Journal of Applied Input-Output Analysis, Vol. 6, 2000

Location of Comparative Advantages in India and Bangladesh

By

Chandrima Roy and Debesh Chakraborty*

Abstract
Trade has been accorded great importance in the SAARC agenda, leading muchdiscussion. However, not much work has been done to study the comparative advantages in
the member countries of the SAARC. The objective of the present paper is to locate thecomparative advantage between the two economies of the SAARC - India and Bangladesh.
Accordingly, we develop a model which is Hecksher - Ohlin as regards factor inputs, but
Ricardian as regards technology. Three variants of the model are developed. In Model 1 thetwo economies maximize foreign earnings subject to their respective endowments andtechnologies. Secondly, a customs union model for India and Bangladesh is presented toassess their comparative advantages. Model 3 is constructed by restricting the bilateral
trade to tradables only. Experiment with the three models is carried out and findings are
discussed.

1. Introduction

Regional economic cooperation has been found to be an important engine of growth bydeveloping countries all over the world. The objective of these cooperation
arrangements is to maximize the people's welfare within the region, given the nature of
the external environment faced by the countries of the region.
As far back as 1947, Jawaharlal Nehru (Parthasarathi, 1990) envisioned the great
many advantages of political and economic cooperation among the countries of Asia.
This spirit of Asian cooperation became manifest in the emergence in 1985 of the South
Asian Association for Regional Cooperation (SAARC), comprised of seven countries:
India, Bangladesh, Bhutan, the Maldives, Nepal, Pakistan and Sri-Lanka. Having
begun with non-economic affairs, member countries of the SAARC gradually extended
the scope of their cooperation to economic fields.

Member countries have initiated various measures for strengthening the process ofregional cooperation within the framework of the SAARC, promoting steps forcooperation in core economic areas so as to facilitate the eventual transition of SAPTA(South Asian Preferential Trade Agreement) into SAFTA (South Asian Free TradeArea).

With the conscious political support offered by the member countries theReceived May 1999, final version received September 1999.

* Jadavpur University, Calcutta, 700032 India.

18

Journal of Applied Input-Output Analysis, Vol. 6, 2000

constitution of a viable trade agreement by lowering tariff barriers under SAPTA, will

result in increased inflows and outflows of goods and services among the member
countries.

Thus,

in

the

long

run

there

will

be

movement

away

from

the

intra-restrictions mandated by SAPTA to a more free trade grouping without the
restrictive trade barriers under the new SAFTA.
In this situation, trade models - both theoretical and empirical - need to be

developed which will show increased inflows and outflows of goods and services
among the member countries of the SAARC and will investigate the impact of such
free trade on the regional economies. The purpose of this paper is to develop such amodel and test it empirically. We shall concern ourselves with two countries of the
SAARC region, namely, India and Bangladesh.

A good volume of literature has developed in recent years, assessing comparativeadvantage or bilateral trade gains between economies. Woodland (1982) developed aneoclassical model of international trade with fixed domestic endowments andcommodities, which are tradable or non-tradable and intermediate or final. Ten Raa
and Mohnen (1991) made this model operational by substituting Leontief production
functions for technologies and foreign earnings for social welfare. They investigatedthe domestic efficiency and bilateral trade gains of the economies of Canada andEurope. Meanwhile, Ten Raa and Chakraborty (1991) likewise tried to locate thecomparative advantage of India vis-a-vis Europe.
In this area, some work has been done for the SAARC region: Waqif (1987);
Waqif (1991); Raghavan (1995); Prakash, Chowdhury, Singh and Sharma (1996);
Mukherjee (1996), Raychowdhuri and Chatterjee (1996); Dubey (1996); Ten Raa(1996). There are also similar works relating to trade between India and Bangladesh:for example, Sen (1972).

But to the best of our knowledge there has been little theoretical or empirical workon Indo-Bangladesh trade. Specifically lacking is a trade model enabling one to analyze

the relative trade positions of India and Bangladesh with a degree of specificity thatwill help to identify sectors where the economy of India has an advantage compared tothat of Bangladesh. The present paper is expected to make a modest contribution tothis area by developing a model that will enable us to locate the comparative advantage
of Indian economy vis-a-vis Bangladesh. Comparative advantage within the twocountries is located on the basis of only these fundamentals: the endowments,

technologies and preferences of the two countries.
This paper is organized as follows. Section 1 introduces a model. Section 2
includes a brief analysis of the salient features of the economies of India and
Bangladesh, followed by a review of the composition and trends in trade of the twocountries. Section 3 presents the model that has been used for the analysis of thecomparative advantage of the Indian economy vis-a-vis that of Bangladesh. Section 4
presents the results of the investigation. The paper, finally, concludes with a summaryof possible explanations for the findings. The Appendix gives an idea of the kinds ofdata used, the sources from which they have been collected, and their adjustments to
the required form.

