Journal of Economic Studies

Revealed comparative advantage and competitiveness in services: A study with special

emphasis on developing countries
Belay Seyoum,
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Belay Seyoum, (2007) "Revealed comparative advantage and competitiveness in services: A study with
special emphasis on developing countries", Journal of Economic Studies, Vol. 34 Issue: 5, pp.376-388, doi:
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JES
34,5 Revealed comparative advantage
and competitiveness in services
A study with special emphasis on
376 developing countries
Belay Seyoum
Nova Southeastern University, Fort Lauderdale, Florida, USA

Abstract
Purpose – The purpose of this paper is to analyze the competitiveness of selected services: business,
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financial, transport and travel services in developing countries in relation to that of the rest of the
world based on three indices of revealed comparative advantage.
Design/methodology/approach – The study uses revealed comparative advantage (RCA) indices
to measure developing countries’ comparative advantages in selected services for the period
1998-2003.
Findings – Strong comparative advantages exist for many developing countries in transport, and
travel services. There is substantial room for improvement in financial and business services. Trade
liberalization and lack of adequate preparation appears to have resulted in a weakening of their
comparative advantages over the years. However, their revealed comparative advantages remain, by
and large, stable and do not show a fundamental shift in the structure of their comparative
advantages.
Originality/value – There are no studies examining developing countries’ comparative advantages
in services. The findings and policy recommendations can be used by developing countries to improve
the competitiveness of their service sectors.
Keywords Services, Developing countries, Comparative tests, Competitive strategy
Paper type Research paper

Journal of Economic Studies
Vol. 34 No. 5, 2007
pp. 376-388
q Emerald Group Publishing Limited
0144-3585
DOI 10.1108/01443580710823194
1. Introduction
Services encompass a heterogeneous group of economic activities often having little
in common other than that their principal outputs are largely intangible products
(Shelp, 1981). It includes both intermediate (construction, distribution, etc.) as well
as final demand services (tourism, health, education, etc). Services account for an
increasing share of employment and GDP in both developed and developing
countries. The growth of trade in services has outstripped manufacturing. Services
trade now makes up a quarter of all cross-border trade (Hoekman and Matoo, 2000).
In 2003, developing countries exported services estimated at $US 504 billion and
this is likely to grow with increasing globalization of their economies and the
market access resulting from the widespread deregulation and privatization of state
owned corporations (IMF, 2004).
There is recognition of the important role of services in many countries. The price
and quality of services is crucial in determining the competitiveness of goods
producers. Africa’s poor trade performance, for example, is largely attributable to poor
infrastructure-based services. Limao and Venables (1999) show that a 10 percent
decrease in transport costs increased trade by 25 percent. In many developing
countries, services account for a large proportion of foreign exchange revenues.
 Presently, tourism appears to be the most significant export although they also possess Comparative
comparative advantages in certain natural-resource based exports such as electric advantage and
power, water as well as labor-intensive services such as construction. Imports of
services through foreign direct investment also provide developing countries with competitiveness
inflows of capital and technology thus facilitating economic growth and increased
exports. The use of information technology has been fundamental in bringing about
productivity improvements and new product development. 377
Trade in services is subject to protectionism in many countries. Such restrictive
policies are largely intended to limit the access of foreign services and/or foreign
service providers to domestic markets. They range from outright prohibitions against
foreign providers, reciprocal agreements, licensing and certification requirements, to
discriminatory fees and limits to access to distribution and communications systems
(Stern, 2002). In his study of market access barriers for services, Hoekman (1996) shows
that the benchmark tariff equivalents ranged from about 200 percent for air and
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maritime transport, postal services, and life insurance to 20-50 percent for sectors in
which market access was less restricted. Services in many developing countries have
been largely costly and inefficient partly due to the absence of vigorous competition.
This underscores the need for reforms and the potential for more inflows of capital and
technology arising from increases in foreign and domestic investment.
To date, there is no clear and adequate definition of services. However, a broad
consensus exists on the characteristics that distinguish trade in services from that of
trade in goods. Services can be remotely accessed or electronically delivered as
opposed to goods that enter through customs. They are also intangible, non-storable
and characterized with more extensive regulations than trade in goods. Trade in
services requires the movement of factors of production i.e. capital or labor thus
necessitating commercial presence or the movement of people to the location of the
service consumer. Unlike the cross-border mode for trade in goods, services can be
provided at various locations: locations of the services provider, consumer or at neither
of these locations (Abu-Akeel, 1999; Chanda, 2003).
The value of trade in services is underestimated because the statistics does not
cover trade in services embodied in goods as well as production and sales of foreign
affiliates (Hoekman et al., 2002). The lack of precise definition and comparable data on
services has partly contributed to limited research in the area. To date, there is hardly
any theoretical and/or empirical research on the competitiveness of services or its role
in promoting exports or economic growth. The objective of this paper is to examine the
competitiveness of selected services in developing countries compared to international
markets. The focus on four service sectors (business, financial, transportation and
travel) is dictated by the importance (or future potential) of these services for many
developing countries and the availability of data. Since many countries began to
implement their GATT/WTO commitments in services after 1998, this study examines
the period 1998-2003.
The study is organized as follows. The following section reviews the literature on
competitiveness in services in developing countries. Section 3 provides various
approaches to measure revealed comparative advantage (RCA) in services. Section 4
identifies areas of RCA in services for developing countries. Section 5 discusses the
stability of RCA indices. Section 6 is devoted to summary and implications.
 JES 2. Recent studies on competitiveness in services and developing countries
34,5 A number of studies suggest that exporting is a less attractive option to gain access to
foreign markets in services (Gorg, 2000). Since most services require direct
involvement and input from consumers (production and consumption takes place
simultaneously), firms have to establish some form of local presence in a foreign
market (Winsted and Patterson, 1998; Javalgi and White, 2002). The presence of
378 dynamic service sectors in developing countries is considered critical for the growth
and efficiency of a wide range of industries as well as overall economic performance.
Certain services can directly or indirectly help goods producers become more efficient.
They provide vital inputs in the form of skills and know-how into the production of
export-oriented primary or secondary industries (Thangavelu and Owyong, 2003;
Mahadevan, 2002). Sectors such as transportation or financial services, for example, set
the conditions under which goods, labor and capital can flow (Mildner and Werner,
2005; United Nations, 2004). A large part of the studies on services and developing
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countries is devoted to the impact of liberalization (of services) on their economy as

