## 1. Determinants of Value-Added Exports of Goods and Services to EU: NMS-10, 2003–11

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---

### Introduction and scope
- Study focus: factors shaping export performance of New Member States (NMS) in a largely tariff-free EU environment, emphasizing structural reforms, export quality improvement, and the services sector.
- Context and sample:
  - Timeframe discussed: tariff liberalization and export growth over 1990―2014 (figure referenced).
  - NMS definition: 11 countries that joined the EU during 2004–13; analysis splits them into NMS-non EA and NMS-EA.
  - Empirical sample for regressions: ten NMS, period 2003–11 (Croatia excluded from regressions due to data gaps).
- Conceptual framing: trade within the EU provides a tariff-free setting to isolate non-tariff drivers of export success.

### Key empirical findings on structural reforms and export integration
- Core conclusion:
  - Structural reforms play a strong role in enabling countries to take advantage of a tariff-free trade environment.
- Policies identified as most relevant for improving export performance:
  - Higher education and skills match.
  - Incentives to work.
  - Foreign investment environment.
- Reform sequencing by quality level:
  - Lower-end quality countries: priority on creating a conducive environment for foreign investment and strengthening supply-chain links.
  - Medium-level quality countries: priority on tertiary education, skills upgrade, and R&D spending.
- Trade-offs and dynamics:
  - EU single market fosters firm growth and stronger competition, raising incentives to improve productivity.
  - Open trade and investment regimes facilitate technology transfer and export quality improvement.
  - Potential downside: premature exposure of nascent industries to competition from established firms.

### Empirical strategy and estimation
- Dependent variable: value added exports to the EU scaled by GDP (preferred to gross exports to net out re-exports and imported inputs).
- Structural explanatory variables:
  - Human capital: upper secondary or tertiary educational attainment; participation in continuous vocational training and skills upgrade.
  - Labor market efficiency: inactivity trap (larger value = weaker incentive to work); relative minimum wage (minimum wage relative to gross average wage).
  - Foreign investment environment: index capturing prevalence of foreign ownership and whether regulations discourage foreign ownership (higher = more conducive).
  - Participation in supply chains: share of exports processed through upstream and downstream supply chains in total.
- Controls and methods:
  - Gravity and macro controls: income per capita, weighted distance, population, weighted PPP real GDP growth of partner countries, weighted consumer sentiment (proxy), and REER-ULC (unit labor cost based real effective exchange rate).
  - Estimation: panel OLS with time dummies, euro area accession and crisis dummies (statistically insignificant); Generalized Least Squares (random effects). Country fixed effects generally not included to identify slow-moving structural variables.

### Key regression results (NMS-10, 2003–11; selected coefficients from Table 1)
- Overall model fit and sample:
  - Observations: 73; R-squared: 0.858 / 0.857 / 0.859 across specifications.
- Structural variables (coefficients reported as in source, significance preserved):
  - Upper secondary or tertiary educational attainment: 0.16** (OLS), 0.19** (GLS), 0.33*** (relative-to-NMS-average OLS).
  - Participation in continuous vocational training and skills upgrade: 0.15***, 0.16***, 0.14***.
  - Inactivity trap: -0.09***, -0.08*, -0.03*.
  - Relative minimum wage: -0.08**, -0.09**, -0.16***.
  - Foreign investment and ownership environment (higher values indicate lower degree of restrictions): 1.0**, 1.0**, 2.2***.
  - Share of exports processed by supply chain: 0.44***, 0.44***, 0.34***.
  - Weighted real GDP growth of trading partners: 0.06 (OLS), 0.06*** (GLS), 0.13 (relative specification).
  - Real effective exchange rate (ULC-based): -0.03, -0.03, -0.07**.
- Robustness:
  - Structural variables remain robust across alternative dependent variables (gross exports, goods vs services, exports to world) and when excluding one country at a time.
- Relative importance (one-standard-deviation improvements; figure referenced):
  - Largest impacts: vocational training and skills upgrade; foreign investment environment; supply chain participation; higher education; relative minimum wage; inactivity trap.
  - Supply chain participation often captures gravity effects (distance, market size, income).