Location of Comparative Advantages in India and Bangladesh

19

2. Salient Features of The Economies of India and Bangladesh
To serve as a background for the ensuing analysis, this section attempts to provide abrief analysis of the salient features of the economies of India and Bangladesh.
2.1 Socio - Economic Indicators

India, with a population of 945 million (estimated in 1996), is the largest country
among the SAARC members, comprising a land area of 2,973 thousands of square

kilometers (estimated in 1995) and a population density of 320 persons per square
kilometer (estimated in 1996). In the same year, the population of Bangladesh wasestimated to be 122 million, inhabiting a land area of 130 thousands square kilometers
and with a population density of 930 persons per square kilometer (both estimated in
1996).

2.2 Macro Economic Indicators
Distribution of GDP

Basically an agrarian economy, India has undergone significant structural changes in
the last three decades. Agriculture, which contributed 38% of gross domestic product(GDP) in 1980, contributed only 29% of GDP in 1995. On the other hand, the sharesof the industry and tertiary sectors have increased noticeably while that ofmanufacturing has increased only marginally. In the case of Bangladesh, too, the shareof agriculture in GDP has diminished. Thus, the importance of agriculture has declined
comparatively more in Bangladesh. The share of industry and services in the GDP of
Bangladesh also increased over the years, but relatively less so than in the Indian
economy. Finally while the share of manufacturing has increased slightly in India, in
Bangladesh it has gone down drastically.
Agricultural Production

India is an agricultural economy, with agriculture still accounting for 31% of the total
GDP of India. In 1991, around 60% of the working population had to depend on
agriculture. Though agricultural production has shown improvement over the last
decade, and the growth rate of agricultural production was 3.1% in the 1980's,
agricultural production was seriously disturbed by the adverse weather conditions of
the following few years, causing the average annual growth rate to decline to 2.9% in
the first five years of the 1990's.

Agriculture is the single largest sector of the economy of Bangladesh, accounting
for as much as 32% of the gross domestic product (GDP) in 1995-96 and 66% of thelabor force. Its contribution to GDP was 38% in 1990-91. Although agriculture's
contribution to the GDP has thus declined, its share in the economy is still high.
Thus, agriculture occupies more or less identical positions in the economies ofIndia and Bangladesh. Though its share in the GDP of both the economies has declined

20

Journal of Applied Input-Output Analysis, Vol. 6, 2000

over the years, both economies are still primarily agricultural.
Industrial Production

Industrial production in India has undergone a major structural change from consumer

goods to durable and capital goods. Today industries are widely dispersed
geographically and there are both privately owned and managed and publicly run
enterprises.

The industrial sector of Bangladesh includes small, medium, and large-scale

manufacturing and cottage industries. The sector as a whole now contributes around
11.5% of GDP and employs around 12% of the employed labor force of the economy.
Its contribution to GDP has been gradually increasing over the last few years fromabout 9.9% in 1984-85 to 11.5% in 1995-96.

The economies of both countries have experienced growth on the industrial front
during the last few years, manufacturing, in particular, being the predominant activity

in the industrial sector of both. But while India's industrial pattern is largely
comparable to those of developed economies, Bangladesh is far below that standard.
Trade and Balance of Payments

The external sector has a strategic role to play in the economies of both India and
Bangladesh. Over the years, this sector has undergone a significant transformation inIndia. Except for the periods 1972-73 and 1976-77, imports have always exceededexports, and this gap widened considerably from 1977-78 onwards. As a result, India'sbalance of payments continued to be under pressure from a number of adverse medium
term factors, including deceleration in the rate of growth of indigenous oil production,

protectionist tendencies in international trade, and the unfavorable climate forconcessional assistance. Following the second oil shock of 1979-80, the trade deficit
had attained a peak of 4.4% of GDP in 1980-81. It declined steadily to 2.8% of GDP

in 1983-84, more marginally in 1984-85, and sharply in 1985-86 to 3.7% of GDP.
During the same period in Bangladesh, exports in value terms declined to 909

million U.S. dollars from 971 million U.S. dollars in 1984-85. But by 1994-95, thisfigure rose significantly and stood at 3500 million U.S. dollars. On the other hand,India's exports in value terms increased from 13,325 million U.S. dollars in 1988 to
25,051 million U.S. dollars in 1994.

Thus, both economies experienced a rise in exports from the mid-eighties to the
mid-nineties. Their imports also increased substantially during the same period. Whilefor India the figure rose from 19,149 million U.S. dollars in 1988 to 26,762 million
U.S. dollars in 1994, that of Bangladesh rose from -2643 million U.S. dollars in
1984-85 to -5700 million U.S. dollars in

1994-95.

But Bangladesh faced an

exceptional situation during 1985-86 when imports declined considerably and stood at
a figure of 2364 million. So, while the Indian economy always showed a trade deficit
over ten-year period, Bangladesh showed a trade surplus only once, with there being a
trade deficit in all other years. During this ten-year period, both economies recorded amaximum trade deficit at almost the same time - Bangladesh during 1989-90, when itLocation of Comparative Advantages in India and Bangladesh

21

faced a deficit of -2273 million U.S. dollars, and India during 1988, when it faced adeficit of-5824.

