## 1. Contribution of Net Exports to GDP Growth, 2002–07

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### Introduction
- Purpose: analyze developments in the external sector since 2002 in Poland, the Czech Republic, Hungary, and Slovakia on a comparable basis to assess competitiveness.
- Time coverage: main analysis over 2002-07; country data series typically start in 1995 (Czech Republic from 1996).
- Approach: describe determinants of exports and imports (price competitiveness, FDI stock, foreign demand, geographic orientation, domestic demand) and quantify dynamic contributions using univariate error-correcting models and cointegration tests.

### Key summarized findings (general)
- Until 2007, exchange rate appreciation had not unduly weighed on trade developments; rapid export and import increases point to greater access to global trade networks and strong nonprice competitiveness gains since EU accession.
- Global growth and post-EU accession upswing explain much of trade dynamism until 2007.
- Nonprice competitiveness gains are evidenced by rising global market shares and FDI inflows.
- Relative trade price developments did not fully mirror REER appreciation; contribution of price competitiveness to trade flows remained subdued over 2002-07.
- Signs of partial reversal in 2006-07, particularly in Poland and, to some extent, Slovakia.
- Heavy reliance on foreign demand created vulnerability when the global economy entered a severe recession.

### Developments in key determinants of trade (selected statistics preserved exactly)
- Contribution of net exports to GDP growth (cumulative percent, 2002–07):
  - Czech Republic: -3.1 5.6 8.4 26.4 5.3 33.5
  - Hungary: -5.0 8.7 10.5 14.9 5.5 24.9
  - Poland: 1.4 5.4 -2.8 23.7 -1.4 30.3
  - Slovakia: 6.1 9.8 4.8 34.3 11.0 47.4
  - (Source: WEO; as presented in the memo item in the source text)
- Trade balance, 2002–07 (in percent of GDP; cumulative change):
  - Czech Republic: -2.1 -0.1 4.8 7.0
  - Hungary: -2.3 -2.7 2.5 4.8
  - Poland: -3.2 -2.2 -2.7 0.5
  - Slovakia: -6.9 -3.0 -0.5 6.4
  - (Source: WEO)
- Real Effective Exchange Rate based on ULCs, 2002–07 (in cumulative percentage change, +=depreciation):
  - Czech Republic: -20.1 -10.3 -28.3
  - Hungary: -9.9 -10.4 -19.3
  - Poland: 36.3 -19.0 10.4
  - Slovakia: -14.2 -18.7 -30.2
  - (Source: European Commission)
- FDI stock (in percent of GDP), 2002/2004/2007: all four countries saw large increases in FDI stock; FDI concentrated in export-oriented sectors (automobiles, “white” appliances).
- Geographic orientation of exports, 2002–07 (percent of exports):
  - Exports to euro area: Poland 61.8/57.1; Czech Republic 66.3/53.9; Hungary 57.9/52.2; Slovakia 57.6/51.8
  - Exports to other Western European countries (Denmark, Norway, Sweden and United Kingdom): Poland 8.0/8.2; Czech Republic 9.8/6.3; Hungary 13.0/12.8; Slovakia 4.3/7.5
  - Exports to CEE: Poland 14.9/18.0; Czech Republic 5.5/12.6; Hungary 7.7/10.5; Slovakia 26.0/24.8
  - Exports to the Baltics: Poland 0.6/0.8; Czech Republic 0.3/0.6; Hungary 3.3/2.9; Slovakia 0.5/0.6
  - Exports to Russia, Ukraine and Belarus: Poland 2.0/3.5; Czech Republic 2.1/5.5; Hungary 6.8/9.5; Slovakia 2.2/3.8
  - Exports to emerging Asia (Asia excluding Japan): Poland 1.9/2.1; Czech Republic 2.0/2.3; Hungary 1.4/1.6; Slovakia 0.9/1.4
  - (Source: IFS, IMF)
- Domestic demand (growth rate, 2002–07): Poland experienced the sharpest improvement in domestic demand; Hungary slowed after EU accession, contributing to cyclical improvement in its trade balance; Slovakia and the Czech Republic showed gradual strengthening.