### Heterogeneity and country-level contributions (2003–11)
- Aggregate: NMS generally exhibit a higher export share in GDP relative to other EU members but with wide variation.
  - Czech Republic, Hungary, and Slovak Republic derive a quarter of their GDP from value added exports to the EU.
  - Latvia and Romania: this share is less than one tenth.
- Country-specific contributions relative to NMS average:
  - Czech Republic and Slovak Republic: positive contributions from vocational training, higher education, foreign investment environment, and supply chain links; labor market variables not a competitiveness source for Czech Republic.
  - Hungary: positive contributors include wage competitiveness, supply chain links, and foreign investment environment (though foreign investment contribution declined recently); negative contributors include vocational training and higher education.
  - Bulgaria, Latvia, Lithuania, Romania: persistent below-average export performance; gaps in human capital, labor market efficiency, and foreign investment environment.
  - Estonia and Slovenia: close to NMS average. Estonia: positive foreign investment environment; higher education and relative minimum wage negative. Slovenia: benefited from low relative minimum wage, above-average higher education, vocational training; offset by less friendly foreign investment environment.
  - Poland: improving; positive from higher education and competitive wages; drag from relatively lower participation in supply chains. Foreign investment environment historically negative but improving; pick-up in off-shoring and outsourcing of business services since 2010.
- Post-crisis dynamics:
  - Since the crisis, exports accounted for a higher share of GDP in all NMS-non EA countries except Croatia; driven by higher exports to both the EU and the rest of the world.

### Export quality and diversification: levels, gaps, and trade-offs
- Export quality distribution (Henn, Papageorgiou, and Spatafora 2013; Di Comite, Thisse and Vandenbussche 2014):
  - Overall NMS export quality: above the 60th percentile relative to all countries.
    - Slovenia: close to the 90th percentile.
    - Romania: 61st percentile.
  - Product-level tiers:
    - Highest tier (quality 61st–97th percentiles): Slovenia, Czech Republic, Slovak Republic.
    - Middle tier (quality 40th–89th percentiles): Croatia, Hungary, Poland, Estonia.
    - Third tier (quality 24th–80th percentiles): Lithuania, Bulgaria, Latvia, Romania.
  - Room for improvement: gap between importer-demanded quality and provided quality is positive for all NMS; largest in Lithuania, Latvia, Romania.
- EU-market relative quality:
  - NMS quality concentrated at low to middle parts of the EU quality spectrum.
  - Share of export products below the 50th percentile relative to other EU countries:
    - Poland: 62 percent.
    - Hungary: 52 percent.
  - More than half of export products from NMS belong to the bottom half of the EU quality ladder.
- Trade-offs:
  - Countries that markedly improved export quality (Czech Republic, Hungary, Slovak Republic) experienced increased export product concentration (higher internal margins), indicating a trade-off between improving quality and diversification.
- Relationship between quality and value:
  - Export quality positively correlated with export value in both EU and world markets.
  - Vandenbussche (2014) estimate: price elasticity of quality ~0.5.
- Policy levers for quality improvement:
  - Determinants include human capital, institutional quality, foreign investment, and R&D expenditure.
  - EBRD 2014 Transition Report guidance:
    - Low-development/product-quality economies: openness and facilitation of foreign investment and supply-chain links to access technology.
    - Mid-quality products: postgraduate education, quality of scientists and engineers, scientific research quality, product and labor market flexibility, science-industry cooperation, availability of venture capital.

### Country-prioritized policy implications for quality
- Bulgaria, Lithuania, Romania: improve foreign investment regime, boost secondary education, and link with supply chains to acquire technology.
- Slovenia, Czech Republic, Slovak Republic, Hungary, Estonia: focus on innovation, ramp up higher education and R&D spending.
- Mid-quality, highly integrated countries: diversify products and markets (including outside the EU) and increase R&D and tertiary education to raise quality further.