Thus, the trade scenario was almost identical in the two countries. Bangladesh
could be taken to be slightly better off compared to India, managing to show a trade
surplus at least once in a period often years.
Export Structure

A study of the trends reveals that the share of primary commodities in the total exportsof both Bangladesh and India increased in the early eighties but has shown a tendency
to decline since the mid-eighties. These trends appear to have been induced byvariations in the share of fuel exports from these countries. The share of manufactured
products in the total exports of either country increased over the period 1970-1992.
The crucial factor contributing to this trend has been the increasing share of textiles
and clothing in these countries' total exports.
Import Structure

According to UNCTAD classification, manufactured imports comprised, on average,around half or more than half the total imports of both Bangladesh and India.
Food imports constituted one of the most important product groups for India, witha total import share on average 11.85%. Ores and metals were another significant
product group imported by both the countries. Fuel among primary products was more
important an import product for India than for Bangladesh, being a little over 26% on
average.

2.3 Trade Between India and Bangladesh

Details of intra-regional exports and imports of Bangladesh and India reveal thatexports of India to Bangladesh have increased over the period 1988 to 1994, but in thecase of Bangladesh this trend is not well marked.

The economies of both India and Bangladesh had a deficit with respect to world
trade. With respect to each other, however, India had a trade surplus with Bangladesh
which continued to increase during the period 1988-94, while Bangladesh had a trade
deficit with India, which kept widening over the years 1988-94.

3. The ModelIn this section we shall develop a model that can be used to determine the commodity
flows between India and Bangladesh and hence help to locate the comparativeadvantage of the Indian economy vis-a-vis the Bangladesh economy.

The model is a linear program. It maximizes the foreign earnings of India and
Bangladesh at given world prices, subject to material balance and factor endowments.
From this maximization exercise, we identify the sectors with positive values as having

22

Journal of Applied Input-Output Analysis, Vol. 6, 2000

comparative advantages. According to the theory of linear programming, these sectors

minimize production cost at shadow prices. Shadow prices are LaGrange multipliers
associated with material balances and factor endowments. In our model, the shadow

prices of material inputs are shown to match the world price, while those of the factor
inputs, capital and labor, measure their relative scarcities in India and Bangladesh.
Foreign earnings are the value of net exports. In this model, we maximize thevalue of net output minus consumption. This includes not only net exports, but also
investment and public spending. Thus, a resulting negative final demand component
indicates an import commodity, but a positive component signals no more than exports

potential, as investment or public spending may very well absorb it. We develop threemodels.
Model 1In the first model, India and Bangladesh maximize foreign earnings subject to theirrespective endowments and technologies. Since we identify endowments and production
structures as sources of comparative advantages, so all data in our model relate toendowments and production in the two economies.
For India, we have
K:

Capital stock

L :Labor force

k :sectoral capital coefficients row

1:

sectoral labor coefficient row

A:material input coefficients matrix

c :consumption coefficients vector.

The data on Bangladesh are the same, but denoted by K\ L\ k1,11, A1, and c1
In addition to the above set of data, we need notations for the endogenous
variables. For India, we use the following:x:

vector of outputs

y :vector of final demand (net of consumption);and for Bangladesh,

x1 :
y1 :

vector of outputs
vector of final demand (net of consumption).

Formally, the objective function to be maximized is n (y + y1), where, tc is a row
vector of world prices.

The world prices used to value total surplus are unity, but in our model they will
be parameterized as 7c, to uncover their role in the analysis.
The maximization of foreign earnings has to be performed under a certain set of
inequality constraints. The production of each commodity has to be sufficient to meet

Location of Comparative Advantages in India and Bangladesh

23

(1)

other commodities, plus the consumption demand and the final demand (net of

the industrial demand: i.e., the intermediate input requirements in the production of theconsumption). Thus, for India, the so-called material balance reads

Ax + clx + y<x.
In (1), A, being the material input coefficients matrix, when multiplied with output

labor coefficients, when multiplied with x, the column vector of outputs yield labor lx,

vector x, represents industrial or intermediate demand. I, being a row vector of sectoral

labor employment figure, we obtain consumption. Alternatively, cl may be consideredwhich is a scalar. On multiplying c, the vector of per capita consumption with thisas augmenting A in acting on x. Since c is a column vector and 1, a row vector, theirrequirement of commodity / per unit of j9 channeled through the household of themultiplication yields a matrix whose typical element is cj/j, which represents theworker. Households are modeled as maintenance places for labor services. The third
consumption), while x on the right hand side of (1) is the vector of outputs thatcomponent on the left-hand side of (1) is y which is the vector of final demand (net ofright hand side represents the supply of the same. Hence, (1) is the demand - supply

represents supply. Thus, the left-hand side of (1) represents total demand while the(2)

Similarly, for Bangladesh the demand-supply constraint or the material balances

constraint for India.
reads

^x1.

