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Relationships between Services and Competitiveness: The

Case of Spanish Trade

Article in The Service Industries Journal · January 2001

DOI: 10.1080/714005000

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Relationships between Services and

Competitiveness: The Case of Spanish
Trade
L. Rubalcaba & D. Gago
Published online: 08 Sep 2010.

To cite this article: L. Rubalcaba & D. Gago (2001) Relationships between Services and
Competitiveness: The Case of Spanish Trade, The Service Industries Journal, 21:1, 35-62, DOI:
10.1080/714005000

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 211sij04.qxd 10/01/2001 10:59 Page 35

Relationships between Services and

Competitiveness: The Case of Spanish Trade

L U I S R U B A L C A B A and D AV I D G A G O

This article establishes a conceptual framework of the

relationships between competitiveness and services, necessarily
different from the one existing between competitiveness and
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manufacturing industry. As a case study, empirical analysis of

trade market shares in relation to effective real exchange rate is
carried out. This enables us to show how the Kaldor paradox
does not have the same importance in services and in
manufacturing industry and that it also varies from one branch
to another within the service sector. The link between the
competitive positions of Spanish services – such as tourism – and
cost factors, which partly explain their competitive capacity,
does not always correspond to what could be expected.

INTRODUCTION

Globalisation, trade, competitiveness, services – all these are words which

economic literature has usually inter-related to point out the challenges
presented by the environment we are living in, at the turn of the twentieth
century. It is obvious that we are in a global economy, where the way of
thinking and operating has radically changed over the last few years, where
many enterprises can look for suppliers, customers and methods in any part
of the world; where technology has enabled us to connect everything, so
that the way already followed by others can be of use. It is also obvious that
trade is a dimension of globalisation, although the latter means a lot more
than a simple internationalisation. Global economy goes hand in hand with
global trade, a fact which can be deduced from the new opportunities
offered by the increase in exchanges of goods, services and knowledge,
international agreements, foreign investment, global strategic decisions, etc.
And from trade we can move on to competitiveness, taken in a purely

Luis Rubalcaba and David Gago are at the University of Alcalá and the Service Activities
Research Laboratory (SERVILAB), Plaza de la Victoria 1, 28802-Alcalá de Henares, Madrid,
Spain.
The Service Industries Journal, Vol.21, No.1 (January 2001), pp.35–62
PUBLISHED BY FRANK CASS, LONDON
 211sij04.qxd 10/01/2001 10:59 Page 36

36 T H E S E RV I C E I N D U S T R I E S J O U R N A L

commercial sense. Countries with a higher market share in a specific sector

are those which are most competitive in those sectors within a global
economy. They are competitive because they offer advantages in cost,
quality, support networks or in any of the factors analysed by the abundant
literature on this topic [Porter, 1990; Martín, 1993; Segura, 1993; Viñals,
1993; Alonso, 1992]. Within this context of competitive factors, services are
not unresponsive. For example, business services are proved to be
competitive factors of European industry [European Commission, 1997;
Rubalcaba, 1999]. And this role is also true for many services as their
importance has increased in international markets. Since the end of the
1980s, various and important studies [Bhagwati, 1987; Nusbaumer, 1987;
Aharoni, 1993; Cuadrado and Del Río, 1993; Daniels, 1993; Dunning,
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1993; Petit, 1994; Roberts, 1999] have analysed the part played by services
as globalisation agents and as driving elements of international trade.
Amongst all the previous points, we feel that the relationship between
competitiveness and services has still not been sufficiently analysed, taking
into account that services are normally not well reflected by international
statistics and that, as a result, it is very difficult to further analyse the
relationship from an empirical point of view. How do services influence the
competitive capacity of a country? Are they a decisive or secondary factor
in global economy? What makes services in themselves competitive? Does
the success of services depend on the same factors as those leading to
advantages in manufacturing industries? Is there only one relationship
between services and competitiveness or are there many relationships
depending on the type of services?
This article will present a first approach to these questions, knowing
that some of them will not be analysed in depth. In each of the following
sections, an aspect of interest will be dealt with. In the first place, an
analytical framework is established to better comprehend the relationships
between services and competitiveness. In the second place, the empirical
part of the article is introduced from an international trade point of view
as a case study of the previous framework. To do so, the relationship
between market shares and effective real exchange rate in the Spanish
economy is analysed with the aim of seeing if services can play an
important part in the relationships defined by a Kaldor paradox (for
instance, an increase in market share in spite of the worsening of the
competitive capacity). In the third place, services are compared with
manufacturing industries in order to try and foresee the elements which
underline the contribution of cost and price variables in service
competitiveness. In the fourth and last section, relationships according to
the type of services are analysed and the need for more refined arguments
to explain international service trade is shown.
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 37

Two methodological clarifications are necessary before starting. The
first one refers to the concept of competitiveness. It should be noted that we
are mainly going to talk about competitiveness in a commercial sense,
although it would have also been appropriate to establish relationships
between services and competitiveness from a wider point of view. Neither
are we going to go into the debates [Krugman, 1994, 1996; Cohen, 1994;
Thurow, 1994; Prestowitz, 1994] on the good or bad use of competitiveness
as an analytical or economic policy tool. It is assumed that some sectors are
more or less competitive, independently from the considerations which can
be made on the consequences of such situations.
The second clarification is related to the use of statistics. Although the
article mainly offers an empirical approach, it should be noted that the
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difficulties in obtaining certain indicators in the service sector are

considerable. Statistics on international service trade are complicated and
only provide a small part of real transactions. And it is complex, if not
impossible, to obtain indexes which could inform us on the competitive
capacity of each type of services on prices or costs, especially when we need
to obtain large and homogeneous series on different countries. Empirical
results presented in this article are logically subject to the limitations
presented by the statistics on which they are based.