### Services exports: constraints, effects of Services Directive, and opportunities
- Role and scale:
  - Services sector contributes two-thirds of EU GDP and creates 9 out of 10 jobs, yet its share in intra-EU trade is low.
  - For NMS, services share in value added exports is about one third and much less than in gross exports.
  - Croatia: services-dominated exports to the EU (mostly tourism).
- Services Directive (SD, 2006) and effects:
  - Most services exports from NMS fall under sectors covered by the SD.
    - Weighted average share of SD sectors in total services exports from NMS-non EA to the EU: 70 percent; almost 90 percent for Croatia.
    - Other EU average: 62 percent; NMS-EA: 59 percent.
  - European Commission assessment: SD implementation reduced average restrictions on services imports across products and countries by about 30 percent since 2006 (with considerable variation).
  - Empirical growth: services exports from NMS in SD sectors grew more (on average 7-8 percent annually) than from other EU members during 2006–2011; growth stronger in sectors most liberalized after SD.
- Remaining barriers and implications:
  - Significant restrictions persist, especially for professional and technical services; SD allowed member states to retain restrictions deemed necessary for public interest, leading to uneven liberalization.
  - Advanced EU economies (major absorbers of NMS exports) still have barriers on professional and technical services.
  - Comparative advantage patterns:
    - Estonia, Bulgaria, Hungary, Latvia, Lithuania, Romania, Slovak Republic show comparative advantage in more services products than goods.
    - Czech Republic, Hungary, Poland, Romania: comparative advantage in professional and technical services (weighted average share of professional services in total SD exports between 30–40 percent in these four countries).
- Policy implication:
  - Further liberalization of services trade by EU members, particularly in professional services, would benefit NMS exports to the EU.
  - On the NMS side, structural reforms enhancing vocational training, incentives to work, foreign investment environment, and supply chain integration are conducive to boosting services exports.

### Policy conclusions and recommendations (Section V)
- Core recommendation:
  - Structural reforms are central to maximizing benefits from unrestricted access to the EU single market.
- Key reform areas:
  - Higher education, skills upgrade (vocational and on-the-job training).
  - Wage structures that provide incentives to work.
  - Foreign investment environment.
  - Policies promoting integration with supply chains.
- Country-prioritized reforms:
  - Bulgaria, Latvia, Lithuania, Romania: broad-based reforms—improve skills, education attainment, and foreign investment regime.
  - Slovenia: more conducive foreign ownership regime.
  - Poland: greater links in services-based supply chains.
  - Estonia: emphasis on higher education and labor market efficiency.
  - Hungary: priority on higher education.
- Export quality and diversification guidance:
  - All NMS have room for quality improvement, largest in Bulgaria, Lithuania, Latvia, Romania.
  - Policy differentiation by current quality level:
    - Low-quality producers: prioritize foreign investment environment improvements and supply-chain links.
    - Mid-quality producers: prioritize skills, higher education, innovation, and R&D spending.
    - High mid-quality producers integrated with EU: consider diversification into new products and markets (including outside EU) and significant boosts to R&D and tertiary education.
- Services trade policy:
  - Services exports can materially increase NMS exports to the EU; many NMS services exports fall under the SD.
  - Professional services face persistent restrictions in many EU member states; further dismantling of restrictions would help NMS.
  - Suggestion: renewed impetus to the Services Directive through third-party review of principles of non-discrimination, necessity and proportionality to assess public interest (Corugedo and Ruiz, 2014).
- Overarching recommendation:
  - Implement structural reforms targeted to country-specific weaknesses to raise export performance, improve export quality, and better exploit the EU single market—complemented by further liberalization of services trade by EU member states.

### Box 1 — Determinants of export quality (literature and empirical patterns)
- Literature survey of drivers:
  - Human capital and R&D: human capital and R&D are important for export sophistication (Zhu et al (2009); Hausmann et al. (2007); Weldemicael (2012); Henn, Papageorgiou, and Spatafora (2013)).
  - Institutional quality: associated with faster quality upgrading (Henn, Papageorgiou, and Spatafora (2013)); effects vary by sector and income (Hausmann et al. (2007); Weldemicael (2012)).
  - FDI: positive impact as channels of international knowledge transfer (Zhu et al (2009); Weldemicael (2012)).
  - Capital and natural resources: higher capital-labor ratio helps sophistication; natural resource abundance tends to reduce industry upgrading absent high institutional quality (Zhu et al (2009)).
  - Country size and distance: country size positive; remoteness negative for export sophistication (Weldemicael (2012); Zhu et al (2009)).
- Empirical fits shown (Box Figure 1):
  - Export Quality and Spending on R&D: fit y = 0.0656ln(x) + 0.9359; vertical axis range 0.65 to 1.15.
  - Export Quality and Labor Market Efficiency: fit y = 0.073x + 0.6042; vertical axis range 0.50 to 1.20.
  - Export Quality and Labor Force with Tertiary Education: fit y = 0.0041x + 0.8342; vertical axis range 0.50 to 1.20.
- Cross-country lesson:
  - Japan and Germany historically provided export quality above what importers demanded; Korea joined after steady improvements in R&D, tertiary education, and business environment indicators.
  - For Czech Republic and Hungary, substantial improvements appear needed in education, R&D expenditure, and business environment to pursue similar upgrades.
- Analytical takeaway:
  - Multiple complementary factors drive export quality upgrading: human capital, R&D, institutional quality, FDI, capital intensity, country size, and proximity to markets. Interactions (e.g., institutional quality and natural resources) matter.

