Asia: Export Similarity Index Approach

THE CHITTAGONG

UNIVERSITY

JOURNAL

OF SOCIAL SCIENCES

Vol. 24 Part-1 2006 (P. 141-152) May 2007zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA

Measuring Export Competitiveness in South

Asia: Export Similarity Index Approach Md. Didarul Hasan* AbstractzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA

This paper measures the export competitiveness in South Asia using export similarity index as a tool. In fact this is the first attempt to measure exports similarity in South Asia. The paper shows that export similarity between India and other SAARC countries is not high enough to justify low level of intra-regional trade. Moreover, the exports similarity is decreasing with the trade liberalization, which was initiated in the early 1990's, implying that the export competitiveness in South Asia is easing through time. Introduction

South Asia is considered an emerging economic region in the world today. It is one of the fastest growing economies with an expected average growth of 7 per cent in the year of 2006-07. In the favourable international economic environment of today, economic liberalization and often regionalism are popular strategies to promote trade, investment and growth (Khan, 1997). South Asian countries started to liberalize their economies in the early 1990s as part of economic reforms and facilitated by the WTO agreements. South Asia also formed a regional economic group under the South Asian Preferential Trading Arrangement (SAPTA) in 1995. It moved one step further and formed South Asian Free Trade Agreement (SAFfA) in January 2005, which has been enforced in July 2006. Despite various initiatives for regional co-operation in South Asia, the level of •Assistant

Professor. Department

of Accounting

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and Inform ation

University

Systems.

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effective co-operation has remained limited. The low level of economic co-operation in South Asia is reflected by the low proportion of intraregional trade. While intra-regional trade in ASEAN. NAFTA, and EU have reached to 49 per cent, 44 per cent and 67 per cent respectively; it is only 4 per cent in thezyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA SAARC region (The daily Prothom-Alo, 2006). Some economists argue that production and trade patterns of South Asian countries are highly similar. So, they actually compete with each other in the international market, and this is one of the major obstacles to their active economic co-operation. But other economists like Jain(1999) opposed the view and argued that South Asia has, more or less, a complementary trade pattern.

!

Under these circumstances, the paper examines the export competitiveness in South Asia using export similarity index. The export similarity index is a widely used technique to measure the similarity between exports structures of two countries or a group of countries. Though it is believed that South Asian countries' export structures are highly similar, no attempt has been made so far to measure the export similarity in the region. This paper makes the first attempt to measure the export similarity index in the context of South Asia.

The paper uses secondary data on exports from the United Nations' COMTRADE database, collected from the International Economic Data Bank (IEDB), Australian National University (ANU). The main limitation of this paper is that it uses SITC-2 digit level data, which are relatively aggregated. The export similarity index may be sensitive to the level of aggregation. It is assumed, however, that the ordinal rankings will remain invariant to the levels of aggregation.zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLK Literature review

Finger and Kreinin (1979) first proposed an export similarity index to compute the similarity of exports between various countries or group of countries to the markets of the US, Japan, old EEC (six countries), and the rest of the industrial countries. They showed that the export similarity index could be used in many purposes, like to measure trade creation/ diversion effects of tariff reduction, to assess the degree to which economic structure of two countries (or groups) is becoming more similar or more divergent by observing the changes of the indices over time.

