Wednesday, August 11, 2010

Behind the efficient networks of gardens in Thailand : the law of comparative advantage

Small nurseries are often said to be unable to sell cheap because they must buy from outside the plants that they cannot produce. Would bigger nurseries be more competitive to produce plants as they use more of their own factors of production, such as land, gardeners etc ?

Working for a relatively small nursery in Bangkok area I thought for years that per $ of factor of production used, the bigger nurseries should have a greater output. This was also suggested to me by the many visitors from abroad prospecting plant nurseries who asked to be guided to the biggest in priority. But over the years I noticed two things : first the bigger the nursery, I mean the larger in size, more active and prosperous it is, the least workers can be seen per unit of area; second while among the visitors almost all beginners and would be importers were mostly interested by the greater sizes, ( especially if they saw before coming to Thailand some giant nurseries in Australia or Florida ) the more professional importers seemed instead not to pay attention to the size but were more concerned by experience, quality, price, search service of new products etc. So do bigger nurseries, as they theorically use larger production factors that they own ( instead of trading ) have an advantage over the smaller nurseries with little land and reduced employment ?

Let's remember that with his law of Comparative advantage Ricardo explained how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade and we could substitute two nurseries in a given country to the two countries envisaged by Ricardo.
See on : " Origins of the theory. Comparative advantage was first described by Robert Torrens in 1815 in an essay on the Corn Laws. He concluded it was to England's advantage to trade with Portugal in return for grain, even though it might be possible to produce that grain more cheaply in England than Portugal.
However, the concept is usually attributed to David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price,closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other."

Let us replace Portugal and England with the " Hoya garden" and the " Adenium garden ", then let's assume that by employing the same resources : land, manpower, water ( and also, why not, marketing and sale opportunities so the output envisaged is the output - sold ) the Hoya garden has an absolute advantage in producing ( selling ) Adenium and Hoya, in the sense that per unit of factor it can produce 6 Hoya or 5 Adenium whereas the Adenium nursery can produce for its own market 4 Hoya and 2 Adenium only. At first sight there seems to be no mutual benefit in trade between the two gardens, as Hoya garden is more efficient at producing both products.

But this is not true, although the intuition is widely shared among the many prospectors I have seen of plant nurseries.
Despite the fact that the Hoya garden has absolute advantage in all activities, it is not in the interest of either of them to work in isolation since they both can benefit from specialization and exchange. If the two gardens divide the work according to comparative advantage then the Hoya garden will specialize in plants at which it is most productive, while the Adenium garden will concentrate on plants where its productivity is only a little less than that of the Hoya garden.

Such an arrangement will increase total production for a given amount of labor supplied by both gardens and it will benefit both of them.
This is why, I think, I could notice that the bigger the nursery the least laborers can be seen working on the spot : to put it in a nutshell, they sell more because they buy more from partners.

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