### Annex II — Sectoral gains and losses in revealed comparative advantage (RCA) in the EU, 1995―2011
- Sectors covered: broad list spanning agriculture, mining, multiple manufacturing categories (labor-intensive, capital-intensive, knowledge-intensive), services (labor-intensive, capital-intensive, knowledge-intensive), and other community and public services.
- Quantitative outcomes reported in the table (preserved formatting as in source):
  - Number of products experiencing a loss of RCA-10-14-7-5-3-5-4-6-9-1
  - Number of products experiencing a gain in RCA4476624139
  - Net change-6-10013-30-5-68
- Note: Orange cells show loss in RCA and green cells show gains in RCA.

*Source: _wp15187 - 1. Determinants of Value-Added Exports of Goods and Services to EU: NMS-10, 2003–11.*

### 1. Determinants of Value-Added Exports of Goods and Services to EU: NMS-10,

### 1. Determinants of Value-Added Exports of Goods and Services to EU: NMS-10, 2003–11

### Introduction and scope
- Study focus: factors shaping export performance of New Member States (NMS) in a largely tariff-free EU environment, with emphasis on the role of structural reforms, export quality improvement, and the services sector.
- Context:
  - Tariff liberalization and export growth examined over 1990―2014 (Figure referenced).
  - NMS includes 11 countries that joined the EU during 2004–13; the paper splits them into two groups: NMS-non EA and NMS-EA.
  - Trade within the EU, at least in goods, generally occurs in a tariff-free environment, creating a setting to isolate non-tariff drivers of export success.

### Key empirical findings on structural reforms and export integration
- Main conclusion: Structural reforms play a strong role in enabling countries to take advantage of a tariff-free trade environment.
- Policies identified as most relevant for improving export performance:
  - Policies that influence higher education and skills match.
  - Incentives to work.
  - Foreign investment environment.
- Findings on reform sequencing for export quality improvement:
  - For countries at the lower end of the quality spectrum:
    - Priority: create a conducive environment for foreign investment and strengthen links with supply chains.
  - For countries at the medium-level of the quality spectrum:
    - Priority: tertiary education, skills upgrade, and R&D spending.
- Trade-offs and dynamics:
  - EU single market provides opportunities for firm growth and stronger competition, raising incentives to improve productivity.
  - Open trade and investment regimes act as conduits for technology transfer that can improve export quality over time.
  - Potential downside: premature exposure of nascent industries to strong competition from established firms.

### Export quality, diversification, and room for improvement
- Objective: assess whether export integration with the EU has been associated with improvements in export quality and the scope for climbing the value chain.
- Stylized fact: Higher exports and export quality can create a virtuous cycle of growth and convergence (cited conceptual framework: Hausmann et al. 2007).
- Implication: There is scope for quality upgrades, but country-specific priorities and reform sequencing matter (see structural reforms above).

### Role of services in exports and policy implications
- Analysis areas:
  - Current role of the services sector in exports to date.
  - Potential for a larger role for services exports going forward.
- Policy-relevant finding:
  - Considerable room exists for increasing services exports to the EU through further dismantling of restrictions by EU members.
- Related institutional change referenced:
  - The recently implemented Services Directive is discussed in the paper with respect to its impact on exports (Annex III referenced).

### Paper structure (as presented)
- Section II: empirical evidence on the role of structural reforms in exports to the EU.
- Section III: stylized facts about export quality and diversification of NMS.
- Section IV: impact of the Services Directive on exports and revealed comparative advantage in services exports.

*Source: _wp15187 - 1. Determinants of Value-Added Exports of Goods and Services to EU: NMS-10, 2003–11.*