SERVICES AND COMPETITIVENESS

In order to approach the relationship between services and competitiveness,

it is convenient to talk of a two-way direction: services have an influence on
competitiveness (thanks to them, an enterprise, a sector or a country can be
more or less competitive) and competitiveness has an influence on services
(the global economy where everybody competes with everybody drives
services to also respond to internationalisation challenges). Logically, these
two directions are inter-related and both have their own explanatory
elements. Two different but complementary approaches will be adopted.
The first one being a general approach, based on the main microeconomic
and sectorial economy-related elements. The second approach, being more
specific, based on macroeconomic elements and extracting a specific
relationship amongst all the possible ones analysed in the first approach.
Figure 1 summarises both approaches. External relationships between
services and competitiveness correspond to points mainly developed in this
section. The internal circuit shows the elements belonging to the second
macroeconomic approach, on which the empirical part will be concentrated.
Logically, some inter-relationships exist between elements of the
macroeconomic flows and other flows but this distinction has been adopted
for clarity’s sake.
 211sij04.qxd 10/01/2001 10:59 Page 38

38 T H E S E RV I C E I N D U S T R I E S J O U R N A L

F I GURE 1
ANALYT I CAL F RAME WORK OF RELATIO N SH IPS BETWEEN
S E RVI CE S AND COMP ETITIV EN ESS

Direct effects on global economy by:

1) service facilities
2) specific expertise and advice
3) globalisation of services

Effects coming from prices, costs and

productivity trends in services
International Relative prices
Services trade (commerce, Global economy and
(exchanges rates,
market share) competitiveness
costs, productivity)
Effects in services coming from prices,
costs and productivity levels
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Expansive factors opening markets and

allowing foreign competition

Limitative factors for foreign competition

according to the service nature and service
regulations

Macroeconomic interrelations

General Approach
Services have an influence on competitiveness in three main ways:
1. The first influence is related to the services which the
internationalisation and competitiveness of any enterprise are going to
facilitate, whichever the sector. A good communication service
facilitates the inter-connection between the employees of a multinational
thus saving on travelling expenses – since it implies less travelling – and
improving the quality of final products – it allows for a better follow-up,
control and shared learning. The same thing can be said about transport
services, business services or, generally speaking, all producer services.
In the way that there are services which improve the competitiveness of
enterprises – reducing costs or improving quality, in the same way do
services highly contribute to competitiveness.
2. The second influence is linked to those services which specifically give
indications on the competitive conditions of the market. In this case,
those services imply a high interactive participation of the customer to
obtain a criterion in the market in which he operates or would like to
operate, so that he can make decisions directed towards a higher
competitiveness. In the previous case, the enterprise becomes more
competitive benefiting from very pre-established and quite standardised
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 39

services. While in the present case, the enterprise must play, with the
help of an expert (employed within or outside the enterprise) an active
part in the comprehension of the events taking place and in the
evaluation of possible strategies to be defined. These services mainly
are: management consultancy, some strategic legal services, fair and
exhibitions services, market research services, some computer services
and certain marketing services. In all these cases, the service markets
provide the inputs needed to take competitiveness trade decisions.
3. The third influence is related to an organisation’s own globalisation of
service activities. To the extent that service enterprises become more
global and competitive (capable of acting in more markets), the
competitiveness of sectors and countries increases. While services
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represent between 60 and 70 per cent of advanced economies, an at least

comparable part of their competitiveness will be due to the way in which
these service activities will themselves be competitive. For that same
reason, effects can be observed in the global economy of service
macroeconomics. Depending on the behaviour of services in prices,
productivity or costs, the competitiveness of an economy will be the
dependent on one or another factor. But this aspect will be further
analysed in the second approach.
The second aspect of the services-competitiveness relationship can also
be explained in various ways, through direct factors, first, and specific and
limiting factors, next. The first way refers to direct elements which imply
that the competitiveness of the global economy increases the global
economy of services. The globalisation of the economy has led to the fact
that many service enterprises have internationalised, modernised and
adapted themselves to new competitive challenges, some in order to follow
their already internationalised customers and others to undertake new
expansion strategies, to benefit from technological advantages offered by
global economy, or because of expectations on future concentration
processes. Many extend their territory due to the low (or even negative, in
some cases) growth potential of their national market. Besides, some
companies benefit from new regulation and liberalisation processes.
Obviously, there are also service enterprises which decide to undertake a
process of international growth because there are economies presenting
better relative cost conditions; the existence of cheaper relative prices can
generate the export of services in a similar way as that of goods. In any case,
globalisation and a higher market competitiveness, in all the different forms
they can adopt, generate changes in services and their international growth.
The competitiveness inherent to a global economy affects services more
or less than other industries. Less because the nature of services and the
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40 T H E S E RV I C E I N D U S T R I E S J O U R N A L

existing regulations make them less inclined to operate on open markets,

compared with a manufacturing industry whose goods have been operating
for a long time in conditions of strong competitiveness. But also more.
Precisely because agriculture and the manufacturing industry have been
operating for a long time on relatively open markets, it is in the world of
services where globalisation challenges can be more patent.
Undoubtedly the nature of services and the regulations associated with
it have created this peculiar environment, only from which the relationships
between services and competitiveness can properly be understood. After a
long period of negativity and marginality from which services have been
defined and classified, recent progresses in service economy have detected
that services should be defined for what they are and not for what they are
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not (non-tangible, non-storable, non-transportable, etc.). This change of

viewpoint has drawn the attention towards the most defining aspects of
services, that is to say, the inter-active character of the relationship between
supplier and customer.
This peculiar nature of services is certainly linked to some aspects
defining the economics of services: product differentiation, reputation,
monopolistic power, externalities and asymmetric information, among
others. All these characteristics explain how traditional or international
pricing in services does not follow the same rules as those applied in
manufacturing industries. Markets are very segmented so even prices
depend more on market structures and determinants than purely on cost
factors. The success of a service firm in international markets requires
consideration of a wide variety of elements of which direct costs and prices
are only part of them. In the same way, the role of uncertainty and quality
of services justify certain specific service regulations addressed to protect
consumer interests, guarantee fair competition play, control externalities,
aim at quality standards, etc. Regulations are highly present in service
economies so the role of prices and costs in competitiveness could have a
different importance in other less regulated branches. A fair regulatory
framework can better explain developments in many service sectors than a
simple evolution of cost factors. Moreover, for many services, prices, costs
and productivity trends can only be understood within trends in dynamic
markets and regulations.
In conclusion, the personal nature of services as well as the service
market organisation and regulations allow us to hypothesise a limited
market share sensitiveness to prices and costs factors. One sector can export
its services if it manages to sell reputed, qualified and personalised services
in the right market and regulatory context. In this context, prices and costs
factors necessarily play a lesser role than in other branches producing very
standardised and international integrated products. However, certain
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 41

arguments sustaining the opposite idea can also be valid. For example,
strong reputation levels gained by large firms from a certain country can
require other countries’ firms to compete offering cheaper prices, so
macroeconomic variables can be more relevant. The same effect can apply
to some over-regulated or over-fragmented sectors lacking quality. In these
instances, prices can be the only way to compete in foreign markets. In any
case, it is clear that there are many non-price factors strongly affecting
service economies and service market shares.

