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Revealed Comparative Advantage of Select Agricultural Products of Ethiopian States

Hailay Gebretinsae Beyene, PhD Associate Professor Mekelle University College of Business and Economics
Tigrai Online, Sept. 26, 2018

Comparing Crop production in Tigrai state, and other Ethiopian states
The study is done to examine the revealed comparative advantages of Ethiopian States in nine select agricultural crops production

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The study is done to examine the revealed comparative advantages of Ethiopian States in nine select agricultural crops production using Balassa’s index (1965). The analysis is done based on the 2017 raw data collected from Central Statistical Agency of Ethiopia. It is uncovered that Tigrai State has the highest revealed comparative advantage in millet, barley, wheat, and teff; Amhara State also has the highest revealed comparative advantage in vetch/grass peas, lentils, chick peas, and horse beans. In addition, it is disclosed that Benshangul Gumuz has the highest revealed comparative advantage in maize production. Considering the RCA indices strength as proxies for a community’s utilization of the crop linked with the community’s cultural background and historical feeding habit, and if historical feeding habit is also considered as an indication of the origin from where the crop has evolved first in Ethiopia, the origin of barley, millet, teff, and wheat would be in Tigrai; maize in Benshangul Gumuz; and chick peas, horse beans, vetch/grass peas and lentils would be in Amhara State.

Key words: Revealed comparative advantage, competitiveness gap, Ethiopian States, Agricultural Products.

JEL Classification: F10, F11, F14

Introduction

One of the useful tools of economics that helps to compare the relative costs of production and identify products, sectors, and markets that have greater opportunity of success is the comparative advantage analysis.

Even though the great contribution and influence of various trade theories, it has been a challenge to apply practically according to the theoretical concept in empirical studies. Despite these challenges, there are some methods considered and widely applied that attempt to examine the comparative advantages of nations. Of these, the revealed comparative advantage developed by Balassa (1965) is one. The indices of revealed comparative advantage (RCA) basically use posttrade data for each of the relevant variables the model specifies. The concept of revealed comparative advantage is used to present the pattern of comparative advantage using the computed results over time.

The concept of revealed comparative advantage has been introduced by Liesner (1958). Later the concept is refined by Balassa (1965), which is widely used to examine and identify the export products of countries that have revealed comparative advantage. Balassa’s index is further enhanced through conceptual framework developed by Hillman (1980), expressed in the form of necessary and sufficient conditions. It is stated that an increase in a country’s exports of specified commodity results in an increase in the concomitant Balassa index, if and only if the Hillman condition is met (Hinloopena and Marrewijk, 2008).

Research findings and reports indicate that agriculture contributes significantly on African economies. It is uncovered that the 23 percent of the annual economic growth of Africa is attributed to farming (World Bank, 2013). Even in the case of export, significantly higher share of its earnings is from agricultural commodities.

The objective of this research paper is to determine the RCA of the agricultural products among the States of Ethiopia. The study aims to examine the advantages in the select agricultural products the States have using the RCA model developed by Balassa index (1965). The findings of this study will be of paramount importance for concerned States of the country, concerned authorities, investors, the public and scholars. Furthermore, it may contribute its part to the existing stock of knowledge and serve as a reference material for researchers in similar area.

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Literature Review Owing

to the fact that developing countries have lower opportunity cost, they have revealed comparative advantage over developed countries in silk cotton, vegetable fibers and man-made fiber/filaments. Conversely, developed countries are found to have higher revealed comparative advantage over developing countries in wool, animal hair, horsehair, yarn and fabric thereof. Moreover, it is uncovered that the gap in the revealed comparative advantage between the two regions is expected to widen in the future. (Abtew et al., 2017)

It is revealed that Ethiopia ranks eighth in the world in terms of the size of livestock which amounts to a total of 102,000 followed by USA with a total of 101,082 livestock as per the data recorded for the year 2012. Specifically, Ethiopia ranks sixth in the world for cattle population, seventh for goats and tenth for sheep. The overall population of the livestock puts Ethiopia among the top ten producers of the specified animals in the world. In fact, the two largest livestock producers in Africa are Nigeria and Ethiopia (Coppeaux et al, 2016).

Besides, the study done by Coppeaux et al (2016) showed that despite the large quantity of livestock Ethiopia is endowed with, several factors have prevented Ethiopia from becoming competitive in the international leather and leather products market. Some of these barriers that prevented to use its natural comparative advantage towards competitiveness include lack of institutional entity able and willing to modernize the agricultural organization, location of Ethiopia makes high the transport time and costs, and the relatively weak institutional situation of the country adds high transaction costs. The study also suggested that to make the Ethiopian leather industry competitive in the future it has to go through deeper transformations in the country, including a modernized agriculture.

Ndayitwayeko et al. (2014) disclosed that East African Community (EAC) countries had revealed comparative advantage in the export of coffee with Uganda and Kenya taking the lead during the period considered in their studies. In spite of this situation EAC countries have faced a decline in their global competitiveness. It is also suggested that to overcome the global competitiveness challenge EAC countries should strengthen their position that enables them defend the coffee price volatility.

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A study is done on the revealed comparative advantage of the footwear sector in select African countries that include Ethiopia, Egypt, Kenya, Nigeria, Tanzania and Uganda during 2003-14 using Balassa’s index. It is found that significant variation exists on the pattern of each country’s revealed comparative advantage. It is revealed that Kenya stands stronger than Ethiopia and Uganda, while Egypt, Nigeria and Tanzania do not have revealed comparative advantage in footwear sector (Abtew, 2017).

