Export Competitiveness and Revealed Comparative Advantage
Appendix II Export Competitiveness and Revealed Comparative Advantage
It must be noted that there are difficulties in measuring the comparative advantage, and the issue remains complex till today. Balassa (1989) observed that relative prices under autarky are not observable. Balassa (1965) argued that it may not be necessary to include all constituents affecting a country’s comparative advantage. Instead, the comparative advantage of a country is ‘revealed’ by its observed trade patterns, and for this purpose, one may not require pre-trade relative prices which are not observable. Thus he proposed a derived index to estimate the comparative advantage from observed data, and the index is known as “Balassa Index”. During the last four decades, there have been attempts to develop new indices to overcome the deficiencies in the Balassa Index. However, the Balassa Index still remains a commonly accepted measure to analyse trade data.
The trade competitiveness of a country shows whether it has specialisation in the production of a good (Tam, 2001). A country has a comparative advantage when it can produce the good more cheaply than other suppliers in the market. As indicated by Kannapiran and Fleming (1999), a country has a comparative advantage over the others if that country can do so at a lower cost. Gain from exporting products continues for a country so long as it enjoys a margin over the world price (Leishman et al., 2002).
Indices on the revealed comparative advantage (RCA) are commonly used as proxies to measure trade competitiveness. RCA assumes that the comparative advantage of a country is reflected or revealed in a market over a selected set of prospective products (Tam, 2001). The RCA provides a rough indicator of the strength of a product in terms of its comparative advantage in the world market, relative to others (Fatimah and Alias, 1997).
The Balassa Index was developed in an evolutionary process. Liesner (1958) is the first to contribute to the empirical study in the area of RCA to examine the competitiveness of the UK in the European Common Market. Since then, the definition of RCA has been revised and modified over the last four decades. The Balassa index is used in varieties of situations to examine the competitiveness of a country in different lines of products/ industries. For example, while Balassa, (1965) used this approach to estimate the competitiveness at the sub-global/regional level, Vollrath (1991) used it to analyse the specialisation in trade at the global level. In a related study, Dimelis and Gatsios (1995) used this approach to examine the competitiveness at the bilateral level.
A simple measure of RCA used in the study is as follows: RCA1 76 =X ij /X nj .............................(1) where X denotes exports, i for country, j for product ( or industry), and n for a set of
countries (e.g. any RTA). Balassa (1965) presented a comprehensive measure of the relative comparative
advantage index. The RCA has gained wider acceptance among the applied international 76 Different variants of RCA are discussed in this section. We have numbered these measures to maintain
their identities.
trade economists, as it is a more comprehensive indicator of the concept of specialisation. It provides a better measure of the overall specialisation pattern of a country. Kunimoto (1977) provides a statistical framework in which the Balassa Index can be interpreted as the ratio between actual and expected trade. The RCA Index is expressed as follows:
ç X ij ÷ ç å i ÷
X ij ö
RCA2 j = ç ÷ ç
ç X å ij ÷ ç X ij
where X stands for exports, i for i th country, j for j th product (or industry). RCA2 j measures i th country’s exports of the j th product (or industry) relative to its total exports and to the corresponding exports of a reference group or World.
When RCA2 j >1, it may be interpreted that the reference country has a revealed comparative advantage in the export of j th product to a reference group or World. If RCA2 j is less than unity, the country is said to have comparative disadvantage in the product/industry. Greenaway and Milner (1993) have argued that the RCA2 index is lopsided due to exclusion of imports from the index. In order to correct the export bias in the RCA index, several indices are proposed in the literature by introducing imports in the modified indices. Greenaway and Milner (1993) have proposed “own” country trade performance. A number of other transformed indices are also seen in the literature, and most of them are very similar to Balassa Index.
Some significant improvement is suggested by Vollrath (1991) to transform the RCA index. He has proposed three alternative ways of measuring a country’s RCA using both export and import variables. These alternative specifications of RCA are called the relative trade advantage (RTA), the logarithm of the relative export advantage (ln RXA), and the revealed competitiveness (RC). One of the advantages of presenting Vollrath’s three alternative measures is that the positive value of revealed comparative advantage reveals a comparative/ competitive advantage, whereas the negative values indicate comparative/ competitive disadvantage. This condition is applicable to all the three alternative measures of Vollrath (1991).
The aforesaid measures are effective so long as trade practices are carried out in a distortion free environment. However, the trade patterns of countries are very often distorted on account of intervention of Governments in the form of import restrictions, export subsidies and other protectionist policies. Such anomalies in trade practices also affect the effectiveness of the RCA index as a sound instrument to measure the comparative advantage of domestic tradable products/sectors. Several studies have proposed a number of measures to remove the prevailing anomalies in trade practices, on account of Government intervention. For example, the study of Fertö and Hubbard (2003), uses nominal assistance coefficients (NACs) estimated by the OECD for country and commodity sectors to filter the effects of possible distortions in measuring Hungarian Agri-food sector RCAs vis-à-vis the EU. Greenaway and Milner (1993), on the other hand, suggest the advantage of a price-based measure of RCA called “implicit revealed comparative advantage” (IRCA) to remove the distortion caused by the post-policy intervention. Vollrath (1991) suggests that the Revealed Competitiveness (RC) index is preferable since supply and demand balance is embodied in the index. It may be noted that although the use of
Balassa and Vollrath indices are very much in vogue to examine the competitiveness of a country, they are not strictly comparable.
The existing literature presents a range of RCA alternative indices to measure the comparative advantage, and sometimes the use of different RCA indices may lead to inconsistent results and interpretational difficulties. Moreover, a number of studies have raised apprehensions about the stability and the consistency of alternative measures of RCA (e.g. Balance et al., 1987; Yeats, 1985; Hinloopen and Van Marrewijjk, 2001).