Macroeconomic Approach
Services affect the economy competitiveness through their influence on
macroeconomic factors which determine the competitive capacity of the
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industry. The inflationary character of many services [Cuadrado, 1993a,

1993b], which leads to wage levels increasing above productivity levels,
necessarily induces a worsening of the competitive capacity of the overall
industry (included services themselves). A relative price increase, due to
services, can negatively affect the international trade of many enterprises. Of
those belonging to the service sector itself, the effect would be direct, since
their export capacity would be reduced. Indeed, it has been observed that, in
Spain, an increase in the price index of services has simultaneously given
rise to a decrease in the balance of invisible items [Gutiérrez, 1992]. But
other industries can also be affected, due to the price rise in productivity-
associated services – higher costs which are usually reflected in final prices
– but also due to a price-wage spiral which leads to price or wage increases
from one sector to another. For instance and in relation to wages, a first rise
moves from the most productive manufacturing sectors, (with a margin to
increase salaries), to service sectors which are apparently less productive
and more inflationary. Seeing such wage increases in services, employees in
other industries normally claim higher wages and thus the spiral is created.
In addition, some researchers suggest that these price-productivity lags
between services and manufacturing industries affect the economic growth
through a slowing-down of the total productivity of factors [Raymond,
1995]. In this way, the growth of a relatively less productive service
economy can help to explain the moderate growth rates amongst the most
advanced countries – compared with the rates of the 1960s, for instance –
and the reasons why some less developed countries find it difficult to
converge more quickly. Logically, services with a limited price increase and
higher productivity would have the opposite effect.
The opposite relationship also underlines some interesting
macroeconomic effects. One might think that the evolution of the changes
in services and, hence, in their competitiveness, would be associated with
the competitive capacity of the overall economy. In this way, its prices, costs
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42 T H E S E RV I C E I N D U S T R I E S J O U R N A L

and productivity levels would necessarily influence the international

evolution of services. This has much to do with the dominant role of
services in the advanced economies and the importance of prices and costs
transmissions between sectors. If global relative prices were higher, service
competitiveness would be lower and the market shares these services could
reach in other countries would be inferior to those present in economies
offering more favourable price conditions.
This idea is linked with the hypothesis formulated before: the service
economy (and market shares) is obviously affected by global economic
prices and cost conditions but to a lesser extent than the other economic
branches. Not only do service price factors affect service
internationalisation, but so do global economic prices. Nevertheless, service
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peculiarities, conditioning all transmission processes, give rise to some

questions to be answered: Up to what point can service and global prices
and costs influence the evolution of international service trade? Can this
influence be different from that which exists between global prices and
costs and global international trade? Should not services be less sensitive to
prices and costs than manufacturing industries, for being less standardised
products and depending on more complex factors? Should not a
desegregated analysis be carried out by type of services, given the
heterogeneity of the sector? An effort to partially answer these questions
will follow in the next section using the market shares approach.

C O M P E T I T I V E N E S S B E H AV I O U R I N S PA I N : A N A N A LY S I S O F
M A R K E T S H A R E S A N D E X C H A N G E R AT E S

The adopted approach for analysing Spanish competitiveness has been

based on the study of export market share indicators and the effective real
exchange rate (ERER). The latter indicates the influence costs and prices
have on competitive capacity which, in spite of their limitations, are still,
nowadays, the dominant approaches. Taking into account the current
statistical availability [Martín, 1993], ERER is used mainly due to the fact
that they are the only indicators elaborated by official and international
organisms in a systematic and periodical way thus offering the best
competitiveness approach. Indeed, export shares present the advantage of
evaluating competitiveness through their effects, so that economies,
industries or enterprises are qualified as competitive if they widen their
participation in the international supply, integrating, through their results,
all the factors which have intervened in the promotion of the supply
capacity of a country [Alonso, 1992].1
The trade competitiveness indicator has to be necessarily assumed to
represent the evolution of the market share of a country or, in other words,
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 43

the capacity shown by this country to increase, in a sustainable way, its
supply participation in a wider market. In this sense, competitiveness cannot
purely be defined as the capacity a country has to sustain a trade balance and
a balance of invisible items. Indeed, many under-developed economies
maintain their balance in equilibrium, or even positive, without necessarily
implying a strong competitive position. What makes the concept of
competitiveness relevant is precisely its relationship with the other
competing economies and not the evolution of their balances.
However, as seen before, the important number of factors integrating the
concept of competitiveness explains why, when we approach the problem of
its measurement through price and cost indicators, we are necessarily
introducing an incomplete vision of the problem. The research carried out
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by Kaldor [1978] was pioneering in showing that the hypotheses on which

price and cost indicators are based do not seem to be confirmed by the
empirical results shown by trade results, a fact further corroborated by
posterior analyses [see, for example, Fagerberg, 1996]. In concrete terms,
these analyses established how countries managed to increase their market
shares in the medium term, independently from the evolution of price and
cost indicators. This led to the conclusion that variations in exchange rates
and in ‘competitive capacity’, as it is normally understood, were not the
causes but the consequences of the trends followed by the countries’ market
shares. Such trends can be explained by factors other than prices and costs
(the so-called non price factors).
From this point of view, the empirical approach tries to evaluate the
existence of a Kaldor paradox in the Spanish economy and, going one step
further, puts forward the above-mentioned hypothesis arguing for the
existence of diverging patterns between the competitive behaviour of
manufacturing industries and that of services: service peculiarities could
make service market shares less sensitive to the evolution of indicators
exclusively based on prices.
Two additional issues before starting the analysis: the competitive
analysis has exclusively been centred on evaluating the presence of Spanish
goods and services on foreign markets (concretely, on the EU-12 market, as
explained later on). Yet, competitiveness in domestic markets is not taken
into account, as it is somewhat distant from the objectives of this article.
On the other hand, it is necessary to consider that international service
trade indicators only reflect part of the generated total trade, in reference to
products, but not to factor trade (human and physical capital), very
important in some service activities such as financial or commercial
services. This is due to the fact that the establishment of productive units in
the host country is essential in services, being flows of specific factors the
means through which this trade is carried out.
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44 T H E S E RV I C E I N D U S T R I E S J O U R N A L

