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.
Thirdly, international trade can introduce or intensify competition. Obviously, competition is good
for consumers, because competition will drive down prices. But what about the producers? In order
to survive domestic firms have to improve production processes, reduce costs, improve quality and
innovate. Competition provides the incentive to do this. There is large evidence that firms that
engage in international trade are more efficient and innovative. Remember the Saba-Bakari trade
example above. If Bakari has to pay a lower price for the chicken, he will receive a larger gain;
with the saved money he can buy something else. Saba in turn will need to make chicken production
more efficient, if she wants to have a larger gain. For example, she can use a different breed of
chicken that gives more meat or has a better taste, or she increases her farm size, or looks out for
cheaper ways to feed the chicken. If Saba can’t match the market price without making a loss, she
will go out of business. But then, she will be “freed” from inefficient chicken production and redirect her resources and energy to something else that fetches a better return. This may be painful
in the short-run, but directing resources to activities which give the highest return is essential in an
efficient economy that does not waste resources.
Static and dynamic gains from trade
So far we have drawn a very rosy picture of international trade. However, advantages of trade can
be limited. Many gains from trade are static. With “static” we mean “one time off” gains: Income
and consumption increases only once. Once these gains are realised there will be no further gains
in the future. For example, international competition that breaks a state monopoly and reduces the
consumer price is such a static gain. Once the price is lowered, there may be no further gains for
domestic consumers or producers. The same can be said with respect to comparative advantages in
agriculture. After opening to trade and specialising in the product in which the country has a
comparative advantage, consumption possibilities do increase, but then no further gains may be
achieved.
It is important to consider dynamic gains. With “dynamic” we mean gains from trade that multiply
over time. Dynamic gains can sustain economic growth. If developing countries specialize in their
current comparative advantage such as agriculture, they will not make steps towards manufacturing
such as textile production. Is this bad? It is not bad, if we only consider static gains. By specialising
in agriculture and trading on the world market, African countries will receive more textiles in
exchange for their agricultural products as if they produced textiles themselves. Specializing in
current comparative advantages might be bad, however, if we consider dynamic gains. It is often
argued that there are no dynamic gains from specialising in agriculture, while there are dynamic
gains from specialising in manufacturing.
Why are there no dynamic gains in agriculture? The reason is that the scope for productivity gains
is limited in agriculture. For example, Ghana specialised in cocoa production. Ghana became the
world’s largest producer in 1911 and stayed so until 1977. However, agricultural techniques and
yields have hardly changed between 1930 and 2000. Hence, the average cocoa farmer produced
about the same amount of cocoa in 1930 as in 2000. Cocoa farmers would only earn a higher
income if they receive a better price for cocoa on the world market. In contrast, manufacturing
allows productivity gains over time: with the same amount of capital and labour, more goods can
be produced every year. The gains in productivity can offset increases in labour costs. Workers can
earn more and more over time.
In addition, economic activities are interlinked. Some sectors positively influence other sectors in
the economy. For example, a large car industry creates demand for steel, which might develop as
a result of having a car industry. Engineers (and businessmen) trained in the car industry can use
the set of skills in the tool manufacturing industry. It often reduces costs if industries locate at the
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same place. Hence, the creation of one industry will create or attract other industries. These
linkages are often associated with manufacturing. These linkages do rarely exist in agriculture.
Skills and inputs used in producing agricultural exports do not benefit other industries. We will
now turn to the history of trade in Africa. We will come back to trade theory later.
For at least 2,500 years there has been trade between sub-Saharan Africa and North Africa and the
Middle East. This trade is called “Trans-Saharan Trade”, because it required traders to cross the
Sahara. As shown in Map 1, the Sahara separates the Mediterranean economies from the economies
of the Niger basin. The Sahara is the world’s largest desert. It is about 2,000 km wide north-south.
The desert consists of sand and stone. Temperatures are very high at day and very cold at night.
There is no water except in the few oases. This makes the Sahara very difficult to cross.
The height of the Trans-Saharan Trade was between 700 and 1600. Gold dust was the most
important export commodity for those West African economies involved. Western Europe and
North Africa used gold for coinage, but lacked gold deposits and therefore imported the gold. It is
estimated that two-thirds of all the gold circulating in the Mediterranean area in the Middle Ages
was imported across the Sahara. In Map 1 gold producing areas are shown as shaded areas and
labelled as “Goldfields”. These areas are located in what is now Ghana and Guinea. Other exports
included slaves (an estimated 12 million in total between 700 and 1900) and commodities such as
ivory and ostrich feathers/ eggs.
The Trans-Saharan trade did not only allow Africans to sell and export their goods but also to
import foreign goods, in exchange for West African export goods. A major import good was salt.
Major deposits are located in northern Africa at Idjil, Taodeni and Taghaza, as shown in Map 1.
Salt makes food taste better. Other import commodities include dates (from the oases), iron tools,
copper and brassware, beads, woven cloth, paper and books. Imports as well as exports were luxury
items – goods that had a high value to weight ratio. Trade in bulk items was not profitable due to
high transportation costs despite of the camel.
Trade gave rise to powerful African empires that controlled and taxed trade. Map 2 shows the
Ghana kingdom (nothing to do with present-day Ghana) occupied the transit territory of the TransSaharan trade covering areas of Senegal, Western Mali, and Southern Mauritania. The kingdom
was first mentioned in 800 AD and lasted until 1240 AD, when it was incorporated into the Mali
Empire. In ca. 1350 the Mali Empire stretched from Senegal to Mali.