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International Trade: The Untapped Engine Of Growth

In A Contemporary Context, Trade (Outward Trade Or Exports), Is Indisputably At The Centre Of The Development Experience Of Countries Ranging From The United Kingdom, To The United States, To Germany, China And Japan. To A Large Extent, The Degree Of Emphasis On Trade As A Driver Of The Economy Can Be Seen In Micro Differences In The Relative Performances Of The Various Aforementioned Economies

International Trade
Image Source: borgenmagazine | International Trade

International trade has historically been acknowledged as an important engine of growth for countries at different stages of development. Trade contributes to growth by facilitating efficient allocation of resources within countries. It also serves as an important transmitter of growth impetus such as technical knowledge, productivity growth and financial flows from one part of the world to another. All through history, international trade had been at the epicenter in the rise of ancient civilizations such as the Egyptian, Greek, Roman and other civilizations. Today, it is still at the center of the development of modern nation states.

 

There are static and dynamic gains from trade. The static gains are those that have to do with absolute wealth creation while the dynamic gains have to do with the various transitory phases that nations pass through in the process. Perhaps, the most important dynamic gain from trade is technology transfer. The term technology transfer is used here, in its most liberal and permissive sense to include skill transfer and sound management practices. Going back to history, some of us have suspected that the Sahara desert acted as a great handicap to Africa because it prevented a smooth flow of merchandise and technological expertise from the new technological hotbed of Egypt, Mesopotamia and later Rome back into the interior of Africa. Though historians would want to dispute this assertion by reference to the bogus term called the trans-Saharan trade, the fact remains that the beneficial effects of trade could not freely flow along such a hostile and tortuous journey fraught with unspeakable risks to human life and property. That was why the trade route only fostered the development of precious metal trade which being an extractive industry, did not advance intellectual capital and the development of writing. It is on record that the trans-Saharan trade route was one of the most perilous trade routes in history. Even today, marauding hordes of desert robbers still make it most unsafe to travel that route, not to speak of more than three thousand years ago when men were still at the state of nature. That however will be an issue for another discussion.

 

International Trade
Image Source: Wga | International Trade Port

In a contemporary context, trade (outward trade or exports), is indisputably at the centre of the development experience of countries ranging from the United Kingdom, to the United States, to Germany, China and Japan. To a large extent, the degree of emphasis on trade as a driver of the economy can be seen in micro differences in the relative performances of the various aforementioned economies. Trade was largely responsible for the resurgent performance of the economy of the United Kingdom during the latter part of the reign of Margaret Thatcher and later during the reign of the amiable though now vilified Tony Blair. The latter in particular was unabashedly pro-immigration which led to the influx new brains and new thinking especially from the far Eastern countries, all focused on trade. Before then, the UK economy lost all impetus to growth and manufacturing and was derisively referred to as the “sick man of Europe” due to economic stagnation and high unemployment. Also, Germany was a more vibrant economy when its economy was export driven, and the German currency the “Mark” was not so strong, than now, when the German economy has become Euro-centered, with a very strong currency which is an export disincentive. Japan had a similar experience with export led growth impetus, until it succumbed to US pressure in the 1980s to open up its economy and encourage its citizens to pursue recreation and other leisure related activities. Immediately Japan succumbed to US pressure to abandon ultra-export promotion programme, it became subject to trade cycles and has since been locked in stagnation for more than twenty years. China is on the verge of suffering the same fate that Japan suffered as it succumbs to American pressure to abandon a winning formula which is ultra-export promotion, to concentrate on home led growth. No matter the angle from which it is viewed, central to all export led growth programming, are: a weak exchange rate, a strong entrepreneurial class, availability of requisite financing and a knowledgeable bureaucracy.

 

Malaysia, Korea and Indonesia are all actively pursuing an outward oriented production regime that fosters rapid economic growth. Brazil, Mexico and Argentina at some point also reaped the gains from an articulate trade promotion regime though they are all now faltering due to left leaning government controls. The current paralysis in Brazil merits a special analysis which is a discussion for another day. Venezuela on the other hand is currently the victim of very deep self-inflicted wounds, despite sitting on the world’s largest oil reserves, owing to ill-advised inward looking policies of the late Hugo Chavez. The masses applauded Hugo Chavez while he systematically destroyed the production fabrics of the economy in favour of distributive governance. Today, they are on the hook from hunger and the disappearance of basic consumer goods. The same applies to Zimbabwe and just about any other economy that abandon policy that works and instead adopts autarky (self-reliance) as a creed of industrial policy. That is why the current government in Nigeria (2015-2019) is very well advised, NOT to attempt to re-regulate the Nigerian economy the way all critical indicators are currently pointing. Regulation is the very antithesis of trade and trade is good for growth and employment and ultimately higher standard of living.