well as the level of competitiveness in services.
Many recent studies explore the potential impact of liberalization of services on
developing economies. Liberalization of services is expected to offer great growth
potential for these countries by fostering foreign direct investment in important
services such as banking, transportation, etc. as well as knowledge and technology
transfers, which stimulates innovation, increasing gains from comparative
advantages, enhancing competition, and lowering the costs of production for
industries that use services and providing a more efficient infrastructure (Mildner and
Werner, 2005). Petrazzini (1996) shows that reforms in the telecommunications sector
in 26 Asian and Latin American countries (1990-1994) increased exports by over 20
percent in markets allowing for varying degrees of competition as compared to 3
percent in monopoly markets. A number of developing countries have progressively
opened up their services sector to foreign investment because they lack the requisite
financial and technical capability to meet the demand for certain services such as
electricity, telecommunications or banking (Gabrielle, 2004). Some countries, however,
fear that liberalization of services will have an adverse effect on their balance of
payments. A large proportion of foreign direct investment in services is
market-seeking and does not contribute to foreign exchange earnings. Payments for
services can quickly outweigh capital inflows, and thus lead to net foreign-currency
losses. Profit remittances for example, amount to 35 percent of the total income of
services of foreign affiliates of US multinationals in 2002 (United Nations, 2004).
Another concern is that many service industries in these countries are insufficiently
developed to withstand foreign competition. Some scholars believe that trade
liberalization can actually reduce competition in small economies because there is little
incentive for new companies to enter the market, i.e. with high entry costs and low
potential revenues, liberalization is likely to result in a single incumbent monopoly or
oligopoly.
Some developing countries have used their locational advantages such as low labor
costs, appropriate skills and infrastructure to develop competitiveness in certain
services. They have also attracted foreign investment in services in which they enjoy
comparative advantages. For example, the export intensity of Indian service industries
rose from 58 to 78 percent (1996-2003) accounting for about 21 percent of total exports
 in 2003 (RIS, 2004). A similar trend is observed in other developing nations such as the Comparative
Philippines, Malaysia, China, Brazil, Chile, Mexico, Ghana and South Africa (United advantage and
Nations, 2004). During the period 1998 to 2003, for example, developing countries
registered overall increases of over 30 percent in their service exports (IMF, 2004). competitiveness
Apart from these general observations, there are no comprehensive studies on the
competitiveness of the service sector in developing countries. This study focuses on the
degree of competitiveness in business, financial, transportation and travel services 379
based on a random sample of 60 countries from different geographical areas and covers
six years (1998-2003).