Again, output in each economy will be constrained by factor endowments. Thus,

Ux<K

(4)

(3)

for India the factor supply-demand constraints are

lx<Z

kV^1

(6)

(5)

The counterparts for Bangladesh are

lV<L\

(7)

Finally, in the absence of inventories, the model is completed by the non-negativity

x>0,

constraints on production. Thus, for India,

and for Bangladesh

24

Journal of Applied Input-Output Analysis, Vol. 6, 2000

x^O.

(8)

It is to be noted that non-negativity is imposed only on the activity levels, x and x1,
but not on the domestic net outputs, y and y1 of the two countries. This freedom
accommodates trade between the countries.

Maximization of n (y+y1), subject to (l)-(8), constitutes the basic model.
Basically, each economy maximizes its own bill of final goods, y or y1, since theobjective function is additive and constraints separate out in (1), (3), (4), and (7) for
India and (2), (5), (6), and (8) for Bangladesh.

This model can be summarized as maximize cz subject to Cz < b where thevariables and objective function parameters are, respectively,

and

z =

The constraint coefficients and the constraint constants are, respectively,C=

A + cl-I

0

I

0

0

0

A'+cT-I

0

I

0

k

0

0

0

K

1

0

0

0

0

k1

0

0

0

I1

0

0

-I

0

0

0

0

0

-I

0

0

0

and b =

L

The first order, or Kuhn-Tucker, conditions of this maximization problem involve

LaGrange multipliers, one for each constraint. A LaGrange multiplier measures thesensitivity of the value of the objective function with respect to the constraint. In fact, itis the amount by which the value would increase, when the constraint is relaxed by one

unit. In other words, the LaGrange multiplier is the marginal productivity of the entity

underlying a constraint. It is also called shadow price. The LaGrange multipliers
associated with the material balance (1) and (2) are the shadow prices of thecommodities in either economy and will be denoted by row vectors p and p1
respectively. The LaGrange multipliers associated with factor endowments, (3-6), arethe shadow prices of labor and capital in either economy and will be denoted by w, r

and w1, r1, respectively. Also, the LaGrange multipliers associated with theLocation of Comparative Advantages in India and Bangladesh 25

non-negativity constraints on output levels, x and x1, are slack variables, denoted by s
and s1 respectively. These shadow prices or LaGrange multipliers can be determined
directly by the so-called dual program, which has the LaGrange multipliers as
variables and yields the same solution value.
Schrijver (1986) shows that the dual to the above primal program is
Minimize Xb subject to XC = c and X > 0,

where A, is a row vector with dimension equal to the number of constraints in the
primal problem, the number of rows of b or C. It lists the LaGrange multiplierassociated with the constraints. Thus,

X = (p,p1,r,w,r1,w,s,s1).
The objective function of the dual problem is

Taking into account the constraints, XC = c, it consists of four components,p(A + d -1) + rk + wl - s = 0,p](A] +C1!1 -Q + r'k1 +wY -s1 =0,
p = n,

and,p1 = n.

Elimination of slacks s and s1 > 0 and domestic prices p and p1 makes the dual
problem separate out intomin

rK + wL subject tominrlK]+w*L]r,wtt(I- A-d)<rk + wl, andsubject to^(I-A1-cY)<r]k

Thus, capital and labor are priced as low as possible subject to the condition thatin each sector unit factor costs cover the value of net output at world prices. If theconstraint is binding, that is if revenue equals cost, then profit is zero; and if theconstraint is not binding, that is, if revenue falls short of cost, then profit will be
negative. According to the phenomenon of complementary slackness, if profit isnegative then output is zero. So, only the sectors having zero profit will operate. Thisbehavior will be mimicked by entrepreneurs in a pure competitive economy. Since there

are only two variables, r and w, only two sectors can break even. They are the sectorsthat use least factor input per net material output. Here lies the comparative advantage
which is signaled by the break-even condition in prices and by positivity of output.

26

Journal of Applied Input-Output Analysis, Vol. 6, 2000

Model 2In this model we consider a scenario in which India and Bangladesh have formed acustoms union, with commodities freely exchanged between the two countries. Eachcountry has its own technology, but can benefit from the superior technology of its
partner by importing its production. This bilateral structure emerges only when
non-negativity is imposed on joint net output of the two countries. Thus, to obtain the
Customs Union Model we have to add one more constraint to the set of inequality
constraints in Model 1.

In a customs union model, the objective function is the same as in Model 1, but
now the constraint in addition to the eight constraints of Model 1 isy + y*>o.

(9)This inequality insulates India and Bangladesh from the rest of the world and theconsequent division of activity will indicate their comparative advantages vis-a-vis
each other.

