Report

32 QUANTIFICATION OF BENEFITS FROM ECONOMIC COOPERATION IN SOUTH ASIA
Figure 3.1 Country-wise Share in Intra-SAARC
Exports in 2004.
Figure 3.2 Country-wise Shares in Intra-SAARC
Imports in 2004
revealed comparative advantage based on two exciting
theories of trade, namely, the Ricardian theory and the
Heckscher-Ohlin (H-O) theory. The Ricardian theory
assumes that comparative advantage arises from
differences in technology across countries while the H-
O theory suggests that technologies are the same across
countries. Instead, the H-O theory attributes
comparative advantage to cost differences resulting
from differences in factor prices across countries.
Balassa (1965) derived an index (called the Balassa
Index) that measures a country’s comparative
advantage. The Balassa Index identifies whether a
country has ‘revealed’ comparative advantage rather
than to determine the underlying sources of
comparative advantage. However, since first suggested
by Balassa (1965), the definition of RCA has been
revised and modified such that excessive number of
measures now exist. Some studies measure RCA at the
global level (Vollrath 1991), others at a sub-global/
regional level (Balassa’s original index), and while some
others evaluate the measurement as bilateral trade
between two countries or trading partners (Dimelis and
Gatsios 1995).
To examine the change in competitive basket in
major trading partners in SAFTA, the revealed comparative
advantage is estimated which is a ratio of the
share of a given product in a country’s exports to its
share in world exports (Balassa 1965) and is defined
as:
X
ih
/ Xit
Rih
=
X
wh
/ Xwt
where R ih
= Revealed comparative advantage ratio for
country i in product h
X ih
= Country i’s exports of product h
X it
= Total exports of country i
X wh
= World exports of product h
X wt
= Total World exports
The index of revealed comparative advantage
(RCA ij
) has a relatively simple interpretation. If it takes
a value greater than unity, the country has a revealed
comparative advantage in that product. If it is less then
unity, the country is said to have a comparative
disadvantage in the commodity/industry. The advantage
of using the comparative index is that it considers the
intrinsic advantage of a particular export commodity
and is consistent with changes in an economy’s relative
factor endowment and productivity. It is argued that
the RCA index is biased due to the omission of imports
especially when country-size is important (Greenaway
and Milner 1993). Some other limitations of the index
are: it cannot distinguish improvements in factor
endowments and pursuit of appropriate trade polices
by a country. In addition, it specifies the advantages in
a product in a particular year only.
Using the RCA index, the competitive basket has
been estimated for four major trading partners of the
region, i.e. Bangladesh, India, Pakistan and Sri Lanka.
For each of the country a competitive basket has been
estimated where the RCA is greater than one for that
country but less than one for the other three trading
partners. The competitive basket for the average period
1991–93 and 2004–06 for each of the countries has
been listed in Table 3.1 (Appendix III). The results show
that the competitive basket has expanded overtime
for almost all the countries in 2004. This indicates
that not only the potential of trade within the SAARC
region has increased but also the products in which
the countries can increase their intra-regional exports.
India’s and Sri Lanka’s competitiveness within the
region has increased substantially. In fact, some of the
new products have entered their competitive basket.
India has become more competitive vis-à-vis other
SAARC countries in dyes, pharmaceuticals, yarns, etc.,