 

Anthony P. Thirlwall, an International Trade exponent alluded recently to these in a paper he presented at the African Development Bank forum when he quoted Adam Smith, the father of modern economics in the “Wealth of nations” thus: “between whatever places foreign trade is carried on, they, all of them, derive two distinct benefits from it. It carries the surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return something else for which there is a demand. It gives value to their superfluities, by exchanging them for something else, which may satisfy part of their wants and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection. By opening a more extensive market for whatever part of the produce of their labour that may exceed the home consumption, it encourages them to improve its productive powers and to augment its annual produce to the utmost, and thereby to increase the real revenue of wealth and society”

 

It is astonishing that Adam Smith was of such a high pedigree among geniuses, in the sense that he so early on, recognized that the narrowness of the domestic market could be a serious limiting factor to economic growth. That is precisely the nemesis of inward looking industrialization policies, which Nigeria is so adept at pursuing. Inward looking policies concentrate economic effort on the domestic front with its limited purchasing power. It also locks the local market agents into self-delusion, in thinking that they are doing well behind sheltered markets. This is precisely why Nigerian producers keep asking for protection for producing substandard goods, instead of taking on the wide world market. In the global market place, every firm or producer is so atomistic, that it approximates to the conditions necessary for perfect competition. For all intents and purposes firms that play in the world stage are unable to adversely affect the world price, no matter its level of output. That is why they can continue to produce and not worry about market saturation.

 

International Trade
Image Source: OCR-Inc | Many Containers Stacked Up At A New Container Terminal

A look at the development histories of the new industrial economies shows a clear insight into the dynamics of the world consumption patterns. The new industrial economies zeroed in on the production of exportable consumer goods with high income elasticity of demand. This range of items include consumer goods like electronics – iPhone, calculators, television sets, toys; electrical goods, chemicals and automobiles. This means that the higher the income levels, the more of these items are found in the average consumption basket. The further good thing about this range of items is that they are highly labour intensive. It is interesting to note that the list often tends to exclude in a very large sense, traditional exports like agricultural commodities and minerals, which the colonial masters introduced to the colonies purely to feed their home demand. These items of primary commodities, being inferior goods, tend to have low income elasticity of demand. This means that their demand does not tend to grow as income grows with the only notable exception being demand for petroleum products.

 

Conditions precedent:

To be able to produce and enter the international market for consumer goods, you do not only need to be able to produce but also need to be able to produce to the minimum standards of quality to penetrate international borders. That is where you need to enter into alliances and franchise production arrangements with established brands. That too is where you need to use diplomacy to open markets. That in particular is why you need the most favoured nation status by the United States. Once you enter the US market the rest of the world is at your beck and call. Of course, this is not a call for Nigeria to abandon traditional agricultural exports. They, should naturally form the baseline point of least resistance in breaking into the export market, while we speedily build up productive capacity in the area of more income elastic consumer durables and non-durables.

 

Building the capacity:

Building up this capacity in exportables requires first, a determined effort to abandon the fallacious notion that we must first satisfy the domestic market before venturing to export. This means a complete rethink of Nigeria’s industrialization policy. Even that is not so farfetched because it is not rocket science. It simply requires copying and pasting the growth formula of recently successful out-ward oriented economies such as Indonesia or Malaysia or China. It also requires us being able to create supply-side enablers by rejuvenating the development finance institutions (DFIs) such as the Bank of Industry, Bank of Agriculture, NERFUND, NBCI and The Peoples bank. The Obasanjo regime tried to kill the smaller DFIs by overtly concentrating on the creating of the two behemoths called the bank of industry and the Bank of Agriculture. Unfortunately, that was a wrong policy. The more DFIs, the better their reach to the producers of various sizes and catagories. They DFIs should be reorganized for efficiency and then infused with foreign lines of credit of say $200-300 million each, to lend solely for importation of machinery along the predetermined “preferred” exportable lines of production which should include:

  • Produce more tradables such as footwear, garmenting, leather goods and light machinery. These four above made Italy the seventh largest world economy. That was before the introduction of Euro which is a strong currency and very trade unfriendly. Presently Greece and Spain with the notable exception of Italy have all stopped producing their traditional goods of garmenting, footwear and even wines and have now become tourism economies because the strength of the Euro makes them not to be able to compete.
  • We should add part of the Asian strategy by encouraging the production of consumer durables such as electronics, electrical goods
  • Also we need to add Industrial Chemicals such as alcohols, acids and petrochemicals which as intermediate goods are the bedrock of industrialization.
  • Finally, we need to add the production of electric motors of all sizes and dimensions, which is the foundation of all industrialization.