### Econometric analysis: method and core results
- Methodology:
  - Eight reduced-form equations (exports and imports per country) estimated univariately in levels; cointegration tests applied.
  - Full error-correction models estimated to capture dynamics; Hendry’s strategy used for lag selection.
  - Dynamic contributions computed combining elasticities and evolution of explanatory variables, accounting for lag structure.
  - Variables: price competitiveness (relative price indexes; for Hungary in one instance the ULC-based REER used), trade-weighted foreign demand, domestic demand, FDI stock (exports), exports included as explanatory for imports, trends where significant.
- Long-term elasticities (Table 5):
  - Exports: elasticity to world demand
    - Czech Rep.: 3.63
    - Hungary: 1.92
    - Poland: 2.40
    - Slovakia: 7.03
  - Exports: elasticity to FDI stock
    - Czech Rep.: 0.00
    - Hungary: 0.56
    - Poland: 0.19
    - Slovakia: 0.07
      - (for Slovakia the elasticity shown applies to data after 2004; before 2004 elasticity marginally higher)
  - Imports: elasticity to domestic demand
    - Czech Rep.: 0.57
    - Hungary: 1.18
    - Poland: 1.81
    - Slovakia: 0.85
  - Imports: elasticity to exports
    - Czech Rep.: 0.73
    - Hungary: 1.10
    - Poland: 0.42
    - Slovakia: 0.32
  - (Source: IMF staff calculations; note: for Hungary, export price competitiveness variable is ULC-based REER)
- Dynamic contributions to export and import growth, 2002–07:
  - Exports:
    - World demand acceleration accounts for the bulk of export buoyancy over 2002-07, strongest impact in Czech Republic and Slovakia.
    - FDI buildup contributed to export growth, more pronounced in Hungary and Poland than in Czech Republic and Slovakia.
    - Price competitiveness made a muted contribution to export growth over 2002-07.
  - Imports:
    - Strong domestic demand was a key driver of import growth.
    - Export growth also drove imports up, reflecting growing import content of exports and integration into regional production networks.
    - Czech Republic and Hungary showed the strongest imports response to exports; Poland’s imports were more dependent on domestic demand and investment.

### Price competitiveness does not appear to have weighed significantly on trade (2002–07)
- Aggregate impact:
  - Over 2002-07, the evolution of relative prices generally contributed negatively to exports and boosted imports, but "the overall size of these impacts remained muted."
  - Interpretation: "Most of the trend appreciation of the real exchange rate reflected more a shift of the equilibrium value than a loss in price competitiveness."
  - Data for 2006-07 "suggest that relative prices had started to weigh more negatively on trade flows in Poland and Slovakia."
  - "The sharp reversal since the fall of 2008 is not warranted by fundamentals."
- Long-term elasticities to price competitiveness indicators (Table 6):
  - Exports elasticities:
    - Czech Republic: 0.0
    - Hungary: 0.15
    - Poland: 0.73
    - Slovakia: 0.63
  - Imports elasticities:
    - Czech Republic: -0.15
    - Hungary: -0.23
    - Poland: -0.52
    - Slovakia: -0.38
  - Note: "For Hungary's exports, the price competitiveness variable is the ULC-based REER, as opposed to the other countries where it is the relative price faced by exporters."
- Cross-country heterogeneity:
  - Elasticity is relatively low in the Czech Republic—"where exports were found not to react at all to relative prices"—and in Hungary.
  - Elasticity is much higher in Poland, possibly reflecting "a different technology content of export goods" and less ability of Poland to move up the quality and technology ladder relative to smaller countries in the region.

### Nonprice competitiveness, residuals, and trend effects
- Export-equation residuals:
  - Statistically average zero over the sample, but subsample behavior can reflect inflection in omitted factors (business climate, sectoral orientation, other nonprice competitiveness indicators).
  - "From EU accession until 2007, the residuals have contributed negatively to exports in all four countries, although to a lesser extent in the Czech Republic."
  - Interpretation: negative residuals "are likely to reflect less dynamic nonprice competitiveness gains as the catch-up proceeds and these economies converge toward Western European standards."
- Import-equation residuals:
  - "Imports were relatively more dynamic before accession in Hungary and Poland (positive residuals), but have turned less dynamic in all countries since 2004 (negative residuals)."
  - Possible reasons:
    - Households brought forward consumption and firms upgraded investment stock pre- and post-accession; this additional momentum is "gradually losing steam."
    - Investment efforts around accession may have improved domestic production capacity to substitute imported goods and services.

