Co-written with Joseph Bruhl
When it comes to understanding globalism and free trade, I think the world has gone crazy. I’ve written many times about the need to be informed consumers, and the power of our vote when we use our dollars to make sustainable, values-based purchases. But when it comes to many basic goods and services provided through a global economy, it’s hard to know what to think. In a complex and interconnected world, real solutions defy simple rhetoric. On the left, writers criticize the status quo and ignore basic economic truths while proffering unworkable alternatives. On the right, lovers-of-the-market can’t get beyond the basic dogma of “free trade benefits both parties.” In the middle, we find ordinary, common sense. The market provides powerful tools that lift millions to a better life. But, the market also carries tremendous risk of exacerbating inequality and deepening the misery of millions. As consumers, we must remain clear-eyed about the benefits and dangers of the market, and ensure that our dollars leverage the power of the market while minimizing its risks.
In China, anti-suicide nets surround factory dormitories. In Bangladesh, thousands of dead lie entombed in collapsed factories. In Indonesia, workers suffer as they sew our clothes for pennies an hour, while local industries in Jamaica are decimated by unfair competition. All of this tells us that something is amiss. All the while, strong voices advise against buying items made in such places, to help end the abuse, as others advise that such boycotts only hurt those very people, by costing them their jobs.
Who is right? Which side has the correct, “long-view?” So, I’ve been pondering all this. And, after parsing all the arguments, I think I have a firmer intellectual foundation with regard to this issue, and it is one that calls for some action.
Let’s start with this picture—
This particular image is of a garment factory in Thailand, but let’s disregard that for a moment and use more general terms to describe the situation depicted. Let’s imagine a very poor country, and let’s just say the country had been ravaged in the past by wars not of their making, but has stabilized and is seeking to improve, and let’s assume that the country produces its goods in inefficient ways, as poor countries do (those two things are related), and that the people there have a low level of education.
Now, trade occurs when countries have an advantage in the production of some good or service, and such trade does indeed benefit both parties. A poor country like this one might not have an absolute advantage in any single area, not in production or fishing or farming or even labor. But, in economics all parties have a comparative advantage in something, and in the cases of countries such as these, it often comes down to having a comparative advantage in labor. While they might have nothing at all to trade, they still have their bodies, and thus their labor. And, since they don’t do much else well (in terms of efficiency) the workers in poor countries have less to lose (lower “opportunity costs”) than other people in the world do if they spend their time laboring in factories like the one pictured above. And, because they have so few (or no) other options, the conditions in such factories don’t have to be great in order to entice people to work there. Long hours, low wages, suspect safety conditions and the like tend to be the norm, and we call such places “sweatshops”. This general situation is why, from an economic perspective, sweatshops are most often found in the poorest places in the world.
From the typical economist’s perspective, sweatshops are often seen as an unfortunate, but necessary, first step in a country’s economic development. Wages in these sweatshops, while very low, tend to be a bit higher than other wages in the area. Some economists even argue that the real problem isn’t sweatshops, but that there aren’t enough sweatshops. On the surface the idea makes some sense—voluntary trade benefits both parties, and comparative advantage and trade create situations where resources, system-wide, are being used most effectively. Poor countries do the things that they have an advantage in, such as provide low-skill labor, and then they trade with the world for the other things that they need. In this view, theoretically, both parties benefit. The worker and the factory owner, the poor countries and the rich ones, all benefit through this voluntary exchange. With “responsible behavior” over many years, the poor country should be able to join the world market, accumulate wealth, and bootstrap itself toward prosperity. And over the years, I’ve generally accepted this argument.
That was until I watched an incisive counter-argument, the film “Life and Debt”, by Stephanie Black. The film focuses on Jamaica, and argues that the International Monetary Fund (IMF), the World Bank, and free trade in general have reduced Jamaicans to a state of virtual slavery. Though I have some quibbles with a few economic arguments presented in the film, on the whole it’s a devastating look at a real-life situation in the aftermath of globalization efforts. It is well-filmed and well-paced, with a snappy soundtrack. I highly recommend watching it; it will change how you see the world.
For the last few years I have more-or-less agreed with the IMF officials interviewed in the film. But I’ve also nurtured a nagging feeling that I was missing something. After much thought, I’m beginning to think that the traditional view of economic development, free trade, and sweatshops is inadequate. Perhaps not everyone benefits from their involvement in the system… even as the system benefits from everyone’s involvement.
