A dynamic analysis of France's external trade. Determinants of merchandise imports and exports and their role in the trade surplus of the 1990s.

The purpose of the paper is to review the sources of France's trade surplus in recent years and to attribute trade balance movements strictly to those determinants of trade flows suggested by economic theory. The paper is organised as follows: after the introduction, section II reviews some salient characteristics of France's trade in recent years; section III discusses an accounting decomposition of movements in the non-energy and in the manufacturing trade balance over the period 1990 to 1996; section IV presents econometric methodology used in the empirical work; section V examines the error-correction model for non-energy and manufacturing imports; section VI examines the possibility of hysteresis in imports through equation stability tests; section VII examines the corresponding model for non-energy and manufacturing exports and section VIII reviews the question of hysteresis in exports; section IX uses elasticity estimates from the economic estimation to shed light on the relationship between the trade balance and demand and competitiveness developments; section X presents simulation results for the non-energy and the manufacturing trade balance since the 1990s; and, finally, section XI presents conclusions. There are 8 annexes complementing the paper.II/511/97-ENOne of the striking characteristics of France's economic performance since the beginning of the present decade has been the strength of the external accounts. In particular, on the basis of national accounts data, since 1989 the current account and the non-energy trade balance have recorded rising surpluses, which in 1996 amounted to 1.7 % of GDP and to close to 1.5 % of GDP, respectively. The service balance, on the other hand, has registered persistent surpluses which averaged between 1 and 1.4 percent of GDP in the 1990s. The largest component of merchandise trade is trade in manufactured goods. The balance on manufacturing trade recorded surpluses throughout the period following the 1973 oil crisis to the late 1980s. The manufacturing trade balance slipped into deficit in the period 1987-1991 but subsequently moved into surplus which rose to almost 1 % of GDP in 1996. Graph 1 presents quarterly data on the evolution of these variables from the beginning of the 1970s to the end of 1996; data adjusted for inflation present a similar picture. It is clear that since movements in the current account are dominated by movements in the non-energy and, in particular, in the manufacturing trade balance throughout this period the sources of the current account improvement in the 1990s are likely to be those explaining the improvement of the manufacturing trade balance.Awareness of the importance of developments in France's external transactions became more pronounced following the commitment to sustain a stable franc in the ERM. External accounts deficits were considered as leading to devaluations and, consequently, exchange rate stability required that the trade balance was not systematically in deficit, in order not to undermine exchange and the stability. Since the dominant component of France's external transactions is trade in manufactures, the commitment to a stable franc inevitably implied the necessity to strengthen the manufacturing trade balance, principally through improvements in competitiveness. These took the form of cost and price restraint which has had a beneficial effect on export growth and on the manufacturing trade balance, and on supporting the external value of the franc.Graph 1 also shows the importance of manufacturing in France's external and, more specifically, in non-energy trade. Over much of the period since the beginning of the 1970s peaks and troughs in the former coincide with peaks and troughs in the latter, while the level of the manufacturing trade balance accounts on average for virtually the level of the non-energy trade balance. This relationship has been particularly close in the period up to the second half of the 1980s. Since then, a systematic deviation has emerged where the level of the manufacturing trade balance has been lower than the level of the non-energy trade balance. Furthermore, since 1987 improvements in the non-energy trade balance have been larger than those in trade in manufactures where notably larger deficits have been recorded until late 1991. Clearly, marked improvements in non-manufacturing, non-energy trade (that is, trade in agricultural and food commodities) are at the background of these developments. By 1996, the non-energy trade balance had registered surpluses amounting to over 1 percent of GDP while the manufacturing trade balance had recovered from a peak deficit of 0.7 percent of GDP recorded at the end of the 1980s and in the beginning of the 1990s to a surplus of 0.7 percent of GDP in the first three quarters of 1996. This improvement has taken place against a background of turbulence in the ERM marked by the