### Section V presents policy conclusions for both EU institutions and individual countries.

### _wp15187 - Section V presents policy conclusions for both EU institutions and individual countries.

### II. EVOLUTION OF EXPORTS TO THE EU SINGLE MARKET: RELATIVE SUCCESS AND DETERMINANTS
- On average, NMS (both NMS-EA and NMS-non EA) have a higher export share in GDP compared to other EU members, but with wide variation:
  - Czech Republic, Hungary, and Slovak Republic derive a quarter of their GDP from value added exports to the EU.
  - Latvia and Romania: this share is less than one tenth.
- Since the crisis, exports accounted for a higher share of GDP in all NMS-non EA countries except Croatia; driven by higher exports to both the EU and the rest of the world.
- Empirical strategy:
  - Sample: ten NMS, period 2003-11. Croatia excluded from regressions due to data gaps.
  - Dependent variable: value added exports to the EU scaled by GDP (preferred to gross exports to net out re-exports and imported inputs).
  - Structural explanatory variables selected for data availability and statistical significance:
    - Human capital: upper secondary or tertiary educational attainment; participation in continuous vocational training and skills upgrade.
    - Labor market efficiency: inactivity trap (larger value = weaker incentive to work); relative minimum wage (minimum wage relative to gross average wage).
    - Foreign investment environment: index capturing prevalence of foreign ownership and whether regulations discourage foreign ownership (higher = more conducive).
    - Participation in supply chains: share of exports processed through upstream and downstream supply chains in total.
  - Gravity and control variables included: income per capita, weighted distance from export partners, population, weighted PPP real GDP growth of partner countries, weighted consumer sentiment (proxy), and REER-ULC (unit labor cost based real effective exchange rate).
  - Estimation methods: panel OLS with time dummies, euro area accession and crisis dummies (found statistically insignificant); Generalized Least Squares (random effects). Country fixed effects generally not included in baseline to allow identification of slow-moving structural variables.
- Key regression results (NMS-10, 2003–11; Table 1):
  - The five structural variables are all statistically highly significant and together capture more than 80 percent of the explained variance (R-squared 0.858 / 0.857 / 0.859 across specifications).
  - Estimated coefficients (selected, from Table 1; significance noted):
    - Upper secondary or tertiary educational attainment: 0.16** (OLS), 0.19** (GLS), 0.33*** (relative-to-NMS-average OLS).
    - Participation in continuous vocational training and skills upgrade: 0.15***, 0.16***, 0.14***.
    - Inactivity trap: -0.09***, -0.08*, -0.03*.
    - Relative minimum wage: -0.08**, -0.09**, -0.16***.
    - Foreign investment and ownership environment (higher values indicate lower degree of restrictions): 1.0**, 1.0**, 2.2***.
    - Share of exports processed by supply chain: 0.44***, 0.44***, 0.34***.
    - Weighted real GDP growth of trading partners: 0.06 (OLS), 0.06*** (GLS), 0.13 (relative specification).
    - Real effective exchange rate (ULC-based): -0.03, -0.03, -0.07**.
  - Observations: 73; R-squared: 0.858 / 0.857 / 0.859.
  - Structural variables remain robust across alternative dependent variables (gross exports, goods vs services, exports to world) and when excluding one country at a time.
- Relative importance (Figure 3; one-standard-deviation improvements):
  - Largest impacts: vocational training and skills upgrade; foreign investment environment; supply chain participation; higher education; relative minimum wage; inactivity trap.
  - Supply chain participation often captures gravity effects (distance, market size, income), consistent with Rahman and Zhao (2013).
- Heterogeneity with advanced EU economies:
  - For advanced EU economies, labor market variables and foreign investment matter more than human capital measures; suggests threshold effects for education and vocational training.

### Country-specific findings (contributions to exports/GDP relative to NMS average, 2003–11)
- Czech Republic and Slovak Republic:
  - Positive contributions: vocational training and skills upgrade; higher education; foreign investment environment; supply chain links.
  - Labor market variables not a source of competitiveness for Czech Republic.
- Hungary:
  - Positive contributors: wage competitiveness, supply chain links, foreign investment environment (though contribution from foreign investment environment declined in recent years).
  - Negative contributors: vocational training and higher education.
- Bulgaria, Latvia, Lithuania, Romania:
  - Persistent below-average export performance; gaps worsening or stable over time.
  - Gaps in human capital, labor market efficiency, and foreign investment environment.
- Estonia and Slovenia:
  - Close to NMS average.
  - Estonia: foreign investment environment positive; higher education and relative minimum wage negative.
  - Slovenia: benefited from low relative minimum wage, above-average higher education, vocational training; offset by less friendly foreign investment environment.
- Poland:
  - Improvement over time; gap relative to NMS peers decreasing.
  - Positive: higher education and competitive wages.
  - Drag: relatively lower participation in supply chains.
  - Foreign investment environment historically negative but improving; pick-up in off-shoring and outsourcing of business services since 2010.