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Kellman and Schroder (1983) provided the structural tests for the export similarity index. They basically examined two questions: first, how stable are the similarity ratios over time? and second, how stable are the similarity indices and the associated country rankings at various levels of commodity aggregation? They showed that the similarity indices do tend to change systematically over time. Kellman and Schroder also showed that the export similarity indices are sensitive to the level of aggregation. The highly aggregated data will tend to yield higher value for indices, since intra-industry trade will tend to be netted out. Yang (1998) used the export similarity index to measure the degree of trade linkage between China and its Asian trading partners to evaluate the impacts on China's exports of the Asian financial crisis. According to Yang, Chinese exports seem to be relatively close substitutes for goods from ASEAN and NIEs. He also showed that substitutability between Chinese exports and those from other Asian developing countries is greater because they tend to export similar commodities. Loy (2001) measured the export similarity index between Japan and other East Asian economies (NIEs and ASEAN) to examine the impact of weak Yen on those economies. He showed that Japanese exports are more similar to NIEs than those of ASEAN. So, weakening of the Yen will have more impact on NIBs exports. Hoen and Mooij (2001) measured the export similarity index between the Netherlands and Poland in the EU market to assess how the accession of Poland in the EU may affect Dutch exports share. They showed a small overlap between two countries export pattern, implying Poland's accession to the EU might create opportunities for Dutch exporters.

However, all these studies used single year exports data to measure export similarity index. But, we know that the volumes of exports are highly volatile across different years. So, it is better to use 2-3 years average data to measure the export similarity index, so that year-to-year fluctuation of exports in particular products can be smoothed out. Most of the studies also measured export similarity of only two or three different years to show the trends of change in export similarity. None of the studies actually showed the long run continuous trends of export similarity. Xu and Song (2000) first used three-year average and long run (30 years) continuous data tozyxwvutsrqponmlkjihgfedcbaZYXW

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measure export similarity among East Asian countries. They calculated export similarity in different dimensions to show the pattern of development in East Asia, specifically of ASEAN and China. This paper also uses long run (21 years) continuous and three-year average data to measure export similarity index between the South Asian countries.zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA

Measurement of Export Similarity Index and its Interpretations

The export similarity index can be measured in two different domains: commodity and market (export destination). In the commodity domain, an export similarity index measures the extent of similarity of commodity In the market domain, exports of any two countries (or group of countries).zyxwvutsrqponmlkjihgfedcbaZYXW it measures the extent of similarity of export destinations of any two countries (or group of countries). It is also possible to measure the extent of similarity of commodity export of any two countries (or group of countries) to a third market, which thus include both commodity and market domains (Xu and Song, 2000). Though there are different formulas for export similarity index, the simplest yet effective index was developed by Finger and Kreinin (1979). The export similarity index proposed by Finger and Kreinin is as follows:

.[Xlik , Xljk ]}.100zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFED {LminzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA x ; X jk I

This is a measure of the similarity of export patterns of two countries (or country groups) i and j to market k. Here, X denotes exports, with its superscriptj denoting a commodity and its first and second subscripts denoting exporting country and export destination respectively. Thus,

X1ik/ X ik is the share of commodity I in country i's exports to county k and X

I ik /

X

ik

is the share of commodity I in country j's exports to country

k. The value of the similarity index is between 0 and 100. If the value of the index is 100, it implies that commodity distribution of i's and j's exports are identical. On the other hand, a value of zero implies the totally dissimilar

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export pattern between two countries. Thus, the higher the value of the similarity index, the more similar the export pattern between two countries. Note, the above index is intended to compare only patterns of exports across product categories; it should notzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA be affected by the relati ve size or scale of total exports. If the similarity index between two countries (or country groups) rises over time, it indicates a convergence of two countries export structures, and also suggests greater competition between them in the export markets (Pearson 1994, Song 2000). On the other hand, a decline in the value of the index suggests increasing specialization between two countries in a third market (Finger and Kreinin 1979, Song 2000). From the importing country's point of view, if the similarity index between two countries increases in that market, it implies that the import becomes more typical (Kellman and Schroder, 1983). Furthermore, the convergence between a developing country and a developed country can be interpreted as fast growth and industrialization for the developing country (Xu and Song, 2000). South Asian Export Similarity: Trends and Explanations