### Interpretation, vulnerabilities, and policy-relevant implications
- Dominant forces:
  - Nonprice competitiveness (FDI, market share gains, integration into trade networks) was the dominant force behind export growth 2002-07.
  - Price competitiveness deteriorations implied by REER appreciation were not translated into equivalent adverse export-price movements in tradable sectors, mitigating negative impacts on trade.
- Heterogeneity across countries:
  - Smaller countries (Czech Republic, Slovakia) showed higher elasticities to world demand and stronger market-share expansion.
  - Poland’s stronger domestic demand growth reduced its trade-balance improvement and made it slightly more protected from world demand swings.
- Vulnerabilities exposed by the crisis:
  - Heavy reliance on foreign demand made the region sensitive to global downturns that began after 2007; "the slowdown in trade partners drastically curtailed trade flows, especially for the smaller CEE countries."
  - Mitigating factor: "in all countries, imports concomitantly slowed down, not only because domestic growth moderated but also because its export-related component was curbed."
- Exchange rate and fundamentals:
  - "The trend exchange rate appreciation did not weigh excessively on trade developments over 2004-07; in this respect, the sharp reversal since the fall of 2008 is not warranted by fundamentals."
  - Despite rapid exchange rate appreciation, "relative trade prices had remained more muted, as productivity gains in export-oriented sectors had proved strong enough to offset nascent domestic wage pressures."
  - However: "Data for 2006-07... suggest that relative prices had started to weigh more negatively on trade flows in Poland and Slovakia."
  - "The extent of the depreciations experienced since mid-2008 in Hungary, Poland and the Czech Republic does not reflect fundamentals; rather, external determinants related to the global financial turmoil have led to significant currency undervaluation."

*Source: IMF staff analysis as presented in the chapter "1. Contribution of Net Exports to GDP Growth, 2002–07" and "Price competitiveness does not appear to have weighed significantly on trade."*

### 1. Contribution of Net Exports to GDP Growth, 2002–07 ..............................................4

### 1. Contribution of Net Exports to GDP Growth, 2002–07

### Introduction
- Purpose: analyze developments in the external sector since 2002 in Poland, the Czech Republic, Hungary, and Slovakia on a comparable basis to assess competitiveness.
- Time coverage: main analysis over 2002-07; country data series typically start in 1995 (Czech Republic from 1996).
- Approach: describe determinants of exports and imports (price competitiveness, FDI stock, foreign demand, geographic orientation, domestic demand) and quantify dynamic contributions using univariate error-correcting models and cointegration tests.

### Key summarized findings (general)
- Until 2007, exchange rate appreciation had not unduly weighed on trade developments; rapid export and import increases point to greater access to global trade networks and strong nonprice competitiveness gains since EU accession.
- Global growth and post-EU accession upswing explain much of trade dynamism until 2007.
- Nonprice competitiveness gains are evidenced by rising global market shares and FDI inflows.
- Relative trade price developments did not fully mirror REER appreciation; contribution of price competitiveness to trade flows remained subdued over 2002-07.
- Signs of partial reversal in 2006-07, particularly in Poland and, to some extent, Slovakia.
- Heavy reliance on foreign demand created vulnerability when the global economy entered a severe recession.

### Developments in Key Determinants of Trade
- Contribution of net exports to GDP growth (cumulative percent, 2002–07):
  - Czech Republic: -3.1 5.6 8.4 26.4 5.3 33.5 (memo line formatting preserved from source)
  - Hungary: -5.0 8.7 10.5 14.9 5.5 24.9
  - Poland: 1.4 5.4 -2.8 23.7 -1.4 30.3
  - Slovakia: 6.1 9.8 4.8 34.3 11.0 47.4
  - (Source: WEO; as presented in the memo item in the source text)

- Trade balance, 2002–07 (in percent of GDP; cumulative change):
  - Czech Republic: -2.1 -0.1 4.8 7.0
  - Hungary: -2.3 -2.7 2.5 4.8
  - Poland: -3.2 -2.2 -2.7 0.5
  - Slovakia: -6.9 -3.0 -0.5 6.4
  - (Source: WEO)

- Real Effective Exchange Rate based on ULCs, 2002–07 (in cumulative percentage change, +=depreciation):
  - Czech Republic: -20.1 -10.3 -28.3
  - Hungary: -9.9 -10.4 -19.3
  - Poland: 36.3 -19.0 10.4
  - Slovakia: -14.2 -18.7 -30.2
  - (Source: European Commission)

- Export competitiveness indicators (1995–2007): export prices and REER based on ULCs show that, except in Poland, continuous REER appreciation occurred over 2002-07 while relative export prices evolved more mutedly in tradable sectors.

- FDI stock (in percent of GDP), 2002/2004/2007: all four countries saw large increases in FDI stock; FDI concentrated in export-oriented sectors (automobiles, “white” appliances).

- Growth rate of world demand, 2002–07 (in percent): foreign absorption accelerated for all four countries over 2002-07 (chart referenced in source).