### III. EXPORT QUALITY AND DIVERSIFICATION IN NMS: ROOM FOR GROWTH
- Export quality assessment (Henn, Papageorgiou, and Spatafora 2013 index; and Di Comite, Thisse and Vandenbussche 2014 for EU):
  - Overall exports quality for NMS is above the 60th percentile relative to all countries in the world.
    - Slovenia: close to the 90th percentile.
    - Romania: 61st percentile.
  - Product-level tiers:
    - Highest tier: Slovenia, Czech Republic, Slovak Republic (quality 61st–97th percentiles).
    - Middle tier: Croatia, Hungary, Poland, Estonia (quality 40th–89th percentiles).
    - Third tier: Lithuania, Bulgaria, Latvia, Romania (quality 24th–80th percentiles).
  - Room for quality improvement (gap between importer-demanded quality and provided quality): positive for all NMS; largest in Lithuania, Latvia, Romania.
  - EU-market based quality (Di Comite et al. 2014): NMS quality distribution concentrated at low (Bulgaria, Romania, Lithuania, Latvia, Poland) to middle (Hungary, Estonia, Slovenia, Slovak Republic, Czech Republic) parts of EU quality spectrum.
    - Share of export products below the 50th percentile relative to other EU countries ranges:
      - Poland: 62 percent.
      - Hungary: 52 percent.
    - More than half of export products from NMS belong to the bottom half of the EU quality ladder.
- Trade-offs and dynamics:
  - Countries that improved export quality markedly (Czech Republic, Hungary, Slovak Republic) experienced increased export product concentration (higher internal margins) — suggesting a trade-off between improving quality and diversification.
  - Correlation: export quality positively correlated with export value in both EU and world markets.
    - Vandenbussche (2014) estimates price elasticity of quality ~0.5 (quality upgrading likely allows firms to increase price, profits, market share).
- Policy levers for quality improvement:
  - Structural reforms highlighted in export-performance regressions also explain differences in export quality: human capital, institutional quality, foreign investment; additionally, R&D expenditure is important.
  - EBRD 2014 Transition Report findings:
    - For low-development/product-quality economies: openness and facilitation of foreign investment, and supply-chain links matter to access technology.
    - For mid-quality products: innovation requires postgraduate education, quality of scientists and engineers, quality of scientific research, product and labor market flexibility, cooperation between science and industry, availability of venture capital.
- Country-specific policy implications for quality:
  - Bulgaria, Lithuania, Romania: improve foreign investment regime, boost secondary education, link with supply chains to acquire technology.
  - Slovenia, Czech Republic, Slovak Republic, Hungary, Estonia: focus on innovation, ramp up higher education and R&D spending.
  - Countries highly integrated in EU market producing mid-quality products: diversify products and markets (including outside the EU) and increase R&D and tertiary education to raise quality further.

### IV. SERVICES EXPORTS: NON-TARIFF BARRIERS ARE HOLDING BACK PERFORMANCE
- Services share and characteristics:
  - Services sector contributes two-thirds of EU GDP and creates 9 out of 10 jobs, yet its share in intra-EU trade is low.
  - For NMS, services share in value added exports is about one third and much less than in gross exports.
  - Croatia: services-dominated exports to the EU (mostly tourism).
  - Services often non-tradable; comparative disadvantage and market-access restrictions may suppress services exports.
- Services Directive (SD, 2006) and effects:
  - Most services exports from NMS fall under sectors covered by the SD.
    - Weighted average share of SD sectors in total services exports from NMS-non EA to the EU: 70 percent (NMS-non EA); almost 90 percent for Croatia.
    - Other EU average: 62 percent; NMS-EA: 59 percent.
  - European Commission assessment: SD implementation reduced average restrictions on services imports across products and countries by about 30 percent since 2006 (with considerable variation).
  - Services exports from NMS in SD sectors grew more (on average 7-8 percent annually) than from other EU members during 2006–2011; growth stronger in sectors most liberalized after SD.
- Remaining barriers:
  - Significant restrictions persist, especially for professional and technical services; SD allowed member states to retain restrictions deemed necessary for public interest, leading to uneven liberalization.
  - Advanced EU economies (major absorbers of NMS exports) still have barriers on professional and technical services.
- Comparative advantage and policy implications:
  - Estonia, Bulgaria, Hungary, Latvia, Lithuania, Romania, Slovak Republic show comparative advantage in more services products than goods.
  - Czech Republic, Hungary, Poland, Romania hold comparative advantage in professional and technical services (weighted average share of professional services in total SD exports ranges between 30–40 percent in these four countries).
  - Further liberalization of services trade by EU members, particularly in professional services, would benefit NMS exports to the EU.
  - On the NMS side, structural reforms enhancing vocational training, incentives to work, foreign investment environment, and supply chain integration are conducive to boosting services exports.