Evolution of Trade and Price Competitiveness in Spain

Before going into the analysis of competitive patterns in services and
manufacturing industries in Spain, we shall briefly look at the evolution of
competitiveness in the overall Spanish economy. In relation to trade
competitiveness, market shares have been established by evaluating the
significance of Spanish service and manufactured goods exports within the
EU-12 market (that is to say the EU imports), using the following formula:

Xt
CEX = * 100
Mt
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Where:
Xt = goods and/or services exported by Spain to the European Union in the
year t
Mt = imports carried out by the European Union over the period t from
countries belonging to the EU itself.
The reason why the EU has been chosen is because it makes up the
majority of service and goods trade (67.4 per cent and 69.2 per cent
respectively in 1998), percentages which have increased over time [Martín,
1993], and because it is comparable with the ERER evolution, calculated
with reference to the EU relative prices and the ECU exchange rate.
As for price competitiveness, it is calculated through the variations
shown in the Competitiveness Trend Index (CTI), elaborated by the Trade
Department and obtained by multiplying the Spanish consumer relative
price index, compared with the European Union, by a weighted index
showing the variations experienced by European currencies in relation to
peseta.2 The results show that the relationship between both variables is not
exactly the one conventionally (non-Kaldor type) suggested for the overall
reference period. Concretely, in the mid-1980s, increases in export shares
were accompanied with a worsening of average price competitive capacity
measured by the CTI, thus corroborating the conclusions reached by Kaldor.
On the contrary, over the last three reference years, the evolution of both
variables adapted itself to the expected economic logic, since the strong
market share increase was accompanied with a CTI improvement.

SERVICES VS. MANUFACTURING IND U S TRI E S I N T R A D E

RELATIONSHIPS

Evolution of Service Trade in Relation to Manufacturing Industries

The increase in international service trade is unquestionable and has been the
object of a growing interest over the last years. This fact rests on various
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 45

F I GURE 2
PA RAL L E L E VOL UT I ON OF MARKE T SH A RES IN TH E EU -12 A N D
COMP E T I T I VE NE S S T RE N D IN D EX (CTI)
1.8

1.6

1.4 Market share

1.2 CTI

0.8
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1982 1985 1988 1991 1994

Source: Based on EUROSTAT and Bank of Spain data.

factors such as the fast growth experienced by service activities,

unprecedented progresses made in new information technologies (NIT) or
the progressive liberalisation of some service markets. In this way, according
to the WTO [1999], service exports grew by an annual accumulative 7.34 per
cent while goods only reached 5.4 per cent between 1980 and 1998. This
implied a strong increase in the relative weight of service exports, which
went from 15.1 per cent to approximately 20 per cent.
Results vary according to economic regions. Concretely, a quite
different behaviour pattern can be appreciated for high income countries in
relation to average or low income ones, so that between 1980 and 1996,
growth of service exports in high-income countries was less important than
in medium or low-income countries (an annual accumulative of 7.5 per cent
and around 8.3 per cent respectively). On the contrary, higher income
countries have registered considerably higher growth rates in manufactured
exports than medium or low-income countries (an approximate annual 7.2
per cent and 3.8 per cent respectively).
The explanation of this disparate evolution in service exports rests on
three main factors: in the first place, high growth rates in less developed
countries are partly due to statistical fiction derived from their scarce
representativeness at the beginning of the period. Indeed, over the last two
years, service exports of many of these countries have been less dynamic
than manufactured exports, or even slightly decreasing.
In the second place, and as a very important factor, this evolution can
also be explained by some statistical and information imperfections, as
regards the service sector, which limit data on foreign transactions and
which, obviously, most strongly affect more developed countries. Amongst
 211sij04.qxd 10/01/2001 10:59 Page 46

46 T H E S E RV I C E I N D U S T R I E S J O U R N A L

them should be mentioned the strong weight intra-industrial trade has in

these countries and which, by virtue of the higher integration of services
into the productive system, incorporates growing levels of intermediate
services (producer services) not taken into account by traditional statistics
on services.
Finally, and in the third place, factor trade has been a very important
internationalisation mechanism adopted by these countries, thus illustrating
in some cases a substitution process in relation to goods trade. As
previously mentioned, this process has been more frequent in some
activities such as financial or tradable services, in which developed
countries show a high specialisation.
Spanish export growth, in services as well as in goods, was quite above
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world growth, thus illustrating the strong process of trade opening and
internationalisation that took place over the whole reference period. In any
case, what is most relevant to our analysis is that, contrarily to what
happened in the rest of the world (medium and low-income countries
included), service exports grew less than goods exports and presented
annual accumulative averages of 8.37 per cent and 9.8 per cent respectively
over the 1980–98 period, and 7.7 per cent and 9.5 per cent over the 1980–96
one. This implies that service exports lost relative weight, from 36.4 per
cent in 1980 to 29.3 per cent in 1998 and that their total trade (sum of
exports plus imports) slightly decreased, in spite of the increase of import
representativeness. As can be seen, Spanish export patterns have been quite
similar, as could be expected, to those observed in high-income countries.
TABL E 1
S H A R E S O F G O O D S A N D S E RV I C E S I N T H E S PA N I S H B A L A N C E O F PAY M E N T S

% Goods % Services Total % Goods % Services Total

Exports Exports Imports Imports

1980 63,5% 36,4% 100% 86,8% 13,2% 100%

1990 66,6% 33,3% 100% 84,2% 15,8% 100%
1998 70,6% 29,3% 100% 82,1% 17,8% 100%

Source: Spanish Balance of Payments, several issues.

