The Balassa‐Samuelson Hypothesis in Estonia: Oil Shale, Tradable Goods, Regulated Prices and Other Culprits

Abstract

This paper analyses the Balassa‐Samuelson (B‐S) framework for the case of Estonia using a unique dataset that consists of a 15‐sectoral breakdown of GDP and a five‐digit level CPI disaggregation with 260 items over the period from 1993 to 2002. Unlike the existing literature, the paper focuses on the following four aspects of the phenomenon: (a) data disaggregation, (b) definition of goods tradability, (c) price regulatedness in services and (d) possible heterogeneity across transition countries. It turns out that the first three aspects do matter and, in addition to this, Estonia appears to bear very specific characteristics when compared with other transition countries. A battery of cointegration techniques (DOLS, ARDL, Johansen) shows that productivity is strongly related to relative prices only when regulated prices are controlled for appropriately in the consumer price index and when country‐specific classification is applied to the open and closed sectors. The B‐S effect contributed to CPI by 1 to 1.5 per cent at the outset of the period and by 0.4 to 0.6 per cent in 2002, whereas its potential long‐run impact is estimated to be 1 to 1.2 per cent. Although real appreciation due to the B‐S effect seems higher in the early 1990s, it explains that better real appreciation occurred in recent years.

Examining Dutch disease across Australian regions

“…Using this ratio of productivity ( RPROD ) is consistent with Égert (, ), which helps to control for the Balassa–Samuelson effect (Balassa, ; Samuelson, ). The Balassa–Samuelson effect states that an increase in productivity of the tradable sectors surpassing that in the non‐tradable sector may go hand in hand with increases in real wages in the tradable sector without losing competitiveness, given that relative purchasing power parity (PPP) holds (Égert, ).…”

“…To analyse the effect of the resources boom on the real exchange rate, following from Égert (, ), Algieri () and Dülger et al. (), we use the following model:where RER is the real exchange rate, and RPROD is the ratio of average labour productivity in the tradable industry sector (manufacturing and mining) to that of the nontradable sector (services).…”

Are wages equal across sectors of production?

“…The latter should more or less be distributed uniformly with population and income. See also Egert (2005Egert ( , 2011) that in detail discuss various possible distinctions between goods that are tradable and those that are not. Many of these services are non-tradable and simply follow the geographical distribution of the goods-producing populationfast-food 7 De Gregorio, Giovannini and Wolf (1994) can only differentiate between transportation and other services.…”

“…Mihaljek and Klau (2004) also count hotels as tradable because of their large service export content in several Central European countries. See also Egert (2005Egert ( , 2011) that in detail discuss various possible distinctions between goods that are tradable and those that are not. 8 The model by Helpman and Krugman (1985) combines economies of scale with monopolistic competition.…”