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

Terms of trade implications of diversification into manufactured exports in a traditional primary-exporting country are examined in the light of the S ri Lankan experience over the past two decades. The empirical analysis focu ses on trends in both commodity and income terms of trade, employing a meth odology which takes care of the 'spurious regression' problem. The results suggest that, contrary to the 'new' terms of trade pessimism, export divers ification has brought about significant terms of trade gains for the Sri La nkan economy. Overall, the study casts doubt on the robustness of results c oming from analyses of price trends in aggregate manufactured exports and c alls for systematic time-profile analyses of the countries which have achie ved significant export diversification in order to inform the policy debate .