In a customs union, bilateral trade is cheap relative to trade with the rest of theworld. The purest case of a customs union is one which involves free bilateral tradeand prohibitively expensive imports from the rest of the world. Constraints (1-8) of
Model 1 along with constraint (9) reflect this condition.

In this Model also, as in the case of Model 1, the LaGrange multipliers of thelinear program, that is, the shadow prices, can be determined directly by the dual
problem

Minimize Xb subject to XC = c and X > 0.

But here, X lists one additional LaGrange multiplier which is associated with theadditional constraint incorporated in this model. It is the price ofjoint autarky and may
be denoted by T. Thus, in this model

X = (p,p1,r,w,r1,w1,s,s1,T)
T is a self-sufficiency price vector common to India and Bangladesh. This

self-sufficiency requires that the number of active sectors in each economy be equal to
the number of commodities. For each commodity there must be one sector (in India orin Bangladesh) which breaks even. This in turn requires mark-ups for thesecommodities, which constitute the minimum tariffs needed to sustain a customs union.
T is a row vector of these tariffs, which are the LaGrange multipliers, associated withthe pooled non-negativity constraints on y.
Model 3Given the model of a customs union of India and Bangladesh, Model 3 is obtained by
restricting bilateral trade to tradable only. Let the subscript N select the non-tradable
commodities. For these non-tradable commodities, the inequality has to be strengthenedLocation of Comparative Advantages in India and Bangladesh

27

to

y^O

and

y^>0.

Each country has to meet its own domestic demand for non-tradables; that is, it

must be self-sufficient with respect to non-tradables. Thus, in Model - 3 the objectivefunction is the same as in Models 1 and 2, but the set of inequality constraints now
includes two constraints in addition to the set of inequality constraints in Model 2:

The LaGrange multiplies of this model are

X = (p,p1,r,w,r1,w1,s,sI,T,t,t1).
The inclusion of the non-tradability constraints (10) and (11) leads to divergenceof price, t and t' are costs of the local production of the non-tradable in excess of what
they would have been were they freely available from the counterpart economy. It iseasily seen that the material balance constraints imply that any tradable commodity
must be produced somewhere and any non-tradable must be produced everywhere.

Consequently, prices of tradables become equal across the two countries while those of

non-tradables are determined by the value added coefficients wl + rk and w111 + r1 k1.
A further application of the complementary slackness is that if the price of a

tradable commodity exceeds world price, then its total surplus is zero. Consequently,
any positive total surplus is signaled by the condition that price is at minimum worldlevels. These commodities constitute the joint Indo-Bangladesh comparative advantage
vis-a-vis the rest of the world.

4. Results
This section presents the results of the models that we have developed in Section-II.
We have three models. In model 1, total surplus is maximized subject to technology

and endowment constraints (1-8). Model 2, the customs union model, makes the two

economies of India and Bangladesh jointly autarkic with respect to the rest of the world,by constraint (9). Furthermore, Model 3 makes two commodities non-tradable throughconstraints (10-11). Tables 1 to 6 present the results.

Table 1 presents the results of model 1. The endogenous variables are the gross

outputs and final demand (net of consumption), that is, net outputs of the various
commodities in India and Bangladesh. Moreover, domestic prices of the commodities
and factor prices can be determined. The latter is shown in Table 2.

The gross output figures, (Table 1) show that both India and Bangladesh produce
all the commodities. There are no specific commodities in which the countries

28

Journal of Applied Input-Output Analysis, Vol. 6, 2000

specialize. But inspection of the signs and magnitudes of net output (Table 1) reveals
that India exports electricity and gas and services to the rest of the world, while
Bangladesh exports chemicals. Moreover, inspection of price figures yields that
production prices exceed world levels, except for electricity and gas and services inIndia and chemicals for Bangladesh. Thus, electricity and gas and services are the mostcompetitive products of the Indian economy while for Bangladesh chemicals are themost competitive of all the products produced.
Table 1. Results of Model 1
Gross Output

Net Output(Rs. Million)(Rs. Million)

India

Bangla

India

Price

Bangla

desh

India

Bangladesh

desh

1. Agriculture

765347

95364

0

-

2.22530

2. Livestock, fishing and forestry

3286681802880-2.39834

1.41408

3. Other food26493733137

01.75635

11.24096

4. Textiles

1.48284288812

29058

-

0

1.18991

11.44005

28812212780570_1.65178

1.15678

6. Chemicals

367557115962807310081.202911

7. Machinery

836463

44290

0

0

1.22030

1.09981

5. Manufacturing

8. Construction

244929

20882

0

0

1.99420

1.21462

9. Electricity and gas

854334148898

5471480011.14905

10. Services

79467451692264835126011.07415

Table 2. Shadow Price of factors in India and Bangladesh in Model 1
Capital

Labor

India

0.559310.02498

Bangladesh

1.402120According to the phenomenon of complementary slackness (Ten Raa, 1995) of thetheory of linear programming, a positive shadow price indicates the scarcity of thecorresponding factor while a zero shadow price signals the abundance of that factor.

