Transaction Cost Impairments to International Trade: Lessons from Egypt

By Abdel-Latif, Abla M.; Nugent, Jeffrey B. | Contemporary Economic Policy, April 1996 | Go to article overview

Transaction Cost Impairments to International Trade: Lessons from Egypt


Abdel-Latif, Abla M., Nugent, Jeffrey B., Contemporary Economic Policy


I. INTRODUCTION

In a world with perfect markets and zero transaction costs, penetrating international markets is a simple matter of production cost--comparative advantages determine which producers penetrate international markets and when. Yet, despite remarkable technological improvements relevant to the costs of international transacting and despite considerable-relaxation of exchange controls, the costs of international transactions generally are far from negligible. (See, for example, Wortzel and Wortzel, 1979, on developing country producers or local agents who persistently receive a low share of an exported good's eventual sale price.) In particular, from around the world growing evidence suggests that reforms designed to provide the right economic environment and incentives for exports are insufficient in themselves to generate rapid export growth (Keeling, 1979; Morawetz, 1981; Dean et al., 1994; Greenaway and Morrissey, 1993). In some respects, international marketing transaction costs even may be increasing over time, preventing otherwise beneficial transactions from taking place. Failure to recognize the high transaction costs in international marketing and to design appropriate strategies for dealing with them may doom to failure even excellent policy reforms. The costs of reform failures are high--as are the costs of failing to try reform.

This paper uses Egypt as a case study to: (i) develop socially relevant but testable hypotheses concerning the ways and means of exporting, (ii) test the validity of such hypotheses, and (iii) derive practical policy proposals to help producers in Egypt and in other less developed countries (LDCs) take better advantage of international market opportunities.

II. TRANSACTION COSTS IN INTERNATIONAL MARKETING

Transaction costs include (i) the costs of obtaining information about market conditions in any given foreign market (the quantities and qualities desired and the prices prevailing for each different quality) and the reciprocal costs for agents in foreign countries, (ii) the costs of information about government regulations and other policies in both foreign and home markets (including exchange rate policy, exchange restrictions, tariff and non-tariff barriers, and health and environmental regulations), (iii) the costs to each potential party of identifying appropriate trading partners in these markets, (iv) the costs of negotiating, writing, and enforcing contracts and resolving disputes between the parties, and (v) the costs of financing the transaction, which generally involves a long lag between placing an export order and making final payment for it, and of bearing the risks of default throughout the process.

Many factors tend to make these costs much higher than those of domestic transactions. Such factors include (i) differences in language, culture and taste, laws and dispute resolution procedures, income and information sources, the modus operandi of markets, and the extent and character of competition, and (ii) difficulties of enforcing contracts across countries, and hence the higher risks of payment default.

These transaction costs are not merely static. They change substantially over time with changes in the identities of the trading agents, environmental conditions, and the character of the respective markets. An exporter may possess all the right information about all the relevant factors in a particular market at one point in time, but rapid change can easily make that information obsolete. Indeed, for any individual country, over time two important trends tend to raise transaction costs for developing country exporters: (i) the growing relative importance in developing country exports of quality-differentiated and increasingly specialized products for which distinguishing between contract fulfillment and non-fulfillment (deliberate or otherwise) is difficult and (ii) the growing use in developed countries (at both the national and subnational levels) of various non-tariff barriers to trade, including environmental regulations, which are subject to more abrupt changes over time than are tariff barriers.

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