COMPARATIVE ADVANTAGE OF ASEAN COUNTRIES IN THE LATE 1990S. Goh Pek Chen ABSTRACT

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1 COMPARATIVE ADVANTAGE OF ASEAN COUNTRIES IN THE LATE 1990S Goh Pek Chen ABSTRACT Indonesia, Malaysia, Philippines, Singapore and Thailand had comparative advantage in most of their major exports in They also tend to have common comparative advantage among themselves. Over the period 1996 to 2000, they had also lost their comparative advantage in some of the major exports, especially for Malaysia and the Philippines. Key words: ASEAN, Comparative Advantage INTRODUCTION The globalization proc ess and the rapid spread of technology has brought about a more competitive environment as markets become increasingly more open, with an increasing number of new entrants to the market. Competitiveness is generally equated with the well performance of an economy. It can be achieved through raising productivity so as to enhance the ability of the economy to generate more output from a given supply of inputs. The OECD has defined competitiveness for a nation as the degree to which a country can produce goods and services which meet the test of international markets, while its citizens earn a standard of living that is both rising and sustainable in the long run. As competitiveness relates to competition, it also implies a comparative element, with the implic ation that competitiveness or more precisely export competitiveness, is essentially about securing market share. Increasing market share alone, however, is not sufficient to achieve sustainable export competitiveness. Other conditions such as the ability of an economy to diversify its exports, to achieve high rates of export growth over time, to upgrade technological content of export activities and to expand the domestic industries base are essential. Exports have been an important sector for the growth of the five major Asian countries, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Average real GDP growth for the period for Indonesia was 4.2%, Malaysia: 7%, the Philippines: 3.3%, Singapore: 7.8% and Thailand: 4.2%. 1 The proportion of total exports to GDP for the period was 42.2% for Indonesia; 120.4% for Malaysia; 53.3% for the Philippines; 167.7% for Singapore and 61.4% for Thailand. 2 Malaysia, Singapore and Thailand were among the top 20 economies with the larg est export market share in These countries are known for their rich natural resources, especially in oil, gas and agricultural products. Extensive industrialization process that took place since the early 1970s in these countries had diversified their export structures, though at different degree of success. Significant increase in the exports of manufactured products in these countries has been mainly due to the influx foreign direct investment (FDI). In 2000, FDI stock as percentage to GDP in Singapore was 103.8%. Similar ratios for Malaysia was 58.8%, Indonesia 39.6%, Thailand 20% and the Philippines 16.6%. 4 OBJECTIVE The objective of this paper is to study the comparative advantages of the major exports of Indonesia, Malaysia, Philippines, Singapore and Thailand. Major issues to identify are: (1) whether each country has comparative advantages in her major exports; (2) whether these countries have common comparative advantages in their major exports and (3) whether the comparative advantages of each major export had improved or deteriorated from 1996 to