Thus, as seen from Table 2, Bangladesh is labor abundant, but capital scarce. India, on

the other hand, is both capital and labor scarce but relatively more scarce in capital.
Thus, given their respective factor endowments, the comparative advantages ofIndia are in electricity, gas and services, and those of Bangladesh are in chemicals in aperfectly competitive world market. But change in world prices may shift thecomparative advantage to other sectors and hence may jeopardize the development
programs of the economies. So, we now turn to the problem of making the two
economies of India and Bangladesh jointly self-sufficient. We consider this insubsequent customs union model by assuming a cut-off in trade connections to India
and Bangladesh from the rest of the world.

Location of Comparative Advantages in India and Bangladesh 29

Table 3. Results of Model 2
Gross Output

Net Output(Rs. Million)(Rs. Million)

India

BanglaIndia

BanglaIndia

Bangla-desh

desh
1. Agriculture

Prirv*
rntc

desh

765347

95364

0

0

2.22530

11.48284

2. Livestock, fishing and forestry

328668180288002.39834

11.41408

3. Other food264937

33137

0

0

1.75635

11.24096

4. Textiles

288812

29058

0

0

1.18991]1.44005

2881221278057001.65178

11.15678

6. Chemicals

367557115962807310081.202911

7. Machinery

836463

44290

0

0

1.22030

11.09981

5. Manufacturing

8. Construction

244929

20882

0

0

1.99420

1.21462

9. Electricity and gas

854334148898

5471480011.14905

10. Services

79467451692264835126011.07415

Note: (-) negligible figures

Table 4. Shadow Price of factors in India and Bangladesh in Model 2
Capital

Labor

India

0.659310.02498

Bangladesh

0.18991

0

The customs union results are shown in Table 3. We find that the competitive
sectors in India are still the electricity and gas and service sectors. But now India iscompetitive in textiles also, while Bangladesh continues to be competitive in chemicals.
It now also enjoys comparative advantage in agriculture, livestock, fishing and forestry,other food and machinery products. However, as seen from Table 3, the net output

figures in these additional competitive sectors are negligible both for India and
Bangladesh, indicating neither enjoys much advantage in the production of thesecommodities. Inspection of the net output figures further shows that there arepractically no bilateral trade relations between India and Bangladesh. The gross figures,as before, show that there are no specific sectors in which each economy specializes.
Both economies produce all commodities themselves instead of producing some andexchanging them for others from the other economy. Moreover, the gross output
figures of the two economies are the same as in Model 1.

The shadow prices of labor and capital also continue to be the same as in Model 1.
Thus, the results of Model 2 show practically no improvement over the results ofModel 1. The few changes that we have are so negligible that they can be easily

ignored. We fail to trace any comparative advantage of India vis-a-vis the economy of
Bangladesh with model 2, indicating that neither India nor Bangladesh is jointly

self-sufficient, but is so dependent on the rest of the world that the idea of one closed
economy comprised of these two economies does not seem to be a viable proposition.

We will now discuss the results of Model 3 where we brought in the non-tradables.
Some commodities may not be tradable for physical reasons. On the basis of zeros in30

Journal of Applied Input-Output Analysis, Vol. 6, 2000

actual trades, we have identified construction and electricity and gas as non-tradables.
The imposition of non-tradability of construction and electricity and gas in Model 2
yields Model 3. Inspection of the signs and magnitudes of net output (Table 5) yields
the following patterns.
Table 5. Results of Model 3
Gross Output

Final Demand(Rs. Million)(Rs. Million)

India

Bangla-India

BanglaDesh

1. Agriculture

rnce

India

Bangla-

desh

desh

76068695157

02.13676

2. Livestock, fishing and forestry

1.4837034948718030302.38199

3. Other food

1.4149925449032614

01.68442

4. Textiles

1.2416830922629044

01.12586

5. Manufacturing

1.440824190599278140001.35043

6. Chemicals

1.15733487699116031607315271.03260

7. Machinery

1855422444290

67364411]1.10044

11.21525

8. Construction

158725

20881

0

0

1.94910

9. Electricity and gas

2072196

48911

0

0

0.72989

10. Services

1i.14913

5313264

169168207364301]1.07480

Note: (-) negligible figures

Table 6. Shadow Price of factors in India and Bangladesh in Model 3
Capital

Labor

India

0.168140.02780

Bangladesh

1.403110

There is, as before, no indication of bilateral trade relations between India and
Bangladesh. But with the imposition of the non-tradability restriction, India's
competitiveness has shifted from electricity and gas to machinery, making it
competitive in the world with its machinery and services. Bangladesh, as before, enjoys
competitiveness in chemicals and to a very small extent in agriculture, livestock,fishing and forestry and other food. But now it imports a very negligible quantity of
manufactured goods, as shown by the net output figure.
The shadow prices of the factors are now slightly changed (Table 6). In
Bangladesh, though the wage rates are the same as before, reflecting labor abundance,
the rental rates of capital are higher, showing that the supply of capital is now short.
On the other hand, in India, the rental rates of capital have gone down, showing
capital is now less scarce while wage rates are slightly higher, showing the greater
scarcity of labor.

