Vent for Surplus Theory

Vent-For-Surplus Approach of International Trade Professor Williams has given the doctrine of vent-for-surplus from the crude idea found in the classical theory of international trade presented by Adam Smith in the Wealth of Nations. Smith stated that foreign trade "carries out that surplus part of the produce of their (trading countries) land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their extra produce, by exchanging them for something else, which may satisfy a part of their wants, and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection." This means international trade overcomes the narrowness of the home market and by increasing the size of the market provides an outlet (vent) for the surplus generated in the domestic market. On this thread of argument, the "Vent-for-surplus" theory of international trade is developed by modern economists like Williams, Myint, etc., to explain the nineteenth-century process of expansion of foreign trade to the underdeveloped countries of the South-East Asia, Latin America and Africa. The vent-for-surplus approach especially seeks to provide an explanation of how colonial underdeveloped countries had entered into foreign trade. The theory asserts that, an underdeveloped country usually tends to have some commodity (mostly primary products) in surplus when its domestic demand is completely satisfied. This surplus is its exportable. Or, it may have some unused/idle resource - raw materials which can be exported once a trade opening takes place. A marked difference between the classical theory and vent-for-surplus theory is that, the former assumes that the trading country operates on its production-possibility frontier both before as well as after trade (owing to the assumption to full employment condition). The later theory, on the other hand, more realistically presumes that the country is operating below its production-possibility (PP) curve. To illuminate the point let us assume a simple model of an underdeveloped country with land and labour producing goods: Raw materials and Handicrafts. According to the vent-for-surplus approach, the country is operating at a point, say Z which is inside, its PP-curve. The PP-curve indicates that in this country raw materials are relatively abundant in supply and the relative productivity of handicrafts is low. Thus, OH of handicrafts is domestically exchanged against OR of raw materials. But, when this country enters into trade with an industrially advanced country (or, X the mother country under colonial rule), it can fetch better price for its raw materials. As an impact of the trade the country will tend to concentrate more on producing raw materials to meet the increasing demand for exports. It may then reach to point Q. The terms of trade may be improved and settled at say point T. The line TQ represents the international terms of trade. Under the vent-for-surplus approach, trade does not cause any reallocation of resources (here, labour) as in the case of the classical theory. The vent-for-surplus approach assumes that more raw

materials will be produced from the available surplus of land and labour. That is to say, trade here induces a 'vent' or and outlet for the unused resources (labour and land). In this theory the gains from trade is measured in terms of the improvement of terms of trade, which is ZT. The theory also implies that as trade goes further the country's specialisation in raw materials tend to be full. As such, labour will be moved away from handicrafts to the production of raw materials. Here, there is reallocation. Then, the country will tend to operate at point R. Assuming some development, the country's PP-Curve will shift as P, Rr The theory arrives at a conclusion that the typical less developed country under the colonial rule, however, ultimately experiences an adverse impact of foreign trade with the mother country when it exports raw materials and imports mechanised goods. Its handicrafts sector tends to vanish under the keen competition from imported mechanised goods. Moreover, since the country is primary producing its capacity is limited by the availability of cultivable land. The country is using primitive techniques and adopts extensive cultivation of lands to produce more raw materials. But, once supply of land is exhausted the further growth stops. Again, when prices of raw materials tend to rise because of inelasticity of supply against the rising demand, the foreign trade eventually contracts and the country's growth process is sterilised further. The vent-for-surplus approach has, however, a limited scope of applicability. Its only merit is that it provides an explanation for the contraction of trade which took place in the colonial economies of India, Africa, etc., in the past. This phenomenon is not easily explicable in the classical or Ohlin's general equilibrium approach. Professor Myint offers following three valid reasons as to why the "vent-for-surplus" theory offers a more effective approach than the traditional approach for explaining the foreign trade expansion process in the underdeveloped countries. 1. Comparative costs theory cannot logically explain the characteristically high rate of expansion of exports observed in many underdeveloped countries in the nineteenth century. 2. Comparative costs theory is extended by Ohlin in terms of qualitative differences in the resources of the trading countries. While, there has been a sharp differences in the resources of the tropical underdeveloped countries and the advanced countries of the temperate regions, so there has been absolute cost differences between these countries. Again, the comparative cost theory or Ohlin's theorem of factor endowments cannot explain the phenomenon such as that, though, Burma and South India have similar factor endowments, and both the regions are rice-producing. Yet why is it so that, Burma is the exporter of rice, while South India is not? Here, we have to resort to the "vent-for-surplus" approach for the answer. It shows that the population density and the demand factor are the main determinant of the surplus and the resulting export capacity. Burma has surplus of rice, while South India has no surplus due to high density of population and intensive domestic demand for rice. Therefore, Burma is the exporter of rice, while South India is not. 3. Ohlin's theory assumes that the country entering into trade should possess a highly developed and flexible economic system which permits factor mobility and specialisation process very quickly. But, underdeveloped countries are lacking in such quick adjustments in their economic frame-work.

Hence, the vent-for-surplus approach in their case seems to be more suitable to explain their trade phenomenon