Factor Intensities of EU-oriented Exports

According to the Heckscher-Ohlin theory, commodity trade patterns reflect differences in comparative advantage as determined by different factor endowments among countries. A country tends to export those goods, which use factors in relative abundance-an outcome of a competitive market mechanism efficiently allocating resources. Exploring a full causal chain linking factor endowments, comparative advantage and trade patterns are not relevant for this discussion. The analysis here concerns broad changes in relative factor intensities as revealed in exports to the EU.

To test the Heckscher-Ohlin theory, Krause (1988) breaks commodity groups as classified in the SITC into four groups reflecting their distinct relative factor intensities. These groups are natural resource-intensive products; unskilled labour-intensive products; technology-intensive products; and, human capital-intensive products. The first two groups represent lines of production characterised by low value added, high natural resource-intensity and simple technologies. For countries at the lower end o f the industrial scale such products account for a dominant share o f exports. While the line dividing the technology- and capital-intensive groups is fuzzy, they both contain products requiring more sophisticated inputs than found in the first two groups.

The results obtained hinge critically on the quality o f a classification used to examine export baskets over time by factor mix. The choice is always controversial. There are major difficulties in defining and measuring factor intensity. Special problems emerge when a classification aims to capture the “quality” o f factors involved (Winters 1997). Some definitions o f the groups o f goods by factor intensity are overlapping and non- exhaustive. Definitions used here try to avoid these shortcomings—all industries are taken into account, an industry appears only in one classification and the classification distinguishes among four types o f factors. Since some industries are intensive in terms of more than one factor, the results may be distorted. But even assuming that the initial classification captures adequately factor proportions at a given point o f time, with the passage of time it may provide a distorted picture. Some industries may become more

capital-intensive or less active in technological terms. In all, however, comparisons with other classifications as well as calculations of respective baskets do not seem to challenge - in terms o f overall changes and tendencies - the major results discussed here.

In this study the Krause classification was adapted for the Harmonised System with the help o f HS - SITC - SIC translator, available online at www.tradecompass.com. To achieve a satisfactory level o f separation o f different product groups according to factor intensities, the separation was conducted at the 4-digit level o f disaggregation. All the 1236 commodity groups at this level were allocated one o f the four factor intensities: natural resource-intensive products; unskilled labour-intensive products; technology­ intensive products; and, human capital-intensive products. The factor intensity applied to each individual product is shown in Annex 1 at the end o f the dissertation.

Table 3.9 shows the composition o f Bulgarian exports to the EU according to factor intensities for each of the years in the period 1989-1996. The major changes during the period took place in the first two groups. The share o f unskilled labour intensive products increased, almost entirely at the expense o f natural resource intensive products, with both groups taking around 30 per cent o f exports each in 1996. These two groups, representing low technology products continued to dominate Bulgarian exports, accounting for around 60 per cent o f exports and slightly increasing their share in the last year of the period compared to the first one.

The groups representing more advanced products. Technology intensive and Human capital intensive, stay practically at the same levels, with some fluctuation, throughout the period. It thus appears that the Bulgarian export expansion to the EU was driven mainly by unskilled labour-intensive products.

Table 3.9: Composition of Bulgarian exports to the EU according to factor

Relative factor intensity groups 1989 1990 1991 1992 1993 1994 1995 1996

1. Natural resource intensive 43.2 42.9 39.1 34.3 36.0 36.1 33.0 29.9 2. Unskilled labour intensive 16.6 19.3 22.0 33.1 34.6 28.2 25.7 31.3

1 + 2 59.8 62.2 61.1 67.5 70.6 64.4 58.8 61.2

3. Technology intensive 22.7 19.6 23.2 17.7 19.4 22.2 20.0 22.9

4. Human capital intensive 17.6 18.2 15.7 14.8 10.0 13.4 21.2 16.0

3 + 4 40.2 37.8 38.9 32.5 29.4 35.6 41.2 38.8

Table 3.10: Composition of Czech exports to the EU according to factor intensities,