3. Measuring revealed comparative advantage

The factor proportions theory states that countries should specialize in the production
and export of products that use intensively its relatively abundant factor. Unlike
classical theory, it assumes that the same technology of production would be used for
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the same goods in all countries (Heckscher, 1949; Ohlin, 1933) and thus does not
assume productivity differences. According to classical theory, trade between
countries is determined by differences in the efficiency of production which arises from
differences in technology or the productivity of labor (Ricardo, 1981). Measuring
comparative advantages or factor endowment ratios poses certain difficulties since
relative prices under autarky are not observable (Balassa, 1989).
Balassa (1977) claims that comparative advantage is revealed by observed trade
patterns, i.e. high shares of export markets. Revealed comparative advantage (RCA) is
one measure of international competitiveness and has gained general acceptance in the
literature (Utkulu and Seymen, 2004). It is grounded in conventional trade theory and
measures a country’s exports of a commodity relative to that of a set of countries. The
RCA measure has undergone a number of revisions/modifications over the years
(Vollrath, 1991; Dimelis and Gatsios, 1995). This study uses three of the commonly
used RCA indices to establish existing comparative advantages in services in selected
developing countries. Data for business, financial, transportation and travel services
are obtained from the IMF’s (1999, 2000, 2001, 2002, 2003, 2004) Balance of Payments
Yearbook. The definition of each service covered in the study is provided in Table I.
The first RCA index employed in this study uses the original index formulated by
Balassa (1965):

RCA 1 ¼ ðXij=XitÞ=ðXnj=XntÞ

where X represents exports, i is a country, j is a service, t is a set of exports (all exports)

and n is a set of countries (the world). RCA 1 is based on observed trade patterns and
measures a country’s exports of a service relative to its total exports and to the
corresponding exports of all countries in the world. Comparative advantage is revealed
if RCA 1 is greater than 1 (RCA . 1).
The alternative measure is a modification of RCA 1 to suit bilateral, regional and
other trade specifications (Vollrath, 1991; Dimelis and Gatsios, 1995; Gual and Martin,
1995). In order to determine whether a country has a comparative advantage for any
particular service, the country’s export share of a given service to that of all services
exports is divided by the corresponding figure for all countries. This index provides
some insight into the national structure of service exports:
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JES
34,5

380

Table I.

