Changes in Revealed Comparative Advantage in Machinery and Equipment: Evidence for Emerging Markets

Abstract

The paper computes Balassa’s index of revealed comparative advantage for machinery and equipment (a rough proxy for high-tech goods) for a number of emerging areas (East Asia, South-East Asia, South Asia, Eastern Europe, Latin America, Africa, and the Middle East) and for selected individual countries over some 50 years, from the early 1970s to the early 2020s. The focus is on why some economies were successful in promoting high-tech sectors. As could be expected, experience differs hugely. In some countries, interventionist trade or industrial policies were crucial in fostering comparative advantage. In others, however, the role of policies appears to have been minor and successes were achieved thanks to the free play of market forces (including an important contribution, at least in some countries, coming from foreign direct investment).

1. Introduction

Economic growth remains a goal for most countries and, indeed, most individuals. It can bring with it some undesirable effects, in particular for the environment, but the rising tide of green regulations and policies (notably in the more advanced economies) is beginning to reduce such negative externalities. Hence, policy makers still strive to achieve growth virtually everywhere. One form of growth that is particularly welcome is so-called “export-led” growth. This is seen as highly desirable for several reasons. It obviously leads to higher output per capita (assuming low population growth), but it also suggests, indirectly, that a country is competitive on the world scene, thus making further growth more likely in future; it also improves (other things equal) the external account, which, in fixed exchange rate systems, may act as constraint on the economy, and it brings in foreign currency, which, particularly in poorer countries, is a scarce resource.

What could be more welcome than a process of export-led growth centered not so much on primary products but on manufacturing and, if possible, on manufacturing in high technology sectors? This surely is a highway to lasting prosperity! But how many countries have actually achieved such a feat? The literature on export-led growth is not particularly encouraging. For the post-World War II period, a fairly general conclusion is that the many tests that have been carried out (often of the Granger-causality variety) have seldom succeeded in proving the hypothesis, at least for the advanced economies. A survey for post-war Western Europe concluded, for instance, that while “phases of export-led growth during cyclical upswing were almost certainly present … longer-run spells of above average growth pulled by foreign demand are … very difficult to detect” (Boltho 2020, p. 201). Rather than showing “export-led” growth, the evidence points to the almost opposite thesis of “growth-led” exports.

Many observers would, however, still argue that specializing in high-tech production, even if not specifically for exports, is very likely to enhance welfare and prosperity. After all, the high living standards of the United Kingdom, the United States, Germany, or Japan today are surely in part at least a consequence of their primacy in the early days of industrialization and of their gradual moves into new sectors characterized by ever more complex production techniques (e.g., from textiles, to steel, to chemicals, to machinery, to ICT), which, in turn, led to successful exports. The literature on endogenous growth has suggested that a link exists between a country’s growth and specialization in high-tech activities (Young 1991).

A way to combine the two strands (high-tech and foreign trade) is to look at one very simple synthetic indicator: the so-called index of “revealed comparative advantage” (Balassa 1965). This measures the ratio of a country’s share of world exports in a particular product to its share of total world exports. Any index value above unity “reveals” that the country in question enjoys an apparent advantage in the world market for that particular product since its presence in that market is above what would normally have been expected given its weight in the world economy.1 Balassa’s revealed comparative advantage (henceforth RCA) index has been subject to criticism and alternative formulations have been suggested (see, for instance, Stellian and Danna-Buitrago 2022), but, in the words of these two authors: “Published studies do not agree on why one index is preferable to another, and the Balassa measure remains a reference in the literature” (ibid., p. 46).

Hence, the paper sticks to Balassa’s original RCA index formulation. Such an index can be easily computed given the availability of foreign trade data over prolonged periods of time. For an earlier work following a similar approach, see Balassa and Noland (1989). The paper’s main aim is to look at how a large number of emerging markets performed over half a century in changing the composition of their foreign trade and on what were the main reasons for why some were successful. The next section discusses the approach followed. Section 2 looks at the main results while Section 3 provides some tentative explanations. The very brief Conclusions (predictably) conclude.