Due to its large size India possesses the major share of production and trade in South Asia. Other countries in the region have to compete with India in the international markets. So, we have measured export similarity between India and other SAARC countries to show the competitiveness of exports in the region. The results can be examined in two ways. One is to compare the indices across countries at a particular point of time, and the other is to compare them for a particular country over time. Since South xwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA Asian exports are dominated by manufacturing goods, we first measure export similarity for manufacturing goods only. Table 1 shows the similarity indices between India and other South Asian countries over time for manufacturing goods. In the early 1980's the export similarity index of Bangladesh with India was lower compared to that of other countries. This is because during the 1970s and early 1980s Bangladesh's export basket was dominated by the primary products like jute and tea, and only textiles were significant among manufacturing goods. However, from the early 1980's Bangladesh upgraded its export structure to the manufacturing goods, mainly to garments and clothing to take the advantage of Multi- Fiber Agreement (MFA) quotas and GSP facilities provided by the industrial countries.

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The change in export structure of Bangladesh is reflected by the sharp increase in export similarity with India in the mid 1980's. However, from the mid 1980's to early 1990's the similarity index was roughly constant for Bangladesh, implying no significant change in export pattern in that period. But since the trade liberalization in the early 1990's export similarity between India and Bangladesh has shown a declining J trend, indicating some form of specialization in export structures of the •zyxwv two countries. This implies that trade liberalization has encouraged specializationzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA in the export structure in Bangladesh. In fact, Bangladesh has specialized its exports to labour-intensive products like garments and clothing, which now account for nearly 80 percent of total exports of Bangladesh. Table 1 Export Similarity Index between India and other South Asian Countries, 1981-2001 (manufacturing goods only) 1984-86

1987-89

1990-92

1993-95

Bangladesh39.35

53.2

53.75

53.76

51.9

45.6

40.8a

Pakistan

53.2

48.6

50.82

48.7

48.4

47.0

Sri Lanka 48.7

48.67

53.18

54.15

53.45b

n.a.

47.86

Nepal

55.2

55.84

52.3

50.6

53.48

58.97c

Maldives

n.a.

n.a.

n.a.

n.a.

n.a.

27.19

26.8

SAARC4

58.71

62.5

56.28

55.8

54.2zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPON 50.53d 50.8

1981-83

52.8

51.0

1996-98

1999-01

Note: SAARC 4 comprises Bangladesh. Pakistan. Nepal. and Sri Lanka. a-only 2001,b-1993-94,c1999-00, d-without Sri Lanka, n.a-not available. Source: Calculations based on United Nations COMTRADE

database, collected from lEDB, ANV.

The export similarity between two archrivals India and Pakistan was roughly constant throughout the 1980's, though it has been slightly decreasing from the early 1990's. It implies that Pakistan has not been able to change its export structure relative to India in two decades. This may be due to fact that Pakistan has not liberalized its trade regime significantly in that period. Sri Lanka's export structure has shown a convergent trend toward India from early the 1980's to early 1990's, suggesting greater competition between them in export markets in that period. Sri Lanka liberalized its trade in the late 1970's; much earlier than other SAARC countries, which probably helped the country to converge to India's export structure.

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However. from the mid 1990's export similarity between Sri Lanka and India has been declining, indicating that they tend to specialize in exports.

Export similarity index between Nepal and India decreased somewhat from the early 80's to mid 1990s, but then showed an increasing trend.zyxwvutsrqponmlkjihgfedcbaZYXWV S o, wvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA after trade liberalization Nepal's export similarity with India is increasing. Export data of Bhutan are not available in IEDB, and for Maldives data are available from 1995.zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA Figure 1 Export Similarity between India and SAARC4

India YS.SAARC 4 in US marketzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA

60~------~========~--~ 50~~~~~~~~~~~ 40~~~-=~~~~--~~ 30~~--~~~~~~~~

2°fj;~ 10Th~~~~ •• O+,-~~~~~~~~~~

m~

xwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA Source: Based on Table 1 The export similarity of Maldives with India is very low, indicating dissimilar export patterns between two countries. Figure 1 shows the export similarity between India and SAARC 4 (Bangladesh, Pakistan, Sri Lanka, and Nepal jointly). The export similarity indices of SAARC 4 on average have shown a divergent trend with India from the mid 1980s, though the index has increased from the early 1980's to mid 1980's. Again the initial increase was mainly due to MFA quotas and GSP facilities granted to those countries in textile and clothing sectors. Paradoxically, protectionism in the form of MFA quotas has helped some of the South Asian countries, such as Bangladesh, Nepal and Sri Lanka to develop their export oriented garment industries by in-