substantial nominal and real depreciations of the exchange rate for the Italian lira, the Spanish peseta, the Portuguese escudo, and the British and the Irish pound against the French franc.There are three significant factors which have undoubtedly contributed to France's external performance in recent years. First, the different cyclical position of France relative to its main trading partners; secondly, relative price developments which have moved to France's advantage or disadvantage principally, but not exclusively, as a result of nominal and real exchange rate changes; and, third, supply improvements which have promoted export expansion and import substitution, principally through gains in cost and price competitiveness but also through improvements in non-price competitiveness associated with changing technology through new investment in the trading sectors of the economy, increased export capacity, productivity-induced relative price changes etc. The impact of the first two factors has likely dominated, especially in short-term developments, the latter's influence on France's trade. Ultimately, however, many supply-side improvements have undoubtedly themselves taken the form of improvements in France's relative costs and relative prices.The purpose of the present paper is to review the sources of France's trade surplus in recent years and to attribute trade balance movements strictly to those determinants of trade flows suggested by economic theory. These determinants are price and/or cost developments, and demand in France and in the rest of the world. Nominal exchange rate movements in the 1990s have been perceived as playing a significant role in France's trade performance, particularly during the depreciation episodes of 1992 and 1993, since they were considered to have imparted a competitive advantage to those trading partners whose currency had depreciated against the franc; ceteris paribus, and assuming that the nominal depreciation led to a real exchange depreciation, imports would increase and exports would decline, and the trade surplus in real terms would decline. This could have permanent effects on the trade balance since, according to some models of international trade, prolonged exchange rate appreciations, or depreciations can induce hysteresis phenomena (see Baldwin (1988), for example). At the same time, slow growth in France relative to the rest of the world in the 1990s would be expected to have led to a widening of the trade surplus. These two factors have a conflicting impact on trade balance movements, and since income elasticities are generally substantially larger than relative price elasticities it is possible to argue that the emergence of the trade surplus since the beginning of the 1990s is dominated by relative demand movements. A primary objective of the paper is to examine the empirical support for these propositions and to analyse the dynamics of adjustment of trade flows to changes in competitiveness and in relative demand. To do so, a cointegration/error-correction model is applied to flows of both imports and exports, and the estimates of key elasticities obtained are instrumental in shedding light on this question.The paper, in addition to the introduction, is organized as follows: Section II reviews some salient characteristics of France's trade in recent years in terms of trade patterns, price and cost competitiveness developments, import penetration and export market performance, and in terms of demand developments in France and abroad; section III discusses an accounting decomposition of movements in the non-energy and in the manufacturing trade balance over the period 1990 to 1996 according to the state of price competitiveness and of relative demand; section IV presents the econometric methodology used in the empirical work; section V examines the error-correction model for non-energy and manufacturing imports; section VI examines the possibility of hysteresis in imports through equation stability tests; section VII examines the corresponding model for non-energy and manufacturing exports and section VIII reviews the question of hysteresis in exports again through equation stability tests; section IX uses elasticity estimates from the econometric estimation to shed light on the relationship between the trade balance and demand and competitiveness developments; section X presents simulation results for the non-energy and the manufacturing trade balance since the beginning of the 1990s where the contribution of price competitiveness and of relative demand is evaluated; and, finally, section XI presents conclusions. There are eight annexes complementing the paper. The sources and the time series properties of the data are presented in Annex A; Annexes B, C and D present additional cointegration results and further evidence on the stability of the import equations; and Annexes E, F, G, and H are devoted to reviewing further cointegration results and to examining the stability of the export functions.trade analysis, french imports, french exports

