Manufactured exports and terms of trade of developing countries: Evidence from Sri Lanka

Abstract

Terms of trade implications of diversification into manufactured exports in a traditional primary‐exporting country are examined in the light of the Sri Lankan experience over the past two decades. The empirical analysis focuses on trends in both commodity and income terms of trade, employing a methodology which takes care of the ‘spurious regression’ problem. The results suggest that, contrary to the ‘new’ terms of trade pessimism, export diversification has brought about significant terms of trade gains for the Sri Lankan economy. Overall, the study casts doubt on the robustness of results coming from analyses of price trends in aggregate manufactured exports and calls for systematic time‐profile analyses of the countries which have achieved significant export diversification in order to inform the policy debate.