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sulating them from direct competition from established producers. However, the decrease in the export similarity from the mid 1980's implies that these countries have been gradually specializing their exports to garments and clothing. At the same time the trend also implies a greater competition between these other countrieszyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQ in the export market, because • they have been specializing in the same products. The trade liberalizations in the early 1990's might have influenced the process of specialization. But, these countries are facing a major challenge in the exports of textile and clothing from 2005, because according to the WTO agreement MFA quotas have been completely phased out by that time, and now they are competing freely with China and other Southeast Asian countries in the world textile and clothing market. However, the experience of Bangladesh is encouraging, as the country has maintained high growth in the export of garments even after the abolition of the MFA quota. Since the US is the single largest export market for South Asian countries, the export similarity index in the US can be considered as representative of the degree of export competitiveness of these economies in third markets. Table 2 shows export similarity index between India and other SAARC countries over time in the US market. In the US market the export similarity indices for Bangladesh, Sri Lanka and Nepal with India have increased over time, indicating greater competition between them in the US market. At the same time it indicates that US imports have become typical from

Table 2zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA Export Similarity between India and other SAARC Counin the US Market, 1981-2001. tries zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA 1981-83

1984-86

1987-89

1990-92

1993-95

1996-98

1999-01

Bangladesh

28.09

42.13

40.2

42.75

46.44

44.6

45.2a

Pakistan

52.0

48.57

43.8

49.3

48.93

48.6

46.5

Sri Lanka

36.2

35.0

35.2

42.2

44.88b

n.a.

44.6

Nepal

36.65

34.14

39.54

42.55

41.6

47.59

46.73c

Maldives

n.a.

n.a.

n.a.

n.a.

n.a.

27.08

26.78

SAARC 4

51.86

47.45

43.18

49.55

49.7

48.2d

47.42

Source: Calculations based on UN COMTRADE

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.. -)

Figure 2 Export Similarity between India and SAARe 4zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQ in the US MarketzyxwvutsrqponmlkjihgfedcbaZYXW

In d'ia vs .SAARC 4 in US mark zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONM et

I

-+-SAARC4

60 50zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA 40

30 20 10

o

Source: Based on Table 2

these countries. This is again due to MFA quotas given by US to the South Asian countries. The South Asian countries upgraded their export structures in the textile and clothing to fulfil their quotas. However, export similarity indices between India and Pakistan in the US market diverged though time. This indicates that India and Pakistan have been specializing their exports in the US market through time. SAARC4 has shown a declining trend in export similarityzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA with India (due to mainly Pakistan) from the early 1980's to late 1980's, but the index rose sharply in the early 1990's and then remained roughly constant (Figure 2). Table 3 presents the export similarity indices between India and other South Asian countries in the world textile and clothing market. Textile and clothing is chosen to represent labour-intensive products, because South Asian countries mainly export labour-intensive goods. In the textile and clothing market export similarity indices are very high between South Asian countries. This is obvious, because textile and clothing is the main export item of all these countries. In the textile and clothing market the export similarity index between India and Bangladesh increased significantly from the early 1980's to late

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1980's, again due to the MFA quota provided by the developed countries. However, from the earlyzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA 1990's the similarity index has shown a divergent trend, indicating some form of specialization in the textile and clothing market between them. In fact Bangladesh has specialized its exports only to the garments products since the early 1990s. For Sri Lanka and Nepal export similarity indices with India in the textile and clothing market increased significantly

Table 3zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA Export Similarity between India and other SAARC Countries in the W orld Textile and Clothing Market.zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPON 1981-83