A dynamic analysis of France's external trade

The purpose of the present paper is to review the sources of France's trade surplus in recent years and to attribute trade balance movements strictly to those determinants of trade flows suggested by economic theory. These determinants are price and/or cost developments, and demand in France and in the rest of the world. A primary objective of the paper is to analyse the dynamics of adjustment of trade flows to changes in competitiveness and in relative demand. To do so, a cointegration/error-correction model is applied to flows of both imports and exports, and the estimates of key elasticities obtained are instrumental in shedding light on this question.France trade balance; price competitiveness; export import; cointegration regression

REFORMS IN TAX-BENEFIT SYSTEMS IN ORDER TO INCREASE EMPLOYMENT INCENTIVES IN THE EU

In this paper we discuss the role of tax and benefit systems in the context of the functioning of the labour markets and review recent progress made by EU Member States in reforming tax and benefit systems with a view to increasing economic incentives for higher employment and job creation. On the basis of the most recent comparable data and indicators, we try to assess whether concrete measures are being taken by Member States to alleviate the tax pressure on labour and especially on the low paid. We also examine benefit systems (especially unemployment benefit systems) with a view to evaluating recent reforms to increase employment incentives. Our main conclusions are that while Member States have started to ease the tax burden on labour, progress on reforms has been unequal between tax and benefit systems: the emphasis has clearly been on the tax side while benefit reforms have mostly been relatively minor, and without adequate attention to the interaction between tax and benefit schemes. In view of the goal of full employment, to which the Union and the Member States are committed, it has become more urgent to speed up reforms of tax and benefit systems in order to increase labour supply and reduce structural unemployment. Further reforms aimed at making work pay should take a more comprehensive approach. This approach could help to move people from benefit dependency to work, while preserving an adequate level of social protection for those in need.Reforms, Tax, tax-benefit sytems, unemployment benefits, labour market reforms, METRs unemployment trap, poverty trap

Do labour taxes (and their composition) affect wages in the short and in the long run?

Measures aimed at reducing the tax burden on labour have been advocated to alleviate the EU unemployment problem. Most of the analyses document a relationship between the unemployment rate and the tax burden on labour. Hence, it is not possible to discern whether the effect on unemployment derives from labour demand, labour supply or through the wage formation mechanism. Moreover, the empirical analyses are usually static, and may be indicative of the steady-state determinants of the unemployment rate and do not reveal the features of the adjustment process. This paper studies the relationship between labour taxes and labour costs by modelling the wage formation mechanism in a dynamic context. We test if the composition of labour taxes affects labour costs in the short- and in the long-run and whether highly centralised bargaining systems have better employment performance than decentralised ones. We apply static and dynamic panel data techniques to a panel of EU countries. Our findings suggest that there is probably some wage resistance in the short-term but not in the long-term, although the transition to the long-term can be very long and therefore the short- term impact and the dynamics of adjustment can be long-lasting.Taxation, tax wedge, tax incidence, labour costs, wage resistance, employment, dynamic panel data, social security contributions.

Tax revenues in the European Union: Recent trends and challenges ahead

The governments of the European Union are facing important challenges that may impact both their need and their capacity to collect taxes. First, ageing will increase some social spending while reducing the potential of some tax bases such as labour. Second, globalisation has the potential to increase the mobility of capital and of high-skilled workers, making it more difficult to rely on them as a source of revenues. Finally, the desire to shift tax away from labour and to make work pay while retaining the social models will force Member States to find alternative robust tax bases. This paper reviews the most recent trends in taxation in the European Union and discusses several tax policy issues in the light of those coming challenges.Taxation; Welfare State; European Union; ageing; globalisation

Long-Term Labour Force Projections for the 25 EU Member States:A set of data for assessing the economic impact of ageing

This paper presents the methodology and results of labour force projections over the long term (until 2050) for each of the 25 EU Member States. These projections were undertaken in order to provide the background technical inputs for the assessment of the potential economic and fiscal impact of an ageing population. The projections presented in this paper show the outcome for the labour force of extrapolating recent trends in labour market behaviour (entry and exit rates from the labour market). These base case projections reflect the working assumption of “no policy change” and are neither forecasts nor predictions in that they are not based on any assessment of more or less likely future changes in working patterns or economic conditions. To summarise the outcome of projections, the baseline scenario indicates that, notwithstanding the projected increase in the participation rates and the reduction in unemployment rates, the pace of labour force and employment growth in the EU25 will be weakly positive over the next 15 years and will turn negative over the period 2018 to 2050. These is mainly the outcome of projected declining trends for the working-age population and a shift in the age structure of the population towards older, less participating groups - a consequence of the baby-boom generation approaching retirement and the succeeding lower-birth-rate cohorts reaching working age.Labour force projections, population projections, cohort method, ageing population, dependency ratios

