Essay on the Doctrine of Comparative Costs and Underdeveloped Countries of International Trade
For many obvious reasons the doctrine of comparative costs is unable to conform to the conditions of foreign trade of an underdeveloped country. They are:
1. The Ricardian principle of “comparative costs” favours free trade for efficient production. It is simply an extension of the theory of laissez-faire to international exchange of commodities,
The theory implies that trade between different countries should not be subjected to any artificial restrictions in the interest of complementary benefits resulting from international specialisation.
The theory may be correct in the case of trading countries which are equally advanced so that, specialisation along lines of comparative advantages may, of course, confer benefits on them.
But when applied to an underdeveloped country, the doctrine of comparative costs appears to be logically untenable and fallacious. Under free trade there may be evils of cut-throat competition, dumping, depreciation of currencies which may smash down complementary character of international trade as assumed by the classicists.
Consequently, free trade between an advanced country and an underdeveloped country may make the poor country more poor rather than give it any mutual benefit. Moreover, the infant industries of a poor country have to be protected by tariffs, otherwise they cannot survive in the growing competition from abroad under free trade.
Further, poor countries are basically primary producing countries; in bargaining with the industrially advanced countries for the export of primary products against the import of manufactured goods, they always suffer adverse terms of trade.
The comparative costs theory deals with only the production aspect of international trade. It seeks to explain how total world production can be maximised through international specialisation on the basis of comparative costs advantage. But it fails to consider the distribution aspect of international welfare emerging through international specialisation.
Free world trade will lead to unequal distribution of income and gain in favour of industrially advanced countries. Thus, under free international trade, a rich nation always benefits at the cost of a poor nation. Therefore, if the tenets of the classical theory of comparative costs are to be strictly followed, the poor countries would remain poor forever.
2. The doctrine of comparative costs assumes a static economy, where the supply of factors is fixed. In a developing economy, where new resources are being developed, this assumption does not hold good; eventually the theory becomes inapplicable. The fundamental problem of a developing country is not just the optimum allocation of resources on the basis of cost advantage and specialisation but that of uplifting the production possibility frontier by improving and developing the resources so that growth may be perpetuated.
3. The principle of comparative costs rests on the assumption of full employment equilibrium condition for each of the trading countries. This is far from being a reality in any country of the present world. Moreover, a poor country is characterised by chronic unemployment, underemployment and “disguised” unemployment.
4. The principle of comparative costs assumes perfect competition. This is, of course, an unrealistic phenomenon throughout the world. In a developing economy, where planning is adopted, a further blow is struck at the freely working price mechanism as assumed by the doctrine.
5. Ricardian theory assumes that labour is perfectly mobile within a region. This is not true for any region whether, it is developed or underdeveloped. However, due to market imperfections, transport bottlenecks, ignorance, personal attachment and such other factors, labour is relatively less mobile in an underdeveloped country than in a developed country. As such, the theory has least applicability to poor countries.
6. Many poor countries also face exchange crises and adverse balance of payments; hence, regulation of foreign trade (specially imports) becomes an economic necessity for them and as such they cannot accept in toto the doctrine of comparative costs. These countries have to be more and more self-sufficient and resort to import substitution rather than specialising merely in primary products according to the comparative costs advantage principle.