Capital Ethiopia Newspaper

About exporting

Export is a business activity, which is getting more and more attention amongst the Ethiopian business community as well as the donor community, for as far as they support the further development of the private sector in Ethiopia. Looking at trends in development cooperation, support to the private sector is now widely accepted as a strategic intervention to join the struggle against poverty and to enhance economic development. Access to markets, domestic as well as international, is crucial and to gain such access the producer must have some sort of competitive advantage over others who operate in the same market. After all, this is the basis for trade. An interesting question is then why particular countries seem to have a competitive advantage in some goods and services and not in others. And why do countries have different advantages and disadvantages at all?
Looking at global developments over the past 20 years or so, we see that the volume of trade has risen dramatically and numerous changes have occurred in the patterns of trade. Countries that once exported certain goods have become net importers of the same. And countries that were known to produce inexpensive handmade products are now competing globally in high tech products. What causes these changes? Why do countries choose to specialize in only certain goods and not in others? What determines the competitive advantages of some countries over others?
First of all we need to realize that to be able to compete in the export markets, we should be efficient in our production and the quality of our products should be high. We should be specialists in the products we make. We need to create our competitive advantage, which may be classified in absolute advantage and comparative advantage.  When we are specialized in producing certain goods or services, than we are able to upscale production and sell to other countries these goods that utilize our special skills and resources most. This concept of selling what you are best at producing is called absolute advantage. I was watching a short television programme this week on a company in China, making shuttle cocks for badminton, which is becoming more and more popular as a sport. The company has really specialized in the business, had its workers and factory facilities fully geared towards efficient quality production. With the relative cheap labour and feathers, that shuttle cocks are made of, abundantly available, the company has created an absolute advantage in this market.
At this moment I cannot think of any product or service, that Ethiopia has an absolute advantage in over other countries. Does this than mean that we stand no chance and that all our producers for export will soon be out of business? Not necessarily. The theory of comparative advantage maintains that it is still possible to produce profitably what one is best at even if someone else is better. Let us examine the concepts of absolute and comparative advantage a bit closer.
Productivity is one of the factors which determine international trade. Let us take for example Ethiopia and Germany and suppose that the average Ethiopian worker can produce 10 cars and the average German worker can produce 20 cars per year. Over the same period, the Ethiopian worker can produce 4 tons of green beans in one year and the German worker 2 tons. In this example German workers can produce more cars absolutely than the Ethiopians, while the Ethiopian workers can produce more green beans absolutely than the Germans. Ethiopia is the obvious low cost producer of green beans and should export to Germany. Similarly, Germany is the low cost producer of cars and should export them to Ethiopia.
However, absolute advantage in terms of productivity is not necessary for trade to occur. Let us assume now that the average Ethiopian worker can produce 10 cars or 5 tons of green beans, compared to the average German worker who can produce either 30 cars or 10 tons of green beans. Germany has now an absolute advantage in both products and it seems that Ethiopia will benefit from importing them both because it can buy them cheaper from Germany than Ethiopia can make for itself. However, both countries could benefit here from trade if we look at the situation from a comparative advantage point of view. Comparative advantage does not measure production costs in monetary terms but compares the production costs of one product with another. It focuses on trade offs. When Germany chooses to produce cars, it cannot use the same resources to produce green beans as well. So the German worker who produces 30 cars will not be able to grow 10 tons of green beans. In other words each ton of green beans costs 3 cars. In Ethiopia however 1 ton of green beans would cost only 2 cars. So now we see that although Ethiopia has an absolute disadvantage in both goods, it still has a comparative advantage in green beans. It is cheaper to produce green beans in Ethiopia than in Germany. And while Germany has an absolute advantage in both goods, it has a comparative advantage only in cars. Now it becomes possible to choose a trade ratio, which will benefit both countries. Choosing any ratio between the two domestic ratios will be mutually advantageous. In our example, the German domestic trade ratio between cars and green beans is 3:1. In Ethiopia this ratio is 2:1. Suppose we choose a ratio of 2.5:1, than Germany will benefit because it will earn more for one car than at home. And since Ethiopia will be exporting green beans, it gains because it will sell it for the equivalent of 2.5 cars in stead of only 2.   
We can conclude then that relative rather than absolute differences in productivity can determine the basis for international trade and that the concept of comparative advantage provides a tool for negotiating mutually advantageous trade. In other words, it is important to know what Ethiopia’s comparative advantages are and to use them in trade negotiations with other markets. We need to make intensive use of those factors that Ethiopia has in abundance. These should be exported, while we import goods for which Ethiopia has a comparative disadvantage. So, with its low labour costs, Ethiopia can export labour intensive products. Combining this with the climate, geophysical conditions and the relative distance to Europe, it is no surprise that we see an increase in the export of horticultural products and flowers. But there could be opportunities in other sectors as well to capitalize on Ethiopia’s comparative advantages over other countries, provided that quality standards are met as well.