Competitive Advantage in Goods and Services

After briefly analysing the trade evolution of goods and services in the
Spanish economy, this section looks at the possibility of finding some
differential patterns in the competitive behaviour of the service sector in
relation to manufacturing industries. In order to do so, it is necessary to
evaluate the relationship between effective real exchange rate (ERER) and
market shares for services and manufacturing industries over the 1982–95
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 47

reference period and for the EU market. The difficulties faced when
calculating these indexes have been great. The lack of an homogeneous data
base on service and goods prices in all the countries making up the
European Union has led the researchers to resort to necessarily indirect
indexes. As a result, the reference price index for goods has been the unit
labour cost (ULC)3 in manufacturing, while for services, it has been the
consumer price index (CPI), formed as a weighted price basket which, as
such, also includes services prices. The limitations presented by the last
indicator are very important, above all if we take into account the different
weights given to services in the total basket for the EU countries and the fact
that the CPI includes all types of services, tradable as well as non-tradable.
For a better view and to avoid scale disparities, all the variables are
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standardised, with an average equal to 0 and a variance equal to 1.

When analysing the behaviour of manufacturing industries, an increase
in export shares for practically all of the considered period can be observed,
a fact which seems to speed up from 1987, one year after the entry of Spain
into the EEC. However, over these years, variations in the effective real
exchange rate in relation to unit labour costs in manufacturing (ERERulc),
follow two opposite trends: towards depreciation (1983, 1985–86 and
1991–95) and towards appreciation (very notable during the 1988–92
quadrennium). Thus, it cannot be concluded that a very clear connection
between their evolution and market shares took place. In any case, if the
overall period – and not specific sub-periods – is analysed, the positive sign
of the correlation coefficient (equal to 0.53) seems to underline a
relationship between both variables in the sense expressed by Kaldor.
However, these results should be further broken down and the two
components making up the effective real exchange rate, that is to say the
ENER (effective nominal exchange rate) and ULC relative prices, should be
separated. As can be deduced from Figure 3 (a–c), the evolution of both
indicators diverged over the reference period. Thus, the ENER globally
presented a depreciation oriented trend, a fact which is confirmed by the
positive market share evolution. On the contrary, relative prices showed a
clearly worsened behaviour, especially from the second half of the 1980s.
The relationship between market shares and the ENER is especially
strong during devaluation phases, which, over the reference period, take
place on two dates: in 1982, soon after the Socialist Party came to power,
and posteriorly, on three consecutive occasions between 1992 and 1993. At
that time, the evolution of market share in goods, already positive,
experienced even more significant increases. As a consequence, it can be
said that out of the two components, exchange rate evolution has been the
one offering the clearest relationship (in the non-Kaldor sense) with the
market share variables and not relative prices.
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48 T H E S E RV I C E I N D U S T R I E S J O U R N A L

Once the relationship between the effective real exchange rate and the
market shares held by manufacturing industries has been analysed, what are
the conclusions which can be reached when looking at services? In this
case, the behaviour pattern seems sensibly different. In the first place, the
evolution of service market shares does not follow an upward trend over the
whole period as in the case of manufacturing industries. On the contrary,
after experiencing a slight increase at the beginning of the 1980s, it initiates
a notable downward trend from 1986 to 1992 (thus falling from 11.5 per
cent to 9.6 per cent), the year when it strongly recovers. In the second place,
and as a very important factor, a stronger connection between market share
evolution and the effective real exchange rate in relation to consumer prices
(ERERcp) can be observed, which in this case takes relative consumer
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prices as a reference. Then, improvements (worsenings) in ERER values

correspond to increases (decreases) in market shares, thus confirming the
non-Kaldor relationship. Such a relationship is also confirmed by the
negative correlation coefficients (-0.47).
It is worth exploring, as in the previous case, the evolution of the two
ERERcp components, the effective nominal exchange rate (ENER), and
relative consumer prices. In this case, two sub-periods can be defined:
between 1982 and 1986, when the evolution is divergent, and from that
year, when a certain accommodation between both variables can be
observed. Although, as in the previous case, the evolution of ENER seems
to have had a stronger influence on the evolution of service market shares
(once again, especially visible in devaluation phases), relative prices also
seem to have played a certain role from 1986.

Trend Influence and Cycle of Export Shares

On the other hand, it could be speculated from what has already been seen,
that the strong upward trend followed by export shares in the manufacturing
industries notably biases results and clearly weakens the relationship
between market shares and ERER. For that reason, the trend component can
be removed from both manufacturing industries and services and a cyclical
component4 can thus be obtained. Once the trend has been eliminated, it can
be observed that the Kaldor relationship between market shares and ERER
is practically non-existent, up to the point that the correlation coefficient
falls down to 0.15.
In conclusion, it can be said that the trend introduces a certain bias in the
behaviour of the export shares of manufacturing industries, thus confirming
the results pointed out by Kaldor. Furthermore, it seems that the cyclical
component weakens the relationship postulated by Kaldor, in both
manufacturing industries and services. In the latter case, this weakening
means a reinforcement of the conventional relationship, so that the
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 49

F I GURE 3 (a-c)
G O O D S : RE L AT I ONS HI P S BE T WE E N MARK ET SH A R E, EFFECTIV E REA L
E X C HANGE RAT E (Unit Labour Costs) (ERER ulc) A N D E F F E C T I V E N O M I N A L
E XCHANGE RAT E ( E NE R) AND RELATIV E PRICES

(3a) 2

1.5

0.5
Market share
0
ERERulc
1982 1985 1988 1991 1994
-0.5
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-1

-1.5

-2

(3b) 2.5
2
1.5
1
0.5 Market share
0 ENER
-0.5 1982 1984 1986 1988 1990 1992 1994
-1
-1.5
-2

(3c) 2
1.5
1
0.5
Market share
0
Rel. Prices
-0.5 1982 1984 1986 1988 1990 1992 1994
-1
-1.5
-2

Source: Based on EUROSTAT and Bank of Spain data.

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50 T H E S E RV I C E I N D U S T R I E S J O U R N A L

F I GURE 4 (a-c)
S E RV I C E S : RE L AT I ONS HI P S BE T WE E N MA R K ET SH A R E, EFFECTIV E REA L
E X C H A N GE RAT E (Consumer Prices) ( E RE Rcp) , EFFEC TIV E N O MIN A L EX C H A N G E
RAT E ( E NE R) AND RE LATIV E PR ICES

(4a) 2
1.5
1
0.5
Market share
0
ERERcp
-0.5 1982 1984 1986 1988 1990 1992 1994
-1
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-1.5
-2

(4b) 2.5
2
1.5
1
0.5 Market share
0 ENER
-0.5 1982 1985 1988 1991 1994
-1
-1.5
-2

(4c) 2
1.5
1
0.5
Market share
0
Rel. Prices
-0.5 1982 1984 1986 1988 1990 1992 1994
-1
-1.5
-2

Source: Based on EUROSTAT and Bank of Spain data.

