Chapter 12: Trade Theory and Development Experience

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.

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

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

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

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)

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

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).

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).

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

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

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.

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.

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.