2 METHODOLOGY In order to measure the performance of a country in gaining market share in international trade of various products, the indicator used here is revealed comparative advantage (RCA) and its changes over a period (CR). In the 19 th century, David Ricardo popularized the classical theory of the comparative advantage. According to this theory, assuming labor is the only factor and it is homogenous, real cost per unit of product remains constant, a country has comparative advantage in producing a product if the opportunity cost of producing the product is smaller than that of another country. Then the country gains by specializing in producing and exporting products that she has comparat ive advantages in. The RCA calculation, pioneered by Balassa (1965, 1979, 1986), assumed that the pattern of comparative advantage can be observed from post-trade data. According to Balassa s argument, countries have different opportunity costs and they specialize in production and trade. Balassa s RCA index compares the export share of a certain product in a country with the export share of the product in the world market. The nature of specialization is such that the product in which its comparative advantage will be stronger will dominate each country s export structure. The formula for RCA is as follows: RCA = Xji Xwi X j X w Where x, i, j and w stand for export, product, country and world, respectively. RCA greater than one implies that the country has comparative advantage in that product. RCA smaller than one means the country has comparative disadvantage in that product. C R measures the change in RCA over a period of time (the ratio of RCA for a period divided by RCA for a previous period). C R indicates if a country is gaining more comparative advantage (when C R is greater than one) or losing comparative advantage (when C R is smaller than one). The use of trade data to calculate RCA has been a common tool in empirical analysis in international trade. However, a few points need to be noted. Changes in RCA cannot distinguish if it is the result from factor endowment or from certain trade policies. Besides, RCA does not show if the country has comparative advantage in producing or in assembling the product for export. Further more, with the presence of trade barriers, RCA can only be an imperfect guide to the pattern of comparative advantage of a country. The data used in this study is obtained from the COMTRADE database of the United Nations Statistics Division. Data covered the period from 1996 to The products are classified according to the Standard Industrial Trade Classification (SITC). Major export for each country is defined as product group in SITC 3-digits that constituted at least 1% of the country s total merchandise export in For example if the export of footwear constituted 1% of Thailand export in 2000, then footwear is included in the study. The formula to work out the RCA for footwear is: RCA Footwear = Export Footwear in Thailand World export Footwear Total export in Thailand Total world export 394

3 FINDINGS The following tables show the RCA and CR for each country. SITC Product group TABLE 1 Major Exports For Indonesia, RCA And C R Country World RCA 2000 RCA 1996 C R share % share % 343 Natural gas Petrol./Bitum. Oil, crude Veneer/Plywood/etc Computer equipment Telecomms equipment Fixed veg oils not soft Paper/paperboard Footwear Copper ores/concentrates Heavy petrol/bitum oils Furniture/stuff furnishg Mens/boys wear, woven Coal non-agglomerated Textile yarn Women/girl clothing wven Man-made woven fabrics Articles of apparel nes Crustaceans molluscs etc Office equip parts/accs Wood manufactures nes Natural rubber/latex/etc Sound/TV recorders etc Valves/transistors/etc Electrical equipment nes Pulp and waste paper Radio broadcast receiver Indonesia had 26 major exports that made up 69.5 percentage of total export in Her exports were quiet evenly distributed between manufactured products (SITC 5 8): 35 percentage and 34 percentage of primary products: natural gas and petrol. Exports that had strong comparative advantage were coal, copper, natural rubber and fixed vegetable oils. Indonesia contributed more than 25 percentage of world export of copp er and fixed vegetable oils. Valves/transistors, electrical equipment, office equipment parts had comparative disadvantages. Of the 9 product groups that lost comparative advantage over the period 1996 to 2000, 5 of them were primary products. Product that had gained the most comparative advantage was coal for primary products and computer equipment for manufactured products. 395

4 TABLE 2 Major Exports For Malaysia, RCA And C R SITC Product group Country share % World share % RCA2000 RCA1996 CR 776 Valves/transistors/etc Office equip parts/accs Computer equipment Telecomms equipment nes Petrol./Bitum. Oil, crude Natural gas Radio broadcast receiver Fixed Veg oils not soft Electric circuit equip Sound/TV recorders etc Television receivers Heavy petrol/bitum oils Furniture/stuff furnishg Veneer/Plywood/etc Electrical equipment nes Wood simply worked Malaysia had 16 m ajor exports that constituted 72.9 percentage of her total export in 2000, dominated by manufactured products. Two product groups: valves/transistors, and office equipment parts made up almost 33 percentage of the total exports. Though valves/transistors were the major export, Malaysia lost its comparative advantage. Been a large producer of palm oil, Malaysia contributed 42.8 percentage of world export of fixed vegetable oil and she also had strong comparative advantage in producing this product. The other product that Malaysia had strong comparative advantage is radio broadcast receivers. Crude petrol./bitumen, heavy petrol/bitumen oils and electrical equipment had comparative disadvantages. Beside valves/transistors, other manufactured products that lost comparative advantages were telecommunication equipment, radio broadcast receivers, sound/tv recorders and television receivers. TABLE 3 Major Exports For The Philippines, RCA And C R SITC Product group Country share % World share % RCA 2000 RCA 1996 C R 776 Valves/transistors/etc Computer equipment Office equip parts/accs Electric circuit equip Telecomms equipment nes Women/girl clot hing wven Electrical distrib equip Articles of apparel nes Motor veh parts/access Mens/boys wear, woven Fixed Veg oils not soft Fruit/nuts, fresh/dried Heavy petrol/bitum oils Furniture/stuff furnishg

