Resources abound in africa but how to manage them well to take advantage of absolute and comparatives cost ADVANTAGES is the problem.
Introduction
Africa is endowed with a rich diversity of environmental resources. Some of these are geographical, terrestrial, aquatic and country-specific resources while others transcend national boundaries of two or more countries within the region or continent. Since World War II, Africans have embarked on the massive utilisation of their environmental resources for improving their quality of life and that of their global business partners (Frobel et al. 1988; French 2000). In spite of the abundance of these resources, local communities, predominantly smallholder farmers and pastoralists, whose production systems are based on Traditional Environmental Knowledge Systems (TEKS), are now unable to meet their basic needs, sustain environmental productivity and even have an equitable share of the global wealth (ADALCO 1990). The predominance of international trade over local needs fostered, among other things, specialisation in spatial production and exchange of goods and services on a global scale, what evolved today as theories of Absolute and Comparative Advantage. Consequently, it is evident that in some geographical areas, natural resources are still sustainably utilised, while in others there is evidence of environmental degradation or inefficient utiliatization (Stebbing 1935; Timberlake 1985; Blaikie 1989; Juma and Ford 1992; Rugumamu 1993; Boyce 2002).
Africa is resource endowed: Untapped; Underutilized; Disregarded; Scourged! Where lies the Problem? Where lies the solution?
Resources abound in Africa but how to manage them to take advantage of absolute and comparative advantages is the problem, that all! Perhaps this suggests that the theory of absolute and comparative advantage holds the solution to the efficient and effective management of Africa’s resources. Before I give the evidence to that effect, let me proceed with an overview of absolute and comparative advantage theories.
The Theory of Comparative and Absolute Cost Advantages are perhaps some of the most important concepts in international trade theory. The Theory of Absolute Cost Advantage is a theory of international trade propounded Adam Smith in 1976. He was of the view that productive efficiency differed among different countries because of diversity in natural and acquired resources possessed by them. Absolute Cost Advantage exists when one country is more efficient at producing a certain good than another or can produce using fewer resources compared to other countries. The theory explains that a country, which has absolute cost advantage in the production of a product on the account of greater efficiency, should specialize in its production and export. That is to say that, given Uganda and Zimbabwe as the only two countries in the world producing only two goods in the world, Cotton and Gold. Given also that their production is as follows with 2,000 hours of labour each:
Table 1 GOODS | UGANDA | ZIMBABWE | | (hrs/Unit) | (hrs/Unit) | COTTON | 50 | 350 | GOLD | 400 | 80 |
If each of them devotes half of its labour resource to each good, then the production in each country would be as follows:
Table 2 Uganda | 1000hrs./(50 hrs./bag) = 20 bags of cotton | 1000hrs./(400 hrs./carat) = 2.5 carats of gold | Zimbabwe | 1000hrs./(350 hrs./bag) = 2.9 bags of cotton | 1000hrs./(80 hrs./carat) = 12.5 carats of gold | Total World Production 22.9 bags of cotton and 15 carats of gold |
But if each country is enlightened by Absolute Cost Advantage and goes by it, then clearly, they should produce what they are more efficient in and import what they are less efficient in. This is because, if they specialize in their area of efficacy, total world out will increase and thus, make available more to export and import are cheaper/lower prices.
Therefore, from the Table 1 above Uganda has an absolute advantage (more efficient in cotton by using less labour hour per bag of cotton – 50hrs/bag) and Zimbabwe has an absolute advantage (more efficient in Gold by using less labour hour per carat of gold – 80hrs/carat). That is why in Table 2 Uganda produces more bags of cotton (20 bags) than Zimbabwe (2.9 bags) and Zimbabwe too produces more carats of gold (12.5 carats) than Uganda (2.5 carats), each using the same hours of labour in all cases.
If both countries now decide to specialize, where they are most efficient, and therefore use all their 2000 hours of labour each for that, then production will be:
Table 3 Uganda (Only cotton with all 2000 hour of labour) | 2000hrs./(50 hrs./bag) = 40 bags of cotton | Zimbabwe (Only gold with all 2000 hour of labour) | 2000hrs./(80 hrs./carat) = 25 carats of gold | Total World Production 40 bags of cotton and 25 carats of gold |
Clearly, world production has increased (as against 22.9 bags of cotton and15 carats of gold in Table 2 above) and each country can be made better off if import and export.