1984-86

1987-89

1990-92

1993-95

1996-98

1999-01

Bangladesh Pakistan Sri Lanka Nepal

62.12 73.05 43.18 68.15

82.32 76.0 48.7 97.62

92.58 71.95 57.54 86.58

81.56 73.1 60.05 74.19

70.91 75.86 60.93 75.96

64.02 78.39 n.a. 85.67

63.46 78.49 62.25 93.08

SAARC4

79.1

89.28

86.84

89.45

96.44

96.82

89.64

Source: Calculations based on UN COMTRADE database Figure 3 Export Similarity between India and SAARC 4 in the W orld Textile and Clothing market zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA

India vs. SAARC 4 in the textile and clothl ng market I--SAARC~I

Source: Based on Table 3

from the early 1980's to late 1990's, indicating that competition between them increased in that period. The sharp increase of Nepal's index in the mid 1980's was again due to the MFA quota provided to Nepal by the

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industrial countries. Pakistan's export similarity with India in the textile and clothing market thougb high, was roughly constant throughout the period under consideration, indicating no significant change in their competitiveness through time.

Figure 3 demonstrates the export similarity of India and SAARC 4 in the world textile and clothing market. SAARC 4 on average has shown an increasing trend in export similarity with India in the textile and clothing market through time, suggesting greater competition between them.zyxwvutsrqponmlkjihgfedcbaZYXWVUT Conclusion

By examining the export similarity between India and other South Asian countries in different (market and commodity) dimensions, the paper has shown that South Asia's export competitiveness is stronger in the textile and clothing market, as expected. But, the overall export similarity between these countries are not very high, which implies that South Asia's exports are not highly competitive. More importantly, since thezyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGF trade liberalization in the early 1990's the export similarity has been decreasing, indicating that competition between them has been easing through time. So the paper suggests that export similarity should not be considered as the main reason for low level of intra-regional trade in South Asia. There might be other political or economic reasons for low level of economic co-operation in that region. However, the results of this paper are not conclusive, rather indicative. Further research in this area should utilize more disaggregated exports data.

REFERENCES Finger. J.M. and Kreinin, M.E., 1979. 'A Measure of Export Similarity and Its Possible Uses',zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA The. Economic Journal, vol.89, no.369, 193-198. Glick, Reuven. and Rose, A., 1998. 'Contagion and Trade: why are Currency Crisis Regional?' NBER Working Paper Series, 6806, National Bureau of Economic Research. Cambridge, MA. Grubel, H.G. and Lloyed, P.J.,1971. 'The Empirical Measurement of lntra-industry Trade', Economic Record, 47.494-517. Hoen, A. and Mooij, R., 2001. 'Polish - Dutch Economic Relations', cpb report 2001.

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Kellman, M. and Schroder, T., 1983. ' The Export Similarity Index: Some Structural Tests',zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA The Economic Journal, vol.93, no.369, 193-198. Khan, S.M., 1997. 'South Asia: Free Trade Area and Trade Liberalization', Journal of Asian Economics, vol.8, no.I, 165-177. Khan, S.M. and Khan, Z.S., 2003. 'Asian Economic Integration: a Perspective of South Asia', Journal of Asian Economics, voU3, 165-177. Loy, C.B., 2002. 'Impact of a Weak Yen on FDI and Trade in Asia', Economic Survey of Singapore, Economics Division, Ministry of Trade and Industry. Pomfret, R., 1981. ' The Impact of EEC Enlargement on Non-member Mediterranean Countries' export to EEC', Economic Journal, 91, 726-9. Xu, X and Song, L., 2000. 'Export Similarity and The Pattern of East Asian Development', in P.I. Lloyd, X. Zhang (eds.), China in The Global Economy, 145-165.

Yang, Y, 1998. 'China in the Middle of the East Asian Crises- Exports growth and Exchange rate', China Update Conference Paper, published by NCDS Asia Pacific Press, APSEM, ANU, ACT, Australia.zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONML

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