Comparative AdvantageECOM/GM 561University of PhoenixComparative AdvantageIntroduction
International trade takes place as nations seek to improve their economic well-being by applying the principle of comparative advantage in production. A country may develop an area of specialization naturally, but frequently, choices must be made to determine what to produce or exchange or trade in this hyper-competitive global economy. It is not profitable to engage in trade, if items produced are insufficient to give the producer a decent profit margin. The purpose of this paper is to explain the concept of comparative advantage and its recommendation for specialization for Sierra Leone, a small country on the West Coast of Africa. The paper will further identify factors of production or technology that are in relative abundance in this country and make recommendations as to which industries Sierra Leone should specialize in (UOPM, 2012).
Concept of comparative advantage
Comparative advantage is one of the most powerful and direct economic concept. Although this concept is important and simple, it rarely seems to inform public deliberations of international trade. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than other producers face (Gerber, 2008). Michael Porter identified two basic types of competitive advantage, the Cost advantage and Differentiation advantage. We can only have a clear concept after all the components of comparative advantage are downright understood to help countries like Sierra Leone compete in today’s market. The concept of comparative advantage is based on the idea that nations maximize their material well-being when they use their resources where they have their highest value (Gerber, 2008).
Factors of production
With the Massive stretches of fertile lands and plenty of mineral resources, Sierra Leone can boost of a natural comparative advantage for agricultural and technological improvement. Enriched with various mineral resources such as bauxite, diamonds, rutile and diamonds can increase it export earnings. Agricultural products such as ginger, coffee, rice and cocoa are in abundant supply in the country. As we can see the country has a comparative advantage over it export resources and potential, but by themselves, they cannot stimulate economic growth. Like most third world countries, Sierra Leone lacks the requirements to sustain a reformed trading system that will encourage trade and expand exports. In order to know the highest valued usage for any resource, Sierra Leone must compare alternative uses with other nations. Sierra Leone must use the product cycle model of trade; this will help explain exports of sophisticated manufactured goods since the country have shortages of skilled labor and capital.
Recommendation
The country was engaged in a brutal civil war that lasted for 9 years (1990-1999) destroying most of the agricultural sector of the country, the extent of war caused the country’s economy to shrink by nearly 43 percent (IMF). My recommendation is that the country specializes in its agriculture and fisheries sectors. With its fertile land and vast fishery resources, the country can quickly develop an export led economy. An assessment done reported legal and direct exports of fish and shrimps to be valued at $443,800 in 2007, are well below their potential (Fisheries of Sierra Leone, third edition 2008).One way to improve in the fishery sector is to put adequate security in place, because there is untiring pirating operation by foreign fishing vessels navigating Sierra Leone coastal waters. Estimates done by the Department for International Development of the United Kingdom shows that the annual commercial catch is about half of it potential. Developing the Marine sector will create an absolute advantage, thus create potential to begin exporting fish at regional level.
Rural areas where most of the farming was concentrated were destroyed; this eventually leads to mass migration of farmers to urban areas leaving a huge vacuum in that sector. Agriculture is the biggest contributor to the country’s GDP at 51.5% (CIA Fact book), developing this sector will reduce poverty and enhance food security. The creation of an agriculture Export markets in Sierra Leone will enable firms to expand production and to realize their scale economies.
Industries under protection
One sector that holds a key element towards development prospects for Sierra Leone is it mining sector. This sector received the biggest boost by the government to develop the investment climate. Sierra Leone’s vast mineral resources and reserves remain among the key elements in its development prospects. The country chief export commodity and foreign-exchange earner is diamonds; it is making up of about 90% of total exports.
To protect this industry, the government of Sierra Leone implemented a mandatory certificate-of-origin requirement in 2000, to reduce the smuggling of diamonds out of the country. The Mines and Minerals Act, was passed in 2009 by the president and members of parliament, the Act main objective is to support local and foreign investment in the mining sector by implementing new and improved provisions for exploration, mine development and marketing of minerals and mineral secondary processing for the benefit of the people of Sierra Leone.
Economic policies
Since the end of the war, the country has shifted its economic policy from post-conflict stabilization to poverty-reduction efforts. The country’s economy will see growth if economic policies are implemented to create investment opportunities for medium and small businesses and also raising the standards for various product development. To manage it debts, Sierra Leone must create stiff measure to properly manage its fiscal and monetary policy. To reduce corruption, the government must give not interfere with the Anti-corruption commission established to monitor government institutions that are embezzling national funds.
Conclusion
Having a comparative advantage is essential for developing country like Sierra Leone, it create avenues for poverty reductions. Having a better understanding about the balance of payments would help the country analyze the policies that might be used to tame the current account deficit -7% of GDP (2011 est.). The Government should remove restriction on trade to allow investors to Invest in commercial agriculture to help forester growth in the agricultural sector. Even With all the vast resources mentioned above, Sierra Leone continues to struggle and depend heavily on foreign assistance, principally from multilateral donors. Good governance and accountability will help reduce the country’s dependent on foreign aid and help restructure its economic policies.
References:
http://www.3adi.org/tl_files/music_academy/campus/Nigeria/3adi/SIL_Natl_Export_Strategy.pdf
Gerber, J. (2008). International economics (4th ed.). Boston: Pearson.
http://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/SL-2004-174-EN-ADF-BD-WP-SIERRA-LEONE-AR-ASREP.PDF
https://www.cia.gov/library/publications/the-world-factbook/fields/2111.html
http://www.sliepa.org/marine-resources#availability
http://www.africaneconomicoutlook.org/en/countries/west-africa/sierra-leone/
http://www.sierra-leone.org/Laws/2009-12.pdf