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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 51

F I GURE 5 (a-b)
R E L AT I ONS HI P BE T WE E N COMP E T I T I VE N ESS C A PA C ITY A N D TH E EX PO RT
S H A R E C Y C L E O F M A N U FA C T U R I N G I N D U S T R I E S A N D S E RV I C E S .

(5a)
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(5b)

Note: CYCLEMAN = cyclical component of manufacturing industries, MSHAREMANUF =

market share in manufacturing industries, CYCLESERV = cyclical component of
services and MSHARESERV = market share in services.

Source: Based on EUROSTAT and Bank of Spain data.

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52 T H E S E RV I C E I N D U S T R I E S J O U R N A L

correlation coefficient goes from -0.47 to -0.68. Finally, the analysis of the
cyclical component of service market shares makes its procyclical
relationship, in comparison to the economic cycle of the Spanish economy,
more obvious. Looking further into the behaviour of this relationship, it can
be said that the cycle of service export shares seems to slightly anticipate
the economic cycle. In this sense, the second half of the 1980s,
characterised by strong economic growth rates (around 4.93 per cent on
average during the 1987–89 triennium), coincided with notable increases in
service export shares, although a decrease already started in 1988. On the
contrary, the deceleration in productive activity, already evident in 1991,
reached its lowest point in 1993 (a -0.3 per cent decrease in GDP). In the
meantime, market shares, which experienced a notable decrease in 1992,
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started following an upward trend in 1993.

TOWARDS AN EXPLANATION OF THE D I F F EREN T I A L

COMPETITIVE BEHAVIOUR OF SERVI CES

The relationship, obtained in the previous section, between service shares

and ERER, based on consumer prices (ERERcp), leads us to analyse the
causes which can explain it and which discard the behaviour hypothesis
considered at the beginning. To this effect, it is necessary to very briefly
look at the sectorial composition of exports in the Spanish balance of
invisible items, given that in this balance are contemplated very varied
activities and that, as such, they can react very differently to the evolution
of the competitiveness-price conditions presented by the economy.
Tourism and travel is the more prominent sector in the service Balance
of Payments. This determines a strong specialisation in this type of services
if compared with EU countries and the OECD [González, 1999]. As a
result, the trend defined by the overall service exports keeps a close
relationship with the evolution maintained by this item. However, this
protagonism, translated into figures reaching 66 per cent of export incomes
in 1990, started to decrease from that year, so that by 1998 it had fallen
down to 60.9 per cent.
TABL E 2
E X P O RT C O M P O S I T I O N I N T H E S PA N I S H B A L A N C E O F PAY M E N T S

Tourism Transports Communications Business Financial Insurances Other Total

1982 62.3% 28.1% 2.1% 1.4% 0.4% 0.5% 5.2% 100%

1990 66.0% 20.6% 3.9% 2.5% 1.4% 1.7% 3.9% 100%
1998 60.9% 14.8% 1.1% 12.6% 2.7% 1.4% 6.5% 100%

Source: Spanish Balance of Payments, several issues.

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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 53

Parallel to this trend, a notable decrease has been registered in the
relative weight presented by transports, which fell by half (from 28.1 per
cent in 1982 down to 14.8 per cent in 1998). As regards communication
services, after a notable increase between 1980 and 1990, they started to
decline and only represented 1.1 per cent of total export incomes in 1998.
The remaining services (business services, financial services and insurance)
represent the other side of the coin, given that they have gained positions as
service exporters. Amongst all of them, the most notable case is business
services, which went from 2.5 per cent of incomes in 1990 to 16.2 per cent
in 1998.
The relationship between the effective real exchange rate based on
consumer prices (ERERcp) and market share is far from similar, when
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analysing the relationship existing between the various activities which

make up the service sector, but actually shows a series of strongly
differentiated patterns. In any case, the results should be treated with some
caution given that, as a consequence of the notable differences amongst the
activities making up tradable services, inflation pressures also differ from
one group of activities to another. As a result, the ERERcp only offers an
approximate average of what is being measured.
In the first place, it can be observed that the three service branches which
show the clearest expected non-Kaldor relationship are tourism and travel,
transport and communications. That is to say the three activities which have
traditionally had the higher relative weight in total exports, in spite of their
decreasing trend (over 90 per cent in 1982 and 76 per cent in 1998). In all
three, increases (decreases) in ERERcp value, that is to say worsenings
(improvements) of the competitive capacity, were translated into decreases
(increases) in market shares, although the relationship was far from being
perfect over the whole period.
The case of tourism deserves special attention. Although the demand in
tourism depends on factors such as preferences, and on the emergence of
new competitors, the Spanish tourism sector is strongly dependent on price
evolution and on exchange rates, a situation in line with results shown by
some econometric analyses [Espasa et al., 1993 and Esteban, 1996]. Thus,
the hypothesis of the rigidity in the change of tourists’ destination in relation
to factors linked to knowledge, customs and the ownership of a residence,
is discarded. Indeed, the decrease in Spanish export shares at the end of the
1980s and beginning of the 1990s was not due to a problem of demand,
generated by the relative decrease in tourists but to a problem of supply,
caused by a macroeconomic policy of the peseta appreciation which led to
strong worsenings in the Spanish tourism sector, all this further aggravated
by devaluation policies carried out by different competing countries. This
strong sensitivity to the evolution of export shares in relation to
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54 T H E S E RV I C E I N D U S T R I E S J O U R N A L

competitiveness levels is also related to the low or average income levels of

the tourists who visit Spain. As a result, maintaining competitive prices
becomes a key factor (even more important if we take into account the
growing competition levels of less developed Mediterranean countries,
which can offer cheaper packages and have weaker currencies).
The analysis also shows the suitability of using the CPI as the reference
variable when calculating the ERER since tourists’ spending includes a
wide range of goods and services with a high weight in the CPI, such as
food and housing. In any case, not all the period has witnessed an evolution
of market shares similar to that of the ERERcp, as for instance the mid-
1980s. On the contrary, devaluations illustrate periods of strong sensibility.
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TABL E 3
E V O L U T I O N O F E X P O RT S , I M P O RT S A N D B A L A N C E S I N S E RV I C E S A N D
M A N U FA C T U R I N G I N D U S T R I E S , S PA I N , 1 9 8 2 – 1 9 9 5