More so, Theory of Comparative Cost Advantage, which was propounded by David Ricardo, explains that a country should specialize in the production and export of a commodity in which it possesses greatest relative advantage. A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. The opportunity cost of a good is the quantity of other goods sacrificed to make another unit of that good. Some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing anything, relative to their trading partners. The theory of comparative costs argues that, put simply, it is better for a country that is inefficient at producing a good or service to specialize in the production of that good it is least inefficient at, compared with producing other goods. Also, the country who is efficient in producing both should still specialize in the production of the good where it is
The following is a variation on the example advanced by Ricardo (Reference: David Ricardo, The Principles of Political Economy and Taxation, London: J. M. Dent & Sons, Ltd., date not listed, p. 82.)
Suppose South Africa and Ghana each have 6,000 hours of labour available, and the production possibilities are as follows: Goods | Togo | Ghana | | (hrs./unit) | (hrs./unit) | Cloth | 100 | 90 | Wine | 120 | 80 |
Notice that Botswana has an absolute advantage in both commodities. First, suppose, that the countries (arbitrarily) allocate half of their 6,000 hours of labour to each good. Then we have the following: Togo | 3000 hrs./(100 hrs./cloth) = 30 units of cloth | 3000 hrs./(120 hrs./wine) = 25 units of wine | Ghana | 3000 hrs./(90 hrs./cloth) = 33 1/3 units of cloth | 3000 hrs./(80 hrs./wine) = 37 1/2 units of wine |
Thus, world production is 63 1/3 units of cloth and 62 1/2 units of wine.
Clearly, Ghana is more efficient than Togo in the production of both cloth and wine. Note, however, that Ghana's greater efficiency is not the same in both commodities. Rudely put, one Togolese labourer is worth 90/100 (0.9) of a Ghanaian labourer in the production of cloth, and 80/120 (0.66) of a Ghanaian labourer in the production of wine.
Thus, although Togolese workers are less efficient than Ghanaian workers in the production of both goods, the Togolese workers are less worse in the production of cloth than they are in the production of wine. (Put differently, the degree of efficiency of the Ghanaian workers is greater in the production of wine than in the production of cloth.) Thus, Togo has a comparative advantage in the production of cloth, and Ghana has a comparative (and absolute) advantage in the production of wine. This is summarized as follows:
Now, suppose that the goal is to increase total world production (i.e., cloth and wine). If Togo put all of its labour into the production of cloth, then we would have 6000 hrs./(100 hrs./cloth) = 60 units of cloth from Togo. In order to maintain the previous level of world production of cloth (i.e., 63 1/3 units of cloth), it is necessary for Ghana to produce at least 3 1/3 units. Thus, Ghana must allocate at least 300 hours of labour (300 = 3 1/3 times 90) to the production of cloth. If Ghana allocates the remaining 2700 hours of labour to the production of wine, then we have 5700 hrs./(80 hrs./wine) = 71 1/4 units of wine from Ghana.
Therefore, the world total of cloth and wine is 63 1/3 units of cloth, as we had before, and 71 1/4 units of wine, which is an increase of 8 ¾ units of wine. Clearly, if we allocate slightly more than 300 hours of labour in Ghana to the production of cloth and the remaining hours to the production of wine, then we can increase the total world production of both cloth and wine by having Togo produce to its comparative advantage.
Why Absolute and Comparative Cost Advantages Matter to Africa Today!
Other nations where labour (and other resources) is much cheaper have such a strong comparative advantage over the high-wage country. Comparative advantage not only affects the production decisions of trading nations, but it also affects the prices of the goods involved. Today, Absolute and Comparative Cost Advantages are of great importance and concern to Africa, in that it is has a number of merits, advantages, opportunities and important bearing that Africa needs if we are to develop socio-economically. If Africa is to manage its resources well then these are the advantages (as explained below) we can take hold of to benefit from Absolute and Comparative Cost Advantages. The following paragraphs explain why Absolute and Comparative Cost Advantages Matter to Africa Today.