5 The Philippines had 14 product groups that made up 78.8 percentage of her total export. Manufactured products dominated the Philippines exports. Valves/transistors and computer equipment already constituted 53.6 percentage of total exports in Products that the Philippines had greater comparative advantages were fixed vegetable oils, valves/transistors and computer equipment. She had comparative disadvantages in telecommunication equipment, motor vehicle parts/access and heavy petrol/bitumen oils. Except three product groups: valves/transistors, computer equipment and electrical circuit equipment, all major exports had lost comparative advantage in Singapore had 9 major product groups as her major exports. All, except heavy petrol, were manufactured products. They constituted 68.9 percentage of Singapore s exports in Singapore had comparative advantage in all her major exports with valves/transistors and computer equipment had stronger comparative advantages than the others. Singapore was also a world major exporter of valves/transistors and computer equipment. Though she had lost comparative advantage for the latter. Besides, heavy petrol, office equipment parts and telecommunication equipment had lost comparative advantages. Singapore gained comparative advantage in musical instrument. TABLE 4 Major Exports For Singapore, RCA And C R SITC Product group Country share % World share % RCA 2000 RCA 1996 C R 776 Valves/transistors/etc Computer equipment Heavy petrol/bitum oils Office euquip parts/accs Telecomms equipment nes Electrical equipment nes Electric circuit equip Musical instrums/records Special indust machn nes Thailand had 23 product groups as her major exports. They made up 56.7 percentage of her total exports, of which 13.3 percentage were primary products such as fish/shellfish, rice, crustaceans, natural rubber, heavy petrol and sugar. Thailand was a world major exporter of natural rubber, rice and fish/shellfish. She also had strong comparative advantages in these products. There were two product groups that had comparative disadvantages: heavy petrol and electrical equipment. Thailand lost comparative advantages in men/boys wear, footwear, jewelry, television receivers, computer equipment and telecommunication equipment. 397

6 TABLE 5 Major Exports For Thailand, RCA And C R SITC Product group Country share % World share % RCA 2000 RCA 1996 C R 759 Office euquip parts/accs Valves/transistors/etc Telecomms equipment nes Fish/shellfish, prep/pres Computer equipment Crustaceans molluscs etc Elelctric circuit equipmt Rice Natural rubber/latex/etc Heavy petrol/bitum oils Goods/services vehicles Articles of apparel nes Mens/boys wear, woven Television receivers Electrical equipment nes Furniture/stuff furnishg Rotating electr plant Jewellery Elect power transm equip Footwear Domestic equipment Sugar/mollasses/honey Mens/boys wear,woven TABLE 6 Common Comparative Advantage Common Comparative Advantage with... Countries Indonesia Malaysia Philippines Singapore Thailand Total Indonesia Malaysia Philippines Singapore Thailand From the above table, countries with the same comparative advantage with the other 4 countries could be identified. On top of the list is Indonesia, followed by Malaysia and Thailand. While Singapore had the least common comparative advantage than the other 4 countries. 398

