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A Good Potential in Light Manufacturing
Box 1.1 Calculating the RCA and the DRC The revealed comparative advantage (RCA)—also called the Balassa index, after Balassa (1965)—is an index that shows the r elative advantage or disadvantage of a country in exporting a commodity as indicated by actual export patterns relative to those of all other countries in the world. It is defined as follows: RCA = (Eij / Eiw) / (Ewj / Ewn)
(B1.1.1)
where Eij refers to exports of commodity j by country i; w is the set of countries; and n is the set of all commodities. A country has a revealed comparative advantage in commodity j if the RCA is greater than 1 and a comparative disadvantage in commodity j if the RCA is less than 1. While the RCA is an indirect measurement of comparative advantage based on trade patterns that are actually revealed and observed in the trade data, the domestic resource cost (DRC) directly measures a country’s comparative advantage in an industry based on factor prices, the foundation of comparative advantage. For an import-dependent country, the DRC is particularly valuable in determining whether a government ought to foster exports that generate foreign exchange or whether it ought instead to support import replacement that conserves foreign exchange. The DRC, widely used as an index of economic efficiency in restrictive trade regimes, is defined by Bruno (1972) as follows:
dj =
−Σ ms = 2 f sj vs uj − mj
(B1.1.2)
where dj is the DRC of product j; m is the number of primary factors; n is the number of roducts; vs is the accounting (shadow) price for the sth primary factor (s = 1 is the foreign p exchange); fsj is the difference between the marginal dollar revenue of commodity j (uj) and the (marginal) dollar import requirements for the unit production of commodity j (mj), and a bar represents the total (direct and indirect) primary factors of production. A DRC of less than 1 indicates that the cost of the domestic resources needed to produce a unit of the good is less than the potential foreign exchange earnings from exporting the product; that is, the country has a comparative advantage in the product, and there is a rationale for the government to foster growth in manufacturing and exporting the product. A DRC greater than 1 indicates that the cost of the domestic resources to produce the good for the domestic market is more than the foreign exchange required to import the good; that is, the country does not have a comparative advantage in the good, and the government should not be supporting import-substitution policies with respect to the good. The DRC and RCA are calculated based on the current and prevailing conditions, which reflect existing resource endowments and policies. Policy reforms could change the DRC value over time. For industries that pass the DRC test, whether for exports or import substitution, integrated value chain studies can map the constraints to policy recommendations and identify what the government should do to promote the expansion of the identified industries.
Light Manufacturing in Tanzania • http://dx.doi.org/10.1596/978-1-4648-0032-0