I will now present the ingredients of the supply side indicator in our decomposition of the MPI indicator. So, the supply side is actually a product of a number of sub-indicators. First, we have so Balassa RCA, Revealed Comparative Advantage. Then, we have dynamic factors that correspond to the growth of that RCA as it was observed in the last years. We have an indicator that takes into account the trade surplus of that particular country for a product. And eventually, we have the global tariff disadvantage faced by the country in world markets. So the Balassa RCA, the really comparative advantage can be interpreted two ways with exactly the same formula, but we can see it as a ratio of the share of a product in one country market to the share of that same product in world exports. It can also be seen as the ratio of the market share of the country for that product, divided by the market share of that country for all products. So actually, it's just the same but by just combining things differently. When the RCA is below one, it mean that, the country is not specialized in that particular product. When it's above one then it means this country has revealed comparative advantage in exporting that product. Though, if we consider an example for leather shoes, Indonesia exports a little more than $2 million of leather shoes, which is very little as compared to world exports which is approximately $60 million. However, for Indonesia as these two millions correspond to more than one percent of their total exports. Whereas at world level, these 60 millions are much less than one percent. And for that reason we can conclude that Indonesia has a comparative advantage in exporting leather shoes. So, in addition to using the Balassa RCA, we also consider the growth of these RCA. Why do we do that? We compute how much this RCA has, how it has evolved between two sub-periods. Because we have seen by doing some econometrical work that actually there is a continuation of this evolution. So, when we have had in the last five years a growth of the RCA, we can expect that there should be no the growth in the coming years. But actually it's not that these will continue just exactly at the same pace. Were the econometrics says is that a small share with more fraction of the growth that has been observed in the past will continue in the future. And this is what we take into consideration. So, for example, if we have Ethiopia, RCA that has grown by 90 percent over the last five years, what we can expect is that there should be on average 23 percent further growth in the next five years. So we apply these to our dynamic factors. For extreme growth rates, very large growth rates, or very small growth rates, we don't exceed range of 0.73 to 156, just because out of range, we have seen that the econometrics results were not reliable anymore. A third component is the export to import ratio. Why do we consider this ratio? Actually some products can consist of re-exports. A country imports a good and re-exports it with very little or no change at all. Then, we will not consider that this country has a real comparative advantage is that good. So, to fix this problem, what we do is that we correct the RCA for the export-to-import ratio of the product, whenever these export-to-import ratio is below one. When it's above one, we don't do anything. So here an example, we have the Netherlands that imports $6.8 million of fruits and nuts, and they export six 6.1 million. So there is a possibility that part of these exports consists of we exported goods. For that reason we compute the ratio 6.1 divided by 6.8, and we will multiply our RCA by the ratio. Eventually, the last component is a global tariff disadvantage. We compare the average tariffs that a country faces, when exported particular good in the world with what all suppliers in the world face when they export that good to the same countries. And we will use these ratios, these comparison to correct the RCA. When we see that a country has a global tariff advantage in world market, we will consider that the off you needs to be downgraded. And on the contrary, if the country has overall a tariff disadvantage, then its RCA has to be upgraded. Why? Because if the RCA is based on actual trade data. So actual trade data are already taking stock of the fact that the country faces a tariff advantage or not. If the country manages to export goods just because this country has a tariff advantage in the world, then it's actual comparative advantage is lower than it seems, than it is reviewed by trade data. So, if a country manages to export despite the fact that this country faces a tariff disadvantage in the world, then, it means that in a market where tariff conditions are better this country could be actually even more successful than the RCA, the Balassa RCA indicates, and by contrast, if the country manages to expose only thanks to these tariff advantage that it has overall in a market where there is no tariff advantage, then we should not expect that these countries be necessarily as successful as in other markets. So this is why we need to apply these correction factor.