Everyone matters and has a part to play
Ricardo’s theory of comparative advantage creates hope for technologically backward African countries by implying that they can be a part of world trading system even though their labour productivity in every good may be lower than that in the developed countries. In the Ricardian model, trade is a win-win situation, as workers in all trading countries are able to consume more of all goods. The theory demonstrates that international trade is possible even when a country is able to produce all goods at cheaper cost, provided the cost advantage is comparatively more in some goods than in the others. This happens because though the lower-cost country suffers by importing some goods from the higher-cost country, it is more than compensated by concentrating its resources on the production of those goods in which it has greater cost advantage.
Extended applications
The Ricardian model of two goods and two countries can easily be extended to cover additional goods and countries in Africa and make it more realistic. In such an expanded model, it is possible to show that an African country may be exporting and importing several goods while there may also be some goods, which are not traded at all.
Possibility to refine/restructure to reality
It is also possible to restructure Ricardian theory by incorporating costs other than labour and by converting them in money costs. In other words, it is possible to refine Ricardian theory, which in its initial form, was far removed from reality.
Practically important and acceptable
Prof. Gottfried Haberler, Frank William Taussig and others attempted to prove the practical importance and acceptability of comparative cost theory.
They argued that the two commodities two countries model could be extended to all the commodities and all the countries. Each country then will specialize in the production of those commodities in which it enjoys comparative advantage and export them to others and import the required goods from others where they are available at a lower price than at home.
Also, the theory which was explained in terms of labour can also be expressed in terms of money as it is possible to express the total cost in terms of money. Specialisation would take place on the basis of comparative advantage in terms of money cost.
They further proved practicality of these theories adding that the assumption of constant returns to scale and no change in technology can be relaxed. With changes in technology and production being subject to laws of returns, specialisation will still take place based on cost advantage under increasing and decreasing cost.
Assumptions of "no transport cost" makes the comparative advantage theory, it is argued, very unrealistic. It is pointed out that after adding transport cost to the cost of production, each country will produce those goods in which it will have cost advantage.
Unchanged cost
It is suggested that cost would not undergo a change as countries operate with assumptions like full employment, perfect competition, static nature of the economy, free trade and many other restrictive assumptions.
Broadened perspectives
There is a general attempt to “broaden the perspectives” of those who are involved in making public decisions and change. However, this is different from “international” or “global” effects that might affect public management.
Regional dimension and Integration
There is now a Regional dimension to much of what is happening, and increasingly we are comparing, for instance, United States of America and the Africa, which is even more confusing because one is a state, and one is not. It therefore permits those involved in policy to understand better, through comparison, the underlying defining cultural/historic determinants contributing to shaping policy and the delivery of policy.
To see ourselves from the outside
The comparative advantage enables us to see ourselves as it were, from the outside. When we see how a country does something, it raises two questions: “Why don’t we do that? Why do we do what we do?”
Why Africa is unable to take advantage of Absolute and Comparative Cost Advantages to manage resources.
Several of the world's smartest economists, analysts, intellectuals and scholars have sought answers as to the reasons for Africa's resource mismanagement and misallocation leading the prevailing poverty. This piece is not in any way exhaustive of the problems of Africa in taking advantage of comparative and absolute cost advantages. However, it addresses the key reasons why resources abound in Africa but how to manage them in other to take advantage of comparative and absolute cost advantages is a problem.
Less Value for Resources
With the exception of bauxite and petroleum, our minerals are not as widely used in industry (or in the same considerable volumes) as a number other minerals, such as tin, copper, nickel, zinc, iron, coal, and lead, that Africa does not produce in sufficient quantities. Indeed, of the top 5 metallic minerals which constitute 62 percent of the total value of global production, Africa is only a significant producer of one of them, Gold! Africa has 8 percent of the world’s copper, 4 percent of aluminium, 3 percent of its iron ore, 2 percent of lead, less than 1 percent of zinc, and ‘virtually’ no tin or nickel. To put these figures into perspective, recall that Africa has about 14.5 percent of the world’s population.
The case of bauxite (which is processed into aluminium) is interesting. Guinea, which ranks fifth worldwide, is the only significant producer among the world’s top 15 countries, producing 18 million tons per annum, compared to Australia’s 70 million.
