Export competitiveness : Assessment through the Balassa index ( the case of Armenia )

The competitiveness of domestic products at the regional or global market is one of the cornerstones of a country’s international competitiveness. In this regard, the assessment and analysis of the competitiveness of a country’s international trade becomes an important issue. Thus, development and diversification of the export potential of the country is viewed as one of the most important directions of the international trade policy of the given country. Therefore, another important task is the specialization of the country in the most efficient and competitive segments of the economy. The above-mentioned circumstances embody the fact, that the role of quantitative assessment of potential competitive advantages is important, as it allows determining to what extent certain factors influence on the formation of export capacity in the country. The main objective of the study is to determine the role of export competitiveness in the process of competitive advantages formation of a country. This study mainly focuses on quantitative analysis based on the calculation of Balassa index, determining the extent to which a country has a comparative advantage in producing and exporting certain goods. The study presents the example of the Republic of Armenia, the study covers the period between 2002 2016. Based on the index calculation, it can be determined whether the country has "revealed" comparative advantage or not. The practical significance of the study lies in the fact that its main findings and conclusions arising from it can be used in assessing the export competitiveness of not only Armenia, but also for other countries or groups of countries. The outcomes and implication of the research can be used to improve the competitiveness of goods and services in the global market.


INTRODUCTION
International competitiveness is a rather controversial and elusive concept.It has gained acceptance and attracts the attention of both academics and policymakers worldwide.Within the context of trade in goods and services in global markets, the concept of international competitiveness refers to a nation securing and maintaining a trade advantage vis-a-vis the rest of the world 1 .Due to the fact that international competitiveness is multidimensional, and the concept of competitiveness, unlike comparative advantage, has not been defined rigorously in the early economic literature.Thus, a large number of concepts of the given phenomenon has been proposed in the economic literature.
Undoubtedly, the concepts competitiveness and comparative advantage are inextricably linked in the real-world conduct of international trade.That is the reason that a large number of researchers use the term competitiveness synonymously or in a similar way as comparative advantage, others view it as an economywide characteristic.With this regard, the distinctions between competitiveness and comparative advantage may seem trivial on the surface but the two concepts are fundamentally different.In certain cases, an economy may experience a loss in competitiveness while maintaining its comparative advantage.Moreover, a country can be competitive without having a comparative advantage.

COMPETITIVENEES
COMPARATIVE ADVANTGE Competitiveness, on the other hand, is an ex-post concept and should ideally involve comparisons between countries in regard to the efficiency of production 2 .
Comparative advantage is an ex-ante theoretical concept involving comparisons between countries and products 3 .
International competitiveness is a matter largely of costs: which country is able to deliver the product to the market most cheaply.
Measurement of comparative advantage would ideally enable us to predict trade flows and to evaluate the extent to which the resource allocation between industries is optimum or not.An improvement in competitiveness may mean that the competitiveness of currently exporting industries improves or that new products, perhaps technologically more advanced ones, become competitive 4 .
Comparative advantage mainly focuses on industryspecific trade, explaining why one country might export labor-intensive products while another country might specialize in capital-intensive ones 5 .
Nonetheless Comparative advantages are key determinants of international competitiveness.This is the reason why we tend to focus on formation and maintenance of comparative advantages.The principle of comparative advantage is at the heart of trade theory.Every country has a comparative advantage in the production of some products.Usually these are products for which it has a lower relative (opportunity) cost than its competitors.From this viewpoint, comparative advantage has little significance from a macroeconomic perspective.Comparative advantage is an equilibrium concept, it can help predict a pattern of trade when prices, trade flows and exchange rates are in equilibrium.
International trade creates an ideal environment not only for firms but also for regions and nations to create, use and develop their comparative advantages.Trade investigation, in this regard is another base for national competitiveness.
When assessing the extent to which a particular nation is engaged in international trade, it is important to mention, that the "quality" of a country's performance in international markets can be determined by the figures and indicators representing its export.Thus, the assessment of export competitiveness, comparative advantages in exportation is the cornerstone for our research and for the assessment of national competitiveness.It can be inferred, that dynamic increase in the export of a country is important, as it leads to the improvement of the country's competitiveness 6 .
The paper views international competitiveness and comparative advantage from a conceptual and historical framework.We have proposed to make a literature survey, to determine differences between the concepts of comparative advantage and competitiveness.The article presents the methods of calculation of export competitiveness, focusing on empirical data and statistics.