2. Approach

What could proxy “high-tech”? The choice of sectors in this area is vast and rapidly changing over time with very few uniform guidelines. One possible short-cut would be to use data on R&D expenditure as a percent of, for instance, an industry’s total sales (and/or the numbers of scientists and engineers as a share of an industry’s total employment) (cfr. Balassa 1977). Such data, however, are not easily forthcoming for many countries and for longer periods of time. A simplification, no doubt, would be to look at foreign trade and use category 7 of the standard international trade classification (SITC) which encompasses “Machinery and transport equipment”. This is probably a proxy not so much for high-tech but for both medium- and high-tech activity, since not everything that is included in SITC 7 is of high technological sophistication (airplanes and electronic machinery are, the assembly of passenger cars, less so). The category also ignores advanced chemical and pharmaceutical products. It still, however, almost certainly covers the bulk of medium- and high-tech production both in the past and today. Its main drawback is that it cannot distinguish between the various sources of comparative advantage (factor endowment, technology, trade policies, institutions …) and can be influenced by the presence of trade barriers. On the other hand, it reflects both relative costs and non-price factors.

Data were collected on total manufactured exports and on exports of SITC 7 for a large number of emerging economies.2 The main source was the United Nations (UN) for statistics between 1970 and 2022, complemented at times by data from the World Trade Organization (WTO). There are, inevitably, some gaps in these statistics as well as breaks in series that had to be filled in with either interpolations or with other, at times more arbitrary, adjustments. Several groups of countries were covered. The emerging world was subdivided between East Asia (China and the four so-called NICs, Hong Kong, Singapore, South Korea, and Taiwan), South East Asia (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam), South Asia (Bangladesh, India, and Pakistan), Eastern Europe (the Czech Republic, Hungary, Poland, Russia, Romania, and Slovakia), Latin America (Argentina, Brazil, Colombia, Chile, the Dominican Republic, Ecuador, Mexico, and Peru), Africa (Algeria, Egypt, Kenya, and Morocco) and the Middle East (Iran, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, plus Israel and Turkey).

The revealed comparative advantage (henceforth RCA) indices were calculated using as denominators not total world and country exports, but only world and country total manufactured exports, excluding, therefore, trade in primary products. As mentioned earlier, any index value above unity suggests the presence of an RCA in SITC 7 for the country in question. Growth in such RCAs would mean that exports and the production of machinery and transport equipment were growing. This, in turn, would have been likely to spur overall growth given that total factor productivity in the machinery and equipment sector is well above average (Herrendorf and Valentinyi 2012).

3. Findings

Figure 1 illustrates developments for the seven major areas selected above.3 Three regions show clear improvements over time in their RCA indices which, by the end of the period, are all above the value of unity: East Asia most notably throughout the 50 years under examination, South-East Asia also virtually through the whole period, and Eastern Europe from the mid-1990s, following the sharp falls incurred during the early years of transition from communism to democracy.4 None of this comes as a big surprise. The East and South-East Asian economies have long been highly competitive on the world market for manufactures. Eastern Europe has also been successful since the fall of the Berlin Wall, helped by low labor costs and rapid integration into Western Europe.

The picture for the other emerging areas here considered is more mixed. None have RCAs above unity, and few show strong long-run improving trends. There are sharp year-to-year fluctuations almost everywhere (which may, at times, reflect problems with the underlying statistics), but little evidence of a gradual upgrading in the export performance of what many would consider crucial sectors for longer-run economic growth.

Turning to individual countries, trend growth rates were computed for each one of them by regressing the RCA indices on time. Strongly positive trends were found in 16 cases (

Table 1. Time trends in revealed comparative advantage SITC 7—machinery and transport equipment.

	Time Period	Coefficient	t-Ratio *
Vietnam	1997–2022	0.038	14.5
Philippines	1970–2022	0.036	20.0
Slovakia	1993–2022	0.033	16.1
Romania	1989–2022	0.026	7.9
Hong Kong	1970–2022	0.025	25.8
China	1980–2022	0.024	19.2
Thailand	1970–2022	0.024	22.3
Czech Republic	1993–2022	0.022	13.3
Korea	1970–2022	0.021	21.0
Mexico	1970–2022	0.020	16.3
Morocco	1970–2022	0.019	14.4
Taiwan	1970–2022	0.017	27.6
Hungary	1993–2022	0.016	8.1
Turkey	1970–2022	0.015	20.8
Malaysia	1970–2022	0.015	5.6
Poland	1993–2022	0.014	6.9

* A value that indicates whether the coefficient on time in the regression is statistically significant; usually a value above 2 suggests that it is. Sources: Author’s computations on data from: United Nations, UN Comtrade Database and World Trade Organization, Statistics on Merchandise Trade.

