Barriers to trade
Openness to international trade affects growth in two ways: it affects the level of steady state income and it affects the speed of convergence to the steady state53. Openness encourages greater efficiency in the allocation of the economy’s scarce resources; it also promotes market competition and thus helps reduce monopolies. Trade is often a vehicle for the importation of technical innovations and improvements, which serve to raise total factor productivity in the entire economy.
Between 1970 and 1980 countries that increased their exposure to international trade also increased their growth rates, from 2. 9% to 5%. Correspondingly, those who did not saw their growth rate decline, from 3. 3% to 1. 4% over the same period54. Unfortunately for Somalia, its current political instability excludes it from exporting products to many countries because their trade barriers prevent them from doing business with such a corrupt country. Somalia is also ineligible for trade benefits under the African Growth and Opportunity Act (AGOA)55.
The Act authorizes countries as eligible to receive the benefits of AGOA if they are determined to have established, or are making continual progress toward establishing, the following: market-based economies; the rule of law and political pluralism; elimination of barriers to U.
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Somalia has a population of approximately 9,925,640 and covers roughly 637,657 sq k57. This gives the country a population density of 15. 5 per sq k. A comparison to the UK’s population density of 39558 shows Somalia is sparsely populated, with 63% of people choosing to live in the country. It is beneficial to a government if a large proportion of their population live in cities or densely populated areas. High density development results in significant savings to the government by reducing both the capital and operating costs of police, fire and waste collection and disposal services.
Infrastructure may also be cheaper. For every rural community there must be a school and medical centre (or hospital, depending on the size of the community) to accommodate it. If two rural communities merge, or migrate to a more urban area, fewer schools and hospitals would need to be built. It could be argued that fixed costs spread over a larger number of people would lower the per capita costs of public services. The same stands for public goods.
If the Somali government was trying to implement street lights to reduce crime, it would be less expensive if the population was urbanized, as fewer lights would be needed. Dense populations can also provide economies of scale. Unfortunately for Somalia this situation is only likely to get worse due to the large number of refugees. In 2007 the number of Somali refugees hit one million, with nearly 200,000 feeling the capital every week59; the situation has hardly improved since. Black market:
The black market is the illegal business of buying or selling goods or currency in violation of restrictions such as price controls or rationing. In Somalia this is estimated to be worth $414million, 7% of GDP60. The examples of this untoward market come in abundance. In 2008, the United Nations claimed that up to 80% of all arms, ammunition and supplies that were supplied to the transnational government of Somalia were diverted to the black market. The firearms ended up in the hands of private individuals, opposition groups and arms traffickers.
When famine stuck Somalia earlier this year there was widespread report of aid being stolen by the black market and sold openly, causing the ‘many unnecessary deaths’ of the 3. 2million in dire need of the aid61. However, the biggest contributor to the Somali black market is piracy. Piracy off the coast of Somalia is growing at an alarming rate62. It has disrupted international trade and provides funds that feed the vicious, ongoing war. With no government, isolated beaches and a population that is both desperate and used to war, Somalia is the perfect environment for piracy to flourish in.
Prior to 1990 it was not a major issue, however a more structured form developed in the 1990s when some armed groups, claiming they were authorised coast guards charged with protecting Somalia’s fishing resources, attacked vessels they declared were fishing illegally in their waters and help them for ransom63. This expanded after 2000 to any vessel that sailed within or close to Somali territorial waters. By 2006 some of these attacked were extending as far as 350m off the coast, and by 2008 the northern coast of Somalia was the most dangerous region in the world for pirate attacks, with 111 incidents reported64.
But why is piracy such a popular choice? Piracy is flourishing in Somalia as it is a quick way for all involved to earn a large amount of money way beyond any other means of income generation. While the action of piracy involves some risk the benefits far outweigh that risk, a fact indicated by the few arrests made. Poverty, lack of employment, environmental hardship, pitifully low incomes, drought and political situation all contribute to the rise and continuance of piracy in Somalia.
The pirates also firmly believe that they have every right and entitlement to attack illegal fishing vessels operating in their territorial waters as their fishing resources are being pillaged daily by international shipping vessels from Asia and Europe. Somalia’s economy is based heavily on the sea, and international shipping and trade. Piracy imposes additional (‘frictional’) costs on business, such as the increase in the costs of ship insurance, or higher shipping freight costs necessary to persuade international ships owners to deploy ships to Somalia’s ports.
Extra security measures, such as deploying armed security teams to protect ships, are also necessary and a cost to the Somali’s. The black market created by piracy discourages overseas business investors, reduces port revenues and consequently the income of those communities dependent on them. Even more detrimental to the economy is the level of inflation which occurs as a result of the large inflows of $s earned by pirates through ransom. Reverting back the wider concept of a black market as a whole, there are numerous negative economic consequences.
The first is that the recorded national income is likely to be underestimated65. This makes it difficult for the government (or in Somalia’s case, the transitional federal government) to correctly identify the true economic status of the country. Accordingly, this will make it hard for the government to implement appropriate economic policies to stabilise the country’s economy and raise standards of living. Another problem is that the tax authority may fail to detect the income earned through the black market. The official tax rates may have to increase as a result, to compensate for the losses.
This adversely affects those who are paying their taxes, and this may lead to them finding ways to evade taxes in subsequent fiscal years. The external costs to society that the black market inflicts are clear. Somalia’s GDP growth may have been constrained by the negative impacts it brings, however it could also be much higher than currently estimated because of this market. GDP is, after all, the value of all the goods and services – if a country is producing more than is being calculated, growth can only be increasing.