Chapter 12: Trade Theory and Development Experience

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Chapter 12 Trade Theory andDevelopment
Experience
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International Trade

• International trade is the engine of
  development as it generates foreign exchange to
  finance industrialization.
• Historically, ME has been known as the
  cross-roads for trade between the East (China,
  India, Persia, and Arabia) West (Asia Minor and
  Europe).
• 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.

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Patterns of Commodity Trade

• ME NA countries
• Export natural resources (e.g., oil) and
  industrial raw materials (e.g., cotton)
• Import finished consumer goods (e.g.,
  electronics), capital goods (e.g., machinery),
  and armaments

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Theory of International Trade

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

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Theory of International Trade

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

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Trade Industrialization

• Export Promotion Industrialization
• 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)

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Trade Industrialization

• Import Substitution Industrialization
• 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 and then compete in
  international markets

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Trade Performance

• International trade strategies may be
• 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).
• Anti-trade-biased the openness index declines as
  economies use protectionist policies to establish
  import-substituting industries (e.g., Iran,
  Israel).

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Terms of Trade

• Terms of Trade Unit Export Price / Unit Import
  Price
• 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.
• Import-substitution industrialization has
  required importation of expensive capital goods,
  resulting in TOT deterioration and trade deficit
  (e.g., Turkey, Tunisia).

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Trade and Development Policy

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

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Trade and Development Policy

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

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Need for Export Diversification

• ME NA must reduce reliance on primary product
  exports and achieve economies of scale in
  import-substituting finished goods.
• 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.

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Inter-regional Trade

• By and large, the flow of trade is between ME
  NA and Developed Countries (Europe, United
  States, and Japan).
• This pattern of trade is explainable by the vent
  for a surplus theory and import-substitution
  strategy. As a consequence, intra-regional trade
  has been small.

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Inter-regional Trade

• 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.
• Among regional economic arrangements, OPEC,
  OAPEC, Organization of Islamic Countries (OIC),
  and Gulf Cooperation Council (GCC) have been
  successful to promote economic advancement.