufactures thereof 08 - Feeding stuff for animals (not including unmilled cereals) 09 - Miscellaneous edible products and preparations 1 - Beverages and tobacco 11 - Beverages 12 - Tobacco and tobacco manufactures 2 - Crude materials, inedible, except fuels 21 - Hides, skins and furskins, raw 22 - Oil-seeds and oleaginous fruits 23 - Crude rubber (including synthetic and reclaimed) 24 - Cork and wood 25 - Pulp and waste paper 26 - Textile fibres (other than wool tops and other combed wool) and their wastes (not manufactured into yarn or fabric) 27 - Crude fertilizers, other than those of Division 56, and crude minerals (excluding coal, petroleum and precious stones) 28 - Metalliferous ores and metal scrap 29 - Crude animal and vegetable materials, n.e.s. 3 - Mineral fuels, lubricants and related materials 32 - Coal, coke and briquettes 33 - Petroleum, petroleum products and related materials 34 - Gas, natural and manufactured 35 - Electric current 4 - Animal and vegetable oils, fats and waxes 41 - Animal oils and fats 42 - Fixed vegetable fats and oils, crude, refined or fractionated

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43 - Animal or vegetable fats and oils, processed; waxes of animal or vegetable origin; inedible mixtures or preparations of animal or vegetable fats or oils, n.e.s. 5 - Chemicals and related products, n.e.s. 51 - Organic chemicals 52 - Inorganic chemicals 53 - Dyeing, tanning and colouring materials 54 - Medicinal and pharmaceutical products 55 - Essential oils and resinoids and perfume materials; toilet, polishing and cleansing preparations 56 - Fertilizers (other than those of group 272) 57 - Plastics in primary forms 58 - Plastics in non-primary forms 59 - Chemical materials and products, n.e.s. 6 - Manufactured goods classified chiefly by material 61 - Leather, leather manufactures, n.e.s., and dressed furskins 62 - Rubber manufactures, n.e.s. 63 - Cork and wood manufactures (excluding furniture) 64 - Paper, paperboard and articles of paper pulp, of paper or of paperboard 65 - Textile yarn, fabrics, made-up articles, n.e.s., and related products 66 - Non-metallic mineral manufactures, n.e.s. 67 - Iron and steel 68 - Non-ferrous metals 69 - Manufactures of metals, n.e.s. 7 - Machinery and transport equipment 71 - Power-generating machinery and equipment 72 - Machinery specialised for particular industries 73 - Metalworking machinery 74 - General industrial machinery and equipment, n.e.s., and machine parts, n.e.s. 75 - Office machines and automatic data-processing machines 76 - Telecommunications and sound-recording and reproducing apparatus and equipment 77 - Electrical machinery, apparatus and appliances, n.e.s., and electrical parts thereof (including non-electrical counterparts, n.e.s., of electrical household-type equipment) 78 - Road vehicles (including air-cushion vehicles) 79 - Other transport equipment

47 Economic Annals, Volume LVIII, No. 196 / January – March 2013

8 - Miscellaneous manufactured articles 81 - Prefabricated buildings; sanitary, plumbing, heating and lighting fixtures and fittings, n.e.s. 82 - Furniture and parts thereof; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings 83 - Travel goods, handbags and similar containers 84 - Articles of apparel and clothing accessories 85 - Footwear 87 - Professional, scientific and controlling instruments and apparatus, n.e.s. 88 - Photographic apparatus, equipment and supplies and optical goods, n.e.s.; watches and clocks 89 - Miscellaneous manufactured articles, n.e.s. 9 - Commodities and transactions not classified elsewhere in the SITC 91 - Postal packages not classified according to kind 93 - Special transactions and commodities not classified according to kind 96 - Coin (other than gold coin), not being legal tender 97 - Gold, non-monetary (excluding gold ores and concentrates) I - Gold, monetary II - Gold coin and current coin

Appendix 2

Table 10. Results of the CSMA analysis 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total effect 0.16 0.07 0.05 0.21 0.08 0.09 0.18 0.21 0.10 0.02 0.04 0.07 Competitiveness 0.12 0.06 0.06 0.19 0.06 0.07 0.14 0.18 0.09 0.05 0.01 0.05 effect Structural effect 0.04 0.01 -0.01 0.02 0.02 0.02 0.04 0.03 0.01 -0.03 0.03 0.02 Product effect 0.03 -0.01 -0.01 -0.00 0.01 0.00 0.01 -0.00 -0.01 -0.03 0.01 0.01 Market effect 0.03 0.02 0.00 0.02 0.01 0.02 0.03 0.03 0.02 -0.01 0.03 0.02 Mixed- -0.02 0.00 0.00 -0.00 -0.00 -0.00 -0.00 -0.00 -0.00 0.01 -0.01 -0.01 structure effect Source: Author´s calculations

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Appendix 3

Testing the normality of residuals

Figure 13. Graphical analysis of normality of residuals in Laursen models – histograms 1999-2011 1999-2005 2005-2011 20 20 15 cy cy cy 15 15 uen uen uen eq eq eq 10 Fr Fr Fr 10 10 05 05 05

-0.5 0.0 0.5 1.0 -0.8 -0.4 0.00.4 -0.4 -0.20.0 0.20.4 0.6

resid(total) resid(period1) resid(period2) Source: Author´s calculations

Figure 14. Graphical analysis of normality of residuals in Laursen models – QQ-plots 1999-2011 1999-2005 2005-2011 Normal Q-Q Normal Q-Q Normal Q-Q 4

51 51 51 24 2

24 uals uals uals 23 sid sid sid re re re 01 ized ized ized rd rd rd 0123 da da da -1 01 an an an St St St -1 -1 -2 -2 25

12 12 -2 18 -3

-2 -1 012 -2 -1 012 -2 -1 012

eoretical Quantiles eoretical Quantiles eoretical Quantiles Source: Author´s calculations

Received: October 09, 2012 Accepted: March 01, 2013

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