With the inclusion of the non-tradability restriction on electricity and gas andconstruction, India now exports services and machinery to the rest of the world andbecomes relatively more capital abundant and more labor scarce. Thus, India, being
endowed with skilled labor, uses more labor to produce machinery, in which it enjoys aLocation of Comparative Advantages in India and Bangladesh

31

comparative advantage. The shift in competitiveness from electricity and gas tomachinery releases capital and absorbs more labor, resulting in the greater laborscarcity and capital abundance in the economy of India. On the other hand, capitalstock in Bangladesh is small, and non-tradibility of some goods changes the production
patterns in such a way that capital becomes even shorter. As a result, the shadow rateof return on capital in the economy becomes considerably high.

5. Summary and Conclusion
Low intra-SAARC trade resulted in a concrete step being taken when a study on

SAARC Trade, Manufactures and Services was commissioned at the Islamabad
Summit in 1988.

Member countries have initiated various measures for strengthening the process ofregional cooperation within the framework of SAARC. They are now promoting steps

for cooperation in core economic areas so as facilitate the transition of SAPTA (South
Asian Preferential Trade Agreement) into SAFTA (South Asian Free Trade Area).
With this kind of effort on the part of the member countries, it is expected that in thelong run there will be a movement away from intra restrictions mandated under thearrangement of SAPTA to a more free trade grouping without restrictive trade barriers
under the arrangement of SAFTA.

In this paper, we have concerned ourselves with two SAARC members, India and
Bangladesh, trying to locate the comparative advantage of the former vis-a-vis thelatter. We have developed three models for the analysis of the comparative advantageof the Indian economy vis-a-vis that of Bangladesh.

The first model shows that while India's comparative advantage in a perfectlycompetitive world market rests in electricity and gas and services, that of Bangladesh isin chemicals. The shadow prices of factor inputs show that India has a scarcity of bothlabor and capital, being relatively more lacking in capital, while Bangladesh is deficient
only in capital.

The results of Model 2 also show that India is competitive in electricity and gas
and services as in model 1. However, with the inclusion of the joint autarky constraint
India now enjoys, though to a very small extent, it now has a comparative advantage intextiles also. Likewise, given the joint autarky constraint Bangladesh continues to enjoy
a comparative advantage in chemicals, with some recently gained advantage, thoughnegligible, in operating the sector - agriculture, livestock, fishing and forestry, otherfood, and machinery.

The shadow prices as obtained in model 2 are the same as in Model 1. Model 2
ultimately shows that there exist no bilateral trade relation as such between theeconomies of India and Bangladesh.

Finally, in the third model, with the inclusion of the non-tradability constraints onelectricity and gas and construction, India's comparative advantage shifts to machinery
while services continue to be a competitive sector. Bangladesh still continues to enjoy
its competitiveness in chemicals and to a negligible extent in agriculture, livestock,fishing and forestry and other food. Bangladesh, now, also imports a small quantity of32

Journal of Applied Input-Output Analysis, Vol. 6, 2000

manufactured goods.
This change is accompanied by an increase in capital scarcity in Bangladesh andlabor scarcity in India. Moreover, capital has now become relatively less scarce inIndia. This may be due to increase in India's competitiveness and hence in productionof machinery, which releases more capital but absorbs more of its abundant factor,
labor. On the other hand, non-tradability of some goods changes production patterns in
Bangladesh in such a way that renders capital more scarce than before.

To conclude, the present study shows that with given world prices, India's
comparative advantage vis-a-vis the rest of the world is in two sectors - electricity andgas and services, and that of Bangladesh is in chemicals. Thus, export of thesecommodities to the rest of the world by India and Bangladesh will enhance the earning
capacity of these economies.
However, our attempt to make India and Bangladesh jointly autarkic does notyield the desirable results.

It shows that the two economies cannot be jointly

self-sufficient. They are too dependent on the rest of the world and as such the idea of aclosed economy comprised of India and Bangladesh does not seem to be a viable
proposition.

The findings of this work should be treated as tentative. Our data base has some
limitations, being of a highly aggregative nature. The economies of both India and
Bangladesh consist of 10 sectors only. Moreover, all the data required are not available
in the desired form, causing us to adopt roundabout methods to prepare the data set.

Nevertheless, the findings, though tentative, encourage us to believe the work should be
pursued in detail.