- Geographic orientation of exports, 2002–07 (percent of exports):
  - Exports to euro area: Poland 61.8/57.1; Czech Republic 66.3/53.9; Hungary 57.9/52.2; Slovakia 57.6/51.8
  - Exports to other Western European countries (Denmark, Norway, Sweden and United Kingdom): Poland 8.0/8.2; Czech Republic 9.8/6.3; Hungary 13.0/12.8; Slovakia 4.3/7.5
  - Exports to CEE: Poland 14.9/18.0; Czech Republic 5.5/12.6; Hungary 7.7/10.5; Slovakia 26.0/24.8
  - Exports to the Baltics: Poland 0.6/0.8; Czech Republic 0.3/0.6; Hungary 3.3/2.9; Slovakia 0.5/0.6
  - Exports to Russia, Ukraine and Belarus: Poland 2.0/3.5; Czech Republic 2.1/5.5; Hungary 6.8/9.5; Slovakia 2.2/3.8
  - Exports to emerging Asia (Asia excluding Japan): Poland 1.9/2.1; Czech Republic 2.0/2.3; Hungary 1.4/1.6; Slovakia 0.9/1.4
  - (Source: IFS, IMF)

- Domestic demand (growth rate, 2002–07): Poland experienced the sharpest improvement in domestic demand; Hungary slowed after EU accession, contributing to cyclical improvement in its trade balance; Slovakia and the Czech Republic showed gradual strengthening.

### Econometric Analysis (method and core results)
- Methodology:
  - Eight reduced-form equations (exports and imports per country) estimated univariately in levels; cointegration tests applied.
  - Full error-correction models estimated to capture dynamics; Hendry’s strategy used for lag selection.
  - Dynamic contributions computed combining elasticities and evolution of explanatory variables, accounting for lag structure (see appendix III in source).
  - Variables: price competitiveness (relative price indexes; for Hungary in one instance the ULC-based REER used), trade-weighted foreign demand, domestic demand, FDI stock (exports), exports included as explanatory for imports, trends where significant.

- Long-term elasticities related to nonprice competitiveness (Table 5; long-term elasticities):
  - Exports: elasticity to world demand
    - Czech Rep.: 3.63
    - Hungary: 1.92
    - Poland: 2.40
    - Slovakia: 7.03
  - Exports: elasticity to FDI stock
    - Czech Rep.: 0.00
    - Hungary: 0.56
    - Poland: 0.19
    - Slovakia: 0.07 (for Slovakia the elasticity shown applies to data after 2004; before 2004 elasticity marginally higher)
  - Imports: elasticity to domestic demand
    - Czech Rep.: 0.57
    - Hungary: 1.18
    - Poland: 1.81
    - Slovakia: 0.85
  - Imports: elasticity to exports
    - Czech Rep.: 0.73
    - Hungary: 1.10
    - Poland: 0.42
    - Slovakia: 0.32
  - (Source: IMF staff calculations; note: for Hungary, export price competitiveness variable is ULC-based REER)

- Dynamic contributions to export and import growth, 2002–07 (summary of major drivers):
  - Exports:
    - World demand acceleration accounts for the bulk of export buoyancy over 2002-07, strongest impact in Czech Republic and Slovakia.
    - FDI buildup contributed to export growth, more pronounced in Hungary and Poland than in Czech Republic and Slovakia.
    - Price competitiveness made a muted contribution to export growth over 2002-07.
  - Imports:
    - Strong domestic demand was a key driver of import growth.
    - Export growth also drove imports up, reflecting growing import content of exports and integration into regional production networks.
    - Czech Republic and Hungary showed the strongest imports response to exports; Poland’s imports were more dependent on domestic demand and investment.

### Interpretation and implications
- Nonprice competitiveness (FDI, market share gains, integration into trade networks) was the dominant force behind export growth 2002-07.
- Price competitiveness deteriorations implied by REER appreciation were not translated into equivalent adverse export-price movements in tradable sectors, mitigating negative impacts on trade.
- Heterogeneity across countries: smaller countries (Czech Republic, Slovakia) showed higher elasticities to world demand and stronger market-share expansion; Poland’s stronger domestic demand growth reduced its trade-balance improvement.
- Vulnerability: heavy reliance on foreign demand made the region sensitive to global downturns that began after 2007.