). Noteworthy in particular, are the performances of the city-state of Hong Kong (in East Asia), of the Philippines (in South-East Asia), and of Mexico (in Latin America). The latter may not come as a surprise given the country’s strong and growing ties with the United States. The former two, on the other hand, may strike some observers as unexpected. Results for the other 23 countries are shown in Appendix A 

Table A1. Time trends in revealed comparative advantage SITC 7—machinery and transport equipment.

	Time Period	Coefficient	t-Ratio
Qatar	1989–2022	0.007	5.3
Indonesia	1970–2022	0.007	5.1
Israel	1970–2022	0.006	6.9
Argentina	1970–2022	0.006	3.6
India	1970–2022	0.005	7.3
Dominican Rep.	1974–2022	0.005	4.7
United Arab Emirates	1978–2022	0.004	1.7
Russia	1994–2022	0.003	2.0
Colombia	1970–2022	0.003	4.8
Chile	1970–2022	0.003	11.4
Brazil	1970–2022	0.002	1.4
Singapore	1970–2022	0.001	1.7
Ecuador	1970–2022	0.001	0.8
Egypt	1970–2022	0.001	1.2
Peru	1970–2022	0.001	2.5
Pakistan	1970–2022	−0.001	2.0
Bangladesh	1977–2022	−0.001	3.0
Algeria	1970–2022	−0.009	4.3
Iran	1997–2022	−0.001	0.8
Kenya	1976–2022	−0.003	1.7
Kuwait	1970–2022	−0.003	0.0
Saudi Arabia	1974–2022	−0.024	6.3
Oman	1979–2022	−0.040	14.3

Sources: Author’s computations on data from: United Nations, UN Comtrade Database and World Trade Organization, Statistics on Merchandise Trad.

. Among the major countries, Argentina, India, and Indonesia manage some modest trend improvements, Brazil, Egypt, and Russia do not. Some economies show statistically significant negative trends (Algeria, Bangladesh, Oman, Pakistan, and Saudi Arabia).

4. Explanations

This section focuses primarily on the success stories shown in Table 1 and illustrated by Figure A1, Figure A2, Figure A3 and Figure A4 in Appendix A. What can throw light on the reasons for these positive performances? Were they primarily the result of market forces or of public sector intervention?5 Was it entrepreneurs, little hindered by intrusive governments or excessive regulation, who spotted opportunities at home and abroad in relatively capital-intensive or advanced technological activities, invested on a large scale and reaped the ensuing profits? Or was performance helped by large inflows of foreign direct investment (FDI) exploiting the benefits of low wages? Alternatively, was it instead governments who, in economies with relatively abundant labor and underdeveloped financial systems, felt that growth in capital-intensive activities, requiring large financial outlets, had to be encouraged by some forms of active intervention to overcome private inertia? These are, of course, much-debated issues, which are far from having been fully solved.

One possible line of enquiry would be to look at the World Bank’s ease of doing business indicators and seeing whether relatively deregulated economies did better than more interventionist ones. Correlating the trend growth rates of the RCAs for the 39 emerging economies here looked at with either the ease of business prevalent in 20196 or changes in that ease between 2009 (the first year for which data are available) and 2019 results in marginally statistically positive coefficients suggesting, prima facie, that deregulation may have had some positive effects on export performance in machinery and transport equipment. Adding inflows of FDI in percent of GDP over the whole period marginally improves the outcome, but the results are very tentative, and the time spans covered differ greatly (1970–2022 for the RCAs and FDI for most countries, but only 2009–19 for ease of business).7 Hence, a more ad-hoc approach, which briefly looks at selected countries and episodes, will be followed.