Tax revenues in the European Union: Recent trends and challenges ahead

The governments of the European Union are facing important challenges that may impact both their need and their capacity to collect taxes. First, ageing will increase some social spending while reducing the potential of some tax bases such as labour. Second, globalisation has the potential to increase the mobility of capital and of high-skilled workers, making it more difficult to rely on them as a source of revenues. Finally, the desire to shift tax away from labour and to make work pay while retaining the social models will force Member States to find alternative robust tax bases. This paper reviews the most recent trends in taxation in the European Union and discusses several tax policy issues in the light of those coming challenges.taxation, welfare state, ageing, globalisation, Carone, Host Schmidt, Nicodeme

Indicators of unemployment and low-wage traps (Marginal effective tax rates on labour)

This paper presents results of an on-going joint European Commission / OECD project, aimed at monitoring the direct influence of tax and benefit instruments on household incomes. Indicators of financial work incentives are needed for identifying any undesired influences of taxes and social transfers on people’s work decisions. Marginal effective tax rates (METRs) are calculated in order to show what part of a change in earnings is “taxed away” by the combined operation of taxes, social security contributions (SSCs), and any withdrawal of earnings related social benefits. Three different types of METRs are calculated in order to measure so-called low-wage,unemployment and inactivity traps, that is situations where incentives to work are low. The results allow the identification of countries and family types that face little financial incentive to increase work effort or to take up a job.Unemployment trap, incentive to work, METR, tax on labour Make work pay, unemployment benefits.

Indicators of unemployment and low-wage traps (marginal effective tax rates on labour)

This paper presents results of an on-going joint European Commission / OECD project, aimed at monitoring the direct influence of tax and benefit instruments on household incomes. Indicators of financial work incentives are needed for identifying any undesired influences of taxes and social transfers on people's work decisions. At the same time, a central part of recent tax and benefit reform strategies has been to reduce reliance on welfare by “making work payâ€, that is, to make work an economically attractive option relative to welfare. It is therefore desirable to monitor the effects of such policies as well as the potential for further reform..taxation, fiscal policy, household income, marginal effective tax rates, METR, unemployment trap, inactivity trap, low-wage trap, employment, Carone, Salom�ki, Immervoll, Paturot

Long-term labour productivity and GDP projections for the EU25 Member States : a production function framework

This paper presents the results of long run labour productivity and GDP growth rate projections (until 2050) for each of the 25 EU Member States and provides a detailed overview of the forecast methodology used. These projections were undertaken in order to provide an internationally comparable macroeconomic framework against which to assess the potential economic and fiscal effects of ageing populations. The projections presented in this paper, using a common production function methodology for all 25 countries, show the GDP growth rate effects of an assumptions-driven extrapolation of recent trends in employment and labour productivity. These base case projections reflect the working assumption of “no policy change”.Various sensitivity tests are carried out to check the GDP per capita impact of some factors which have been excluded from the baseline scenario for reasons of simplicity or because of a lack of consensus in the academic literature. Some of the interesting conclusions that emerge from these sensitivity tests include : • Firstly, the GDP per capita impact of changes in the participation rate assumption used in the projections is much greater than for assumed changes in the share of part-time employment (i.e. in average hours worked per worker). • Secondly, the negative effect of a change in the age-structure of the population is fairly limited, although it is accepted that the labour productivity of an individual is likely to decline after the age of 55. A very strong fall in the productivity of older workers compared with that of prime-age workers would be required to significantly depress total labour productivity. Such an outcome, on the basis of current evidence, appears rather unlikely. • Thirdly, changing the TFP growth rate targets (e.g. use of the 1990’s average instead of the long-term 1970-2004 average) could strongly affect the projections. • Finally, an assumption of productivity convergence in levels substantially alters the projections for most EU10 countries but leaves the EU15 almost unchanged. JEL classificProductivity; ageing; long-term projections; production function; labour productivity; older workers