Relative factor intensity groups 1993 1994 1995 1996

1. Natural resource intensive 19.3 18.6 19.5 17.4 2. Unskilled labour intensive 28.3 26.7 23.6 23.1

1 + 2 47.6 45.3 43.1 40.5

3. Technology intensive 23.1 25.6 27.3 29.4

4. Human capital intensive 29.3 29.1 29.6 30.1

3 + 4 52.4 54.7 56.9 59.5

Table 3.11: Composition of Hungarian exports to the EU according to factor

Relative factor intensity groups 1989 1990 1991 1992 1993 1994 1995 1996

1. Natural resource intensive 42.1 36.8 35.5 30.2 26.9 25.3 23.7 21.9 2. Unskilled labour intensive 23.6 25.4 26.6 29.0 30.3 26.2 21.3 20.1

1 + 2 65.6 62.2 62.1 59.1 57.2 51.5 45.0 41.9

3. Technology intensive 22.0 23.7 24.9 26.5 29.7 33.6 39.2 41.6

4. Human capital intensive 12.4 14.1 13.0 14.4 13.1 14.9 15.8 16.5

3 + 4 34.4 37.8 37.9 40.9 42.8 48.5 55.0 58.1

Table 3.12: Composition of Polish exports to the EU according to factor intensities,

Relative factor intensity groups 1989 1990 1991 1992 1993 1994 1995 1996

1. Natural resource intensive 51.6 47.9 44.7 40.6 34.2 35.2 32.9 29.0 2. Unskilled labour intensive 17.7 19.8 24.4 26.4 30.3 29.8 27.7 29.2

1 + 2 69 3 67.7 69.1 67 64.5 65 60.6 58.1

3. Technology intensive 14.1 17.1 16.5 14.8 16.1 14.8 17.4 19.4

4. Human capital intensive 16.6 15.2 14.4 18.2 19.4 20.2 22.0 22.5

3 + 4 30.7 32.3 30.9 33 35.5 35 39.4 41.9

A look at the Czech and Hungarian pattern o f change in composition o f trade (tables 3.10 and 3.11) reveals a very different picture. The Czech Republic registers in the second sub-period decrease in the shares o f both low value-added groups: Unskilled labour intensive and Natural resource intensive products. This decrease is almost entirely accounted for by the increase in the share o f Technology intensive products, while Human capital intensive increase their share only slightly. In all, the share o f the

two higher quality groups increase their share from 52.4 per cent in 1993 to nearly 60 per cent in 1996. Hungary is a similar success story. It is interesting to note that in the first transition sub-period (up to 1993) Hungary’s export expansion to the EU is driven by two groups: Unskilled labour intensive and Technology intensive goods. The share o f Unskilled labour intensive then fell by 1996 to below its pre-transition level in 1989. The share o f the other low value added group, Natural resource intensive goods, fell precipitously throughout the entire period, ending up with twice lower share in 1996 (21.9 per cent) than in 1989. The major change in Hungarian exports clearly occurred during the second phase, when new exports were driven mostly by the explosive growth in Technology intensive and, to a lesser degree. Human capital intensive goods. This is a clear evidence o f the emergence o f second generation firms, able to move transition forward and close the gap in economic development with the EU. There isn’t even a hint o f such a process taking place in Bulgaria. Overall, the share o f the two more advanced groups in Hungary increased from one third o f exports in 1989 (lower share than Bulgaria!) to 58.1 per cent in 1996, 20 per cent more than Bulgaria.

The Polish pattern o f trade composition for 1996 (Table 3.12) is closest to Bulgaria’s. However, Poland comes from a much lower starting position in 1989. The share of Technology intensive and Human capital intensive goods is 30.7 per cent in 1989, compared to Bulgaria’s 40.2. In Poland this share increases to 41.9 per cent in 1996, while in Bulgaria it decreases to 38.8. In Poland, just like in Hungary, Unskilled labour intensive goods increase their share only until 1993, following which it fell by 1996 to below its pre-transition level in 1989. The new exports from 1993 were driven by Technology intensive and Human capital intensive goods. Thus Bulgaria compares unfavourably with Poland as well, especially regarding the direction of change in trade composition, suggesting a dynamic restructuring process in Poland and a lack o f such in Bulgaria.

