Chapter 12 Trade Theory and Development Experience

Chapter 12: Trade Theory and Development Experience

International Trade l International trade is the “engine” of development as it generates foreign exchange to finance industrialization. l Historically, ME has been known as the “cross-roads” for trade between the East (China, India, Persia, and Arabia) West (Asia Minor and Europe). l Today, the ME & NA is a major exporter of natural and human resources to the West, and a large importer of capital and consumer goods from it.

Patterns of Commodity Trade ME & NA countries l Export natural resources (e. g. , oil) and industrial raw materials (e. g. , cotton) l Import finished consumer goods (e. g. , electronics), capital goods (e. g. , machinery), and armaments

Theory of International Trade l Comparative Advantage: Free trade is mutually beneficial if countries specialize in production of low cost goods and trade them for high cost goods l If so, the existing pattern of trade must continue. ME & NA export natural resources

Theory of International Trade l Vent-for-Surplus: Commercialization of Third World agriculture enabled colonizers to use the unemployed and underemployed farm labor to increase production l Exportation of natural resources and importation of finished goods

Trade & Industrialization Export Promotion Industrialization: l l Transfer technology Export light manufacturing goods (e. g. , textiles) Achieve efficiency and charge competitive prices Expand industrial production to more advanced products (e. g. , electronics)

Trade & Industrialization Import Substitution Industrialization: l l Invest in “infant” industries (high demand elasticity) Protect them against foreign competition through trade barriers Achieve economies of large-scale production: falling average cost and low price Satisfy the domestic demand then compete in international markets

Trade Performance International trade strategies may be l Pro-trade biased: the openness index increases as economies open up by exporting of their natural resources (e. g. , Algeria and Egypt) or manufacturing products (e. g. , Turkey, Tunisia). l Anti-trade-biased: the openness index declines as economies use protectionist policies to establish import-substituting industries (e. g. , Iran, Israel).

Terms of Trade = Unit Export Price / Unit Import Price l Many ME & NA countries suffer from terms-of-trade deterioration and trade deficit since their export prices increase less rapidly than import prices (e. g. , Egypt, Iran, Morocco). Demand for natural resources is more “price elastic” than finished goods. l Import-substitution industrialization has required importation of expensive capital goods, resulting in TOT deterioration and trade deficit (e. g. , Turkey, Tunisia).

Trade and Development Policy l Transform the rural to urban-industrial economy, while developing agriculture l Develop light manufacturing industries to satisfy the domestic demand export to regional markets

Trade and Development Policy l Improve efficiency in large scale production to supply manufactured goods at competitive prices l Expand foreign markets and range of exportables l Participate in regional trade unions

Need for Export Diversification l ME & NA must reduce reliance on primary product exports and achieve economies of scale in importsubstituting finished goods. l The non-OPEC nations (Israel, Tunisia, Turkey, Jordan, Morocco, Egypt, and Syria) have reduced their share of primary product exports over a two-decade period. Among these countries, Israel and Turkey have substantially increased their value of manufacturing exports.

Inter-regional Trade l By and large, the flow of trade is between ME & NA and Developed Countries (Europe, United States, and Japan). l This pattern of trade is explainable by the “vent for a surplus” theory and importsubstitution strategy. As a consequence, intra-regional trade has been small.

Inter-regional Trade l Intra-Arab trade has been growing as several non-oil countries export manufacturing products to oil producing nations. If Arabs remove the boycott against Israel, intra-regional trade can significantly expand. l Among regional economic arrangements, OPEC, OAPEC, Organization of Islamic Countries (OIC), and Gulf Cooperation Council (GCC) have been successful to promote economic advancement.