Taking intervention first, it would seem that one form that may have been successful in the past (protectionism) can be ruled out for the trends shown here. Evidence for Britain in the 18th century and for a number of advanced countries in the 19th century suggests that industrial growth was almost certainly helped by tariffs or even full bans on imports (e.g., O’Brien et al. 1991; O’Rourke 2000; Clemens and Williamson 2004) and protectionism may well have helped some crucial industries to grow very rapidly in the Japan of the 1950s and 1960 (Boltho 1978). Such views are nowadays condemned by mainstream analysts, but, as was aptly said: “… the current focus on the postwar relative superiority of outward-oriented policies is empirically myopic, ignoring the fact that historically many capitalist economies, such as the United States and Japan, experience rapid growth under early conditions of protectionism” (Young 1991, pp. 369–70).

It is true that import substitution, a policy followed by many countries both in the distant past but also in more recent decades, gets a bad press. Two dangers, in particular, lurk behind the protectionism it usually entails: inefficiency and rent seeking. The absence of foreign competition can send domestic firms to sleep unless fierce domestic competition (as was the case in Japan) pushes companies to invest and improve productivity. The appeal of the higher profits, which a protected home market is likely to provide, encourages firms to lobby politicians and civil servants so as to obtain the desired trade barriers, thereby wasting resources and, possibly, encouraging corruption. The dangers are particularly present in relatively small economies with few firms in each sector and in countries with inefficient or corrupt administrators. Many developing countries, unfortunately, meet both criteria.

Be this as it may, over the last few decades, the world has embarked on a sustained campaign of foreign trade liberalization. World Bank estimates show, for instance, that for both high-income and low- and middle-income economies, the average weighted tariff rate had declined from some 5 and 25 percent, respectively, in the late 1980s to some 2 and 5 percent in 2017. Quantitative controls followed similar trends. Recent years have seen some movement in the opposite direction (largely, but not solely, thanks to Trump) and non-tariff barriers seem to have risen lately in a number of both advanced and developing economies (Kinzius et al. 2019), but trade today is nonetheless a lot freer than it was 50 years ago.

Other forms of intervention in more recent times have, however, not been absent. The most publicized has been industrial policy, a vague term involving a whole array of instruments designed to help particular sectors or firms, going from direct subsidies to favorable tax treatment, to easy access to credit, etc. Much of the modern literature on such schemes is critical or, indeed, scathing. It is entrepreneurs working in open markets, not bureaucrats working behind their desks, who generate successful products and hence exports. Yet, the economic history of several of the countries here looked at may suggest otherwise.

East Asia. Looking at the most successful area, East Asia (Figure A1), there can be little doubt that China’s rising RCA resulted primarily from massive government intervention in machinery and other similar production. China’s private sector is both dynamic and highly competitive, but heavier and high-tech industries were primarily in the hands of the government, which lavished favors on them. There was no such central planning elsewhere in East Asia but recent research suggests that industrial policies were important (Juhász et al. 2023). Thus, evidence from South Korea (henceforth Korea) suggests that the state played a crucial role in the country’s industrialization, be this in steel (Redding 1999), in shipping (Lee 1990), and more generally in the economy (Amsden 1989; Lane 2022). Taiwan may seem a less obvious candidate, yet here too the government aided manufacturing companies through a variety of instruments (Rodrik 1995; Wade 2004), and, in particular, the production of semi-conductors via significant injections of capital in 1987 into TSMC, now the world’s dominant firm in this sector (National Research Council 2003).8 Three common features characterize the experience of these two countries: direct intervention to correct perceived market failures, stress on exports rather than on import-substitution, and a firm belief in the need for fierce competition for domestic firms both at home and on the world market (Cherif and Hasanov 2019). FDI, on the other hand, does not seem to have played much of a role. Both Korea and Taiwan recorded very small inflows, smaller than those of most of the countries here considered.

Hong Kong, however, provides a very different story. As was aptly said, Hong Kong’s industrial policy can be described as “maximum support but minimal intervention” (Chen and Ng 2001, p. 225), the maximum support being a policy of almost unfettered “laissez-faire”. Partly perhaps as a consequence, Hong Kong experienced massive de-industrialization. The share of manufacturing value added in GDP, which fluctuated between 20 and 30 percent in Korea and Taiwan between 1970 and 2020, went from 29 to 1 percent over the same time-period in Hong Kong. Yet, the territory’s RCA in SITC 7 rose from 0.3 in 1970 to 1.6 in 2022, the second highest level in the sample of countries here covered. It is electronics production which spearheaded this development, thanks initially to very large Japanese and US foreign direct investment in assembly operations and exports (Tsui-Auch 1998). Today, electric and electronic items account for 95 percent of Hong Kong’s SITC 7 exports. The technological upgrading that must have occurred seems to have owed little to targeted government efforts and much to the FDI of foreign corporations.

