Bank of Lithuania
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2015-01-04

Lithuanian exports: Are services and modern services different?

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In the recent debate about the channels for growth there are two different aspects to take into account: the importance of the exports in services and the sophistication of the exports themselves. We analyze in this paper the situation of exports in Lithuania, highlighting the modern/high-tech sectors with a special focus on services.
We found that the percentage of high-tech merchandise exports on the total exports increased in general the last decade, from less than 4% of total merchandise exports to more than 10%.The exports in modern services are instead the only one which experienced a positive growth rate in the worst period of the crisis (2009). Looking at the foreign demand for services, especially for modern services, this changed a lot in the last decade. The main partner for modern services now is Germany, while for total service exports the first destination is Russia, as it is for total goods. For total goods other countries not in the EU mattered more in 2004 than nowadays. Non-EU countries are becoming crucial for exports in modern services.
In addition, we provide a simple econometric setup in which we study the impact on the different type of real exports of the Real Effective Exchange Rate (REER, deflated in several ways) and the trade-weighted (weighted for trade in services and in goods) foreign demand based on real GDP data or Gross Value Added. The exports of modern services seem to be not explained by the competitiveness or demand factor. In our setups the main determinant is the exports in the previous period. The outcome for modern services is quite robust across the specifications and with different REERs. The exceptions concern the setup with GDP foreign demand estimated by OLS, in which also the foreign demand seems to play a role for exports in modern services. For exports in total services and traditional services instead, foreign demand matter in more cases and using different REERs especially with a more general measure of foreign demand based on real GDP.
The REER for goods and services exports matters more if deflated by CPI both in case of GDP and Gross Value Added-based foreign demand, and mostly in the short-run.

JEL Codes: F14, F43, C22.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Mariarosaria Comunale, real effective exchange rate, Lithuania, exports in goods and services, high-tech goods, modern services, foreign demand, trade balance, cointegration, error correction model, value added