selected developing
countries (1998-2003)
Revealed comparative
advantages (RCAs) for
Business servicesa Financial servicesa Transport servicesa Travel servicesa
RCA1 RCA2 RCA3 RCA1 RCA2 RCA3 RCA1 RCA2 RCA3 RCA1 RCA2 RCA3
Country .1 .1 .0 .1 .1 .0 .1 .1 .0 .1 .1 .0
Argentina 0.138 0.205 0.024 0.046 0.064 22.670 0.000 0.000 0.000 1.403 1.933 0.243
Barbados 0.906 0.222 20.026 23.588 5.793 29.326 0.000 0.000 0.000 9.340 2.222 1.514
Bolivia 0.000 0.000 0.000 5.135 6.827 23.224 0.000 0.000 0.000 0.860 1.081 0.462
Botswana 0.000 0.111 20.228 0.000 0.000 0.000 0.000 0.000 0.000 1.417 2.010 0.842
Brazil 0.685 1.080 0.492 1.504 2.383 21.406 0.528 0.834 20.222 0.463 0.688 20.082
Bulgaria 0.389 0.266 20.113 0.953 0.655 21.898 1.950 1.318 20.298 2.509 1.695 0.581
Chile 0.290 0.323 20.121 1.092 1.209 24.393 2.168 2.390 0.676 0.652 0.718 0.184
China 0.348 0.640 0.142 0.230 0.419 23.979 0.313 0.573 20.493 0.893 1.655 0.467
Colombia 0.046 0.078 20.155 0.802 1.344 25.461 0.000 0.000 0.000 1.012 1.665 0.506
Costa Rica 0.299 0.248 20.139 0.156 0.138 22.531 0.000 0.000 0.000 2.613 2.175 0.960
Croatia 0.381 0.149 20.539 1.380 0.547 22.590 1.384 0.545 20.174 6.147 2.348 1.259
Czech Republic 0.395 0.435 20.488 1.204 1.300 23.724 0.908 1.010 0.487 1.351 1.521 0.571
Dominican Republic 0.000 0.000 0.000 0.000 0.000 25.610 0.000 0.000 0.000 5.497 2.980 2.204
Ecuador 0.000 0.000 20.536 0.105 0.167 22.652 1.063 1.579 0.122 1.146 1.598 0.792
Egypt 1.488 0.504 20.307 1.395 0.467 23.889 4.000 1.344 0.127 4.085 1.359 0.737
El Salvador 0.085 0.086 20.263 3.229 3.299 25.137 1.699 1.713 0.086 1.056 1.039 0.347
Estonia 0.428 0.257 20.235 0.746 0.448 20.766 3.586 2.118 0.403 1.862 1.113 0.365
Gabon 0.101 0.189 20.095 0.292 0.531 21.314 1.077 2.918 1.764 0.108 0.120 0.000
Ghana 0.238 0.243 20.329 0.425 0.437 23.109 0.916 0.926 21.012 2.217 2.201 1.630
Guatemala 0.488 0.469 0.185 2.190 2.052 23.145 0.524 0.506 21.430 2.165 1.854 0.985
Guyana 0.141 0.116 20.092 10.228 8.431 218.102 0.118 0.097 20.030 1.826 1.538 0.459
Haiti 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 4.554 2.464 1.793
Honduras 0.067 0.072 20.284 2.709 3.171 3.015 0.486 0.539 21.445 1.774 1.749 1.031
Hong Kong 0.499 0.588 0.427 1.621 1.919 20.120 1.199 1.381 0.475 0.025 0.029 20.004
Hungary 0.276 0.317 20.335 0.956 1.098 22.692 0.378 0.431 20.121 1.568 1.795 0.802
India 1.864 1.417 0.548 0.734 0.569 20.652 0.000 0.000 0.000 0.796 0.609 0.169
Indonesia 0.000 0.000 21.212 0.003 0.007 21.250 0.392 0.916 20.127 1.291 2.989 2.295
Iran 0.040 0.000 0.000 0.421 0.000 0.000 0.478 0.000 0.000 0.288 1.044 0.448
Israel 0.843 0.566 20.186 0.082 0.055 21.893 0.000 0.000 0.000 1.280 0.847 0.018
Jamaica 0.108 0.036 20.643 1.640 0.541 23.596 2.476 0.811 20.755 6.657 2.185 1.629
Kenya 0.000 0.000 20.217 0.388 0.326 25.890 3.025 2.419 0.671 1.675 1.008 0.270
Korea 0.384 0.521 20.197 0.597 0.822 0.138 1.552 2.093 0.809 0.560 0.743 20.062
Madasgascar 0.000 0.672 0.431 0.000 0.000 0.000 0.000 0.000 0.000 1.470 0.996 0.205
Malawi 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.999 2.361 1.362
Malaysia 0.000 0.000 0.000 0.446 0.704 20.804 0.584 0.899 20.381 0.836 1.294 0.768
(continued)
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Business servicesa Financial servicesa Transport servicesa Travel servicesa