South-East Asia. How about the other South-East Asian success stories of Malaysia in the 1970s, of Thailand and the Philippines in the 1980s and 1990s, and of Vietnam more recently (Figure A2)? Malaysia and Thailand have on the whole had very different experiences, as exemplified by the growth of their car industry. In Malaysia, this was state led, with heavy government intervention in promoting national champions (the firm Proton being the most obvious example). In Thailand, by contrast, it was primarily led by the private sector, with little state interference, and an important contribution coming from Japanese investment (Abdulsomad 1999). In the Philippines, protectionism and import substitution were followed from the 1950 to the 1970s (with poor results), but from the 1980s onwards, the country embarked onto a phase of unilateral trade liberalization (Llanto and Ortiz 2015), including the freeing of restrictions on FDI. Crucial seems to have been the creation of a large number of Special Economic Zones, begun already in the 1970s. It is these that probably contributed to the very sharp rise in the country’s RCA for SITC 7 at the time despite the then prevalence of inward-looking policies (Dohner and Intal 1989).

In Vietnam (for which the RCA index is only available from 1997), liberalizing reforms along Chinese lines came in the late 1980s, helped by the presence of a competent bureaucracy (Altenburg 2011), and, as in China, openness to trade and to FDI were encouraged, but the country maintained a large number of state-owned enterprises (SOEs) and was interventionist in its policies. Indeed, in the late 1990s, it even refused World Bank financial assistance, which was being offered in exchange for structural adjustments in line with the Bank’s then policy (Bring 2023). The role of FDI has risen through time at the expense of SOEs, but the economy remained in 2019 more regulated even than China’s according to the World Bank’s ease of doing business criterion.

The experience of these nine Asian countries is clearly mixed. Interventionist industrial policies would seem to have had clear successes in China, Korea, Taiwan, and Vietnam. Hong Kong and Thailand provide an opposite message. Here, it would seem that governments played a more passive role, limited to providing basic public goods. For Malaysia and the Philippines, the verdict is uncertain. Both dabbled with protectionism in the earlier years, when their RCAs soared, both liberalized their economies from the 1990s onwards, when their (by then high) RCAs stagnated or fell back.

Eastern Europe. The verdict is probably simpler for the five successful East European economies here selected (the Czech Republic, Hungary, Poland, Romania, and Slovakia). All five, over the shorter time-period 1993–2022, witnessed significant increases in their RCAs from about 1995 to about 2010, with Poland, however, seeing some setbacks more recently (Figure A3).

Three main features lie behind their successes. First, of course, was the abandonment of central planning and the acceptance of market forces leading to radical institutional changes. Second came openness to free trade, culminating, in 2005 (2007 for Romania), with entrance into the EU and its Single Market. Third, and not least, were inflows of FDI. Germany, in particular, sent some 15 to 20 percent of its total FDI to Eastern Europe between 1990 and 2019, creating greenfield sites and supply networks that greatly added to the recipient countries’ exports. And, overall, the five countries recorded FDI inflows between 1990 and 2022 equivalent to 3 ½ percent of their GDP (unweighted average), well above the 2 percent of Western Europe over the same period. Their experience clearly shows that abandoning communism and embracing free markets can pay high dividends.

The laggard among these countries has been Poland. Its RCA was the slowest growing up to 2010 and has fallen back since. Performance was good in machinery, both electric and non-electric, but poor in transport equipment (including aircraft) and in telecommunications. There seems to be no obvious culprit for these developments. The exchange rate has not appreciated, except in 2023–24. FDI (as a percentage of GDP) has been lower than in the other four countries over the period as a whole, but the differences are not great. It has declined in the last decade, but that was also the case in the more successful Czech and Slovak economies. Nor, of course, has there been a backlash against liberalization.