7 TABLE 7-1 Gained / Lost In Comparative Advantage In Producing Primary Products SITC Product group Indonesia Malaysia Philippine Singapore Thailand 36 Crustaceans molluscs etc Gained Lost 37 Fish/shellfish, prep/pres Gained 42 Rice Gained 57 Fruit/nuts, fresh/dried Lost 61 Sugar/mollasses/honey Lost 231 Natural rubber/latex/etc Lost Gained 248 Wood simply worked Lost 251 Pulp and waste paper Gained 283 Copper Lost ores/comcentrates 321 Coal non-agglomerated Gained 333 Petrol./Bitum. Oil, crude Lost Lost 334 Heavy petrol/bitum oils Lost Gained Lost Lost Gained 343 Natural gas Lost Lost 422 Fixed veg oils not soft Gained Lost Lost % of pro. gained in c. adv Singapore and the Philippines lost all comparative advantages in the export of primary products. Only Thailand had gained significantly in the export of primary products. TABLE 7-2 Gained/Lost In Comparative Advantage In Producing Manufactured Products SITC Product group Indonesia Malaysia Philippine Singapore Thailand 634 Veneer/Plywood/etc Lost Lost 635 Wood manufactures nes Lost 641 Paper/paperboard Gained 651 Textile yarn Gained 653 Man-made woven fabrics Gained 716 Rotating electr plant Gained 728 Special indust machn nes Gained 741 Mens/boys wear, woven Gained 752 Computer equipment Gained Gained Gained Lost Lost 759 Office euquip parts/accs Gained Gained Lost Lost Gained 761 Television receivers Lost Lost 762 Radio broadcast receiver Gained Lost 763 Sound/TV recorders etc Lost Lost 764 Telecomms equipment nes Gained Lost Lost Lost Lost 771 Elect power transm equip Gained 772 Electric circuit equip Gained Gained Gained Gained 773 Electrical distrib equip Lost 775 Domestic equipment Gained 776 Valves/transistors/etc Gained Lost Gained Gained Gained 778 Electrical equipment nes Gained Gained Gained Gained 399

8 782 Goods/services vehicles Gained 784 Motor veh parts/access Lost 821 Furniture/stuff furnishg Gained Gained Lost Gained 841 Mens/boys wear, woven Gained Lost Lost 842 Women/girl clothing Gained Lost wven 845 Articles of apparel nes Gained Lost Gained 851 Footwear Lost Lost 897 Jewellery Lost 898 Musical instrums/records Gained % of pro. gained in c. adv In the export of manufactured products, Indonesia had 76.5 percentage of manufactured exports that gained comparative advantages. Similar ratio for Thailand was 64.7 percentage, and Singapore 62.5 percentage. Malaysia and the Philippines had less significant gained in comparative advantages in the manufactured exports. CONCLUSION Been resources rich countries, the Asian five countries are able to export a variety of primary products to world market. Most significant product is fixed vegetable oils. Seventy-eight percentage of world export came from Indonesia, Malaysia and the Philippines. Except Indonesia, the latter two countries had lost their comparative advantage. In order words, they had lost the market share due to increasing labor cost. Thailand, compared with the other 4 countries, had gained market share in producing primary products, particularly in natural rubber, rice, heavy petrol and fish/shellfish. For the manufacturing products, due to the influx of FDI in information technology investments, all five countries exported computer equipment, office equipment, telecommunication equipment, valves/transistors. In 2000 Asian five countries exported about 28 percentage of valves/transistors, 25 percentage of office equipment, 20 percentage of computer equipment to the world. Except Malaysia, the other four countries had gained market share in producing valves/transistors. Indonesia, Malaysia and the Philippines had bigger market share in computer equipment. While Indonesia, Malaysia and Thailand had greater market share in office equipment. Beside electrical and electronic products, Singapore had also targeted at specific industries and gained market share in musical instrument and special industries machinery. 1 Data from World Investment Report Annex table A. II.1. 2 ibid. 3 World Investment Report 2002, p Figure VI (Country fact sheet) REFERRENCES World Investment Report 2002: Transnational Corporation and Export Competitiveness, UNCTAD. International Trade Statistics 2002 by WTO available on line Table A4 (export)and A5(import) International Trade Center 400