Revealed comparative advantage in services trade and current account imbalances in emerging and advanced economies

In recent decades, the steady increase in services exports has been associated with worsening current account balances in emerging market economies. This paper examines the relationship between trade specialization in services and current account balances using data from 161 countries from 1996 to 2023. First, we develop a theoretical model to analyze how relative specialization in services influences the current account, focusing on agent optimization and intertemporal constraints. Then, we create an index of relative advantage in service exports compared to manufacturing exports, which significantly impacts the current account balance. We select control variables through Bayesian Model Averaging and estimate the current account equation using four different methods to ensure robustness. Results show a negative relationship between the current account and the relative revealed comparative advantage in services among emerging market economies. In advanced economies, this effect is not statistically significant. We suggest policy actions for governments in emerging economies to boost the productivity of the services sector, ensuring that increased specialization and competitive advantages in services trade do not adversely affect these countries’ current accounts.