Guinea does hold the world’s largest estimated reserves of bauxite (7.2 billion tons), with Australia closely following (6.2 billion tons). This fact brings the other filter into play: reserves or untapped mineral deposits and their distribution across Africa (“Africa’s Fabulous Mineral Wealth that isn’t ALL there – Bright Simons”).
Resources are undiscovered or barely harnessed
Much of Africa’s natural resources are undiscovered or barely harnessed. Having a low human density for a long period of time, Africa has been colonized by more dynamic groups, exploiting African resources. Some economists have talked about the 'scourge of raw materials', large quantities of rare raw materials putting Africa under heavy pressures and tensions, leading to wars and slow development. Despite these abundances of natural resources, claims suggest that many Western nations like the United States, Canada, France and the United Kingdom, as well as emerging economic powerhouses like China, often exploit Africa's natural resources today, causing most of the value and money from the natural resources to go to the West rather than Africa, further causing the poverty in Africa.
Insufficient education
Insufficient education has been a major contributing factor to the problems of Africa. Education changes everything. The majority of African human resources today do not have access to sound education, which is required to open up their minds to knowledge and skills needed to equip them to discover ideas and opportunities that will create jobs and put people in employment. African governments still have a lot to do in terms of education. Education in most African countries is still beyond the reach of many because of the costs involved and African governments do little or nothing to support parents, guardians and sponsors in sending children to school. The majority of African governments have very little initiative to ensure easy accessibility to education. Without this education, the African people will never have the wherewithal to developing the continent, or be able to identify and exploit the numerous materials on our African soils and seas. It is for insufficient enlightenment that Western countries come to us, give us peanuts in the form of foreign aid, and then exploit our resources for their own benefit. We do not have the know-how to exploit our own resources and such. We are poor because these foreign nations take us for fools in international trade, because we are not informed enough to negotiate properly. Because of this we are finding it difficult to participate in specialization and exporting through the comparative and absolute cost advantages theories.
Tribal-ethnic wars and clashes
With the incessant tribal-ethnic wars and clashes that has become so much identified with Africa, we destroy the abundant resources and the little development we have achieved by burning down each other's houses, land, exploding resource reserves and other properties that would have brought some level of economic prosperity to our continent or even traded with for other resources in international trade. We also kill intelligent minds that might have changed the economy of Africa.
Corruption
The corruption of our African leaders cannot be overlooked as well. When international donors throw aid our way to develop our African economy, our leaders, instead of using the monies for the purposes for which they were given, rather choose to ignore the plight of the people they are supposed to serve, and instead, indulge in materialistic tendencies. Our leaders have been known to embezzle funds, buy castles round the world, and open up Swiss bank accounts while the majority of the people languish in poverty. How is Africa supposed to manage her resources to take advantage of comparative and absolute cost theories when our leaders keep acting like Africa's monies are a part of their private investment fund?
Lack of indigenous support
Africans do not support their own. When we have young, intelligent people who come up with breakthrough ideas in business, technology or science, how often do governments or financial institutions support them? One of the things that have kept America and other Western countries still leading the world is their ability and willingness to support people with exceptional ideas that would create employment opportunities for thousands of people and give them domination over international trade. Access to financing from government or financial institutions to develop big ideas is difficult in this part of the world. How are we supposed to succeed if we cannot support our own?
Trade unsustainability
This problem divides into two parts: unsustainable imports and exports. When Africa, does not cover the value of its imports with the value of its exports, it must make up the difference by either selling assets or assuming debt. If either is happening, Africa is either gradually being sold off to foreigners or gradually sinking into debt to them and this situation is unsustainable thereby preventing Africa from taking advantage of absolute and Comparative Cost theories. We have only so many existing assets we can sell off but can only afford to service so much debt. So if our deficit in trade should go on year after year, we will eventually be curtailed—which will mean reducing our consumption one day.
Now considering unsustainable exports, this means that if we adopt absolute and Comparative Cost theories and export non-renewable natural resources, we will tend to maximize our short-term living standard at the expense of long-term prosperity. So natural
Industrial immobility of Factors of production
The theory of comparative advantage is about reshuffling factors of production from less valuable to uses that are more valuable. However, this assumes that the factors of production used to produce one product can switch to producing another. If they can’t, then imports won’t push a nation’s economy into industries better suited to its comparative advantage. Imports will just kill off its existing industries and leave nothing in their place.
