Many of the goods and services that we consume are not produced by ourselves. We rely on others
to provide these goods. We trade. This is truer, the more complex and more advanced an economy
becomes. Like people, countries trade too. This is called international trade. Why is commodity
trade of such vital importance? Does free trade foster economic development? Do historical trade
patterns affect us today? What are the risks of international trade? What insights does history teach
us with respect to the recent commodity trade boom in Africa? These are the questions that we
cover in this chapter on trade. We first look at the benefits of trade through the lens of trade theory.
We then describe the development of trade in Africa from early times to today. We finally discuss
the lessons trade history provides when it comes to the recently good performance of Africa
countries.
- Trade Theory
Why do people trade? Because voluntary trade must necessarily improve the situation of both,
buyer and seller. Take two individuals: Saba and Bakari. Also, take one good that they both value:
a chicken (it can be any other good; it just happens that Saba and Bakari both like to eat chicken).
We can find out how much Saba and Bakari value a chicken by asking: “How much are you willing
to pay for a chicken?”
Saba: “I am willing to pay up to 10,000 shillings for a chicken.”
Bakari: “I love eating chicken. I am willing to pay up to 20,000 shillings for a chicken.”
Their answers inform us about how much they value a chicken. Both would gain from buying a
lower price than what they are willing to pay. For example, if Bakari pays 10,000 shillings for a
chicken, he gains because he is paying 10,000 shillings less than what he would be willing to pay
(which is 20,000 shillings).
Now assume that Saba owns a chicken. Should Saba eat the chicken herself or sell the chicken to
Bakari? This depends on the price that Bakari pays her.
a) She will keep the chicken for any price lower than 10,000 shillings, because it is less than
she values the chicken herself.
b) She will sell the chicken for any price higher than 10,000 shillings.
Because Bakari is willing to pay up to 20,000 shilling and this is more than what the chicken is
worth to Saba, there are gains from trade. Independent of the actual price they negotiate, the total
gain (Total gain = Seller‘s gain + Buyer’s gain) in any trade will sum up to 10,000 shillings.
This is just an example, but it highlights a basic principle of trade. Traded goods have value to
both, buyer and seller. Sellers would never produce or sell anything, if they did not get “something
better” in return. The good will be passed to the buyer, because the buyer values the good more
than the seller. It also follows that trade is a win–win situation: buyer and seller both gain. If we
observe voluntary trade, the alternative of no-trade must have been worse.
Comparative advantages
Trade and economic growth go hand in hand. However, there are reasons to think that trade fosters
development. Trade can deepen specialisation. Famous 18th century thinker Adam Smith described
how division of labour, through specialisation, can increase productivity: more output can be
produced without increasing the amount of labour or capital. The 19th century economist David
Ricardo showed that countries can benefit from trade, even if a country has an absolute advantage
in everything. With “absolute advantage” we mean that a country is better (=uses less
resources/inputs) in producing any product. Ricardo‘s theory of comparative advantage remains a
very important argument in favour of international free trade.
We can understand the argument best by looking at a simple, hypothetical case: Two countries
produce only two commodities using only one input, labour. Say, Malawi and Brazil produce
tobacco and textiles. Brazil can produce one unit of tobacco in one hour and one unit of textiles in
two hours. Let’s say Malawi is less efficient. Malawi needs to employ more labour: two hours to
produce one unit of tobacco and ten hours to produce one unit of textiles. Table 1 lists the
hypothetical production costs of tobacco and textiles in Brazil and Malawi.
Are there gains from trade? One would think the answer is ‘no’, because Brazil needs less labour
in producing both tobacco and textiles than Malawi. But this is wrong.
The production of a good comes at a cost. No country has unlimited resources. The same hour of
work used in tobacco production cannot be used in textiles production. With this idea in mind, we
can now express production costs in terms of foregone production of the other good. This is what
economists call opportunity costs.
- Brazil needs to give up 2 units of tobacco to produce 1 unit of textiles. This is because after two
hours of work, Brazil produced either 2 units of tobacco or 1 unit of textiles. This means 2 units
of tobacco “cost” 1 unit of textiles; or every unit of tobacco costs Brazil half a unit of textiles. - Malawi can produce tobacco relatively cheaper than Brazil. Malawi can produce one unit of
tobacco at the cost of 1/5 (0.2) textiles. In contrast, if Brazil produced that unit of tobacco she
had to forego half a unit of textiles, hence the Brazilian cost of one unit of tobacco is 1/2 (0.5)
textiles. Malawi has a comparative advantage in producing tobacco. Malawi needs to give up
less units of textiles than Brazil. Brazil in turn has a comparative advantage in textiles
production.
The two countries would gain from trade. Brazil should specialise in the production of textiles and
Malawi should specialise in the production of tobacco. The countries should then trade their surplus
products in exchange for the other good that they do not produce. Comparative advantages also
affect the prices of the goods involved. With trade, the market price will fall between the
opportunity costs of both countries. In the above example, the world market price of textiles will
be between 2 and 5 tobacco. Malawians will pay less for textiles buying textiles on the world
market than if they produced it on their own. Brazilians will pay less for tobacco than they would - pay if the two countries were producing both goods for themselves. Without increasing inputs
- (more labour/capital) or technological change, trading partners benefit from a more efficient
- international allocation of resources.
- It is important to understand the concept of comparative advantage. Firstly, it explains trade
- patterns. It is often argued that Africa has a comparative advantage in agricultural products such
- as cocoa, coffee, cotton or groundnuts.
- This does not mean that African countries are the only possible producers of these commodities.
The United States, for example, can produce cotton, groundnuts and tobacco (and does indeed
produce them more efficiently). - This does not mean that African countries are unable to produce sophisticated manufacturing
goods like cars or mobile phones.
By comparative advantage we mean that African countries can produce agricultural products at
lower opportunity costs than other countries. Instead of producing one mobile phone, African
countries can use the same amount of resources, produce agricultural products, and exchange them
on the world market for more than one mobile phone.
Other ways how trade can influence development
Scholars have identified various other ways how trade can boost economic development. Firstly,
trade attracts Foreign Direct Investments (FDIs). FDIs are inflows of physical investments from
individuals or companies abroad. Physical investment means capital such as tools, machinery, and
factories (not buying bonds or stocks). FDIs add to a country’s capital stock. Capital accumulation
is needed, because workers equipped with more capital can produce more goods.
Secondly, trade may enhance technological progress, which is the ultimate engine of economic
growth. Technological progress means that more can be produced with the same amount of
production factors. The two production factors economists have in mind are capital and labour.
Trade can generate technological progress. For example, openness to trade may let highly efficient
foreign firms choose to locate production in a developing country. These foreign firms hire and
train workers. When those trained people leave and take a job at a domestic firm, they take their
knowledge and skills with them and may apply them in their new firm.