### V. POLICY IMPLICATIONS
- Core conclusion:
  - Structural reforms are central to maximizing benefits from unrestricted access to the EU single market.
  - Key reform areas: higher education, skills upgrade (vocational and on-the-job training), wage structures that provide incentives to work, foreign investment environment, and policies promoting integration with supply chains.
- Country-prioritized reforms:
  - Bulgaria, Latvia, Lithuania, Romania: broad-based reforms—improve skills, education attainment, and foreign investment regime.
  - Slovenia: more conducive foreign ownership regime.
  - Poland: greater links in services-based supply chains.
  - Estonia: emphasis on higher education and labor market efficiency.
  - Hungary: priority on higher education.
- Export quality and diversification:
  - All NMS have room for quality improvement, particularly for exports to the EU; largest room in Bulgaria, Lithuania, Latvia, Romania.
  - Strong positive relationship between export value and quality implies structural reforms will lift both exports and quality.
  - Policy differentiation by current quality level:
    - Low-quality producers: prioritize foreign investment environment improvements and supply-chain links to acquire technology.
    - Mid-quality producers: prioritize skills, higher education, innovation, and R&D spending.
    - High mid-quality producers highly integrated with EU: consider diversification into new products and markets (including outside EU) and significant boosts to R&D and tertiary education to further increase quality.
- Services trade policy:
  - Services exports can materially increase NMS exports to the EU; many NMS services exports fall under the SD.
  - Professional services face persistent restrictions in many EU member states; further dismantling of restrictions would help NMS.
  - A renewed impetus to the Services Directive through third-party review of principles of non-discrimination, necessity and proportionality to assess public interest may help (Corugedo and Ruiz, 2014).
- Overarching recommendation:
  - Implement structural reforms targeted to country-specific weaknesses to raise export performance, improve export quality, and better exploit the EU single market—complemented by further liberalization of services trade by EU member states.

*Source: _wp15187 - Section V presents policy conclusions for both EU institutions and individual countries.*

### Box 1. What Explains a Country’s Quality Upgrade in Exports?

### Box 1. What Explains a Country’s Quality Upgrade in Exports?

### Determinants of export quality (surveyed literature)
- Human capital and R&D:
  - Zhu et al (2009) suggest human capital and R&D serve as important sources of indigenous knowledge creation contributing to the rise of export sophistication.
  - Hausmann, et al. (2007), Weldemicael (2012), and Henn, Papageorgiou, and Spatafora (2013) find human capital to have a significant positive effect on export quality.
- Institutional quality:
  - Henn, Papageorgiou, and Spatafora (2013) find that an increase in institutional quality is associated with faster quality upgrading.
  - Weldemicael (2012) shows institutional quality has a significant impact only for manufactured exports.
  - Hausmann et al. (2007) argue institutional quality is not significantly related to export sophistication after controlling for per capita income; income level tends to be positively correlated with institutional quality.
- FDI:
  - Zhu et al (2009) and Weldemicael (2012) find that FDI, as the main channels of international knowledge transfer, has a significant positive impact on export quality.
- Capital and natural resource abundance:
  - Zhu et al (2009) show higher capital-labor ratio helps a country export more sophisticated goods while natural resource abundance has a negative impact.
  - Natural resource abundance appears to reduce motivation to accumulate physical and human capital and industry upgrading.
  - In countries with higher institutional quality, natural resources tend to generate a significant positive effect on export sophistication (Zhu et al (2009)).
- Country size and distance from major markets:
  - Weldemicael (2012) suggests country size has a significant positive effect on export quality, while remoteness from major markets has a strong negative effect on export sophistication.
  - Zhu et al (2009) also find country size is conducive to raising the level of export sophistication.