3.4.1 Change in RCA and Share in EU Imports According to Factor Intensity

Calculations o f Bulgaria’s RCA indices and share of exports in total EU imports according to factor intensity (Table 3.13) give further credibility to the above observations. Technology intensive products and human capital intensive products are at a comparative disadvantage throughout the period, except for 1995, when Human capital intensive products briefly rise above unity. Technology intensive products show the lowest RCA indices, which are consistently at 0.6-0.7 levels. The only group with consistently increasing RCA index is unskilled labour intensive products. Changes in shares o f various products in EU imports provide insights into the competitive position o f Bulgarian firms vis-à-vis other suppliers. While Bulgaria slightly increases its share in exports in all the four groups, these shares are almost negligible, with only unskilled labour intensive products increasing their share to above half a per cent o f EU imports.

Table 3.13: RCA indices and shares in EU imports of Bulgarian exports to the EU according to factor intensities, 1989-1996

Revealed comparative advantage indices

Relative factor intensity groups 1989 1990 1991 1992 1993 1994 1995 1996

Natural resource intensive 1.2 1.2 1.2 1.1 1.2 1.2 1.1 0.9

Unskilled labour intensive 1.4 1.6 1.6 2.3 2.4 2.0 1.8 2.2

Technology intensive 0.7 0.6 0.7 0.6 0.6 0.7 0.6 0.7

Human capital intensive 0.8 0.9 0.7 0.7 0.5 0.6 1.1 0.8

Share in E U imports, per cent

Natural resource intensive 0.14 0.15 0.18 0.20 0.23 0.30 0.36 0.28

Unskilled labour intensive 0.17 0.20 0.25 0.44 0.46 0.50 0.61 0.64

Technology intensive 0.09 0.08 O il 0.11 0.11 0.17 0.20 0.19

Human capital intensive 0.10 0.11 0.12 0.13 0.09 0.16 0.36 0.24

Table 3.14: RCA indices in Czech exports to the EU according to factor intensities, 1989-1996

Revealed comparative advantage indices

Relative factor intensity groups 1993 1994 1995 1996

Natural resource intensive 0.6 0.6 0.6 0.6

Unskilled labour intensive 1.9 1.9 1.6 1.6

Technology intensive 0.7 0.8 0.8 0.8

Human capital intensive 1.3 1.4 1.5 1.6

Share in E U imports, per cent

Natural resource intensive 0.63 0.71 1.05 0.93 Unskilled labour intensive 1.90 2.19 2.71 2.71

Technology intensive 0.68 0.89 1.32 1.43

Table 3.15: RCA indices in Hungarian exports to the EU according to factor intensities, 1989-1996

Revealed comparative advantage indices

Relative factor intensity groups 1989 1990 1991 1992 1993 1994 1995 1996

Natural resource intensive 1.2 1.0 1.1 0.9 0.9 0.8 0.8 0.7

Unskilled labour intensive 2.0 2.1 1.9 2.0 2.1 1.8 1.5 1.4

Technology intensive 0.7 0.8 0.8 0.8 0.9 1.0 1.1 1.2

Human capital intensive 0.6 0.7 0.6 0.7 0.6 0.7 0.8 0.9

Share in E U imports, per cent

Natural resource intensive 0.69 0.67 0.80 0.78 0.72 0.77 1.09 1.07

Unskilled labour intensive 1.17 1.35 1.47 1.70 1.69 1.68 2.09 2.14

Technology intensive 0.42 0.51 0.59 0.70 0.73 0.92 1.62 1.84

Human capital intensive 0.35 0.44 0.47 0.55 0.49 0.64 1.12 1.31

Table 3.16: RCA indices in Polish exports to the EU according to factor intensities, 1989-1996

Revealed comparative advantage indices

Relative factor intensity groups 1989 1990 1991 1992 1993 1994 1995 1996

Natural resource intensive 1.4 1.3 1.3 1.3 1.1 1.2 1.1 0.9

Unskilled labour intensive 1.5 1.6 1.8 1.8 2.1 2.1 1.9 2.0

Technology intensive 0.5 0.6 0.5 0.5 0.5 0.4 0.5 0.6

Human capital intensive 0.8 0.7 0.7 0.8 0.9 0.9 1.1 1.2

Share in E U imports, per cent

Natural resource intensive 1.26 1.52 1.69 1.85 1.74 1.96 2.42 1.95

Unskilled labour intensive 1.30 1.83 2.28 2.73 3.20 3.53 4.34 4.30

Technology intensive 0.41 0.64 0.66 0.69 0.75 0.75 1.15 1.19

Human capital intensive 0.70 0.84 0.87 1.24 1.38 1.61 2.50 2.47