Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
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investment - either domestic or foreign. Opening up to international trade is likely to provide
increased opportunities and incentives which could either increase the incentives towards
migration, or incentives for increased investment. The incentives arise from the opportunities
derived from access to a bigger market, and possibly a more efficient economic and business
environment.
2. Increase in technical efficiency: i.e. where more output is produced with the same level
of inputs. Typically here one can distinguish between two routes for increased technical
efficiency:
• Economies of scale at the level of the firm or industry. Economies of scale can arise
where there are large fixed costs at the firm level and so the more the plant/firm produces the
lower is the average cost (efficiency) of production. At the industry level economies of scale
can arise where there are spill over effects between firms in the industry - for example from
having a trained workforce which can move from one firm to another. Hence, as countries
engage in regional liberalisation and get improved access to partner country markets, firms
may be able to increase their production and exports and hence produce at lower average cost.
• Firms becoming more productive either because they are reducing “x-inefficiency"; or
because of some form of technological progress. Firms can become more efficient because of
innovation or invention - which can improve either their processes or their products.
There are several routes by which trade can be associated with technological improvement. It
could arise because of improved access to higher quality intermediate goods (which can be
thought of as technological progress). It could also arise because of technological transfer - as
firms interact more with their competitors abroad, or as there is increased foreign investment
than there is greater scope for learning improved techniques from those competitors and or
directly as a result of the investment. The increase in productivity could arise from improving
production processes in the engineering sense, or it could arise from improving managerial
processes and techniques. Finally, it is worth pointing out that the increase in competition
from foreign firms which typically accompanies liberalisation can also increase the incentives
for firms to improve the production techniques and processes. As a result firms can often
produce more with the same technology and the same inputs - but just by organising
themselves better. This is often referred to as reducing x-inefficiency. But also some firms are
likely to have an incentive to improve their production process through innovation as they face
more competition.
3. Increase in allocative efficiency and intra-firm reallocation effects: Allocative efficiency
occurs when prices in an economy are not distorted (for example by taxes and subsidies) and
therefore that resources are allocated correctly given those prices.
• Comparative advantage: when countries specialise in the sectors and products in
which they are relatively more efficient, than there is an improvement in allocative efficiency