LITERATURE OVERVIEW
Many authors have tried to explain the behavior of firms on international markets.Traditionally, the starting point of the models and approaches suggested by many theorists and researchers are theories of international trade.International trade was explained within the assumptions of neoclassical economics.Adam Smith was the first, who defined the role of absolute advantages 7 .His ideas were later developed by David Ricardo, who is truly threated as the founding father of the modern trade theory.His theory of comparative advantage is more than two centuries old, but it remains at the heart of economists' theories of international trade 8 .One of the outstanding models in international trade and advantage development is suggested by Swedish economists Eli Heckscher and Bertil Ohlin and is well-known as H-O model.The main idea of this theory is that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively 9 .
Newer contributions in this area, suggest that the international trade development is significantly influenced by market imperfections, that lead to the occurrence of externalities such as scale economies and heterogeneity of consumer preferences 10 .This approach is known as "new trade theory" 11 , and has fundamentally changed the way economists think about international trade flows.The new theory of international trade suggests two main forms of trade on the global market 12 :  inter-industry form of international trade is characterized by comparative advantages described in the neoclassical model,  intra-industry form of international trade occurs due to the differences in preferences and possibilities to realize the economies of scale due to the increased market size 13 .Table 2 presents the historical development of economic though in comparative advantage.Global competitiveness owes its origin to the theory of comparative advantage, it is one of the widely discussed, criticized phenomena of international economics.This fact explains existing of many theories discussing features of competitiveness 14 .The phenomenon has been described by various authors as a theoretical, multidimensional and relative concept associated with the market mechanism.
Table 3 illustrates some of the existing definitions and famous concepts of international competitiveness.
Table 3: International competitiveness; definitions International competitiveness is the ability to exchange the goods and services that are abundant in home country for the goods and services that are scarce in this country.Barker, Köhler [1998]  Country's competitiveness is the degree to which it can, under free and fair market conditions, produce goods or services meeting the test of international markets, while simultaneously maintaining and expanding the real incomes of its population over the longer term.Bobba et al. [1971]  Competitiveness is the ability of nations, regions and companies to generate wealth being the precondition for high wages.

European Commission
Competitiveness of a nation is the ability of an economy to provide its population with high and rising standards of living and high rates of employment on a sustainable basis.Krugman [1990, 1994]  If competitiveness has any meaning, it is simply just another way to express productivity.The ability of a country to improve its living standard depends almost entirely on its ability to raise its productivity.
Competitiveness is meaningless word when applied to national economies.Porter [1990]  The only meaningful concept of competitiveness at the national level is national productivity.Competitiveness is an ability of an economy to provide its residents with a rising standard of living and a high employment on a sustainable basis.Porter et al. [2008]  The most intuitive definition of competitiveness is a country's share of world markets for its products.This makes competitiveness a zero-sum game, because one country's gain comes at the expense of others.Scott, Lodge [1985]  National competitiveness is a country's ability to create, produce, distribute, and/or service products in international trade while earning rising returns on its resources.Tyson D'Andrea [1992]  Competitiveness is our ability to produce goods and services that meet the test of international competition while our citizens enjoy a standard of living that is both rising and sustainable.

World Economic Forum
Competitiveness is the set of institutions, policies, and factors that determine the level of productivity of a country Competitiveness is the ability of a country to achieve sustained high rates of growth in GDP per capita.
Given the fact, that export is one of the most important factors, which can stimulate the development of national economy.Its development is especially essential for small countries with developing economies.Many authors claim, that higher export competitiveness can contribute to the country's capability to overcome after-effects of economic recession and stimulate the development of the national economy 15 .

