Trade And Economic Development
Jim Blair

Peter W. Dawson of the University of Northern Colorado e-mailed me the following correction to this essay: "Life expectancy is calculated by taking the number of deaths, per 1000 people, in a given year, and averaging the ages.  Before the Industrial Revolution the world's infant mortality rate (IMR) was higher, bringing the average life expectancy down.  While it is true that people usually did not live into their 80s, then, it was not only the nobles who did so.  It was a matter of genetics and luck, as it is today." Jim Blair felt that, since infant mortality is a bad thing, it is appropriate to see it as bringing an increase in life expectancy. And he disputed whether this was just "a matter of genetics and luck".

What with the current anti-globalization protests happening every year or so, a lot of people are questioning whether trade really helps economic development in poor countries.

Yes, it helps. Of course it helps.

Does *not* bringing employment to the poor help them?

Trade helps workers in developing countries two ways:

* New employment increases the demand for labor, which increases the wage rate.

* More importantly over the long run, first-world investment introduces new technology and skills into the recipient underdeveloped country. These spread and increase national productivity.

It is the level of productivity that determines the wage rate in the entire national labor market. Wages rise with productivity, for *everyone*. Including for those not in the "international" or tech-advanced industries. A barber cuts hair with scissors -- the same no-tech, low-skill job anywhere in the world. But a barber earns much more in NYC than Mississippi, and much, much more in Mississippi than in the third world, because of the different overall regional market wage rates in these different areas, which is determined by overall productivity in them.

You are aghast at working conditions in the third world.

Good, you should be.

Those conditions are universal in human experience before modern economic development. Life expectancy was under 25 everywhere in the world through all history until the Industrial Revolution. Short and miserable for near everyone unless you were a king, and even then....

Capitalism doesn't create that condition, it starts from it. Economic development is the way up and out of that miserable condition. Trade is the driving force of it for undeveloped nations, bringing in demand for jobs, new technologies, new skills.

You worry that it may be immoral to invest in nations with low wages and abused labor.

Well, look at US history. The US was a third-world nation in the 19th Century when rich British businesses and investors poured in huge amounts of money to take advantage of cheap US workers and resources. They financed our railroad, factories, etc. We were just a poor 90% agrarian country without the means to finance such things ourselves.

There were no US labor unions, the law was anti-union, and the Pinkertons would bust up any group that tried to organize.

And the British certainly weren't being charitable.

Do you often remember this time of history as the era of British exploitation of the US? Should they have stayed out for moral reasons and left us an undeveloped nation?

Or were US working people better off with the US developing at a rate the world had never seen before, powered by British investment, to emerge as the world's most developed and richest nation -- with the average person having double the life expectancy of only 60 years earlier?

You might also feel that people like us, like in rich countries, should boycott companies that use sweatshop labour.

But you can boycot all you want if it makes you feel better -- but a nation's workers aren't given rights by benevolent foreigners.

Workers *take* rights when they are in demand. When they become skilled, productive and valuable to their employers their bargaining power increases not only economically but politically. They beat the Pinkertons.

How do you help foreign workers by restricting demand for them, not introducing new skills to them, limiting their value to their employers?

You seem to fear that corrupt business owners and governments will keep the workers down and usurp all the new profits from trade and growing productivity.

Well of course they will *try*. They tried in the US.

But the law of supply and demand is a *very* powerful thing. And when workers are in demand they *get* -- just as when they aren't, they don't.

If you are really afraid that all gain from trade is being usurped from suppressed workers by corrupt powers, then a look at the actual numbers should be reassuring.

In 1950, Japan's average wage in manufacturing was 10% that of the US -- a third world country, our Country B.

In 1996 Japan's manufacturing wage was 120% that of the US. And being that the US's own wage doubled in the meantime, that's a 24X gain for Japanese workers in real pay.

Since 1975, manufacturing pay in dollar terms in * Korea has risen from 5% of the US level to 45% -- a 9X gain. * Singapore has risen from 13% of the US level to 48% -- almost a 4X gain. * Taiwan has risen from 6% of the US level to 34% -- a 5.7X gain. * All the "emerging" Asian nations overall has risen from 8% of the US level to 39% -- a 5X gain.

That's in one generation, 25 years. In each case wages have risen with productivity. From a dirt-poor start.

Where's the nation that's had a similar rise in productivity without a corresponding rise in wages? Try to find it.

Economic development is a *process*. There's no magic wand. It took both the US and Japan 40+ years to reach the top rank of developed nations with the help of a *lot* of outside investment and trade. These other countries are about half-way through. Many others are just starting. Others haven't started at all. (Haiti, etc.)

If you try to impose US level wages and work conditions on these countries now, you will just throttle their economies in their beds, kill them. End all the real progress they are making.

They aren't productive enough, they can't pay the cost. Businesses that can't pay the cost go out of business. People are unemployed. They learn no new skills, are in no demand, have no power. You will create the situation you fear.

Productivity and the skills that create it cannot be imposed, they must be *learned* by people. That takes time and investment -- and contact with the outside to speed things up, and to provide access to markets of sufficient size to make it possible at all.

Rising productivity increases wages, you can take that to the bank. Trade increases productivity, that's what it's all about -- nations specializing in what they are comparably most productive at, whether rich or poor.

Beware the good intentions that pave the road to Hell.

If you like that original Krugman article you posted, you should love this one: "In Praise of Cheap Labor"
http://web.mit.edu/krugman/www/smokey.html

Here's one for a slightly more sophisticated audience: http://web.mit.edu/krugman/www/ricardo.htm

In fact, take a look at his whole web site, there's a lot of trade stuff on it. He's a trade economist:
http://web.mit.edu/krugman/www/

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