The earliest and most influential theory of international trade is the comparative advantage analysis first developed by Ricardo and later perfected by A Smith in 1776
(Smith 1776), from then onwards additions to the theory have been fairly modest in the sense of changing the fundamental premise of the theory.
The comparative advantage theory points that between whatever places international trade is carried on, it will have distinct beneficial effects to the countries concerned. It is therefore in the interest of countries to engage in international trade because this will increase production in the concerned countries. The question that arises is how international trade raises output in the countries involved. To answer this question, we use a simplified example of two countries involved in international trade with each other. We will also look at the fundamental arguments of comparative advantage.
The comparative advantage thesis is based on two fundamental assumptions. Firstly, it is assumed that international trade is free and competitive. This means that there are no barrier to the movements of factors of production and more importantly that the pricing mechanism is not distorted. Secondly, it is assumed that there is full employment in the countries involved in international trade. Full employment is defined in the sense of Parento optimality. This means that it is not feasible to expand the production of any one commodity without reducing the production of the other.
Thirdly, though this is not really an assumption in the liberal meaning of the word, it is considered that countries are endowed differently with factors of production. This means that some countries will have a plentiful supply of some factors of production and a relative shortage of others. Given these conditions the theory posits that countries should specialise in the production of commodities in which they have favourable factors of production and exchange these through international trade for commodities in which they lack factors of production. In the production of commodities in which the country have favourable factor endowment, there is an enjoyment of comparative advantage. Comparative advantage implies that it is less costly to produce commodities in which the country have plentiful supplies of factors of production. By the same reasoning it will be costly for a country to produce goods in which it has a shortage of factors of production. This is why the theory of comparative advantage is sometimes referred to as the least costly principle.
For example, if there are two countries, X and Y, each producing two commodities A and B, assume also that country X has a plentiful supply of capital but a relative shortage of labour while country Y has plentiful supply of labour and a relative shortage of capital. Finally, assume that the production of commodity A requires plentiful utilisation of capital while commodity B requires plentiful utilisation of labour. It is clear that country X can cheaply produce commodity A while it is costly to produce commodity B, due to its labour shortage. On the other hand, country Y can cheaply produce commodity B while it produces commodity A at great cost due to the capital shortage.
The theory of comparative advantage posits that it is not in the interest of both countries to each produce commodities A and B. Country X should devote all its resources to the production of A which it can do cheaply and exchange the surplus for B which it cannot produce cheaply. Country Y on the other hand should specialise in the production of B and exchange the surplus for A. Both countries will be better off specialising in the production of commodities in which they have a comparative advantage (in terms of costs) and exchange these through international trade for commodities in which they have a disadvantage
Applied to developing
countries, the comparative advantage model prescribes that these countries should specialise in the production of commodities in which they enjoy comparative advantage. Through international trade, the earnings from the comparative advantage products can then be used to import goods in which developing countries have a comparative disadvantage. Comparative advantage, therefore, allows developed and developing countries to mutually benefit from international trade. The theory of comparative advantage has been criticised generally and especially when it is applied to developing countries. Firstly, the model is basically a static efficiency allocation hypothesis. It considers factor endowment as given and not changeable by say government policy. It is now fairly recognised that comparative advantages do change and can in fact, be created by conscious government policy.
Comparative advantage or indeed factors of production are not given and therefore developing countries are not condemned to live with a particular comparative advantage until the end of time.
Secondly, the comparative advantage model assumes full employment such that a simultaneous increase in the production of many products is ruled out. The reverse is in fact true in developing countries with wide spread unemployment or underemployment of factors of production. Under conditions of unemployment, it becomes feasible to simultaneously expand production of many products. Thirdly, the comparative advantage model leads to developing countries specializing in a narrow-range product thereby increasing their venerability to international markets. If the argument of comparative advantage is followed to its conclusion, it supports the view that exports are the engine for growth as long as the country exports products in which it enjoys comparative advantage. For development policy practitioners, it is important therefore to understand factors that determine the growth of exports. However, it is generally agreed that the majority of exports from Sub-Saharan Africa have very low-income elasticity. This is primarily due to the nature of raw materials and also to the increasing rate of substitution. Many raw materials like cotton, coffee, sisal etc. are increasingly being substituted for synthetic materials. The grave implication of this trend is that as the world incomes deplete, less and less of the raw materials are being purchased therefore leading to a shrink in export growth. Importantly, there is an urgent need to diversify into the production of exports with high price and income elasticity.
African context
Africa is regarded as a developing continent. The foregoing indicates that the comparative advantage may have negative ramifications in Africa. On 17 February 2023, New Era carried a story in which African leaders met to push for free trade zone. The African leaders, serve for Erithrea, met to push for a free trade zone as a block. This is reminiscent with the current trends because the global market has countries that have more economic power than individual African countries. On 1 March 2023, The Namibian, carried a story in which Namibia and Zambia have agreed to revive the joint trade and investment committee to strengthen bilateral cooperation on trade, trade related and investment matters. ‘The meeting was instrumental in supporting and collectively driving the enhanced trade relations agenda between the two countries.’
Comparative advantage in Africa will be a great opportunity if the markets are fair. However, because of the big-brother mentality on global economic super powers, the need for Africa to be united and work as a block cannot be overemphasised. The initiatives of African trade within African soil among African countries creates a sense of fairness. It is imperative for players in the trade to ensure that comparative advantage does not become another exploitative system and further marginalize and exclude weak economies.
*(Reverend Jan A Scholtz is the former chairperson of the //Kharas Regional Council and former !Nami#nus constituency councillor and is a holder of a Diploma in Theology, B-Theo (SA), a Diploma in Youth Work and Development from the University of Zambia (UNZA), Diploma in Education III (KOK) BA (HED) from UNISA.