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Comment & analysis

From comparative to competitive advantage

Chambi Chachage

2010-04-22, Issue 478

http://pambazuka.org/en/category/comment/63876

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Economist David Ricardo's theory of 'comparative advantage', despite being highly dubious, continues to exert a high degree of influence on Tanzanian policymakers, writes Chambi Chachage.

The Nyerere Intellectual Festival Week has come to a close. It has proved to be what it promised to be, a moment of reflections on the Arusha Declaration in the time of a crisis of capitalism.

Just before our economists wrapped up the festival with deliberations on a discipline that has primarily been responsible for dragging Tanzania down the road to neoliberalism, an interesting exposé occurred. Utsa Patnaik exposed the fallacy of David Ricardo's theory of 'comparative advantage'. Ironically, this theory continues to influence economic planners and policymakers.

This author of 'The Republic of Hunger' indeed gave us food for thought. In her lecture on 'The agrarian question in the neoliberal era', she observes how this 'theoretical rationale is used to urge developing countries to "open up" their agriculture to free trade'. Yet we hardly question it.

Said she: 'This famous argument where Ricardo took the two countries as England and Portugal, and the two commodities as cloth and wine, said that even if the second country, Portugal could produce both goods more cheaply than the first country, as long as the relative cost of production was different – namely one country say Britain by producing one unit less of wine could produce more of cloth, than the other country Portugal could, then it would make economic sense for Britain to specialize in cloth and Portugal in wine.' But do they produce both? No!

In fact at the time when the theory was being developed in the wake of mercantile capitalism, it was Portugal that produced both goods. Britain produced cloth. But it could not produce wine commercially. Why? As Utsa reminds us, it is because it cannot grow grapes in Britain. No wonder, like many imperial countries of the time, it colonised countries with primary resources.

Tellingly, as Utsa observes, 'modern textbooks try to avoid the problem by altering Ricardo's own example from cloth and wine to cloth and food'. 'But', as she notes, 'altering the example per se does not do away with the fallacy in the argument, for it is a rule and not an exception that countries trade in goods they are incapable of producing.' Yes, why buy what you already have?

She thus affirms that 'developing countries are poor today precisely because they were and are much richer in primary resources than are developed countries which continue to depend to this day, more and more heavily for their food, beverages, fibres and energy on these developing countries.' In other words, we are poor because we are rich. They are rich because they are poor.

However, as she puts it, the theory keeps on insisting that for 'unchanged total output of one good, the output of the other good would increase through such specialization, and by trading both countries could then consume more of one good for no lower consumption of the other good – thus both countries would benefit.' We only have to turn to our Poverty and Human Development Reports (PHDRs) to observe this persistent influence that Utsa studied elsewhere.

PHDR 2007 confidently asserts that experience 'has proven that a sound choice of growth drivers is based on a comprehensive analysis of a country's comparative and competitive advantages'. It then categorically concludes that 'for most poor countries, including Tanzania, comparative advantages will, at least initially, determine the choice of appropriate drivers.'

This, it claims, 'is because competitive advantages – developed over time – depend on an advanced level of technical and managerial expertise, which is currently lacking in most sectors'. What more rationale do we need for recolonisation through foreign direct investments and free trade? No wonder a first 'comparative advantage' PHDR 2007 lists is agricultural land!

Probably because the ongoing global crisis of neoliberalism has stripped mainstream economics of its hegemonic garb of legitimacy, the recently launched PHDR 2009 is relatively less explicit. In its chapter on 'The role of the state in a developing market economy', it concludes that 'state ownership and implementation of specific activities will depend upon the comparative advantage of the state in relation to the other development actors' and not on 'direct ownership'.

Lest we think this has nothing to do with Ricardo's theory, let's be reminded that the other development actors mentioned in PHDR 2009 include 'small-scale producers' and 'private investors'. As we all know, now the latter are virtually synonymous to foreign investors who are increasingly displacing small-scale producers. As a matter of fact they are doing so in the areas of 'geographical' 'comparative advantages' listed in PHDR 2007 – land, mining and tourism.

It is not by accident then that our economists, who write these government reports which inform the National Strategy for Growth and Reduction of Poverty (MKUKUTA), talk that way. They have been brought up on the bosom of Ricardo. It is indeed 'most unfortunate that an incorrect theory has been taught for two centuries and continues to be taught uncritically to this day'.

This is why it is very important to take Utsa's critique of the influence of Ricardo's fallacious theory in policymaking very seriously. After all, it was another equally influential economist, John Maynard Keynes, who confessed that 'practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist'.

Let us face the fact of life that we have been enslaved by the defunct economics of comparative advantage. That way we can free ourselves. For what we really have is a competitive advantage.

BROUGHT TO YOU BY PAMBAZUKA NEWS

* Chambi Chachage is co-editor of 'Africa's Liberation: the Legacy of Nyerere', forthcoming from Pambazuka Press.
* Chambi Chachage's blog can be found at udadisi.blogspot.com.
* Please send comments to editor@pambazuka.org or comment online at Pambazuka News.


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