The Dynamics of Comparative Advantage

We characterize the evolution of country export performance over the last five decades. Using the gravity model of trade, we extract a measure of country export capability by industry which we use to evaluate how absolute advantage changes over time for 135 industries in 90 countries. We alternatively use the Balassa RCA index as a measure of comparative advantage. Part I of the analysis documents two empirical regularities in country export behavior. One is hyperspecialization: in the typical country, export success is concentrated in a handful of industries. Hyperspecialization is consistent with a heavy upper tail in the distribution of absolute advantage across industries within a country, which is well approximated by a generalized gamma distribution whose shape is stable both across countries and over time. The second empirical regularity is a high rate of turnover in a country’s top export industries. Churning in top exports reflects mean reversion in a typical country’s absolute advantage, which we estimate to be on the order of 30% per decade. Part II of the analysis reconciles hyperspecialization in exports with high decay rates in export capability by modeling absolute advantage as a stochastic process. We specify a generalized logistic diffusion for absolute advantage that allows for Brownian innovations (accounting for surges in a country’s export prowess), a country-wide stochastic trend (flexibly transforming absolute into comparative advantage), and deterministic mean reversion (permitting export surges to be impermanent). To gauge the fit of the model, we take the parameters estimated from the pooled time series and project the cross-sectional distribution of absolute advantage for each country in each year. Based on just three global parameters, the simulated values match the cross-sectional distributions—which are not targeted in the estimation—with considerable accuracy. Our results provide an empirical road map for dynamic theoretical models of the determinants of comparative advantage. Ina Jäkle and Heea Jung provided excellent research assistance. We thank Dave Donaldson, Davin Chor, Sam Kortum and Ben Moll as well as seminar participants at NBER ITI, Carnegie Mellon U, UC Berkeley, Brown U, U Dauphine Paris, the West Coast Trade Workshop UCLA, CESifo Munich, and the Cowles Foundation Yale for helpful discussions and comments. IR/PS 0519, University of California, San Diego, 9500 Gilman Dr, La Jolla, CA 92093-0519 ([email protected]) econweb.ucsd.edu/ nrlind, Dept. of Economics, University of California, San Diego, 9500 Gilman Dr MC 0508, La Jolla, CA 92093-0508 ([email protected]). www.econ.ucsd.edu/muendler, Dept. of Economics, University of California, San Diego, 9500 Gilman Dr MC 0508, La Jolla, CA 92093-0508 ([email protected]). Further affiliations: CAGE and CESifo.