RCA1 RCA2 RCA3 RCA1 RCA2 RCA3 RCA1 RCA2 RCA3 RCA1 RCA2 RCA3
Country .1 .1 .0 .1 .1 .0 .1 .1 .0 .1 .1 .0
Mauritius 0.000 0.000 0.000 2.449 1.229 22.048 0.000 0.000 0.000 3.480 1.772 0.878
Mexico 0.028 0.72 20.084 1.467 3.857 220.293 0.000 0.000 0.000 0.854 2.226 1.039
Morocco 0.313 0.203 20.333 0.609 0.395 20.999 1.224 0.789 20.816 3.479 2.090 1.362
Namibia 0.000 0.021 20.612 0.000 0.000 0.000 0.000 0.000 0.000 2.570 2.740 1.903
Nicaragua 0.000 0.000 20.577 0.599 0.587 21.500 0.729 0.698 21.093 2.408 1.968 1.164
Nigeria 0.000 0.000 0.000 0.033 0.084 20.423 0.000 0.000 0.000 0.043 0.088 20.653
Pakistan 0.175 0.281 0.017 0.449 0.724 21.890 1.669 2.631 0.137 0.141 0.167 20.384
Panama 0.189 0.157 20.112 5.208 4.154 24.822 3.182 2.578 0.606 0.959 0.760 0.204
Paraguay 0.000 0.000 0.000 3.279 2.144 26.732 0.000 0.000 0.000 0.762 0.469 20.306
Peru 0.174 0.206 20.344 3.495 3.774 21.999 0.711 0.817 20.677 1.659 1.813 0.993
Phillipines 0.000 0.000 0.000 0.443 0.934 22.404 0.357 0.736 20.717 0.806 1.443 0.785
Poland 0.280 0.282 20.280 2.638 2.492 23.568 1.291 1.307 0.532 1.412 1.455 0.443
Romania 0.292 0.417 20.207 1.422 2.043 21.690 1.272 1.808 0.521 0.410 0.578 20.141
Senegal 0.491 0.392 0.107 0.969 0.773 23.700 0.560 0.438 21.649 1.947 0.000 0.000
Singapore 0.000 0.752 0.370 2.200 2.632 21.254 1.340 1.736 0.089 1.340 0.542 20.072
Slovakia 0.344 0.000 0.000 5.218 3.000 0.000 1.649 1.230 1.340 0.589 0.768 0.126
Slovenia 0.247 0.277 20.223 0.400 0.446 21.035 1.077 1.194 0.309 1.505 1.686 0.405
South Africa 0.139 0.194 20.082 0.298 0.417 20.780 0.608 0.855 0.609 1.364 1.875 0.653
Sri Lanka 0.000 0.000 0.000 3.206 3.100 21.674 1.676 1.809 20.326 0.818 0.860 0.305
Thailand 0.493 0.533 20.101 0.207 0.230 23.014 0.908 0.986 20.620 1.557 1.705 1.032
Trinidad and Tobago 0.095 0.129 20.130 2.214 3.206 2.839 1.130 1.562 20.007 0.838 1.156 20.301
Tunisia 0.000 0.000 0.000 1.241 0.855 23.960 0.000 0.000 0.000 3.027 1.988 1.299
Turkey 0.874 0.435 0.050 1.538 0.848 26.497 1.273 0.699 20.375 2.725 1.508 0.759
Uruguay 0.202 0.132 20.061 4.962 3.332 20.113 1.939 1.288 20.393 2.681 1.735 0.621
Venezuela 0.051 0.248 20.171 0.021 0.091 23.919 0.300 1.450 20.065 0.323 1.435 0.574
Notes: a Business services: services provided by residents to non-residents (or by non-residents to residents) and covers merchandising and trade-related services,
operating leasing services and profession/technical services. Financial services include financial intermediation services such as letters of credit fees or
commissions, credit and banking services (excludes insurance). Transport services includes freight and passenger transportation by all modes and other auxiliary
services including rentals of transportation equipment crews. Travel services are those services acquired by non-resident travellers (including excursionist) for
business and personal use during their visits of less than a year. It excludes passenger services which are included in transportation
Mean values for 1998-2003. RCAs are measured in relation to the rest of the world. RCA are shown in italic
Source: IMF (1998, 1999, 2000, 2001, 2002, 2003)
competitiveness
Comparative
advantage and

