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Week Nine Notes: Industry and Trade
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Reading Notes
Reading 1: World Trade and Late Industrialization
SOURCE: T.J. Moss and D. Resnick, ch. 13 “World Trade and Late Industrialization” in African
Development: Making Sense of Issues and Actors, Rienner (2017) pp. 239-262.
SUMMARY: 21 pages to ~ 12 pages
Introduction
● Trade is also one of the most complex and heated development issues.
● Trade - the simple idea of a voluntary exchange of goods or services
● Trade is one of the most important ways in which Africa interactions with the rest of the world
● Africans have been actively involved in long-distance specialized international trade for more
than a millennium.
● Boosting trade is now thought vital to Africa's current development prospects, both as a possible
explanation of disappointing development so far and as a potential way to improve incomes.
● Increasing opportunities for trade is often considered an efficient way to reduce poverty, such
as the common refrain “trade not aid” as a development strategy.
● However, African countries are “late industrializers” and often are limited to trading primary
commodities rather than profitable high-value manufactured goods that have been cornered by
other regions and often produced at lower cost
Africa's Long Trading History
● Trade has been an essential part of most African societies, and the continent has a long history of
long-distance international trade
● The trans-Saharan trade route, moving goods overland via caravans of camels from the North
African coast on the Mediterranean across the Sahara desert to the West African coast, was active
from perhaps as early as the eighth century
● Not only driven by economic interests, but also was undoubtedly linked to the expansion of
Islam and the increasing availabilit'y of domesticated camels
● Another significant trade route was along the East African coast, where trading occurred with
Arabia and parts of South Asia.
● The arrival of Europeans was both a boon to and tragic for African trade
● Although the prime focus was West Africa, the Portuguese also seized control of Zanzibar in
the early 1500s. Many of the early trading posts were initially viewed as restocking facilities for
ships headed to lucrative markets in Asia, but trade with local African groups gradually
expanded.
● Colonization improved trading infrastructure, such as the construction of roads and railways,
but the European powers also manipulated trade to their advantage, setting up zones of
monopoly control and practicing aggressive mercantilism.
● Voluntary trading with Africans also gradually grew into more exploitative arrangements as
colonialism began to take hold. The colonial economies were shaped to meet the needs of Europe,
reflected in trading patterns that were highly uneven
Africa's Postcolonial Trade
● South Africa alone is responsible for about one-third of all African exports.
● Oil is also a dominant export product, accounting for nearly all the exports from some large
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countries such as Nigeria and Angola.
● Mining and primary commodity products make up the vast bulk of the rest of the continent's
exports.
● Despite some limited successes, Africa's share of global trade has declined substantially in the
postcolonial period
● Africa's disappointing trade performance is the result of multiple factors. Among the most
commonly cited are deteriorating terms of trade, unfair global rules, and domestic
competitiveness.
● African governments have tended to blame poor trade performance on trade barriers such as
tariffs and quotas in developed markets, particularly in areas such as agriculture and textiles
● The International Monetary Fund (IMF), World Bank, and other donors have tended to
emphasize economic and policy weakness in Africa as the major barrier.
● A growing body of evidence suggests that both matter, but anti-competitive domestic policies
are probably the greater hindrance, since most of the market access issues have been resolved
● Regardless, for policymakers these need not be mutually exclusive, and they all suggest some
policy changes by all players that might allow Africa to overcome its past and expand trade even
further
● → increase opportunities and job creation, allowing trade to contribute to economic development
and increased incomes.
Trade, Growth, and Poverty
● Domestic producers may require larger markets to reap the gains of economies of scale that can
only be achieved through seeking external customers.
● And by importing goods, Africans can benefit from the technological progress and economic
advances in other countries.
● Of course, you must do one (export) in order to be able to afford to do the other (import).
● Based on cross-country analysis, higher levels of trade seem to correspond with higher rates of
economic growth. A statistical link between trade openness and growth is difficult to establish
because of the many other factors that are hard to disentangle.
● There may also be a pro-poor element in expanding trade, although detecting the connection to
poverty reduction is far from obvious.
● In theory, increased trade should improve consumer choice, lower the costs of goods, and
enlarge the range of possible tradable goods, including those bought and sold by the poor.
● Some macroeconomic trade models show huge gains in the battle against poverty from free flows
of goods, such as one estimate that total global free trade would lift 500 million people out of
poverty.
● But they also make a host of assumptions and must be treated with caution.* Several
microeconomic studies have found mixed results, with the poor gaining from certain kinds of
trade, but also facing a host of other kinds of barriers that prevent them from reaping the gains of
greater participation in the global economy.
The Concept of Comparative Advantage
● Classical trade theory is based on the concept of comparative advantage, the idea that total
efficiency and welfare are maximized by specialization in the products and sectors for which
each country has a relative advantage.
● The notion of comparative advantage suggests that each country should focus on producing the
kinds of goods and services that it does best relative to other goods and services it might produce
less efficiently - not relative to what other countries might produce more efficiently
● The crucial-and often misunderstood-implication of this theory is that two countries can trade
to their mutual benefit even if one of them is more efficient than the other at producing
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everything, as long as each emphasizes what it does most efficiently and trades for what it does
not.
● If comparative advantage is correct - and economists nearly unanimously accept it, then the
implication is that completely free trade is both the most efficient and welfare-maximizing.
● Although there is some ideological resistance to the idea of free trade, the vociferous disputes
over trade policy tend rather to focus on how political and economic realities differ from the
model and on various strategies and mechanisms for managing transitions toward more optimal
trade relationships.
Free Trade
● Free trade is the idea that governments should not erect barriers that prevent or restrict the
exchange of goods and services across national borders
Three broad rationales exist for free trade, or at least for moving toward more open borders as much as
possible:
1. Moral argument for free trade
● The liberal premise that expansion of freedom was an inherent good in itself (Smith, Mill,
& Friedman)
● Questioning whether governments should have the right to interfere in the free exchange
of goods between private individuals.
● Unless there is a compelling case for intervention where the benefits clearly outweigh the
costs, states should not interfere with markets.
2. Economic argument for free trade
● The economic efficiency argument, most eloquently argued by David Ricardo, is based
on the idea that markets are a better determinant than states of economic outcomes.
● Closely linked to comparative advantage and the concept that economic efficiency is
welfare-maximizing.
● Given that Africa's borders are particularly arbitrary and unconnected to the
socioeconomic organization of the people on the ground, should the lines drawn up by
European officials sitting at a conference table in Berlin more than a century ago
determine which people are allowed to trade with each other today?
3. Political argument for free trade.
● Because economic policy, including most trade intervention, is typically captured by
political elites, liberalization reduces the value of political connections
● Trade barriers are less of a policy designed to promote development or exports and more
of a rent doled out by the state. Thus, removing trade barriers could also be justified
on fairness grounds.
Unfree Trade as Development Policy
● In some instances, trade intervention is still considered useful to promote development. In the
past, economic development theories have supported the establishment of certain kinds of trade
barriers as a tool to encourage industrialization and other developmental goals
● Import substitution industrialization (ISI) → for a country to start by assessing its main
imports, and then to erect barriers against those products to try to encourage local firms to
produce them instead
● In practice, ISI was a near total failure, as the protected domestic industries rarely were able to
become efficient without market pressure and the impact on.the balance of payments was sharply
negative