Exports (growth rate Imports (growth rate Balances (idem)

previous year) previous year)
Median Median St. Median Median St. Median Median
82-90 90-95 Deviation 82-90 90-95 Deviation 82-90 90-95

Goods 0.209 0.116 0.108 0.271 0.109 0.127 0.530 –0.025

Services 0.069 0.086 0.066 0.148 0.097 0.092 0.050 0.079
Transports 0.069 0.082 0.133 0.153 0.097 0.109 –0.033 –0.245
Tourism 0.105 0.074 0.079 0.145 0.011 0.156 0.102 0.090
Communications 0.103 0.098 1.441 0.000 0.231 0.457 0.063 0.412
Insurances 0.136 0.282 0.413 0.088 0.164 0.353 0.024 –0.181
Commercial Services 0.250 0.016 0.544 0.066 –0.007 0.453 0.075 –0.250
Construction Services 0.132 0.128 1.534 0.256 0.711 0.732 –0.585 –0.875
Financial Services 0.130 –0.039 0.508 0.133 0.261 0.692 0.182 –0.143
Business Services 0.183 0.477 0.246 0.148 0.136 0.158 0.135 0.049

Source: Based on EUROSTAT data.

Since the 1970s and 1980s, the evolution of Spanish transport services
has fallen into a certain slackness. Its market shares followed a progressive
downward trend and a sustained worsening of balances (a median of -0.33
between 1982 and 1989 and of -0.245 between 1990 and 1995). Within this
critical framework, a certain sensibility of market shares to the evolution of
price competitiveness can be observed, as previously indicated. In any case,
it is necessary to consider the heterogeneous nature of these services when
analysing its behaviour. For example, air transport market shares showed no
clear links to ERER trends; market dynamism and deregulation processes
explained it. On the contrary, the rest of transport followed a quite different
path, especially if sea transport is excluded from the analysis. In that case,
two main sub-periods are to be distinguished: the first one, covering the
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 55

years 1982–88, and the second one, covering 1989–95. In the former one, a
non-Kaldor type relationship can be concluded, whereas the evolution is the
contrary (Kaldor type) for the 1989–95 period. All of this brings us to reach
a conclusion: the importance that institutional factors have in explaining the
evolution of market shares, especially the elimination of entry barriers due
to deregulation processes and the entry of Spain into the EEC.
As pointed out, communication services also present conventional (non
Kaldor-type) behaviour patterns, so that worsenings (improvements) in
price competitiveness have led to parallel falls (increases) in market shares.
On the other hand, the evolution of their trade has been quite erratic over the
whole period, as can be deduced from the high levels shown by standard
deviation, in exports as well as in imports. In spite of being a sector
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characterised by strong regulatory frameworks, at least till the beginning of

the 1990s, the technological impact has been very important, thus greatly
reducing location restriction, a characteristic of service activities, and
benefiting price competition.
As for the remaining services, quite disparate relationships between
exchange rate and market shares can be observed, although they are not as
obvious as in the case of tourism, transport and communications. This
does not imply that during specific periods (as in construction services at
the beginning of the 1980s), a high level of coincidence cannot be
observed, but the key point is that such behaviour does not last over the
whole period.
One of the most interesting results obtained from the remaining services
is the one offered by business services, whose market shares continuously
increased over the whole reference period, without showing any sign of
connection with the evolution of ERERcp. As can be seen, there is a high
level of coincidence in relation to the evolution of manufacturing market
shares – a fact which underlines the complementary character of both
activities even when analysing export shares. All this leads to an extremely
well-known conclusion: in order for a country to be able to count on an
internationally competitive industry, its enterprises should increasingly
benefit from competitive and good quality services.
The increase in business service export shares is, in addition, parallel to
the important increase shown by this type of services in the Spanish
economy, from a qualitative point of view (making up a factor which
improves industrial competitiveness levels) as well as a quantitative one.
From the latter approach, their relative growth should be underlined, with
employment going from 1.07 per cent in 1981 to 5.5 per cent in 1997. In
addition, and as can be seen in Table 3, their growth has rested on solid and
structural bases, as can be deduced from the low value shown by the
standard deviation of their export (and import) growth.
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56 T H E S E RV I C E I N D U S T R I E S J O U R N A L

F I GURE 6 (a-h)
R E L AT I O NS HI P BE T WE E N COMP E T I T I VE C A PA C ITY A N D MA RK ET SH A R E
F OR DI F F E RE NT SERV ICES

(6a) 2
1.5
1
0.5
0 M. tourism
-0.5 1982 1984 1986 1988 1990 1992 1994 ERERcp
-1
-1.5
-2
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-2.5

(6b) 3
2
1
M. transports
0
ERERcp
-1 1982 1984 1986 1988 1990 1992 1994
-2
-3

(6c)
3

1 M. insurances

0 ERERcp
1982 1984 1986 1988 1990 1992 1994
-1

-2
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 57

F I GURE 6 (Cont’d)

(6d) 3

1 M. financial

0 ERERcp
1982 1984 1986 1988 1990 1992 1994
-1

-2
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(6e)
2.5
2
1.5
1
0.5 M. Commerce
0 ERERcp
-0.5 1982 1984 1986 1988 1990 1992 1994
-1
-1.5
-2

(6f)
2.5
2
1.5
1
0.5 M. Communic.
0 ERERcp
-0.5 1982 1985 1988 1991 1994
-1
-1.5
-2
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58 T H E S E RV I C E I N D U S T R I E S J O U R N A L

F I GURE 6 (Cont’d)

(6g) 2
1.5
1
0.5
M. construction
0
ERERcp
-0.5 1982 1984 1986 1988 1990 1992 1994
-1
-1.5
-2
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(6h) 2.5
2
1.5
1
0.5 M. business
0 ERERcp
-0.5 1982 1984 1986 1988 1990 1992 1994
-1
-1.5
-2

Note: ERERcp means effective real exchange rate with consumer prices.