381

Table I.
 JES RCA 2 ¼ ðXij=XisÞ=ðXnj=XnsÞ
34,5 where X represents exports, i is a country, j is a given service, n is a set of countries (all
countries in the world), and s is a set of services (all services). While RCA 1 measures a
country’s service exports in a given sector in relation to total exports, RCA 2 relates it
to all service exports. Comparative advantage is revealed if RCA 2 is greater than 1
382 (RCA2 . 1). Both indices do not take into account imports.
The third RCA index (RCA 3) considers exports and imports within a particular
service. It is derived by subtracting a country’s import advantage (RMA) from its
relative export advantage (RXA). A similar study was made by Ferto and Hubbard
(2003) in their study of the competitiveness of Hungarian agri-food sectors:

RXA ¼ RCA 2 ¼ ðXij=XisÞ=ðXnj=XnsÞ

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RMA ¼ ðMij=MisÞ=ðMnj=MnsÞ

where M represents imports, i is a country, j is a service, s is a set of services (all

services) and n is a set of countries (all countries in the world):

RCA 3 ¼ RCA 2 2 RMA:

Comparative advantage is revealed if RCA 3 is greater than 0 (RCA 3 . 0).

The RCA calculations based on observed trade data show that strong comparative
advantages exist for many countries in transport, travel and tourism services;
comparative advantages for low income countries are limited to travel and tourism,
and that many developing countries have not developed comparatives advantages in
business and financial services. These measures, however, do not account for the effect
of government distortions on RCA indices such as quotas or subsidies. In spite of this
shortcoming, it offers a useful tool to detect comparative advantages in specific sectors.

4. Identifying areas of comparative advantage: empirical findings

The RCA analysis, largely based on contributions of Balassa (1977) and Vollrath (1991)
shows the revealed comparative advantages of developing countries in selected
services (Table I). It is primarily intended to examine their global competitiveness as
opposed to specific countries or regions. Here are the most significant findings of the
study:
(1) Countries which have revealed comparative advantages in all three indices
(1998-2003):
.
business services: India;
.
financial services: Honduras, Trinidad and Tobago;
.
transportation services: Chile, Egypt, El Salvador, Estonia, Gabon, Hong
Kong, Kenya, Korea, Pakistan, Panama, Poland, Singapore, Slovakia, and
Slovenia;
.
travel services: Argentina, Barbados, Botswana, Bulgaria, Costa Rica,
Croatia, Czech Republic, Dominican Republic, Ecuador, Egypt, El Salvador,
Estonia, Ghana, Guatemala, Guyana, Haiti, Honduras, Hungary, Indonesia,
 Jamaica, Kenya, Mauritius, Morocco, Nicaragua, Peru, Poland, Slovenia, Comparative
South Africa, Thailand, Tunisia, Turkey, and Uruguay. advantage and
(2) Countries with revealed comparative advantages (RCA) in 1998 but show competitiveness
revealed comparative disadvantages (RCA) in 2003 in one or more indices i.e. in
countries losing their RCAs (RCA ! RCD):
.
business services: Brazil, Israel, Turkey and Uruguay;
383
.
financial services: Brazil, Bulgaria, Colombia, The Czech Rep., Ecuador,
Korea, Senegal, Trinidad and Tobago and Uruguay;
.
transport services: Brazil, Ecuador, Gabon, Indonesia, Iran and Turkey;
.
travel services: Botswana,Colombia, El Salvador, Estonia, Guyana, Israel,
Kenya, Madagascar and Trinidad and Tobago.
(3) Countries with revealed comparative disadvantages in one or more indices in
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1998 but have revealed comparative advantages in 2003 (RCD ! RCA):

