Testing Comparative Advantage Theory in Somalia

Abstract

The trade deficit is a major problem in Somalia, and although this issue is prevalent in the country few studies have been done to test factors that affect exports in the country. This study aims to extract the revealed comparative advantage (RCA) of 40 commodities from 2010 to 2019, and then use the RCA to leverage the effect it has on export testing comparative theory. In the first part, the study used the Balassa index to get RCA, then used RSCA to test the effect it has on export by employing quantile 
regression and using Yue & Hua (2002) model. The findings were insect resin, gold, sheep and goats are commodities that have the highest comparative advantage, while insect resin and sheep and goats are commodities that Somalia’s major exporters in the world.  According to the regression analysis, the RCA has a negative effect on the export, but it is only significant in the middle quantiles. The results suggest specializing in RCA will not improve the export performance of the country and it will not balance the trade deficit problem. So, it is recommended that Somalia should have export diversification.