*Source: IMF staff analysis as presented in the chapter "1. Contribution of Net Exports to GDP Growth, 2002–07" of the provided PDF.*

### 14.      Price competitiveness does not appear to have weighed significantly on trade

### 14.      Price competitiveness does not appear to have weighed significantly on trade

### Impact of price competitiveness on exports and imports (2002–07)
- Over 2002-07, the evolution of relative prices generally:
  - contributed negatively to exports and
  - boosted imports,
  - but "the overall size of these impacts remained muted."
- Interpretation:
  - "Most of the trend appreciation of the real exchange rate reflected more a shift of the equilibrium value than a loss in price competitiveness."
  - Data for 2006-07 "suggest that relative prices had started to weigh more negatively on trade flows in Poland and Slovakia."
  - "The sharp reversal since the fall of 2008 is not warranted by fundamentals."
- Long-term elasticities to price competitiveness indicators (Table 6):
  - Exports elasticities:
    - Czech Republic: 0.0
    - Hungary: 0.15
    - Poland: 0.73
    - Slovakia: 0.63
  - Imports elasticities:
    - Czech Republic: -0.15
    - Hungary: -0.23
    - Poland: -0.52
    - Slovakia: -0.38
  - Note: "For Hungary's exports, the price competitiveness variable is the ULC-based REER, as opposed to the other countries where it is the relative price faced by exporters."
- Cross-country heterogeneity:
  - Elasticity is relatively low in the Czech Republic—"where exports were found not to react at all to relative prices"—and in Hungary.
  - Elasticity is much higher in Poland, possibly reflecting "a different technology content of export goods" and less ability of Poland to move up the quality and technology ladder relative to smaller countries in the region.

### Nonprice competitiveness, residuals, and trend effects
- Export-equation residuals:
  - Statistically average zero over the sample, but subsample behavior can reflect inflection in omitted factors (business climate, sectoral orientation, other nonprice competitiveness indicators).
  - "From EU accession until 2007, the residuals have contributed negatively to exports in all four countries, although to a lesser extent in the Czech Republic."
  - Interpretation: negative residuals "are likely to reflect less dynamic nonprice competitiveness gains as the catch-up proceeds and these economies converge toward Western European standards."
- Import-equation residuals:
  - "Imports were relatively more dynamic before accession in Hungary and Poland (positive residuals), but have turned less dynamic in all countries since 2004 (negative residuals)."
  - Possible reasons:
    - Households brought forward consumption and firms upgraded investment stock pre- and post-accession; this additional momentum is "gradually losing steam."
    - Investment efforts around accession may have improved domestic production capacity to substitute imported goods and services.

### Dynamic contributions and cyclical drivers
- Dominant drivers during EU accession to the onset of the financial crisis:
  - "The pickup in growth in the main trade partners’ economies during 2004-07, especially in Western Europe, undeniably played the biggest role in supporting export growth in all four countries."
  - Domestic absorption in the run-up to, and wake of, EU accession "significantly boosted imports."
  - Strong FDI inflows helped increase export market share and supported nonprice competitiveness gains.
  - Development of production and exchange networks within the region and with mature markets increased import content related to export-oriented production.
- Country differences:
  - "The Czech Republic and Slovakia seem to have benefited the most and the earliest from these gains, while Poland lagged slightly behind."

### Conclusions and policy-relevant implications (from the study)
- Overall assessment:
  - "The global and domestic upswings, along with rising market shares, go a long way toward accounting for trade developments in Central-Eastern European countries during the period spanning from EU accession to the onset of the financial crisis; this period was characterized by strong, albeit moderating, nonprice competitiveness gains."
- Exchange rate and fundamentals:
  - "The trend exchange rate appreciation did not weigh excessively on trade developments over 2004-07; in this respect, the sharp reversal since the fall of 2008 is not warranted by fundamentals."
  - Despite rapid exchange rate appreciation, "relative trade prices had remained more muted, as productivity gains in export-oriented sectors had proved strong enough to offset nascent domestic wage pressures."
  - "This feature likely highlights the fact that most of the real exchange rate appreciation over 2004-07 had followed an upward trend in its equilibrium value, without jeopardizing price competitiveness."
  - However: "Data for 2006-07... suggest that relative prices had started to weigh more negatively on trade flows in Poland and Slovakia."
  - "The extent of the depreciations experienced since mid-2008 in Hungary, Poland and the Czech Republic does not reflect fundamentals; rather, external determinants related to the global financial turmoil have led to significant currency undervaluation."
- Vulnerabilities exposed by the crisis:
  - The region entered the global turmoil "from a strong competitiveness position," but the crisis exposed "the vulnerability of its heavy reliance on global demand to a sudden trade shock."
  - "The slowdown in trade partners drastically curtailed trade flows, especially for the smaller CEE countries."
  - "Poland seems slightly more protected, being less sensitive to world demand."
  - Mitigating factor: "in all countries, imports concomitantly slowed down, not only because domestic growth moderated but also because its export-related component was curbed."

*Source: IMF staff calculations and estimates as presented in the chapter "Price competitiveness does not appear to have weighed significantly on trade."*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09121.pdf_