.
business services: Argentina;
.
financial services: Estonia, Hong Kong, Hungary, India, Malaysia, Mauritius,
Morocco, Pakistan and Tunisia;
.
transport services: The Czech Rep., El Salvador, Pakistan, Singapore,
Uruguay and Venezuela;
.
travel services: Bolivia, Costa Rica, Ecuador, Guatemala, Honduras,
Malaysia, Malawi, Mauritius, Mexico, Nicaragua, Panama, Peru,
Philippines, Sri Lanka, Thailand and Turkey.

5. Consistency of the RCA indices

It is important to evaluate the extent to which the RCA indices are consistent in their
identification of comparative advantage. Balance et al. (1987) suggest three statistical
tests to measure the consistency of RCA indices:
(1) Cardinal measures: cardinal measures identify the extent to which a country
has a comparative advantage or disadvantage in a given service. Consistency
test of such measures is established by comparing correlation coefficients
between paired indices (1998-2003).
(2) Ordinal measures: consistency tests of RCA indices an ordinal measures
determine whether pairs of RCA indices yield a consistent ranking of countries
by the degree of comparative advantage. Rank correlation coefficients for each
service and each pair of RCA indices are calculated (1998-2003).
(3) Dichotomous measures: these tests compare alternative indices of comparative
advantage to establish the extent to which they are consistent in distinguishing
between countries that enjoy comparative advantage and countries that do not
(1998-2003) (Balance et al., 1987).

The consistency test of the indices as cardinal measures (of RCA indices) shows that all
twelve of the correlations are significant at 0.01 and 0.05 levels (Table II). The tests
indicate that the indices are consistent as cardinal measures of revealed comparative
advantage. The correlation coefficients are between the average pairs of RCA indices
for 1998-2003. Similarly, the correlations between the indices as ordinal measures are
 JES
Cardinal RCA2 RCA3 Ordinal RCA2 RCA3 Nominal RCA2 RCA3
34,5
Business RCA1 0.78* 0.34* RCA1 0.83* 0.10 RCA1 0.98* 0.96*
services RCA2 1.00 0.51* RCA2 1.00 0.17 RCA2 1.00 0.98*
Financial RCA1 0.73* 0.40* RCA1 0.93* 0.26 RCA1 0.77* 0.15
services RCA2 1.00 0.48* RCA2 1.00 0.28** RCA2 1.00 0.71*
384 Transport RCA1 0.75* 0.24** RCA1 0.86* 0.19 RCA1 0.73* 0.59*
services RCA2 1.00 0.43** RCA2 1.00 0.34* RCA2 1.00 0.78*
Travel RCA1 0.65* 0.63* RCA1 0.78* 0.71* RCA1 0.65* 0.55*
Table II. services RCA2 1.00 0.89* RCA2 1.00 0.90* RCA2 1.00 0.62*
Correlations among RCA
measures to test Notes: * significant at 0.01 level; ** significant at 0.05 level
consistency of indices Correlations using cardinal, ordinal and nominal measures to test consistency of RCA indices
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significant for seven of the 12 pairs. The tests are based on the rank correlation
coefficient of each ordinal measure. The nominal measures based on dichotomous pairs
of RCA indices (comparative advantage as 1 and comparative disadvantage as 0) also
show 11 of the 12 correlations as significant (Table II).
The correlations tests confirm that all the three indices are largely consistent in
measuring comparative advantages and serve as useful proxies in establishing
whether developing countries have comparative advantages in certain services.