This problem actually applies to all factors of production in Africa. We usually hear of it with regard to mineral deposits, natural resource reserves and labour. When workers can’t move between industries—usually because they don’t have the right skills or don’t live in the right place—shifts in African’s economy’s comparative advantage won’t move them into an industry with lower opportunity costs, but into unemployment. Sometimes the difficulty of reallocating workers shows up as outright unemployment. The same way each African country has a little bit of every resource and the immobility of them makes it difficult for us to move these resources to other sectors where we are most efficient. Because of this we are unable to take advantage of absolute and comparative cost advantages.
(Exchange) Trade raises income inequality
When the theory of comparative advantage promises gains from free trade, these gains are only promised to the economy as a whole, not to any particular individuals or groups thereof. So it is entirely possible that even if Africa as a whole gets bigger thanks to freer trade, many (or even most) of the people in it may lose income. This is not a trivial problem: it has been estimated that involving in free export and import trade reshuffles five dollars of income between different groups of people domestically for every one dollar of net gain it brings to the economy as a whole.
Specializing in our area of efficiency in other to trade for instance squeezes the wages of the ordinary African largely because it expands the world’s effective supply of labour, which can move from rice farm to factory overnight, faster than its supply of capital, which takes
Global Capital Immobility
Despite its wide implications, the theory of comparative advantage is, at bottom, a very narrow theory. It is only about the best uses to which Africans can put their factors of production. More precisely, it tells us to let the free market direct the flow of resources. Because of this, market forces drive all our factors to their best uses in booming economies. If that happens, all bets are off about driving these factors to their most productive use in our economy. Their most productive use may well be in another country, and if they are internationally mobile, then free trade will cause them to migrate there. This will benefit the world economy as a whole, and the nation they migrate to, but it will not necessarily benefit us.
This problem actually applies to all factors of production but because land and other fixed resources can’t migrate, labour is legally constrained in migrating, and people usually don’t try to stop technology or raw materials from migrating, the crux of the problem is capital. Absolute advantage contains no guarantees whatsoever about the results of Capital mobility being good for both trading partners. The win-win guarantee is purely an effect of the world economy being yoked to comparative advantage but dies with it.
Conclusion
If Africa is ever going to take its rightful place among the superpowers and manage its resources by taking advantage of absolute and comparative cost theories, then it must first and foremost educate and invest in its people. We must gain knowledge enough so as to be able to deal intelligently with our western counterparts in trade and commerce. Africa must believe in the strength and power of its own ideas and support entrepreneurial and inventive minds that have the potential to create new ventures that would open up more job opportunities in areas where we are most efficient. Africans must also quit destroying themselves along tribal, ethnic and religious lines. We must also nurture a new set of leaders- leaders of intelligence and character who will manage our resources well, and work towards maximum utilization, rather than get obsessed in their pursuit of financial security.
Also, given that Africa is unable to manage its resources well by taking advantage of the theory of comparative and absolute cost advantages because of Lack of indigenous support, Trade unsustainability, immobile Factors of production between industries, Trade-income inequality and Capital not internationally mobile, how much validity do they (the theories) really have? Asking what industries we have comparative advantage in helps illuminate what kind of economy we have and insofar as the theory’s assumptions do hold to some extent, some of the time, it can give us some valid policy recommendations.
References * Ballentine K & Sherman J. (2003), The Political Economy of Armed Conflict: Beyond Greed and Grievance, New York: IPA * Shackleton, S.E. and Campbell, B. M. (2001), Devolution in natural resource management: Institutional arrangements and power shifts. A synthesis of case studies from southern Africa. SADC Wildlife Sector Natural Resource Management Programme, Lilongwe & WWF (Southern Africa), Harare. * Anderson, D. and Grove, R. eds. (1989), Conservation in Africa: People, Policies and Practice. Cambridge University Press, Cambridge. * Africa’s Fabulous Mineral Wealth that isn’t ALL there – By Bright Simons
Source: africanarguemnts.org * Kannapiran, C.A. & Fleming, E.M. (1999). Competitiveness and comparative advantage of tree crop smallholdings in Papua New Guinea. Working Paper Series in Agricultural and Resource Economics No. 99–10. Armidale, Australia, University of New England (also available atwww.une.edu.au/economics/publications)