METHODOLOGY
Export competitiveness can be measured using various methods: by analyzing one or several factors of the country's export, creating composite indices, analyzing factors and conditions which stimulate the international trade, etc.Each of the methods mentioned has its pros and cons, that\s why the scientists seek to find the most reliable, methodologically justified, understandable, convenient to practical use and objective method, which could be accepted generally and widely used in strategic planning on improving competitiveness of the national export and total national economy.
Many researchers and international organizations have presented series of articles and papers describing export competitiveness and trying to make both qualitative and quantitative analysis on it.Several methodological approaches in the assessment of export competitiveness are introduced below.
One of the most famous models is proposed by D'Cruz and Verbeke, called "Double diamond".This model incorporates multinational activities and government, instead of treating them as exogenous variables.The underlying idea is that Porter's Diamond Model is too narrow to accurately reflect challenges faced in the global marketplace 16 .
Thus, for the purpose of making the comparative analysis, the Double Diamond Model (known as DDM) has proven to be more useful.The DDM has three important extensions to Porter's single Diamond Model;  The DDM incorporates multinational activities;  this model enables us to operationalize the competitiveness paradigm, make a comparison of the sizes and shapes of the domestic and international diamonds and show major strategic differences;  the model includes government as an important variable, as it influences the four determinants of the Porter's Model.As a consequence, the DDM combines the domestic diamond and international diamond 17 .Another model is suggested by Bela Balassa and is known as Balassa Index or Revealed Comparative Advantage (RCA).The model is considered to be one of the most outstanding and useful methods of the assessment of a nation's competitiveness.Balassa model involves the comparative index of competitive advantage RCA, which reveals the most significant groups of goods within export.
The model embodies the fact, that many countries are producing and exporting a particular good or service 18 .Balassa argued that there is a need to compare the share of exports of the particular good or service in the country's total exports to establish whether a country holds a particularly strong position in the industry observed.Therefore, the Balassa index for A country (for industry j) is calculated as follows; If BI A j >1, country A has a revealed comparative advantage in industry j 19 .If BI A j <1, the country is said to have a comparative disadvantage in the industry.
Later the Balassa index has been reviewed by many authors; their empirical analysis showed that the Balassa index is theoretically sound and is useful for making thorough analysis 20 .

MORE DETERMINANTS OF INTERNATIONAL COMPETITIVENESS
Given the fact, that competitiveness of the national economy is rather controversial, there are various determinants, that define the particular country's engagement in international trade.Some key indicators are listed below;  Country's Share of World Exports -the share of a country's total exports in the world's total exports.The ratio is used to assess the change of the country's share of the world market over time 21 . Share of Product in Total Exports -the share of each export product in the country's total exports 22 . Share of Market in Total Exports -the share of exports sold in each foreign country in the home country's total exports.This ratio can be defined as the share of the partner country in the total exports of the country observed. Trade Intensity Index -determines the value of trade between two countries 23 .The index identifies is the value of trade greater or smaller than would be expected on the basis of their importance in world trade.The T index characterizes the share of one country's exports going to a partner divided by the share of world exports going to the partner.It is calculated using the following formula; Where xij and xwj are the values of country i's exports and of world exports to country j Xit and Xwt are country i's total exports and total world exports respectively.When Tij > 1, the bilateral trade flow that is larger than expected, given the partner country's importance in world trade.
And the opposite Tij < 1 shows, that the bilateral trade flow that is smaller than expected, given the partner country's importance in world trade.
 Trade Complementarity Index -(TC) provides useful information on prospects for intraregional trade and shows how well the structures of a country's imports and exports match 24 .The TC index values for certain countries consider the formation of a regional trade agreement.The results of the index are useful for comparing with others that have formed or tried to form similar arrangements.
For assessing the trade between countries k and j, we can calculate TC as follows: Where xij is the share of good i in global exports of country j mik is the share of good i in all imports of country k.
If TC = 0 -no goods are exported by one country or imported by the other In case TC = 100 the export and import shares exactly match.
 Export Diversification (or Concentration) Index.The underlying concept here is diversification, which is important especially for developing countries, as they are generally dependent on few primary commodities for their export earnings.Unstable prices for these commodities may cause serious trade shocks for these countries.For this reason, diversification is viewed as a positive development.The export diversification (DX) index is calculated by the following formula: Where hij is the share of commodity i in the total exports of country j hi is the share of the commodity in world exports.
 Hirschman Herfindahl Index -is one of the modifications of the previous index, it is measured as the sum of squared shares of each product in total export.A country with a perfectly diversified export portfolio will have an index close to zero, whereas a country which exports only one export will have a value of 1 (least diversified) 25 .The H index is also known as trade concentration index.And is measured as follows; Where xi is country j's exports of product i (at the three-digit classification) Xt is country j's total exports.The maximum value of the index is 239 (the number of individual three-digit products in SITC revision 2), and its minimum (theoretical) value is zero, for a country with no exports26 .The lower the index, the less concentrated are a country's exports.
 Export Specialization Index -(ES) index is a slightly modified RCA index, the denominator is measured by specific markets or partners providing detailed information on revealed specialization in the export sector of a country.The EC is calculated as the ratio of the share of a product in a country's total exports to the share of this product in imports to specific markets or partners rather than its share in world exports: Where xij , Xit are export values of country i in product j, respectively mkj, Mkt are the import values of product j in market k and total imports in market k.The results of ES are similar to the ones of RCA 27 ; the value of ES less than unity indicates a comparative disadvantage and a value above unity represents specialization in this market.
 Index of Export Market Penetration -the share of the actual number of export relationships forged by a particular country in the maximum possible number of export relationships it can form given the number of its exports 28 .The denominator is calculated by summing the number of import partners of the country observed.

