The study examines price competitiveness of manufacturing industries in 5 countries: Egypt, Jordan, Morocco, Tunisia and Turkey. Over the past 10 years, the 5 countries adopted different exchange rate policies. Egypt and Jordan maintained a peg to the US dollar while Morocco and Tunisia opted for a (flexible) peg to the euro. Turkey adopted a managed floating. The study considers various indicators of price competitiveness. The first part focuses on the equilibrium exchange rate as follows from both the Purchasing Power Parity (PPP) and models based on other fundamental determinants of exchange rate. The second part considers price competitiveness based on specific industry’s exchange rate. The third part examines the productivity by industry in order to see how improvement in productivity could mitigate price competitiveness as measured by Real Effective Exchange Rate (REER). The productivity by industry is computed both in absolute and relative (with respect to the main competitors) terms. Data availability allows deepening the analysis of productivity gains and convergence only for Tunisia with respect to the OECD.

Relative prices and macroeconomic competitiveness

Different measures of price competitiveness are used in the literature. The most common is based on the Real Effective Exchange Rate (REER). The latter shows the evolution of relative prices adjusted for the change in nominal exchange rate. We computed the REER considering two types of main partners: the main partners in terms of a country’s imports (excluding oil) and the main partners in terms of a country’s exports. To examine potential overvaluation of a currency a comparison is conducted with respect to the Purchasing Power Parity (PPP) exchange rate and to the macroeconomic equilibrium exchange rate. The latter allows identifying the “normal” evolution of exchange rate given the long term evolution of its fundamental determinants. It involves a regression of the REER on a set of its fundamental determinants. The estimated coefficients are, then, used together with the permanent components of the explanatory variables to compute series of Equilibrium Real Effective Exchange Rate (EREER). The decomposition of the explanatory variables into permanent and temporary components is based on the well known Hodrick-Prescott filter. As robustness check, moving averages of the explanatory variables are also used as representing the permanent components. The regression is conducted on a sample of 52 developing countries (LDCs) over the period 1980-2005 using Panel Data Cointegration techniques. The REER was found to be cointegrated with the set of fundamentals considered. To obtain reliable estimates of the long term relationship, two estimation methods were used: DOLS, Dynamic Ordinary Least squares and FMOLS, Fully Modified Ordinary Least squares.

The results show that at the end of the period the Moroccan and the Jordanian currencies are slightly undervalued while the Tunisian and the Egyptian ones are more undervalued. These findings are robust to the estimation techniques and the way the permanent component is computed. However, the percentages of misalignment are almost double with the moving average than with Hodrick Prescott filter in Morocco and Jordan. Overall, when the criterion of the equilibrium exchange rate is adopted, all the currencies, except the Turkish lira which is not considered for this analysis, look undervalued from about 10 % to 30 %. On the one hand, this could mean that over the near future, producers of manufactured goods do not have much to expect from a more flexible rate. But, and on the other hand, the undervaluation may also be interpreted as revealing that exchange rate policies have already “internalized” the specific constraints of some producers on domestic as well as on external markets.

Relative prices and manufacturing competitiveness

This part examines price competitiveness based on specific industry’s exchange rates. The Sector Equilibrium Real Effective Exchange Rate (SREER) is computed as follows. First, the main components of each country’s exports are determined on the basis of the average flows over the period 1999-2003 of the goods belonging to classes 5 to 8 of the Standard International Trade Classification (SITC). For each component a SREER is computed considering the weights of the main world exporters of such component. Second, the various SREERs are aggregated into a single SREER using the exports structure of the country.

The results show that the SREER exhibit a similar pattern to the REER. In comparison to the base year 1995, the Egyptian and Tunisian currencies exhibit a marked depreciation of around 25% of the SREER. In contrast, a modest appreciation (11%) appears for Jordan but a much more marked appreciation 50%shows up in Turkey.

Another way of examining competitiveness consists in shifting the focus from relative external prices to relative domestic prices i.e. the ratio between non-tradable to manufactured tradable goods. The latter is computed using the weight of each good in the country’s exports. The resulting ratio, Real Exchange Rate (RER), shows the incentive for firms to produce for the internal or the external markets. In all countries, except Jordan, the RER are less favourable than the REER with a relative decrease in competitiveness of between 5 and 10 percents. The most critical situation shows up in Turkey. In Jordan, the large depreciation of the US$ seems to be the main driver of competitiveness instead of any deliberate policy by the government.

Overall, it appears that exchange rate policy has supported the development of the manufactured sector in a period where imports liberalization and the emergence of new competitors call for serious efforts. In this regard, Tunisia’s policy has been the most active. Egypt seems also to perform well but a high volatility of the nominal exchange makes the interpretation of the results difficult. The other countries are in less favourable situation; in particular Turkey.

Sectors’ competitiveness and firms’ behaviour

When the nominal exchange rate is set in order to preserve macroeconomic equilibrium, sectors’ competitiveness can only be improved through firms own efforts. The latter concern mainly improvement in absolute or relative productivity i.e. in comparison to the mains competitors. A sensible improvement in productivity may allow compensation for cost handicaps like high nominal wages.

The Total Factor Productivity (TFP) was computed using both parametric (Malmquist index) and non-parametric (Tšrnquist index) methods. The former allows decomposing productivity into technical efficiency and technical progress components. Irrespective of the method used, no clear evidence is found that countries’ productivity relative to the OECD is different. Tunisia appears as the most efficient in particular regarding chemical and building goods.

Although relative prices are important for the analysis of international competitiveness, for prices to be a proper proxy of costs we have to adjust them for productivity differences. Therefore, for each of six major manufacturing sectors, an indicator has been constructed by combining relative prices and relative TFP gains in the MENA countries with respect to the OECD countries. Tunisia seems to be the only country having improved its sectors’ competitiveness; especially in Chemicals. The country has benefited from an amplification of the effects of economic policies through exchange rate and price stability policies. In the other countries the results are less clear cut. The gains in term of productivity are real but insufficient to compensate for the REER appreciation.

Benefiting from the availability of reliable data over a long period in Tunisia, an investigation of the determinants of sectors’ productivity and its convergence toward the OECD’s was conducted for this country. The results show a unidirectional causality running form foreign direct investment and the degree of export orientation of a sector to productivity. Bidirectional causality is found with respect to domestic demand and export structure. Furthermore, some sectors appear to be in a catch up process with the OECD.