Obadi (2016) has made a sectoral revealed comparative advantage and competitiveness analyses of EU-28 and the USA using Balassa’s index. It is uncovered that in the global level USA has higher revealed comparative advantage in greater number of groups of commodities (40 groups of commodities in SITC two digits) than the EU-28 which has higher revealed comparative advantage in lesser number of groups of commodities (32 groups of commodities in SITC two digits).

Comparative advantage assessments are basically done to reveal the opportunities of a country or region on products, sectors, and markets that result due to various factors such as factor endowment, favourable trade policies, etc. One of these approaches that helps to examine comparative advantages is examination of the specialization of a country or a region. A country or region that specializes in a good or service implies that country or region is able to produce the good or service relatively efficiently and cheaply than others. Assessments on revealing comparative advantages can be done using either trade or production data as long as it has the ability to assess the specialization of the country/region. When we compare each approach, “trade data” based comparative advantage analysis is more straightforward than “production data” based comparative advantage. This is for the reason that countries face similar market condition in the case of international trade but the domestic market conditions could be significantly different among each country. Besides, while trade specialization reflects the export performance of the country on the specified products, production specialization reveals the general information on the relative importance of the products for growth and development of the country/region Leung and Cai (2005).

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Methodology of the study

The study has adopted the concept of comparative advantage of Balassa as adapted to one country classified into States. In fact, the revealed comparative advantage is highly applied to examine and compare a country’s commodity or sector’s export advantage with other countries’ exports. The concept of comparative advantage is applied for comparison of a country’s performance vis-à-vis other countries as it has intrinsic assumption that a country’s export is consistent and directly associated with an economy’s relative factor endowment and productivity. However, it has an intrinsic limitation that it does not distinguish the changes in productivity are the results of factor endowments or changes in trade policies of a country.

In the absence of trade data to examine revealed comparative advantages of countries, researcher use production data as proxy data. Studies done by Cai et al. (2005) examined the RCAs of Asian, Latin American, and Sub-Saharan countries in the farming of three major freshwater aquaculture species (i.e., carp, catfish, and tilapia). Their study’s main purpose was to systematically assess the specialization pattern of these regions on the select agricultural products.

Given due consideration to the intrinsic advantages and limitations of the concept of comparative advantage, this study has applied it as adapted to the production of select agricultural products across Ethiopia in general and in the States in particular. Therefore, the comparison is analogous to the comparison actually done when Balassa’s concept is used to compare comparative advantage of a country with other countries in the world.

As discussed in above, as long as the method expresses the relative specialization, a country’s comparative advantage can be examined using either trade data or production data. In this particular study the focus is not to examine the trade specialization of the States of Ethiopia but to examine the specialization they have which can serve as a base for trade among each States of the country or highlights for policy intervention on the bases of specialization.

Production data is the base for this assessment; hence the “production” comparative advantage would be different from the conventional “trade” comparative advantage revealed by trade specialization patterns. Obviously, the main difference between the production data and trade data based analysis is that a country’s production serves both domestic and foreign markets.

Here, in this study by applying the formula adapted to the Ethiopian context, comparison on the revealed comparative advantage of the States of Ethiopia on select agricultural products is done accordingly. The formula used to undergo the comparative analysis defined and described as shown below.

Click here to Read more of this article & find graphs and facts comparing Tigrai state and other Ethiopian states.

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References

Abtew, Mulat Alubel (2017), Revealed Comparative Advantage of Footwear Industry: An Empirical Analysis for Selected African Countries, International Research Journal of Business and Economics - IRJBM – Volume No – X , Issue – 13.

Balassa B (1965) Trade Liberalization and ‘‘Revealed’’ Comparative Advantage. The Manchester School 33: 99-123.

Cai, J., Leung, P.S., and N. Hishamunda (2005). “Comparative advantage in aquaculture: an assessment framework,” Report submitted to Food and Agriculture Organization of the United Nations.

Coppeaux, Zakaria, Claire Corral-Collière, Anas Ilhami, Roxane Laigle, Narcis Savu, Matthieu Soudan, Margaret Kyle, and Olivier Bomsel (2016), Does Ethiopia have a comparative advantage in the leather industry? Mines ParisTech Working Paper, Industrial Organization

Fitawek, Wegayehu (2015), The Effect of Export Tax on the Competitiveness of Ethiopia’s Leather Industry, University of Pretoria, South Africa, Unpublished Masters Thesis.

Hinloopena, J. and van Marrewijk, C. (2008) “Empirical relevance of the Hillman condition for revealed comparative advantage: 10 stylized facts”,Applied Economics, 40, 2313-2328.

Kowalski, P. (2011) “Comparative Advantage and Trade Performance: Policy Implications”, OECD Trade Policy Papers, 121(5), 1-54.

Leung, PingSun and Junning Cai (2005), A Review of Comparative Advantage Assessment Approaches in Relation to Aquaculture Development, College of Tropical Agriculture and Human Resources, University of Hawaii at Manoa.

Liesner, H.H. (1958) “The European Common Market and British industry”, Economic Journal,68, 302-316.

Mulat Alubel Abtew, Annu Kumari, and Srinivasa Moorthy, Export Performance and Revealed Comparative Advantage of Developing and Developed Economies for Textile Fibers or Fabrics, Journal of Global Economics, Volume 5, Issue 3, pp 1-9.

Ndayitwayeko, W.M., M.O. Odhiambo1, M. Korir2, P.M. Nyangweso and W. Chepng’eno (2014), Comparative Advantage of The Eastern and Central Africa in the Coffee Export Sector: The Case of Burundi, African Crop Science Journal, Vol. 22, Issue Supplement s4, pp. 987 – 995

Obadi, Salih Mthan (2016), Revealed Comparative Advantage and Competitiveness in the EU-28 and the USA, Economic Review, Volume 45, No. 2, pp 243-59.

World Bank. (2013). World Development Indicators. Washington DC.

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