To explore, let’s step away from the sweatshop example for a bit and examine another, simpler case.
Let’s assume that I live in a modern, prosperous place like the state of Vermont, and right across Lake Champlain, in upstate New York, is an extremely impoverished area (this isn’t at all true in actuality, but let me build a hypothetical situation). People there are nearly starving and are desperate for work, and might work for virtually any wage offered, in order to subsist.
BUT—they would never actually work for slave-wages, because there is freedom of movement between Vermont and New York, and these disadvantaged workers would assuredly cross the lake, just like goods do, and find jobs in Vermont. Even if they were poorly educated and could only take low-end jobs in Vermont, they would be paid Vermont’s minimum wage… a living wage. (There is a side issue here, that of currency exchange rates, but most countries use free-floating rates, which allow the purchasing power of a currency to stabilize in relation to other currencies over time… but, I digress).
Because of the freedom of movement between New York and Vermont, if I wanted to build a factory on the New York side of the lake, or employ people in New York to do some other sort of labor, I would have to pay wages that were competitive in Vermont. With those wages, workers in New York could buy the goods and services that flow freely across the lake, and could indeed “behave responsibly” and bootstrap themselves to better lives.
The problem is, Jamaica is a long way from Vermont, and workers entrapped there don’t have the luxury of swimming across the barrier that separates them from a better opportunity. In the case of most poor countries that harbor sweatshops, the people have limited freedom of movement. Laborers in poor countries cannot hop on planes or otherwise move to the US or Europe to work (except by doing so illegally, at great risk). The result is that in poor counties around the world we have situations just like my Vermont/New York example, except that in real life, goods often flow freely while labor does not. Even where laws don’t prohibit movement, poverty serves as a de facto barrier. But goods do move. In fact, it is almost a fundamental precondition of the IMF and the World Bank that trade barriers be lifted before loans are granted. The result is that those in the market with the power to move and consume benefit at the expense of static and often entrapped labor forces.
Once trade barriers are lifted and developing countries enter the fray of the global market, they find themselves thrown into the fire of an extremely competitive and efficient marketplace, but they lack sufficient systems or development to compete. Every single industry in the newly-integrated poor country is too inefficient to compete with the best of the world’s producers, all of which are now depositing cheap goods on their doorstep. As local producers are put out of business unemployment skyrockets, and the country’s trade deficit soars.
So the poor countries find themselves in a hopeless jam, time after time. With free trade, goods are cheap. But without a productive base, if poor countries buy them (as they are forced to) they fall into debt and become dependent on internationally proffered loans. This predicament induces another hopeless jam, as poor counties’ interest payments prevent productive investment and outpace GDP growth.
But, solving this problem is not as simple as restricting free trade. With protectionist policies in place, a poor country’s economy is disadvantaged for other reasons; as every single item anyone in the country buys is priced higher than it could be, if it is available at all, and the country remains cut off from the wealth creation that being a meaningful player in the world market could bring. Without integration in the global economy, poor countries remain on the margins of a system that holds tremendous promise for all involved.
The roots of this terrible dilemma go back well over a century, when the countries that became efficient the earliest secured a first-mover advantage. Today businesses in these same wealthy countries, already efficient, can get even MORE efficient by lowering labor costs by “trading” with a poor country by outsourcing labor. The poor country has less to gain (or nothing), so by participating the poor country is actually actively working to broaden the gap between the two. The same cheap goods they make are then shipped to both the rich world AND to other poor countries, where they help put yet another country in a bind. The businesses in the wealthy world benefit, while every other player struggles to break even, and inequality inexorably grows. The wealthy countries often have outsized influence when it comes to setting trade policy, so other unfair aspects work their way into the system. For instance, the United States is allowed to heavily subsidize its farmers, which artificially lowers the market price of the agricultural goods they produce. Corn from the U.S., for example, sells in most parts of the world for below what it costs even hyper-efficient U.S. farmers to produce it, which adds to the nearly insurmountable barriers to entrance into this market.
Small countries, by default, need high import rates; it’s normal. Jamaica will never, and should never, make all the goods it needs. So everything from steel to tools to seeds to fertilizer is imported… all at rich-world prices (though they might be converted to the poor country’s currency), but… the poor country’s workers are working for pennies. It becomes a true and undeniable “cycle of poverty”. Poor countries become trapped, and then poverty eats away at their social structures, engendering crime and violence and dysfunction. Workers in the sweatshops are trapped as well, they can’t unionize, complain, or move to another country, and if they do complain or agitate, there’s always the threat that the company will move their production to an even poorer country, a “race to the bottom”.
