Download Chapter 1: Human Misery

Chapter 12:
Trade Theory and
Development Experience
International Trade

International trade is the “engine” of development as it
generates foreign exchange to finance
industrialization.
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Historically, ME has been known as the “cross-roads”
for trade between the East (China, India, Persia, and
Arabia) West (Asia Minor and Europe).
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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:

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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:
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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 importsubstituting 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 importsubstitution 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.