 

I must quickly add here, that any attempt to re-awaken the numerous textile factories in the country without first re-directing their production psyche to produce exportables such as denims (jeans), office shirt materials and “T” shirts and other modern millennial forms of garmenting and adornments, will only lead them to once again produce solely for the domestic market which has very limited financial absorptive capacity. The end result will be another round of bankruptcy and another round of expensive bailouts from taxpayer money. Producing tribal fabric for a local market with small absorptive capacity was surely their number one limiting factor and why they have all failed despite bouts of billion naira bailouts, which went down the drains. This is so, because they were all created under import substitution regime.

Lufthansa Cargo
Image Source: Nieuwsbladtransport Cargo

Copycat:

International trade theory has a sub-theory called the “innovator-immitator paradigm”. In summary, it simply states that the innovator must keep innovating or else it will lose market share to the imitator. Thus, the US being the most innovative economy in the world, must keep innovating because that is where it has comparative advantage or else it will soon lose market share to aggressive imitators in South East Asia. It is the stark fact of life and even the US recognizes it. That is why the US government refused to subscribe to protectionist pressure in the run-up to the last election even though the economic picture was not so good and it made cheap political capital to shout against outsourcing. Similarly, China for example refuses to subscribe to the international copyright requirement, because it will stifle its copycat technological advancement especially in software development and heavy industries. The same applies to India which is perhaps the headquarters of copycats in the world.

 

Back home in Nigeria, we were in a hurry to sign up for the international copyright regulations. Having signed up we are now bound by its dictates to chase and incarcerate copycats or imitators. Unfortunately, without imitators, there can be no technological progress especially in this age of information technology. The Nigerian police and the Nigerian Copyright Commission goes prowling at the hapless trader selling CDs, in the name of copyright violation. I am still surprised that the “experts” at the Federal Ministry of Industry and the Federal Ministry of Commerce did not read the national interest into the draft agreements as India, China and Pakistan did, before telling the government to sign the international protocols? That was exactly what we did with the nuclear non-proliferation treaty in the 1970s which now hamstrings us from independent research into nuclear fission technology. We were in a hurry to sign up the (Nuclear Nonproliferation Treaty (NNPT) whereas countries like India, Israel and South Africa, refused to sign up because it was in their long term strategic interest. These notwithstanding, when there is a will to industrialize, there is surely a way round these hamstrings.

 

These are some of the reasons why I am so convinced that our biggest problem is the sheer incompetence of the extra large bureaucracy at all levels but especially at the federal government level. That is also why I blame former President Olusegun Obasanjo for nearly eight years of non-performance with particular regard to industrialization strategy, even though he did well with the notable exception of the foreign reserve buildup and the foreign debt deal. He had a golden opportunity to put his imprimatur on an outward oriented industrialization programme but he chose not to. His hand-picked successors on the other hand, did not have the strong will that Obasanjo possessed and therefore did nothing too. A lot was expected in the area of export expansion through carefully planned industrialization programme to mop up the huge army of unemployed but unfortunately nothing was forthcoming. A lot too was expected in the area of diversification and restructuring of the economy but little was forthcoming. For all these shortcomings I would rather lay the blame at the feet of an incompetent leadership and bureaucracy

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Osa Felix Asemota holds a degree in economics and an MBA both from the Obafemi Awolowo University Ife. He trained at the International Monetary Fund Institute in 1991 as a Balance of payments specialist. He is also an alumnus of Euromoney Training and the National Institute of Rural Indistrialization in Hyderabad, India. He had extensive work experience as an economist at the Central Bank of Nigeria (CBN) including covering the Oil and Gas sector, Money and Banking Division, the stock market doing stock market indices, and finally an extensive stint in the Balance of Payments section in the External Sector Division. He went on secondment to the National Economic Reconstruction Fund where he distinguished himself managing the reporting system to the African Development Bank on the utilization of the 100 Units of Account (US$144.0 million) line of credit and more.....
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