Location of Comparative Advantages in India and Bangladesh

33

Appendix
Data

The data required for our empirical work was not available in the desired form and as such
we had to adopt roundabout methods to obtain the statistics necessary for the model. We haveused various sources - official and semiofficial sources, as well as studies of other researchers- to build a data base for the empirical implementation of the model.
The application of the model developed in Section 3 requires data on the following*
Input-output coefficient matrices for India and Bangladesh (A, A1)***

Sectoral capital and labor coefficients (k, k1,1,11)
Sectoral consumption coefficients (c, c1)
Stock of capital and labor for the two economies (K, Z,, K], Z,1).
Since the data are not always available in these forms, we will now describe the data
and their manipulation in the following section.

A.1 Input - Output Coefficient Matrices

The basis of the data for this study are the two Input-Output Tables of the Indian Economy
for the year 1991-92 [Government of India, Planning Commission, 1995], and of theeconomy of Bangladesh for the year 1992-93 [Center on Integrated Rural Development for
Asia and Pacific, (CIRDAP), Bangladesh, June 1996].

The Input-Output Table for the Indian economy consists of 60 sectors, while that of theeconomy of Bangladesh consists of 53 sectors. These two input-output tables have been
aggregated into 10 sectors only, in a way such that there are common sectors for India and
Bangladesh. From the aggregated input-output table of each country, the input-output

coefficient matrices - (A) for India and (A1) for Bangladesh - have been computed.

A.2 Labor and Capital Coefficients
Labor Coefficients

In this study, sectoral labor coefficients for each sector have been computed from the sectoral
employment and sectoral output data of the respective economies. While for the economy of
Bangladesh the employment figures for the desired sectors were available for the year
1992-93 [Center on Integrated Rural Development for Asia and the Pacific (CIRDAP),
Bangladesh, June 1996], for the economy of India the employment figures for all the sectors
desired were not available for the year 1991-92. We computed them using the employment
figures of the year 1979-80 (Ten Raa and Chakraborty, 1991) and employment growth rate
for the period 1977-78 to 1987-88 (Government of India, Planning Commission, 1995).
Capital Coefficients

To obtain the sectoral capital coefficients for the economies of India and Bangladesh, we
made use of their sectoral values added at factor cost and their wage rates. For both theeconomies these figures for sectoral capital coefficients were available from their respective
input-output tables.

For the Indian economy, the wage rate was available from the Indian Labor Year Book
1995. For the economy of Bangladesh we had the data on wage rates for all the sectors,

34

Journal of Applied Input-Output Analysis, Vol. 6, 2000

[Center on Integrated Rural development for Asia and Pacific (CIRDAP), June 1996]
A.3 Consumption Coefficients

From the input-output table of India and Bangladesh we take the consumption vector,
and allocate to the workers by the wage share of value added. Finally, we divide this by total
employment to get consumption per unit of labor, i.e, the consumption coefficients.
Table A.1 Sectoral Labor, Capital and Consumption Coefficientsin India and Bangladesh
India

Bangladesh

Labor

Capital

Con

Labor

CapitalCon

Coefficient

coefficient

sumption

Coefficient

coefficient

sumptioncoefficient

coefficient

1.

Agriculture

42.37672

0.392793

0.001540

53.82907

0.299198

2.

Livestock, fishing and forestry

42.37672

0.229301

0.000650

28.68416

0.574995

0.001197

3.

Other food8.832467

0.075254

0.000626

11.20844

0.162946

0.000942

4.

Textile8.832468

0.409036

0.000578

30.29417

0.002132

0.000506

5.

Manufacturing

8.832467

0.294772

0.000274

6.156246

0.136486

0.000260

6.

Chemicals

8.832468

0.264908

0.000089

1.355685

0.209854

0.000355

7.

Machinery

8.832467

0.333914

0.000155

4.2025120.259145

0.0001388.

Construction

32.86428

0.018992

09.094539

0.0351940

9.

Electricity and gas

4.602278

0.443211

0.000034

2.759021

0.461916

0.000037

10.

Services

18.59349

0.487776

0.002054

21.16043

0.388550

0.002187

0.003919

A.4 Capital Stock and Labor Stock

In order to estimate the total capital stock of an economy, we require data on the degree ofcapacity utilization of that economy. For India, we obtained it to be roughly around 60% fromTen Raa and Chakraborty (1991). Given this rough estimate of capacity utilization, the total
capital stock for the Indian economy is obtained.

The capacity utilization in Bangladesh is also assumed to be around 60% and the capitalstock for the economy of Bangladesh is also obtained.

The figures for the total labor force for both economies are the total economically active
population which includes persons employed as well as those who are willing to supply labor.

For India this figure is available from the Government of India, Planning Commission 1995,
and for Bangladesh it is available from the World Development Report, 1995.
Table A.2 Capital Stock and Labor Stock of India and Bangladesh
Capital Stock

Labor (million)(Rs millions)India

5876701.0

282.42000

Bangladesh

521360.4

36.23898

Location of Comparative Advantages in India and Bangladesh

35

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