THE EXPORT COMPETITIVENESS: IMPLICATIONS FOR THE REPUBLIC OF ARMENIA
For the purpose of assessing the export competitiveness of Armenia, we have created a database of trade indicators for the period of 2002-2016.In this stage of the research the main focus is the share of trade partners in the total export of the observed country.The data sources are indicators of world trade, published by national statistics agency and statistics of international organizations (i.e.world bank, WTO, WEF, etc.).
As the period is too large, the analysis was conducted using well-known method for data aggregation, called "atlas" 29 .The method is suggested by the world bank and uses Atlas conversion factor instead of simple rates.The main purpose of the Atlas conversion factor is to reduce the impact of fluctuations of indicators' scores in the cross-country comparison as well as relatively simplify time series.The Atlas conversion factor for any year is the average of a country's score for that year and those for the two preceding years.
As the positive value of the Balassa index show markets where Armenia has revealed comparative advantage, we can bring export statistics for the top 10 countries importing Armenian goods and services.One of the outstanding features of the methodology is that it can easily be applied for making more thorough analysis about the competitiveness of national economy.The outcomes and methods that will be used depends on the purpose of the research and the data available.
The results of the research show, that Armenia's export competitiveness is relatively weak, and there is a need for an addressed, stabilized and purposeful policy towards improving it.Improving export competitiveness is vital for creating a unique and safe environment for creating and doing business, investing and working in a country.In this context, continuous focus on the competitiveness improvement policy will lead to a more stable economic growth and development, which, in turn, helps improve wellbeing and prosperity for the nation.Thus, there is a need to;  Secure existing Armenian strengths;  Strengthen the foundations of competitiveness;  Create a focused strategy to attract foreign direct investment;  Build efficient domestic economy, not just the traded sector;  Upgrade telecommunications and air transport;  Create a long-term plan for cross-border economic cooperation in the region;  Create and implement a strong competition policy that limits anticompetitive practices, cartels, and monopolies;  Upgrade physical infrastructure through regulatory reform and mobilization of private capital; etc.

CONCLUDING REMARKS
 The findings, methodological approaches introduced in the article provide a useful basis for making appropriate policy recommendations for fostering competitiveness.For creating and maintaining basis for sustainable and high levels of competitiveness achieving the required legislative and institutional framework, market liberalization and a stable macroeconomic environment are necessary.They are conditions for ensuring continued economic growth, the achievement of sustainable development. The methods discussed in the article can be applied for any country, for a certain period of time.Their practical application will give reliably true data on the country's performance in the global marketplace. The most outstanding advantage of the research is that it is useful for evaluating social, political or economic policies in a given country, thus its results can be applied in the process of policymaking. Another distinguishing features is that it allows us to add more indicators to existing ones and make the research broader depending on the purposes and given circumstances.

Table 2 :
History of the developments of the concept comparative advantage