Source: Based on EUROSTAT and Bank of Spain data.

As regards insurance and financial services, they present the most

different behaviour patterns in relation to tourism, transport and
communications. They also show a certain relationship between their
market shares and ERERcp, but this time in the sense expressed by Kaldor.
This conclusion is especially obvious at the end of the 1980s and beginning
of the 1990s, when market share growth was very strong, in spite of the
opposite evolution of price competitiveness, and also from 1992 to 1993,
when devaluations coincided with strong corrections in market shares.
The strong growth of market share in insurance and financial services
during the later 1980s coincided with a gradual loss of market share in the
United Kingdom, France and the Netherlands, being the most competitive
countries in the sector [Hardwick and Dou, 1998]. Yet, from the beginning
of the 1990s, this sector experienced new competitive pressures, partly as a
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 59

consequence of the measures taken within the Single Market to increase
competition, of the progressive elimination of barriers which separate some
activities from others (for instance, the insurance banks) and of the
incorporation of new agents which were different from those who until then
made up the traditional financial service industry (e.g. the growth of credit
cards issued by non-banks) [European Commission, 1997]. Taking all these
facts into account, it can be concluded that, after a very favourable evolution
of the export market shares held by this type of services (not free from
fluctuations), the new competitive pressures at the beginning of the 1990s
seemed to have some effects in Spain from 1992, their evolution being
independent from the improvements in the price competitiveness of the
economy. The loss of competitiveness in market shares during the last
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reference years is, in addition, parallel to a strong worsening in the trade

balances of this type of services, a fact which suggests that the loss of
competitiveness not only took place on some foreign markets but also on the
domestic one.

CONCLUSIONS

The relationships between competitiveness and services must be understood

within an analytical framework which takes into account the effects services
have on the global economy and the challenges which competitive
economies impose on these services. Following this second direction, it is
obvious that services require a specific approach since they are not
internationalised in the same way as goods. Two types of factors influence
service trade: expansive factors which force the opening of markets – due
to the economic dynamics themselves – as well as limitative factors which
restrict the possibilities of trade growth – due to the peculiarities inherent to
the nature of services and to some of the regulations associated with them.
Within this analytical framework, the relationship between market
shares (taken as a competitiveness indicator) and the price and cost
indicators (which necessarily must influence the competitive capacity) are
presented as a particular case. The analysis has been carried out separately
for services and manufacturing industries so that the differential behaviour
of service competitiveness could be investigated.
Due to the referred limitative elements (market power, market
segmentation, regulations, internalities, etc.), it would be expected that
services would show a lower sensitivity to price and costs factors. However,
according to the results obtained for the Spanish economy, manufacturing
industries appear much less sensitive to prices than services. Furthermore,
services are ‘within’ the relationship expected from manufacturing
industries: to lower prices correspond higher market shares and vice versa.
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60 T H E S E RV I C E I N D U S T R I E S J O U R N A L

All the indexes used in this analysis confirm this fact. In addition, it
underlines the strong influence played by economic cycles in sustaining
relative prices (contrary to trends which show a basic behaviour justifying
the arguments presented by Kaldor). However, there is a factor which
explains the partial discarding of the main hypothesis derived from the
subsectorial specialisation of Spanish service exports: the strong presence
of tourism in the Spanish economy (two thirds of service trade), submitted
to more cyclical and relative price-related components than would be
expected.
Another factor justifying the partial refutation of the hypothesis resides
in the fact that market shares do not represent a full guarantee
competitiveness indicator. Its estimation, as shown by Alonso [1992], ‘very
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strongly depends on those institutional alterations which affect the levels of

connection of the country – or competitors – with international markets’. In
the Spanish case, it is obvious that the strong trade opening of the 1980s,
especially from the entry into the EEC in 1986, led to an increase in market
shares abroad, with different results in manufacturing industries and
services. Previously low levels of international integration determined a
very positive market share evolution in manufacturing. However, in some
specific services, previous levels of opening were sensibly higher, since
tourism already represented a strategic activity in the 1960s and, later,
became even more decisive for the overall economy than it is nowadays. On
the contrary, other service activities in which Spain shows a scarce
specialisation are those traditionally associated with extremely strong
regulatory frameworks and low levels of international exposure.
Thus it can be concluded that the acceptance of the hypothesis
formulated between service trade competitiveness (market shares) and
competitive capacity (prices) is partially correct for some of the service
sectors, especially some of the producer services. Business services present
a relative trade linked more to their structural growth trends and to elements
inherent in their nature. Financial and insurance services also show weak
Kaldor-type relationships, linked to market integration, regulations and the
economic cycle. On the contrary, transport and communication services also
show similarities with tourism, within the recent processes of liberalisation,
which could have accentuated the importance of relative prices.
Finally, it should be taken into account that the analysis carried out in
this article is only a first exploration of competitiveness applied at a
sectorial level which would logically require posterior, more advanced and
precise research to shed more light on the complex range of relationships,
factors and variables along which the elusive concept of competitiveness
runs.
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SERVICES AND COM PETI TI VENESS: SPA N I S H T R A D E 61

NOTES

1. The approach used in this article notably differs from Barras and Peterson [1987], who
analysed international competitiveness in services comparing the value of a constructed
index in different European countries.
2. In concrete terms, its formula is the following: ITC = PRI* IPX

( )
nj −1 /( n1+ n 2+...nj )
PRI = PCI e * PCI1n1 * PCI 2n 2 * ... * PCI j
− nj
IPX = (tc1− n1 * tc2− n 2 * ... * tc j )1 /( n1 + n 2 + ...nj )

Where:
CPIe consumer price index in Spain
CPIi: consumer price index in each of the j countries considered
Nj: weights
Downloaded by [62.83.77.77] at 14:08 24 October 2014

Tcj: peseta exchange rate in relation to the currencies considered.

3. The reasons for using the ULC in goods and not another index, such as the industrial price
index, are based on two factors: first, statistical data availability, and second, the fact that the
objective is not to compare both real effective exchange rate indicators but to compare their
evolution in relation to market shares.
4. In order to do so, Hodrick-Prescott filter has been extracted and a parameter Lambda equal
to 100 has been specified, given that the series was annual.

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