REVEALED COMPARATIVE ADVANTAGE: AN ANALYSIS FOR SRI LANKA BASED ON LEADING EXPORTS

Abstract

Sri Lanka experience four different economic policies as, prior to colonisation (before 1505), colonial period (1505-1948), after independence to economic liberalisation (1948-1977), and economic liberalisation and its aftermath (after 1977) . During the period of colonisation, Sri Lankan economy shifted to an export and import economy, discarding the self-sufficient economic system . Further, the structure of the exports and imports changed after following the export diversification, which promoted products that are more industrial after trade liberalisation introduced in 1977 . Sri Lankan exports in 1948 substantially depended on agricultural sector during the colonial period while there are significant changes in the export composition as industrial products after trade liberalisation . Therefore, it is important to analyse whether the export product portfolio in Sri Lanka is based on principals of comparative advantage .

Foreign trade is a country's trade with other countries to exchange goods and services across international boundaries . According to international trade theories, countries are able to specialise in producing goods, which they can produce most efficiently at a least cost compared to other countries . Exporting such commodities to other countries earn foreign exchange that enable them to increase import capacity and achieve international competitiveness . Comparative advantage is a concept, more than 200 years old and immovable until today, and considered as the determinant of specialisation in the concept of international trade .

While Ricado laid down basic view of Comparative advantage in international trade, Balassa (1965) developed the concept of revealed comparative advantage (RCA) . The term RCA is one measure of international competitiveness; grounded in conventional trade theory, it measures a country's export of a commodity, relative to that of a set of countries . The RCA analysis is largely based on contributions of Balassa (1977) and Vollrah (1991) . Liesner (1958) is the first person who introduced the measurement of RCA, later developed by Balassa (1965) . Balassa (1977) empirically analysed the pattern of comparative advantage of industrial countries for the period of 1953-1971 . The empirical results suggest renewal of the product cycle for US that possess an ever-increasing technical lead . The standard deviation of the RCA indices for different countries, an association also seen to hold between size and diversification of exports .

Various economists have employed the concept of RCA . Leishman et al. (1999) empirically investigated the international competitiveness for agricultural commodities . Mehmeed (2005) also analysed export specialisation and comparative advantage of non-agricultural products in Pakistan . Jayawickrma and Thangavelu (2010) examined trade linkages and degree of export competitiveness in Singapore, China, and India, in a broad range of manufactured goods using Balassa's export performance index and dynamic RCA index . The study concluded that given the abundant resources, China and India have comparative advantage in broad range of manufactured goods than Singapore . Pilinkiewe (2014) evaluated international competitiveness using the RCA in Baltic States: Lithuania, Latvia, and Estonia . There were different RCA indices such as Revealed comparative advantage index of exports, Revealed comparative advantage index for imports, and Relative trade advantage index . Results indicated that Baltic States might lose their competition due to the globalisation effect and increasing competition from the emerging economies . Further enhancement of these countries depend on their ability to implement reforms in the public sector . Analysing the RCA at a particular point of time, and studying the comparative advantage over a period of time are important .