### Empirical relationships illustrated (Box Figure 1)
- Export Quality and Spending on R&D:
  - Scatter/fit: y = 0.0656ln(x) + 0.9359
  - Vertical axis range shown: 0.65 to 1.15 (Average export quality for the last 10 years)
  - Horizontal axis label: Average Expenditure on R&D relative to GDP for the last 10 years (scale labels present)
- Export Quality and Labor Market Efficiency (index for efficient use of talents):
  - Fit: y = 0.073x + 0.6042
  - Vertical axis range shown: 0.50 to 1.20 (Average export quality for last 10 years)
  - Horizontal axis scale labels shown (2.5 to 6)
- Export Quality and Labor Force with Tertiary Education (share):
  - Fit: y = 0.0041x + 0.8342
  - Vertical axis range shown: 0.50 to 1.20 (Average export quality for last 10 years)
  - Horizontal axis scale labels shown (49 to 49?—figure shows a numeric sequence 4 9 14 19 24 29 34 39 44 49; axis labeled Average share of labor force with tertiary education)

### Cross-country illustrative lesson (summary from Box 2 content linked in same pages)
- Japan and Germany historically provided export quality above what importers demanded, helping them maintain market shares.
- Korea joined this group in the early 2000s after steady quality improvement, associated with ramping up in:
  - Spending on R&D (percent of GDP; time series shown for 1996–2010)
  - Share of labor force with tertiary education (percent; time series shown for 1990–2012)
  - Business environment indicators (Doing business ranking as of 2014; Use of Talent index as of 2014)
- For Czech Republic and Hungary to pursue similar quality upgrades, substantial improvements appear needed in education, R&D expenditure, and business environment.

### Key analytical takeaways
- Multiple complementary factors drive export quality upgrading: human capital, R&D, institutional quality, FDI, capital intensity, country size, and proximity to markets.
- Some factors interact: institutional quality can change the sign/magnitude of natural resource effects on export sophistication.
- Cross-sectional and panel evidence (figures and literature cited) show positive associations between average export quality and:
  - Average Expenditure on R&D relative to GDP (log relationship reported),
  - Labor market efficiency (linear fit reported),
  - Share of labor force with tertiary education (linear fit reported).

*Source: Papageorgiou and Spatafora (2013), WDI, ILO, and IMF staff estimates.*

### Annex II. Table 2. NMS: Sectoral Gains and Losses in RCA in the EU, 1995―2011

### Annex II. Table 2. NMS: Sectoral Gains and Losses in RCA in the EU, 1995―2011

### Sectoral pattern summary
- The table lists sectors across New Member States (NMS): Czech Republic, Hungary, Poland, Bulgaria, Romania, Estonia, Latvia, Lithuania, Slovak Republic, Slovenia.
- Sectors covered include:
  - Agriculture, Hunting, Forestry and Fishing
  - Mining and Quarrying
  - Labor-intensive manufacturing
  - Manufacturing, Nec; Recycling
  - Textiles and Textile Products
  - Leather, Leather and Footwear
  - Capital-intensive manufacutring
  - Food, Beverages and Tobacco
  - Wood and Products of Wood and Cork
  - Pulp, Paper, Paper , Printing and Publishing
  - Coke, Refined Petroleum and Nuclear Fuel
  - Rubber and Plastics
  - Other Non-Metallic Mineral
  - Basic Metals and Fabricated Metal
  - Knowledge-intensive manufacturing
  - Chemicals and Chemical Products
  - Machinery, Nec
  - Electrical and Optical Equipment
  - Transport Equipment
  - Labor-intensive services
  - Construction
  - Sale, Maintenance and Repair of Motor Vehicles and Motorcycles; Retail Sale of Fuel
  - Wholesale Trade and Commission Trade, Except of Motor Vehicles and Motorcycles
  - Retail Trade, Except of Motor Vehicles and Motorcycles; Repair of Household Goods
  - Hotels and Restaurants
  - Other Supporting and Auxiliary Transport Activities; Activities of Travel Agencies
  - Private Households with Employed Persons
  - Capital-intensive services
  - Electricity, Gas and Water Supply
  - Inland Transport
  - Water Transport
  - Air Transport
  - Post and Telecommunications
  - Real Estate Activities
  - Knowledge-intensive services
  - Financial Intermediation
  - Renting of M&Eq and Other Business Activities
  - Other services
  - Public Admin and Defence; Compulsory Social Security
  - Education
  - Health and Social Work
  - Other Community, Social and Personal Services

### Quantitative outcomes reported in the table (preserve source formatting)
- Number of products experiencing a loss of RCA-10-14-7-5-3-5-4-6-9-1
- Number of products experiencing a gain in RCA4476624139
- Net change-6-10013-30-5-68

### Notes and legend from the table
- Note: Orange cells show loss in RCA and green cells show gains in RCA

*Source: _wp15187 - Annex II. Table 2. NMS: Sectoral Gains and Losses in RCA in the EU, 1995―2011*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15187.pdf_