Some poor countries have avoided this trap, and have actually managed to weather the storm and clamber up to prosperity; South Korea and Taiwan come to mind. But, sadly, most do not. Economic growth has lifted millions from poverty in recent decades, but that growth has been uneven, and the gap between rich countries and poor ones continues to grow.
So what to think of sweatshops? On the balance, sweatshops don’t actually help poor countries because the wages paid to workers entrap them in a cycle of self-perpetuating poverty. When rich corporations establish sweatshops, they take advantage of people with limited options without entering into a relationship that is mutually beneficial. In essence, sweatshops are the ‘payday lenders’ of the global economy: tantalizing short-term gain at perverse long-term costs… abusive, exploitive, and immoral.
Consumers in rich countries soothe their consciences by arguing that wages of sweatshops are higher than local average, but this is a moot point. Due to the miracles of trade and shipping, the basic goods people must buy in order to subsist are priced at roughly the same relative price around the world. So when a corporation pays a sweatshop worker 30 cents an hour equivalent, it’s really 30 cents an hour.
So the rich get richer, and poor nations find themselves stuck in vicious cycles of poverty. Because of the first-mover advantage, the trend toward inequality is inherent in the very system. Poor countries can eventually improve, but rich countries improve even more… and more rapidly. (Paradoxically, if the poor country wasn’t so poor, it would be a better consumer for goods from the rich country.) This leads logically to a conclusion with even bigger ramifications—if the trend toward inequality is inherent in the system, then the unequal distribution of goods is itself a negative externality; a market failure. The results are profoundly unfair. I was born, through no choice of my own, into the rich world, where there are virtually no limits as to what I can do or achieve. An equivalent me, born in a poor country, might easily be doomed to a life of abject poverty and labor that serves the rich.
The solutions? As with negative externalities of all stripes, the best solutions lie with good governance. Governments are what tame the vagaries of the market system and channel its power toward the good of all. One option—we could give workers worldwide the freedom of movement. (I have a friend who is an ardent socialist, and she holds a goal for there to be a world without borders. I’ve always discounted this, but perhaps she’s on to something…) (because I can’t see rich countries allowing it). OR, we could establish a worldwide minimum wage for labor that is outsourced, or perhaps allow poor countries to retain select protectionist tariffs to give their industries time to develop. We could (and should) forgive odious debt, and we should set international labor standards. I’m sure that some of these changes would be complex and difficult, but by not working to change the system we risk becoming complicit with its failures.
Regardless of the changes we put into place, we need to actually be helping poor countries develop. Corporations perhaps need to follow a simple rule– if they are sourcing products from poor countries whose workers are prohibited from moving, then they must show that the relationship is actually helping to develop the economy of the poor country. The system as it stands now is simply immoral, an uncomfortable but unavoidable truth for consumers… like us… in the rich world.
Note: 3 Nov. 2015— It occurs to me that in this long-ish post I never quite circled back around to the actions that consumers, like us, can make—I will address this in the next post.
Note: 20 Nov. 2016— After not paying much attention to this issue for the last year, I just saw confirmation of these ideas about the mobility of people (or lack thereof) in an article in The Economist, in which they review “The Great Convergence: Information Technology and the New Globalization”, a book by Richard Baldwin. They write that “In an economist’s dream world, things, ideas and people would flow freely across borders”, and that in the last centuries the first and second of those three things (things and ideas) have indeed been freed up to flow more or less easily around the world, but that the third, people, faces formidable obstacles. The root of the unfairness in the world, I think, comes from that third piece not being mobile…
Top image credit: Times Asi, “April 25, 2013. Two victims amid the rubble of a garment factory building collapse in Savar, near Dhaka, Bangladesh.”, Flickr Creative Commons.
Factory workers: Greg Walters, “Garment Factory (Thailand)”, Flickr Creative Commons. Image has been cropped.
Container ship: Andrew Priest, “Stadt Freiburg”; Flickr Creative Commons. Image has been cropped.
Combine: Charles Knowles, “Combine Unloads Grain”, Palouse region, Washington State. Flickr Creative Commons.
Slum: Ninara, “_Y1A1213”, Kibera Slum, Nairobi, Kenya , Flickr Creative Commons.