Other Areas. Three more countries appear in Table 1 (and in Figure A4). The case of Mexico is probably the simplest one. Proximity to the largest single market in the world, the creation of NAFTA in 1992, and wage levels that were a fraction of those prevalent in the US, provided the country’s exporters with a huge opportunity and also encouraged large inward flows of FDI. But a good deal of the country’s impressive export performance since the early 1980s may have reflected Mexico’s broadly successful import-substitution policies of previous decades, which had laid the basis for the country’s industrialization (Ros 1994). And import substitution and selective industrial policies were still being followed in the 1980s despite the move to a more liberalized and open foreign trade regime, with apparent success in particular in the car and computer industries (ibid.). From the 1990s, the economy saw widespread liberalization, in part because of NAFTA’s requirements (Peters 2003) but Mexico is still some way from being a fully laissez-faire economy.

Morocco, like many other developing countries, also moved away from a protectionist policy centered on import-substitution to gradual liberalization from 1980 onwards. The improvement in its RCA performance dates, however, from the early or mid-2000s, following the signing of an association agreement with the EU in 2000 which created a free trade area. It was mainly led by FDI in the automotive sector and in electronics linked to car production (Hahn and Auktor 2018). Targeting such specific sectors remained in place with financial incentives for FDI and the creation of special economic zones. FDI was clearly an essential input in the process (Ali and Msadfa 2019).

Turkey, not unlike Morocco, followed a protectionist policy of import substitution until about the early 1980s, years which saw little movement in its RCA. Some liberalization was introduced from 1980 onwards, but subsidies to exporters and other forms of intervention remained widespread. This changed from 1995 as Turkey joined the WTO and established a customs union with the EU. Industrial policy moved away from sectoral targeting towards more “horizontal” measures (e.g., for regional development). Investment incentives remained in place but were less selective than earlier (Atiyas and Bakis 2015). Turkey’s RCA moved upwards from the early 1990s but then stopped growing from the mid-2000s. Selective industrial policies are unlikely to have contributed to these trends (ibid.). From 2010, the country moved back to selective help and the targeting of medium- and high-tech sectors. Partly because of macroeconomic instability, partly because of a deterioration in the institutional environment, these policies have fallen well short of their aims, with the possible exception of the defense industry (Toksöz et al. 2023).

5. Conclusions

What is one to make of these very different experiences? As the saying goes: “there’s more than one way to skin a cat”. Successful mid- and high-tech industries may be fostered in a variety of ways. Two extremes stand out: Korea and Taiwan on the one hand, Hong Kong on the other. The former two show the benefits of an industrial policy that targets specific sectors but also imposes competition on them; the latter shows how the free play of market forces, combined with large inflows of FDI, can be equally successful. The latter message would also seem to apply to Eastern Europe, an area which has clearly embraced an outward-looking, free-trading approach. Most of the other countries here briefly looked at dabbled with both intervention and liberalization. China and Vietnam are interventionist but welcome FDI; Mexico has liberalized but still intervenes. The earlier successes of Malaysia, the Philippines, and Turkey owed something to industrial and import-substitution policies, but that was not the case for Thailand’s relatively liberal stance in the 1980s or Morocco’s more recent embrace of freer trade. These various, and admittedly vague, conclusions would merit further in-depth research.

The intellectual and also policy pendulum has been swinging in the direction of greater liberalization almost everywhere, at least until recently with, on the whole, beneficial effects. But this may no longer be the case now. The last few years have seen a significant dent in the globalizing of our economies, both developed and developing. As was put in a working document prepared by IMF staff members: “the world is facing the risk of fragmentation” (IMF 2023, p. 4). Recent years have seen a levelling off of both trade and capital flows as well as a surge of trade restrictions. The successes many emerging countries have seen on world markets, illustrated above by the rapid increases in their RCAs in advanced goods, and more generally by their closing of the income per capita gap with the rich world, owed a lot to the whittling down of protectionism and the acceptance of free capital flows, especially of the FDI variety. Political and military tensions are jeopardizing these achievements. Depending on the extent of fragmentation, costs could easily escalate, with world output being reduced by anything between 0.2 and as much as 7 percent over the longer run, with developing countries hit more than proportionately (ibid.). The time period covered in this paper may, in future, be seen as a “golden era” that, sadly, ushered in a less prosperous period.