5. Stability of RCA indices

Stability measures of revealed comparative advantage are intended to evaluate any
shifts in the structure of a developing country’s RCAs in a given service sector over a
certain period (1998-2003). A given service may reveal RCA in 1998 and a RCA in 2003
or vice versa (Table III). The relative importance of a certain service is used as a
stability indicator (Ferto and Hubbard, 2003; Wilson, 2000). Examining the changes in
the distribution of RCAs, developing countries have, by and large, experienced a

Services RCA Index RCA, 1998a RCA, 2003 RCD, 1998b RCD, 2003

Business RCA1 4 1 52 55
services RCA2 2 1 54 56
RCA3 14 6 42 50
Financial RCA1 30 25 24 31
services RCA2 28 25 28 32
RCA3 5 2 51 54
Transport RCA1 22 19 34 37
services RCA2 23 22 32 31
RCA3 14 18 42 38
Table III. Travel RCA1 39 43 17 14
Stability of RCA services RCA2 41 40 15 14
measured by shifts in RCA3 52 47 5 8
comparative advantages
between 1998 and 2003 Notes: a Comparative advantage; b Comparative disadvantage (by numer of countries)
 weakening of their comparative advantages in services. However, their RCAs do not Comparative
show a fundamental shift in the structure of their comparative advantages. advantage and
competitiveness
6. Conclusion and policy implications
This paper examined the competitiveness of developing countries in selected services,
based on three indices of revealed comparative advantage for 1998-2003. All three
indices show that many developing countries have revealed comparative advantages 385
in travel/tourism and transport services. About a third of the countries in the sample
also show comparative advantages in financial services. In spite of the general concern
in industrial countries about outsourcing of business services to developing countries,
there is no evidence to show that the latter used their locational advantages to increase
investment and/or exports in this sector. Only a small number of countries such as
Argentina, Egypt India, or Turkey show RCAs in business services.
Consistency tests measured by significance of correlations among RCA indices
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suggest that, by and large, the three indices employed are consistent as measures of
comparative advantage. The consistency test of the indices was made by using
cardinal, ordinal and nominal measures of comparative advantage. RCA explains the
level and trend of service export patterns in developing countries. Even though there is
evidence of some weakening in RCA in the service sectors under study, there does not
appear to be a fundamental shift in the structure of their of comparative advantages.
Services represent 40 percent of exports in many developing countries and are
expected to increase to about 70 percent by 2010 (De Souza, 2005). This is partly
attributed to technology and trade liberalization in many services. As developing
countries face erosion in their trade preferences and stiff external competition in
traditional sectors such as agriculture or manufacturing, their dependence on services
is likely to grow. Service exports offer opportunities for suppliers in developing
countries. Technology allows for cost-effective delivery of business and financial
services across borders. Outsourcing has gained popularity as corporations in
advanced countries strive to reduce fixed overhead by contracting out routine
functions. These include data processing, electronic publishing, customer call centers,
medical records management, hotel reservations, credit card services etc. US
corporations alone spend over $50 billion a year on information processing (Riddle,
1998). Bilateral/regional agreements have also reduced restrictions on cross border
delivery of transport services. Many countries have also taken measures to develop a
sustainable tourism industry that will contribute to the creation of economic growth
and employment (Perrings and Ansuategi, 2000).
In order to take advantage of existing opportunities in services, developing
countries need to upgrade their infrastructure and technological capability. It is,
however, difficult to develop competitive services in the absence of roads, railways,
electricity or telecommunications (England, 2005). An important ingredient in the
development of a vibrant, competitive service sector is the presence of a well developed
private sector that works with the government in the development of national
infrastructure; foreign direct investment, joint ventures or other forms of strategic
alliances with leading service firms in other countries to upgrade existing capabilities
and enhance overall competitiveness. It is important to promote and target
export-oriented investment in services to gain employment, foreign currency and
skills, and governments in these countries need to support competitiveness in services
 JES by providing a conducive climate for the private sector, and improving infrastructure
34,5 and skills (Clark, 2000; Perrings and Ansuategi, 2000).

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About the author

Belay Seyoum is associate professor of international business studies at Nova Southeastern
University in Florida, USA. He earned his Doctorate at McGill University in Canada. His research
interests are in the areas of trade and technology policy. Belay Seyoum can be contacted at:
seyoum@huizenga.nova.edu

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