Comparative advantage aka Why the Mid-East is so messed up

an in-depth look at comparative advantage can be found here, but the basics are this: two countries should trade goods (rather than both produce them) when one actor has a relative advantage over the other. the classic example is you have a roommate and he types really fast, but irons clothes really slow. You are the opposite; you can iron like a madman, but typing, not so much. well, if you both do what you are best at then more will get done in less time.

this is one reason why so many countries around the world produce not much more than the natural resources they possess while depending on the western world to refine, market and distribute the finished goods. in this example, we are looking at the mid-east, which of course sits on some of the largest oil reserves on the planet. they enjoy comparative advantage over others in that they both possess and have the necessary knowledge to acquire the oil. what they do not have is the technology and distribution systems. so, they continue to depend on selling crude oil for revenue while we add value to the crude and depend on sales of the finished good.

all is well then right? wrong. the problem here is two-fold:

1. raw material goods are hardly worth shit. everything from diamonds to zinc follows this pattern. peru sells a shit load of zinc every year, but the price of raw zinc is terrible. the people making the real money in the zinc market are the refiners and manufacturers. what comes out of the ground may be worth pennies, but as soon as it hits the boat in which it will travel to the refinery, its value has doubled, if not tripled. (see Kwame Nkrumah’s book on neo-colonialism for details.) this also means that if the country needs finished goods made from the very raw material taken from their ground they will be paying the market price for that good, with no price break that takes into consideration where the raw ore originated.

2. the western world understands this dynamic all too well and actively prevents the distribution of the knowledge and technology needed to refine raw goods. think about it, if Debeers (the diamond company) knows that refined diamonds are valuable, do you think they are going to sell the technology to either of the Congonese republics? hell no. they will continue to pay the natives pennies for those diamonds, transport them to europe and sell them at a premium on rodeo drive in los angeles.

 

One Response to “Comparative advantage aka Why the Mid-East is so messed up”

  1. J-Ro Says:

    You are right on here. Globalization, and free trade in general, work best when countries are more or less equals. There can be comparitive advantages between the two, but they should have equal market sizes and value of goods to offer. You get in trouble when you start trading between unequals…it gets abusive really quickly. Case in point right here, with natural resources. The Western world loves to buy the 3rd world’s resources, because we can make something with those raw materials and turn right around to sell our goods back, at inflated prices. Hence, the resource curse.

Leave a Reply

You must be logged in to post a comment.